e10vq
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2010
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
(KEYCORP LOGO)
(Exact name of registrant as specified in its charter)
     
Ohio   34-6542451
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
127 Public Square, Cleveland, Ohio   44114-1306
     
(Address of principal executive offices)   (Zip Code)
(216) 689-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Common Shares with a par value of $1 each   880,282,505 Shares
     
(Title of class)   (Outstanding at July 30, 2010)

 


 

KEYCORP
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 EX-10.1
 EX-15
 EX-31.1
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 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

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Exhibits
    126  
Throughout the Notes to Consolidated Financial Statements and Management’s Discussion & Analysis of
Financial Condition & Results of Operations, we use certain acronyms and abbreviations which are
defined in Note 1 (“Basis of Presentation”), which begins on page 9.

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
                         
    June 30,     December 31,     June 30,  
in millions, except share data   2010     2009     2009  
    (Unaudited)             (Unaudited)  
ASSETS
                       
Cash and due from banks
  $ 591     $ 471     $ 706  
Short-term investments
    1,984       1,743       3,487  
Trading account assets
    1,014       1,209       771  
Securities available for sale
    19,773       16,641       11,988  
Held-to-maturity securities (fair value: $19, $24 and $25)
    19       24       25  
Other investments
    1,415       1,488       1,450  
Loans, net of unearned income of $1,641, $1,770 and $1,994
    53,334       58,770       67,167  
Less: Allowance for loan losses
    2,219       2,534       2,339  
 
Net loans
    51,115       56,236       64,828  
Loans held for sale
    699       443       761  
Premises and equipment
    872       880       858  
Operating lease assets
    589       716       842  
Goodwill
    917       917       917  
Other intangible assets
    42       50       104  
Corporate-owned life insurance
    3,109       3,071       3,016  
Derivative assets
    1,153       1,094       1,182  
Accrued income and other assets (including $134 of consolidated LIHTC guaranteed funds VIEs, see Note 7) (a)
    4,061       4,096       2,775  
Discontinued assets (including $3,285 of consolidated education loan securitization trusts VIEs at fair value, see Note 7) (a)
    6,814       4,208       4,082  
 
Total assets
  $ 94,167     $ 93,287     $ 97,792  
 
                 
 
                       
LIABILITIES
                       
Deposits in domestic offices:
                       
NOW and money market deposit accounts
  $ 25,526     $ 24,341     $ 23,939  
Savings deposits
    1,883       1,807       1,795  
Certificates of deposit ($100,000 or more)
    8,476       10,954       13,486  
Other time deposits
    10,430       13,286       15,055  
 
Total interest-bearing
    46,315       50,388       54,275  
Noninterest-bearing
    15,226       14,415       12,873  
Deposits in foreign office — interest-bearing
    834       768       632  
 
Total deposits
    62,375       65,571       67,780  
Federal funds purchased and securities sold under repurchase agreements
    2,836       1,742       1,530  
Bank notes and other short-term borrowings
    819       340       1,710  
Derivative liabilities
    1,321       1,012       528  
Accrued expense and other liabilities
    2,154       2,007       1,600  
Long-term debt
    10,451       11,558       13,462  
Discontinued liabilities (including $3,135 of consolidated education loan securitization trusts VIEs at fair value, see Note 7) (a)
    3,139       124       122  
 
Total liabilities
    83,095       82,354       86,732  
 
                       
EQUITY
                       
Preferred stock, $1 par value, authorized 25,000,000 shares:
                       
7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 7,475,000 shares; issued 2,904,839, 2,904,839 and 2,904,839 shares
    291       291       291  
Fixed-Rate Cumulative Perpetual Preferred Stock, Series B, $100,000 liquidation preference; authorized and issued 25,000 shares
    2,438       2,430       2,422  
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 946,348,435, 946,348,435 and 865,070,221 shares
    946       946       865  
Common stock warrant
    87       87       87  
Capital surplus
    3,701       3,734       3,292  
Retained earnings
    5,118       5,158       5,878  
Treasury stock, at cost (65,833,721, 67,813,492 and 67,824,373 shares)
    (1,914 )     (1,980 )     (1,984 )
Accumulated other comprehensive income (loss)
    153       (3 )      
 
Key shareholders’ equity
    10,820       10,663       10,851  
Noncontrolling interests
    252       270       209  
 
Total equity
    11,072       10,933       11,060  
 
Total liabilities and equity
  $ 94,167     $ 93,287     $ 97,792  
 
                 
 
 
(a)   Assets of the VIEs can only be used by the particular VIE and there is no recourse to Key with respect to the liabilities of the consolidated education loan securitization trusts VIEs.
See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Income (Unaudited)
                                 
    Three months ended June 30,   Six months ended June 30,
dollars in millions, except per share amounts   2010     2009     2010     2009  
 
INTEREST INCOME
                               
Loans
  $ 677     $ 819     $ 1,387     $ 1,659  
Loans held for sale
    5       8       9       16  
Securities available for sale
    154       89       304       189  
Held-to-maturity securities
                1       1  
Trading account assets
    10       13       21       26  
Short-term investments
    2       3       4       6  
Other investments
    13       13       27       25  
 
Total interest income
    861       945       1,753       1,922  
 
                               
INTEREST EXPENSE
                               
Deposits
    188       296       400       596  
Federal funds purchased and securities sold under repurchase agreements
    2       1       3       2  
Bank notes and other short-term borrowings
    4       4       7       10  
Long-term debt
    50       75       101       156  
 
Total interest expense
    244       376       511       764  
 
 
                               
NET INTEREST INCOME
    617       569       1,242       1,158  
Provision for loan losses
    228       823       641       1,670  
 
Net interest income (expense) after provision for loan losses
    389       (254 )     601       (512 )
 
                               
NONINTEREST INCOME
                               
Trust and investment services income
    112       119       226       229  
Service charges on deposit accounts
    80       83       156       165  
Operating lease income
    43       59       90       120  
Letter of credit and loan fees
    42       44       82       82  
Corporate-owned life insurance income
    28       25       56       52  
Net securities gains (losses) (a)
    (2 )     125       1       111  
Electronic banking fees
    29       27       56       51  
Gains on leased equipment
    2       36       10       62  
Insurance income
    19       16       37       34  
Net gains (losses) from loan sales
    25       (3 )     29       4  
Net gains (losses) from principal investing
    17       (6 )     54       (78 )
Investment banking and capital markets income (loss)
    31       14       40       31  
Gain from sale/redemption of Visa Inc. shares
                      105  
Gain related to exchange of common shares for capital securities
          95             95  
Other income
    66       72       105       121  
 
Total noninterest income
    492       706       942       1,184  
 
                               
NONINTEREST EXPENSE
                               
Personnel
    385       375       747       734  
Net occupancy
    64       63       130       129  
Operating lease expense
    35       49       74       99  
Computer processing
    47       48       94       95  
Professional fees
    41       46       79       80  
FDIC assessment
    33       70       70       100  
OREO expense, net
    22       15       54       21  
Equipment
    26       25       50       47  
Marketing
    16       17       29       31  
Provision (credit) for losses on lending-related commitments
    (10 )     11       (12 )     11  
Intangible asset impairment
                      196  
Other expense
    110       136       239       239  
 
Total noninterest expense
    769       855       1,554       1,782  
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    112       (403 )     (11 )     (1,110 )
Income taxes
    11       (176 )     (71 )     (414 )
 
INCOME (LOSS) FROM CONTINUING OPERATIONS
    101       (227 )     60       (696 )
Income (loss) from discontinued operations, net of taxes, of ($17), ($8), ($15) and ($14) (see Note 16)
    (27 )     4       (25 )     (25 )
 
NET INCOME (LOSS)
    74       (223 )     35       (721 )
Less: Net income (loss) attributable to noncontrolling interests
    4       3       20       (7 )
 
NET INCOME (LOSS) ATTRIBUTABLE TO KEY
  $ 70     $ (226 )   $ 15     $ (714 )
 
                       
 
                               
Income (loss) from continuing operations attributable to Key common shareholders
  $ 56     $ (394 )   $ (42 )   $ (901 )
Net income (loss) attributable to Key common shareholders
    29       (390 )     (67 )     (926 )
 
                               
Per common share:
                               
Income (loss) from continuing operations attributable to Key common shareholders
  $ .06     $ (.68 )   $ (.05 )   $ (1.68 )
Income (loss) from discontinued operations, net of taxes
    (.03 )     .01       (.03 )     (.05 )
Net income (loss) attributable to Key common shareholders
    .03       (.68 )     (.08 )     (1.73 )
 
                               
Per common share — assuming dilution:
                               
Income (loss) from continuing operations attributable to Key common shareholders
  $ .06     $ (.68 )   $ (.05 )   $ (1.68 )
Income (loss) from discontinued operations, net of taxes
    (.03 )     .01       (.03 )     (.05 )
Net income (loss) attributable to Key common shareholders
    .03       (.68 )     (.08 )     (1.73 )
 
                               
Cash dividends declared per common share
  $ .01     $ .01     $ .02     $ .0725  
 
                               
Weighted-average common shares outstanding (000)
    874,664       576,883       874,526       535,080  
Weighted-average common shares and potential common shares outstanding (000)
    874,664       576,883       874,526       535,080  
 
 
(a)   For the three months ended June 30, 2010, Key had $4 million in impairment losses related to securities, which were recognized in earnings. For the three months ended June 30, 2009, impairment losses totaled $7 million, of which $1 million was recognized in equity as a component of AOCI. (see Note 4)
See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Changes in Equity (Unaudited)
                                                                                         
    Key Shareholders’ Equity              
                                                                    Accumulated              
    Preferred Stock     Common Shares                     Common                     Treasury     Other              
    Outstanding     Outstanding     Preferred     Common     Stock     Capital     Retained     Stock,     Comprehensive     Noncontrolling     Comprehensive  
dollars in millions, except per share amounts   (000)     (000)     Stock     Shares     Warrant     Surplus     Earnings     at Cost     Income (Loss)     Interests     Income (Loss)  
 
BALANCE AT DECEMBER 31, 2008
    6,600       495,002     $ 3,072     $ 584     $ 87     $ 2,553     $ 6,727     $ (2,608 )   $ 65     $ 201          
Net income (loss)
                                                    (714 )                     (7 )   $ (721 )
Other comprehensive income (loss):
                                                                                       
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($23)
                                                                    (38 )             (38 )
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($37)
                                                                    (61 )             (61 )
Net contribution to noncontrolling interests
                                                                            15       15  
Foreign currency translation adjustments
                                                                    21               21  
Net pension and postretirement benefit costs, net of income taxes
                                                                    13               13  
 
                                                                                     
Total comprehensive income (loss)
                                                                                  $ (771 )
 
                                                                                     
Deferred compensation
                                            15                                          
Cash dividends declared on common shares ($.0725 per share)
                                                    (37 )                                
Cash dividends declared on Noncumulative Series A
                                                                                       
Preferred Stock ($3.875 per share)
                                                    (22 )                                
Cash dividends accrued on Cumulative Series B
                                                                                       
Preferred Stock (5% per annum)
                                                    (63 )                                
Amortization of discount on Series B Preferred Stock
                    8                               (8 )                                
Common shares issued
            205,439               206               781                                          
Common shares exchanged for Series A Preferred Stock
    (3,670 )     46,602       (367 )     29               (167 )     (5 )     508                          
Common shares exchanged for capital securities
            46,338               46               196                                          
Common shares reissued for stock options and other employee benefit plans
            3,865                               (86 )             116                          
         
BALANCE AT JUNE 30, 2009
    2,930       797,246     $ 2,713     $ 865     $ 87     $ 3,292     $ 5,878     $ (1,984 )         $ 209          
 
                                                                   
 
BALANCE AT DECEMBER 31, 2009
    2,930       878,535     $ 2,721     $ 946     $ 87     $ 3,734     $ 5,158     $ (1,980 )   $ (3 )   $ 270          
Cumulative effect adjustment to beginning balance of Retained Earnings
                                                    45                             $ 45  
Net income (loss)
                                                    15                       20       35  
Other comprehensive income (loss):
                                                                                       
Net unrealized gains (losses) on securities available for sale, net of income taxes of $136
                                                                    230               230  
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($39)
                                                                    (66 )             (66 )
Net distribution from noncontrolling interests
                                                                            (38 )     (38 )
Foreign currency translation adjustments
                                                                    (19 )             (19 )
Net pension and postretirement benefit costs, net of income taxes
                                                                    11               11  
 
                                                                                     
Total comprehensive income (loss)
                                                                                  $ 198  
 
                                                                                     
Deferred compensation
                                            9                                          
Cash dividends declared on common shares ($.02 per share)
                                                    (18 )                                
Cash dividends declared on Noncumulative Series A
                                                                                       
Preferred Stock ($3.875 per share)
                                                    (12 )                                
Cash dividends accrued on Cumulative Series B
                                                                                       
Preferred Stock (5% per annum)
                                                    (62 )                                
Amortization of discount on Series B Preferred Stock
                    8                               (8 )                                
Common shares reissued for stock options and other employee benefit plans
            1,980                               (42 )             66                          
         
BALANCE AT JUNE 30, 2010
    2,930       880,515     $ 2,729     $ 946     $ 87     $ 3,701     $ 5,118     $ (1,914 )   $ 153     $ 252          
 
                                                                   
 
See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Cash Flows (Unaudited)
                 
    Six months ended June 30,  
in millions   2010     2009  
OPERATING ACTIVITIES
               
Net income (loss)
  $ 35     $ (721 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Provision for loan losses
    641       1,670  
Depreciation and amortization expense
    173       201  
Intangible assets impairment
          196  
Net losses (gains) from principal investing
    (54 )     78  
Net losses (gains) from loan sales
    (29 )     (4 )
Deferred income taxes
    (66 )     (413 )
Net securities losses (gains)
    (1 )     (111 )
Gain from sale/redemption of Visa Inc. shares
          (105 )
Gain related to exchange of common shares for capital securities
          (95 )
Gains on leased equipment
    (10 )     (62 )
Gain from sale of Key’s claim associated with the Lehman
          (32 )
Provision for losses on LIHTC guaranteed funds
          16  
Provision (credit) for losses on lending-related commitments
    (12 )     11  
Net decrease (increase) in loans held for sale excluding transfers from continuing operations
    (48 )     (180 )
Net decrease (increase) in trading account assets
    195       509  
Other operating activities, net
    729       (84 )
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    1,553       874  
INVESTING ACTIVITIES
               
Proceeds from sale/redemption of Visa Inc. shares
          105  
Net decrease (increase) in short-term investments
    (241 )     1,734  
Purchases of securities available for sale
    (4,453 )     (8,031 )
Proceeds from sales of securities available for sale
    32       2,957  
Proceeds from prepayments and maturities of securities available for sale
    1,676       1,404  
Purchases of held-to-maturity securities
    (2 )     (6 )
Proceeds from prepayments and maturities of held-to-maturity securities
    4       6  
Purchases of other investments
    (60 )     (82 )
Proceeds from sales of other investments
    88       14  
Proceeds from prepayments and maturities of other investments
    53       41  
Net decrease (increase) in loans, excluding acquisitions, sales and transfers
    3,882       4,581  
Proceeds from loan sales
    293       80  
Purchases of premises and equipment
    (54 )     (73 )
Proceeds from sales of premises and equipment
    1       2  
Proceeds from sales of other real estate owned
    79       12  
 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    1,298       2,744  
FINANCING ACTIVITIES
               
Net increase (decrease) in deposits
    (3,196 )     2,653  
Net increase (decrease) in short-term borrowings
    1,573       (6,794 )
Net proceeds from issuance of long-term debt
    18       455  
Payments on long-term debt
    (1,034 )     (1,331 )
Net proceeds from issuance of common shares and preferred stock
          987  
Tax benefits over (under) recognized compensation cost for stock-based awards
          (5 )
Cash dividends paid
    (92 )     (122 )
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    (2,731 )     (4,157 )
 
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
    120       (539 )
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD
    471       1,245  
 
CASH AND DUE FROM BANKS AT END OF PERIOD
  $ 591     $ 706  
 
           
 
Additional disclosures relative to cash flows:
               
Interest paid
  $ 528     $ 799  
Income taxes paid (refunded)
    (157 )     (109 )
Noncash items:
               
Loans transferred to portfolio from held for sale
        $ 92  
Loans transferred to held for sale from portfolio
  $ 208       47  
Loans transferred to other real estate owned
    99       91  
 
See Notes to Consolidated Financial Statements (Unaudited).

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

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The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements include any voting rights entities in which we have a controlling financial interest. In accordance with the applicable accounting guidance for consolidations, we also consolidate a VIE if we have: (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity’s economic performance; and (iii) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., we are considered to be the primary beneficiary). Variable interests can include equity interests, subordinated debt, derivative contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments. See Note 7 (“Variable Interest Entities”) for information on our involvement with VIEs.
We use the equity method to account for unconsolidated investments in voting rights entities or VIEs if we have significant influence over the entity’s operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%, but not controlling). Unconsolidated investments in voting rights entities or VIEs in which we have a voting or economic interest of less than 20% generally are carried at cost. Investments held by our registered broker-dealer and investment company subsidiaries (primarily principal investments) are carried at fair value.
Effective January 1, 2010, we prospectively adopted new accounting guidance which changes the way we account for securitizations and SPEs by eliminating the concept of a QSPE and changing the requirements for derecognition of financial assets. In adopting this guidance, we had to analyze our existing QSPEs for possible consolidation. As a result, we consolidated our education loan securitization trusts thereby adding $2.8 billion in discontinued assets and liabilities to our balance sheet including $2.6 billion of loans. Prior to January 1, 2010, QSPEs, including securitization trusts, established under the applicable accounting guidance for transfers of financial assets were not consolidated. For additional information related to the consolidation of our education loan securitization trusts, see the section entitled “Accounting Standards Adopted in 2010” in this note and Note 16 (“Discontinued Operations”).
We believe that the unaudited condensed consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented. Some previously reported amounts have been reclassified to conform to current reporting practices.
The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our 2009 Annual Report to Shareholders.
In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC. In compliance with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.
Goodwill and Other Intangible Assets
In accordance with relevant accounting guidance, goodwill and certain other intangible assets are subject to impairment testing, which must be conducted at least annually. We perform goodwill impairment testing in the fourth quarter of each year. Our reporting units for purposes of this testing are our two business groups, Community Banking and National Banking. Due to uncertainty regarding the strength of the economic recovery, we continue to monitor the impairment indicators for goodwill and other intangible assets, and to evaluate the carrying amount of these assets as necessary.
Based on our review of impairment indicators during the first and second quarters of 2010, we determined that further reviews of goodwill recorded in our Community Banking unit were necessary. These reviews indicated the estimated fair value of the Community Banking unit continued to exceed its carrying amount

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at both June 30, 2010 and March 31, 2010. No further impairment testing was required. There was no goodwill associated with our National Banking unit at either June 30, 2010 or March 31, 2010.
Offsetting Derivative Positions
In accordance with the applicable accounting guidance related to the offsetting of certain derivative contracts on the balance sheet, we take into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related collateral when recognizing derivative assets and liabilities. Additional information regarding derivative offsetting is provided in Note 14 (“Derivatives and Hedging Activities”).
Accounting Guidance Adopted in 2010
Transfers of financial assets. In June 2009, the FASB issued new accounting guidance which changes the way entities account for securitizations and SPEs by eliminating the concept of a QSPE and changing the requirements for derecognition of financial assets. This guidance, which also requires additional disclosures, was effective at the start of an entity’s first fiscal year beginning after November 15, 2009 (effective January 1, 2010, for us). Adoption of this guidance did not have a material effect on our financial condition or results of operations.
Consolidation of variable interest entities. In June 2009, the FASB issued new accounting guidance which, in addition to requiring additional disclosures, changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, the entity’s purpose and design, and the company’s ability to direct the activities that most significantly impact the entity’s economic performance. This guidance was effective at the start of a company’s first fiscal year beginning after November 15, 2009 (effective January 1, 2010, for us).
In conjunction with our prospective adoption of this guidance on January 1, 2010, we consolidated our education loan securitization trusts (classified as discontinued assets and liabilities), thereby adding $2.8 billion in assets and liabilities to our balance sheet, of which $2.6 billion were loans.
In February 2010, the FASB deferred the application of this new guidance for certain investment entities and clarified other aspects of the guidance. Entities qualifying for this deferral will continue to apply the previously existing consolidation guidance.
Improving disclosures about fair value measurements. In January 2010, the FASB issued accounting guidance which requires new disclosures regarding certain aspects of an entity’s fair value disclosures and clarifies existing fair value disclosure requirements. The new disclosures and clarifications were effective for interim and annual reporting periods beginning after December 15, 2009 (effective January 1, 2010, for us), except for disclosures regarding purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for interim and annual periods beginning after December 15, 2010 (effective January 1, 2011, for us). Our policy is to recognize transfers between levels of the fair value hierarchy at the end of the reporting period. The required disclosures are provided in Note 15 (“Fair Value Measurements”).
Accounting Guidance Pending Adoption at June 30, 2010
Credit quality disclosures. In July 2010, the FASB issued new accounting guidance which requires additional disclosures about the credit quality of financing receivables (i.e. loans) and the allowance for credit losses. Most of these additional disclosures will be required for interim and annual reporting periods ending on or after December 15, 2010 (effective December 31, 2010, for us). Specific items regarding activity that occurred before the issuance of this accounting guidance, such as the allowance rollforward and modification disclosures, will be required for periods beginning after December 15, 2010 (January 1, 2011, for us).

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Embedded credit derivatives. In March 2010, the FASB issued new accounting guidance that amends and clarifies how entities should evaluate credit derivatives embedded in beneficial interests in securitized financial assets. This accounting guidance eliminates the existing scope exception for most credit derivative features embedded in beneficial interests in securitized financial assets. This guidance will be effective the first day of the fiscal quarter beginning after June 15, 2010 (effective July 1, 2010, for us) with early adoption permitted. We have no financial instruments that would be subject to this accounting guidance.
2. Earnings Per Common Share
Our basic and diluted earnings per common share are calculated as follows:
                                 
    Three months ended June 30,   Six months ended June 30,
dollars in millions, except per share amounts   2010     2009     2010     2009  
 
EARNINGS
                               
Income (loss) from continuing operations
  $ 101     $ (227 )   $ 60     $ (696 )
Less: Net income (loss) attributable to noncontrolling interests
    4       3       20       (7 )
 
Income (loss) from continuing operations attributable to Key
    97       (230 )     40       (689 )
Less: Dividends on Series A Preferred Stock
    6       15       12       27  
Noncash deemed dividend — common shares exchanged for Series A Preferred Stock
          114             114  
Cash dividends on Series B Preferred Stock
    31       31       62       63  
Amortization of discount on Series B Preferred Stock
    4       4       8       8  
 
Income (loss) from continuing operations attributable to Key common shareholders
    56       (394 )     (42 )     (901 )
Income (loss) from discontinued operations, net of taxes (a)
    (27 )     4       (25 )     (25 )
 
Net income (loss) attributable to Key common shareholders
  $ 29     $ (390 )   $ (67 )   $ (926 )
 
                       
 
WEIGHTED-AVERAGE COMMON SHARES
                               
Weighted-average common shares outstanding (000)
    874,664       576,883       874,526       535,080  
Effect of dilutive convertible preferred stock, common stock options and other stock awards (000)
                       
 
Weighted-average common shares and potential common shares outstanding (000)
    874,664       576,883       874,526       535,080  
 
                       
 
EARNINGS PER COMMON SHARE
                               
Income (loss) from continuing operations attributable to Key common shareholders
  $ .06     $ (.68 )   $ (.05 )   $ (1.68 )
Income (loss) from discontinued operations, net of taxes (a)
    (.03 )     .01       (.03 )     (.05 )
Net income (loss) attributable to Key common shareholders
    .03       (.68 )     (.08 )     (1.73 )
 
                               
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution
  $ .06     $ (.68 )   $ (.05 )   $ (1.68 )
Income (loss) from discontinued operations, net of taxes (a)
    (.03 )     .01       (.03 )     (.05 )
Net income (loss) attributable to Key common shareholders — assuming dilution
    .03       (.68 )     (.08 )     (1.73 )
 
 
(a)   In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result of these decisions, we have accounted for these businesses as discontinued operations. The loss from discontinued operations for the six-month period ended June 30, 2010, was primarily attributable to fair value adjustments related to the education lending securitization trusts. Included in the loss from discontinued operations for the six-month period ended June 30, 2009, is a charge for intangible assets impairment related to Austin.

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3. Line of Business Results
The specific lines of business that comprise each of the major business groups (operating segments) are described below. During the first quarter of 2010, we re-aligned our reporting structure for our business groups. Prior to 2010, Consumer Finance consisted mainly of portfolios which were identified as exit or run-off portfolios and were included in our National Banking segment. For all periods presented, we are reflecting the results of these exit portfolios in Other Segments. The automobile dealer floor-plan business, previously included in Consumer Finance, has been re-aligned with the Commercial Banking line of business within the Community Banking segment. Our tuition processing business was moved from Consumer Finance to Global Treasury Management within Real Estate Capital and Corporate Banking Services. In addition, other previously identified exit portfolios included in the National Banking segment have been moved to Other Segments.
Community Banking
Regional Banking provides individuals with branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans. This line of business also provides small businesses with deposit, investment and credit products, and business advisory services.
Regional Banking also offers financial, estate and retirement planning, and asset management services to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving and related needs.
Commercial Banking provides midsize businesses with products and services that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives and foreign exchange.
National Banking
Real Estate Capital and Corporate Banking Services consists of two business units, Real Estate Capital and Corporate Banking Services.
Real Estate Capital is a national business that provides construction and interim lending, permanent debt placements and servicing, equity and investment banking, and other commercial banking products and services to developers, brokers and owner-investors. This unit deals primarily with nonowner-occupied properties (i.e., generally properties in which at least 50% of the debt service is provided by rental income from nonaffiliated third parties). Real Estate Capital emphasizes providing clients with finance solutions through access to the capital markets.
Corporate Banking Services provides cash management, interest rate derivatives, and foreign exchange products and services to clients served by the Community Banking and National Banking groups. Through its Public Sector and Financial Institutions businesses, Corporate Banking Services also provides a full array of commercial banking products and services to government and not-for-profit entities and to community banks. A variety of cash management services, including the processing of tuition payments for private schools, are provided through the Global Treasury Management unit.
Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients. Lease financing receivables and related revenues are assigned to other lines of business (primarily Institutional and Capital Markets, and Commercial Banking) if those businesses are principally responsible for maintaining the relationship with the client.
Institutional and Capital Markets, through its KeyBanc Capital Markets unit, provides commercial lending, treasury management, investment banking, derivatives, foreign exchange, equity and debt

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underwriting and trading, and syndicated finance products and services to large corporations and middle-market companies.
Institutional and Capital Markets, through its Victory Capital Management unit, also manages or offers advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals. These portfolios may be managed in separate accounts, common funds or the Victory family of mutual funds.
Other Segments
Other Segments consist of Corporate Treasury, our Principal Investing unit and various exit portfolios which were previously included within the National Banking segment. These exit portfolios were moved to Other Segments during the first quarter of 2010.
Reconciling Items
Total assets included under “Reconciling Items” primarily represent the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling Items also includes intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations.
The table on the following pages shows selected financial data for each major business group for the three- and six- month periods ended June 30, 2010 and 2009. This table is accompanied by supplementary information for each of the lines of business that make up these groups. The information was derived from the internal financial reporting system that we use to monitor and manage our financial performance. GAAP guides financial accounting, but there is no authoritative guidance for “management accounting” — the way we use our judgment and experience to make reporting decisions. Consequently, the line of business results we report may not be comparable with line of business results presented by other companies.
The selected financial data are based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. In accordance with our policies:
¨   Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment and/or repricing characteristics. The net effect of this funds transfer pricing is charged to the lines of business based on the total loan and deposit balances of each line.
 
¨   Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent to which each line actually uses the services.
 
¨   The consolidated provision for loan losses is allocated among the lines of business primarily based on their actual net charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that we use to estimate our consolidated allowance for loan losses. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan Losses” on page 82 in our 2009 Annual Report to Shareholders.
 
¨   Income taxes are allocated based on the statutory federal income tax rate of 35% (adjusted for tax-exempt interest income, income from corporate-owned life insurance and tax credits associated with investments in low-income housing projects) and a blended state income tax rate (net of the federal income tax benefit) of 2.2%.
 
¨   Capital is assigned based on our assessment of economic risk factors (primarily credit, operating and market risk) directly attributable to each line.

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Developing and applying the methodologies that we use to allocate items among our lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect accounting enhancements, changes in the risk profile of a particular business or changes in our organizational structure.
                                 
Three months ended June 30,   Community Banking     National Banking  
dollars in millions   2010     2009     2010     2009  
 
SUMMARY OF OPERATIONS
                               
Net interest income (TE)
  $ 408     $ 437     $ 199     $ 234  
Noninterest income
    199       193       210       211  
 
Total revenue (TE) (a)
    607       630       409       445  
Provision (credit) for loan losses
    121       199       99       494  
Depreciation and amortization expense
    9       11       25       31  
Other noninterest expense
    446       485       234       261  
 
Income (loss) from continuing operations before income taxes (TE)
    31       (65 )     51       (341 )
Allocated income taxes and TE adjustments
    (1 )     (35 )     18       (129 )
 
Income (loss) from continuing operations
    32       (30 )     33       (212 )
Income (loss) from discontinued operations, net of taxes
                       
 
Net income (loss)
    32       (30 )     33       (212 )
Less: Net income (loss) attributable to noncontrolling interests
                      (1 )
 
Net income (loss) attributable to Key
  $ 32     $ (30 )   $ 33     $ (211 )
 
                       
 
AVERAGE BALANCES (b)
                               
Loans and leases
  $ 27,218     $ 30,305     $ 20,948     $ 28,586  
Total assets (a)
    30,292       33,162       24,781       34,798  
Deposits
    50,421       52,786       12,474       13,019  
 
OTHER FINANCIAL DATA
                               
Net loan charge-offs (b)
  $ 148     $ 114     $ 173     $ 252  
Return on average allocated equity (b)
    3.46  %     (3.30 ) %     3.92  %     (21.47 ) %
Return on average allocated equity
    3.46       (3.30 )     3.92       (21.47 )
Average full-time equivalent employees (e)
    8,246       8,709       2,327       2,545  
 
                                 
Six months ended June 30,   Community Banking     National Banking  
dollars in millions   2010     2009     2010     2009  
 
SUMMARY OF OPERATIONS
                               
Net interest income (TE)
  $ 821     $ 859     $ 396     $ 456
Noninterest income
    386       381     389       410
 
Total revenue (TE) (a)
    1,207       1,240       785       866  
Provision (credit) for loan losses
    263       340       260       1,005  
Depreciation and amortization expense
    18       22       51       63  
Other noninterest expense
    904       941       479       657  (c)
 
Income (loss) from continuing operations before income taxes (TE)
    22       (63 )     (5 )     (859 )
Allocated income taxes and TE adjustments
    (16 )     (44 )     (5 )     (251 )
 
Income (loss) from continuing operations
    38       (19 )           (608 )
Income (loss) from discontinued operations, net of taxes
                       
 
Net income (loss)
    38       (19 )           (608 )
Less: Net income (loss) attributable to noncontrolling interests
                      (3 )
 
Net income (loss) attributable to Key
  $ 38     $ (19 )         $ (605 )
 
                       
 
AVERAGE BALANCES (b)
                               
Loans and leases
  $ 27,492     $ 30,787     $ 21,690     $ 29,141  
Total assets (a)
    30,581       33,664       25,521       35,999  
Deposits
    50,937       52,223       12,445       12,496  
 
OTHER FINANCIAL DATA
                               
Net loan charge-offs (b)
  $ 264     $ 203     $ 424     $ 492  
Return on average allocated equity (b)
    2.06  %     (1.06 ) %           (30.83 ) %
Return on average allocated equity
    2.06       (1.06 )           (30.83 )
Average full-time equivalent employees (e)
    8,217       8,823       2,348       2,583  
 
 
(a)   Substantially all revenue generated by our major business groups is derived from clients that reside in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software and goodwill held by our major business groups, are located in the United States.
 
(b)   From continuing operations.
 
(c)   Other Segments’ results for the second quarter of 2009 include net gains of $125 million ($78 million after tax) in connection with the repositioning of the securities portfolio and a $95 million ($59 million after tax) gain related to the exchange of Key common shares for capital securities.
 
(d)   Reconciling Items for the second quarter of 2009 include a $32 million ($20 million after tax) gain from the sale of Key’s claim associated with the Lehman Brothers’ bankruptcy.
 
(e)   The number of average full-time equivalent employees has not been adjusted for discontinued operations.

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Other Segments     Total Segments     Reconciling Items     Key  
2010     2009     2010     2009     2010     2009     2010     2009  
 
                                                             
$ 9     $ (91 )   $ 616     $ 580     $ 7     $ (5 )   $ 623     $ 575  
  77       278  (c)     486       682       6       24  (d)     492       706  
 
  86       187       1,102       1,262       13       19       1,115       1,281  
  7       131       227       824       1       (1 )     228       823  
  10       18       44       60       41       40       85       100  
  33       34       713       780       (29 )     (25 )     684       755  
 
  36       4       118       (402 )           5       118       (397 )
  3       (8 )     20       (172 )     (3 )     2       17       (170 )
 
  33       12       98       (230 )     3       3       101       (227 )
                          (27 )     4       (27 )     4  
 
  33       12       98       (230 )     (24 )     7       74       (223 )
  4       4       4       3                   4       3  
 
$ 29     $ 8     $ 94     $ (233 )   $ (24 )   $ 7     $ 70     $ (226 )
                                             
 
                                                             
$ 6,738     $ 9,765     $ 54,904     $ 68,656     $ 49     $ 54     $ 54,953     $ 68,710  
  30,583       27,920       85,656       95,880       2,188       608       87,844       96,488  
  1,574       1,974       64,469       67,779       (60 )     (416 )     64,409       67,363  
 
                                                             
$ 115     $ 136     $ 436     $ 502     $ (1 )         $ 435     $ 502  
  N/M       N/M       4.60  %     (10.50 ) %     N/M       N/M       3.65 %     (9.04 ) %
  N/M       N/M       4.60       (10.50 )     N/M       N/M       2.64       (8.89 )
  40       87       10,613       11,341       5,052       5,596       15,665       16,937  
 
                                                             
Other Segments     Total Segments     Reconciling Items     Key  
2010     2009     2010     2009     2010     2009     2010     2009  
 
                                                             
$ 25     $ (132 )   $ 1,242     $ 1,183     $ 13     $ (13 )   $ 1,255     $ 1,170  
  157       282  (c)     932       1,073       10       111  (d)     942       1,184  
 
  182       150       2,174       2,256       23       98       2,197       2,354  
  128       324       651       1,669       (10 )     1       641       1,670  
  21       36       90       121       83       80       173       201  
  63       73       1,446       1,671       (65 )     (90 )     1,381       1,581  
 
  (30 )     (283 )     (13 )     (1,205 )     15       107       2       (1,098 )
  (31 )     (126 )     (52 )     (421 )     (6 )     19       (58 )     (402 )
 
  1       (157 )     39       (784 )     21       88       60       (696 )
                          (25 )     (25 )     (25 )     (25 )
 
  1       (157 )     39       (784 )     (4 )     63       35       (721 )
  20       (4 )     20       (7 )                 20       (7 )
 
$ (19 )   $ (153 )   $ 19     $ (777 )   $ (4 )   $ 63     $ 15     $ (714 )
                                             
 
                                                             
$ 7,047     $ 10,180     $ 56,229     $ 70,108     $ 53     $ 45     $ 56,282     $ 70,153  
  29,962       27,651       86,064       97,314       2,219       584       88,283       97,898  
  1,609       1,884       64,991       66,603       (109 )     (293 )     64,882       66,310  
 
                                                             
$ 269     $ 267     $ 957     $ 962                 $ 957     $ 962  
  N/M       N/M       .46 %     (17.62 ) %     N/M       N/M       .75 %     (13.52 ) %
  N/M       N/M       .46       (17.62 )     N/M       N/M       .28       (14.01 )
  41       97       10,606       11,503       5,112       5,698       15,718       17,201  
 

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Supplementary information (Community Banking lines of business)
                                 
Three months ended June 30,   Regional Banking   Commercial Banking
dollars in millions   2010     2009     2010     2009  
 
Total revenue (TE)
  $ 494     $ 527     $ 113     $ 103  
Provision for loan losses
    57       166       64       33  
Noninterest expense
    409       439       46       57  
Net income (loss) attributable to Key
    30       (38 )     2       8  
Average loans and leases
    18,405       19,745       8,813       10,560  
Average loans held for sale
    69       168       1       1  
Average deposits
    45,234       48,717       5,187       4,069  
Net loan charge-offs
    82       72       66       42  
Net loan charge-offs to average loans
    1.79  %     1.46  %     3.00  %     1.60  %
Nonperforming assets at period end
  $ 339     $ 245     $ 222     $ 267  
Return on average allocated equity
    4.90  %     (6.60 ) %     .64  %     2.39  %
Average full-time equivalent employees
    7,891       8,339       355       370  
 
                                 
Six months ended June 30,   Regional Banking   Commercial Banking
dollars in millions   2010     2009     2010     2009  
 
Total revenue (TE)
  $ 985     $ 1,034     $ 222     $ 206  
Provision for loan losses
    172       234       91       106  
Noninterest expense
    830       849       92       114  
Net income (loss) attributable to Key
    14       (10 )     24       (9 )
Average loans and leases
    18,578       19,874       8,914       10,913  
Average loans held for sale
    75       142       1       2  
Average deposits
    45,713       48,253       5,224       3,970  
Net loan charge-offs
    179       125       85       78  
Net loan charge-offs to average loans
    1.94  %     1.27  %     1.92  %     1.44  %
Nonperforming assets at period end
  $ 339     $ 245     $ 222     $ 267  
Return on average allocated equity
    1.15  %     (.88 ) %     3.82  %     (1.37 ) %
Average full-time equivalent employees
    7,864       8,451       353       372  
 
Supplementary information (National Banking lines of business)
                                                 
    Real Estate Capital and                   Institutional and
Three months ended June 30,   Corporate Banking Services   Equipment Finance   Capital Markets
dollars in millions   2010     2009     2010     2009     2010     2009  
 
Total revenue (TE)
  $ 176     $ 191     $ 61     $ 65     $ 172     $ 189  
Provision for loan losses
    77       414       10       42       12       38  
Noninterest expense
    106       113       49       60       104       119  
Net income (loss) attributable to Key
    (4 )     (209 )     1       (23 )     36       21  
Average loans and leases
    11,465       15,145       4,478       5,051       5,005       8,390  
Average loans held for sale
    194       182       16       18       171       193  
Average deposits
    9,811       10,678       5       9       2,658       2,332  
Net loan charge-offs
    142       212       18       29       13       11  
Net loan charge-offs to average loans
    4.97  %     5.61  %     1.61  %     2.30  %     1.04  %     .53  %
Nonperforming assets at period end
  $ 867     $ 1,023     $ 106     $ 105     $ 116     $ 89  
Return on average allocated equity
    (.78 ) %     (34.43 ) %     1.14  %     (25.07 ) %     14.92  %     7.40  %
Average full-time equivalent employees
    1,052       1,125       549       637       726       783  
 
                                                 
    Real Estate Capital and                   Institutional and
Six months ended June 30,   Corporate Banking Services   Equipment Finance   Capital Markets
dollars in millions   2010     2009     2010     2009     2010     2009  
 
Total revenue (TE)
  $ 320     $ 374     $ 122     $ 130     $ 343     $ 362  
Provision for loan losses
    222       852       14       83       24       70  
Noninterest expense
    221       304       96       113       213       303  
Net income (loss) attributable to Key
    (76 )     (530 )     7       (41 )     69       (34 )
Average loans and leases
    11,900       15,432       4,525       5,041       5,265       8,668  
Average loans held for sale
    154       194       9       13       148       230  
Average deposits
    9,823       10,433       5       9       2,617       2,054  
Net loan charge-offs
    349       385       36       50       39       57  
Net loan charge-offs to average loans
    5.91  %     5.03  %     1.60  %     2.00  %     1.49  %     1.33  %
Nonperforming assets at period end
  $ 867     $ 1,023     $ 106     $ 105     $ 116     $ 89  
Return on average allocated equity
    (7.42 ) %     (45.00 ) %     3.92  %     (20.12 ) %     14.13  %     (5.86 ) %
Average full-time equivalent employees
    1,065       1,146       556       639       727       798  
 

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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.

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    June 30, 2010  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 8                 $ 8  
States and political subdivisions
    75     $ 3             78  
Collateralized mortgage obligations
    17,817       473             18,290  
Other mortgage-backed securities
    1,187       96             1,283  
Other securities
    106       11     $ 3       114  
 
Total securities available for sale
  $ 19,193     $ 583     $ 3     $ 19,773  
 
                       
 
                               
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
  $ 3                 $ 3  
Other securities
    16                   16  
 
Total held-to-maturity securities
  $ 19                 $ 19  
 
                       
 
                                 
    December 31, 2009  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 8                 $ 8  
States and political subdivisions
    81     $ 2             83  
Collateralized mortgage obligations
    14,894       187     $ 75       15,006  
Other mortgage-backed securities
    1,351       77             1,428  
Other securities
    100       17       1       116  
 
Total securities available for sale
  $ 16,434     $ 283     $ 76     $ 16,641  
 
                       
 
 
                               
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
  $ 3                 $ 3  
Other securities
    21                   21  
 
Total held-to-maturity securities
  $ 24                 $ 24  
 
                       
 
                                 
    June 30, 2009  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 1,710                 $ 1,710  
States and political subdivisions
    85     $ 1             86  
Collateralized mortgage obligations
    8,462       99     $ 38       8,523  
Other mortgage-backed securities
    1,525       74             1,599  
Other securities
    66       6       2       70  
 
Total securities available for sale
  $ 11,848     $ 180     $ 40     $ 11,988  
 
                       
 
 
                               
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
  $ 4                 $ 4  
Other securities
    21                   21  
 
Total held-to-maturity securities
  $ 25                 $ 25  
 
                       
 

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The following table summarizes our securities available for sale that were in an unrealized loss position as of June 30, 2010, December 31, 2009, and June 30, 2009.
                                                 
    Duration of Unrealized Loss Position        
    Less than 12 Months     12 Months or Longer     Total  
            Gross             Gross             Gross  
            Unrealized             Unrealized             Unrealized  
in millions   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
 
JUNE 30, 2010
                                               
Securities available for sale:
                                               
Other securities
  $ 18     $ 2     $ 3     $ 1     $ 21     $ 3  
 
Total temporarily impaired securities
  $ 18     $ 2     $ 3     $ 1     $ 21     $ 3  
 
                                   
 
DECEMBER 31, 2009
                                               
Securities available for sale:
                                               
Collateralized mortgage obligations
  $ 4,988     $ 75                 $ 4,988     $ 75  
Other securities
    2           $ 4     $ 1       6       1  
 
Total temporarily impaired securities
  $ 4,990     $ 75     $ 4     $ 1     $ 4,994     $ 76  
 
                                   
 
JUNE 30, 2009
                                               
Securities available for sale:
                                               
Collateralized mortgage obligations
  $ 1,660     $ 38                 $ 1,660     $ 38  
Other securities
    10       1     $ 2     $ 1       12       2  
 
Total temporarily impaired securities
  $ 1,670     $ 39     $ 2     $ 1     $ 1,672     $ 40  
 
                                   
 
The unrealized losses within each investment category are considered temporary since we expect to collect all contractually due amounts from these securities. Accordingly, these investments have been reduced to their fair value through OCI, not earnings.
We regularly assess our securities portfolio for OTTI. The assessments are based on the nature of the securities, underlying collateral, the financial condition of the issuer, the extent and duration of the loss, our intent related to the individual securities, and the likelihood that we will have to sell these securities prior to expected recovery.
Debt securities identified to have OTTI are written down to their current fair value. For those debt securities that we intend to sell, or more-likely-than-not will be required to sell, prior to the expected recovery of the amortized cost, the entire impairment (i.e., the difference between amortized cost and the fair value) is recognized in earnings. For those debt securities that we do not intend to sell, or more-likely-than-not will not be required to sell, prior to expected recovery, the credit portion of OTTI is recognized in earnings, while the remaining OTTI is recognized in equity as a component of AOCI on the balance sheet. As shown in the following table, there was $4 million in impairment losses recognized in earnings for the three months ended June 30, 2010.
         
Three months ended June 30, 2010        
in millions        
 
Balance at March 31, 2010
     
Impairment recognized in earnings
  $ 4  
 
Balance at June 30, 2010
  $ 4  
 
     
 

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As a result of adopting new consolidation guidance on January 1, 2010, we have consolidated our education loan securitization trusts and eliminated our residual interests in these trusts. Prior to our consolidation of these trusts, we accounted for the residual interests associated with these securitizations as debt securities which we regularly assessed for impairment. These residual interests will no longer be assessed for impairment. The consolidated assets and liabilities related to these trusts are included in “discontinued assets” and “discontinued liabilities” on the balance sheet as a result of our decision to exit the education lending business. For more information about this discontinued operation, see Note 16 (“Discontinued Operations”).
Realized gains and losses related to securities available for sale were as follows:
         
Six months ended June 30, 2010        
in millions        
 
Realized gains
  $ 5  
Realized losses
    4  
 
Net securities gains (losses)
  $ 1  
 
     
 
At June 30, 2010, securities available for sale and held-to-maturity securities totaling $12.1 billion were pledged to secure securities sold under repurchase agreements, public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.
The following table shows securities by remaining maturity. Collateralized mortgage obligations and other mortgage-backed securities — both of which are included in the securities available-for-sale portfolio — are presented based on their expected average lives. The remaining securities, including all of those in the held-to-maturity portfolio, are presented based on their remaining contractual maturity. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.
                                 
    Securities     Held-to-Maturity  
    Available for Sale     Securities  
June 30, 2010   Amortized     Fair     Amortized     Fair  
in millions   Cost     Value     Cost     Value  
 
Due in one year or less
  $ 679     $ 698     $ 2     $ 2  
Due after one through five years
    18,371       18,924       17       17  
Due after five through ten years
    126       133              
Due after ten years
    17       18              
 
Total
  $ 19,193     $ 19,773     $ 19     $ 19  
 
                       
 

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5. Loans and Loans Held for Sale
Our loans by category are summarized as follows:
                         
    June 30,     December 31,     June 30,  
in millions   2010     2009     2009  
 
Commercial, financial and agricultural
  $ 17,113     $ 19,248     $ 23,542  
Commercial real estate:
                       
Commercial mortgage
    9,971       10,457       11,761  
Construction
    3,430       4,739       6,119  
 
Total commercial real estate loans
    13,401       15,196       17,880  
Commercial lease financing
    6,620       7,460       8,263  
 
Total commercial loans
    37,134       41,904       49,685  
Real estate — residential mortgage
    1,846       1,796       1,753  
Home equity:
                       
Community Banking
    9,775       10,048       10,250  
Other
    753       838       940  
 
Total home equity loans
    10,528       10,886       11,190  
Consumer other — Community Banking
    1,147       1,181       1,199  
Consumer other:
                       
Marine
    2,491       2,787       3,095  
Other
    188       216       245  
 
Total consumer other
    2,679       3,003       3,340  
 
Total consumer loans
    16,200       16,866       17,482  
 
Total loans (a)
  $ 53,334     $ 58,770     $ 67,167  
 
                 
 
(a)   Excludes loans in the amount of $6.6 billion, $3.5 billion and $3.6 billion at June 30, 2010, December 31, 2009 and June 30, 2009, respectively, related to the discontinued operations of the education lending business.
We use interest rate swaps, which modify the repricing characteristics of certain loans, to manage interest rate risk. For more information about such swaps, see Note 20 (“Derivatives and Hedging Activities”), which begins on page 122 of our 2009 Annual Report to Shareholders.
Our loans held for sale by category are summarized as follows:
                         
    June 30,     December 31,     June 30,  
in millions   2010     2009     2009  
 
Commercial, financial and agricultural
  $ 255     $ 14     $ 51  
Real estate — commercial mortgage
    235       171       288  
Real estate — construction
    112       92       146  
Commercial lease financing
    16       27       30  
Real estate — residential mortgage
    81       139       245  
Automobile
                1  
 
Total loans held for sale (a)
  $ 699  (b)   $ 443  (b)   $ 761  
 
                 
 
(a)   Excludes loans in the amount of $92 million, $434 million and $148 million at June 30, 2010, December 31, 2009, and June 30, 2009, respectively, related to the discontinued operations of the education lending business.
 
(b)   The beginning balance at December 31, 2009 of $443 million increased by new originations in the amount of $1.321 billion and net transfers from held to maturity in the amount of $174 million, and decreased by loan sales of $1.200 billion, transfers to OREO/valuation adjustments of $17 million and loan payments of $22 million, for an ending balance of $699 million at June 30, 2010.

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Changes in the allowance for loan losses are summarized as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
in millions   2010     2009     2010     2009  
 
Balance at beginning of period
  $ 2,425     $ 2,016     $ 2,534     $ 1,629  
 
                               
Charge-offs
    (492 )     (540 )     (1,049 )     (1,027 )
Recoveries
    57       38       92       65  
 
Net loans charged off
    (435 )     (502 )     (957 )     (962 )
Provision for loan losses from continuing operations
    228       823       641       1,670  
Foreign currency translation adjustment
    1       2       1       2  
 
Balance at end of period
  $ 2,219     $ 2,339     $ 2,219     $ 2,339  
 
                       
 
Changes in the liability for credit losses on lending-related commitments are summarized as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
in millions   2010     2009     2010     2009  
 
Balance at beginning of period
  $ 119     $ 54     $ 121     $ 54  
Provision (credit) for losses on lending-related commitments
    (10 )     11       (12 )     11  
 
Balance at end of period (a)
  $ 109     $ 65     $ 109     $ 65  
 
                       
 
 
(a)   Included in “accrued expense and other liabilities” on the balance sheet.
6. Mortgage Servicing Assets
We originate and periodically sell commercial mortgage loans but continue to service those loans for the buyers. We also may purchase the right to service commercial mortgage loans for other lenders. A servicing asset is recorded if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market rate. Changes in the carrying amount of mortgage servicing assets are summarized as follows:
                 
    Six months ended June 30,  
in millions   2010     2009  
 
Balance at beginning of period
  $ 221     $ 242  
Servicing retained from loan sales
    3       4  
Purchases
    7       15  
Amortization
    (22 )     (27 )
 
Balance at end of period
  $ 209     $ 234  
 
           
 
Fair value at end of period
  $ 307     $ 403  
 
           
 
The fair value of mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. Primary economic assumptions used to measure the fair value of our mortgage servicing assets at June 30, 2010 and 2009, are:
w   prepayment speed generally at an annual rate of 0.00% to 25.00%;
 
w   expected credit losses at a static rate of 2.00% to 3.00%; and
 
w   residual cash flows discount rate of 7.00% to 15.00%.
Changes in these assumptions could cause the fair value of mortgage servicing assets to change in the future. The volume of loans serviced and expected credit losses are critical to the valuation of servicing assets. At June 30, 2010, a 1.00% increase in the assumed default rate of commercial mortgage loans would cause a $9 million decrease in the fair value of our mortgage servicing assets.

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Contractual fee income from servicing commercial mortgage loans totaled $37 million and $34 million for the six-month periods ended June 30, 2010 and 2009, respectively. We have elected to remeasure servicing assets using the amortization method. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income. The amortization of servicing assets for each period, as shown in the preceding table, is recorded as a reduction to fee income. Both the contractual fee income and the amortization are recorded in “other income” on the income statement.
Additional information pertaining to the accounting for mortgage and other servicing assets is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Servicing Assets” on page 82 of our 2009 Annual Report to Shareholders and Note 16 (“Discontinued Operations”) under the heading “Education lending.”
7. Variable Interest Entities
A VIE is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:
w   The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.
 
w   The entity’s investors lack the power to direct the activities that most significantly impact the entity’s economic performance.
 
w   The entity’s equity at risk holders do not have the obligation to absorb losses and the right to receive residual returns.
 
w   The voting rights of some investors are not proportional to their economic interest in the entity, and substantially all of the entity’s activities involve or are conducted on behalf of investors with disproportionately few voting rights.
Our VIEs, including those consolidated and those in which we hold a significant interest, are summarized below. We define a “significant interest” in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIE’s expected losses or residual returns; however, we do not have the power to direct the activities that most significantly impact the entity’s economic performance.
                                         
    Consolidated VIEs     Unconsolidated VIEs  
    Total     Total     Total     Total     Maximum  
in millions   Assets     Liabilities     Assets     Liabilities     Exposure to Loss  
 
June 30, 2010
                                       
LIHTC funds
  $ 134       N/A     $ 175              
Education loan securitization trusts
    3,285     $ 3,135       N/A       N/A       N/A  
LIHTC investments
    N/A       N/A       963           $ 451  
 
 

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Our involvement with VIEs is described below.
Consolidated VIEs
LIHTC guaranteed funds. KAHC formed limited partnerships, known as funds, which invested in LIHTC operating partnerships. Interests in these funds were offered in syndication to qualified investors who paid a fee to KAHC for a guaranteed return. We also earned syndication fees from the funds and continue to earn asset management fees. The funds’ assets primarily are investments in LIHTC operating partnerships, which totaled $118 million at June 30, 2010. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the funds’ limited obligations.
We have not formed new funds or added LIHTC partnerships since October 2003. However, we continue to act as asset manager and provide occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, we have determined that we are the primary beneficiary of these funds. We recorded additional expenses of approximately $2 million related to this guarantee obligation during the first six months of 2010. Additional information on return guarantee agreements with LIHTC investors is presented in Note 13 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Guarantees.”
In accordance with the applicable accounting guidance for distinguishing liabilities from equity, third-party interests associated with our LIHTC guaranteed funds are considered mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. However, the FASB has indefinitely deferred the measurement and recognition provisions of this accounting guidance for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as our LIHTC guaranteed funds. We adjust our financial statements each period for the third-party investors’ share of the funds’ profits and losses. At June 30, 2010, we estimated the settlement value of these third-party interests to be between $83 million and $93 million, while the recorded value, including reserves, totaled $143 million. The partnership agreement for each of our guaranteed funds requires the fund to be dissolved by a certain date.
Education loan securitization trusts. In September 2009, we decided to exit the government-guaranteed education lending business. Therefore, we have accounted for this business as a discontinued operation. As part of our education lending business model, we would originate and securitize education loans. We, as the transferor, retained a portion of the risk in the form of a residual interest and also retained the right to service the securitized loans and receive servicing fees.
As a result of adopting the new consolidation accounting guidance issued by the FASB in June 2009, we have consolidated our ten outstanding education loan securitization trusts as of January 1, 2010. We were required to consolidate these trusts because we hold the residual interests and are the master servicer who has the power to direct the activities that most significantly impact the economic performance of these trusts. We elected to consolidate these trusts at fair value. The assets held by these trusts can only be used to settle the obligations or securities issued by the trusts. We cannot sell the assets or transfer the liabilities of the consolidated trusts. The security holders or beneficial interest holders do not have recourse to us. We do not have any liability recorded related to these trusts other than the securities issued by the trusts. We have not securitized any education loans since 2006. Additional information regarding these trusts is provided in Note 16 (“Discontinued Operations”) under the heading “Education lending.”

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Unconsolidated VIEs
LIHTC nonguaranteed funds. Although we hold significant interests in certain nonguaranteed funds that we formed and funded, we have determined that we are not the primary beneficiary of those funds because we do not absorb the majority of the funds’ expected losses and do not have the power to direct activities that most significantly impact the economic performance of these entities. At June 30, 2010, assets of these unconsolidated nonguaranteed funds totaled $175 million. Our maximum exposure to loss in connection with these funds is minimal, and we do not have any liability recorded related to the funds. We have not formed nonguaranteed funds since October 2003.
LIHTC investments. Through the Community Banking business group, we have made investments directly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, we are allocated tax credits and deductions associated with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities of the partnerships that most significantly impact their economic performance and have the obligation to absorb expected losses and the right to receive benefits from the entity. At June 30, 2010, assets of these unconsolidated LIHTC operating partnerships totaled approximately $963 million. At June 30, 2010, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $373 million plus $78 million of tax credits claimed but subject to recapture. We do not have any liability recorded related to these investments because we believe the likelihood of any loss in connection with these partnerships is remote. During the first six months of 2010, we did not obtain significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships.
We have additional investments in unconsolidated LIHTC operating partnerships that are held by the consolidated LIHTC guaranteed funds. Total assets of these operating partnerships were approximately $1.3 billion at June 30, 2010. The tax credits and deductions associated with these properties are allocated to the funds’ investors based on their ownership percentages. We have determined that we are not the primary beneficiary of these partnerships because the general partners have the power to direct the activities that most significantly impact their economic performance and the obligation to absorb expected losses and right to receive residual returns from the entity. Information regarding our exposure to loss in connection with these guaranteed funds is included in Note 13 under the heading “Return guarantee agreement with LIHTC investors.”
Commercial and residential real estate investments and principal investments. Our Principal Investing unit and the Real Estate Capital and Corporate Banking Services line of business make equity and mezzanine investments, some of which are in VIEs. These investments are held by nonregistered investment companies subject to the provisions of the AICPA Audit and Accounting Guide, “Audits of Investment Companies.” We are not currently applying the accounting or disclosure provisions in the applicable accounting guidance for consolidations to these investments, which remain unconsolidated. The FASB has indefinitely deferred the effective date of this guidance for such nonregistered investment companies.

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8. Nonperforming Assets and Past Due Loans from Continuing Operations
Impaired loans totaled $1.4 billion at June 30, 2010, compared to $1.9 billion at December 31, 2009, and $1.9 billion at June 30, 2009. Impaired loans had an average balance of $1.6 billion for the second quarter of 2010 and $1.7 billion for the second quarter of 2009. At June 30, 2010, restructured loans (which are included in impaired loans) totaled $213 million while at December 31, 2009, restructured loans totaled $364 million. Although $76 million in restructured loans were added during the first six months of 2010, the decrease in restructured loans was primarily attributable to the transfer out of $207 million of troubled debt restructurings to performing status, and $83 million in payments and charge-offs. Restructured loans were nominal at June 30, 2009.
Our nonperforming assets and past due loans were as follows:
                         
    June 30,     December 31,     June 30,  
in millions   2010     2009     2009  
 
Impaired loans
  $ 1,435     $ 1,903     $ 1,912  
Other nonperforming loans
    268       284       273  
 
Total nonperforming loans
    1,703       2,187       2,185  
 
                       
Nonperforming loans held for sale
    221       116       145  
 
                       
Other real estate owned (“OREO”)
    200       191       182  
Allowance for OREO losses
    (64 )     (23 )     (11 )
 
OREO, net of allowance
    136       168       171  
Other nonperforming assets
    26       39       47  
 
Total nonperforming assets
  $ 2,086     $ 2,510     $ 2,548  
 
                 
 
Impaired loans with a specifically allocated allowance
  $ 1,099     $ 1,645     $ 1,731  
Specifically allocated allowance for impaired loans
    157       300       393  
 
Restructured loans included in nonaccrual loans (a)
  $ 167     $ 139        
Restructured loans with a specifically allocated allowance (b)
    65       256        
Specifically allocated allowance for restructured loans (c)
    15       44        
 
Accruing loans past due 90 days or more
  $ 240     $ 331     $ 552  
Accruing loans past due 30 through 89 days
    610       933       1,081  
 
 
(a)   Restructured loans (i.e. troubled debt restructurings) are those for which we, for reasons related to a borrower’s financial difficulties, have granted a concession to the borrower that we would not otherwise have considered. These concessions are made to improve the collectability of the loan and generally take the form of a reduction of the interest rate, extension of the maturity date or reduction in the principal balance.
 
(b)   Included in impaired loans with a specifically allocated allowance.
 
(c)   Included in specifically allocated allowance for impaired loans.
At June 30, 2010, we did not have any significant commitments to lend additional funds to borrowers with loans on nonperforming status.
We evaluate the collectability of our loans as described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan Losses” on page 82 of our 2009 Annual Report to Shareholders.

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9. Capital Securities Issued by Unconsolidated Subsidiaries
We own the outstanding common stock of business trusts formed by us that issued corporation-obligated mandatorily redeemable preferred capital securities. The trusts used the proceeds from the issuance of their capital securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts’ only assets; the interest payments from the debentures finance the distributions paid on the capital securities.
We unconditionally guarantee the following payments or distributions on behalf of the trusts:
w   required distributions on the capital securities;
 
w   the redemption price when a capital security is redeemed; and
 
w   the amounts due if a trust is liquidated or terminated.
Our capital securities have historically provided an attractive source of funds: they currently constitute Tier 1 capital for regulatory reporting purposes, but have the same federal tax advantages as debt.
In 2005, the Federal Reserve adopted a rule that allows bank holding companies to continue to treat capital securities as Tier 1 capital, but imposed stricter quantitative limits that were to take effect March 31, 2009. On March 17, 2009, in light of continued stress in the financial markets, the Federal Reserve delayed the effective date of these new limits until March 31, 2011. We believe this new rule will not have any material effect on our financial condition.
The enactment of the Dodd-Frank Act changes the regulatory capital standards that apply to bank holding companies by phasing-out the treatment of capital securities and cumulative preferred securities (excluding TARP CPP preferred stock issued to the United States or its agencies or instrumentalities before October 4, 2010) as Tier 1 eligible capital. This three year phase-out period, which commences January 1, 2013, and it will ultimately result in our capital securities being treated only as Tier 2 capital. These changes in effect apply the same leverage and risk-based capital requirements that apply to depository institutions to bank holding companies, savings and loan companies, and non-bank financial companies identified as systemically important. The Federal Reserve has 180 days from the enactment of the Dodd-Frank Act to issue its regulations in this area. We anticipate that the Federal Reserve’s rulemaking on this matter should provide additional clarity to the regulatory capital guidelines applicable to bank holding companies such as Key.
As of June 30, 2010, the capital securities issued by the KeyCorp and Union State Bank capital trusts represent $1.8 billion or 14% of our Tier 1 capital.

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The capital securities, common stock and related debentures are summarized as follows:
                                         
                    Principal     Interest Rate     Maturity  
    Capital             Amount of     of Capital     of Capital  
    Securities,     Common     Debentures,     Securities and     Securities and  
dollars in millions   Net of Discount  (a)   Stock     Net of Discount  (b)   Debentures  (c)   Debentures  
 
June 30, 2010
                                       
KeyCorp Capital I
  $ 156     $ 6     $ 158       1.031  %     2028  
KeyCorp Capital II
    81       4       106       6.875       2029  
KeyCorp Capital III
    102       4       136       7.750       2029  
KeyCorp Capital V
    115       4       128       5.875       2033  
KeyCorp Capital VI
    55       2       60       6.125       2033  
KeyCorp Capital VII
    164       5       177       5.700       2035  
KeyCorp Capital VIII
    171             210       7.000       2066  
KeyCorp Capital IX
    331             359       6.750       2066  
KeyCorp Capital X
    570             616       8.000       2068  
Union State Capital I
    20       1       21       9.580       2027  
Union State Statutory II
    20             20       3.918       2031  
Union State Statutory IV
    10             10       3.103       2034  
 
Total
  $ 1,795     $ 26     $ 2,001       6.546  %      
Total
                                 
 
December 31, 2009
  $ 1,872     $ 26     $ 1,906       6.577  %      
Total
                                 
 
June 30, 2009
  $ 2,449     $ 29     $ 2,485       6.769  %      
Total
                                 
 
 
(a)   The capital securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of capital securities carries an interest rate identical to that of the related debenture. Certain capital securities include basis adjustments related to fair value hedges totaling $4 million at June 30, 2010, $81 million at December 31, 2009, and $158 million at June 30, 2009. See Note 14 (“Derivatives and Hedging Activities”) for an explanation of fair value hedges.
 
(b)   We have the right to redeem our debentures: (i) in whole or in part, on or after July 1, 2008 (for debentures owned by KeyCorp Capital I); March 18, 1999 (for debentures owned by KeyCorp Capital II); July 16, 1999 (for debentures owned by KeyCorp Capital III); July 21, 2008 (for debentures owned by KeyCorp Capital V); December 15, 2008 (for debentures owned by KeyCorp Capital VI); June 15, 2010 (for debentures owned by KeyCorp Capital VII); June 15, 2011 (for debentures owned by KeyCorp Capital VIII); December 15, 2011 (for debentures owned by KeyCorp Capital IX); March 15, 2013 (for debentures owned by KeyCorp Capital X); February 1, 2007 (for debentures owned by Union State Capital I); July 31, 2006 (for debentures owned by Union State Statutory II); and April 7, 2009 (for debentures owned by Union State Statutory IV); and (ii) in whole at any time within 90 days after and during the continuation of a “tax event,” a “capital treatment event”, with respect to KeyCorp Capital V, VI, VII, VIII, IX and X only an “investment company event” with respect to KeyCorp Capital X only a “rating agency event” (as each is defined in the applicable indenture). If the debentures purchased by KeyCorp Capital I, KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VII, KeyCorp Capital VIII, KeyCorp Capital IX, Union State Capital I or Union State Statutory IV are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (a) the principal amount, plus any accrued but unpaid interest or (b) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points (25 basis points or 50 basis points in the case of redemption upon either a tax event or a capital treatment event for KeyCorp Capital III), plus any accrued but unpaid interest. If the debentures purchased by Union State Statutory II are redeemed before July 31, 2011, the redemption price will be 101.50% of the principal amount, plus any accrued but unpaid interest. When debentures are; redeemed in response to tax or capital treatment events, the redemption price for KeyCorp Capital II and KeyCorp Capital III generally is slightly more favorable to us. The principal amount of debentures includes adjustments related to hedging with financial instruments totaling $184 million at June 30, 2010, $89 million at December 31, 2009, and $165 million at June 30, 2009.
 
(c)   The interest rates for KeyCorp Capital II, KeyCorp Capital III, KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VII, KeyCorp Capital VIII, KeyCorp Capital IX, KeyCorp Capital X and Union State Capital I are fixed. KeyCorp Capital I has a floating interest rate equal to three-month LIBOR plus 74 basis points that reprices quarterly. Union State Statutory II has a floating interest rate equal to three-month LIBOR plus 358 basis points that reprices quarterly. Union State Statutory IV has a floating interest rate equal to three-month LIBOR plus 280 basis points that reprices quarterly. The total interest rates are weighted-average rates.

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10. Shareholders’ Equity
Cumulative effect adjustment (after-tax)
Effective January 1, 2010, we adopted new consolidation accounting guidance. As a result of adopting this new guidance, we consolidated our education loan securitization trusts (classified as discontinued assets and liabilities), thereby adding $2.8 billion in assets and liabilities to our balance sheet and recording a cumulative effect adjustment (after-tax) of $45 million to beginning retained earnings on January 1, 2010. Additional information regarding this new consolidation guidance and the consolidation of these education loan securitization trusts is provided in Note 1 (“Basis of Presentation”) and Note 16 (“Discontinued Operations”).
We did not undertake any new capital generating activities during the first six months of 2010. Note 15 (“Shareholders’ Equity”) on page 107 of our 2009 Annual Report to Shareholders provides information regarding our capital generating activities in 2009.
11. Employee Benefits
Pension Plans
Effective December 31, 2009, we amended our pension plans to freeze all benefit accruals. We will continue to credit participants’ account balances for interest until they receive their plan benefits. The plans were closed to new employees as of December 31, 2009.
The components of net pension cost for all funded and unfunded plans are as follows:
                                 
    Three months ended June 30,   Six months ended June 30,
in millions   2010     2009     2010     2009  
 
Service cost of benefits earned
        $ 13           $ 25  
Interest cost on PBO
  $ 15       14     $ 30       29  
Expected return on plan assets
    (18 )     (16 )     (36 )     (32 )
Amortization of losses
    9       11       18       21  
 
Net pension cost
  $ 6     $ 22     $ 12     $ 43  
 
                       
 
Other Postretirement Benefit Plans
We sponsor a contributory postretirement healthcare plan that covers substantially all active and retired employees hired before 2001 who meet certain eligibility criteria. Retirees’ contributions are adjusted annually to reflect certain cost-sharing provisions and benefit limitations. We also sponsor a death benefit plan covering certain grandfathered employees; the plan is noncontributory. Separate VEBA trusts are used to fund the healthcare plan and the death benefit plan.
The components of net postretirement benefit cost for all funded and unfunded plans are as follows:
                                 
    Three months ended June 30,   Six months ended June 30,
in millions   2010     2009     2010     2009  
 
Interest cost on APBO
  $ 1     $ 1     $ 2     $ 2  
Expected return on plan assets
    (1 )           (2 )     (1 )
Amortization of unrecognized prior service benefit
    (1 )     (1 )     (1 )     (1 )
 
Net postretirement (benefit) cost
  $ (1 )         $ (1 )      
 
                       
 
The “Patient Protection and Affordable Care Act” and “Education Reconciliation Act of 2010,” which were signed into law on March 23, 2010 and March 30, 2010, respectively, changed the tax treatment of

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federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least “actuarially equivalent” to the benefits under Medicare Part D. As a result of these laws, these subsidy payments become taxable in tax years beginning after December 31, 2012. The accounting guidance applicable to income taxes requires the impact of a change in tax law to be immediately recognized in the period that includes the enactment date. The changes to the tax law as a result of the “Patient Protection and Affordable Care Act” and “Education Reconciliation Act of 2010” did not impact us as we did not have a deferred tax asset recorded as a result of Medicare Part D subsidies received.
12. Income Taxes
Income Tax Provision
In accordance with current accounting guidance, the principal method established for computing the provision for income taxes in interim periods requires us to make our best estimate of the effective tax rate expected to be applicable for the full year. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes. This method has been used to determine the provision, or in our case the benefit, for income taxes for the quarters ended March 31, 2010 and June 30, 2009.
However, the accounting guidance allows for an alternative method to computing the effective tax rate and, thus the interim provision for income taxes, when a taxpayer is unable to calculate a reliable estimate of the effective tax rate for the entire year. Due to the current economic environment, we have concluded that the alternative method is more reliable in determining the provision for income taxes for the second quarter of 2010. The provision for the current quarter is calculated by applying the statutory federal income tax rate to the quarter’s consolidated operating income before taxes after modifications for non-taxable items recognized in the quarter which include income from corporate-owned life insurance and tax credits related to investments in low income housing projects and then adding state taxes.
Deferred Tax Asset
As of June 30, 2010, we had a net deferred tax asset from continuing operations of $594 million compared to a net deferred tax asset from continuing operations of $577 million as of December 31, 2009 included in “accrued income and other assets” on the balance sheet; prior to September 30, 2009, we had been in a net deferred tax liability position. To determine the amount of deferred tax assets that are more likely than not to be realized, and therefore recorded, we conduct a quarterly assessment of all available evidence. This evidence includes, but is not limited to, taxable income in prior periods, projected future taxable income, and projected future reversals of deferred tax items. Based on these criteria, and in particular our projections for future taxable income, we currently believe that it is more likely than not that we will realize the net deferred tax asset in future periods.
Unrecognized Tax Benefits
As permitted under the applicable accounting guidance for income taxes, it is our policy to recognize interest and penalties related to unrecognized tax benefits in income tax expense.
13. Commitments, Contingent Liabilities and Guarantees
Legal Proceedings
Shareholder derivative matter. On July 6, 2010, certain current and former directors and executive officers of KeyCorp were named as defendants in James T. King, Jr. v. Henry L. Meyer III, et al., a shareholder derivative lawsuit filed in the Cuyahoga County Court of Common Pleas. The complaint alleges that the KeyCorp defendants violated their fiduciary duties, including their duties of candor, good faith and loyalty, and are liable for corporate waste and unjust enrichment in connection with 2009 executive compensation decisions.

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The complaint seeks unspecified compensatory damages from the KeyCorp defendants, various forms of equitable and/or injunctive relief, and attorneys’ and other professional fees and costs. KeyCorp was also named as a nominal defendant in the lawsuit, but no damages are being sought from it.
KeyCorp’s Board of Directors has appointed a special committee of non-management directors to assess its executive compensation practices and to investigate the allegations made in the complaint. This committee has retained an independent law firm to assist in its investigation.
Taylor litigation. On August 11, 2008, a purported class action case was filed against KeyCorp, its directors and certain employees, captioned Taylor v. KeyCorp et al., in the United States District Court for the Northern District of Ohio. On September 16, 2008, a second and related case was filed in the same district court, captioned Wildes v. KeyCorp et al. The plaintiffs in these cases seek to represent a class of all participants in our 401(k) Savings Plan and allege that the defendants in the lawsuit breached fiduciary duties owed to them under ERISA. On January 7, 2009, the Court consolidated the Taylor and Wildes lawsuits into a single action. Plaintiffs have since filed their consolidated complaint, which continues to name certain employees as defendants but no longer names any outside directors. We strongly disagree with the allegations asserted against us in these actions, and intend to vigorously defend against them.
Madoff-related claims. In December 2008, Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers, determined that its funds had suffered investment losses of up to approximately $186 million resulting from the crimes perpetrated by Bernard L. Madoff and entities that he controlled. The investment losses borne by Austin’s clients stem from investments that Austin made in certain Madoff-advised “hedge” funds. Several lawsuits, including putative class actions and direct actions, and one arbitration proceeding were filed against Austin seeking to recover losses incurred as a result of Madoff’s crimes. The lawsuits and arbitration proceeding allege various claims, including negligence, fraud, breach of fiduciary duties, and violations of federal securities laws and ERISA. In the event we were to incur any liability for this matter, we believe it would be covered under the terms and conditions of our insurance policy, subject to a $25 million self-insurance deductible and usual policy exceptions.
In April 2009, we decided to wind down Austin’s operations and have determined that the related exit costs will not be material. Information regarding the Austin discontinued operations is included in Note 16 (“Discontinued Operations”).
Data Treasury matter. In February 2006, an action styled DataTreasury Corporation v. Wells Fargo & Company, et al., was filed against KeyBank and numerous other financial institutions, as owners and users of Small Value Payments Company, LLC software, in the United States District Court for the Eastern District of Texas. The plaintiff alleges patent infringement and is seeking an unspecified amount of damages and treble damages. In January 2010, the Court entered an order establishing three trial dates due to the number of defendants involved in the action, including an October 2010 trial date for KeyBank and its trial phase codefendants. We strongly disagree with the allegations asserted against us, and have been vigorously defending against them. Management believes it has established appropriate reserves for the matter consistent with applicable accounting guidance.
Other litigation. In the ordinary course of business, we are subject to other legal actions that involve claims for substantial monetary relief. Based on information presently known to us, we do not believe there is any legal action to which we are a party, or involving any of our properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial condition.
Guarantees
We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at June 30, 2010. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (“Summary of

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Significant Accounting Policies”) under the heading “Guarantees” on page 84 of our 2009 Annual Report to Shareholders.
                 
    Maximum Potential        
June 30, 2010   Undiscounted     Liability  
in millions   Future Payments     Recorded  
 
Financial guarantees:
               
Standby letters of credit
  $ 10,793     $ 67  
Recourse agreement with FNMA
    707       12  
Return guarantee agreement with LIHTC investors
    93       62  
Written put options (a)
    2,867       60  
Default guarantees
    24       3  
 
Total
  $ 14,484     $ 204  
 
           
 
(a)   The maximum potential undiscounted future payments represent notional amounts of derivatives qualifying as guarantees.
We determine the payment/performance risk associated with each type of guarantee described below based on the probability that we could be required to make the maximum potential undiscounted future payments shown in the preceding table. We use a scale of low (0-30% probability of payment), moderate (31-70% probability of payment) or high (71-100% probability of payment) to assess the payment/performance risk, and have determined that the payment/performance risk associated with each type of guarantee outstanding at June 30, 2010, is low.
Standby letters of credit. KeyBank issues standby letters of credit to address clients’ financing needs. These instruments obligate us to pay a specified third party when a client fails to repay an outstanding loan or debt instrument, or fails to perform some contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated as loans to the client; they bear interest (generally at variable rates) and pose the same credit risk to us as a loan. At June 30, 2010, our standby letters of credit had a remaining weighted-average life of 1.6 years, with remaining actual lives ranging from less than one year to as many as ten years.
Recourse agreement with FNMA. We participate as a lender in the FNMA Delegated Underwriting and Servicing program. FNMA delegates responsibility for originating, underwriting and servicing mortgages, and we assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that we sell to FNMA. We maintain a reserve for such potential losses in an amount that we believe approximates the fair value of our liability. At June 30, 2010, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 5.9 years, and the unpaid principal balance outstanding of loans sold by us as a participant in this program was $2.2 billion. As shown in the preceding table, the maximum potential amount of undiscounted future payments that we could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at June 30, 2010. If we are required to make a payment, we would have an interest in the collateral underlying the related commercial mortgage loan. Therefore, any loss incurred could be offset by the amount of any recovery from the collateral.
Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KeyBank, offered limited partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential rental properties that qualify for federal low income housing tax credits under Section 42 of the Internal Revenue Code. In certain partnerships, investors paid a fee to KAHC for a guaranteed return that is based on the financial performance of the property and the property’s confirmed LIHTC status throughout a fifteen-year compliance period. Typically, KAHC provides these guaranteed returns by distributing tax credits and deductions associated with the specific properties. If KAHC defaults on its obligation to provide the guaranteed return, KeyBank is obligated to make any necessary payments to investors. No recourse or collateral is available to offset our guarantee obligation other than the underlying income stream from the properties and the residual value of the operating partnership interests.

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As shown in the previous table, KAHC maintained a reserve in the amount of $62 million at June 30, 2010, which we believe will be sufficient to cover estimated future obligations under the guarantees. The maximum exposure to loss reflected in the table represents undiscounted future payments due to investors for the return on and of their investments.
These guarantees have expiration dates that extend through 2019, but there have been no new partnerships formed under this program since October 2003. Additional information regarding these partnerships is included in Note 7 (“Variable Interest Entities”).
Written put options. In the ordinary course of business, we “write” interest rate caps and floors for commercial loan clients that have variable and fixed rate loans, respectively, with us and wish to mitigate their exposure to changes in interest rates. At June 30, 2010, our written put options had an average life of 1.2 years. These instruments are considered to be guarantees as we are required to make payments to the counterparty (the commercial loan client) based on changes in an underlying variable that is related to an asset, a liability or an equity security held by the guaranteed party. We are obligated to pay the client if the applicable benchmark interest rate is above or below a specified level (known as the “strike rate”). These written put options are accounted for as derivatives at fair value, which are further discussed in Note 14 (“Derivatives and Hedging Activities”). We typically mitigate our potential future payments by entering into offsetting positions with third parties.
Written put options where the counterparty is a broker-dealer or bank are accounted for as derivatives at fair value, but are not considered guarantees as these counterparties do not typically hold the underlying instruments. In addition, we are a purchaser and seller of credit derivatives, which are further discussed in Note 14.
Default guarantees. Some lines of business participate in guarantees that obligate us to perform if the debtor (typically a client) fails to satisfy all of its payment obligations to third parties. We generally undertake these guarantees for one of two possible reasons: either the risk profile of the debtor should provide an investment return, or we are supporting our underlying investment. The terms of these default guarantees range from less than one year to as many as nine years; some default guarantees do not have a contractual end date. Although no collateral is held, we would receive a pro rata share should the third party collect some or all of the amounts due from the debtor.
Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in the applicable accounting guidance for guarantees, and from other relationships.
Liquidity facilities that support asset-backed commercial paper conduits. We provide liquidity facilities to several unconsolidated third-party commercial paper conduits. These facilities obligate us to provide funding in the event that a credit market disruption or other factors prevent the conduit from issuing commercial paper. At June 30, 2010, we had one liquidity facility remaining, which will expire by May, 2011, obligating us to provide aggregate funding of up to $51 million. The aggregate amount available to be drawn is based on the amount of current commitments to borrowers and totaled $23 million at June 30, 2010. We periodically evaluate our commitments to provide liquidity.
Indemnifications provided in the ordinary course of business. We provide certain indemnifications, primarily through representations and warranties in contracts that we execute in the ordinary course of business in connection with loan sales and other ongoing activities, as well as in connection with purchases and sales of businesses. We maintain reserves, when appropriate, with respect to liability that reasonably could arise in connection with these indemnities.
Intercompany guarantees. KeyCorp and certain of our affiliates are parties to various guarantees that facilitate the ongoing business activities of other affiliates. These business activities encompass debt issuance, certain lease and insurance obligations, the purchase or issuance of investments and securities, and certain leasing transactions involving clients.

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Heartland Payment Systems matter. Under an agreement between KeyBank and Heartland Payment Systems, Inc. (“Heartland”), Heartland utilizes KeyBank’s membership in the Visa and MasterCard networks to provide merchant payment processing services for Visa and MasterCard transactions. On January 20, 2009, Heartland publicly announced its discovery of an alleged criminal breach of its credit card payment processing systems environment (the “Intrusion”) that reportedly occurred during 2008 and allegedly involved the malicious collection of in-transit, unencrypted payment card data that Heartland was processing. Heartland’s 2008 Form 10-K filed with the SEC on March 10, 2009, (“Heartland’s 2008 Form 10-K”) reported that the major card brands, including Visa and MasterCard, asserted claims seeking to impose fines, penalties, and/or other assessments against Heartland and/or certain card brand members, such as KeyBank, as a result of the alleged potential breach of the respective card brand rules and regulations, and the alleged criminal breach of its credit card payment processing systems environment.
KeyBank has received letters from both Visa and MasterCard imposing fines, penalties or assessments related to the Intrusion. Under its agreement with Heartland, KeyBank has certain rights of indemnification from Heartland for costs assessed against it by Visa and MasterCard and other associated costs, and KeyBank has notified Heartland of its indemnification rights. In the event that Heartland is unable to fulfill its indemnification obligations to KeyBank, the charges (net of any indemnification) could be significant, although it is not possible to quantify them at this time. Accordingly, under applicable accounting rules, we have not established any reserve.
In Heartland’s Form 10-K filed with the SEC on March 10, 2010 (“Heartland’s 2009 Form 10-K”), Heartland disclosed that it had consummated the previously reported settlement among Heartland, Visa U.S.A. Inc., Visa International Service Association, and Visa Inc., and the Sponsor Banks, including KeyBank and Heartland Bank.
In Heartland’s Form 8-K filed with the SEC on May 19, 2010, Heartland disclosed that it had entered into a settlement agreement with MasterCard International Incorporated to resolve potential claims and other disputes among Heartland, the Acquiring Banks, including KeyBank and Heartland Bank, on the one hand and MasterCard and certain MasterCard Issuers, on the other hand, with respect to potential rights of MasterCard issuers and potential associated claims by MasterCard and MasterCard Issuers related to the Intrusion. The maximum potential aggregate amounts payable to the MasterCard Issuers pursuant to the Settlement Agreement will not exceed $41.4 million, including MasterCard’s credit of $6.6 million of the non-compliance assessment towards the settlement amounts. The Settlement Agreement contains mutual releases between Heartland and the Acquiring Bank, on the one hand, and MasterCard and the MasterCard Issuers who accept the recovery offers, on the other hand, of claims relating to the Intrusion. Consummation of the settlement is subject to several events and a termination period. At March 31, 2010, Heartland carried a $42.8 million reserve for the Intrusion (before adjustment for taxes).
For further information on Heartland and the Intrusion, see Heartland’s 2009 Form 10-K, Heartland’s 2008 Form 10-K; Heartland’s Form 10-Q filed with the SEC on May 11, 2009, August 7, 2009, and May 7, 2010, Heartland’s Form 8-K filed with the SEC on August 4, 2009, November 3, 2009, January 8, 2010, February 4, 2010, February 18, 2010, February 24, 2010, and May 19, 2010.

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14. Derivatives and Hedging Activities
We are a party to various derivative instruments, mainly through our subsidiary, KeyBank. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. A derivative’s notional amount serves as the basis for the payment provision of the contract, and takes the form of units, such as shares or dollars. A derivative’s underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract.
The primary derivatives that we use are interest rate swaps, caps, floors and futures; foreign exchange contracts; energy derivatives; credit derivatives; and equity derivatives. Generally, these instruments help us manage exposure to interest rate risk, mitigate the credit risk inherent in the loan portfolio, hedge against changes in foreign currency exchange rates, and meet client financing and hedging needs. Interest rate risk represents the possibility that the economic value of equity or net interest income will be adversely affected by fluctuations in interest rates. Credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Foreign exchange risk is the risk that an exchange rate will adversely affect the fair value of a financial instrument.
Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the effects of bilateral collateral and master netting agreements. These bilateral collateral and master netting agreements allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. As a result, we could have derivative contracts with negative fair values included in derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities.
At June 30, 2010, after taking into account the effects of bilateral collateral and master netting agreements, we had $283 million of derivative assets and $244 million of derivative liabilities that relate to contracts entered into for hedging purposes. As of the same date, after taking into account the effects of bilateral collateral and master netting agreements, and a reserve for potential future losses, we had derivative assets of $872 million and derivative liabilities of $1.1 billion that were not designated as hedging instruments.
The recently enacted Dodd-Frank Act may limit the types of derivatives activities conducted by KeyBank and other insured depository institutions. As a result, it is possible that our continued use of one or more of the types of derivatives noted above could be affected.
Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Basis of Presentation”) under the heading “Derivatives,” on page 83 of our 2009 Annual Report to Shareholders.
Derivatives Designated in Hedge Relationships
Changes in interest rates and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities may cause fluctuations in net interest income and the economic value of equity. To minimize the volatility of net interest income and the EVE, we manage exposure to interest rate risk in accordance with policy limits established by the Enterprise Risk Management Committee. We utilize derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance for derivatives and hedging to minimize interest rate volatility. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities. These instruments are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index.
We designate certain “receive fixed/pay variable” interest rate swaps as fair value hedges. These swaps are used primarily to modify our exposure to interest rate risk. These contracts convert certain fixed-rate long-

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term debt into variable-rate obligations. As a result, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
Similarly, we designate certain “receive fixed/pay variable” interest rate swaps as cash flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse effect of interest rate decreases on future interest income. These contracts allow us to receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts. We also designate certain “pay fixed/receive variable” interest rate swaps as cash flow hedges. These swaps are used to convert certain floating-rate debt into fixed-rate debt.
We also use interest rate swaps to hedge the floating-rate debt that funds fixed-rate leases entered into by our Equipment Finance line of business. These swaps are designated as cash flow hedges to mitigate the interest rate mismatch between the fixed-rate lease cash flows and the floating-rate payments on the debt.
The derivatives used for managing foreign currency exchange risk are cross currency swaps. We have several outstanding issuances of medium-term notes that are denominated in foreign currencies. The notes are subject to translation risk, which represents the possibility that changes in the fair value of the foreign-denominated debt will occur based on movement of the underlying foreign currency spot rate. It is our practice to hedge against potential fair value changes caused by changes in foreign currency exchange rates and interest rates. The hedge converts the notes to a variable-rate U.S. currency-denominated debt, which is designated as a fair value hedge of foreign currency exchange risk.
Derivatives Not Designated in Hedge Relationships
On occasion, we enter into interest rate swap contracts to manage economic risks but do not designate the instruments in hedge relationships. We did not have a significant amount in interest rate swap contracts entered into to manage economic risks at June 30, 2010.
Like other financial services institutions, we originate loans and extend credit, both of which expose us to credit risk. We actively manage our overall loan portfolio and the associated credit risk in a manner consistent with asset quality objectives. This process entails the use of credit derivatives ¾ primarily credit default swaps ¾ to mitigate our credit risk. Credit default swaps enable us to transfer to a third party a portion of the credit risk associated with a particular extension of credit, and to manage portfolio concentration and correlation risks. Occasionally, we also provide credit protection to other lenders through the sale of credit default swaps. In most instances, this objective is accomplished through the use of an investment-grade diversified dealer-traded basket of credit default swaps. These transactions may generate fee income, and diversify and reduce overall portfolio credit risk volatility. Although we use these instruments for risk management purposes, they are not treated as hedging instruments as defined by the applicable accounting guidance for derivatives and hedging.
We also enter into derivative contracts to meet customer needs and for proprietary purposes that consist of the following instruments:
w   interest rate swap, cap, floor and futures contracts entered into generally to accommodate the needs of commercial loan clients;
 
w   energy swap and options contracts entered into to accommodate the needs of clients;
 
w   interest rate swaps and foreign exchange contracts used for proprietary trading purposes;
 
w   positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above; and
 
w   foreign exchange forward contracts entered into to accommodate the needs of clients.
These contracts are not designated as part of hedge relationships.

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Fair Values, Volume of Activity and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of our derivative instruments on a gross basis as of June 30, 2010, December 31, 2009 and June 30, 2009. The volume of our derivative transaction activity during the first half of 2010 is represented by the change in the notional amounts of our gross derivatives by type from December 31, 2009 to June 30, 2010. The notional amounts are not affected by bilateral collateral and master netting agreements. Our derivative instruments are included in “derivative assets” or “derivative liabilities” on the balance sheet, as indicated in the following table:
                                                                         
    June 30, 2010     December 31, 2009     June 30, 2009  
            Fair Value             Fair Value             Fair Value  
    Notional     Derivative     Derivative     Notional     Derivative     Derivative     Notional     Derivative     Derivative  
in millions   Amount     Assets     Liabilities     Amount     Assets     Liabilities     Amount     Assets     Liabilities  
 
Derivatives designated as hedging instruments:
                                                                       
Interest rate
  $ 14,168     $ 601     $ 4     $ 18,259     $ 489     $ 9     $ 23,234     $ 561     $ 14  
Foreign exchange
    1,383       14       334       1,888       78       189       2,550       68       324  
 
Total
    15,551       615       338       20,147       567       198       25,784       629       338  
Derivatives not designated as hedging instruments:
                                                                       
Interest rate
    65,173       1,624       1,611       70,017       1,434       1,345       78,564       1,664       1,523  
Foreign exchange
    7,617       183       163       6,293       206       184       7,317       222       193  
Energy and commodity
    2,031       344       364       1,955       403       427       2,155       533       562  
Credit
    3,640       47       37       4,538       55       49       7,012       94       99  
Equity
    18       1       1       3       1       1                    
 
Total
    78,479       2,199       2,176       82,806       2,099       2,006       95,048       2,513       2,377  
 
Netting adjustments (a)
    N/A       (1,661 )     (1,193 )     N/A       (1,572 )     (1,192 )     N/A       (1,960 )     (2,187 )
 
Total derivatives
  $ 94,030     $ 1,153     $ 1,321     $ 102,953     $ 1,094     $ 1,012     $ 120,832     $ 1,182     $ 528  
Total
                                                     
 
 
(a)   Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance related to the offsetting of certain derivative contracts on the balance sheet. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related collateral.
Fair value hedges. Instruments designated as fair value hedges are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. The effective portion of a change in the fair value of a hedging instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item, resulting in no effect on net income. The ineffective portion of a change in the fair value of such a hedging instrument is recorded in “other income” on the income statement with no corresponding offset. During the six-month period ended June 30, 2010, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While some ineffectiveness is present in our hedging relationships, all of our fair value hedges remained “highly effective” as of June 30, 2010.

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The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the six-month periods ended June 30, 2010 and 2009, and where they are recorded on the income statement.
                                         
    Six months ended June 30, 2010
          Net Gains                     Net Gains  
    Income Statement Location of   (Losses) on             Income Statement Location of   (Losses) on  
in millions   Net Gains (Losses) on Derivative   Derivative     Hedged Item     Net Gains (Losses) on Hedged Item   Hedged Item  
 
Interest rate
  Other income   $ 184     Long-term debt   Other income   $ (176)  (a)
Interest rate
  Interest expense – Long-term debt     109                          
Foreign exchange
  Other income     (264 )   Long-term debt   Other income     258  (a)
Foreign exchange
  Interest expense – Long-term debt     3     Long-term debt   Interest expense – Long-term debt     (7)  (b)
 
Total
          $ 32                     $ 75  
 
                                   
 
                                         
    Six months ended June 30, 2009
          Net Gains                     Net Gains  
    Income Statement Location of   (Losses) on             Income Statement Location of   (Losses) on  
in millions   Net Gains (Losses) on Derivative   Derivative     Hedged Item   Net Gains (Losses) on Hedged Item   Hedged Item  
 
Interest rate
  Other income   $ (437 )   Long-term debt   Other income   $ 439  (a)
Interest rate
  Interest expense – Long-term debt     112                          
Foreign exchange
  Other income     66     Long-term debt   Other income     (69 (a)
Foreign exchange
  Interest expense – Long-term debt     12     Long-term debt   Interest expense – Long-term debt     (31 (b)
 
Total
          $ (247 )                   $ 339  
 
                                   
 
     
(a)   Net gains (losses) on hedged items represent the change in fair value caused by fluctuations in interest rates.
 
(b)   Net losses on hedged items represent the change in fair value caused by fluctuations in foreign currency exchange rates.
Cash flow hedges. Instruments designated as cash flow hedges are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. The effective portion of a gain or loss on a cash flow hedge is initially recorded as a component of AOCI on the balance sheet and subsequently reclassified into income when the hedged transaction impacts earnings (e.g. when we pay variable-rate interest on debt, receive variable-rate interest on commercial loans or sell commercial real estate loans). The ineffective portion of cash flow hedging transactions is included in “other income” on the income statement. During the six-month period ended June 30, 2010, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While some ineffectiveness is present in our hedging relationships, all of our cash flow hedges remained “highly effective” as of June 30, 2010.
The following table summarizes the pre-tax net gains (losses) on our cash flow hedges for the six-month periods ended June 30, 2010 and 2009, and where they are recorded on the income statement. The table includes the effective portion of net gains (losses) recognized in OCI during the period, the effective portion of net gains (losses) reclassified from OCI into income during the current period and the portion of net gains (losses) recognized directly in income, representing the amount of hedge ineffectiveness.
                                         
    Six months ended June 30, 2010  
                    Net Gains     Income Statement Location   Net Gains  
    Net Gains (Losses)             (Losses) Reclassified     of Net Gains (Losses)   (Losses) Recognized  
    Recognized in OCI     Income Statement Location of Net Gains (Losses)   From OCI Into Income     Recognized in Income   in Income  
in millions   (Effective Portion)     Reclassified From OCI Into Income (Effective Portion)   (Effective Portion)     (Ineffective Portion)   (Ineffective Portion)  
 
Interest rate
  $ 42     Interest income – Loans   $ 134     Other income   $  
Interest rate
    (22 )   Interest expense – Long-term debt     (10 )   Other income      
Interest rate
        Net gains (losses) from loan securitizations and sales         Other income      
 
Total
  $ 20             $ 124             $  
Total
                                 
 
                                         
    Six months ended June 30, 2009  
                    Net Gains     Income Statement Location   Net Gains  
    Net Gains (Losses)             (Losses) Reclassified     of Net Gains (Losses)   (Losses) Recognized  
    Recognized in OCI     Income Statement Location of Net Gains (Losses)   From OCI Into Income     Recognized in Income   in Income  
in millions   (Effective Portion)     Reclassified From OCI Into Income (Effective Portion)   (Effective Portion)     (Ineffective Portion)   (Ineffective Portion)  
 
Interest rate
  $ 102     Interest income – Loans   $ 233     Other income   $ (1 )
Interest rate
    25     Interest expense – Long-term debt     (9 )   Other income     1  
Interest rate
    4     Net gains (losses) from loan securitizations and sales     5     Other income      
 
Total
  $ 131             $ 229                
Total
                                 
 

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The after-tax change in AOCI resulting from cash flow hedges is as follows:
                                 
                    Reclassification        
    December 31,     2010     of Gains to     June 30,  
in millions   2009     Hedging Activity     Net Income     2010  
 
Accumulated other comprehensive income resulting from cash flow hedges
  $ 114     $ 13     $ (79 )   $ 48  
 
Considering the interest rates, yield curves and notional amounts as of June 30, 2010, we would expect to reclassify an estimated $16 million of net losses on derivative instruments from AOCI to income during the next twelve months. In addition, we expect to reclassify approximately $32 million of net gains related to terminated cash flow hedges from AOCI to income during the next 12 months. The maximum length of time over which forecasted transactions are hedged is 18 years.
Nonhedging instruments. Our derivatives that are not designated as hedging instruments are recorded at fair value in “derivative assets” and “derivative liabilities” on the balance sheet. Adjustments to the fair values of these instruments, as well as any premium paid or received, are included in “investment banking and capital markets income (loss)” on the income statement.
The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the six-month periods ended June 30, 2010 and 2009, and where they are recorded on the income statement.
                 
    Six months ended June 30,  
in millions   2010     2009  
 
NET GAINS (LOSSES) (a)
               
Interest rate
  $ 7     $ 15  
Foreign exchange
    20       31  
Energy and commodity
    4       4  
Credit
    (9 )     (23 )
 
Total net gains (losses)
  $ 22     $ 27  
 
           
 
 
(a)   Recorded in “investment banking and capital markets income (loss)” on the income statement.
Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected positive replacement value of the contracts. We use several means to mitigate and manage exposure to credit risk on derivative contracts. We generally enter into bilateral collateral and master netting agreements using standard forms published by ISDA. These agreements provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, we monitor counterparty credit risk exposure on each contract to determine appropriate limits on our total credit exposure across all product types. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with ISDA and other related agreements. We generally hold collateral in the form of cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises or GNMA. The collateral netted against derivative assets on the balance sheet totaled $469 million at June 30, 2010, $381 million at December 31, 2009, and $533 million at June 30, 2009. The collateral netted against derivative liabilities totaled $2 million at June 30, 2010, less than $1 million at December 31, 2009, and $759 million at June 30, 2009.

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The following table summarizes our largest exposure to an individual counterparty at the dates indicated.
                         
    June 30,     December 31,     June 30,  
in millions   2010     2009     2009  
 
Largest gross exposure to an individual counterparty
  $ 219     $ 217     $ 308  
Collateral posted by this counterparty
    33       21       37  
Derivative liability with this counterparty
    320       331       348  
Collateral pledged to this counterparty
    154       164       95  
Net exposure after netting adjustments and collateral
    20       29       18  
 
 
The following table summarizes the fair value of our derivative assets by type. These assets represent our gross exposure to potential loss after taking into account the effects of bilateral collateral and master netting agreements and other means used to mitigate risk.
                         
    June 30,     December 31,     June 30,  
in millions   2010     2009     2009  
 
Interest rate
  $ 1,436     $ 1,147     $ 1,365  
Foreign exchange
    94       178       141  
Energy and commodity
    74       131       183  
Credit
    19       19       26  
Equity
    1              
 
Derivative assets before collateral
    1,624       1,475       1,715  
Less: Related collateral
    469       381       533  
 
Total derivative assets
  $ 1,155     $ 1,094     $ 1,182  
 
                 
 
We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, we have different methods for managing counterparty credit exposure and credit risk.
We enter into transactions with broker-dealers and banks for various risk management purposes and proprietary trading purposes. These types of transactions generally are high dollar volume. We generally enter into bilateral collateral and master netting agreements with these counterparties. At June 30, 2010, after taking into account the effects of bilateral collateral and master netting agreements, we had gross exposure of $1.1 billion to broker-dealers and banks. We had net exposure of $314 million after the application of master netting agreements and collateral; our net exposure to broker-dealers and banks at June 30, 2010, was reduced to $84 million with the $230 million of additional collateral held in the form of securities.
We enter into transactions with clients to accommodate their business needs. These types of transactions generally are low dollar volume. We generally enter into master netting agreements with these counterparties. In addition, we mitigate our overall portfolio exposure and market risk by entering into offsetting positions with broker-dealers and other banks. Due to the smaller size and magnitude of the individual contracts with clients, collateral generally is not exchanged in connection with these derivative transactions. To address the risk of default associated with the uncollateralized contracts, we have established a default reserve (included in “derivative assets”) in the amount of $80 million at June 30, 2010, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At June 30, 2009 and December 31, 2009 the default reserve was $52 million and $59 million, respectively. At June 30, 2010, after taking into account the effects of master netting agreements, we had gross exposure of $958 million to client counterparties. We had net exposure of $841 million on our derivatives with clients after the application of master netting agreements, collateral and the related reserve.

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Credit Derivatives
We are both a buyer and seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with specific commercial lending and swap obligations. We also sell credit derivatives, mainly index credit default swaps, to diversify the concentration risk within our loan portfolio.
The following table summarizes the fair value of our credit derivatives purchased and sold by type. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.
                                                                         
    June 30, 2010     December 31, 2009     June 30, 2009  
in millions   Purchased     Sold     Net     Purchased     Sold     Net     Purchased     Sold     Net  
 
Single name credit default swaps
  $ 12     $ (4 )   $ 8     $ 5     $ (3 )   $ 2     $ 60     $ (36 )   $ 24  
Traded credit default swap indices
    1       (2 )     (1 )     2             2       11       (18 )     (7 )
Total credit derivatives Other
    5       (2 )     3       (1 )     4       3             (11 )     (11 )
 
Total credit derivatives
  $ 18     $ (8 )   $ 10     $ 6     $ 1     $ 7     $ 71     $ (65 )   $ 6  
 
                                                     
 
Single name credit default swaps are bilateral contracts whereby the seller agrees, for a premium, to provide protection against the credit risk of a reference entity in connection with a specific debt obligation. The protected credit risk is related to adverse credit events, such as bankruptcy, failure to make payments, and acceleration or restructuring of obligations, specified in the credit derivative contract using standard documentation terms published by ISDA. As the seller of a single name credit derivative, we would be required to pay the purchaser the difference between the par value and the market price of the debt obligation (cash settlement) or receive the specified referenced asset in exchange for payment of the par value (physical settlement) if the underlying reference entity experiences a predefined credit event. For a single name credit derivative, the notional amount represents the maximum amount that a seller could be required to pay. In the event that physical settlement occurs and we receive our portion of the related debt obligation, we will join other creditors in the liquidation process, which may result in the recovery of a portion of the amount paid under the credit default swap contract. We also may purchase offsetting credit derivatives for the same reference entity from third parties that will permit us to recover the amount we pay should a credit event occur.
A traded credit default swap index represents a position on a basket or portfolio of reference entities. As a seller of protection on a credit default swap index, we would be required to pay the purchaser if one or more of the entities in the index had a credit event. For a credit default swap index, the notional amount represents the maximum amount that a seller could be required to pay. Upon a credit event, the amount payable is based on the percentage of the notional amount allocated to the specific defaulting entity.
The majority of transactions represented by the “other” category shown in the above table are risk participation agreements. In these transactions, the lead participant has a swap agreement with a customer. The lead participant (purchaser of protection) then enters into a risk participation agreement with a counterparty (seller of protection), under which the counterparty receives a fee to accept a portion of the lead participant’s credit risk. If the customer defaults on the swap contract, the counterparty to the risk participation agreement must reimburse the lead participant for the counterparty’s percentage of the positive fair value of the customer swap as of the default date. If the customer swap has a negative fair value, the counterparty has no reimbursement requirements. The notional amount represents the maximum amount that the seller could be required to pay. In the case of customer default, the seller is entitled to a pro rata share of the lead participant’s claims against the customer under the terms of the initial swap agreement between the lead participant and the customer.
The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at June 30, 2010, December 31, 2009 and June 30, 2009. The payment/performance risk assessment is based on the default probabilities for the underlying reference entities’ debt obligations using the credit ratings matrix provided by Moody’s, specifically Moody’s “Idealized” Cumulative Default Rates, except as noted. The payment/performance risk shown in the table represents a weighted-average of

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the default probabilities for all reference entities in the respective portfolios. These default probabilities are directly correlated to the probability that we will have to make a payment under the credit derivative contracts.
                                                                         
    June 30, 2010     December 31, 2009     June 30, 2009  
            Average     Payment /             Average     Payment /             Average     Payment /  
    Notional     Term     Performance     Notional     Term     Performance     Notional     Term     Performance  
dollars in millions   Amount     (Years)     Risk     Amount     (Years)     Risk     Amount     (Years)     Risk  
 
Single name credit default swaps
  $ 1,102       2.45       4.10  %   $ 1,140       2.57       4.88  %   $ 1,548       2.38       5.16  %
Traded credit default swap indices
    344       4.00       8.08       733       2.71       13.29       1,703       1.74       6.59  
Other
    46       3.09       7.70       44       1.94       5.41       50       1.50     Low  (a)
 
Total credit derivatives sold
  $ 1,492                 $ 1,917                 $ 3,301              
 
                                                                 
 
(a)   The other credit derivatives were not referenced to an entity’s debt obligation. We determined the payment/performance risk based on the probability that we could be required to pay the maximum amount under the credit derivatives. We have determined that the payment/performance risk associated with the other credit derivatives was low (i.e., less than or equal to 30% probability of payment).
Credit Risk Contingent Features
We have entered into certain derivative contracts that require us to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to our long-term senior unsecured credit ratings with Moody’s and S&P. Collateral requirements are also based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that we have signed with the counterparties. In a limited number of instances, counterparties also have the right to terminate their ISDA Master Agreements with us if our ratings fall below a certain level, usually investment-grade level (i.e., “Baa3” for Moody’s and “BBB-” for S&P). At June 30, 2010, KeyBank’s ratings with Moody’s and S&P were “A2” and “A-,” respectively, and KeyCorp’s ratings with Moody’s and S&P were “Baa1” and “BBB+,” respectively. If there were a downgrade of our ratings, we could be required to post additional collateral under those ISDA Master Agreements where we are in a net liability position. As of June 30, 2010, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) held by KeyBank that were in a net liability position totaled $1.1 billion, which includes $745 million in derivative assets and $1.9 billion in derivative liabilities. We had $1.1 billion in cash and securities collateral posted to cover those positions as of June 30, 2010.
The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of June 30, 2010, December 31, 2009 and June 30, 2009. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two or three ratings as of June 30, 2010, and take into account all collateral already posted. At June 30, 2010, KeyCorp did not have any derivatives in a net liability position that contained credit risk contingent features.
                                                 
    June 30, 2010     December 31, 2009     June 30, 2009  
in millions   Moody’s     S&P     Moody’s     S&P     Moody’s     S&P  
 
KeyBank’s long-term senior unsecured credit ratings
    A2       A-       A2       A-       A2       A-  
 
One rating downgrade
  $ 28     $ 22     $ 34     $ 22     $ 33     $ 26  
Two rating downgrades
    51       25       56       31       59       39  
Three rating downgrades
    59       30       65       36       72       45  
 
 
If KeyBank’s ratings had been downgraded below investment grade as of June 30, 2010, payments of up to $81 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted. To be downgraded below investment grade, KeyBank’s long-term senior unsecured credit rating would need to be downgraded five ratings by Moody’s and four ratings by S&P.

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15. Fair Value Measurements
Fair Value Determination
As defined in the applicable accounting guidance for fair value measurements and disclosures, fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market. We have established and documented our process for determining the fair values of our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, we determine the fair value of our assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on our judgment, assumptions and estimates related to credit quality, liquidity, interest rates and other relevant inputs.
Valuation adjustments, such as those pertaining to counterparty and our own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing is not indicative of the counterparty’s credit quality.
When we are unable to observe recent market transactions for identical or similar instruments, we make liquidity valuation adjustments to the fair value to reflect the uncertainty in the pricing and trading of the instrument. Liquidity valuation adjustments are based on the following factors:
¨   the amount of time since the last relevant valuation;
 
¨   whether there is an actual trade or relevant external quote available at the measurement date; and
 
¨   volatility associated with the primary pricing components.
We ensure that our fair value measurements are accurate and appropriate by relying upon various controls, including:
¨   an independent review and approval of valuation models;
 
¨   a detailed review of profit and loss conducted on a regular basis; and
 
¨   a validation of valuation model components against benchmark data and similar products, where possible.
We review any changes to valuation methodologies to ensure they are appropriate and justified, and refine valuation methodologies as more market-based data becomes available.
Additional information regarding our accounting policies for the determination of fair value is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” on page 84 of our 2009 Annual Report to Shareholders.
Qualitative Disclosures of Valuation Techniques
Loans. Loans recorded as trading account assets are valued using an internal cash flow model because the market in which these assets typically trade is not active. The most significant inputs to our internal model are actual and projected financial results for the individual borrowers. Accordingly, these loans are classified as Level 3 assets. As of June 30, 2010, there was one loan that was actively traded. This loan was valued based on market spreads for identical assets and, therefore, classified as Level 2 since the fair value recorded is based on observable market data.

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Securities (trading and available for sale). Securities are classified as Level 1 when quoted market prices are available in an active market for those identical securities. Level 1 instruments include exchange-traded equity securities. If quoted prices for identical securities are not available, we determine fair value using pricing models or quoted prices of similar securities. These instruments, classified as Level 2 assets, include municipal bonds; bonds backed by the U.S. government, corporate bonds, certain mortgage-backed securities, securities issued by the U.S. Treasury and certain agency and corporate collateralized mortgage obligations. Inputs to the pricing models include actual trade data (i.e., spreads, credit ratings and interest rates) for comparable assets, spread tables, matrices, high-grade scales, option-adjusted spreads and standard inputs, such as yields, broker/dealer quotes, bids and offers. Where there is limited activity in the market for a particular instrument, we use internal models based on certain assumptions to determine fair value. Such instruments, classified as Level 3 assets, include certain commercial mortgage-backed securities and certain commercial paper. Inputs for the Level 3 internal models include expected cash flows from the underlying loans, which take into account expected default and recovery percentages, market research and discount rates commensurate with current market conditions.
Private equity and mezzanine investments. Private equity and mezzanine investments consist of investments in debt and equity securities through our Real Estate Capital line of business. They include direct investments made in a property, as well as indirect investments made in funds that include other investors for the purpose of investing in properties. There is not an active market in which to value these investments. The direct investments are initially valued based upon the transaction price. The carrying amount is then adjusted based upon the estimated future cash flows associated with the investments. Inputs used in determining future cash flows include the cost of build-out, future selling prices, current market outlook and operating performance of the particular investment. The indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to use statements from the investment manager to calculate net asset value per share. A primary input used in estimating fair value is the most recent value of the capital accounts as reported by the general partners of the investee funds. Private equity and mezzanine investments are classified as Level 3 assets since our judgment impacts determination of fair value.
Within private equity and mezzanine investments, we have investments in real estate private equity funds. The main purpose of these funds is to acquire a portfolio of real estate investments that provides attractive risk-adjusted returns and current income for investors. Certain of these investments do not have readily determinable fair values and represent our ownership interest in an entity that follows measurement principles under investment company accounting. The following table presents the fair value of the funds and related unfunded commitments at June 30, 2010:
                 
June 30, 2010           Unfunded  
in millions   Fair Value     Commitments  
 
INVESTMENT TYPE
               
Passive funds (a)
  $ 17     $ 5  
Co-managed funds (b)
    14       19  
 
Total
  $ 31     $ 24  
 
           
 
(a)   We invest in passive funds, which are multi-investor private equity funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. Some funds have no restrictions on sale, while others require investors to remain in the fund until maturity. The funds will be liquidated over a period of one to six years.
 
(b)   We are a manager or co-manager of these funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. In addition, we receive management fees. A sale or transfer of our interest in the funds can only occur through written consent of a majority of the fund’s investors. In one instance, the other co-manager of the fund must consent to the sale or transfer of our interest in the fund. The funds will mature over a period of four to seven years.

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Principal investments. Principal investments consist of investments in equity and debt instruments made by our principal investing entities. They include direct investments (investments made in a particular company), as well as indirect investments (investments made through funds that include other investors) in predominantly privately held companies and funds. When quoted prices are available in an active market for the identical investment, the quoted prices are used in the valuation process, and the related investments are classified as Level 1 assets. However, in most cases, quoted market prices are not available for the identical investment, and we must rely upon other sources and inputs, such as market multiples; historical and forecast earnings before interest, taxation, depreciation and amortization; net debt levels; and investment risk ratings to perform the valuations of the direct investments. The indirect investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing and do not have readily determinable fair values. The indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to estimate fair value using net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). A primary input used in estimating fair value is the most recent value of the capital accounts as reported by the general partners of the investee funds. These investments are classified as Level 3 assets since our assumptions impact the overall determination of fair value. The following table presents the fair value of the indirect funds and related unfunded commitments at June 30, 2010:
                 
June 30, 2010           Unfunded  
in millions   Fair Value     Commitments  
 
INVESTMENT TYPE
               
Private equity funds (a)
  $ 514     $ 227  
Hedge funds (b)
    10        
 
Total
  $ 524     $ 227  
 
           
 
(a)   Consists of buyout, venture capital and fund of funds. These investments can never be redeemed with the investee funds. Instead, distributions are received through the liquidation of the underlying investments of the fund. These investments cannot be sold without the approval of the general partners of the investee funds. We estimate that the underlying investments of the funds will be liquidated over a period of one to ten years.
 
(b)   Consists of investee funds invested in long and short positions of “stressed and distressed” fixed income-oriented securities with the goal of producing attractive risk-adjusted returns. The investments can be redeemed quarterly with 45 days notice. However, the general partners may impose quarterly redemption limits that may delay receipt of requested redemptions.
Derivatives. Exchange-traded derivatives are valued using quoted prices and, therefore, are classified as Level 1 instruments. However, only a few types of derivatives are exchange-traded, so the majority of our derivative positions are valued using internally developed models based on market convention that use observable market inputs, such as interest rate curves, yield curves, the LIBOR discount rates and curves, index pricing curves, foreign currency curves and volatility surfaces. These derivative contracts, which are classified as Level 2 instruments, include interest rate swaps, certain options, cross currency swaps and credit default swaps. In addition, we have a few customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models. Inputs to the models consist of available market data, such as bond spreads and asset values, as well as our assumptions, such as loss probabilities and proxy prices.
Market convention implies a credit rating of “AA” equivalent in the pricing of derivative contracts, which assumes all counterparties have the same creditworthiness. To reflect the actual exposure on our derivative contracts related to both counterparty and our own creditworthiness, we record a fair value adjustment in the form of a default reserve. The credit component is valued on a counterparty-by-counterparty basis based on the probability of default, and considers master netting and collateral agreements. The default reserve is considered to be a Level 3 input.

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Other assets and liabilities. The value of our repurchase and reverse repurchase agreements, trade date receivables and payables, and short positions is driven by the valuation of the underlying securities. The underlying securities may include equity securities, which are valued using quoted market prices in an active market for identical securities, resulting in a Level 1 classification. If quoted prices for identical securities are not available, fair value is determined by using pricing models or quoted prices of similar securities, resulting in a Level 2 classification. Inputs include spreads, credit ratings and interest rates for the interest rate-driven products. Inputs include actual trade data for comparable assets, and bids and offers for the credit-driven products. Credit-driven securities include corporate bonds and mortgage-backed securities, while interest rate-driven securities include government bonds, U.S. Treasury bonds and other products backed by the U.S. government.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. These assets and liabilities are measured at fair value on a regular basis. The following tables present our assets and liabilities measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009.

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June 30, 2010                           Netting        
in millions   Level 1     Level 2     Level 3     Adjustments  (a)   Total  
 
ASSETS MEASURED ON A RECURRING BASIS
                                       
Short term investments:
                                       
Securities purchased under resale agreements
        $ 416                 $ 416  
Trading account assets:
                                       
U.S. Treasury, agencies and corporations
          7                   7  
Other mortgage-backed securities
              $ 4             4  
Other securities
  $ 59       910       24             993  
 
Total trading account securities
    59       917       28             1,004  
Commercial loans
          2       9             11  
 
Total trading account assets
    59       919       37             1,015  
Securities available for sale:
                                       
U.S. Treasury, agencies and corporations
          8                   8  
States and political subdivisions
          78                   78  
Collateralized mortgage obligations
          18,290                   18,290  
Other mortgage-backed securities
          1,283                   1,283  
Other securities
    109       5                   114  
 
Total securities available for sale
    109       19,664                   19,773  
Other investments:
                                       
Principal investments:
                                       
Direct
                419             419  
Indirect
                530             530  
 
Total principal investments
                949             949  
Equity and mezzanine investments:
                                       
Direct
                24             24  
Indirect
                31             31  
 
Total equity and mezzanine investments
                55             55  
 
Total other investments
                1,004             1,004  
Derivative assets:
                                       
Interest rate
          2,138       87             2,225  
Foreign exchange
    119       78                   197  
Energy
          345                   345  
Credit
          36       11             47  
Equity
          1                   1  
 
Total derivative assets
    119       2,598       98     $ (1,662 )     1,153  (a)
Accrued income and other assets
    5       71       3             79  
 
Total assets on a recurring basis at fair value
  $ 292     $ 23,668     $ 1,142     $ (1,662 )   $ 23,440  
 
                             
 
LIABILITIES MEASURED ON A RECURRING BASIS
                                       
Federal funds purchased and securities sold under repurchase agreements:
                                       
Securities sold under repurchase agreements
        $ 583                 $ 583  
Bank notes and other short-term borrowings:
                                       
Short positions
  $ 8       497                   505  
Derivative liabilities:
                                       
Interest rate
          1,615                   1,615  
Foreign exchange
    103       394                   497  
Energy
          364                   364  
Credit
          36     $ 1             37  
Equity
          1                   1  
 
Total derivative liabilities
    103       2,410       1     $ (1,193 )     1,321  (a)
Accrued expense and other liabilities
          125                   125  
 
Total liabilities on a recurring basis at fair value
  $ 111     $ 3,615     $ 1     $ (1,193 )   $ 2,534  
 
                             
 
 
(a)   Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance related to the offsetting of certain derivative contracts on the balance sheet. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related collateral. Total derivative assets and liabilities include these netting adjustments.

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December 31, 2009                           Netting        
in millions   Level 1     Level 2     Level 3     Adjustments  (a)   Total  
 
ASSETS MEASURED ON A RECURRING BASIS
                                       
Short term investments:
                                       
Securities purchased under resale agreements
        $ 285                 $ 285  
Trading account assets:
                                       
U.S. Treasury, agencies and corporations
          10                   10  
Other mortgage-backed securities
              $ 29             29  
Other securities
  $ 100       624       423             1,147  
 
Total trading account securities
    100       634       452             1,186  
Commercial loans
          4       19             23  
 
Total trading account assets
    100       638       471             1,209  
Securities available for sale:
                                       
U.S. Treasury, agencies and corporations
          8                   8  
States and political subdivisions
          83                   83  
Collateralized mortgage obligations
          15,006                   15,006  
Other mortgage-backed securities
          1,428                   1,428  
Other securities
    102       14                   116  
 
Total securities available for sale
    102       16,539                   16,641  
Other investments:
                                       
Principal investments:
                                       
Direct
                538             538  
Indirect
                497             497  
 
Total principal investments
                1,035             1,035  
Equity and mezzanine investments:
                                       
Direct
                26             26  
Indirect
                31             31  
 
Total equity and mezzanine investments
                57             57  
 
Total other investments
                1,092             1,092  
Derivative assets:
                                       
Interest rate
          1,927       100             2,027  
Foreign exchange
    140       140                   280  
Energy
          403                   403  
Credit
          (54 )     10             (44 )
Equity
                             
 
Total derivative assets
    140       2,416       110     $ (1,572 )     1,094  (a)
Accrued income and other assets
    8       38                   46  
 
Total assets on a recurring basis at fair value
  $ 350     $ 19,916     $ 1,673     $ (1,572 )   $ 20,367  
 
                             
 
 
                                       
LIABILITIES MEASURED ON A RECURRING BASIS
                                       
Federal funds purchased and securities sold under repurchase agreements:
                                       
Securities sold under repurchase agreements
        $ 449                 $ 449  
Bank notes and other short-term borrowings:
                                       
Short positions
  $ 1       276                   277  
Derivative liabilities:
                                       
Interest rate
          1,357                   1,357  
Foreign exchange
    123       248                   371  
Energy
          426                   426  
Credit
          48     $ 2             50  
Equity
                             
 
Total derivative liabilities
    123       2,079       2     $ (1,192 )     1,012  (a)
Accrued expense and other liabilities
          21                   21  
 
Total liabilities on a recurring basis at fair value
  $ 124     $ 2,825     $ 2     $ (1,192 )   $ 1,759  
 
                             
 
 
(a)   Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance related to the offsetting of certain derivative contracts on the balance sheet. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related collateral. Total derivative assets and liabilities include these netting adjustments.

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Changes in Level 3 Fair Value Measurements
The following tables show the change in the fair values of our Level 3 financial instruments for the three and six months ended June 30, 2010 and 2009. We mitigate the credit risk, interest rate risk and risk of loss related to many of these Level 3 instruments through the use of securities and derivative positions classified as Level 1 or Level 2. Level 1 or Level 2 instruments are not included in the following tables. Therefore, the gains or losses shown do not include the impact of our risk management activities.
                                                                                         
    Trading Account Assets     Other Investments             Derivative Instruments (a)  
    Other                                           Accrued                    
    Mortgage-                           Equity and     Income                    
    Backed     Other     Commercial     Principal Investments     Mezzanine Investments     and Other     Interest     Energy and        
in millions   Securities     Securities     Loans     Direct     Indirect     Direct     Indirect     Assets     Rate     Commodity     Credit  
 
Balance at December 31, 2009
  $ 29     $ 423     $ 19     $ 538     $ 497     $ 26     $ 31           $ 99           $ 9  
Gains (losses) included in earnings
    3  (b)      (b)     (1 (b)     18  (c)     36  (c)     5  (c)     (4 ) (c)      (c)      (b)      (b)     1  (b)
Purchases, sales, issuances and settlements
    (29 )     (399 )     (9 )     (129 )     (3 )     (13 )     4     $ 3       (4 )            
Net transfers into (out of) Level 3
    1                   (8 )           6                   (8 )            
 
Balance at June 30, 2010
  $ 4     $ 24     $ 9     $ 419     $ 530     $ 24     $ 31     $ 3     $ 87           $ 10  
 
                                                                 
 
 
                                                                                       
Unrealized gains (losses) included in earnings
  $ 2  (b)      (b)   $ (1 ) (b)   $ 2  (c)   $ 32  (c)   $ 41  (c)   $ (4 ) (c)      (c)      (b)       (b)       (b)
 
 
                                                                                       
Balance at March 31, 2010
  $ 29     $ 199     $ 11     $ 534     $ 518     $ 32     $ 33     $ 3     $ 80           $ 10  
Gains (losses) included in earnings
    3  (b)      (b)     (1 (b)     3  (c)     13  (c)     3  (c)     (2 ) (c)      (c)     9  (b)      (b)      (b)
Purchases, sales, issuances and settlements
    (29 )     (175 )     (1 )     (118 )     (1 )     (11 )                 (1 )            
Net transfers into (out of) Level 3
    1                                                 (1 )            
 
Balance at June 30, 2010
  $ 4     $ 24     $ 9     $ 419     $ 530     $ 24     $ 31     $ 3     $ 87           $ 10  
 
                                                                 
 
 
                                                                                       
Unrealized gains (losses) included in earnings
  $ 2  (b)      (b)      (b)   $ (14)  (c)   $ 13  (c)   $ 34  (c)   $ (2)  (c)      (c)     (b)     (b)     (b)
 
 
                                                                                       
Balance at December 31, 2008
  $ 67     $ 758     $ 31     $ 479     $ 505     $ 103     $ 47             15           $  
Gains (losses) included in earnings
    (1)  (b)     (1)  (b)      (b)     (23 (c)     (58 (c)     (6 (c)     (9 (c)      (c)      (b)      (b)     (13 (b)
Purchases, sales, issuances and settlements
          (733 )     (2 )     15       9       8       3                          
Net transfers into (out of) Level 3
                                                    67       1        
 
Balance at June 30, 2009
  $ 66     $ 24     $ 29     $ 471     $ 456     $ 105     $ 41           $ 82     $ 1     $ (13 )
 
                                                                 
 
 
                                                                                       
Unrealized gains (losses) included in earnings
  $ (1 (b)     (1 (b)      (b)   $ (24 (c)   $ (54 (c)   $ (6 (c)   $ (9 (c)      (c)      (b)      (b)      (b)
 
 
                                                                                       
Balance at March 31, 2009
  $ 67     $ 673     $ 30     $ 467     $ 460     $ 103     $ 44                         (3 )
Gains (losses) included in earnings
    (1 (b)      (b)      (b)      (c)     (6 (c)     (4 (c)     (4 (c)      (c)      (b)      (b)     (10 (b)
Purchases, sales, issuances and settlements
          (649 )     (1 )     4       2       6       1                          
Net transfers into (out of) Level 3
                                                    82       1        
 
Balance at June 30, 2009
  $ 66     $ 24     $ 29     $ 471     $ 456     $ 105     $ 41           $ 82     $ 1     $ (13 )
 
                                                                 
 
 
                                                                                       
Unrealized gains (losses) included in earnings
  $ (1)  (b)      (b)      (b)   $ (1 (c)   $ (5 (c)   $ (4 (c)   $ (4 (c)      (c)      (b)      (b)      (b)
 
 
(a)   Amounts represent Level 3 derivative assets less Level 3 derivative liabilities.
 
(b)   Realized and unrealized gains and losses on trading account assets and derivative instruments are reported in “investment banking and capital markets income (loss)” on the income statement.
 
(c)   Realized and unrealized gains and losses on principal investments are reported in “net gains (losses) from principal investments” on the income statement. Realized and unrealized gains and losses on private equity and mezzanine investments are reported in “investment banking and capital markets income (loss)” on the income statement. Realized and unrealized gains and losses on investments included in accrued income and other assets are reported in “other income” on the income statement.

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Assets Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. The following tables present our assets measured at fair value on a nonrecurring basis at June 30, 2010 and December 31, 2009.
                                                                 
    June 30, 2010     December 31, 2009  
in millions   Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
 
ASSETS MEASURED ON A NONRECURRING BASIS
                                                               
Impaired loans
              $ 402     $ 402           $ 3     $ 679     $ 682  
Loans held for sale (a)
                33       33                   85       85  
Other investments
                1       1                          
Operating lease assets
                                        9       9  
Goodwill
                                               
Other intangible assets
                                               
Accrued income and other assets
        $ 51       119       170             36       118       154  
 
Total assets on a nonrecurring basis at fair value
        $ 51     $ 555     $ 606           $ 39     $ 891     $ 930  
 
                                               
 
 
(a)   During the first half of 2010, we transferred $43 million of commercial and consumer loans from held-for-sale status to the held-to-maturity portfolio at their current fair value.
We typically adjust the carrying amount of our impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows, the fair value of the underlying collateral or the loan’s observable market price. Cash flow analysis considers internally developed inputs, such as discount rates, default rates, costs of foreclosure and changes in real estate values. The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations and assessments provided by third-party appraisers. Appraisals of collateral dependent impaired loans are performed or reaffirmed at least annually. Appraisals may occur more frequently if the most recent appraisal does not accurately reflect the current market, the debtor is seriously delinquent or chronically past due or there has been material deterioration in the performance of the project or condition of the property type. Adjustments to outdated appraisals that result in an appraisal value less than the carrying value of a collateral dependent impaired loan are reflected in the allowance for loan losses. Impaired loans with a specifically allocated allowance based on cash flow analysis or the underlying collateral are classified as Level 3 assets, while those with a specifically allocated allowance based on an observable market price that reflects recent sale transactions for similar loans and collateral are classified as Level 2. Current market conditions, including credit risk profiles and decreased real estate values, impacted the inputs used in our internal valuation analysis, resulting in write-downs of these assets.
Through a quarterly analysis of our commercial loan and lease portfolios held for sale, we determined that certain adjustments were necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. After adjustments, these loans and leases totaled $33 million at June 30, 2010 and $85 million at December 31, 2009. Current market conditions, including credit risk profiles, liquidity and decreased real estate values, impacted the inputs used in our internal models and other valuation methodologies, resulting in write-downs of these assets.
The valuations of performing commercial mortgage and construction loans are conducted using internal models that rely on market data from sales or nonbinding bids on similar assets, including credit spreads, treasury rates, interest rate curves and risk profiles, as well as our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. Therefore, we have classified these loans as Level 3 assets. The inputs related to our assumptions and other internal loan data include changes in real estate values, costs of foreclosure, prepayment rates, default rates and discount rates.

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The valuations of nonperforming commercial mortgage and construction loans are based on current agreements to sell the loans or approved discounted payoffs. If a negotiated value is not available, third party appraisals, adjusted for current market conditions, are used. Since valuations are based on unobservable data, these loans have been classified as Level 3 assets.
The valuation of commercial finance and operating leases is performed using an internal model that relies on market data, such as swap rates and bond ratings, as well as our own assumptions about the exit market for the leases and details about the individual leases in the portfolio. These leases have been classified as Level 3 assets. The inputs related to our assumptions include changes in the value of leased items and internal credit ratings. In addition, commercial leases may be valued using nonbinding bids when they are available and current. The leases valued under this methodology are classified as Level 2 assets.
On a quarterly basis, we review impairment indicators to determine whether we need to evaluate the carrying amount of the goodwill and other intangible assets assigned to our Community Banking and National Banking units. We also perform an annual impairment test for goodwill. Fair value of our reporting units is determined using both an income approach (discounted cash flow method) and a market approach (using publicly traded company and recent transactions data), which are weighted equally. Inputs used include market available data, such as industry, historical and expected growth rates and peer valuations, as well as internally driven inputs, such as forecasted earnings and market participant insights. Since this valuation relies on a significant number of unobservable inputs, we have classified these assets as Level 3. For additional information on the results of recent goodwill impairment testing, see Note 11 (“Goodwill and Other Intangible Assets”) on page 102 of our 2009 Annual Report to Shareholders and Note 1 (“Basis of Presentation”).
The fair value of other intangible assets is calculated using a cash flow approach. While the calculation to test for recoverability uses a number of assumptions that are based on current market conditions, the calculation is based primarily on unobservable assumptions; therefore the assets are classified as Level 3. The assumptions used are dependent on the type of intangible being valued and include such items as attrition rates, types of customers, revenue streams, prepayment rates, refinancing probabilities and credit defaults. There was no impairment of other intangible assets during the quarter ended June 30, 2010.
OREO and other repossessed properties are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Therefore, we have classified these assets as Level 3. OREO and other repossessed properties are classified as Level 2 if we receive binding purchase agreements to sell these properties. Returned lease inventory is valued based on market data for similar assets and is classified as Level 2. Assets that are acquired through, or in lieu of, loan foreclosures are recorded as held for sale initially at the lower of the loan balance or fair value upon the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions may require the assets to be marked down further to a new cost basis.

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Fair Value Disclosures of Financial Instruments
The carrying amount and fair value of our financial instruments at June 30, 2010 and December 31, 2009 are shown in the following table:
                                 
    June 30, 2010     December 31, 2009  
    Carrying     Fair     Carrying     Fair  
in millions   Amount     Value     Amount     Value  
 
ASSETS
                               
Cash and short-term investments (a)
  $ 2,575     $ 2,575     $ 2,214     $ 2,214  
Trading account assets (e)
    1,014       1,014       1,209       1,209  
Securities available for sale (e)
    19,193       19,773       16,434       16,641  
Held-to-maturity securities (b)
    19       19       24       24  
Other investments (e)
    1,415       1,415       1,488       1,488  
Loans, net of allowance (c)
    51,115       47,322       56,236       49,136  
Loans held for sale (e)
    699       699       443       443  
Mortgage servicing assets (d)
    209       307       221       334  
Derivative assets (e)
    1,153       1,153       1,094       1,094  
LIABILITIES
                               
Deposits with no stated maturity (a)
  $ 42,635     $ 42,635     $ 40,563     $ 40,563  
Time deposits (d)
    19,740       20,392       25,008       25,908  
Short-term borrowings (a)
    3,655       3,655       2,082       2,082  
Long-term debt (d)
    10,451       10,271       11,558       10,761  
Derivative liabilities (e)
    1,321       1,321       1,012       1,012  
 
 
Valuation Methods and Assumptions
 
(a)   Fair value equals or approximates carrying amount. The fair value of deposits with no stated maturity does not take into consideration the value ascribed to core deposit intangibles.
 
(b)   Fair values of held-to-maturity securities are determined through the use of models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities and certain prepayment assumptions. We review the valuations derived from the models for reasonableness to ensure they are consistent with the values placed on similar securities traded in the secondary markets.
(c)   The fair value of the loans is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital. In addition, an incremental liquidity discount was applied to certain loans using historical sales of loans during periods of similar economic conditions as a benchmark. The fair value of loans includes lease financing receivables at their aggregate carrying amount, which is equivalent to their fair value.
(d)   Fair values of servicing assets, time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.
(e)   Information pertaining to our methodology for measuring the fair values of these assets and liabilities is included in the section entitled “Qualitative Disclosures of Valuation Techniques” and “Assets Measured at Fair Value on a Nonrecurring Basis” in this note.
The discontinued education lending business consists of assets and liabilities (recorded at fair value) from the securitization trusts, which were consolidated as of January 1, 2010 in accordance with new consolidation accounting guidance, as well as loans and loans held for sale outside the trusts (recorded at carrying value with appropriate valuation reserves). All of these loans were excluded from the table above as follows: loans at carrying value, net of allowance, of $3.2 billion ($2.4 billion fair value) and $3.4 billion ($2.5 billion fair value) at June 30, 2010 and December 31, 2009, respectively; loans held for sale of $92 million and $434 million at June 30, 2010 and December 31, 2009, respectively; and loans at fair value of $3.2 billion at June 30, 2010. As discussed above, loans at fair value were not consolidated until January 1, 2010. Securities issued by the education lending securitization trusts, which are the primary liabilities of the trusts, totaling $3.1 billion at fair value have also been excluded from the above table at June 30, 2010. Additional information regarding the consolidation of the education lending securitization trusts is provided in Note 16 (“Discontinued Operations”). The fair values of loans held for sale were identical to their carrying amounts.

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Residential real estate mortgage loans with carrying amounts of $1.8 billion at June 30, 2010 and December 31, 2009 are included in “Loans, net of allowance” in the above table.
For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values.
We use valuation methods based on exit market prices in accordance with the applicable accounting guidance for fair value measurements. We determine fair value based on assumptions pertaining to the factors a market participant would consider in valuing the asset. During the second quarter of 2010, our fair value assumptions improved primarily due to more liquidity in the markets particularly related to loans. A substantial portion of the fair value adjustment is related to liquidity. If we were to use different assumptions, the fair values shown in the preceding table could change significantly. Also, because the applicable accounting guidance for financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of our company as a whole.

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16. Discontinued Operations
Education lending. In September 2009, we decided to exit the government-guaranteed education lending business. As a result of this decision, we have accounted for this business as a discontinued operation.
The changes in fair value of the assets and liabilities of the education loan securitization trusts (discussed later in this note), and the interest income and expense from the loans and the securities of the trusts are all recorded as a component of “income (loss) from discontinued operations, net of taxes” on the income statement. These amounts are shown separately in the following table. Gains and losses attributable to changes in fair value are recorded as a component of noninterest income or expense. It is our policy to recognize interest income and expense related to the loans and securities separately from changes in fair value. These amounts are shown as a component of “Net interest income.” The components of “income (loss) from discontinued operations, net of taxes” for this business are as follows:
                                 
    Three months ended June 30,     Six months ended June 30,
in millions   2010     2009     2010     2009  
       
Net interest income
  $ 39     $ 23     $ 79     $ 48  
Provision for loan losses
    14       27       38       55  
 
Net interest income (expense) after provision for loan losses
    25       (4 )     41       (7 )
Noninterest income
    (55 )     9       (56 )     16  
Noninterest expense
    13       15       25       30  
 
Income (loss) before income taxes
    (43 )     (10 )     (40 )     (21 )
Income taxes
    (16 )     (4 )     (15 )     (8 )
 
Income (loss) from discontinued operations, net of taxes (a)
  $ (27 )   $ (6 )   $ (25 )   $ (13 )
 
                       
 
 
(a)   Includes after-tax charges of $15 million and $16 million for the three-month periods ended June 30, 2010 and 2009, respectively, and $30 million and $35 million for the six-month periods ended June 30, 2010 and 2009, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.
The discontinued assets and liabilities of our education lending business included on the balance sheet are as follows:
                         
    June 30,     December 31,     June 30,  
in millions   2010     2009     2009  
 
Securities available for sale
        $ 182     $ 186  
Loans at fair value
  $ 3,223              
Loans, net of unearned income of $1, $1 and $1
    3,371       3,523       3,636  
Less: Allowance for loan losses
    128       157       160  
 
Net loans
    6,466       3,366       3,476  
Loans held for sale
    92       434       148  
Accrued income and other assets
    223       192       246  
 
Total assets
  $ 6,781     $ 4,174     $ 4,056  
 
                 
 
                       
Noninterest-bearing deposits
        $ 119     $ 104  
Derivative liabilities
                2  
Accrued expense and other liabilities
    46       4       13  
Securities at fair value
    3,092              
 
Total liabilities
  $ 3,138     $ 123     $ 119  
 
                 
 

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As part of our education lending business model, we originated and securitized education loans. The process of securitization involves taking a pool of loans from our balance sheet and selling them to a bankruptcy remote QSPE, or trust. This trust then issues securities to investors in the capital market to raise funds to pay for the loans. The interest generated on the loans goes to pay holders of the securities issued. We, as the transferor, retain a portion of the risk in the form of a residual interest and also retain the right to service the securitized loans and receive servicing fees.
In June 2009, the FASB issued new consolidation accounting guidance which eliminated the scope exception for QSPEs and, as a result our education loan securitization trusts had to be analyzed under this new guidance. We determined that consolidation of our ten outstanding securitization trusts as of January 1, 2010 was required since we hold the residual interests and are the master servicer who has the power to direct the activities that most significantly impact the economic performance of these trusts.
The assets held by these trusts can only be used to settle the obligations or securities issued by the trusts. We cannot sell the assets or transfer the liabilities of the consolidated trusts. The loans in the consolidated trusts are comprised of both private and government-guaranteed loans. The security holders or beneficial interest holders do not have recourse to us. Our economic interest or risk of loss associated with these education loan securitization trusts is approximately $150 million as of June 30, 2010. As a result of our economic interest in the trusts, we record all income and expense (including fair value adjustments) through the “income (loss) from discontinued operations, net of tax” line item in our income statement.
We elected to consolidate these trusts at fair value upon our prospective adoption of this new consolidation guidance. Carrying the assets and liabilities of the trusts at fair value better depicts our economic interest in these trusts. A cumulative effect adjustment of approximately $45 million, which increased our beginning balance of retained earnings at January 1, 2010, was recorded upon the consolidation of these trusts. The amount of this cumulative effect adjustment was driven primarily by derecognizing the residual interests and servicing assets related to these trusts and the consolidation of the assets and liabilities at fair value.
At June 30, 2010, the primary economic assumptions used to measure the fair value of the assets and liabilities of the trusts are shown in the following table. The fair value of the assets and liabilities of the trusts is determined by present valuing the future expected cash flows which are affected by the following assumptions. We rely on unobservable inputs (Level 3) when determining the fair value of the assets and liabilities of the trusts due to the lack of observable market data.
         
June 30, 2010        
dollars in millions        
 
Weighted-average life (years)
    1.4 - 6.0  
 
PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE)
    4.00% - 26.00 %
 
EXPECTED CREDIT LOSSES
    2.00% - 80.00 %
 
LOAN DISCOUNT RATES (ANNUAL RATE)
    3.63% - 8.16 %
 
SECURITY DISCOUNT RATES (ANNUAL RATE)
    3.30% - 7.70 %
 
EXPECTED DEFAULTS (STATIC RATE)
    3.75% - 40.00 %
 
The following table shows the consolidated trusts’ assets and liabilities at fair value and their related contractual values as of June 30, 2010. Loans held by the trusts with unpaid principal balances of $48 million were 90 days or more past due and $34 million were in nonaccrual status or $43 million and $31 million on a fair value basis, respectively, at June 30, 2010.

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June 30, 2010   Contractual     Fair  
in millions   Amount     Value  
 
ASSETS
               
Loans
  $ 3,610     $ 3,223  
Other Assets
    63       63  
 
               
LIABILITIES
               
Securities
  $ 3,731     $ 3,092  
Other Liabilities
    44       44  
 
The following table presents the assets and liabilities of the trusts that were consolidated and are measured at fair value on a recurring basis.
                                 
June 30, 2010                        
in millions   Level 1     Level 2     Level 3     Total  
 
ASSETS MEASURED ON A RECURRING BASIS
                               
Loans
              $ 3,223     $ 3,223  
Other assets
                63       63  
 
Total assets on a recurring basis at fair value
              $ 3,286     $ 3,286  
 
                       
 
 
                               
LIABILITIES MEASURED ON A RECURRING BASIS
                               
Securities
              $ 3,092     $ 3,092  
Other liabilities
                44       44  
 
Total liabilities on a recurring basis at fair value
              $ 3,136     $ 3,136  
 
                       
 
The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts for the quarter ended June 30, 2010.
                                 
    Trust                    
    Student     Other     Trust     Other  
in millions   Loans     Assets     Securities     Liabilities  
 
Balance at January 1, 2010
  $ 2,639     $ 47     $ 2,521     $ 2  
Gains/Losses recognized in Earnings (a)
    785             848        
Purchases, sales, issuances and settlements
    (201 )     16       (277 )     42  
 
Balance at June 30, 2010
  $ 3,223     $ 63     $ 3,092     $ 44  
 
                       
 
 
(a)   Gains/Losses on the Trust Student Loans and Trust Securities were driven primarily by fair value adjustments.
Austin Capital Management, Ltd. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result of this decision, we have accounted for this business as a discontinued operation.
The results of this discontinued business are included in “loss from discontinued operations, net of taxes” on the income statement. The components of “income (loss) from discontinued operations, net of taxes” for this business are as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
in millions   2010     2009     2010     2009  
       
Noninterest income
  $ 1     $ 7     $ 4     $ 14  
Intangible assets impairment
                      27  
Other noninterest expense
    2       1       4       5  
 
Income (loss) before income taxes
    (1 )     6             (18 )
Income taxes
    (1 )     (4 )           (6 )
 
Income (loss) from discontinued operations, net of taxes
        $ 10           $ (12 )
 
                       
 

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The discontinued assets and liabilities of Austin included on the balance sheet are as follows:
                         
    June 30,     December 31,     June 30,  
in millions   2010     2009     2009  
 
Cash and due from banks
  $ 32     $ 23     $ 17  
Other intangible assets
    1       1       2  
Accrued income and other assets
          10       7  
 
Total assets
  $ 33     $ 34     $ 26  
 
                 
 
                       
Accrued expense and other liabilities
  $ 1     $ 1     $ 3  
 
Total liabilities
  $ 1     $ 1     $ 3  
 
                 
 
Combined discontinued operations. The combined results of the discontinued operations are as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
in millions   2010     2009     2010     2009  
       
Net interest income
  $ 39     $ 23     $ 79     $ 48  
Provision for loan losses
    14       27       38       55  
 
Net interest income (expense) after provision for loan losses
    25       (4 )     41       (7 )
Noninterest income
    (54 )     16       (52 )     30  
Intangible assets impairment
                      27  
Noninterest expense
    15       16       29       35  
 
Income (loss) before income taxes
    (44 )     (4 )     (40 )     (39 )
Income taxes
    (17 )     (8 )     (15 )     (14 )
 
Income (loss) from discontinued operations, net of taxes (a)
  $ (27 )   $ 4     $ (25 )   $ (25 )
 
                       
 
 
(a)   Includes after-tax charges of $15 million and $16 million for the three-month periods ended June 30, 2010 and 2009, respectively, and $30 million and $35 million for the six-month periods ended June 30, 2010 and 2009, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.
The combined assets and liabilities of the discontinued operations are as follows:
                         
    June 30,     December 31,     June 30,  
in millions   2010     2009     2009  
 
Cash and due from banks
  $ 32     $ 23     $ 17  
Securities available for sale
          182       186  
Loans at fair value
    3,223              
Loans, net of unearned income of $1, $1 and $1
    3,371       3,523       3,636  
Less: Allowance for loan losses
    128       157       160  
 
Net loans
    6,466       3,366       3,476  
Loans held for sale
    92       434       148  
Other intangible assets
    1       1       2  
Accrued income and other assets
    223       202       253  
 
Total assets
  $ 6,814     $ 4,208     $ 4,082  
 
                 
 
                       
Noninterest-bearing deposits
        $ 119     $ 104  
Derivative liabilities
                2  
Accrued expense and other liabilities
    47       5       16  
Securities at fair value
    3,092              
 
Total liabilities
  $ 3,139     $ 124     $ 122  
 
                 
 

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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
KeyCorp
We have reviewed the condensed consolidated balance sheets of KeyCorp and subsidiaries (“Key”) as of June 30, 2010 and 2009, and the related condensed consolidated statements of income, changes in equity and cash flows for the three-month periods ended June 30, 2010 and 2009. These financial statements are the responsibility of Key’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Key as of December 31, 2009, and the related consolidated statements of income, changes in equity and cash flows for the year then ended not presented herein, and in our report dated March 1, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
(ERNST & YOUNG LLP)
Cleveland, Ohio
August 6, 2010

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Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations
Introduction
This section generally reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly and year to date periods ended June 30, 2010 and 2009. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes in this report. The page locations of specific sections and notes that we refer to are presented in the table of contents.
Terminology
Throughout this discussion, references to “Key,” “we,” “our,” “us” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. “KeyCorp” refers solely to the parent holding company, and “KeyBank” refers to KeyCorp’s subsidiary bank, KeyBank National Association.
We want to explain some industry-specific terms at the outset so you can better understand the discussion that follows.
  In September 2009, we decided to discontinue the education lending business. In April 2009, we decided to wind down the operations of Austin Capital Management, Ltd., a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result of these decisions, we have accounted for these businesses as discontinued operations. We use the phrase continuing operations in this document to mean all of our businesses other than the education lending business and Austin.
 
  Our exit loan portfolios are distinct from our discontinued operations. These portfolios, which are in a run-off mode, stem from product lines we decided to cease because they no longer fit with our corporate strategy. These exit loan portfolios are included in Other Segments.
 
  We engage in capital markets activities primarily through business conducted by our National Banking group. These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients’ financing needs and for proprietary trading purposes), and conduct transactions in foreign currencies (both to accommodate clients’ needs and to benefit from fluctuations in exchange rates).
 
  For regulatory purposes, capital is divided into two classes. Federal regulations prescribe that at least one-half of a bank or bank holding company’s total risk-based capital must qualify as Tier 1 capital. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. As described in the section entitled “Economic Overview” that begins on page 17 of our 2009 Annual Report to Shareholders, the regulators initiated an additional level of review of capital adequacy for the country’s nineteen largest banking institutions, including KeyCorp, during 2009. As part of this capital adequacy review, banking regulators evaluated a component of Tier 1 capital, known as Tier 1 common equity. For a detailed explanation of total capital, Tier 1 capital and Tier 1 common equity, and how they are calculated see the section entitled “Capital.”
 
  During the first quarter of 2010, we re-aligned our reporting structure for our business groups. Previously, the Consumer Finance business group consisted mainly of portfolios which were identified as exit or run-off portfolios and were included in our National Banking segment. We are reflecting these exit portfolios in Other Segments. The automobile dealer floor plan business, previously included in Consumer Finance, has been re-aligned with the Commercial Banking line of business within the Community Banking segment. In addition, other previously identified exit portfolios included in the National Banking segment, including our homebuilder loans from the Real Estate Capital line of business and commercial leases from the Equipment Finance line of business, have been moved to Other Segments. For more detailed financial information pertaining to each business group and its respective lines of business, see Note 3 (“Line of Business Results”).
Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 (“Basis of Presentation”).

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

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  unanticipated adverse affects of acquisitions and dispositions of assets, business units or affiliates;
 
  our ability to attract and/or retain talented executives and employees;
 
  operational or risk management failures due to technological or other factors;
 
  changes in accounting principles or in tax laws, rules and regulations;
 
  adverse judicial proceedings;
 
  occurrence of natural or man-made disasters or conflicts or terrorist attacks disrupting the economy or our ability to operate; and
 
  other risks and uncertainties summarized in Part 1, Item 1A: Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009.
Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our SEC filings, including our reports on Forms 8-K, 10-K and 10-Q and our registration statements under the Securities Act of 1933, as amended, all of which are accessible on the SEC’s website at www.sec.gov and at www.Key.com/IR.
Long-term goals
Our long-term financial goals are as follows:
  Continue to achieve a loan to core deposit ratio range of 90% to 100%.
 
  Return to a moderate risk profile by targeting a net charge-off ratio range of 40 to 50 basis points.
 
  Grow high quality and diverse revenue streams by targeting a net interest margin in excess of 3.50% and maintain noninterest income to total revenue of greater than 40%.
 
  Create positive operating leverage and complete Keyvolution run-rate savings goal of $300 million to $375 million by the end of 2012.
 
  Achieve a return on average assets in the range of 1.00% to 1.25%.

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Figure 1 shows the evaluation of our long-term goals for the second quarter of 2010.
Figure 1. Quarterly evaluation of our goals
 
                         
Goal   Key Metrics (a)   2Q10   Targets       Action Plans
Core funded
  Loan to deposit ratio (b) (c)     93%   90-100%   §   Improve risk profile of loan portfolio
 
                       
 
                  §   Improve mix and grow deposit base
 
                       
                         
Returning to a moderate risk profile
  NCOs to average loans     3.18%   .40-.50%   §   Focus on relationship clients
 
                  §   Exit noncore portfolios
 
                       
 
                  §   Limit concentrations
 
                       
 
                  §   Focus on risk-adjusted returns
 
                       
                         
Growing high quality, diverse revenue streams
  Net Interest Margin     3.17%   >3.50%   §   Improve funding mix
 
                  §   Focus on risk-adjusted returns
 
                       
 
  Noninterest income/total revenue     44.10%   >40%   §   Leverage Key’s total client solutions and cross-selling capabilities
 
                       
                         
Creating positive operating leverage
  Keyvolution cost savings   $197 million
implemented
  $300-$375
million
  §   Improve efficiency and effectiveness
 
                  §   Leverage technology
 
                       
 
                  §   Change cost base to more variable from fixed
 
                       
                         
Executing our strategies
  Return on average assets     .44%   1.00-1.25%   §   Execute our client insight-driven relationship model
 
                       
 
                  §   Improved funding mix with lower cost core deposits
 
                       
 
                  §   Keyvolution savings
                         
 
(a)   Calculated from continuing operations, unless otherwise noted.
 
(b)   Loans and loans held for sale (excluding securitized loans) to deposits (excluding foreign branches).
 
(c)   Calculated from consolidated operations.
Strategic developments
We initiated the following actions during 2009 and 2010 to support our corporate strategy described in the “Introduction” section under the “Corporate Strategy” heading on page 16 of our 2009 annual report.
  We established long-term benchmark metrics for success for our loan to deposit ratio, net charge-offs to average loans, net interest margin, noninterest income to total revenue ratio, return on average assets and our efficiency/expense control initiative (Keyvolution) during the first quarter of 2010.
 
  During the first six months of 2010, we have opened 18 new branches, and we expect to open an additional 22 branches during the remainder of 2010. During 2009, we opened 38 new branches in eight markets, and we have completed renovations on 192 branches over the past two and a half years.
 
  During 2009, we settled all outstanding federal income tax issues with the IRS for the tax years 1997-2006, including all outstanding leveraged lease tax issues for all open tax years.
 
  During the third quarter of 2009, we decided to exit the government-guaranteed education lending business, following earlier actions taken in the third quarter of 2008 to cease private student lending. As a result of this decision, we have accounted for the education lending business as a discontinued operation. Additionally, we ceased conducting business in both the commercial vehicle and office equipment leasing markets.
 
  During the second quarter of 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result of this decision, we have accounted for this business as a discontinued operation.

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Table of Contents

Economic overview
During the second quarter of 2010, concerns emerged that the pace of the U.S. economic recovery was slowing. A reluctance by employers to add employees to payrolls, slowing of growth in housing and consumer spending, and the European sovereign debt crisis each cast doubt on the sustainability of economic growth and the recovery. U.S. payrolls increased by 524,000 during the second quarter of 2010 compared to a 261,000 increase in the first quarter of 2010; however, a large part of this improvement was due to temporary government census hiring. Private payrolls did increase by 323,000 compared to a 236,000 increase the prior quarter. Prior to 2010, over 8 million Americans had lost their jobs during the recession that began in December 2007. The average unemployment rate for the second quarter of 2010 remained at the first quarter average of 9.7%. This compares to a 9.3% average rate for all of 2009 and a 10 year average rate of 5.8%.
U.S. household spending slowed during the second quarter of 2010. The average monthly rate of consumer spending was unchanged for the second quarter of 2010 compared to an average monthly increase of 0.4% in the first quarter of 2010 and an average monthly increase of 0.3% for all of 2009. Measures of inflation continued to remain under control as prices for consumer goods and services increased a modest 1.1% in June 2010 from June 2009, compared to an annual increase of 2.3% in March 2010 and a 2.7% increase for all of 2009.
The homebuyer tax credit, offered as part of “The Worker, Homeownership and Business Assistance Act of 2009,” contributed to an improvement in the housing market to begin the