e10vq
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
[Ö] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ To ______
Commission File Number 1-11302
(LOGO)
KeyCorp
   (Exact name of registrant as specified in its charter)   
     
Ohio   34-6542451
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
127 Public Square, Cleveland, Ohio   44114-1306
     
(Address of principal executive offices)   (Zip Code)
(216) 689-3000
   (Registrant’s telephone number, including area code)   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
     
Large accelerated filer þ
  Accelerated filer o
 
   
Non-accelerated filer o (Do not check if a smaller reporting company)
  Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
  Common Shares with a par value of $1 each   950,813,920 Shares  
         
  (Title of class)   (Outstanding at May 2, 2011)  

 


Table of Contents

KEYCORP
TABLE OF CONTENTS
PART I.  FINANCIAL INFORMATION
             
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Item 1.       111  
   
 
       
Item 1A.       111  
   
 
       
Item 2.       112  
   
 
       
Item 6.       112  
   
 
       
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Exhibits
    114  
 EX-15
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
Throughout the Notes to Consolidated Financial Statements (Unaudited) 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
                         
    March 31,     December 31,     March 31,  
  in millions, except per share data   2011     2010     2010  
    (Unaudited)           (Unaudited)  
ASSETS
                       
Cash and due from banks
   $ 540      $ 278      $ 619  
Short-term investments
    3,705       1,344       4,345  
Trading account assets
    1,041       985       1,034  
Securities available for sale
    19,448       21,933       16,553  
Held-to-maturity securities (fair value: $19, $17 and $22)
    19       17       22  
Other investments
    1,402       1,358       1,525  
Loans, net of unearned income of $1,498, $1,572 and $1,692
    48,552       50,107       55,913  
Less: Allowance for loan and lease losses
    1,372       1,604       2,425  
 
Net loans
    47,180       48,503       53,488  
Loans held for sale
    426       467       556  
Premises and equipment
    906       908       872  
Operating lease assets
    491       509       652  
Goodwill
    917       917       917  
Other intangible assets
    20       21       46  
Corporate-owned life insurance
    3,187       3,167       3,087  
Derivative assets
    1,005       1,006       1,063  
Accrued income and other assets (including $85 of consolidated
LIHTC guaranteed funds VIEs, see Note 9)(a)
    3,758       3,876       4,150  
Discontinued assets (including $3,104 of consolidated education
loan securitization trust VIEs at fair value, see Note 9)(a)
    6,393       6,554       6,374  
 
 
                       
Total assets
   $ 90,438      $ 91,843      $ 95,303  
 
           
 
                       
LIABILITIES
                       
Deposits in domestic offices:
                       
NOW and money market deposit accounts
   $ 26,177      $ 27,066      $ 25,068  
Savings deposits
    1,964       1,879       1,873  
Certificates of deposit ($100,000 or more)
    5,314       5,862       10,188  
Other time deposits
    7,597       8,245       12,010  
 
Total interest-bearing
    41,052       43,052       49,139  
Noninterest-bearing
    16,495       16,653       15,364  
Deposits in foreign office — interest-bearing
    3,263       905       646  
 
Total deposits
    60,810       60,610       65,149  
Federal funds purchased and securities sold under repurchase agreements
    2,232       2,045       1,927  
Bank notes and other short-term borrowings
    685       1,151       446  
Derivative liabilities
    1,106       1,142       1,103  
Accrued expense and other liabilities
    1,931       1,931       2,089  
Long-term debt
    11,048       10,592       11,177  
Discontinued liabilities (including $2,928 of consolidated education
loan securitization trust VIEs at fair value, see Note 9)(a)
    2,929       2,998       2,490  
 
Total liabilities
    80,741       80,469       84,381  
 
                       
EQUITY
                       
Preferred stock, $1 par value, authorized 25,000,000 shares:
                       
7.75% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 7,475,000 shares; issued 2,904,839, 2,904,839 and 2,904,839 shares
    291       291       291  
Fixed-Rate Cumulative Perpetual Preferred Stock, Series B, $100,000 liquidation preference; authorized and issued 25,000 shares
          2,446       2,434  
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 1,016,969,905 946,348,435 and 946,348,435 shares
    1,017       946       946  
Common stock warrant
    87       87       87  
Capital surplus
    4,167       3,711       3,724  
Retained earnings
    5,721       5,557       5,098  
Treasury stock, at cost (63,043,642, 65,740,726 and 67,296,277)
    (1,823 )     (1,904 )     (1,958 )
Accumulated other comprehensive income (loss)
    (35 )     (17 )     19  
 
Key shareholders’ equity
    9,425       11,117       10,641  
Noncontrolling interests
    272       257       281  
 
Total equity
    9,697       11,374       10,922  
 
 
                       
Total liabilities and equity
   $ 90,438      $ 91,843      $ 95,303  
 
           
 
                       
 
(a)   The 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 trust VIEs for LIHTC.
See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Income (Unaudited)
                 
      Three months ended March 31,  
  dollars in millions, except per share amounts   2011     2010  
 
INTEREST INCOME
               
Loans
   $ 570      $ 710  
Loans held for sale
    4       4  
Securities available for sale
    166       150  
Held-to-maturity securities
          1  
Trading account assets
    7       11  
Short-term investments
    1       2  
Other investments
    12       14  
 
Total interest income
    760       892  
 
               
INTEREST EXPENSE
               
Deposits
    110       212  
Federal funds purchased and securities sold under repurchase agreements
    1       1  
Bank notes and other short-term borrowings
    3       3  
Long-term debt
    49       51  
 
Total interest expense
    163       267  
 
NET INTEREST INCOME
    597       625  
Provision (credit) for loan and lease losses
    (40 )     413  
 
Net interest income (expense) after provision for loan and lease losses
    637       212  
 
               
NONINTEREST INCOME
               
Trust and investment services income
    110       114  
Service charges on deposit accounts
    68       76  
Operating lease income
    35       47  
Letter of credit and loan fees
    55       40  
Corporate-owned life insurance income
    27       28  
Net securities gains (losses)(a)
    (1 )     3  
Electronic banking fees
    30       27  
Gains on leased equipment
    4       8  
Insurance income
    15       18  
Net gains (losses) from loan sales
    19       4  
Net gains (losses) from principal investing
    35       37  
Investment banking and capital markets income (loss)
    43       9  
Other income
    17       39  
 
Total noninterest income
    457       450  
 
               
NONINTEREST EXPENSE
               
Personnel
    371       362  
Net occupancy
    65       66  
Operating lease expense
    28       39  
Computer processing
    42       47  
Business services and professional fees
    38       38  
FDIC assessment
    29       37  
OREO expense, net
    10       32  
Equipment
    26       24  
Marketing
    10       13  
Provision (credit) for losses on lending-related commitments
    (4 )     (2 )
Other expense
    86       129  
 
Total noninterest expense
    701       785  
 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    393       (123 )
Income taxes
    111       (82 )
 
INCOME (LOSS) FROM CONTINUING OPERATIONS
    282       (41 )
Income (loss) from discontinued operations, net of taxes of ($6) and $2 (see Note 11)
    (11 )     2  
 
NET INCOME (LOSS)
    271       (39 )
Less: Net income (loss) attributable to noncontrolling interests
    8       16  
 
NET INCOME (LOSS) ATTRIBUTABLE TO KEY
   $ 263      $ (55 )
 
       
 
               
Income (loss) from continuing operations attributable to Key common shareholders
   $ 184      $ (98 )
Net income (loss) attributable to Key common shareholders
    173       (96 )
 
               
Per common share:
               
Income (loss) from continuing operations attributable to Key common shareholders
   $ .21      $ (.11 )
Income (loss) from discontinued operations, net of taxes
    (.01 )      
Net income (loss) attributable to Key common shareholders
    .20       (.11 )
 
               
Per common share — assuming dilution:
               
Income (loss) from continuing operations attributable to Key common shareholders
   $ .21      $ (.11 )
Income (loss) from discontinued operations, net of taxes
    (.01 )      
Net income (loss) attributable to Key common shareholders
    .19       (.11 )
 
               
Cash dividends declared per common share
   $ .01      $ .01  
 
               
Weighted-average common shares outstanding (000) (b)
    881,894       874,386  
Weighted-average common shares and potential common shares outstanding (000)
    887,836       874,386  
 
(a)   For the three months ended March 31, 2011 and 2010, we did not have impairment losses related to securities.
 
(b)   Assumes conversion of stock options and/or Preferred Series A, as applicable.
See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Changes in Equity (Unaudited)
                                                                                         
    Key Shareholders’ Equity              
    Preferred     Common                                                     Accumulated              
    Shares     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, 2009
    2,930       878,535      $ 2,721      $ 946      $ 87      $ 3,734      $ 5,158      $ (1,980 )    $ (3 )    $ 270          
Cumulative effect adjustment to beginning balance of Retained Earnings
                                                    45                              $ 45  
Net income (loss)
                                                    (55 )                     16       (39 )
Other comprehensive income (loss):
                                                                                       
Net unrealized gains (losses) on securities available for sale, net of income taxes of $31
                                                                    52               52  
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($18)
                                                                    (30 )             (30 )
Net distribution to noncontrolling interests
                                                                            (5 )     (5 )
Foreign currency translation adjustments
                                                                    (2 )             (2 )
Net pension and postretirement benefit costs, net of income taxes
                                                                    2               2  
 
                                                                                   
Total comprehensive income (loss)
                                                                                   $ 23  
 
                                                                                   
Deferred compensation
                                            (3 )                                        
Cash dividends declared on common shares ($.01 per share)
                                                    (9 )                                
Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)
                                                    (6 )                                
Cash dividends accrued on Cumulative Series B Preferred Stock (5% per annum)
                                                    (31 )                                
Amortization of discount on Series B Preferred Stock
                    4                               (4 )                                
Common shares reissued for stock options and other employee benefit plans
            517                               (7 )             22                          
         
BALANCE AT MARCH 31, 2010
    2,930       879,052      $ 2,725      $ 946      $ 87      $ 3,724      $ 5,098      $ (1,958 )    $ 19      $ 281          
 
                                           
 
         
BALANCE AT DECEMBER 31, 2010
    2,930       880,608      $ 2,737      $ 946      $ 87      $ 3,711      $ 5,557      $ (1,904 )    $ (17 )    $ 257          
Net income (loss)
                                                    263                              $ 263  
Other comprehensive income (loss):
                                                                                       
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($12)
                                                                    (20 )             (20 )
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($5)
                                                                    (8 )             (8 )
Net distribution from noncontrolling interests
                                                                            15       15  
Foreign currency translation adjustments
                                                                    9               9  
Net pension and postretirement benefit costs, net of income taxes
                                                                    1               1  
 
                                                                                   
Total comprehensive income (loss)
                                                                                   $ 260  
 
                                                                                   
 
                                                                                       
Deferred compensation
                                            (5 )                                        
Cash dividends declared on common shares ($.01 per share)
                                                    (9 )                                
Cash dividends declared on Noncumulative Series A Preferred Stock ($1.9375 per share)
                                                    (6 )                                
Cash dividends accrued on Cumulative Series B Preferred Stock (5% per annum)
                                                    (31 )                                
Series B Preferred Stock — TARP redemption
    (25 )             (2,451 )                             (49 )                                
Amortization of discount on Series B Preferred Stock
                    4                               (4 )                                
Common shares issuance
            70,621               71               529                                          
Common shares reissued for stock options and other employee benefit plans
            2,697                               (68 )             81                          
Other
                    1                                                                  
         
BALANCE AT MARCH 31, 2011
    2,905       953,926      $ 291      $ 1,017      $ 87      $ 4,167      $ 5,721      $ (1,823 )    $ (35 )    $ 272          
 
                                           
 
         
See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Cash Flows (Unaudited)
                 
      Three months ended March 31,  
  in millions   2011     2010  
 
OPERATING ACTIVITIES
               
Net income (loss)
   $ 271      $ (39 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Provision (credit) for loan and lease losses
    (40 )     413  
Depreciation and amortization expense
    74       88  
FDIC (payments) net of FDIC expense
    27       33  
Deferred income taxes
    96       (109 )
Net losses (gains) and writedown on OREO
    10       28  
Provision (credit) for customer derivative losses
    (11 )     26  
Net losses (gains) from loan sales
    (19 )     (4 )
Net losses (gains) from principal investing
    (35 )     (37 )
Provision (credit) for losses on lending-related commitments
    (4 )     (2 )
(Gains) losses on leased equipment
    (4 )     (8 )
Net securities losses (gains)
    1       (3 )
Net decrease (increase) in loans held for sale excluding transfers from continuing operations
    80       14  
Net decrease (increase) in trading account assets
    (56 )     175  
Other operating activities, net
    22       268  
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    412       843  
INVESTING ACTIVITIES
               
Net decrease (increase) in short-term investments
    (2,361 )     (2,602 )
Purchases of securities available for sale
    (613 )     (618 )
Proceeds from sales of securities available for sale
    1,578       23  
Proceeds from prepayments and maturities of securities available for sale
    1,486       786  
Proceeds from prepayments and maturities of held-to-maturity securities
          2  
Purchases of held-to-maturity securities
    (2 )      
Purchases of other investments
    (45 )     (35 )
Proceeds from sales of other investments
    14       22  
Proceeds from prepayments and maturities of other investments
    21       15  
Net decrease (increase) in loans, excluding acquisitions, sales and transfers
    1,234       2,108  
Proceeds from loan sales
    75       84  
Purchases of premises and equipment
    (30 )     (21 )
Proceeds from sales of premises and equipment
          1  
Proceeds from sales of other real estate owned
    35       35  
 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    1,392       (200 )
FINANCING ACTIVITIES
               
Net increase (decrease) in deposits
    200       (422 )
Net increase (decrease) in short-term borrowings
    (279 )     291  
Net proceeds from issuance of long-term debt
    1,000       9  
Payments on long-term debt
    (502 )     (327 )
Net proceeds from issuance of common stock
    600        
Series B Preferred Stock - TARP redemption
    (2,500 )      
Cash dividends paid
    (61 )     (46 )
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    (1,542 )     (495 )
 
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
    262       148  
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD
    278       471  
 
CASH AND DUE FROM BANKS AT END OF PERIOD
   $ 540      $ 619  
 
       
 
 
Additional disclosures relative to cash flows:
               
Interest paid
   $ 134      $ 286  
Income taxes paid (refunded)
    (267 )     (154 )
Noncash items:
               
Loans transferred to held for sale from portfolio
   $ 39      $ 127  
Loans transferred to other real estate owned
    12       27  
 
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.
The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as Management’s Discussion & Analysis of Financial Condition & Results of Operations. You may find it helpful to refer back to this page as you read the 10-Q.
References to our “2010 Annual Report on Form 10-K” refer to our Annual Report on Form 10-K for the year ended December 31, 2010, which has been filed with the U.S. Securities and Exchange Commission and is available on its website (www.sec.gov) or on our website (www.key.com/ir), and list specific sections and page locations in our 2010 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission.
           
           
 
AICPA: American Institute of Certified Public Accountants.
    NASDAQ: National Association of Securities Dealers  
 
ALCO: Asset/Liability Management Committee.
    Automated Quotation System.  
 
ALLL: Allowance for loan and lease losses.
    N/M: Not meaningful.  
 
A/LM: Asset/liability management.
    NOW: Negotiable Order of Withdrawal.  
 
AOCI: Accumulated other comprehensive income (loss).
    NYSE: New York Stock Exchange.  
 
APBO: Accumulated postretirement benefit obligation.
    OCI: Other comprehensive income (loss).  
 
Austin: Austin Capital Management, Ltd.
    OREO: Other real estate owned.  
 
BHCs: Bank holding companies.
    OTTI: Other-than-temporary impairment.  
 
CMO: Collateralized mortgage obligation.
    PBO: Projected Benefit Obligation.  
 
Common Shares: Common Stock, $1 par value.
    QSPE: Qualifying special purpose entity.  
 
CPP: Capital Purchase Program of the U.S. Treasury.
    S&P: Standard and Poor’s Ratings Services, a Division of The  
 
DIF: Deposit Insurance Fund.
    McGraw-Hill Companies, Inc.  
 
Dodd-Frank Act: Dodd-Frank Wall Street Reform and
    SCAP: Supervisory Capital Assessment Program administered  
 
Consumer Protection Act of 2010.
    by the Federal Reserve.  
 
ERM: Enterprise risk management.
    SEC: U.S. Securities and Exchange Commission.  
 
EVE: Economic value of equity.
    Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative  
 
FASB: Financial Accounting Standards Board.
    Perpetual Convertible Preferred Stock, Series A.  
 
FDIC: Federal Deposit Insurance Corporation.
    Series B Preferred Stock: KeyCorp’s Fixed-Rate Cumulative  
 
Federal Reserve: Board of Governors of the Federal Reserve
    Perpetual Preferred Stock, Series B issued to the  
 
System.
    U.S. Treasury under the CPP.  
 
FHLMC: Federal Home Loan Mortgage Corporation.
    SILO: Sale in, lease out transaction.  
 
FNMA: Federal National Mortgage Association.
    TAG: Transaction Account Guarantee program of the FDIC.  
 
GAAP: U.S. generally accepted accounting principles.
    TARP: Troubled Asset Relief Program.  
 
GNMA: Government National Mortgage Association.
    TDR: Troubled debt restructuring.  
 
IRS: Internal Revenue Service.
    TE: Taxable equivalent.  
 
ISDA: International Swaps and Derivatives Association.
    TLGP: Temporary Liquidity Guarantee Program of the FDIC.  
 
KAHC: Key Affordable Housing Corporation.
    U.S. Treasury: United States Department of the Treasury.  
 
LIBOR: London Interbank Offered Rate.
    VAR: Value at risk.  
 
LIHTC: Low-income housing tax credit.
    VEBA: Voluntary Employee Benefit Association.  
 
LILO: Lease in, lease out transaction.
    VIE: Variable interest entity.  
 
Moody’s: Moody’s Investors Service, Inc.
    XBRL: eXtensible Business Reporting Language.  
 
N/A: Not applicable.
       
           
The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Some previously reported amounts have been reclassified to conform to current reporting practices.

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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 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 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 9 (“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 that 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. That consolidation added $2.8 billion in discontinued assets, liabilities and equity to our balance sheet, of which $2.6 billion of the assets represented 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 Note 9 (“Variable Interest Entities”) and Note 11 (“Divestiture and Discontinued Operations”).
We believe that the unaudited consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented.
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 2010 Annual Report on Form 10-K.
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.
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 7 (“Derivatives and Hedging Activities”).
Accounting Guidance Adopted in 2011
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. Most of these new disclosures were required for interim and annual reporting periods beginning after December 15, 2009 (effective January 1, 2010, for us), however, the disclosures regarding purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements are effective for interim and annual periods beginning after December 15, 2010 (effective January 1, 2011, for us). The required disclosures are provided in Note 5 (“Fair Value Measurements”).
Credit quality disclosures. In July 2010, the FASB issued new accounting guidance that requires additional disclosures about the credit quality of financing receivables (i.e., loans) and the allowance for credit losses. Most of these additional disclosures were 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 disclosures, are required for periods beginning after December 15, 2010 (January 1, 2011, for us). The required disclosures are provided in Note 4 (“Asset Quality”). In January 2011, the FASB issued new

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accounting guidance that temporarily delays the effective date of the credit quality disclosures about troubled debt restructurings until the accounting guidance discussed in the Accounting Guidance Pending Adoption at March 31, 2011 section of this note becomes effective.
Accounting Guidance Pending Adoption at March 31, 2011
Troubled debt restructurings. In April 2011, the FASB issued accounting guidance to assist creditors in evaluating whether a modification or restructuring of a loan is a TDR. It clarifies existing guidance on whether the creditor has granted a concession and whether the debtor is experiencing financial difficulties, which are the two criteria used to determine whether a modification or restructuring is a TDR. This accounting guidance will also require additional disclosures regarding TDRs. It will be effective for the first interim or annual period beginning after June 15, 2011 (effective July 1, 2011 for Key) and will be applied retrospectively for all modifications and restructurings that have occurred from the beginning of the annual period of adoption (2011 for Key). Early adoption is permitted. Management is currently evaluating the impact this guidance may have on Key’s financial condition or results of operations.
2.  Earnings Per Common Share
Our basic and diluted earnings per Common Share are calculated as follows:
                 
    Three months ended March 31,  
  dollars in millions, except per share amounts   2011     2010  
 
EARNINGS
               
Income (loss) from continuing operations
   $ 282      $ (41 )
Less: Net income (loss) attributable to noncontrolling interests
    8       16  
 
Income (loss) from continuing operations attributable to Key
    274       (57 )
Less: Dividends on Series A Preferred Stock
    6       6  
Cash dividends on Series B Preferred Stock
    31       31  
Amortization of discount on Series B Preferred Stock(b)
    53       4  
 
Income (loss) from continuing operations attributable to Key common shareholders
    184       (98 )
Income (loss) from discontinued operations, net of taxes (a)
    (11 )     2  
 
Net income (loss) attributable to Key common shareholders
   $ 173      $ (96 )
 
       
 
 
WEIGHTED-AVERAGE COMMON SHARES
               
Weighted-average common shares outstanding (000)
    881,894       874,386  
Effect of dilutive convertible preferred stock, common stock options and other stock awards (000)
    5,942        
 
Weighted-average common shares and potential common shares outstanding (000)
    887,836       874,386  
 
       
 
 
EARNINGS PER COMMON SHARE
               
 
               
Income (loss) from continuing operations attributable to Key common shareholders
   $ .21      $ (.11 )
Income (loss) from discontinued operations, net of taxes (a)
    (.01 )      
Net income (loss) attributable to Key common shareholders(c)
    .20       (.11 )
 
               
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution
   $ .21      $ (.11 )
Income (loss) from discontinued operations, net of taxes (a)
    (.01 )      
Net income (loss) attributable to Key common shareholders — assuming dilution (c)
    .19       (.11 )
 
(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 period ended March 31, 2011, was primarily attributable to fair value adjustments related to the education lending securitization trusts.
 
(b)   A $49 million deemed dividend is included in the March 31, 2011 amortization amount.
 
(c)   EPS may not foot due to rounding.

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3.  Loans and Loans Held for Sale
Our loans by category are summarized as follows:
                           
    March 31,     December 31,     March 31,  
  in millions   2011     2010     2010  
 
Commercial, financial and agricultural
   $ 16,440      $ 16,441      $ 18,015  
Commercial real estate:
                       
Commercial mortgage
    8,806       9,502       10,467  
Construction
    1,845       2,106       3,990  
 
Total commercial real estate loans
    10,651       11,608       14,457  
Commercial lease financing
    6,207       6,471       6,964  
 
Total commercial loans
    33,298       34,520       39,436  
Residential — prime loans:
                       
Real estate — residential mortgage
    1,803       1,844       1,812  
Home equity:
                       
Key Community Bank
    9,421       9,514       9,892  
Other
    627       666       795  
 
Total home equity loans
    10,048       10,180       10,687  
Total residential — prime loans
    11,851       12,024       12,499  
Consumer other — Key Community Bank
    1,141       1,167       1,141  
Consumer other:
                       
Marine
    2,112       2,234       2,636  
Other
    150       162       201  
 
Total consumer other
    2,262       2,396       2,837  
 
Total consumer loans
    15,254       15,587       16,477  
 
Total loans (a)
   $ 48,552      $ 50,107      $ 55,913  
 
           
 
 
(a)   Excludes loans in the amount of $6.3 billion, $6.5 billion and $6 billion at March 31, 2011, December 31, 2010 and March 31, 2010, respectively, related to the discontinued operations of the education lending business.
Our loans held for sale are summarized as follows:
                           
    March 31,     December 31,     March 31,  
  in millions   2011     2010     2010  
 
Commercial, financial and agricultural
   $ 19      $ 196      $ 25  
Real estate — commercial mortgage
    287       118       265  
Real estate — construction
    61       35       147  
Commercial lease financing
    7       8       27  
Real estate — residential mortgage
    52       110       92  
 
Total loans held for sale (a)
   $ 426      $ 467      $ 556  
 
           
 
 
(a)   Excludes loans in the amount of $14 million, $15 million and $246 million at March 31, 2011, December 31, 2010, and March 31, 2010, respectively, related to the discontinued operations of the education lending business.

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Our summary of changes in loans held for sale follows:
                               
    March 31,     December 31,     March 31,  
in millions   2011     2010     2010  
 
Balance at beginning of period
   $ 467      $ 637      $ 443  
New originations
    980       1,053       509  
Transfers from held to maturity, net
    32             109  
Loan sales
    (991 )     (1,174 )     (488 )
Loan payments
    (62 )     (49 )     (6 )
Transfers to OREO / valuation adjustments
                (11 )
 
Balance at end of period
   $ 426      $ 467      $ 556  
 
           
 
                       
 
4.  Asset Quality
We use the following three-step process to estimate the appropriate level of the allowance for loan and lease losses on at least a quarterly basis: (1) we apply historical loss rates to existing loans with similar risk characteristics as noted in the credit quality indicator table that follows; (2) we exercise judgment to assess the impact of factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets; and, (3) for all TDRs, regardless of size, as well as impaired loans with an outstanding balance greater than $2.5 million, we conduct further analysis to determine the probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of impairment by comparing the carrying amount of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral or the loan’s observable market price. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. Additional information is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” on page 102 of our 2010 Annual Report on Form 10-K. The allowance for loan and lease losses at March 31, 2011, represents our best estimate of the losses inherent in the loan portfolio at that date.
While quantitative modeling factors such as default probability and expected recovery rates are constantly changing as the financial strength of the borrower and overall economic conditions change, there have been no changes to the accounting policies or methodology we used to estimate the allowance for loan and lease losses.
Commercial loans generally are charged off in full or charged down to the fair value of the underlying collateral when the borrower’s payment is 180 days past due. Our charge-off policy for most consumer loans is similar but takes effect when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to the fair value of the underlying collateral when payment is 180 days past due.
At March 31, 2011, the allowance for loan and lease losses was $1.4 billion, or 2.83% of loans compared to $1.6 billion, or 3.20% of loans, at December 31, 2010. At March 31, 2011, the allowance for loan and lease losses was 155.03% of nonperforming loans compared to 117.43% at March 31, 2010.
The risk characteristic prevalent to both commercial and consumer loans is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Evaluation of this risk is stratified and monitored by the assigned loan risk rating grades for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios. This risk rating stratification assists in the determination of the allowance for loan and lease losses.
Loan grades are assigned at the time of origination, verified by credit risk management and periodically reevaluated thereafter. Most extensions of credit are subject to loan grading or scoring. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the borrower’s competitive position within its industry sector and our view of industry risk within the context of the general economic outlook. Types of exposure, transaction structure and collateral, including credit risk mitigants, affect the expected recovery assessment.
Credit quality indicators for loans are updated on an ongoing basis. Bond rating classifications are indicative of the credit quality of our commercial loan portfolios and are determined by converting our internally assigned risk rating grades to bond rating

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categories. Payment activity and the regulatory classifications of pass, special mention and substandard, are indicators of the credit quality of our consumer loan portfolios.
Credit quality indicators for our commercial and consumer loan portfolios based on bond rating, regulatory classification and payment activity as of March 31, 2011 are as follows:
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category (a)
                                                                                 
 March 31,  
 in millions
    Commercial, financial and                          
    agricultural     RE — Commercial     RE — Construction     Commercial Lease     Total  
 RATING   2011     2010     2011     2010     2011     2010     2011     2010     2011     2010  
 
AAA — AA
   $ 95      $ 83      $ 2      $ 2                  $ 645      $ 642      $ 742      $ 727  
A
    712       890       84       32      $ 5      $ 1       1,246       1,167       2,047       2,090  
BBB — BB
    12,646       11,765       6,045       6,378       801       1,306       3,655       4,056       23,147       23,505  
B
    1,125       1,757       954       1,333       309       801       365       677       2,753       4,568  
CCC — C
    1,862       3,520       1,721       2,722       730       1,882       296       422       4,609       8,546  
 
Total
   $ 16,440      $ 18,015      $ 8,806      $ 10,467      $ 1,845      $ 3,990      $ 6,207      $ 6,964      $ 33,298      $ 39,436  
 
                                       
 
                                                                               
 
   
(a) Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the interim period ending March 31, 2011.  
   
Consumer Credit Exposure
Credit Risk Profile by Regulatory Classifications (a)
 
                                                                                 
 March 31,  
 in millions  
 
    Residential — Prime  
GRADE   2011     2010  
 
Pass
   $ 11,624      $ 12,256  
Special Mention
           
Substandard
    227       243  
 
Total
   $ 11,851      $ 12,499  
 
       
 
               
 
   
Credit Risk Profile Based on Payment Activity (a)  
                                                                                 
    Consumer — Key                    
    Community Bank     Consumer — Marine     Consumer — Other     Total  
    2011     2010     2011     2010     2011     2010     2011     2010  
 
Performing
   $ 1,138      $ 1,137      $ 2,081      $ 2,620      $ 149      $ 200      $ 3,368      $ 3,957  
Nonperforming
    3       4       31       16       1       1       35       21  
 
Total
   $ 1,141      $ 1,141      $ 2,112      $ 2,636      $ 150      $ 201      $ 3,403      $ 3,978  
 
                               
 
                                                               
 
(a)   Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the interim period ending March 31, 2011.

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Our policies for our commercial and consumer loan portfolios for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans and resuming accrual of interest are disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Impaired and Other Nonaccrual Loans” on page 102 of our 2010 Annual Report on Form 10-K.
At March 31, 2011, approximately $47 billion, or 97% of our total loans are current. Total past due loans of $1.5 billion represent approximately 3% of total loans.
The following aging analysis as of March 31, 2011 of past due and current loans provides an alternative view of Key’s credit exposure.
                                                         
 March 31, 2011  
            30 -59   60-89   Greater   Non          
            Days Past   Days Past   Than 90   Accrual   Total Past      
 in millions   Current     Due   Due   Days   (NPL)   Due   Total Loans  
 
 
                                                       
LOAN TYPE
                                                       
 
                                                       
Commercial, financial and agricultural
   $ 16,138      $ 46      $ 13      $ 22      $ 221      $ 302      $ 16,440  
 
                                                       
Commercial real estate:
                                                       
 
                                                       
Commercial mortgage
    8,459       36       37       29       245       347       8,806  
 
                                                       
Construction
    1,623       40       14       22       146       222       1,845  
 
 
                                                       
Total commercial real estate loans
    10,082       76       51       51       391       569       10,651  
 
                                                       
Commercial lease financing
    6,054       53       21       37       42       153       6,207  
 
 
                                                       
Total commercial loans
   $ 32,274      $ 175      $ 85      $ 110      $ 654      $ 1,024      $ 33,298  
 
                           
 
                                                       
Real estate — residential mortgage
   $ 1,676      $ 22      $ 12      $ 9      $ 84      $ 127      $ 1,803  
 
                                                       
Home equity:
                                                       
 
                                                       
Key Community Bank
    9,211       60       34       17       99       210       9,421  
 
                                                       
Other
    591       11       7       5       13       36       627  
 
 
                                                       
Total home equity loans
    9,802       71       41       22       112       246       10,048  
 
                                                       
Consumer other — Key Community Bank
    1,115       10       5       8       3       26       1,141  
 
                                                       
Consumer other:
                                                       
 
                                                       
Marine
    2,030       34       14       3       31       82       2,112  
 
                                                       
Other
    144       3       1       1       1       6       150  
 
 
                                                       
Total consumer other
    2,174       37       15       4       32       88       2,262  
 
 
                                                       
Total consumer loans
   $ 14,767      $ 140      $ 73      $ 43      $ 231      $ 487      $ 15,254  
 
                           
 
                                                       
Total loans
   $ 47,041      $ 315      $ 158      $ 153      $ 885      $ 1,511      $ 48,552  
 
                                                       
 
At March 31, 2011, the approximate carrying amount of our commercial nonperforming loans outstanding represented 55% of their original contractual amount, and total nonperforming loans outstanding represented 62% of their original contractual amount. At the same date, OREO represented 49% of its original contractual amount, while loans held for sale and other nonperforming assets in the aggregate represented 53% of their face value.
At March 31, 2011, our twenty largest nonperforming loans totaled $284 million, representing 32% of total loans on nonperforming status from continuing operations as compared to $306 million in nonperforming loans representing 29% of total loans at December 31, 2010 and $558 million in nonperforming loans representing 26% of total loans on nonperforming status at March 31, 2010.

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Our nonperforming assets and past due loans were as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2011     2010     2010  
 
 
                       
Total nonperforming loans
   $ 885      $ 1,068      $ 2,065  
 
                       
Nonperforming loans held for sale
    86       106       195  
 
                       
OREO
    97       129       130  
 
                       
Other nonperforming assets
    21       35       38  
 
Total nonperforming assets
   $ 1,089      $ 1,338      $ 2,428  
 
                       
 
           
 
                       
 
 
                       
Impaired loans
   $ 731      $ 881      $ 1,791  
Impaired loans with a specifically allocated allowance
    493       621       1,519  
Specifically allocated allowance for impaired loans
    39       58       307  
 
 
                       
Restructured loans included in nonperforming loans(a)
   $ 136      $ 202      $ 213  
Restructured loans with a specifically allocated allowance (b)
    29       57       162  
Specifically allocated allowance for restructured loans (c)
    9       18       37  
 
 
                       
Accruing loans past due 90 days or more
   $ 153      $ 239      $ 434  
Accruing loans past due 30 through 89 days
    474       476       639  
 
                       
 
(a)   Restructured loans (i.e., troubled debt restructurings) are those for which we, for reasons related to a borrower’s financial difficulties, grant a concession that we would not otherwise have considered. To improve the collectability of the loan, typical concessions include reducing the interest rate, extending the maturity date or reducing the principal balance.
 
(b)   Included in impaired loans with a specifically allocated allowance.
 
(c)   Included in specifically allocated allowance for impaired loans.
Impaired loans totaled $731 million at March 31, 2011, compared to $881 million at December 31, 2010, and $1.8 billion at March 31, 2010. Of total impaired loans, $493 million required a specifically allocated allowance at March 31, 2011. A total allowance of $39 million was specifically allocated to these loans. At March 31, 2011, aggregate restructured loans (accrual, nonaccrual, and held-for-sale loans) totaled $242 million while at December 31, 2010 total restructured loans totaled $297 million. Although we added $47 million in restructured loans during the first three months of 2011, the overall decrease in restructured loans was primarily attributable to $102 million in payments and charge-offs.

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A further breakdown of impaired loans by loan category as of March 31, 2011 follows:
                                 
March 31, 2011  
            Unpaid             Average  
    Recorded     Principal     Related     Recorded  
 in millions   Investment     Balance     Allowance     Investment  
 
With no related allowance recorded:
                               
Commercial, financial and agricultural
   $ 176      $ 84            $ 152  
Commercial real estate:
                               
Commercial mortgage
    298       156             304  
Construction
    408       121             407  
 
Total commercial real estate loans
    706       277             711  
Commercial lease financing
                       
 
Total commercial loans
    882       361             863  
 
                               
Home equity:
                               
Key Community Bank
    2                   3  
 
Total home equity loans
    2                   3  
 
Total loans with no related allowance recorded
    884       361             866  
 
                               
With an allowance recorded:
                               
Commercial, financial and agricultural
    277       112      $ 50       274  
Commercial real estate:
                               
Commercial mortgage
    189       119       41       198  
Construction
    83       33       14       125  
 
Total commercial real estate loans
    272       152       55       323  
Commercial lease financing
    42       25       11       48  
 
Total commercial loans
    591       289       116       645  
 
                               
Real estate — residential mortgage
    50       36       3       53  
 
                               
Home equity:
                               
Key Community Bank
    21       21       6       18  
 
Total Home Equity Loans
    21       21       6       18  
 
                               
Consumer other — Key Community Bank
    25       24       1       27  
 
                               
 
Total loans with an allowance recorded
    687       370       126       743  
 
 
                               
Total
   $ 1,571      $ 731      $ 126      $ 1,609  
 
               
 
                               
 
At March 31, 2011, we did not have any significant commitments to lend additional funds to borrowers with loans on nonperforming status. The amount by which loans and loans held for sale, which were classified as nonperforming, reduced expected interest income was $8 million for the three months ended March 31, 2011 and $22 million for the year ended December 31, 2010.
For continuing operations, the loans outstanding individually evaluated for impairment totaled $493 million, which had a corresponding allowance of $39 million at March 31, 2011. Loans outstanding collectively evaluated for impairment totaled $48 billion, with a corresponding allowance of $1.3 billion at March 31, 2011.

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A breakdown of the individual and collective allowance for loan and lease losses and the corresponding loan balances as of March 31, 2011 follows:
                                         
    Allowance(a)     Outstanding(a)  
 March 31, 2011  
Individually
    Collectively             Individually     Collectively  
    Evaluated for     Evaluated for             Evaluated for     Evaluated for  
 in millions   Impairment     Impairment     Loans     Impairment     Impairment  
 
Commercial, financial and agricultural
   $ 25      $ 394      $ 16,440      $ 143      $ 16,297  
Commercial real estate:
                                       
Commercial mortgage
    13       373       8,806       218       8,588  
Construction
    1       116       1,845       128       1,717  
 
Total commercial real estate loans
    14       489       10,651       346       10,305  
Commercial lease financing
          132       6,207       2       6,205  
 
Total commercial loans
    39       1,015       33,298       491       32,807  
 
                                       
Real estate — residential mortgage
          40       1,803             1,803  
 
                                       
Home equity:
                                       
Key Community Bank
          111       9,421       2       9,419  
Other
          45       627             627  
 
Total home equity loans
          156       10,048       2       10,046  
 
                                       
Consumer other — Key Community Bank
          50       1,141             1,141  
 
                                       
Consumer other:
                                       
Marine
          68       2,112             2,112  
Other
          4       150             150  
 
Total consumer other
          72       2,262             2,262  
 
Total consumer loans
          318       15,254       2       15,252  
 
Total ALLL — continuing operations
    39       1,333       48,552       493       48,059  
 
                                       
Discontinued operations
          111       6,304             6,304  
 
                                       
 
Total ALLL — including discontinued operations
   $ 39      $ 1,444      $ 54,856      $ 493      $ 54,363  
 
                   
 
                                       
 
(a)   There were no loans acquired with deteriorated credit quality at March 31, 2011.
Our allowance for loan and lease losses decreased by $1.1 billion, or 43%, since the first quarter of 2010. This contraction was associated with the improvement in credit quality of our loan portfolios, which has trended more favorably the past four quarters. Our asset quality showed continued improvement and therefore has resulted in favorable risk rating migration and a reduction in our general allowance. Our general allowance encompasses the application of historical loss rates to our existing loans with similar risk characteristics and an assessment of factors such as changes in economic conditions and changes in credit policies or underwriting standards. Our delinquency trends improved throughout most of 2010 and into 2011. We attribute this improvement to a more moderate level of economic activity, more favorable conditions in the capital markets, improvement in client income statements and continued run off in our exit loan portfolio.
Changes in the allowance for loan and lease losses are summarized as follows:
                 
      Three months ended March 31,  
 
 in millions   2011     2010  
 
 
               
Balance at beginning of period — continuing operations
   $ 1,604      $ 2,534  
 
               
Charge-offs
    (232 )     (557 )
Recoveries
    39       35  
 
 
               
Net loans charged off
    (193 )     (522 )
 
               
Provision for loan and lease losses from continuing operations
    (40 )     413  
 
               
Foreign currency translation adjustment
    1        
 
Balance at end of period — continuing operations
   $ 1,372      $ 2,425  
 
               
 
       
 
               
 

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The changes in the ALLL by loan category from December 31, 2010 are as follows:
                                                 
    December 31,                             March 31,  
in millions   2010     Provision     Charge-offs     Recoveries     2011  
 
 
                                       
Commercial, financial and agricultural
   $ 485      $ (34 )    $ 42      $ 10      $ 419  
 
                                       
Real estate — commercial mortgage
    416       13       46       3       386  
 
                                       
Real estate — construction
    145       2       35       5       117  
 
                                       
Commercial lease financing
    175       (32 )     17       6       132  
 
 
                                       
Total commercial loans
    1,221       (51 )     140       24       1,054  
 
                                       
Real estate — residential mortgage
    49             10       1       40  
 
                                       
Home equity:
                                       
 
                                       
Key Community Bank
    120       15       25       1       111  
 
                                       
Other
    57       2       15       1       45  
 
Total home equity loans
    177       17       40       2       156  
 
                                       
Consumer other — Key Community Bank
    57       3       12       2       50  
 
                                       
Consumer other:
                                       
 
                                       
Marine
    89       (2 )     27       8       68  
 
                                       
Other
    11       (6 )     3       2       4  
 
 
                                       
Total consumer other:
    100       (8 )     30       10       72  
 
 
                                       
Total consumer loans
    383       12       92       15       318  
 
 
                                       
Total ALLL — continuing operations
    1,604       (39 ) (a)     232       39       1,372  
 
                                       
Discontinued operations
    114       32       38       3       111  
 
 
                                       
Total ALLL — including discontinued operations
   $ 1,718      $ (7 )    $ 270      $ 42      $ 1,483  
 
                   
 
                                       
 
(a)   Includes $1 million of foreign currency translation adjustment.
The liability for credit losses inherent in lending-related commitments, such as letters of credit and unfunded loan commitments, is included in “accrued expense and other liabilities” on the balance sheet. We establish the amount of this reserve by considering both historical trends and current market conditions quarterly, or more often if deemed necessary. Our liability for credit losses on lending-related commitments has decreased since the first quarter of 2010 by $50 million to $69 million at March 31, 2011. When combined with our allowance for loan and lease losses, our total allowance for credit losses represented 2.97% of loans at March 31, 2011 compared to 4.55% at March 31, 2010.
Changes in the liability for credit losses on lending-related commitments are summarized as follows:
                   
      Three months ended March 31,  
 in millions   2011     2010  
 
 
               
Balance at beginning of period
   $ 73      $ 121  
 
               
Provision (credit) for losses on lending-related commitments
    (4 )     (2 )
 
Balance at end of period
   $ 69      $ 119  
 
               
 
       
 
               
 

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5.  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.
We make liquidity valuation adjustments to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when we are unable to observe recent market transactions for identical or similar instruments. 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. We recognize transfers between levels of the fair value hierarchy at the end of the reporting period.
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 105 of our 2010 Annual Report on Form 10-K.
Qualitative Disclosures of Valuation Techniques
Loans. Most loans recorded as trading account assets are valued based on market spreads for identical assets since they are actively traded. Therefore, these loans are classified as Level 2 because the fair value recorded is based on observable market data for similar assets.
Securities (trading and available for sale). We own several types of securities, requiring a range of valuation methods:
¨   Securities are classified as Level 1 when quoted market prices are available in an active market for the identical securities. Level 1 instruments include exchange-traded equity securities.
 
¨   Securities are classified as Level 2 if quoted prices for identical securities are not available, and we determine fair value using pricing models or quoted prices of similar securities. These instruments include municipal bonds; bonds backed by the U.S. government; corporate bonds; certain mortgage-backed securities; securities issued by the U.S. Treasury; money markets; 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.

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¨   Securities are classified as Level 3 when there is limited activity in the market for a particular instrument. In such cases, we use internal models based on certain assumptions to determine fair value. Level 3 instruments include certain commercial mortgage-backed securities. 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 pool assets of many investors to invest in properties. There is not an active market in which to value these investments so we employ other valuation methods.
Direct investments in properties 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. 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 funds in which we invest. Private equity and mezzanine investments are classified as Level 3 assets since our judgment significantly influences the determination of fair value.
Investments in real estate private equity funds are included within private equity and mezzanine investments. The main purpose of these funds is to acquire a portfolio of real estate investments that provides attractive risk-adjusted returns and current income for investors. Certain of these investments do not have readily determinable fair values and represent our ownership interest in an entity that follows measurement principles under investment company accounting. The following table presents the fair value of the funds and related unfunded commitments at March 31, 2011:
                   
March 31, 2011           Unfunded  
in millions   Fair Value     Commitments  
 
INVESTMENT TYPE
               
Passive funds (a)
   $ 16      $ 5  
Co-managed funds (b)
    11       16  
 
Total
   $ 27      $ 21  
 
               
 
       
 
               
 
(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 five 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. We can sell or transfer our interest in any of these funds with the 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 three to six years.
Principal investments. Principal investments consist of investments in equity and debt instruments made by our principal investing entities. They include direct investments (investments made in a particular company), as well as indirect investments (investments made through funds that include other investors).
When quoted prices are available in an active market for the identical investment, we use the quoted prices 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 perform valuations for direct investments based 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.
Our indirect investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing; these investments do not have readily determinable fair values. Indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to estimate fair value based upon 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 funds in which we invest. These investments are classified as Level 3 assets since our assumptions influence the overall determination of fair value. The following table presents the fair value of the indirect funds and related unfunded commitments at March 31, 2011:

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March 31, 2011           Unfunded  
in millions   Fair Value     Commitments  
 
INVESTMENT TYPE
               
Private equity funds (a)
   $ 540      $ 186  
Hedge funds (b)
    8        
 
Total
   $ 548      $ 186  
 
               
 
       
 
               
 
(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. An investment in any one of these funds can be sold only with the approval of the fund’s general partners. We estimate that the underlying investments of the funds will be liquidated over a period of one to ten years.
 
(b)   Consists of 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 fund’s 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, LIBOR discount rates and curves, index pricing curves, foreign currency curves and volatility surfaces (the three-dimensional graph of implied volatility against strike price and maturity). 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, with inputs consisting 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 by individual counterparty based on the probability of default, and considers master netting and collateral agreements. The default reserve is considered to be a Level 3 input.
Other assets and liabilities. The value of our repurchase and reverse repurchase agreements, trade date receivables and payables, and short positions is driven by the valuation of the underlying securities. The underlying securities may include equity securities, which are valued using quoted market prices in an active market for identical securities, resulting in a Level 1 classification. If quoted prices for identical securities are not available, fair value is determined by using pricing models or quoted prices of similar securities, resulting in a Level 2 classification. For the interest rate-driven products, such as government bonds, U.S. Treasury bonds and other products backed by the U.S. government, inputs include spreads, credit ratings and interest rates. For the credit-driven products, such as corporate bonds and mortgage-backed securities, inputs include actual trade data for comparable assets, and bids and offers.
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. The following tables present our assets and liabilities measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010.

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March 31, 2011                        
in millions   Level 1     Level 2     Level 3     Total  
 
ASSETS MEASURED ON A RECURRING BASIS
                               
Short-term investments:
                               
Securities purchased under resale agreements
          $ 556             $ 556  
Trading account assets:
                               
U.S. Treasury, agencies and corporations
          576             576  
States and political subdivisions
          80             80  
Collateralized mortgage obligations
          104             104  
Other mortgage-backed securities
          135       $ 1       136  
Other securities
    $ 5       134             139  
 
Total trading account securities
    5       1,029       1       1,035  
Commercial loans
          6             6  
 
Total trading account assets
    5       1,035       1       1,041  
Securities available for sale:
                               
U.S. Treasury, agencies and corporations
          9             9  
States and political subdivisions
          150             150  
Collateralized mortgage obligations
          18,289             18,289  
Other mortgage-backed securities
          981             981  
Other securities
    13       6             19  
 
Total securities available for sale
    13       19,435             19,448  
Other investments:
                               
Principal investments:
                               
Direct
                395       395  
Indirect
                548       548  
 
Total principal investments
                943       943  
Equity and mezzanine investments:
                               
Direct
                25       25  
Indirect
                27       27  
 
Total equity and mezzanine investments
                52       52  
 
Total other investments
                995       995  
Derivative assets:
                               
Interest rate
    1       1,429       81       1,511  
Foreign exchange
    110       94             204  
Energy and commodity
          418             418  
Credit
          26       10       36  
Equity
          3             3  
 
Derivative assets
    111       1,970       91       2,172  
Netting adjustments(a)
                      (1,167 )
 
Total derivative assets
    111       1,970       91       1,005  
Accrued income and other assets
    7       266             273  
 
Total assets on a recurring basis at fair value
    $ 136       $ 23,262       $ 1,087       $ 23,318  
 
               
 
 
LIABILITIES MEASURED ON A RECURRING BASIS
                               
Federal funds purchased and securities sold under repurchase agreements:
                               
Securities sold under repurchase agreements
          $ 605             $ 605  
Bank notes and other short-term borrowings:
                               
Short positions
    $ 1       622             623  
Derivative liabilities:
                               
Interest rate
          1,181             1,181  
Foreign exchange
    104       264             368  
Energy and commodity
          430             430  
Credit
          30       $ 6       36  
Equity
          3             3  
 
Derivative liabilities
    104       1,908       6       2,018  
Netting adjustments(a)
                      (912 )
 
Total derivative liabilities
    104       1,908       6       1,106  
Accrued expense and other liabilities
          249             249  
 
Total liabilities on a recurring basis at fair value
    $ 105       $ 3,384       $ 6       $ 2,583  
 
               
 
 
(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, 2010                        
in millions   Level 1     Level 2     Level 3     Total  
 
ASSETS MEASURED ON A RECURRING BASIS
                               
Short term investments:
                               
Securities purchased under resale agreements
          $ 373             $ 373  
Trading account assets:
                               
U.S. Treasury, agencies and corporations
          501             501  
States and political subdivisions
          66             66  
Collateralized mortgage obligations
          34             34  
Other mortgage-backed securities
          137       $ 1       138  
Other securities
    $ 145       69       21       235  
 
Total trading account securities
    145       807       22       974  
Commercial loans
          11             11  
 
Total trading account assets
    145       818       22       985  
Securities available for sale:
                               
U.S. Treasury, agencies and corporations
          8             8  
States and political subdivisions
          172             172  
Collateralized mortgage obligations
          20,665             20,665  
Other mortgage-backed securities
          1,069             1,069  
Other securities
    13       6             19  
 
Total securities available for sale
    13       21,920             21,933  
Other investments:
                               
Principal investments:
                               
Direct
                372       372  
Indirect
                526       526  
 
Total principal investments
                898       898  
Equity and mezzanine investments:
                               
Direct
                20       20  
Indirect
                30       30  
 
Total equity and mezzanine investments
                50       50  
 
Total other investments
                948       948  
Derivative assets:
                               
Interest rate
          1,691       75       1,766  
Foreign exchange
    92       88             180  
Energy and commodity
          317       1       318  
Credit
          27       12       39  
Equity
          1             1  
 
Derivative assets
    92       2,124       88       2,304  
Netting adjustments (a)
                      (1,298 )
 
Total derivative assets
    92       2,124       88       1,006  
Accrued income and other assets
    1       76             77  
 
Total assets on a recurring basis at fair value
    $ 251       $ 25,311       $ 1,058       $ 25,322  
 
               
 
 
LIABILITIES MEASURED ON A RECURRING BASIS
                               
Federal funds purchased and securities sold under repurchase agreements:
                               
Securities sold under repurchase agreements
          $ 572             $ 572  
Bank notes and other short-term borrowings:
                               
Short positions
          395             395  
Derivative liabilities:
                               
Interest rate
          1,335             1,335  
Foreign exchange
    $ 82       323             405  
Energy and commodity
          335             335  
Credit
          30       $ 1       31  
Equity
          1             1  
 
Derivative liabilities
    82       2,024       1       2,107  
Netting adjustments (a)
                      (965 )
 
Total derivative liabilities
    82       2,024       1       1,142  
Accrued expense and other liabilities
          66             66  
 
Total liabilities on a recurring basis at fair value
    $ 82       $ 3,057       $ 1       $ 2,175  
 
               
 
 
(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 months ended March 31, 2011 and 2010. We mitigate the credit risk, interest rate risk and risk of loss related to many of these Level 3 instruments by using 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                                     Equity and     Accrued                    
    Mortgage-                    
Principal Investments
   
Mezzanine Investments
    Income                    
    Backed     Other     Commercial                                     and Other     Interest     Energy and        
in millions   Securities     Securities     Loans     Direct     Indirect     Direct     Indirect     Assets     Rate     Commodity     Credit  
   
Balance at December 31, 2010
    $ 1       $ 21             $ 372       $ 526       $ 20       $ 30             $ 75       $ 1       $ 11    
 
Gains (losses) included in earnings
      (b)     (b)     (b)   2   (c)   33   (c)   5   (c)   (1)   (c)     (c)   4   (b)   (1)   (b)   (1)    (b)
Purchases
                      28       14             2                         (6)   
Sales
                      (7 )     (25 )                       (2 )               
Issuances
                                                                    
Settlements
          (21 )                             (1 )                           
Transfers into Level 3
                                                    7                 
Transfers out of Level 3
                                        (3 )           (3 )               
   
Balance at March 31, 2011
    $ 1                   $ 395       $ 548       $ 25       $ 27             $ 81             $ 4    
 
                                             
 
   
Unrealized gains (losses) included in
earnings
      (b)     (b)     (b) $ 2   (c) $ 24   (c) $ 10   (c) $ (4)   (c)     (c)     (b)     (b)       (b)
   

 
                                                                                       
    Trading Account Assets    
Other Investments
           
Derivative Instruments
 (a)
    Other                                     Equity and     Accrued                    
    Mortgage-                    
Principal Investments
   
Mezzanine Investments
    Income                    
    Backed     Other     Commercial                                     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
      (b)     (b)     (b)   15   (c)   23   (c)   2   (c)   (2 (c)     (c)   (9 (b)     (b)   1     (b)
Purchases, sales, issuances and settlements
          (224 )     (8 )     (11 )     (2 )     (2 )     4       $ 3       (3 )           —    
Net transfers into (out of) Level 3
                      (8 )           6                   (7 )           —    
   
Balance at March 31, 2010
    $ 29       $ 199       $ 11       $ 534       $ 518       $ 32       $ 33       $ 3       $ 80             $ 10    
 
                                             
 
   
Unrealized gains (losses) included in
earnings
      (b)     (b) $ (1 (b) $ 16   (c) $ 19   (c) $ 7   (c) $ (2 (c)     (c) $ (19 (b)     (b)   —     (b)
   
 
(a)   Amounts represent Level 3 derivative assets less Level 3 derivative liabilities.
 
(b)   Realized and unrealized gains and losses on trading account assets and derivative instruments are reported in “investment banking and capital markets income (loss)” on the income statement.
 
(c)   Realized and unrealized gains and losses on principal investments are reported in “net gains (losses) from principal investments” on the income statement. Realized and unrealized gains and losses on private equity and mezzanine investments are reported in “investment banking and capital markets income (loss)” on the income statement. Realized and unrealized gains and losses on investments included in accrued income and other assets are reported in “other income” on the income statement.
Assets Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. The following table presents our assets measured at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010:
                                                                 
   
March 31, 2011
 
December 31, 2010
in millions   Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
 
ASSETS MEASURED ON A NONRECURRING BASIS
                                                               
Impaired loans
                $ 107       $ 107                   $ 219       $ 219  
Loans held for sale (a)
                33       33                   15       15  
Operating lease assets
                                               
Goodwill and other intangible assets
                                               
Accrued income and other assets
          $ 19       24       43             $ 39       23       62  
 
Total assets on a nonrecurring basis at fair value
          $ 19       $ 164       $ 183             $ 39       $ 257       $ 296  
 
                               
 
 
(a)   During the first quarter of 2011, we transferred $11 million of commercial and consumer loans from held-for-sale status to the held-to-maturity portfolio at their current fair value.

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Impaired loans. 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. We perform or reaffirm appraisals of collateral-dependent impaired loans 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 material deterioration in the performance of the project or condition of the property has occurred. Adjustments to outdated appraisals that result in an appraisal value less than the carrying amount of a collateral-dependent impaired loan are reflected in the allowance for loan and lease 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 impaired loans during the first quarter of 2011.
Loans held for sale and operating lease assets. Through a quarterly analysis of our loan and lease portfolios held for sale, we determined that adjustments were necessary to record some of the portfolios at the lower of cost or fair value in accordance with GAAP. Adjusted loans held for sale portfolios totaled $33 million at March 31, 2011 and $15 million at December 31, 2010. Current market conditions, including credit risk profiles, liquidity and decreased real estate values, impacted the inputs used in our internal models and other valuation methodologies, resulting in write-downs of these loan and lease portfolios.
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.
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, we use third-party appraisals, adjusted for current market conditions. 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.
Goodwill and other intangible 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 Key Community Bank and Key Corporate Bank. 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 10 (“Goodwill and Other Intangible Assets”) on page 135 of our 2010 Annual Report on Form 10-K.
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. We use various assumptions depending on the type of intangible being valued; our assumptions may include such items as attrition rates, types of customers, revenue streams, prepayment rates, refinancing probabilities and credit defaults. There was no impairment of other intangible assets during the quarter ended March 31, 2011.
Other assets. OREO and other repossessed properties are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Generally, we classify these assets as Level 3. However, OREO and other repossessed

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properties for which we receive binding purchase agreements are classified as Level 2. 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 initially as held for sale at the lower of the loan balance or fair value at the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions may require the assets to be marked down further to a new cost basis.
Fair Value Disclosures of Financial Instruments
The carrying amount and fair value of our financial instruments at March 31, 2011 and December 31, 2010 are shown in the following table:
                                 
    March 31, 2011   December 31, 2010
  Carrying     Fair     Carrying     Fair  
in millions   Amount     Value     Amount     Value  
 
ASSETS
                               
Cash and short-term investments (a)
    $ 4,245       $ 4,245       $ 1,622       $ 1,622  
Trading account assets (e)
    1,041       1,041       985       985  
Securities available for sale (e)
    19,448       19,448       21,933       21,933  
Held-to-maturity securities (b)
    19       19       17       17  
Other investments (e)
    1,402       1,402       1,358       1,358  
Loans, net of allowance (c)
    47,180       45,766       48,503       46,140  
Loans held for sale (e)
    426       426       467       467  
Mortgage servicing assets (d)
    182       232       196       284  
Derivative assets (e)
    1,005       1,005       1,006       1,006  
 
                               
LIABILITIES
                               
Deposits with no stated maturity (a)
    $ 44,636       $ 44,636       $ 45,598       $ 45,598  
Time deposits (d)
    16,174       16,637       15,012       15,502  
Short-term borrowings (a)
    2,917       2,917       3,196       3,196  
Long-term debt (d)
    11,048       11,151       10,592       10,611  
Derivative liabilities (e)
    1,106       1,106       1,142       1,142  
 
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 by using 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 to ensure they are reasonable and 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 is 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 derivative assets and liabilities is included in the sections entitled “Qualitative Disclosures of Valuation Techniques” and “Assets Measured at Fair Value on a Nonrecurring Basis” in this note.
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. A substantial portion of our fair value adjustments are related to liquidity. During the first quarter of 2011, the fair values of our loan portfolios improved primarily due to increasing liquidity in the loan markets. 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.
Education lending business. The discontinued education lending business consists of assets and liabilities (recorded at fair value) in the securitization trusts, which were consolidated as of January 1, 2010 in accordance with new consolidation

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accounting guidance, as well as loans in portfolio (recorded at carrying value with appropriate valuation reserves) and loans held for sale, both of which are outside the trusts. The fair value of loans held for sale was identical to the aggregate carrying amount of the loans. All of these loans were excluded from the table above as follows:
¨   loans at carrying value, net of allowance, of $3.1 billion ($2.7 billion fair value) at March 31, 2011 and $3.2 billion ($2.8 billion fair value) at December 31, 2010;
 
¨   loans held for sale of $14 million at March 31, 2011 and $15 million at December 31, 2010; and
 
¨   loans in the trusts at fair value of $3.1 billion at March 31, 2011 and December 31, 2010.
Securities issued by the education lending securitization trusts, which are the primary liabilities of the trusts, totaling $2.9 billion in fair value at March 31, 2011 and $3.0 billion in fair value at December 31, 2010, are also excluded from the above table. Additional information regarding the consolidation of the education lending securitization trusts is provided in Note 11 (“Divestiture and Discontinued Operations”).
Residential real estate mortgage loans. Residential real estate mortgage loans with carrying amounts of $1.8 billion at March 31, 2011 and December 31, 2010 are included in “Loans, net of allowance” in the above table.
Short-term financial instruments. 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.
6. 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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    March 31, 2011
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
    $ 9                   $ 9  
States and political subdivisions
    148       $ 2             150  
Collateralized mortgage obligations
    17,998       331       $ 40       18,289  
Other mortgage-backed securities
    913       68             981  
Other securities
    14       5             19  
 
Total securities available for sale
    $ 19,082       $ 406       $ 40       $ 19,448  
 
               
 
 
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
    $ 1                   $ 1  
Other securities
    18                   18  
 
Total held-to-maturity securities
    $ 19                   $ 19  
 
               
 
                                 
    December 31, 2010
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
    $ 8                   $ 8  
States and political subdivisions
    170       $ 2             172  
Collateralized mortgage obligations
    20,344       408       $ 87       20,665  
Other mortgage-backed securities
    998       71             1,069  
Other securities
    15       4             19  
 
Total securities available for sale
    $ 21,535       $ 485       $ 87       $ 21,933  
 
               
 
 
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
    $ 1                   $ 1  
Other securities
    16                   16  
 
Total held-to-maturity securities
    $ 17                   $ 17  
 
               
 
                                 
    March 31, 2010
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
    $ 8                   $ 8  
States and political subdivisions
    81       $ 2             83  
Collateralized mortgage obligations
    14,789       227       $ 32       14,984  
Other mortgage-backed securities
    1,270       85             1,355  
Other securities
    107       17       1       123  
 
Total securities available for sale
    $ 16,255       $ 331       $ 33       $ 16,553  
 
               
 
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
    $ 3                   $ 3  
Other securities
    19                   19  
 
Total held-to-maturity securities
    $ 22                   $ 22  
 
               
 

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The following table summarizes our securities available for sale that were in an unrealized loss position as of March 31, 2011, December 31, 2010, and March 31, 2010.
                                                 
    Duration of Unrealized Loss Position      
    Less than 12 Months   12 Months or Longer   Total
            Gross             Gross             Gross  
            Unrealized             Unrealized             Unrealized  
in millions   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
 
MARCH 31, 2011
                                               
Securities available for sale:
                                               
Collateralized mortgage obligations
    $ 3,819       $ 40                   $ 3,819       $ 40  
     
Total temporarily impaired securities
    $ 3,819       $ 40                   $ 3,819       $ 40  
 
                       
 
 
DECEMBER 31, 2010
                                               
Securities available for sale:
                                               
Collateralized mortgage obligations
    $ 4,028       $ 87                   $ 4,028       $ 87  
     
Total temporarily impaired securities
    $ 4,028       $ 87                   $ 4,028       $ 87  
 
                       
 
 
 
                                               
March 31, 2010
                                               
Securities available for sale:
                                               
Collateralized mortgage obligations
    $ 3,249       $ 32                   $ 3,249       $ 32  
Other securities
    8             $ 3       $ 1       11       1  
 
Total temporarily impaired securities
    $ 3,257       $ 32       $ 3       $ 1       $ 3,260       $ 33  
 
                       
 
The $40 million of gross unrealized losses at March 31, 2011 relates to 33 fixed-rate collateralized mortgage obligations, which we invested in as part of an overall A/LM strategy. Since these securities have fixed interest rates, their fair value is sensitive to movements in market interest rates. These securities have a weighted-average maturity of 4.2 years at March 31, 2011.
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, the 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 securities prior to expected recovery.
Debt securities identified to have OTTI are written down to their current fair value. For those debt securities that we intend to sell, or more-likely-than-not will be required to sell, prior to the expected recovery of the amortized cost, the entire impairment (i.e., the difference between amortized cost and the fair value) is recognized in earnings. For those debt securities that we do not intend to sell, or more-likely-than-not will not be required to sell, prior to expected recovery, the credit portion of OTTI is recognized in earnings, while the remaining OTTI is recognized in equity as a component of AOCI on the balance sheet. As shown in the following table, we did not have any impairment losses recognized in earnings for the three months ended March 31, 2011.

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Three months ended March 31, 2011
         
in millions        
 
Balance at December 31, 2010
     $ 4  
Impairment recognized in earnings
     
 
Balance at March 31, 2011
     $ 4  
 
   
 
 
Realized gains and losses related to securities available for sale were as follows:
Three months ended March 31, 2011
         
 in millions        
 
Realized gains
    $ 21  
Realized losses
    (22 )
 
 
       
Net securities gains (losses)
    $ (1 )
 
   
 
 
At March 31, 2011, securities available for sale and held-to-maturity securities totaling $11.9 billion were pledged to secure securities sold under repurchase agreements, to secure public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.
The following table shows securities by remaining maturity. Collateralized mortgage obligations and other mortgage-backed securities — both of which are included in the securities available-for-sale portfolio — are presented based on their expected average lives. The remaining securities, including all of those in the held-to-maturity portfolio, are presented based on their remaining contractual maturity. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.
                                     
    Securities   Held-to-Maturity
    Available for Sale   Securities
 March 31, 2011   Amortized     Fair     Amortized     Fair  
 in millions   Cost     Value     Cost     Value  
 
Due in one year or less
   $ 449      $ 461      $ 5      $ 5  
Due after one through five years
    18,434       18,780       14       14  
Due after five through ten years
    113       120              
Due after ten years
    86       87              
 
 
                               
Total
   $ 19,082      $ 19,448      $ 19      $ 19  
 
               
 
 

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7.  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 a small or 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. As further discussed in this note:
¨   interest rate risk represents the possibility that the EVE or net interest income will be adversely affected by fluctuations in interest rates,
 
¨   credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms, and
 
¨   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 agreements allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. As a result, we could have derivative contracts with negative fair values included in derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities.
At March 31, 2011, after taking into account the effects of bilateral collateral and master netting agreements, we had $203 million of derivative assets and $149 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 $802 million and derivative liabilities of $957 million that were not designated as hedging instruments.
The recently enacted Dodd-Frank Act may limit the types of derivatives activities that KeyBank and other insured depository institutions may conduct. As a result, our use of one or more of the types of derivatives noted above may change in the future.
Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives”, on page 104 of our 2010 Annual Report on Form 10-K.
Derivatives Designated in Hedge Relationships
Net interest income and the EVE change in response to changes in interest rates and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. 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, which then minimizes the volatility of net interest income and the EVE. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index.
We designate certain “receive fixed/pay variable” interest rate swaps as fair value hedges. These swaps are used primarily to modify our consolidated exposure to changes in interest rates. These contracts convert certain fixed-rate long-term debt into variable-rate obligations. As a result, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
Similarly, we designate certain “receive fixed/pay variable” interest rate swaps as cash flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse effect of interest rate decreases on future interest income. Again, we 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

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fixed/receive variable” interest rate swaps as cash flow hedges. These swaps 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 outstanding issuances of medium-term notes that are denominated in foreign currencies. The notes are subject to translation risk, which represents the possibility that the fair value of the foreign-denominated debt will change 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. The amount of these contracts at March 31, 2011 was not significant.
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 -- primarily credit default swaps. Credit default swaps enable us to transfer to a third party a portion of the credit risk associated with a particular extension of credit, and to manage portfolio concentration and correlation risks. Occasionally, we also provide credit protection to other lenders through the sale of credit default swaps. This objective is accomplished primarily through the use of an investment-grade diversified dealer-traded basket of credit default swaps. These transactions may generate fee income, and diversify and reduce overall portfolio credit risk volatility. Although we use credit default swaps 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 for other purposes, including:
¨   interest rate swap, cap, floor and futures contracts entered into generally to accommodate the needs of commercial loan clients;
 
¨   energy swap and options contracts entered into to accommodate the needs of clients;
 
¨   interest rate derivatives and foreign exchange contracts used for proprietary trading purposes;
 
¨   positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above; and
 
¨   foreign exchange forward contracts entered into to accommodate the needs of clients.
These contracts are not designated as part of hedge relationships.
Fair Values, Volume of Activity and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of our derivative instruments on a gross basis as of March 31, 2011, December 31, 2010, and March 31, 2010. The change in the notional amounts of these derivatives by type from December 31, 2010 to March 31, 2011 indicates the volume of our derivative transaction activity during the first quarter of 2011. 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:

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      March 31, 2011     December 31, 2010     March 31, 2010
              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
   $ 10,151      $ 383      $ 41      $ 10,586      $ 458      $ 17      $ 15,964      $ 487      $ 5  
Foreign exchange
    1,162             175       1,093             240       1,712       53       259  
 
Total
    11,313       383       216       11,679       458       257       17,676       540       264  
 
                                                                       
Derivatives not designated as
                                                                       
hedging instruments:
                                                                       
Interest rate
    49,941       1,128       1,140       48,344       1,308       1,319       72,334       1,452       1,383  
Foreign exchange
    6,494       204       193       5,946       180       164       6,296       189       164  
Energy and commodity
    1,995       418       430       1,827       318       335       1,969       415       437  
Credit
    3,127       36       36       3,375       39       31       3,863       52       38  
Equity
    18       3       3       20       1       1       13       1       1  
 
Total
    61,575       1,789       1,802       59,512       1,846       1,850       84,475       2,109       2,023  
 
                                                                       
Netting adjustments (a)
          (1,167 )     (912 )           (1,298 )     (965 )           (1,586 )     (1,184)
 
Total derivatives
   $ 72,888      $ 1,005      $ 1,106      $ 71,191      $ 1,006      $ 1,142      $ 102,151      $ 1,063      $ 1,103  
 
                                   
 
 
(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. 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 an instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item, resulting in no effect on net income. The ineffective portion of a change in the fair value of such a hedging instrument is recorded in “other income” on the income statement with no corresponding offset. During the three-month period ended March 31, 2011, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While there is some ineffectiveness in our hedging relationships, all of our fair value hedges remained “highly effective” as of March 31, 2011.
The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the three-month periods ended March 31, 2011 and 2010, and where they are recorded on the income statement.
                                         
       
  Three months ended March 31, 2011  
            Net Gains                     Net Gains  
    Income Statement Location of   (Losses) on             Income Statement Location of   (Losses) on  
 in millions   Net Gains (Losses) on Derivative   Derivative     Hedged Item   Net Gains (Losses) on Hedged Item   Hedged Item  
   
Interest rate
  Other income      $ (84)     Long-term debt   Other income      $ 80   (a)
Interest rate
  Interest expense – Long-term debt     54                           
Foreign exchange
  Other income     65      Long-term debt   Other income     (69)  (a)
Foreign exchange
  Interest expense – Long-term debt         Long-term debt   Interest expense – Long-term debt     (4)  (b)
 
Total
             $ 37                         $  
 
                                   
 
   
 
                                       
 
                                       
  Three months ended March 31, 2010  
            Net Gains                     Net Gains  
    Income Statement Location of   (Losses) on             Income Statement Location of   (Losses) on  
 in millions   Net Gains (Losses) on Derivative   Derivative     Hedged Item   Net Gains (Losses) on Hedged Item   Hedged Item  
   
Interest rate
  Other income      $ 47      Long-term debt   Other income      $ (46)  (a)
Interest rate
  Interest expense – Long-term debt     59                           
Foreign exchange
  Other income     (108)     Long-term debt   Other income     104   (a)
Foreign exchange
  Interest expense – Long-term debt         Long-term debt   Interest expense – Long-term debt     (4)  (b)
   
Total
            —                         $ 54   
 
                                   
 
   
(a)   Net gains (losses) on hedged items represent the change in fair value caused by fluctuations in interest rates.
 
(b)   Net gains (losses) on hedged items represent the change in fair value caused by fluctuations in foreign currency exchange rates.
Cash flow hedges. Instruments designated as cash flow hedges are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. Initially, the effective portion of a gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet and is subsequently reclassified into income when the hedged transaction impacts earnings (e.g., when we pay variable-rate interest on debt, receive variable-rate interest on commercial loans or sell commercial real estate loans). The ineffective portion of cash flow hedging transactions is included in “other income” on the income statement. During the three-month period ended March 31, 2011, we did not exclude any portion of

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these hedging instruments from the assessment of hedge effectiveness. While there is some ineffectiveness in our hedging relationships, all of our cash flow hedges remained “highly effective” as of March 31, 2011.
The following table summarizes the pre-tax net gains (losses) on our cash flow hedges for the three-month periods ended March 31, 2011 and 2010, 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.
                                                  
       
      Three months ended March 31, 2011
                      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
     $    (1 )   Interest income – Loans      $    17     Other income      
Interest rate
    3     Interest expense – Long-term debt     (3 )   Other income      
Interest rate
        Net gains (losses) from loan sales         Other income      
 
Total
     $    2                $    14                
 
                           
 
 
 
                                       
 
                                       
       
      Three months ended March 31, 2010
                    Net Gains     Income Statement Location     Net Gains  
    Net Gains (Losses)             (Losses) Reclassified     of Net Gains (Losses)     (Losses) Recognized  
    Recognized in OCI     Income Statement Location of Net Gains (Losses)     From OCI Into Income     Recognized in Income     in Income  
  in millions   (Effective Portion)     Reclassified From OCI Into Income (Effective Portion)     (Effective Portion)     (Ineffective Portion)     (Ineffective Portion)  
 
Interest rate
     $    27     Interest income – Loans      $    77     Other income      
Interest rate
    (3 )   Interest expense – Long-term debt     (5 )   Other income      
Interest rate
        Net gains (losses) from loan sales         Other income      
 
Total
     $    24                $    72                
 
                           
 
 
The after-tax change in AOCI resulting from cash flow hedges is as follows:
                                 
                    Reclassification        
    December 31,     2011     of Gains to     March 31,  
 in millions   2010     Hedging Activity     Net Income     2011  
 
 
                               
AOCI resulting from cash flow hedges
   $ 8      $ 1      $ (9)        
 
                               
 
Considering the interest rates, yield curves and notional amounts as of March 31, 2011, we would expect to reclassify an estimated $7 million of net losses on derivative instruments from AOCI to income during the next twelve months. In addition, we expect to reclassify approximately $14 million of net gains related to terminated cash flow hedges from AOCI to income during the next twelve months. The maximum length of time over which we hedge forecasted transactions is 17 years.
Nonhedging instruments. Our derivatives that are not designated as hedging instruments are recorded at fair value in “derivative assets” and “derivative liabilities” on the balance sheet. Adjustments to the fair values of these instruments, as well as any premium paid or received, are included in “investment banking and capital markets income (loss)” on the income statement.
The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the three-month periods ended March 31, 2011 and 2010, and where they are recorded on the income statement.

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      Three months ended March 31,   
  in millions   2011     2010  
 
NET GAINS (LOSSES) (a)
               
Interest rate
    $ 2         $ 3    
Foreign exchange
    10         9    
Energy and commodity
    2         2    
Credit
    (7)        3    
 
Total net gains (losses)
    $ 7         $ 17    
 
           
 
 
(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 that 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 $264 million at March 31, 2011, $331 million at December 31, 2010, and $406 million at March 31, 2010. The collateral netted against derivative liabilities totaled $10 million at March 31, 2011, $2 million at December 31, 2010, and $3 million at March 31, 2010.
The following table summarizes our largest exposure to an individual counterparty at the dates indicated.
                         
    March 31,     December 31,     March 31,  
  in millions   2011     2010     2010  
 
 
                       
Largest gross exposure (derivative asset) to an individual counterparty
    $ 138       $ 168       $ 223  
Collateral posted by this counterparty
    19       25       21  
Derivative liability with this counterparty
    276       275       316  
Collateral pledged to this counterparty
    160       141       118  
Net exposure after netting adjustments and collateral
    3       9       5  
 
                       
 
The following table summarizes the fair value of our derivative assets by type. These assets represent our gross exposure to potential loss after taking into account the effects of bilateral collateral and master netting agreements and other means used to mitigate risk.
                         
    March 31,     December 31,     March 31,  
  in millions   2011     2010     2010  
 
 
                       
Interest rate
    $ 939       $ 1,134       $ 1,156  
Foreign exchange
    116       104       155  
Energy and commodity
    200       84       138  
Credit
    11       14       20  
Equity
    3       1        
 
Derivative assets before collateral
    1,269       1,337       1,469  
Less: Related collateral
    264       331       406  
 
Total derivative assets
    $ 1,005       $ 1,006       $ 1,063  
 
           
 
 
We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, we have different methods for managing counterparty credit exposure and credit risk.
We enter into transactions with broker-dealers and banks for various risk management purposes and proprietary trading purposes. These types of transactions generally are high dollar volume. We generally enter into bilateral collateral and master netting agreements with these counterparties. At March 31, 2011, after taking into account the effects of bilateral collateral and master netting agreements, we had gross exposure of $750 million to broker-dealers and banks. We had net exposure of $213 million after the application of master netting agreements and collateral; our net exposure to broker-dealers and banks at March 31, 2011, was reduced to $16 million with $197 million of additional collateral held in the form of securities.

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We enter into transactions with clients to accommodate their business needs. These types of transactions generally are low dollar volume. We generally enter into master netting agreements with these counterparties. In addition, we mitigate our overall portfolio exposure and market risk by entering into offsetting positions, U.S. Treasuries, Eurodollar futures and other derivative contracts. Due to the smaller size and magnitude of the individual contracts with clients, collateral generally is not exchanged in connection with these derivative transactions. To address the risk of default associated with the uncollateralized contracts, we have established a default reserve (included in “derivative assets”) in the amount of $36 million at March 31, 2011, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At December 31, 2010, the default reserve was $48 million. At March 31, 2011, after taking into account the effects of master netting agreements, we had gross exposure of $1 billion to client counterparties. We had net exposure of $791 million on our derivatives with clients after the application of master netting agreements, collateral and the related reserve.
Credit Derivatives
We are both a buyer and seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with specific commercial lending and swap obligations. We also sell credit derivatives, mainly index credit default swaps, to diversify the concentration risk within our loan portfolio.
The following table summarizes the fair value of our credit derivatives purchased and sold by type. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.
                                                                         
    March 31, 2011   December 31, 2010   March 31, 2010
in millions   Purchased     Sold     Net     Purchased     Sold     Net     Purchased     Sold     Net  
 
Single name credit default swaps
    $ (11 )     $ 11             $ (8 )     $ 9       $ 1       $ 5       $ 3       $ 8  
Traded credit default swap indices
          2       $ 2             2       2       1       2       3  
Other
    4             4       5             5       4       (1 )     3  
 
Total credit derivatives
    $ (7 )     $ 13       $ 6       $ (3 )     $ 11       $ 8       $ 10       $ 4       $ 14  
 
                                   
 
                                                                       
 
Single name credit default swaps are bilateral contracts whereby the seller agrees, for a premium, to provide protection against the credit risk of a specific entity (referred to as the “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, identified in the credit derivative contract. 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. If the customer defaults on the swap contract and the seller fulfills its payment obligations under the risk participation agreement, the seller is entitled to a pro rata share of the lead participant’s claims against the customer under the terms of the swap agreement.
The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at March 31, 2011, December 31, 2010, and March 31, 2010. Except as noted, the payment/performance risk assessment is based on the default probabilities for the underlying reference entities’ debt obligations using a Moody’s credit ratings matrix known

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as Moody’s “Idealized” Cumulative Default Rates. The payment/performance risk shown in the table represents a weighted-average of the default probabilities for all reference entities in the respective portfolios. These default probabilities are directly correlated to the probability that we will have to make a payment under the credit derivative contracts.
                                                                         
 
    March 31, 2011   December 31, 2010   March 31, 2010  
            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
    $ 955       2.30       3.40   %     $ 942       2.42       3.93     %   $ 1,114       2.41       5.29   %
Traded credit default swap indices
    369       3.37       3.76       369       3.86       6.68       394       4.29       7.49  
Other
    16       1.45       4.28       48       2.00       Low     (a)   46       2.25       6.98  
   
Total credit derivatives sold
    $ 1,340                   $ 1,359                   $ 1,554              
 
                                                           
 
                                                                       
   
 
(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 also are based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that we have signed with the counterparties. In a limited number of instances, counterparties also have the right to terminate their ISDA Master Agreements with us if our ratings fall below a certain level, usually investment-grade level (i.e., “Baa3” for Moody’s and “BBB-” for S&P). At March 31, 2011, KeyBank’s ratings with Moody’s and S&P were “A3” and “A-,” respectively, and KeyCorp’s ratings with Moody’s and S&P were “Baa1” and “BBB+,” respectively. If there was a downgrade of our ratings, we could be required to post additional collateral under those ISDA Master Agreements where we are in a net liability position. As of March 31, 2011, 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 billion, which includes $531 million in derivative assets and $1.5 billion in derivative liabilities. We had $1 billion in cash and securities collateral posted to cover those positions as of March 31, 2011.
The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of March 31, 2011, December 31, 2010, and March 31, 2010. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two or three ratings as of March 31, 2011, and take into account all collateral already posted. At March 31, 2011, KeyCorp did not have any derivatives in a net liability position that contained credit risk contingent features.
                                                 
      March 31, 2011     December 31, 2010     March 31, 2010
in millions   Moody’s     S&P     Moody’s     S&P     Moody’s     S&P  
 
KeyBank’s long-term senior
unsecured credit ratings
    A3       A-       A3       A-       A2       A-  
 
One rating downgrade
    $ 18       $ 18       $ 16       $ 16       $ 27       $ 17  
Two rating downgrades
    28       28       27       27       45       25  
Three rating downgrades
    33       33       32       32       53       30  
 
If KeyBank’s ratings had been downgraded below investment grade as of March 31, 2011, payments of up to $35 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. KeyBank’s long-term senior unsecured credit rating currently is four ratings above investment grade at Moody’s and S&P.

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8.  Mortgage Servicing Assets
We originate and periodically sell commercial mortgage loans but continue to service those loans for the buyers. We also may purchase the right to service commercial mortgage loans for other lenders. A servicing asset is recorded if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market rate. Changes in the carrying amount of mortgage servicing assets are summarized as follows:
                   
      Three months ended March 31,
in millions   2011     2010  
 
Balance at beginning of period
     $ 196        $ 221  
Servicing retained from loan sales
    3       1  
Amortization
    (17 )     (11 )
 
Balance at end of period
     $ 182        $ 211  
 
               
 
       
 
               
 
Fair value at end of period
     $ 232        $ 315  
 
               
 
       
 
               
 
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. The primary economic assumptions used to measure the fair value of our mortgage servicing assets at March 31, 2011 and 2010, are:
¨   prepayment speed generally at an annual rate of 0.00% to 25.00%;
 
¨   expected credit losses at a static rate of 2.00% to 3.00%;
 
¨   residual cash flows discount rate of 7.00% to 15.00%; and
 
¨   value assigned to escrow funds at an interest rate of 2.50% to 7.18%.
Changes in these economic assumptions could cause the fair value of mortgage servicing assets to change in the future. The volume of loans serviced and expected credit losses are critical to the valuation of servicing assets. At March 31, 2011, a 1.00% decrease in the value assigned to the escrow deposits would cause a $31 million decrease in the fair value of our mortgage servicing rights; and an increase in the assumed default rate of commercial mortgage loans of 1.00% would cause a $5 million decrease in the fair value of our mortgage servicing assets.
Contractual fee income from servicing commercial mortgage loans totaled $21 million and $18 million for the three-month periods ended March 31, 2011 and 2010, 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.
Subsequent to its January 19, 2011 publicly issued announcement, Moody’s, a credit rating agency that rates KeyCorp and KeyBank debt securities, indicated to KeyBank that certain escrow deposits associated with our mortgage servicing operations will be required to be moved to another financial institution which meets Moody’s minimum ratings threshold. As a result of this decision by Moody’s, during the first quarter of 2011, KeyBank transferred approximately $1.5 billion of these escrow deposit balances to an acceptably-rated institution resulting in an immaterial impairment of the related mortgage servicing assets. We funded this movement of the escrow deposits by selling a similar amount of securities available for sale at the time of the transfer. KeyBank has ample liquidity reserves to offset the loss of these deposits and expects to remain in a strong liquidity position.
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 103 of our 2010 Annual Report on Form 10-K and Note 11 (“Divestiture and Discontinued Operations”) under the heading “Education lending.”

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9.  Variable Interest Entities
A VIE is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:
¨   The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.
 
¨   The entity’s investors lack the power to direct the activities that most significantly impact the entity’s economic performance.
 
¨   The entity’s equity at risk holders do not have the obligation to absorb losses or the right to receive residual returns.
 
¨   The voting rights of some investors are not proportional to their economic interests 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 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, even though we do not have the power to direct the activities that most significantly impact the entity’s economic performance.
                                           
      Consolidated VIEs     Unconsolidated VIEs
    Total     Total     Total     Total     Maximum  
in millions   Assets     Liabilities     Assets     Liabilities       Exposure to Loss  
 
March 31, 2011
                                       
LIHTC funds
    $ 85       N/A       $ 149              
Education loan securitization trusts
    3,104       $ 2,928       N/A       N/A       N/A  
LIHTC investments
    N/A       N/A       1,116             $ 463  
 
                                       
 
Our involvement with VIEs is described below.
Consolidated VIEs
LIHTC guaranteed funds. KAHC formed limited partnerships, known as funds that 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 $69 million at March 31, 2011. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the funds’ limited obligations.
We have not formed new funds or added LIHTC partnerships since October 2003. However, we continue to act as asset manager and provide occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, we have determined that we are the primary beneficiary of these funds. We did not record any additional expenses related to this guarantee obligation during the first three months of 2011. Additional information on return guarantee agreements with LIHTC investors is presented in Note 12 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Guarantees.”
In accordance with the applicable accounting guidance for distinguishing liabilities from equity, third-party interests associated with our LIHTC guaranteed funds are considered mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. However, the FASB has indefinitely deferred the measurement and recognition provisions of this accounting guidance for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as our LIHTC guaranteed funds. We adjust our financial statements each period for the third-party investors’ share of the funds’ profits and losses. At March 31, 2011, we estimated the settlement value of these third-party interests to be between $48 million and $56 million, while the recorded value, including reserves, totaled $99 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. In the past, as part of our education lending business model, we originated and securitized education loans. As the transferor, we 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. We have not securitized any education loans since 2006.

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We 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 as the master servicer we have the power to direct the activities that most significantly impact the trusts’ economic performance. We elected to consolidate these trusts at fair value. The trust assets can be used only to settle the obligations or securities that the trusts issue; we cannot sell the assets or transfer the liabilities. The security holders or beneficial interest holders do not have recourse to us, and we do not have any liability recorded related to their securities. Additional information regarding the education loan securitization trusts is provided in Note 11 (“Divestiture and Discontinued Operations”) under the heading “Education lending.”
Unconsolidated VIEs
LIHTC nonguaranteed funds. Although we hold significant interests in certain nonguaranteed funds that we formed and funded, we have determined that we are not the primary beneficiary because we do not absorb the majority of the funds’ expected losses and do not have the power to direct activities that most significantly impact the economic performance of these entities. At March 31, 2011, assets of these unconsolidated nonguaranteed funds totaled $149 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 Key Community Bank, 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 that most significantly impact the economic performance of the partnership and have the obligation to absorb expected losses and the right to receive benefits.
At March 31, 2011, assets of these unconsolidated LIHTC operating partnerships totaled approximately $1.1 billion. At March 31, 2011, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $384 million plus $79 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 is remote. During the first three months of 2011, 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 $1.0 billion at March 31, 2011. 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. Information regarding our exposure to loss in connection with these guaranteed funds is included in Note 12 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.
10.  Income Taxes
Income Tax Provision
In accordance with the applicable accounting guidance, the principal method established for computing the provision for income taxes in interim periods requires us to make our best estimate of the effective tax rate expected to be applicable for the full year. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes. Additionally, 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 first quarter of 2011, as well as 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.

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The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 28.2% for the first quarter of 2011, 33.9% for the fourth quarter of 2010, and 66.7% for the first quarter of 2010.
The effective tax rates for both the current quarter of 2011 and fourth quarter of 2010 are below our combined federal and state statutory tax rate of 37.2%, due primarily to income from investments in tax-advantaged assets such as corporate-owned life insurance, and credits associated with investments in low-income housing projects. The effective tax rate for the first quarter of 2010 is higher than our statutory tax rate, mainly due to pre-tax book losses for the quarter creating a tax benefit, which is further increased for the tax impact from the investments in tax-advantaged assets.
Deferred Tax Asset
As of March 31, 2011, we had a net deferred tax asset from continuing operations of $348 million compared to $430 million as of December 31, 2010 and $651 million as of March 31, 2010 included in “accrued income and other assets” on the balance sheet. 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.
11.  Divestiture and Discontinued Operations
Divestiture
Tuition Management Systems. On November 21, 2010, we entered into a definitive agreement to sell substantially all of the net assets of the Tuition Management Systems business (TMS) to a wholly-owned subsidiary of Boston-based First Marblehead Corporation, for approximately $47 million in cash. TMS, which is based in Warwick, Rhode Island, provides tuition billing, planning, counseling and payment technology services to approximately 1,200 colleges, universities and elementary and secondary schools in 47 states. The transaction closed on December 31, 2010. We wrote off against the purchase price, to determine the net gain on sale, $15 million of customer relationship intangible assets in conjunction with this transaction.
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 the education lending business are as follows:

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      Three months ended March 31,
in millions   2011     2010  
 
Net interest income
    $ 36       $ 40  
Provision for loan and lease losses
    32       24  
 
Net interest income (expense) after provision for loan and lease losses
    4       16  
Noninterest income
    (10 )     (1 )
Noninterest expense
    11       12  
 
Income (loss) before income taxes
    (17 )     3  
Income taxes
    (6 )     1  
 
Income (loss) from discontinued operations, net of taxes (a)
    $ (11 )     $ 2  
 
       
 
               
 
 
(a)   Includes after-tax charges of $13 million and $14 million for the three-month periods ended March 31, 2011 and 2010, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.
The discontinued assets and liabilities of our education lending business included on the balance sheet are as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2011     2010     2010  
 
Loans at fair value
    $ 3,065       $ 3,125       $ 2,573  
Loans, net of unearned income of $1, $1 and $1
    3,239       3,326       3,449  
Less: Allowance for loan and lease losses
    111       114       145  
 
Net loans
    6,193       6,337       5,877  
Loans held for sale
    14       15       246  
Accrued income and other assets
    153       169       217  
 
Total assets
    $ 6,360       $ 6,521       $ 6,340  
 
           
 
                       
Noninterest-bearing deposits
                $ 30  
Accrued expense and other liabilities
    $ 34       $ 31       53  
Securities at fair value
    2,894       2,966       2,406  
 
Total liabilities
    $ 2,928       $ 2,997       $ 2,489  
 
           
 
                       
 
In the past, 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 markets to raise funds to pay for the loans. The interest generated on the loans goes to pay holders of the securities issued. As the transferor, we 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 that required us to analyze our existing QSPEs for possible consolidation. We determined that we should consolidate our ten outstanding securitization trusts as of January 1, 2010, since we hold the residual interests and are the master servicer with the power to direct the activities that most significantly impact the economic performance of these trusts.
The trust assets can be used only to settle the obligations or securities the trusts issue; we cannot sell the assets or transfer the liabilities. 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 Key. Our economic interest or risk of loss associated with these education loan securitization trusts is approximately $176 million as of March 31, 2011. 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 when we prospectively adopted this new consolidation guidance. Carrying the assets and liabilities of the trusts at fair value better depicts our economic interest. A cumulative effect adjustment of approximately $45 million, which increased our beginning balance of retained earnings at January 1, 2010, was recorded when the trusts were consolidated. The amount of this cumulative effect adjustment was driven primarily by derecognizing the residual interests and servicing assets related to these trusts and consolidating the assets and liabilities at fair value.

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At March 31, 2011, 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 is determined by calculating the present value of the future expected cash flows; those cash flows 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 because observable market data is not available.
         
March 31, 2011        
   
 
       
Weighted-average life (years)
    1.4 - 6.1  
   
 
       
PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE)
    4.00 % - 26.00  %
 
       
   
 
       
EXPECTED CREDIT LOSSES
    2.00 % - 80.00  %
 
       
   
 
       
LOAN DISCOUNT RATES (ANNUAL RATE)
    3.66 % - 9.63  %
 
       
   
 
       
SECURITY DISCOUNT RATES (ANNUAL RATE)
    3.34 % - 9.60  %
 
       
   
 
       
EXPECTED DEFAULTS (STATIC RATE)
    3.75 % - 40.00  %
 
       
   
The following table shows the consolidated trusts’ assets and liabilities at fair value and their related contractual values as of March 31, 2011. At March 31, 2011, loans held by the trusts with unpaid principal balances of $43 million ($40 million on a fair value basis) were 90 days or more past due, and loans aggregating $20 million ($18 million on a fair value) were in nonaccrual status.
                 
March 31, 2011   Contractual     Fair
in millions   Amount     Value
 
ASSETS
               
Loans
    $ 3,282       $ 3,065  
Other assets
    39       39  
 
               
LIABILITIES
               
Securities
    $ 3,396       $ 2,894  
Other liabilities
    34       34  
 
The following table presents the assets and liabilities of the trusts that were consolidated and are measured at fair value on a recurring basis.
                                    
March 31, 2011                        
in millions   Level 1     Level 2     Level 3     Total  
 
ASSETS MEASURED ON A RECURRING BASIS
                               
Loans
                $ 3,065       $ 3,065  
Other assets
                39       39  
 
Total assets on a recurring basis at fair value
                $ 3,104       $ 3,104  
 
               
 
                               
 
LIABILITIES MEASURED ON A RECURRING BASIS
                               
Securities
                $ 2,894       $ 2,894  
Other liabilities
                34       34  
 
Total liabilities on a recurring basis at fair value
                $ 2,928       $ 2,928  
 
               
 
                               
 
The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts for the three-month period ended March 31, 2011.

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    Trust                    
    Student     Other     Trust     Other
in millions   Loans     Assets     Securities     Liabilities
 
Balance at January 1, 2011
    $ 3,125       $ 45       $ 2,966       $ 31  
Gains (losses) recognized in earnings (a)
    31             41        
Purchases
                       
Sales
                       
Issuances
                       
Settlements
    (91 )     (6 )     (113 )     3  
 
Balance at March 31, 2011
    $ 3,065       $ 39       $ 2,894       $ 34  
 
               
 
                               
 
 
(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 “income (loss) from discontinued operations, net of taxes” on the income statement. The components of “income (loss) from discontinued operations, net of taxes” for Austin are as follows:
                 
      Three months ended March 31,
in millions   2011     2010  
 
Noninterest income
    $ 1       $ 3  
Other noninterest expense
    1       2  
 
Income (loss) before income taxes
          1  
Income taxes
          1  
 
Income (loss) from discontinued operations, net of taxes
           
 
       
 
               
 
The discontinued assets and liabilities of Austin included on the balance sheet are as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2011     2010     2010  
 
Cash and due from banks
    $ 33       $ 33       $ 31  
Other intangible assets
                1  
Accrued income and other assets
                2  
 
Total assets
    $ 33       $ 33       $ 34  
 
           
 
                       
Accrued expense and other liabilities
    $ 1       $ 1       $ 1  
 
Total liabilities
    $ 1       $ 1       $ 1  
 
           
 
                       
 

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Combined discontinued operations. The combined results of the discontinued operations are as follows:
                 
    Three months ended March 31,
in millions   2011      2010 
 
Net interest income
    $ 36       $ 40  
Provision for loan and lease losses
    32       24  
 
Net interest income (expense) after provision for loan and lease losses
    4       16  
Noninterest income
    (9 )     2  
Noninterest expense
    12       14  
 
Income (loss) before income taxes
    (17 )     4  
Income taxes
    (6 )     2  
 
Income (loss) from discontinued operations, net of taxes (a)
    $ (11 )     $ 2  
 
       
 
               
 
 
(a)   Includes after-tax charges of $13 million and $14 million for the three-month periods ended March 31, 2011 and 2010, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.
The combined assets and liabilities of the discontinued operations are as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2011     2010     2010  
 
Cash and due from banks
    $ 33       $ 33       $ 31  
Loans at fair value
    3,065       3,125       2,573  
Loans, net of unearned income of $1, $1 and $1
    3,239       3,326       3,449  
Less: Allowance for loan and lease losses
    111       114       145  
 
Net loans
    6,193       6,337       5,877  
Loans held for sale
    14       15       246  
Other intangible assets
                1  
Accrued income and other assets
    153       169       219  
 
Total assets
    $ 6,393       $ 6,554       $ 6,374  
 
           
 
                       
Noninterest-bearing deposits
                $ 30  
Accrued expense and other liabilities
    $ 35       $ 32       54  
Securities at fair value
    2,894       2,966       2,406  
 
Total liabilities
    $ 2,929       $ 2,998       $ 2,490  
 
           
 
                       
 
12.  Contingent Liabilities and Guarantees
Legal Proceedings
The following provides information on material developments in our legal proceedings during the quarter. For additional information on our legal proceedings, we refer you to our 2010 Annual Report on Form 10-K, Note 16 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Legal Proceedings” on pages 147 to 148.
Shareholder derivative matter.
In re: KeyCorp Derivative Litigation. As previously announced, on March 25, 2011, KeyCorp and the other defendants entered into a Stipulation and Agreement of Settlement (the “Settlement Agreement”) with the plaintiffs in the purported shareholders’ derivative action captioned In re KeyCorp Derivative Litigation, Lead Case No. 1:10-cv-01786-DAP, pending in the United States District Court for the Northern District of Ohio. Pursuant to the settlement, KeyCorp’s Board of Directors agreed to implement certain corporate governance enhancements related to executive-compensation matters.
On April 28, 2011, the court approved the settlement and dismissed the litigation with prejudice.
Additional information concerning the corporate governance enhancements and the terms of the settlement are contained in our proxy statement, dated April 5, 2011, on pages 23 to 24, and in our Form 8-K filed on March 25, 2011

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relating to the Settlement Agreement. Exhibit 99.3 to such Form 8-K contains the Notice of Pendency and Proposed Settlement of Shareholder Derivative Action (the “Notice”). The Notice is also available for viewing on our website (www.key.com/ir) as part of our SEC filings. Shareholders should read the Notice for more information.
Warren Monday, et al., v. Henry L. Meyer, III, et al. Plaintiffs in the shareholder derivative lawsuit captioned Warren Monday, et al., v. Henry L. Meyer III, et al. (“Monday”), pending in the United States District Court, Northern District of Ohio, filed in February 2011 a consolidated amended complaint asserting claims under federal and state law against various current and former directors and officers of KeyCorp, including claims for violation of section 10(b) and section 20(A) of the Exchange Act of 1934, as amended, breach of fiduciary duty, corporate waste, and unjust enrichment. These claims relate to previously made allegations and relief sought concerning the leveraged leasing transactions and the tax consequences of those transactions. The consolidated amended complaint challenges the disclosures and accounting for such transactions. On April 18, 2011, the defendants moved to dismiss the consolidated amended complaint.
Taylor and Metyk litigation.
The previously reported appeal and Key’s Cross-Appeal in the consolidated putative class actions styled Taylor v. KeyCorp, et al. (“Taylor”) remain pending. The consolidated putative class actions with similar allegations and causes of action styled Thomas J. Metyk, et al., v. KeyCorp, et al. (“Metyk”) have been stayed due to the pendency of the appeals in Taylor.
Guarantees
We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at March 31, 2011. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Guarantees” on page 105 of our 2010 Annual Report on Form 10-K.
                 
    Maximum Potential        
March 31, 2011   Undiscounted     Liability 
in millions   Future Payments     Recorded 
 
Financial guarantees:
               
Standby letters of credit
    $ 10,019       $ 67  
Recourse agreement with FNMA
    784       17  
Return guarantee agreement with LIHTC investors
    56       55  
Written put options (a)
    1,587       40  
Default guarantees
    57       5  
 
Total
    $ 12,503       $ 184  
 
       
 
               
 
 
(a)   The maximum potential undiscounted future payments represent notional amounts of derivatives qualifying as guarantees.
We determine the payment/performance risk associated with each type of guarantee described below based on the probability that we could be required to make the maximum potential undiscounted future payments shown in the preceding table. We use a scale of low (0-30% probability of payment), moderate (31-70% probability of payment) or high (71-100% probability of payment) to assess the payment/performance risk, and have determined that the payment/performance risk associated with each type of guarantee outstanding at March 31, 2011 is low.
Standby letters of credit. KeyBank issues standby letters of credit to address clients’ financing needs. These instruments obligate us to pay a specified third party when a client fails to repay an outstanding loan or debt instrument or fails to perform some contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated as loans to the client; they bear interest (generally at variable rates) and pose the same credit risk to us as a loan. At March 31, 2011, our standby letters of credit had a remaining weighted-average life of 1.9 years, with remaining actual lives ranging from less than one year to as many as eight 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 March 31, 2011, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 5.8 years, and the unpaid principal balance outstanding of loans sold by us as a participant was $2.5 billion. As shown in the preceding table, the maximum potential amount of undiscounted future payments that we could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at March 31, 2011. 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.

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Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KeyBank, offered limited partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential rental properties that qualify for federal low income housing tax credits under Section 42 of the Internal Revenue Code. In certain partnerships, investors paid a fee to KAHC for a guaranteed return that is based on the financial performance of the property and the property’s confirmed LIHTC status throughout a fifteen-year compliance period. Typically, KAHC provides these guaranteed returns by distributing tax credits and deductions associated with the specific properties. If KAHC defaults on its obligation to provide the guaranteed return, KeyBank is obligated to make any necessary payments to investors. No recourse or collateral is available to offset our guarantee obligation other than the underlying income stream from the properties and the residual value of the operating partnership interests.
As shown in the previous table, KAHC maintained a reserve in the amount of $55 million at March 31, 2011, 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 KAHC has not formed any new partnerships under this program since October 2003. Additional information regarding these partnerships is included in Note 9 (“Variable Interest Entities”).
Written put options. In the ordinary course of business, we “write” interest rate caps and floors for commercial loan clients that have variable and fixed rate loans, respectively, with us and wish to mitigate their exposure to changes in interest rates. At March 31, 2011, our written put options had an average life of 1.3 years. These instruments are considered to be guarantees as we are required to make payments to the counterparty (the commercial loan client) based on changes in an underlying variable that is related to an asset, a liability or an equity security held by the guaranteed party (i.e., the commercial loan client). 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, as further discussed in Note 7 (“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 since these counterparties typically do not hold the underlying instruments. In addition, we are a purchaser and seller of credit derivatives, which are further discussed in Note 7.
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 eight 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, and from other relationships.
Liquidity facilities that support asset-backed commercial paper conduits. At March 31, 2011, we had one liquidity facility remaining outstanding with an unconsolidated third-party commercial paper conduit. This liquidity facility, which will expire by May 15, 2013, obligates us to provide aggregate funding of up to $51 million in the event that a credit market disruption or other factors prevent the conduit from issuing commercial paper. The aggregate amount available to be drawn which is based on the amount of the conduit’s current commitments to borrowers totaled $24 million at March 31, 2011. We periodically evaluate our commitment to provide liquidity.
Indemnifications provided in the ordinary course of business. We provide certain indemnifications, primarily through representations and warranties in contracts that we execute in the ordinary course of business in connection with loan sales and other ongoing activities, as well as in connection with purchases and sales of businesses. We maintain reserves, when appropriate, with respect to liability that reasonably could arise as a result of 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 issuing debt, assuming certain lease and insurance obligations, purchasing or issuing investments and securities, and engaging in certain leasing transactions involving clients.

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13.  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 mandatorily redeemable preferred capital securities.
We unconditionally guarantee the following payments or distributions on behalf of the trusts:
¨   required distributions on the capital securities;
 
¨   the redemption price when a capital security is redeemed; and
 
¨   the amounts due if a trust is liquidated or terminated.
Our mandatorily redeemable preferred capital securities provide 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 BHCs to continue to treat capital securities as Tier 1 capital but imposed stricter quantitative limits that were to take effect March 31, 2009. However, in light of continued stress in the financial markets, the Federal Reserve later delayed the effective date of these new limits until March 31, 2011. This rule did not have a material effect on our financial condition.
The Dodd-Frank Act changes the regulatory capital standards that apply to BHCs by requiring the phase-out of the treatment of capital securities and cumulative preferred securities as Tier 1 eligible capital. This three-year phase-out period, which commences January 1, 2013, ultimately will result in our mandatorily redeemable preferred capital securities being treated only as Tier 2 capital. Generally speaking, these changes take the leverage and risk-based capital requirements that apply to depository institutions and apply them to BHCs, savings and loan companies, and nonbank financial companies identified as systemically important. The Federal Reserve has 18 months from the enactment of the Dodd-Frank Act to issue the relevant regulations. We anticipate that the rulemaking will provide additional clarity to the regulatory capital guidelines applicable to BHCs such as Key.
As of March 31, 2011, the capital securities issued by the KeyCorp and Union State Bank capital trusts represent $1.8 billion or 18% 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  
 
March 31, 2011
                                       
KeyCorp Capital I
    $ 156       $ 6       $ 159       1.043   %     2028  
KeyCorp Capital II
    81       4       99       6.875       2029  
KeyCorp Capital III
    102       4       126       7.750       2029  
KeyCorp Capital V
    115       4       128       5.875       2033  
KeyCorp Capital VI
    55       2       60       6.125       2033  
KeyCorp Capital VII
    165       5       192       5.700       2035  
KeyCorp Capital VIII (d)
    171             173       7.000       2066  
KeyCorp Capital IX (d)
    331             339       6.750       2066  
KeyCorp Capital X (d)
    574             589       8.000       2068  
Union State Capital I
    20       1       21       9.580       2027  
Union State Statutory II
    20             20       3.884       2031  
Union State Statutory IV
    10             10       3.103       2034  
 
Total
    $ 1,800       $ 26       $ 1,916       6.548   %      
 
                           
 
 
March 31, 2010
    $ 1,811       $ 26       $ 1,927       6.539   %      
 
                           
 
 
 
(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 $9 million at March 31, 2011 and $20 million at March 31, 2010. See Note 7 (“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, 2011 (for debentures owned by KeyCorp Capital VIII); December 15, 2011 (for debentures owned by KeyCorp Capital IX); March 15, 2013 (for debentures owned by KeyCorp Capital X); February 1, 2007 (for debentures owned by Union State Capital I); July 31, 2006 (for debentures owned by Union State Statutory II); and April 7, 2009 (for debentures owned by Union State Statutory IV); and (ii) in whole at any time within 90 days after and during the continuation of: a “tax event,” a “capital treatment event”, with respect to KeyCorp Capital V, VI, VII, VIII, IX and X only an “investment company event,” and with respect to KeyCorp Capital X only a “rating agency event” (as each is defined in the applicable indenture). If the debentures purchased by KeyCorp Capital I, KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VII, KeyCorp Capital VIII, KeyCorp Capital IX, Union State Capital I or Union State Statutory IV are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (a) the principal amount, plus any accrued but unpaid interest or (b) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points (25 basis points or 50 basis points in the case of redemption upon either a tax event or a capital treatment event for KeyCorp Capital III), plus any accrued but unpaid interest. If the debentures purchased by Union State Statutory II are redeemed before July 31, 2011, the redemption price will be 101.50% of the principal amount, plus any accrued but unpaid interest. When debentures are redeemed in response to tax or capital treatment events, the redemption price for KeyCorp Capital II and KeyCorp Capital III generally is slightly more favorable to us. The principal amount of debentures includes adjustments related to hedging with financial instruments totaling $99 million at March 31, 2011 and $110 million at March 31, 2010.
 
(c)   The interest rates for KeyCorp Capital II, KeyCorp Capital III, KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VII, KeyCorp Capital VIII, KeyCorp Capital IX, KeyCorp Capital X and Union State Capital I are fixed. KeyCorp Capital I has a floating interest rate equal to three-month LIBOR plus 74 basis points that reprices quarterly. Union State Statutory II has a floating interest rate equal to three-month LIBOR plus 358 basis points that reprices quarterly. Union State Statutory IV has a floating interest rate equal to three-month LIBOR plus 280 basis points that reprices quarterly. The total interest rates are weighted-average rates.
 
(d)   In connection with each of these issuances of trust preferred securities, KeyCorp entered into a replacement capital covenant (“RCC”). Should KeyCorp redeem or purchase these securities or related subordinated debentures, absent receipt of consent from the holders of the “Covered Debt” or certain limited exceptions, KeyCorp would need to comply with the applicable RCC.
14.  Employee Benefits
Pension Plans
Effective December 31, 2009, we amended our pension plans to freeze all benefit accruals and close the plans to new employees. We will continue to credit participants’ existing account balances for interest until they receive their plan benefits. We changed certain pension plan assumptions as a result of freezing the pension plans.
The components of net pension cost for all funded and unfunded plans are as follows:

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    Three months ended March 31,
in millions   2011     2010  
 
Interest cost on PBO
    $ 14       $ 15  
Expected return on plan assets
    (20 )     (18 )
Amortization of losses
    3       9  
 
Net pension cost
    $ (3 )     $ 6  
 
       
 
               
 
We made a discretionary contribution of $100 million to our primary qualified cash balance pension plan in the first quarter of 2011.
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. We use separate VEBA trusts 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 March 31,
in millions   2011     2010 
 
Interest cost on APBO
    $ 1       $ 1  
Expected return on plan assets
    (1 )     (1 )
 
Net postretirement benefit cost
           
 
       
 
               
 
The “Patient Protection and Affordable Care Act” and “Education Reconciliation Act of 2010,” which were signed into law on March 23, 2010 and March 30, 2010, respectively, changed the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least “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.

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15.  Shareholders’ Equity
SCAP
In November 2010, the Federal Reserve issued Revised Temporary Addendum to Supervisory Letter SR 09-4. This letter outlines specific criteria the Federal Reserve will consider when evaluating proposed capital actions by the 19 largest U.S. banking institutions that participated in the SCAP, including KeyCorp (“SCAP BHCs”). These include actions such as increasing dividends, implementing common stock repurchase programs, or redeeming or repurchasing capital instruments more broadly. The Federal Reserve is required to assess the capital adequacy of SCAP BHCs based upon a review of each SCAP BHC’s comprehensive capital plan, which we submitted to the Federal Reserve and the Office of the Comptroller of the Currency on January 7, 2011. On March 18, 2011, the Federal Reserve informed us that it had no objections to the capital actions set forth in our Comprehensive Capital Plan. For a discussion of our capital actions, see the “Capital” section of Management’s Discussion and Analysis.
Repurchase of TARP CPP Preferred Stock, Warrant and Completion of Equity and Debt Offerings
On March 30, 2011, we completed the repurchase of the $2.5 billion of Series B Preferred Stock, issued to the U.S. Treasury as part of the TARP CPP. The repurchase followed a $625 million common equity offering and a $1 billion debt offering of 5.1% Senior Medium Term Notes, Series I, both of which were completed in the first quarter of 2011.
As a result of the repurchase of the Series B Preferred Stock, we accelerated the amortization of the issuance discount (deemed dividend) on the Series B Preferred Stock in the amount of $49 million, which reduced net income available to holders of our Common Shares and, in turn, reduced our earnings per Common Share by $.06. The issuance discount is due to the carrying value of the Series B Preferred Stock being less than its liquidation value, as the carrying value of our Series B Preferred Stock and the corresponding warrant issued to the U.S. Treasury as part of our participation was based upon its fair value at issuance. On April 20, 2011 we repurchased the warrant directly from the U.S. Treasury for $70 million.
During the first quarter of 2011, KeyCorp completed the underwritten public offering of 70,621,470 of its Common Shares at a price of $8.85 per share, with aggregate proceeds to KeyCorp of $625 million. KeyCorp also completed the public offering of $1 billion 5.1% Senior Medium-Term Notes, Series I, during the first quarter of 2011. The proceeds from the sale of Common Shares and medium-term notes were used, along with other available funds, to repurchase the Series B Preferred Stock issued to the U.S. Treasury.
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). That consolidation added $2.8 billion in assets, liabilities and equity to our balance sheet and resulted in a cumulative effect adjustment (after-tax) of $45 million to beginning retained earnings on January 1, 2010. Additional information regarding the consolidation of these education loan securitization trusts is provided in Note 9 (“Variable Interest Entities”) and Note 11 (“Divestiture and Discontinued Operations”).

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16.  Line of Business Results
The specific lines of business that comprise each of the major business segments (operating segments) are described below.
Key Community Bank
Regional Banking serves a range of clients.
¨   For individuals, Regional Banking offers branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans.
 
¨   For small businesses, Regional Banking provides deposit, investment and credit products, and business advisory services.
 
¨   For high-net-worth clients, Regional Banking offers financial, estate and retirement planning, and asset management services to assist with 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.
Key Corporate Bank
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 non-affiliated third parties).
Corporate Banking Services provides cash management, interest rate derivatives, and foreign exchange products and services to clients served by Key Community Bank and Key Corporate Bank. Through its Public Sector and Financial Institutions businesses, Corporate Banking Services also provides a full array of commercial banking products and services to government and not-for-profit entities and to community banks. A variety of cash management services are provided through the Global Treasury Management unit.
Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients. Lease financing receivables and related revenues are assigned to other lines of business (primarily Institutional and Capital Markets, and Commercial Banking) if those businesses are principally responsible for maintaining the applicable client relationships.
Institutional and Capital Markets through its KeyBanc Capital Markets unit, provides commercial lending, treasury management, investment banking, derivatives, foreign exchange, equity and debt underwriting and trading, and syndicated finance products and services to large corporations and middle-market companies.
Through its Victory Capital Management unit, Institutional and Capital Markets also manages or offers advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals. These portfolios may be managed in separate accounts, common funds or the Victory family of mutual funds.
Other Segments
Other Segments consist of Corporate Treasury, our Principal Investing unit and various exit portfolios.
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

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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 our two major business segments for the three-month periods ended March 31, 2011 and 2010. This table is accompanied by supplementary information for each of the lines of business that make up these segments. The information was derived from the internal financial reporting system 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 to line of business results presented by other companies.
The selected financial data are based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. In accordance with our policies:
¨   Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment and/or repricing characteristics.
 
¨   Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent to which each line of business actually uses the services.
 
¨   The consolidated provision for loan and lease 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 and lease losses. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” on page 102 in our 2010 Annual Report on Form 10-K.
 
¨   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 of business.
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.

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Three months ended March 31,     Key Community Bank       Key Corporate Bank  
dollars in millions   2011     2010     2011     2010  
 
SUMMARY OF OPERATIONS
                               
Net interest income (TE)
    $ 378       $ 412       $ 185       $ 195  
Noninterest income
    187       182       218       177  
 
Total revenue (TE) (a)
    565       594       403       372  
Provision (credit) for loan and lease losses
    11       142       (21 )     161  
Depreciation and amortization expense
    10       9       20       26  
Other noninterest expense
    435       442       208       246  
 
Income (loss) from continuing operations before income taxes (TE)
    109       1       196       (61 )
Allocated income taxes and TE adjustments
    28       (12 )     72       (24 )
 
Income (loss) from continuing operations
    81       13       124       (37 )
Income (loss) from discontinued operations, net of taxes
                       
 
Net income (loss)
    81       13       124       (37 )
Less: Net income (loss) attributable to noncontrolling interests
                (1 )     (1 )
 
Net income (loss) attributable to Key
    $ 81       $ 13       $ 125       $ (36)     
 
                       
 
                               
 
AVERAGE BALANCES (b)
                               
Loans and leases
    $ 26,312       $ 27,769       $ 17,677       $ 22,440  
Total assets (a)
    29,739       30,886       21,747       26,270  
Deposits
    48,108       51,444       11,282       12,220  
 
OTHER FINANCIAL DATA
                               
Net loan charge-offs (b)
    $ 76       $ 116       $ 75       $ 251  
Return on average allocated equity (b)
    10.03   %     1.47   %     19.65   %     (4.32 )  %
Return on average allocated equity
    10.03       1.47       19.65       (4.32 )
Average full-time equivalent employees (c)
    8,378       8,182       2,155       2,213  
 
 
(a)   Substantially all revenue generated by our major business segments 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 segments, are located in the United States.
 
(b)   From continuing operations.
 
(c)   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
    2011     2010     2011     2010     2011     2010     2011     2010  
 
 
                                                               
 
    $ 35       $ 17       $ 598       $ 624       $ 6       $ 8       $ 604       $ 632  
 
    61       87       466       446       (9 )     4       457       450  
 
 
    96       104       1,064       1,070       (3 )     12       1,061       1,082  
 
    (25 )     122       (35 )     425       (5 )     (12 )     (40 )     413  
 
    6       12       36       47       38       41       74       88  
 
    24       38       667       726       (40 )     (29 )     627       697  
 
 
    91       (68 )     396       (128 )     4       12       400       (116 )
 
    24       (36 )     124       (72 )     (6 )     (3 )     118       (75 )
 
 
    67       (32 )     272       (56 )     10       15       282       (41 )
 
                            (11 )     2       (11 )