FORM 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
         
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)    
 
  OF THE SECURITIES EXCHANGE ACT OF 1934    
For the Quarterly Period Ended March 31, 2009
or
         
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)    
 
  OF THE SECURITIES EXCHANGE ACT OF 1934    
For the Transition Period From                      To                     
Commission File Number 1-11302
     (KEYCORP LOGO)     
(Exact name of registrant as specified in its charter)
     
Ohio   34-6542451
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
127 Public Square, Cleveland, Ohio   44114-1306
     
(Address of principal executive offices)   (Zip Code)
(216) 689-6300
 
(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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Common Shares with a par value of $1 each   502,479,136 Shares
     
(Title of class)   (Outstanding at April 30, 2009)
 
 

 


 

KEYCORP
TABLE OF CONTENTS
             
PART I. FINANCIAL INFORMATION
 
           
 
      Page Number
 
           
  Financial Statements        
 
           
 
  Consolidated Balance Sheets — March 31, 2009 (Unaudited), December 31, 2008, and March 31, 2008 (Unaudited)     3  
 
           
 
  Consolidated Statements of Income (Unaudited) — Three months ended March 31, 2009 and 2008     4  
 
           
 
  Consolidated Statements of Changes in Equity (Unaudited) — Three months ended March 31, 2009 and 2008     5  
 
           
 
  Consolidated Statements of Cash Flows (Unaudited) — Three months ended March 31, 2009 and 2008     6  
 
           
 
  Notes to Consolidated Financial Statements (Unaudited)     7  
 
           
 
  Report of Independent Registered Public Accounting Firm     41  
 
           
  Management’s Discussion & Analysis of Financial Condition & Results of Operations     42  
 
           
  Quantitative and Qualitative Disclosure about Market Risk     95  
 
           
  Controls and Procedures     95  
 
           
PART II. OTHER INFORMATION
 
           
  Legal Proceedings     96  
 
           
  Risk Factors     96  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     99  
 
           
  Exhibits     99  
 
           
 
  Signature     100  
 
           
 
  Exhibits     101  
 EX-10.1
 EX-15
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
                         
    March 31,     December 31,     March 31,  
in millions, except share data   2009     2008     2008  
    (Unaudited)             (Unaudited)  
ASSETS
                       
Cash and due from banks
  $ 637     $ 1,257     $ 1,730  
Short-term investments
    2,917       5,221       577  
Trading account assets
    1,279       1,280       1,015  
Securities available for sale
    8,530       8,437       8,419  
Held-to-maturity securities (fair value: $25, $25 and $29)
    25       25       29  
Other investments
    1,464       1,526       1,561  
Loans, net of unearned income of $2,143, $2,345 and $2,168
    73,703       76,504       76,444  
Less: Allowance for loan losses
    2,186       1,803       1,298  
 
Net loans
    71,517       74,701       75,146  
Loans held for sale
    1,124       1,027       1,674  
Premises and equipment
    847       840       712  
Operating lease assets
    889       990       1,070  
Goodwill
    917       1,138       1,599  
Other intangible assets
    112       128       164  
Corporate-owned life insurance
    2,994       2,970       2,894  
Derivative assets
    1,707       1,896       1,508  
Accrued income and other assets
    2,875       3,095       3,394  
 
Total assets
  $ 97,834     $ 104,531     $ 101,492  
 
                 
 
                       
LIABILITIES
                       
Deposits in domestic offices:
                       
NOW and money market deposit accounts
  $ 23,599     $ 24,191     $ 26,527  
Savings deposits
    1,795       1,712       1,826  
Certificates of deposit ($100,000 or more)
    13,250       11,991       8,330  
Other time deposits
    14,791       14,763       12,933  
 
Total interest-bearing
    53,435       52,657       49,616  
Noninterest-bearing
    11,760       11,485       10,896  
Deposits in foreign office — interest-bearing
    801       1,118       4,190  
 
Total deposits
    65,996       65,260       64,702  
Federal funds purchased and securities sold under repurchase agreements
    1,565       1,557       3,503  
Bank notes and other short-term borrowings
    2,285       8,477       5,464  
Derivative liabilities
    932       1,038       465  
Accrued expense and other liabilities
    1,904       2,523       4,252  
Long-term debt
    14,978       14,995       14,337  
 
Total liabilities
    87,660       93,850       92,723  
 
                       
EQUITY
                       
Preferred stock, $1 par value, authorized 25,000,000 shares:
                       
7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 7,475,000 shares; issued 6,575,000 shares
    658       658        
Fixed-Rate Cumulative Perpetual Preferred Stock, Series B, $100,000 liquidation preference; authorized and issued 25,000 shares
    2,418       2,414        
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 584,061,120, 584,061,120 and 491,888,780 shares
    584       584       492  
Common stock warrant
    87       87        
Capital surplus
    2,464       2,553       1,659  
Retained earnings
    6,160       6,727       8,737  
Treasury stock, at cost (85,487,810, 89,058,634, and 91,818,259 shares)
    (2,500 )     (2,608 )     (2,689 )
Accumulated other comprehensive income
    97       65       393  
 
Key shareholders’ equity
    9,968       10,480       8,592  
Noncontrolling interests
    206       201       177  
 
Total equity
    10,174       10,681       8,769  
 
Total liabilities and equity
  $ 97,834     $ 104,531     $ 101,492  
 
                 
 
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   2009     2008  
 
INTEREST INCOME
               
Loans
  $ 883     $ 1,123  
Loans held for sale
    12       87  
Securities available for sale
    108       109  
Held-to-maturity securities
    1       1  
Trading account assets
    13       13  
Short-term investments
    3       9  
Other investments
    12       12  
 
Total interest income
    1,032       1,354  
 
               
INTEREST EXPENSE
               
Deposits
    300       428  
Federal funds purchased and securities sold under repurchase agreements
    1       28  
Bank notes and other short-term borrowings
    6       39  
Long-term debt
    111       146  
 
Total interest expense
    418       641  
 
 
               
NET INTEREST INCOME
    614       713  
Provision for loan losses
    875       187  
 
Net interest (loss) income after provision for loan losses
    (261 )     526  
 
               
NONINTEREST INCOME
               
Trust and investment services income
    117       129  
Service charges on deposit accounts
    82       88  
Operating lease income
    61       69  
Letter of credit and loan fees
    38       37  
Corporate-owned life insurance income
    27       28  
Electronic banking fees
    24       24  
Insurance income
    18       15  
Investment banking and capital markets income
    18       8  
Net securities (losses) gains
    (14 )     3  
Net (losses) gains from principal investing
    (72 )     11  
Net gains (losses) from loan securitizations and sales
    8       (101 )
Gain from sale/redemption of Visa Inc. shares
    105       165  
Other income
    80       54  
 
Total noninterest income
    492       530  
 
               
NONINTEREST EXPENSE
               
Personnel
    362       409  
Net occupancy
    66       66  
Operating lease expense
    50       58  
Computer processing
    47       47  
Professional fees
    35       23  
FDIC assessment
    30       2  
Equipment
    22       24  
Marketing
    14       14  
Intangible assets impairment
    223        
Other expense
    124       90  
 
Total noninterest expense
    973       733  
 
               
(LOSS) INCOME BEFORE INCOME TAXES
    (742 )     323  
Income taxes
    (244 )     104  
 
NET (LOSS) INCOME
    (498 )     219  
Less: Net (loss) income attributable to noncontrolling interests
    (10 )     1  
 
NET (LOSS) INCOME ATTRIBUTABLE TO KEY
  $ (488 )   $ 218  
 
           
 
               
Net (loss) income attributable to Key common shareholders
  $ (536 )   $ 218  
 
               
Per common share:
               
Net (loss) income attributable to Key
  $ (1.09 )   $ .55  
Net (loss) income attributable to Key — assuming dilution
    (1.09 )     .54  
Cash dividends declared
    .0625        
 
               
Weighted-average common shares outstanding (000)
    492,813       399,121  
Weighted-average common shares and potential common shares outstanding (000)
    492,813       399,769  
 
See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Changes in Equity (Unaudited)
                                                                                         
    Key Shareholders’ Equity              
                                                                    Accumulated              
                                    Common                     Treasury     Other              
    Preferred Stock     Common Shares     Preferred     Common     Stock     Capital     Retained     Stock,     Comprehensive     Noncontrolling     Comprehensive  
dollars in millions, except per share amounts   Outstanding (000)     Outstanding (000)     Stock     Shares     Warrant     Surplus     Earnings     at Cost     Income (Loss)     Interests     Income (Loss)  
 
BALANCE AT DECEMBER 31, 2007
          388,793           $ 492           $ 1,623     $ 8,522     $ (3,021 )   $ 130     $ 233          
Net income
                                                    218                       1     $ 219  
Other comprehensive income (loss):
                                                                                       
Net unrealized gains on securities available for sale, net of income taxes of $68 (a)
                                                                    113               113  
Net unrealized gains on derivative financial instruments, net of income taxes of $91
                                                                    138               138  
Net distribution to noncontrolling interests
                                                                            (57 )     (57 )
Foreign currency translation adjustments
                                                                    10               10  
Net pension and postretirement benefit costs, net of income taxes
                                                                    2               2  
 
                                                                                     
Total comprehensive income
                                                                                  $ 425  
 
                                                                                     
Deferred compensation
                                            (2 )     (3 )                                
Common shares reissued:
                                                                                       
Acquisition of U.S.B. Holding Co., Inc.
            9,895                               58               290                          
Stock options and other employee benefit plans
            1,383                               (20 )             42                          
         
BALANCE AT MARCH 31, 2008
          400,071           $ 492           $ 1,659     $ 8,737     $ (2,689 )   $ 393     $ 177          
 
                                                                   
         
BALANCE AT DECEMBER 31, 2008
    6,600       495,002     $ 3,072     $ 584     $ 87     $ 2,553     $ 6,727     $ (2,608 )   $ 65     $ 201          
Net loss
                                                    (488 )                     (10 )   $ (498 )
Other comprehensive income (loss):
                                                                                       
Net unrealized gains on securities available for sale, net of income taxes of $26 (a)
                                                                    44             44  
Net unrealized losses on derivative financial instruments, net of income taxes of ($5)
                                                                    (9 )             (9 )
Net contribution from noncontrolling interests
                                                                            15       15  
Foreign currency translation adjustments
                                                                    (9 )             (9 )
Net pension and postretirement benefit costs, net of income taxes
                                                                    6               6  
 
                                                                                     
Total comprehensive loss
                                                                                  $ (451 )
 
                                                                                     
Deferred compensation
                                            3                                          
Cash dividends declared on common shares ($.0625 per share)
                                                    (31 )                                
Cash dividends declared on Noncumulative Series A
                                                                                       
Preferred Stock ($1.9375 per share)
                                                    (12 )                                
Cash dividends accrued on Cumulative Series B
                                                                                       
Preferred Stock (5% per annum)
                                                    (32 )                                
Amortization of discount on Series B Preferred Stock
                    4                               (4 )                                
Common shares reissued for stock options and other employee benefit plans
            3,571                               (92 )             108                          
         
BALANCE AT MARCH 31, 2009
    6,600       498,573     $ 3,076     $ 584     $ 87     $ 2,464     $ 6,160     $ (2,500 )   $ 97     $ 206          
 
                                                                   
         
(a)   Net of reclassification adjustments.
See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Cash Flows (Unaudited)
                 
    Three months ended March 31,  
in millions   2009     2008  
 
OPERATING ACTIVITIES
               
Net (loss) income
  $ (498 )   $ 219  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
               
Provision for loan losses
    875       187  
Intangible assets impairment
    223        
Depreciation and amortization expense
    102       110  
Gain from sale/redemption of Visa Inc. shares
    (105 )     (165 )
Net losses (gains) from principal investing
    72       (11 )
Net securities losses (gains)
    14       (3 )
Net (gains) losses from loan securitizations and sales
    (8 )     101  
Liability to Visa
          (64 )
Deferred income taxes
    (176 )     (87 )
Net increase in loans held for sale
    (181 )     (222 )
Net decrease in trading account assets
    1       41  
Other operating activities, net
    (282 )     156  
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
    37       262  
INVESTING ACTIVITIES
               
Proceeds from sale/redemption of Visa Inc. shares
    105       165  
Cash used in acquisitions, net of cash acquired
          (157 )
Net decrease in short-term investments
    2,304       5  
Purchases of securities available for sale
    (502 )     (331 )
Proceeds from sales of securities available for sale
    16       825  
Proceeds from prepayments and maturities of securities available for sale
    458       354  
Purchases of held-to-maturity securities
    (6 )     (2 )
Proceeds from prepayments and maturities of held-to-maturity securities
    6        
Purchases of other investments
    (48 )     (174 )
Proceeds from sales of other investments
    3       84  
Proceeds from prepayments and maturities of other investments
    28       37  
Net decrease (increase) in loans, excluding acquisitions, sales and transfers
    2,379       (1,163 )
Purchases of loans
          (17 )
Proceeds from loan securitizations and sales
    7       144  
Purchases of premises and equipment
    (33 )     (46 )
Proceeds from sales of premises and equipment
    1        
Proceeds from sales of other real estate owned
    5       2  
 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    4,723       (274 )
FINANCING ACTIVITIES
               
Net increase (decrease) in deposits
    736       (202 )
Net decrease in short-term borrowings
    (6,184 )     (1,610 )
Net proceeds from issuance of long-term debt
    445       2,241  
Payments on long-term debt
    (300 )     (356 )
Net proceeds from issuance of common shares
          3  
Tax benefits under recognized compensation cost for stock-based awards
    (2 )      
Cash dividends paid
    (75 )     (148 )
 
NET CASH USED IN FINANCING ACTIVITIES
    (5,380 )     (72 )
 
NET DECREASE IN CASH AND DUE FROM BANKS
    (620 )     (84 )
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD
    1,257       1,814  
 
CASH AND DUE FROM BANKS AT END OF PERIOD
  $ 637     $ 1,730  
 
           
 
Additional disclosures relative to cash flows:
               
Interest paid
  $ 1,002     $ 693  
Income taxes (refunded) paid
    (126 )     15  
Noncash items:
               
Assets acquired
        $ 2,810  
Liabilities assumed
          2,648  
Loans transferred to portfolio from held for sale
  $ 84       3,284  
Loans transferred to other real estate owned
    45       12  
 
See Notes to Consolidated Financial Statements (Unaudited).

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Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The unaudited condensed consolidated interim financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
As used in these Notes:
¨   KeyCorp refers solely to the parent holding company;
 
¨   KeyBank refers to KeyCorp’s subsidiary bank, KeyBank National Association; and
 
¨   Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries.
The consolidated financial statements include any voting rights entity in which Key has a controlling financial interest. In accordance with Financial Accounting Standards Board (“FASB”) Revised Interpretation No. 46, “Consolidation of Variable Interest Entities,” a variable interest entity (“VIE”) is consolidated if Key has a variable interest in the entity and is exposed to the majority of its expected losses and/or residual returns (i.e., Key is considered to be the primary beneficiary). Variable interests can include equity interests, subordinated debt, derivative contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments. See Note 8 (“Variable Interest Entities”), which begins on page 21, for information on Key’s involvement with VIEs.
Management uses the equity method to account for unconsolidated investments in voting rights entities or VIEs in which Key has significant influence over operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%, but not controlling). Unconsolidated investments in voting rights entities or VIEs in which Key has a voting or economic interest of less than 20% generally are carried at cost. Investments held by KeyCorp’s registered broker-dealer and investment company subsidiaries (primarily principal investments) are carried at fair value.
Qualifying special purpose entities (“SPEs”), including securitization trusts, established by Key under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are not consolidated. Information on SFAS No. 140 is included in Note 7 (“Loan Securitizations and Mortgage Servicing Assets”), which begins on page 18.
Management believes that the unaudited condensed consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented. Some previously reported amounts have been reclassified to conform to current reporting practices.
The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in Key’s 2008 Annual Report to Shareholders.
Goodwill and Other Intangible Assets
Under SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and certain other intangible assets are subject to impairment testing, which must be conducted at least annually. Key performs the goodwill impairment testing in the fourth quarter of each year. Key’s reporting units for purposes of this testing are its major business segments, Community Banking and National Banking. Due to the ongoing uncertainty regarding market conditions, which may continue to negatively impact the performance of Key’s reporting units, management continues to monitor the impairment indicators for goodwill and other intangible assets and to evaluate the carrying amount of these assets, if necessary.

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During the first quarter of 2009, market conditions prompted management to review and evaluate the carrying amount of the goodwill and other intangible assets assigned to Key’s Community Banking and National Banking units. This review indicated that the estimated fair value of the Community Banking unit was greater than its carrying amount, while the estimated fair value of the National Banking unit was less than its carrying amount, reflecting continued weakness in the financial markets. Based on the results of additional impairment testing required for the National Banking unit, Key recorded an after-tax noncash accounting charge of $187 million, or $.38 per common share, during the first quarter of 2009. Key’s regulatory and tangible capital ratios were not affected by this adjustment. As a result of this charge, Key has now written off all of the goodwill that had been assigned to the National Banking unit.
Noncontrolling Interests
Key’s Principal Investing unit and the Real Estate Capital and Corporate Banking Services line of business have noncontrolling (minority) interests. Key accounts for these interests in accordance with SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51.” Key reports noncontrolling interests in subsidiaries as a component of equity on the consolidated balance sheets. Net (loss) income includes the revenues, expenses, gains and losses pertaining to both Key and the noncontrolling interests. The portion of net results attributable to the noncontrolling interests is disclosed separately on the face of Key’s consolidated income statements to arrive at net (loss) income attributable to Key.
Offsetting Derivative Positions
In accordance with FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation 39,” and Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” Key takes into account the impact of master netting agreements that allow Key to settle all derivative contracts held with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral when recognizing derivative assets and liabilities. Additional information regarding derivative offsetting is provided in Note 15 (“Derivatives and Hedging Activities”), which begins on page 30.
Accounting Pronouncements Adopted in 2009
Business combinations. In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” The new pronouncement requires the acquiring entity in a business combination to recognize only the assets acquired and liabilities assumed in a transaction (e.g., acquisition costs must be expensed when incurred), establishes the fair value at the date of acquisition as the initial measurement for all assets acquired and liabilities assumed, and requires expanded disclosures. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited.
Noncontrolling interests. In December 2007, the FASB issued SFAS No. 160, which requires all entities to report noncontrolling interests in subsidiaries as a component of equity and sets forth other presentation and disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited. Additional information regarding this guidance is provided in this note under the heading “Noncontrolling Interests.” Adoption of this guidance did not have a material effect on Key’s financial condition or results of operations.
Accounting for transfers of financial assets and repurchase financing transactions. In February 2008, the FASB issued Staff Position No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This Staff Position provides guidance on accounting for a transfer of a financial asset and a repurchase financing, and presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing shall be evaluated separately. Staff Position No. FAS 140-3 is effective for fiscal years beginning after November 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited. Adoption of this guidance did not have a material effect on Key’s financial condition or results of operations.

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Disclosures about derivative instruments and hedging activities. In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts, and gains and losses on derivative instruments, and disclosures about credit risk contingent features in derivative agreements. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008 (effective January 1, 2009, for Key). The required disclosures are provided in Note 15.
Determination of the useful life of intangible assets. In April 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This Staff Position is effective for fiscal years beginning after December 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited. Adoption of this guidance did not have a material effect on Key’s financial condition or results of operations.
Accounting for convertible debt instruments. In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This guidance requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This Staff Position is effective for fiscal years beginning after December 15, 2008 (effective January 1, 2009, for Key). Early adoption was prohibited. Key has not issued and does not have any convertible debt instruments outstanding that are subject to the accounting guidance in this Staff Position. Therefore, adoption of this guidance did not have an effect on Key’s financial condition or results of operations.
Accounting Pronouncements Pending Adoption
Recognition and presentation of other-than-temporary impairments. In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This Staff Position provides new guidance on the recognition and presentation of other-than-temporary impairments of debt securities, and requires additional disclosures that are applicable to both debt and equity securities. This guidance will be effective for interim and annual periods ending after June 15, 2009 (effective June 30, 2009, for Key) with early adoption permitted. Adoption of this guidance is not expected to have a material effect on Key’s financial condition or results of operations.
Interim disclosures about fair value of financial instruments. In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This guidance amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosures about the fair value of financial instruments in interim financial statements of publicly traded companies. This Staff Position will be effective for interim and annual periods ending after June 15, 2009 (effective June 30, 2009, for Key) with early adoption permitted.
Determining fair value when volume and level of activity have significantly decreased and identifying transactions that are not orderly. In April 2009, the FASB issued Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This Staff Position provides additional guidance for: (i) estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased, and (ii) identifying circumstances that indicate that a transaction is not orderly. This guidance emphasizes that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions (i.e., not a forced liquidation or distressed sale). Staff Position No. FAS 157-4 will be effective

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for interim and annual periods ending after June 15, 2009 (effective June 30, 2009, for Key) with early adoption permitted. Adoption of this accounting guidance is not expected to have a material effect on Key’s financial condition or results of operations.
Employers’ disclosures about postretirement benefit plan assets. In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This guidance will require additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan, including fair values of each major asset category and the levels within the fair value hierarchy as set forth in SFAS No. 157. This Staff Position will be effective for fiscal years ending after December 15, 2009 (effective December 31, 2009, for Key).
2. Earnings Per Common Share
Key’s basic and diluted earnings per common share are calculated as follows:
                 
    Three months ended March 31,
dollars in millions, except per share amounts   2009     2008  
 
EARNINGS
               
Net (loss) income attributable to Key
  $ (488 )   $ 218  
Less: Cash dividends declared on Series A Preferred Stock
    12        
Cash dividends accrued on Series B Preferred Stock
    32        
Amortization of discount on Series B Preferred Stock
    4        
 
Net (loss) income attributable to Key common shareholders
  $ (536 )   $ 218  
 
           
 
WEIGHTED-AVERAGE COMMON SHARES
               
Weighted-average common shares outstanding (000)
    492,813       399,121  
Effect of dilutive convertible preferred stock, common stock options and other stock awards (000)
          648  
 
Weighted-average common shares and potential common shares outstanding (000)
    492,813       399,769  
 
           
 
EARNINGS PER COMMON SHARE
               
Net (loss) income attributable to Key
  $ (1.09 )   $ .55  
Net (loss) income attributable to Key — assuming dilution
    (1.09 )     .54  
 
3. Acquisition
Key completed the following acquisition in 2008.
U.S.B. Holding Co., Inc.
On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the holding company for Union State Bank, a 31-branch state-chartered commercial bank headquartered in Orangeburg, New York. U.S.B. Holding Co. had assets of $2.840 billion and deposits of $1.804 billion at the date of acquisition. Under the terms of the agreement, Key exchanged 9,895,000 KeyCorp common shares, with a value of $348 million, and $194 million in cash for all of the outstanding shares of U.S.B. Holding Co. In connection with the acquisition, Key recorded goodwill of approximately $350 million in the Community Banking reporting unit. The acquisition expanded Key’s presence in markets both within and contiguous to its current operations in the Hudson Valley.

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4. Line of Business Results
Community Banking
Regional Banking provides individuals with branch-based deposit and investment products, personal finance services, and loans, including residential mortgages, home equity and various types of installment loans. This line of business also provides small businesses with deposit, investment and credit products, and business advisory services.
Regional Banking also offers financial, estate and retirement planning, and asset management services to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving and related needs.
Commercial Banking provides midsize businesses with products and services that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives and foreign exchange.
National Banking
Real Estate Capital and Corporate Banking Services consists of two business units, Real Estate Capital and Corporate Banking Services.
Real Estate Capital is a national business that provides construction and interim lending, permanent debt placements and servicing, equity and investment banking, and other commercial banking products and services to developers, brokers and owner-investors. This unit deals primarily with nonowner-occupied properties (i.e., generally properties in which at least 50% of the debt service is provided by rental income from nonaffiliated third parties). Real Estate Capital emphasizes providing clients with finance solutions through access to the capital markets.
Corporate Banking Services provides cash management, interest rate derivatives, and foreign exchange products and services to clients served by both the Community Banking and National Banking groups. Through its Public Sector and Financial Institutions businesses, Corporate Banking Services also provides a full array of commercial banking products and services to government and not-for-profit entities, and to community banks.
Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients. Lease financing receivables and related revenues are assigned to other lines of business (primarily Institutional and Capital Markets, and Commercial Banking) if those businesses are principally responsible for maintaining the relationship with the client.
Institutional and Capital Markets, through its KeyBanc Capital Markets unit, provides commercial lending, treasury management, investment banking, derivatives, foreign exchange, equity and debt underwriting and trading, and syndicated finance products and services to large corporations and middle-market companies.
Through its Victory Capital Management unit, Institutional and Capital Markets also manages or offers advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals. These portfolios may be managed in separate accounts, common funds or the Victory family of mutual funds.
Consumer Finance provides government-guaranteed education loans to students and their parents, and processes tuition payments for private schools. Through its Commercial Floor Plan Lending unit, this line of business also finances inventory for automobile dealers. In October 2008, Consumer Finance exited retail and floor-plan lending for marine and recreational vehicle products and began to limit new education loans to those backed by government guarantee. This line of business continues to service existing loans in these portfolios and to honor existing education loan commitments. These actions are consistent with Key’s strategy of de-emphasizing nonrelationship or out-of-footprint businesses.

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Other Segments
Other Segments consist of Corporate Treasury and Key’s Principal Investing unit.
Reconciling Items
Total assets included under “Reconciling Items” primarily represent the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling Items also includes intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations.
The table that spans pages 13 and 14 shows selected financial data for each major business group for the three-month periods ended March 31, 2009 and 2008. This table is accompanied by supplementary information for each of the lines of business that make up these groups. The information was derived from the internal financial reporting system that management uses to monitor and manage Key’s financial performance. U.S. generally accepted accounting principles (“GAAP”) guides financial accounting, but there is no authoritative guidance for “management accounting ” — the way management uses its judgment and experience to make reporting decisions. Consequently, the line of business results Key reports may not be comparable with line of business results presented by other companies.
The selected financial data are based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. In accordance with Key’s policies:
¨   Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment and/or repricing characteristics. The net effect of this funds transfer pricing is charged to the lines of business based on the total loan and deposit balances of each line.
 
¨   Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent to which each line actually uses the services.
 
¨   Key’s consolidated provision for loan losses is allocated among the lines of business primarily based on their actual net charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that management uses to estimate Key’s consolidated allowance for loan losses. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan Losses” on page 79 of Key’s 2008 Annual Report to Shareholders.
 
¨   Income taxes are allocated based on the statutory federal income tax rate of 35% (adjusted for tax-exempt interest income, income from corporate-owned life insurance, and tax credits associated with investments in low-income housing projects) and a blended state income tax rate (net of the federal income tax benefit) of 2.5%.
 
¨   Capital is assigned based on management’s assessment of economic risk factors (primarily credit, operating and market risk) directly attributable to each line.
Developing and applying the methodologies that management uses to allocate items among Key’s lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect accounting enhancements, changes in the risk profile of a particular business or changes in Key’s organizational structure.

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Three months ended March 31,   Community Banking     National Banking  
dollars in millions   2009     2008     2009     2008  
 
SUMMARY OF OPERATIONS
                               
Net interest income (loss) (TE)
  $ 415     $ 422     $ 286     $ 338  (b)
Noninterest income
    189       207       251       101  
 
Total revenue (TE)  (a)
    604       629       537       439  
Provision for loan losses
    81       18       789       169  
Depreciation and amortization expense
    36       38       66       72  
Other noninterest expense
    434       387       471  (b)     236  
 
Income (loss) before income taxes (TE)
    53       186       (789 )     (38 )
Allocated income taxes and TE adjustments
    20       70       (216 )     (14 )
 
Net income (loss)
    33       116       (573 )     (24 )
Less: Net (loss) income attributable to noncontrolling interests
                (2 )      
 
Net income (loss) attributable to Key
  $ 33     $ 116     $ (571 )   $ (24 )
 
                       
 
                               
Percent of consolidated net income attributable to Key
    N/M       53 %     N/M       (11 )%
Percent of total segments net income attributable to Key
    N/M       103       N/M       (21 )
 
AVERAGE BALANCES
                               
Loans and leases
  $ 28,940     $ 28,085     $ 46,197     $ 44,162  
Total assets  (a)
    31,949       31,016       54,810       56,193  
Deposits
    51,560       49,777       12,214       11,877  
 
OTHER FINANCIAL DATA
                               
Net loan charge-offs
  $ 54     $ 30     $ 438     $ 91  
Return on average allocated equity
    4.13 %     15.93 %     (42.65 )%     (1.96 )%
Average full-time equivalent employees
    8,887       8,712       3,024       3,744  
 
(a)   Substantially all revenue generated by Key’s major business groups is derived from clients with residency in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software and goodwill held by Key’s major business groups are located in the United States.
 
(b)   National Banking’s results for the first quarter of 2009 include a noncash charge for goodwill and other intangible assets impairment of $223 million ($187 million after tax). During the first quarter of 2008, National Banking’s taxable-equivalent net interest income and net results were reduced by $34 million and $21 million, respectively, as a result of its involvement with certain leveraged lease financing transactions which were challenged by the Internal Revenue Service (“IRS”).
 
(c)   Reconciling Items for the first quarter of 2009 include a $105 million ($65 million after tax) gain from the sale of Key’s remaining equity interest in Visa Inc. For the first quarter of 2008, Reconciling Items include a $165 million ($103 million after tax) gain from the partial redemption of Key’s equity interest in Visa Inc. and a $17 million charge to income taxes for the interest cost associated with the increase to Key’s tax reserves for certain lease in, lease out (“LILO”) transactions.
 
TE   = Taxable Equivalent, N/A = Not Applicable, N/M = Not Meaningful

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Other Segments     Total Segments     Reconciling Items     Key  
2009     2008     2009     2008     2009     2008     2009     2008  
 
                                                             
$ (45 )   $ (27 )   $ 656     $ 733     $ (36 )   $ (29 )   $ 620     $ 704  
  (33 )     55       407       363       85  (c)     167  (c)     492       530  
 
  (78 )     28       1,063       1,096       49       138       1,112       1,234  
              870       187       5             875       187  
              102       110                   102       110  
  10       11       915       634       (44 )     (11 )     871       623  
 
  (88 )     17       (824 )     165       88       149       (736 )     314  
  (43 )     (5 )     (239 )     51       1       44  (c)     (238 )     95  
 
  (45 )     22       (585 )     114       87       105       (498 )     219  
  (8 )     1       (10 )     1                   (10 )     1  
 
$ (37 )   $ 21     $ (575 )   $ 113     $ 87     $ 105     $ (488 )   $ 218  
                                             
                                                             
  N/M       10 %     N/M       52 %     N/M       48 %     N/M       100 %
  N/M       18       N/M       100       N/A       N/A       N/A       N/A  
 
                                                             
$ 156     $ 238     $ 75,293     $ 72,485     $ 36     $ 203     $ 75,329     $ 72,688  
  16,567       14,421       103,326       101,630       489       1,726       103,815       103,356  
  1,750       4,801       65,524       66,455       (140 )     (169 )     65,384       66,286  
 
                                                             
            $ 492     $ 121                 $ 492     $ 121  
  N/M       N/M       (25.34 )%     5.43 %     N/M       N/M       (19.12 )%     10.38 %
  41       43       11,952       12,499       5,516       5,927       17,468       18,426  
 
Supplementary information (Community Banking lines of business)
                                 
Three months ended March 31,   Regional Banking     Commercial Banking  
dollars in millions               2009                   2008                   2009                  2008  
 
Total revenue (TE)
  $ 511     $ 528     $ 93     $ 101  
Provision for loan losses
    69       9       12       9  
Noninterest expense
    419       383       51       42  
Net income
    14       85       19       31  
Average loans and leases
    20,004       19,562       8,936       8,523  
Average deposits
    47,784       46,192       3,776       3,585  
Net loan charge-offs
    53       29       1       1  
Net loan charge-offs to average loans
    1.07 %     .60 %     .05 %     .05 %
Nonperforming assets at period end
  $ 216     $ 142     $ 115     $ 62  
Return on average allocated equity
    2.50 %     16.40 %     7.96 %     14.79 %
Average full-time equivalent employees
    8,565       8,380       322       332  
 
TE = Taxable Equivalent
Supplementary information (National Banking lines of business)
                                                                 
    Real Estate Capital and                     Institutional and        
Three months ended March 31,   Corporate Banking Services     Equipment Finance     Capital Markets     Consumer Finance  
dollars in millions   2009     2008     2009     2008     2009     2008     2009     2008  
 
Total revenue (TE)
  $ 171     $ 83     $ 102     $ 93     $ 176     $ 160     $ 88     $ 103  
Provision for loan losses
    470       45       77       24       31       16       211       84  
Noninterest expense
    113       60       86       95       236       105       102       48  
Net (loss) income attributable to Key
    (270 )     (14 )     (38 )     (16 )     (101 )     24       (162 )     (18 )
Average loans and leases
    16,567       16,497       9,091       10,596       8,948       7,632       11,591       9,437  
Average loans held for sale
    269       989       28       32       267       555       514       3,356  
Average deposits 
    9,987       9,784       17       14       1,773       1,460       437       619  
Net loan charge-offs
    218       38       44       24       45       2       131       27  
Net loan charge-offs to average loans
    5.34 %     .93 %     1.96 %     .91 %     2.04 %     .11 %     4.58 %     1.15 %
Nonperforming assets at period end
  $ 1,072     $ 732     $ 215     $ 69     $ 59     $ 12     $ 300     $ 98  
Return on average allocated equity
    (45.38 )%     (3.00 )%     (21.71 )%     (6.94 )%     (33.33 )%     7.94 %     (60.95 )%     (7.94 )%
Average full-time equivalent employees
    1,024       1,233       741       885       912       938       347       688  
 
TE = Taxable Equivalent

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5. Securities
Securities available for sale. These are securities that Key intends 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 shareholders’ equity as a component of “accumulated other comprehensive income” on the balance sheet. Unrealized losses on specific securities deemed to be “other-than-temporary” are included in “net securities (losses) gains” on the income statement, as are actual gains and losses resulting from the sales of securities using the specific identification method.
When Key retains an interest in loans it securitizes, it bears risk that the loans will be prepaid (which would reduce expected interest income) or not paid at all. Key accounts for these retained interests as debt securities and classifies them as available for sale.
“Other securities” held in the available-for-sale portfolio are primarily marketable equity securities.
Held-to-maturity securities. These are debt securities that Key has the intent and ability to hold until maturity. Debt securities are carried at cost, 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, trust preferred securities and preferred equity securities.
The amortized cost, unrealized gains and losses, and approximate fair value of Key’s 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, 2009  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 10                 $ 10  
States and political subdivisions
    90     $ 1             91  
Collateralized mortgage obligations
    6,289       216             6,505  
Other mortgage-backed securities
    1,624       77             1,701  
Retained interests in securitizations
    166       1             167  
Other securities
    61       2     $ 7       56  
 
Total securities available for sale
  $ 8,240     $ 297     $ 7     $ 8,530  
 
                       
 
                               
 
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
  $ 4                 $ 4  
Other securities
    21                   21  
 
Total held-to-maturity securities
  $ 25                 $ 25  
 
                       
 
                                 
    December 31, 2008  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 9     $ 1           $ 10  
States and political subdivisions
    90       1             91  
Collateralized mortgage obligations
    6,380       148     $ 5       6,523  
Other mortgage-backed securities
    1,505       63       1       1,567  
Retained interests in securitizations
    162       29             191  
Other securities
    71       1       17       55  
 
Total securities available for sale
  $ 8,217     $ 243     $ 23     $ 8,437  
 
                       
 
                               
 
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
  $ 4                 $ 4  
Other securities
    21                   21  
 
Total held-to-maturity securities
  $ 25                 $ 25  
 
                       
 
                                 
    March 31, 2008  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 18                 $ 18  
States and political subdivisions
    92     $ 1             93  
Collateralized mortgage obligations
    6,355       170     $ 8       6,517  
Other mortgage-backed securities
    1,486       37       1       1,522  
Retained interests in securitizations
    153       33             186  
Other securities
    84       4       5       83  
 
Total securities available for sale
  $ 8,188     $ 245     $ 14     $ 8,419  
 
                       
 
                               
 
HELD-TO-MATURITY SECURITIES
                               
States and political subdivisions
  $ 8                 $ 8  
Other securities
    21                   21  
 
Total held-to-maturity securities
  $ 29                 $ 29  
 
                       
 

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6. Loans and Loans Held for Sale
Key’s loans by category are summarized as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2009     2008     2008  
 
Commercial, financial and agricultural
  $ 25,405     $ 27,260     $ 25,777  
Commercial real estate:
                       
Commercial mortgage
    12,057  (a)     10,819       10,479  
Construction
    6,208  (a)     7,717       8,473  
 
Total commercial real estate loans
    18,265       18,536  (b)     18,952  
Commercial lease financing
    8,553       9,039       10,000  
 
Total commercial loans
    52,223       54,835       54,729  
Real estate — residential mortgage
    1,759       1,908       1,954  
Home equity:
                       
Community Banking
    10,290       10,124       9,678  
National Banking
    998       1,051       1,220  
 
Total home equity loans
    11,288       11,175       10,898  
Consumer other — Community Banking
    1,215       1,233       1,266  
Consumer other — National Banking:
                       
Marine
    3,256       3,401       3,653  
Education
    3,700       3,669       3,608  
Other
    262       283       336  
 
Total consumer other — National Banking
    7,218       7,353       7,597  
 
Total consumer loans
    21,480       21,669       21,715  
 
Total loans
  $ 73,703     $ 76,504     $ 76,444  
 
                 
 
(a)   In late March 2009, Key transferred $1.474 billion of loans from the construction portfolio to the commercial mortgage portfolio in accordance with regulatory guidelines pertaining to the classification of loans that have reached a completed status.
 
(b)   During the second quarter of 2008, Key transferred $384 million of commercial real estate loans ($719 million of primarily construction loans, net of $335 million in net charge-offs) from the loan portfolio to held-for-sale status.
Key uses interest rate swaps to manage interest rate risk; these swaps modify the repricing characteristics of certain loans. For more information about such swaps, see Note 19 (“Derivatives and Hedging Activities”), which begins on page 115 of Key’s 2008 Annual Report to Shareholders.
Key’s loans held for sale by category are summarized as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2009     2008     2008  
 
Commercial, financial and agricultural
  $ 24     $ 102     $ 291  
Real estate — commercial mortgage
    301       273       1,139  
Real estate — construction
    151       164  (a)     25  
Commercial lease financing
    10       7       31  
Real estate — residential mortgage
    183       77       58  
Home equity
                1  
Education
    453       401       123  
Automobile
    2       3       6  
 
Total loans held for sale
  $ 1,124     $ 1,027     $ 1,674  
 
                 
 
(a)   During the second quarter of 2008, Key transferred $384 million of commercial real estate loans ($719 million of primarily construction loans, net of $335 million in net charge-offs) from the loan portfolio to held-for-sale status.

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Changes in the allowance for loan losses are summarized as follows:
                 
    Three months ended March 31,  
in millions   2009     2008  
 
Balance at beginning of period
  $ 1,803     $ 1,200  
Charge-offs
    (520 )     (148 )
Recoveries
    28       27  
 
Net loans charged off
    (492 )     (121 )
Provision for loan losses
    875       187  
Allowance related to loans acquired, net
          32  
 
Balance at end of period
  $ 2,186     $ 1,298  
 
           
 
Changes in the liability for credit losses on lending-related commitments are summarized as follows:
                 
    Three months ended March 31,  
in millions   2009     2008  
 
Balance at beginning of period
  $ 54     $ 80  
Credit for losses on lending-related commitments
          (27 )
 
Balance at end of period (a)
  $ 54     $ 53  
 
           
 
(a)   Included in “accrued expense and other liabilities” on the consolidated balance sheet.
7. Loan Securitizations and Mortgage Servicing Assets
Retained Interests in Loan Securitizations
A securitization involves the sale of a pool of loan receivables to investors through either a public or private issuance (generally by a qualifying SPE) of asset-backed securities. Generally, the assets are transferred to a trust that sells interests in the form of certificates of ownership. In previous years, Key sold education loans in securitizations; however, Key has not securitized any education loans since 2006 due to unfavorable market conditions.
When Key sells loans in securitizations, Key records a gain or loss when the net sale proceeds and residual interests, if any, differ from the loans’ allocated carrying amount. Gains or losses resulting from securitizations are recorded as one component of “net gains (losses) from loan securitizations and sales” on the income statement.
A servicing asset is recorded if Key purchases or retains the right to service securitized loans, and receives servicing fees that exceed the going market rate. Key generally retains an interest in securitized loans in the form of an interest-only strip, residual asset, servicing asset or security. Key’s mortgage servicing assets are discussed under the heading “Mortgage Servicing Assets” on page 20. All other retained interests are accounted for as debt securities and classified as securities available for sale.
In accordance with Revised Interpretation No. 46, “Consolidation of Variable Interest Entities,” qualifying SPEs, including securitization trusts, established by Key under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are exempt from consolidation. Information related to Revised Interpretation No. 46 is included in Note 1 (“Basis of Presentation”), which begins on page 7.

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Management uses certain assumptions and estimates to determine the fair value to be allocated to retained interests at the date of transfer and at subsequent measurement dates. Primary economic assumptions used to measure the fair value of Key’s retained interests in education loans and the sensitivity of the current fair value of residual cash flows to immediate adverse changes in those assumptions at March 31, 2009, are as follows:
         
dollars in millions        
 
Fair value of retained interests
  $ 168  
Weighted-average life (years)
    1.0 - 6.7  
 
PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE)
    4.00% - 30.00 %
Impact on fair value of 1% CPR adverse change
  $ (7 )
Impact on fair value of 2% CPR adverse change
    (10 )
 
 
       
EXPECTED CREDIT LOSSES (STATIC RATE)
    .14% - 26.40 %
Impact on fair value of .25% adverse change
  $ (4 )
Impact on fair value of .50% adverse change
    (8 )
 
 
       
RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL RATE)
    8.50% - 14.00 %
Impact on fair value of 1% adverse change
  $ (6 )
Impact on fair value of 2% adverse change
    (12 )
 
 
       
EXPECTED STATIC DEFAULT (STATIC RATE)
    3.75% - 33.00 %
Impact on fair value of 1% adverse change
  $ (32 )
Impact on fair value of 2% adverse change
    (64 )
 
 
       
VARIABLE RETURNS TO TRANSFEREES
    (a )
 
These sensitivities are hypothetical and should be relied upon with caution. Sensitivity analysis is based on the nature of the asset, the seasoning (i.e., age and payment history) of the portfolio and historical results. Changes in fair value based on a 1% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may cause changes in another. For example, increases in market interest rates may result in lower prepayments and increased credit losses, which might magnify or counteract the sensitivities.
(a)   Forward London Interbank Offered Rate (“LIBOR”) plus contractual spread over LIBOR ranging from .00% to 1.15%.
 
CPR = Constant Prepayment Rate
The fair value measurement of Key’s mortgage servicing assets is described under the heading “Mortgage Servicing Assets” on page 20. Management conducts a quarterly review of the fair values of its other retained interests. The historical performance of each retained interest and the assumptions used to project future cash flows are reviewed, assumptions are revised and present values of cash flows are recalculated, as appropriate.
The present values of cash flows represent the fair value of the retained interests. If the carrying amount of a retained interest classified as a security available for sale exceeds its fair value, impairment is indicated and recognized in earnings if considered to be “other-than-temporary” or recognized in equity as “accumulated other comprehensive income” if deemed to be temporary. Conversely, if the fair value of the retained interest exceeds its carrying value, the increase in fair value is recorded in equity as “accumulated other comprehensive income.”

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The table below shows the relationship between the education loans Key manages and those held in the loan portfolio. Managed loans include those held in portfolio and those securitized and sold, but still serviced by Key. Related delinquencies and net credit losses are also presented.
                         
            Loans Past     Net Credit  
March 31, 2009   Loan     Due 60 days     Losses During  
in millions   Principal     or More     the Quarter  
 
Education loans managed
  $ 8,299     $ 247     $ 60  
Less: Loans securitized
    4,146       154       28  
Loans held for sale or securitization
    453       7        
 
Loans held in portfolio
  $ 3,700     $ 86     $ 32  
 
                 
 
Mortgage Servicing Assets
Key originates and periodically sells commercial mortgage loans but continues to service those loans for the buyers. Key also may purchase the right to service commercial mortgage loans for other lenders. Changes in the carrying amount of mortgage servicing assets are summarized as follows:
                 
    Three months ended March 31,  
in millions   2009     2008  
 
Balance at beginning of period
  $ 242     $ 313  
Servicing retained from loan sales
    1       2  
Amortization
    (15 )     (28 )
 
Balance at end of period
  $ 228     $ 287  
 
           
 
Fair value at end of period
  $ 384     $ 425  
 
           
 
The fair value of mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. Primary economic assumptions used to measure the fair value of Key’s mortgage servicing assets at March 31, 2009 and 2008, are:
¨   prepayment speed generally at an annual rate of 0.00% to 25.00%;
 
¨   expected credit losses at a static rate of 2.00%; and
 
¨   residual cash flows discount rate of 8.50% to 15.00%.
Changes in these assumptions could cause the fair value of mortgage servicing assets to change in the future. The volume of loans serviced and expected credit losses are critical to the valuation of servicing assets. A 1.00% increase in the assumed default rate of commercial mortgage loans at March 31, 2009, would cause a $9 million decrease in the fair value of Key’s mortgage servicing assets.
Contractual fee income from servicing commercial mortgage loans totaled $16 million and $17 million for the three-month periods ended March 31, 2009 and 2008, respectively. Key has 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.

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Servicing assets are evaluated quarterly for possible impairment. This process involves classifying the assets based on the types of loans serviced and their associated interest rates, and determining the fair value of each class. If the evaluation indicates that the carrying amount of the servicing assets exceeds their fair value, the carrying amount is reduced through a charge to income in the amount of such excess. For the three-month periods ended March 31, 2009 and 2008, no servicing asset impairment occurred.
8. 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 authority to make decisions about the activities of the entity through voting rights or similar rights, and do not have the obligation to absorb the entity’s expected losses or the right to receive the entity’s expected residual returns.
 
¨   The voting rights of some investors are not proportional to their economic interest in the entity, and substantially all of the entity’s activities involve or are conducted on behalf of investors with disproportionately few voting rights.
Key’s VIEs, including those consolidated and those in which Key holds a significant interest, are summarized below. Key defines a “significant interest” in a VIE as a subordinated interest that exposes Key to a significant portion, but not the majority, of the VIE’s expected losses or residual returns.
                                 
    Consolidated VIEs     Unconsolidated VIEs  
March 31, 2009                     Maximum  
in millions   Total Assets     Total Assets     Total Liabilities     Exposure to Loss  
 
Low-income housing tax credit (“LIHTC”) funds
  $ 236     $ 202              
LIHTC investments
    N/A       987           $ 362  
 
N/A = Not Applicable
Key’s involvement with VIEs is described below.
Consolidated VIEs
LIHTC guaranteed funds. Key Affordable Housing Corporation (“KAHC”) formed limited partnerships (“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. Key also earned syndication fees from these funds and continues to earn asset management fees. The funds’ assets primarily are investments in LIHTC operating partnerships, which totaled $225 million at March 31, 2009. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the funds’ limited obligations. Key has not formed new funds or added LIHTC partnerships since October 2003. However, Key continues to act as asset manager and provides occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, management has determined that Key is the primary beneficiary of these funds. Key did not record any expenses related to this guarantee obligation during the first three months of 2009. Additional information on return guarantee agreements with LIHTC investors is presented in Note 14 (“Contingent Liabilities and Guarantees”) under the heading “Guarantees” on page 27.
The partnership agreement for each guaranteed fund requires the fund to be dissolved by a certain date. In accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” the third-party interests associated with these funds are considered mandatorily

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redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. The FASB has indefinitely deferred the measurement and recognition provisions of SFAS No. 150 for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as Key’s LIHTC guaranteed funds. Key adjusts the financial statements each period for the third-party investors’ share of the funds’ profits and losses. At March 31, 2009, the settlement value of these third-party interests was estimated to be between $171 million and $178 million, while the recorded value, including reserves, totaled $229 million.
Unconsolidated VIEs
LIHTC nonguaranteed funds. Although Key holds significant interests in certain nonguaranteed funds that Key formed and funded, management has determined that Key is not the primary beneficiary of those funds because Key does not absorb the majority of the expected losses of the funds. At March 31, 2009, assets of these unconsolidated nonguaranteed funds totaled $202 million. Key’s maximum exposure to loss in connection with these funds is minimal, and Key does not have any liability recorded related to the funds. Management elected to cease forming these funds in October 2003.
LIHTC investments. Through the Community Banking business group, Key has made investments directly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, Key is allocated tax credits and deductions associated with the underlying properties. Management has determined that Key is not the primary beneficiary of these investments because the general partners are more closely associated with the business activities of these partnerships. At March 31, 2009, assets of these unconsolidated LIHTC operating partnerships totaled approximately $987 million. Key’s maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $293 million at March 31, 2009, plus $69 million of tax credits claimed but subject to recapture. Key does not have any liability recorded related to these investments because Key believes the likelihood of any loss in connection with these partnerships is remote. During the first three months of 2009, Key did not obtain significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships.
Key has additional investments in unconsolidated LIHTC operating partnerships that are held by the consolidated LIHTC guaranteed funds. Total assets of these operating partnerships were approximately $1.527 billion at March 31, 2009. The tax credits and deductions associated with these properties are allocated to the funds’ investors based on their ownership percentages. Management has determined that Key is not the primary beneficiary of these partnerships because the general partners are more closely associated with the business activities of these partnerships. Information regarding Key’s exposure to loss in connection with these guaranteed funds is included in Note 14 under the heading “Return guarantee agreement with LIHTC investors” on page 28.
Commercial and residential real estate investments and principal investments. Key’s 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 American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide, “Audits of Investment Companies.” Key is not currently applying the accounting or disclosure provisions of Revised Interpretation No. 46 to these investments, which remain unconsolidated; the FASB deferred the effective date of Revised Interpretation No. 46 for such nonregistered investment companies until the AICPA clarifies the scope of the Audit Guide.

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9. Nonperforming Assets and Past Due Loans
Impaired loans totaled $1.472 billion at March 31, 2009, compared to $985 million at December 31, 2008, and $839 million at March 31, 2008. Impaired loans had an average balance of $1.229 billion for the first quarter of 2009 and $679 million for the first quarter of 2008.
Key’s nonperforming assets and past due loans were as follows:
                         
    March 31,     December 31,     March 31,  
in millions   2009     2008     2008  
 
Impaired loans
  $ 1,472     $ 985     $ 839  
Other nonaccrual loans
    266       240       215  
 
Total nonperforming loans
    1,738       1,225       1,054  
 
                       
Nonperforming loans held for sale
    72       90  (a)     9  
 
                       
Other real estate owned (“OREO”)
    147       110       29  
Allowance for OREO losses
    (4 )     (3 )     (2 )
 
OREO, net of allowance
    143       107       27  
Other nonperforming assets (b)
    44       42       25  
 
Total nonperforming assets
  $ 1,997     $ 1,464     $ 1,115  
 
                 
 
Impaired loans with a specifically allocated allowance
  $ 1,327     $ 876     $ 789  
Specifically allocated allowance for impaired loans
    233       178       177  
 
Accruing loans past due 90 days or more
  $ 458     $ 433     $ 283  
Accruing loans past due 30 through 89 days
    1,407       1,314       1,169  
 
(a)   During the second quarter of 2008, Key transferred $384 million of commercial real estate loans ($719 million of primarily construction loans, net of $335 million in net charge-offs) from the loan portfolio to held-for-sale status.
 
(b)   Primarily investments held by the Private Equity unit within Key’s Real Estate Capital and Corporate Banking Services line of business.
At March 31, 2009, Key did not have any significant commitments to lend additional funds to borrowers with loans on nonperforming status.
Management evaluates the collectibility of Key’s loans as described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan Losses” on page 79 of Key’s 2008 Annual Report to Shareholders.

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10. Capital Securities Issued by Unconsolidated Subsidiaries
KeyCorp owns the outstanding common stock of business trusts that issued corporation-obligated mandatorily redeemable preferred capital securities. The trusts used the proceeds from the issuance of their capital securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts’ only assets; the interest payments from the debentures finance the distributions paid on the capital securities.
The capital securities provide an attractive source of funds: they constitute Tier 1 capital for regulatory reporting purposes, but have the same tax advantages as debt for federal income tax purposes. During the first quarter of 2005, the Federal Reserve Board adopted a rule that allows bank holding companies to continue to treat capital securities as Tier 1 capital, but imposed stricter quantitative limits that would have taken effect March 31, 2009. On March 17, 2009, in light of continued stress in the financial markets, the Federal Reserve Board delayed the effective date of these new limits until March 31, 2011. Management believes the new rule will not have any material effect on Key’s financial condition.
KeyCorp unconditionally guarantees 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.
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, 2009
                                       
KeyCorp Capital I
  $ 197     $ 8     $ 201       2.175 %     2028  
KeyCorp Capital II
    224       8       220       6.875       2029  
KeyCorp Capital III
    281       8       263       7.750       2029  
KeyCorp Capital V
    175       5       194       5.875       2033  
KeyCorp Capital VI
    75       2       82       6.125       2033  
KeyCorp Capital VII
    306       8       284       5.700       2035  
KeyCorp Capital VIII
    277             335       7.000       2066  
KeyCorp Capital IX
    559             558       6.750       2066  
KeyCorp Capital X
    829             827       8.000       2068  
Union State Capital I
    20       1       21       9.580       2027  
Union State Statutory II
    20             20       4.750       2031  
Union State Statutory IV
    10             10       3.894       2034  
 
Total
  $ 2,973     $ 40     $ 3,015       6.743 %      
 
                                 
 
December 31, 2008
  $ 3,042     $ 40     $ 3,084       6.931 %      
 
                                 
 
March 31, 2008
  $ 2,753     $ 40     $ 2,799       6.985 %      
 
                                 
 
(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. Included in certain capital securities at March 31, 2009, December 31, 2008, and March 31, 2008, are basis adjustments of $390 million, $459 million and $170 million, respectively, related to fair value hedges. See Note 19 (“Derivatives and Hedging Activities”), which begins on page 115 of Key’s 2008 Annual Report to Shareholders, for an explanation of fair value hedges.
 
(b)   KeyCorp has the right to redeem its debentures: (i) in whole or in part, on or after July 1, 2008 (for debentures owned by Capital I); March 18, 1999 (for debentures owned by Capital II); July 16, 1999 (for debentures owned by Capital III); July 31, 2006 (for debentures owned by Union State Statutory II); February 1, 2007 (for debentures owned by Union State Capital I); July 21, 2008 (for debentures owned by Capital V); December 15, 2008 (for debentures owned by Capital VI); April 7, 2009 (for debentures owned by Union State Statutory IV); June 15, 2010 (for debentures owned by Capital VII); June 15, 2011 (for debentures owned by Capital VIII); December 15, 2011 (for debentures owned by Capital IX); and March 15, 2013 (for debentures owned by Capital X); and (ii) in whole at any time within 90 days after and during the continuation of a “tax event,” an “investment company event” or a “capital treatment event” (as defined in the applicable indenture). If the debentures purchased by Union State Statutory IV, Capital I, Capital V, Capital VI, Capital VII, Capital VIII, Capital IX or Capital X are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by Union State Capital I are redeemed before they mature, the redemption price

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    will be 104.31% of the principal amount, plus any accrued but unpaid interest. If the debentures purchased by Union State Statutory II are redeemed before they mature, the redemption price will be 104.50% of the principal amount, plus any accrued but unpaid interest. If the debentures purchased by Capital II or 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 for Capital III), plus any accrued but unpaid interest. When debentures are redeemed in response to tax or capital treatment events, the redemption price generally is slightly more favorable to KeyCorp. Included in the principal amount of debentures at March 31, 2009, December 31, 2008, and March 31, 2008, are adjustments relating to hedging with financial instruments totaling $392 million, $461 million and $176 million, respectively.
 
(c)   The interest rates for Capital II, Capital III, Capital V, Capital VI, Capital VII, Capital VIII, Capital IX, Capital X and Union State Capital I are fixed. 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 rates shown as the totals at March 31, 2009, December 31, 2008, and March 31, 2008, are weighted-average rates.
11. Shareholders’ Equity
Preferred Stock Conversion to Common Shares
On April 2, 2009, KeyCorp entered into an agreement with certain institutional shareholders pursuant to which KeyCorp and each of the institutional shareholders agreed to exchange KeyCorp’s 7.750% noncumulative perpetual convertible preferred stock, Series A (“Series A Preferred Stock”) held by the institutional shareholders for KeyCorp’s common shares, $1 par value. In the aggregate, KeyCorp exchanged 400,000 shares of the Series A Preferred Stock for 3,699,600 KeyCorp common shares, or approximately .74% of the issued and outstanding KeyCorp common shares, on April 7, 2009, the date on which the exchange transactions settled. The common shares of KeyCorp were issued in reliance upon the exemption set forth in Section 3(a)(9) of the Securities Act of 1933, as amended, for securities exchanged by the issuer and an existing security holder where no commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting such exchange. KeyCorp utilized treasury shares to complete the transactions.
Supervisory Capital Assessment Program
To implement the United States Department of the Treasury’s (the “U.S. Treasury”) Capital Assistance Program (“CAP”), the Federal Reserve, the Federal Reserve Banks, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency commenced a review of the capital of the nineteen largest U.S. banking institutions. This review, referred to as the Supervisory Capital Assessment Program (“SCAP”), involved a forward-looking capital assessment, or “stress test,” of all domestic bank holding companies with risk-weighted assets of more than $100 billion, including KeyCorp, at December 31, 2008. As announced on May 7, 2009, under the SCAP, KeyCorp’s regulators determined that it needs to raise $1.8 billion in additional Tier 1 common equity or contingent common equity (i.e., mandatorily convertible preferred shares). Information regarding the CAP and KeyCorp’s final SCAP assessment is included in the “Capital” section under the heading “Financial Stability Plan” on page 79.

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12. Employee Benefits
Pension Plans
The components of net pension cost for all funded and unfunded plans are as follows:
                 
    Three months ended March 31,  
in millions   2009     2008  
 
Service cost of benefits earned
  $ 12     $ 13  
Interest cost on projected benefit obligation
    15       16  
Expected return on plan assets
    (16 )     (23 )
Amortization of losses
    10       3  
 
Net pension cost
  $ 21     $ 9  
 
           
 
Other Postretirement Benefit Plans
Key sponsors 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. Key also sponsors life insurance plans covering certain grandfathered employees. These plans are principally noncontributory. Separate Voluntary Employee Beneficiary Association trusts are used to fund the healthcare plan and one of the life insurance plans.
The components of net postretirement benefit cost for all funded and unfunded plans are as follows:
                 
    Three months ended March 31,  
in millions   2009     2008  
 
Interest cost on accumulated postretirement benefit obligation
  $ 1     $ 1  
Expected return on plan assets
    (1 )     (1 )
 
Net postretirement benefit cost
           
 
           
 
13. Income Taxes
Lease Financing Transactions
On February 13, 2009, Key and the IRS entered into a closing agreement that resolves substantially all outstanding LILO and sale in, sale out (“SILO”) tax issues between Key and the IRS. Key has deposited $2.047 billion with the IRS to cover the anticipated amount of taxes and associated interest cost due to the IRS for all tax years affected by the settlement. Key expects the remaining LILO/SILO tax issues to be settled with the IRS in the near future with no additional tax or interest liability to Key.
During 2009, Key will amend its state tax returns to reflect the impact of the settlement on prior years’ state tax liabilities. While the settlement with the IRS provides a waiver of federal tax penalties, management anticipates that certain statutory penalties under state tax laws will be imposed on Key. Although Key intends to vigorously defend its position against the imposition of any such penalties, during the fourth quarter of 2008, management accrued $31 million for potential penalties in accordance with current accounting guidance.
Pursuant to FASB Staff Position No. 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” management updated its assessment of the timing of the tax payments associated with the LILO/SILO settlement. As a result, Key recognized a $5 million ($3 million after-tax) increase to earnings during the first quarter of 2009.

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Unrecognized Tax Benefits
As permitted under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” it is Key’s policy to recognize interest and penalties related to unrecognized tax benefits in income tax expense.
14. Contingent Liabilities and Guarantees
Legal Proceedings
Tax disputes. The information pertaining to lease financing transactions presented in Note 13 (“Income Taxes”) is incorporated herein by reference.
Taylor litigation. On August 11, 2008, a purported class action case was filed against KeyCorp, its directors and certain employees (collectively, the “Key parties”), captioned Taylor v. KeyCorp et al., in the United States District Court for the Northern District of Ohio. On September 16, 2008, a second and related case was filed in the same district court, captioned Wildes v. KeyCorp et al. The plaintiffs in these cases seek to represent a class of all participants in Key’s 401(k) Savings Plan and allege that the Key parties breached fiduciary duties owed to them under the Employee Retirement Income Security Act (“ERISA”). On November 25, 2008, the Court consolidated the Taylor and Wildes lawsuits into a single action. Plaintiffs have since filed their consolidated complaint, which continues to name certain employees as defendants but no longer names any outside directors. Key strongly disagrees with the allegations contained in the complaints and the consolidated complaint, and intends to vigorously defend against them.
Madoff-related claims. In December 2008, Austin Capital Management, Ltd. (“Austin”), an investment firm owned by Key, which selects and manages hedge fund investments for its principally institutional customer base, determined that its funds had suffered investment losses of up to approximately $186 million resulting from the crimes perpetrated by Bernard L. Madoff and entities that he controls. The investment losses borne by Austin’s clients stem from investments that Austin made in certain Madoff-advised “hedge” funds. During the first quarter of 2009, three purported class actions and one arbitration proceeding were filed against Austin seeking to recover losses incurred as a result of Madoff’s crimes. The class action lawsuits and arbitration allege various claims, including negligence, fraud, breach of fiduciary duties and violations of federal securities laws and the ERISA. In the event Key were to incur any liability for this matter, Key believes such liability would be covered under the terms and conditions of its insurance policy, subject to a $25 million self-insurance deductible and usual policy exceptions.
In April 2009, management made the strategic decision to curtail Austin’s operations and expects that the related charges will not be material.
Other litigation. In the ordinary course of business, Key is subject to other legal actions that involve claims for substantial monetary relief. Based on information presently known to management, management does not believe there is any legal action to which KeyCorp or any of its subsidiaries is a party, or involving any of their properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on Key’s financial condition.
Guarantees
Key is a guarantor in various agreements with third parties. The following table shows the types of guarantees that Key had outstanding at March 31, 2009. 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 82 of Key’s 2008 Annual Report to Shareholders.

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    Maximum Potential        
March 31, 2009   Undiscounted     Liability  
in millions   Future Payments     Recorded  
 
Financial guarantees:
               
Standby letters of credit
  $ 13,756     $ 101  
Recourse agreement with FNMA
    699       6  
Return guarantee agreement with LIHTC investors
    198       48  
Written interest rate caps (a)
    225       31  
Default guarantees
    32       1  
 
Total
  $ 14,910     $ 187  
 
           
 
(a)   As of March 31, 2009, the weighted-average interest rate on written interest rate caps was .8%, and the weighted-average strike rate was 4.6%. Maximum potential undiscounted future payments were calculated assuming a 10% interest rate.
Management determines the payment/performance risk associated with each type of guarantee described below based on the probability that Key could be required to make the maximum potential undiscounted future payments shown in the preceding table. Management uses 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 has determined that the payment/performance risk associated with each type of guarantee outstanding at March 31, 2009, is low.
Standby letters of credit. Many of Key’s lines of business issue standby letters of credit to address clients’ financing needs. These instruments obligate Key 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; they bear interest (generally at variable rates) and pose the same credit risk to Key as a loan. At March 31, 2009, Key’s standby letters of credit had a remaining weighted-average life of approximately 1.9 years, with remaining actual lives ranging from less than one year to as many as ten years.
Recourse agreement with Federal National Mortgage Association. KeyBank participates as a lender in the Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing program. As a condition to FNMA’s delegation of responsibility for originating, underwriting and servicing mortgages, KeyBank has agreed to assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan KeyBank sells to FNMA. Accordingly, KeyBank maintains a reserve for such potential losses in an amount estimated by management to approximate the fair value of KeyBank’s liability. At March 31, 2009, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 6.8 years, and the unpaid principal balance outstanding of loans sold by KeyBank as a participant in this program was approximately $2.204 billion. As shown in the table above, the maximum potential amount of undiscounted future payments that KeyBank could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at March 31, 2009. If KeyBank is required to make a payment, it would have an interest in the collateral underlying the related commercial mortgage loan.
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. If KAHC defaults on its obligation to provide the guaranteed return, Key is obligated to make any necessary payments to investors. These guarantees have expiration dates that extend through 2019, but there have been no new partnerships under this program since October 2003. Additional information regarding these partnerships is included in Note 8 (“Variable Interest Entities”), which begins on page 21.

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No recourse or collateral is available to offset Key’s guarantee obligation other than the underlying income stream from the properties. Any guaranteed returns that are not met through distribution of tax credits and deductions associated with the specific properties from the partnerships remain Key’s obligation.
As shown in the table on page 28, KAHC maintained a reserve in the amount of $48 million at March 31, 2009, which management believes 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.
Written interest rate caps. In the ordinary course of business, Key “writes” interest rate caps for commercial loan clients that have variable rate loans with Key and wish to limit their exposure to interest rate increases. At March 31, 2009, outstanding caps had a weighted-average life of approximately 1.6 years.
Key is obligated to pay the client if the applicable benchmark interest rate exceeds a specified level (known as the “strike rate”). These instruments are accounted for as derivatives. Key typically mitigates its potential future payments by entering into offsetting positions with third parties.
Default guarantees. Some lines of business participate in guarantees that obligate Key to perform if the debtor fails to satisfy all of its payment obligations to third parties. Key generally undertakes these guarantees in instances where the risk profile of the debtor should provide an investment return or to support its underlying investment. The terms of these default guarantees range from less than one year to as many as thirteen years, while some default guarantees do not have a contractual end date. Although no collateral is held, Key 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 Interpretation No. 45 and from other relationships.
Liquidity facilities that support asset-backed commercial paper conduits. Key provides liquidity facilities to several unconsolidated third-party commercial paper conduits. These facilities obligate Key to provide funding if there is a credit market disruption or there are other factors that would preclude the issuance of commercial paper by the conduits. The liquidity facilities, all of which expire by November 10, 2010, obligate Key to provide aggregate funding of up to $845 million, with individual facilities ranging from $40 million to $125 million. The aggregate amount available to be drawn is based on the amount of current commitments to borrowers and totaled $684 million at March 31, 2009. Management periodically evaluates Key’s commitments to provide liquidity.
Indemnifications provided in the ordinary course of business. Key provides certain indemnifications, primarily through representations and warranties in contracts that are entered into 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. Key maintains reserves, when appropriate, with respect to liability that reasonably could arise in connection with these indemnities.
Intercompany guarantees. KeyCorp and certain Key affiliates are parties to various guarantees that facilitate the ongoing business activities of other Key affiliates. These business activities encompass debt issuance, certain lease and insurance obligations, the purchase or issuance of investments and securities, and certain leasing transactions involving clients.
Heartland Payment Systems Matter. Under an agreement between KeyBank and Heartland Payment Systems, Inc. (“Heartland”), Heartland utilizes KeyBank’s membership in the Visa and MasterCard networks to register as an Independent Sales Organization for Visa and a Member Service Provider with MasterCard to provide merchant payment processing services for Visa and MasterCard transactions. On

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January 20, 2009, Heartland publicly announced its discovery of an alleged criminal breach of its credit card payment processing systems environment (the “Intrusion”) that reportedly occurred during 2008 and is alleged to have involved the malicious collection of in-transit, unencrypted payment card data that was being processed by Heartland.
In Heartland’s Form 10-K filed with the Securities and Exchange Commission on March 16, 2009 (“Heartland’s 2008 Form 10-K”), Heartland reported that it expects the major card brands, including Visa and MasterCard, to assert claims seeking to impose fines, penalties, and/or other assessments against Heartland and/or certain card brand members, such as KeyBank, as a result of the alleged potential breach of the respective card brand rules and regulations and the Intrusion. Heartland also indicated that it is likely that the overall costs associated with the Intrusion will be material to it, and that it may need to seek financing in order to pay such costs.
KeyBank has received letters from both Visa and MasterCard assessing fines, penalties or assessments related to the Intrusion. KeyBank is in the process of pursuing appeals of such fines, penalties or assessments. Visa and MasterCard (as well as Heartland and KeyBank) are each still investigating the matter, and they may revise their respective assessments. Under its agreement with Heartland, KeyBank has certain rights of indemnification from Heartland for costs assessed against it by Visa and MasterCard and other associated costs, and KeyBank has notified Heartland of its indemnification rights. In the event that Heartland is unable to fulfill its indemnification obligations to KeyBank, the charges (net of any indemnification) could be significant, although it is not possible to quantify at this time. Accordingly, under applicable accounting rules KeyBank has not established any reserve. For further information on Heartland and the Intrusion, please review Heartland’s 2008 Form 10-K.
15. Derivatives and Hedging Activities
Key, mainly through its subsidiary bank, KeyBank, is party to various derivative instruments that are used for interest rate risk management, credit risk management and trading purposes. Derivative instruments are contracts between two or more parties that have a notional amount and underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract.
The primary derivatives that Key uses are interest rate swaps, caps, floors and futures, foreign exchange contracts, energy derivatives, credit derivatives and equity derivatives. Generally, these instruments help Key manage exposure to interest rate risk, mitigate the credit risk inherent in the loan portfolio, and meet client financing and hedging needs. Interest rate risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in interest rates. Credit risk is defined as the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms.
Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the effects of master netting agreements. These master netting agreements allow Key to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable. As a result, Key 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, 2009, after taking into account the effects of bilateral collateral and master netting agreements, Key had $319 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 such agreements, Key had trading derivative assets of $1.388 billion and trading derivative liabilities of $783 million.

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The following table summarizes the volume of Key’s derivative transaction activity during the first quarter of 2009. Volume is represented by the notional amounts of Key’s gross derivatives by type at March 31, 2009, and December 31, 2008, which are not affected by bilateral collateral and master netting agreements. Also presented are the average notional amounts of these derivatives for the first quarter of 2009.
                                                 
                                    Average for the  
                                    Three Months Ended  
    March 31, 2009     December 31, 2008     March 31, 2009  
in millions   Purchased     Sold     Purchased     Sold     Purchased     Sold  
 
Interest rate (a)
  $ 52,258     $ 55,336     $ 47,066     $ 55,573     $ 48,877     $ 54,464  
Foreign exchange
    11,235       587       14,281       612       13,733       596  
Energy and commodity (b)
    273       1,623       320       1,632       262       1,593  
Credit
    3,840       3,302       3,892       3,294       3,937       4,677  
Equity
                2       2       1       1  
 
Total derivatives
  $ 67,606     $ 60,848     $ 65,561     $ 61,113     $ 66,810     $ 61,331  
 
                                   
 
(a)   Interest rate contracts purchased are defined as “receive fixed/pay variable” contracts, and interest rate contracts sold are defined as “receive variable/pay fixed” contracts.
 
(b)   A portion of the energy and commodity contracts purchased are defined as “receive fixed/pay variable” contracts, and a portion of the energy contracts sold are defined as “receive variable/pay fixed” contracts.
Interest Rate Risk Management
Fluctuations in net interest income and the economic value of equity may result from changes in interest rates, and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. To minimize the volatility of net interest income and the economic value of equity, Key manages exposure to interest rate risk in accordance with guidelines established by the Asset/Liability Management Committee. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities. These instruments are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index.
Key has designated certain “receive fixed/pay variable” interest rate swaps as fair value hedges, primarily to modify its exposure to interest rate risk. These contracts convert certain fixed-rate long-term debt into variable-rate obligations. As a result, Key receives fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the underlying notional amounts.
Additionally, Key has designated 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 impact from interest rate decreases on future interest income. These contracts allow Key to receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the underlying notional amounts. Similarly, Key has designated certain “pay fixed/receive variable” interest rate swaps as cash flow hedges to convert certain floating-rate debt into fixed-rate debt.
Key also uses interest rate swaps to hedge the floating-rate debt that funds fixed-rate leases entered into by Key’s 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.
Key has used “pay fixed/receive variable” interest rate swaps as cash flow hedges to manage the interest rate risk associated with anticipated sales of certain commercial real estate loans. These swaps protected against a possible short-term decline in the value of the loans that could result from changes in interest rates between the time they were originated and the time they were sold. During the first quarter of 2009, these hedges were terminated. Therefore, Key did not have any of these hedges outstanding at March 31, 2009.

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Foreign Currency Exchange Risk Management
The derivatives used for managing foreign currency exchange risk are cross currency swaps. Key has several outstanding issues of medium-term notes that are denominated in a foreign currency. The notes are subject to translation risk, which represents the possibility that changes in the fair value of the foreign-denominated debt will occur based on movement of the underlying foreign currency spot rate. It is Key’s 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 functional currency-denominated debt, which is designated as a fair value hedge of foreign currency exchange risk.
Credit Risk Management
Credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Like other financial services institutions, Key originates loans and extends credit, both of which expose Key to credit risk. Key actively manages its overall loan portfolio, and the associated credit risk, in a manner consistent with asset quality objectives. This process entails the use of credit derivatives ¾ primarily credit default swaps ¾ to mitigate Key’s credit risk. Credit default swaps enable Key to transfer a portion of the credit risk associated with a particular extension of credit to a third party, and to manage portfolio concentration and correlation risks. Occasionally, Key also provides credit protection to other lenders through the sale of credit default swaps. In most instances, this objective is accomplished through the use of an investment-grade diversified dealer-traded basket of credit default swaps. These transactions may generate fee income, and diversify and reduce overall portfolio credit risk volatility. Although Key uses these instruments for risk management purposes, they are not treated as hedging instruments as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
Trading Portfolio
Key’s trading portfolio consists of the following instruments:
¨   interest rate swap, cap, floor and futures contracts entered into generally to accommodate the needs of commercial loan clients;
 
¨   energy swap and options contracts entered into to accommodate the needs of clients;
 
¨   foreign exchange forward contracts entered into to accommodate the needs of clients;
 
¨   positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above; and
 
¨   interest rate swaps, foreign exchange forward contracts and credit default swaps used for proprietary trading purposes.
Key does not apply hedge accounting to any of these contracts.

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Fair Values and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of Key’s derivative instruments on a gross basis as of March 31, 2009, and where they are recorded on the balance sheet.
                         
    Derivative Assets     Derivative Liabilities  
March 31, 2009   Balance Sheet   Fair     Balance Sheet   Fair  
in millions   Location   Value     Location   Value  
 
Derivatives designated as hedging instruments:
                       
Interest rate
  Derivative assets   $ 876     Derivative liabilities   $ 14  
Foreign exchange
  Derivative assets     46     Derivative liabilities     434  
 
Total
        922           448  
Derivatives not designated as hedging instruments:
                       
Interest rate
  Derivative assets     2,284     Derivative liabilities     2,075  
Foreign exchange
  Derivative assets     422     Derivative liabilities     380  
Energy and commodity
  Derivative assets     721     Derivative liabilities     751  
Credit
  Derivative assets     171     Derivative liabilities     173  
Equity
  Derivative assets     1     Derivative liabilities      
 
Total
        3,599           3,379  
 
Netting adjustments (a)
        (2,814 )         (2,895 )
 
Total derivatives
      $ 1,707         $ 932  
 
                   
 
(a)   Netting adjustments represent the amounts recorded to convert Key’s derivative assets and liabilities from a gross basis to a net basis in accordance with Key’s January 1, 2008, adoption of FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” and FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation 39.” The net basis takes into account the impact of master netting agreements that allow Key to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral.
Fair value hedges. These hedging instruments are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. The effective portion of a change in the fair value of a hedging instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item, resulting in no effect on net income. The ineffective portion of a change in the fair value of such a hedging instrument is recognized in “other income” on the income statement with no corresponding offset. During the three-month period ended March 31, 2009, Key did not exclude any portion of hedging instruments from the assessment of hedge effectiveness. While some ineffectiveness is present in Key’s hedging relationships, all of Key’s fair value hedges remained “highly effective” during the first quarter.
The following table summarizes the net gains (losses) on Key’s fair value hedges during the three-month period ended March 31, 2009, and where they are recorded on the income statement.
                                     
            Net Gains                 Net Gains  
Three months ended March 31, 2009   Income Statement Location     (Losses)         Income Statement Location     (Losses)  
in millions   of Net Gains (Losses) on Derivative     on Derivative     Hedged Item   of Net Gains (Losses) on Hedged Item     on Hedged Item  
 
Interest rate
  Other income     $ (84 )   Long-term debt   Other income     $ 97  (a)
Interest rate
  Interest expense – Long-term debt       53                      
Foreign exchange
  Other income       (67 )   Long-term debt   Other income       65  (a)
Foreign exchange
  Interest expense – Long-term debt       8     Long-term debt   Interest expense – Long-term debt       (20 (b)
 
Total
          $ (90 )               $ 142  
 
                               
 
(a)   Net gains on hedged items represent the change in fair value caused by fluctuations in interest rates.
 
(b)   Net losses on hedged items represent the change in fair value caused by fluctuations in foreign currency exchange rates.
Cash flow hedges. These hedging instruments are recorded at fair value and included in “derivative assets” or “derivative liabilities” on the balance sheet. The effective portion of a gain or loss on a cash flow hedge is recorded as a component of “accumulated other comprehensive income” on the balance sheet. The amounts are reclassified into earnings in the same period in which the hedged transaction impacts earnings, such as when Key pays variable-rate interest on debt, receives variable-rate interest on commercial loans or sells 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, 2009, Key did not exclude any portion of its hedging instruments from the assessment of hedge effectiveness. While some

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ineffectiveness is present in Key’s hedging relationships, all of Key’s cash flow hedges remained “highly effective” during the first quarter.
The following table summarizes the net gains (losses) on Key’s cash flow hedges during the three-month period ended March 31, 2009, and where they are recorded on the income statement. The table includes the effective portion of net gains (losses) recognized in “other comprehensive income (loss)” (“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) recorded directly in income, representing the amount of hedge ineffectiveness.
                                         
                    Net Gains     Income Statement Location     Net Gains  
    Net Gains (Losses)             (Losses) Reclassified     of Net Gains (Losses)     (Losses) Recognized  
Three months ended March 31, 2009   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
  $ 64     Interest income – Loans     $ 89     Other income     $ (1 )
Interest rate
    8     Interest expense – Long-term debt       (4 )   Other income       1  
Interest rate
    4     Net (losses) gains from loan securitizations and sales       5     Other income        
 
Total
  $ 76             $ 90                
 
                                 
 
The change in “accumulated other comprehensive income” resulting from cash flow hedges is as follows:
                                 
                    Reclassification        
    December 31,     2009     of Gains to     March 31,  
in millions   2008     Hedging Activity     Net Income     2009  
 
Accumulated other comprehensive income resulting from cash flow hedges
  $ 238     $ 47     $ (56 )   $ 229  
 
Given the interest rates, yield curves and notional amounts as of March 31, 2009, management would expect to reclassify an estimated $31 million of net losses on derivative instruments from “accumulated other comprehensive income” to earnings during the next twelve months. The maximum length of time over which forecasted transactions are hedged is nineteen years.
Nonhedging instruments. Key’s derivatives that are not used in hedging relationships 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” on the income statement.
The following table summarizes the net gains (losses) on Key’s derivative instruments that are not used in hedging relationships for the three-month period ended March 31, 2009, and where they are recorded on the income statement.
             
Three months ended March 31, 2009   Income Statement Location of   Net Gains  
in millions   Net Gains (Losses)   (Losses)  
 
Interest rate
  Investment banking and capital markets income   $ 13  
Foreign exchange
  Investment banking and capital markets income     10  
Energy and commodity
  Investment banking and capital markets income     3  
Credit
  Investment banking and capital markets income     (19 )
Equity (a)
  Investment banking and capital markets income      
 
Total
      $ 7  
 
         
 
(a)   Key enters into equity contracts to accommodate the needs of clients and offsets these positions with third parties. Key did not enter into any new equity contracts during the three months ended March 31, 2009.

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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. Key uses several means to mitigate and manage exposure to credit risk on derivative contracts. Key generally enters into bilateral collateral and master netting agreements using standard forms published by the International Swaps and Derivatives Association (“ISDA”). These agreements provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, management monitors credit risk exposure to the counterparty on each contract to determine appropriate limits on Key’s total credit exposure across all product types. Management reviews Key’s collateral positions on a daily basis and exchanges collateral with its counterparties in accordance with ISDA and other related agreements. Key generally holds collateral in the form of cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises or the Government National Mortgage Association. The cash collateral netted against derivative assets on the balance sheet totaled $810 million at March 31, 2009, $974 million at December 31, 2008, and $486 million at March 31, 2008. The cash collateral netted against derivative liabilities totaled $892 million at March 31, 2009, $586 million at December 31, 2008, and $309 million at March 31, 2008.
At March 31, 2009, the largest gross exposure to an individual counterparty was $468 million, which was secured with $82 million in collateral. Additionally, Key had a derivative liability of $409 million with this counterparty whereby Key pledged $39 million in collateral. After taking into account the effects of a master netting agreement and collateral, Key had a net exposure of $16 million.
The following table summarizes the fair value of Key’s derivative assets by type. These assets represent Key’s gross exposure to potential loss after taking into account the effects of master netting agreements and other means used to mitigate risk.
                         
    March 31,     December 31,     March 31,  
in millions   2009     2008     2008  
 
Interest rate
  $ 1,985     $ 2,333     $ 1,513  
Foreign exchange
    180       279       255  
Energy and commodity
    331       214       196  
Credit
    20       42       5  
Equity
    1       2       25  
 
Derivative assets before cash collateral
    2,517       2,870       1,994  
Less: Related cash collateral
    810       974       486  
 
Total derivative assets
  $ 1,707     $ 1,896     $ 1,508  
 
                 
 
Key enters into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, Key manages counterparty credit exposure and credit risk in a different manner for each group.
Key enters into transactions with broker-dealers and banks for purposes of asset/liability management, risk management and proprietary trading purposes. These types of transactions generally are high dollar volume. Key generally enters into bilateral collateral and master netting agreements with these counterparties. At March 31, 2009, after taking into account the effects of master netting agreements, Key had gross exposure of $1.839 billion to broker-dealers and banks. Key had net exposure of $446 million after the application of master netting agreements and cash collateral. Key’s net exposure to broker-dealers and banks at March 31, 2009, was reduced to $238 million by $208 million of additional collateral held in the form of securities.
Additionally, Key enters into transactions with clients to accommodate their business needs. These types of transactions generally are low dollar volume. Key generally enters into master netting agreements with these counterparties. In addition, Key mitigates its overall portfolio exposure and market risk by entering into offsetting positions with other banks. Due to the smaller size and magnitude of the individual contracts with clients, collateral is generally not exchanged on these derivative transactions. In order to address the risk of default associated with the uncollateralized contracts, Key has established a reserve (included in

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“derivative assets”) in the amount of $30 million at March 31, 2009, which management estimates to be the potential future losses on amounts due from client counterparties in the event of default. At March 31, 2009, after taking into account the effects of master netting agreements, Key had gross exposure of $1.330 billion to these counterparties. Key had net exposure of $1.261 billion on its derivatives with clients after the application of master netting agreements, cash collateral and the related reserve.
Credit Derivatives
Key is both buyer and seller of credit protection through the credit derivative market. Key purchases credit derivatives to manage the credit risk associated with specific commercial lending obligations. Key also sells credit derivatives, mainly index credit default swaps, to diversify the concentration risk within its loan portfolio. In addition, Key has entered into derivatives for proprietary trading purposes. The following table summarizes the fair value of Key’s credit derivatives purchased and sold by type as of March 31, 2009, and December 31, 2008. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.
                                                 
    March 31, 2009     December 31, 2008  
in millions   Purchased     Sold     Net     Purchased     Sold     Net  
 
Single name credit default swaps
  $ 132     $ (103 )   $ 29     $ 155     $ (104 )   $ 51  
Traded credit default swap indices
    30       (48 )     (18 )     34       (47 )     (13 )
Other
          (13 )     (13 )           (8 )     (8 )
 
Total credit derivatives
  $ 162     $ (164 )   $ (2 )   $ 189     $ (159 )   $ 30  
 
                                   
 
Single name credit default swaps are bilateral contracts between a buyer and seller, whereby protection against the credit risk of a reference entity is sold. The protected credit risk is related to adverse credit events, such as bankruptcy, failure to make payments, and acceleration or restructuring of obligations specified in the credit derivative contract using standard documentation terms governed by the ISDA. The credit default swap contract will reference a specific debt obligation of the reference entity. As the seller of a single name credit derivative, Key would be required to pay the purchaser the difference between 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 certain, predefined credit event. For a single name credit derivative, the notional amount represents the maximum amount that a seller could be required to pay under the credit derivative. In the event that physical settlement occurs and Key receives its portion of the related debt obligation, Key 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. Key also may purchase offsetting credit derivatives for the same reference entity from third parties that will permit Key to recover the amount it pays 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, Key would be required to pay the purchaser if one or more of the entities in the index have a credit event. For a credit default swap index, the notional amount represents the maximum amount that a seller could be required to pay under the credit derivative. Upon a credit event, the amount payable is based on the percentage of the notional amount allocated to the specific defaulting entity.
The following table provides information on the types of credit derivatives sold by Key and held on the balance sheet at March 31, 2009, and December 31, 2008. This table includes derivatives sold both to diversify Key’s credit exposure and for proprietary trading purposes. The payment/performance risk assessment is based on the default probabilities for the underlying reference entities’ debt obligations using the credit ratings matrix provided by Moody’s, specifically Moody’s “Idealized” Cumulative Default Rates, except as noted below. The payment/performance risk shown below 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 of Key having to make a payment under the credit derivative contracts.

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    March 31, 2009     December 31, 2008  
            Average     Payment /             Average     Payment /  
    Notional     Term     Performance     Notional     Term     Performance  
dollars in millions   Amount     (Years)     Risk     Amount     (Years)     Risk  
 
Single name credit default swaps
  $ 1,537       1.72       8.09 %   $ 1,476       2.44       4.75 %
Traded credit default swap indices
    1,706       .96       6.52       1,759       1.51       4.67  
Other
    59       1.50     Low  (a)     59       1.50     Low  (a)
 
Total credit derivatives sold
  $ 3,302                 $ 3,294              
 
                                           
 
(a)   The other credit derivatives are not referenced to an entity’s debt obligation. Management determined the payment/performance risk based on the probability that Key could be required to pay the maximum amount under the credit derivatives. Key has determined that the payment/performance risk associated with the other credit derivatives is low (i.e., less than or equal to 30% probability of payment).
Credit Risk Contingent Features
Key has entered into certain derivative contracts that require Key to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is generally based on thresholds related to Key’s long-term senior unsecured credit ratings with Moody’s Investors Service, Inc. (“Moody’s”) and Standard and Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc. (“S&P”). The collateral to be posted is also based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that Key has signed with the counterparties. In a limited number of instances, counterparties also have the right to terminate their ISDA Master Agreements with Key if Key’s ratings fall below a certain level, usually investment-grade level (i.e., “Baa3” for Moody’s and “BBB-” for S&P). At March 31, 2009, KeyBank’s ratings with Moody’s and S&P were “A1” and “A,” respectively, and KeyCorp’s ratings with Moody’s and S&P were “A2” and “A-,” respectively. Upon a downgrade of Key’s ratings, Key could be required to post additional collateral under those ISDA Master Agreements where Key is in a net liability position. As of March 31, 2009, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on Key’s ratings) that were in a net liability position totaled $1.218 billion, which includes $1.262 billion in derivative assets and $2.480 billion in derivative liabilities. Key had $1.076 billion in cash and securities collateral posted to cover those positions as of March 31, 2009.
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, 2009. 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, 2009, and take into account all collateral already posted. At March 31, 2009, KeyCorp did not have any derivatives in a net liability position that contained credit risk contingent features.
                 
March 31, 2009            
in millions   Moody’s     S&P  
 
KeyBank’s long-term senior unsecured credit ratings
    A1       A  
 
One rating downgrade
        $ 25  
Two rating downgrades
  $ 25       44  
Three rating downgrades
    49       51  
 
If KeyBank’s ratings had been downgraded below investment-grade as of March 31, 2009, payments of up to $88 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted. To be downgraded below investment-grade, KeyBank’s long-term senior unsecured credit rating would need to be downgraded six ratings by Moody’s and five ratings by S&P.
On April 30, 2009, KeyBank received a one rating downgrade on its long-term senior unsecured credit rating from Moody’s (from “A1” to “A2”), and KeyCorp received a two rating downgrade on its long-term senior unsecured credit rating (from “A2” to “Baa1”). As shown in the table above, KeyBank was not required to post additional collateral as a result of the one rating downgrade. As of the date of this filing, the S&P long-term senior unsecured credit ratings for both KeyBank and KeyCorp remain unchanged from March 31, 2009.

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16. Fair Value Measurements
Fair Value Determination
As defined in SFAS No. 157, “Fair Value Measurements,” fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in Key’s principal market. Key has established and documented its process for determining the fair values of its 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, management determines the fair value of Key’s 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 management’s judgment, assumptions and estimates related to credit quality, liquidity, interest rates and other relevant inputs. Additional information pertaining to Key’s valuation techniques is summarized in Note 20 (“Fair Value Measurements”), which begins on page 118 of Key’s 2008 Annual Report to Shareholders.
Fair Value Hierarchy
SFAS No. 157 establishes a three-level valuation hierarchy for determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy, from highest ranking to lowest, are as follows:
¨   Level 1. Quoted prices in active markets for identical assets or liabilities.
 
¨   Level 2. Either: (i) quoted market prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.
 
¨   Level 3. Unobservable inputs.
The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based on the lowest level input that is significant to the overall fair value measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly or quarterly). The following table shows Key’s assets and liabilities measured at fair value on a recurring basis at March 31, 2009.
                                         
March 31, 2009                           Netting        
in millions   Level 1     Level 2     Level 3     Adjustments   (a)   Total  
 
ASSETS MEASURED ON A RECURRING BASIS
                                       
Short term investments
        $ 158                 $ 158  
Trading account assets
  $ 8       501     $ 770             1,279  
Securities available for sale
    46       8,316                   8,362  
Other investments
          5       1,074             1,079  
Derivative assets
    381       4,131       9     $ (2,814 )     1,707  
Accrued income and other assets
    18       41                   59  
 
Total assets on a recurring basis at fair value
  $ 453     $ 13,152     $ 1,853     $ (2,814 )   $ 12,644  
 
                             
 
 
                                       
LIABILITIES MEASURED ON A RECURRING BASIS
                                       
Federal funds purchased and securities sold under repurchase agreements
        $ 310                 $ 310  
Bank notes and other short-term borrowings
  $ 39       156                   195  
Derivative liabilities
    347       3,468     $ 12     $ (2,895 )     932  
 
Total liabilities on a recurring basis at fair value
  $ 386     $ 3,934     $ 12     $ (2,895 )   $ 1,437  
 
                             
 
(a)   Netting adjustments represent the amounts recorded to convert Key’s derivative assets and liabilities from a gross basis to a net basis in accordance with Key’s January 1, 2008, adoption of FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” and FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation 39.” The net basis takes into account the impact of master netting agreements that allow Key to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral.

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Changes in Level 3 Fair Value Measurements
The following table shows the change in the fair values of Key’s Level 3 financial instruments for the three months ended March 31, 2009. An instrument is classified as Level 3 if unobservable inputs are significant relative to the overall fair value measurement of the instrument. In addition to unobservable inputs, Level 3 instruments also may have inputs that are observable within the market. Management mitigates the credit risk, interest rate risk and risk of loss related to many of these Level 3 instruments through the use of securities and derivative positions classified as Level 1 or Level 2. Level 1 or Level 2 instruments are not included in the following table. Therefore, the gains or losses shown do not include the impact of Key’s risk management activities.
                         
    Trading              
    Account     Other     Derivative  
in millions   Assets     Investments     Instruments   (a)
 
Balance at December 31, 2008
  $ 856     $ 1,134     $ 15  
(Losses) gains:
                       
Included in earnings
    (1 (b)     (81 (c)     (3 (b)
Included in other comprehensive income (loss)
    (84 )            
Purchases, sales, issuances and settlements
    (1 )     21        
Net transfers out of Level 3
                (15 )
 
Balance at March 31, 2009
  $ 770     $ 1,074     $ (3 )
 
                 
 
Unrealized losses included in earnings
  $ (2 (b)   $ (78 (c)   $ (1 (b)
 
(a)   Amount represents 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” on the income statement.
 
(c)   Other investments consist of principal investments, and private equity and mezzanine investments. Realized and unrealized gains and losses on principal investments are reported in “net (losses) gains 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” on the income statement.
Assets Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the result of applying other accounting pronouncements that require assets or liabilities to be assessed for impairment, or recorded at the lower of cost or fair value. The following table presents Key’s assets measured at fair value on a nonrecurring basis at March 31, 2009.
                                 
March 31, 2009                        
in millions   Level 1     Level 2     Level 3     Total  
 
ASSETS MEASURED ON A NONRECURRING BASIS
                               
Securities available for sale
              $ 23     $ 23  
Loans held for sale
                244       244  
Goodwill
                       
Other intangible assets
                2       2  
Accrued income and other assets
        $ 5       58       63  
 
Total assets on a nonrecurring basis at fair value
        $ 5     $ 327     $ 332  
 
                       
 
Through a quarterly analysis of Key’s commercial and construction loan portfolios held for sale, management determined that certain adjustments were necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. After adjustments, these loans totaled $244 million at March 31, 2009. Because the valuation of these loans is performed using an internal model that relies on market data from sales of similar assets, including credit spreads, interest rate curves and risk profiles, as well as management’s own assumptions about the exit market for the loans, Key has classified these loans as Level 3. Key’s loans held for sale, which are measured at fair value on a nonrecurring basis, include the remaining $70 million of commercial real estate loans transferred from the loan portfolio to held-for-sale status in June 2008. The fair value of these loans was measured using letters of intent, where available, or third-party appraisals. Additionally, during the first quarter of 2009, Key transferred $78 million of commercial loans from held for sale to the loan portfolio at their current fair value.

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During the first quarter of 2009, market conditions prompted management to review and evaluate the carrying amount of the goodwill and other intangible assets assigned to Key’s Community Banking and National Banking reporting units. This review indicated that the estimated fair value of the Community Banking unit was greater than its carrying amount, while the estimated fair value of the National Banking unit was less than its carrying amount, reflecting continued weakness in the financial markets. Based on the results of additional impairment testing required for the National Banking unit, Key recorded an after-tax noncash accounting charge of $187 million, or $.38 per common share, during the first quarter of 2009. Consequently, Key has now written off all of the goodwill that had been assigned to the National Banking unit. No additional impairment testing was required for the Community Banking unit. The goodwill assigned to the Community Banking unit is recorded at cost on Key’s balance sheet and, therefore, not included in the table above.
Other real estate owned and other repossessed properties are valued based on appraisals and third-party price opinions, less estimated selling costs. Assets that are acquired through, or in lieu of, loan foreclosures are recorded as held for sale initially at the lower of the loan balance or fair value upon the date of foreclosure. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new cost basis. These adjusted assets, which totaled $49 million at March 31, 2009, are considered to be nonrecurring items in the fair value hierarchy.
Current market conditions, including lower prepayments, interest rates and expected recovery rates have impacted Key’s modeling assumptions pertaining to education lending-related servicing rights and residual interests, and consequently resulted in write-downs of these instruments. These instruments are included in “accrued income and other assets” and “securities available for sale,” respectively, in the preceding table.

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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
KeyCorp
We have reviewed the condensed consolidated balance sheets of KeyCorp and subsidiaries (“Key”) as of March 31, 2009 and 2008, and the related condensed consolidated statements of income, changes in equity and cash flows for the three-month periods ended March 31, 2009 and 2008. These financial statements are the responsibility of Key’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Key as of December 31, 2008, and the related consolidated statements of income, changes in equity and cash flows for the year then ended not presented herein, and in our report dated February 25, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
May 7, 2009

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Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations
Introduction
This section generally reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the first three months of 2009 and 2008. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes that appear on pages 3 through 40. A description of Key’s business is included under the heading “Description of Business” on page 16 of Key’s 2008 Annual Report to Shareholders.
Terminology
This report contains some shortened names and industry-specific terms. We want to explain some of these terms at the outset so you can better understand the discussion that follows.
¨   KeyCorp refers solely to the parent holding company.
 
¨   KeyBank refers to KeyCorp’s subsidiary bank, KeyBank National Association.
 
¨   Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries.
 
¨   Key engages in capital markets activities primarily through business conducted by the National Banking group. These activities encompass a variety of products and services. Among other things, Key trades securities as a dealer, enters into derivative contracts (both to accommodate clients’ financing needs and for proprietary trading purposes), and conducts transactions in foreign currencies (both to accommodate clients’ needs and to benefit from fluctuations in exchange rates).
 
¨   For regulatory purposes, capital is divided into two classes. Federal regulations prescribe that at least one-half of a bank or bank holding company’s total risk-based capital must qualify as Tier 1. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. You will find a more detailed explanation of total and Tier 1 capital and how they are calculated in the section entitled “Capital,” which begins on page 74.
Forward-looking statements
This report and other reports filed by Key under the Securities Exchange Act of 1934, as amended, or registration statements filed by Key under the Securities Act of 1933, as amended, contain statements that are considered “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about Key’s long-term goals, financial condition, results of operations, earnings, levels of net loan charge-offs and nonperforming assets, interest rate exposure and profitability. These statements usually can be identified by the use of forward-looking language such as “our goal,” “our objective,” “our plan,” “will likely result,” “expects,” “plans,” “anticipates,” “intends,” “projects,” “believes,” “estimates” or other similar words, expressions or conditional verbs such as “will,” “would,” “could” and “should.”
Forward-looking statements express management’s current expectations, forecasts of future events or long-term goals and, by their nature, are subject to assumptions, risks and uncertainties. Although management believes that the expectations, forecasts and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including the following factors:
¨   In conjunction with the Supervisory Capital Assessment Program (“SCAP”), a component of the United States Department of the Treasury’s (the “U.S. Treasury”) Capital Assistance Program (“CAP”), the regulators determined that KeyCorp needs to raise $1.8 billion in additional Tier 1 common equity. KeyCorp’s capital raising and augmentation efforts will likely be highly dilutive to

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    it’s common shareholders and may reduce the market price of KeyCorp’s common shares. If KeyCorp is unable to increase common equity capital through the capital markets, it will be required to obtain such capital from the U.S. Treasury by converting a portion of its fixed-rate cumulative perpetual preferred stock, Series B (“Series B Preferred Stock”) issued under the CPP to mandatorily convertible preferred shares under the CAP by November 9, 2009.
 
¨   KeyCorp may be unable to raise any or all of the private capital in the amount required to augment Tier 1 common equity as required by the regulators.
 
¨   Converting KeyCorp’s Series B Preferred Stock under the CAP will impose additional restrictions on operations and may affect liquidity.
 
¨   The credit ratings of KeyCorp and KeyBank are essential to maintaining liquidity. Further downgrades from the major credit ratings agencies in 2009 could mean that Key’s debt ratings fall below investment-grade, which, in turn, could have an adverse effect on access to liquidity sources, cost of funds, access to investors, and collateral or funding requirements.
 
¨   KeyCorp’s requirement to raise additional Tier 1 common equity could potentially require it to obtain a significant amount of additional capital from the U.S. Treasury or an individual private investor, both of which could result in a change of control for Key under applicable regulatory standards and contractual terms.
 
¨   Potential misinterpretation of the SCAP assessment results could adversely affect Key’s ability to attract and retain customers and compete for new business opportunities.
 
¨   Unprecedented volatility in the stock markets, public debt markets and other capital markets, including continued disruption in the fixed income markets, has affected and could continue to affect Key’s ability to raise capital or other funding for liquidity and business purposes, as well as revenue from client-based underwriting, investment banking and other capital markets-driven businesses.
 
¨   Interest rates could change more quickly or more significantly than management expects, which may have an adverse effect on Key’s financial results.
 
¨   Trade, monetary and fiscal policies of various governmental bodies may affect the economic environment in which Key operates, as well as its financial condition and results of operations.
 
¨   Changes in foreign exchange rates, equity markets, and the financial soundness of bond insurers, sureties and even other unrelated financial companies have the potential to affect current market values of financial instruments which, in turn, could have a material adverse effect on Key.
 
¨   Asset price deterioration has had (and may continue to have) a negative effect on the valuation of many of the asset categories represented on Key’s balance sheet.
 
¨   The Emergency Economic Stabilization Act of 2008 (“EESA”), the American Recovery and Reinvestment Act of 2009, the Financial Stability Plan announced on February 10, 2009, by the Secretary of the U.S. Treasury, in coordination with other financial institution regulators, and other initiatives undertaken by the U.S. government may not have the intended effect on the financial markets; the current extreme volatility and limited credit availability may persist. If these actions fail to help stabilize the financial markets and the current financial market and economic conditions continue or deteriorate further, Key’s business, financial condition, results of operations, access to credit and the trading price of Key’s common shares could all suffer a material decline.
 
¨   The terms of the Capital Purchase Program (“CPP”), pursuant to which KeyCorp issued securities to the U.S. Treasury, may limit Key’s ability to return capital to shareholders and could be dilutive to Key’s common shares. If Key is unable to redeem such preferred shares within five years, the dividend rate will increase substantially.

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¨   Key’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.
 
¨   The problems in the housing markets, including issues related to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and related conditions in the financial markets, or other issues, such as the price volatility of oil or other commodities, could cause general economic conditions to deteriorate further. In addition, these problems may inflict further damage on the local economies or industries in which Key has significant operations or assets, and, among other things, may materially impact credit quality in existing portfolios and/or Key’s ability to generate loans in the future.
 
¨   Increases in interest rates or further weakening economic conditions could constrain borrowers’ ability to repay outstanding loans or diminish the value of the collateral securing those loans. Additionally, Key’s allowance for loan losses may be insufficient if the estimates and judgments management used to establish the allowance prove to be inaccurate.
 
¨   Key may face increased competitive pressure due to the recent consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies.
 
¨   Key may become subject to new or heightened legal standards and regulatory requirements, practices or expectations, which may impede profitability or affect Key’s financial condition, including new regulations imposed in connection with the Troubled Asset Relief Program (“TARP”) provisions of the EESA, such as the Financial Stability Plan and the CPP, being implemented and administered by the U.S. Treasury in coordination with other federal regulatory agencies, further laws enacted by the U.S. Congress in an effort to strengthen the fundamentals of the economy, or other regulations promulgated by federal regulators to mitigate the systemic risk presented by the current financial crisis, such as the Federal Deposit Insurance Corporation’s (“FDIC”) Temporary Liquidity Guarantee Program (“TLGP”).
 
¨   It could take Key longer than anticipated to implement strategic initiatives, including those designed to grow revenue or manage expenses; Key may be unable to implement certain initiatives; or the initiatives Key employs may be unsuccessful.
 
¨   Increases in deposit insurance premiums imposed on KeyBank due to the FDIC’s restoration plan for the Deposit Insurance Fund established on October 7, 2008, and continued difficulties experienced by other financial institutions may have an adverse effect on Key’s results of operations.
 
¨   Acquisitions and dispositions of assets, business units or affiliates could adversely affect Key in ways that management has not anticipated.
 
¨   Key is subject to voluminous and complex rules, regulations and guidelines imposed by a number of government authorities; regulatory requirements appear to be expanding in the current environment. Implementing and monitoring compliance with these requirements is a significant task, and failure to effectively do so may result in penalties or related costs that could have an adverse effect on Key’s results of operations.
 
¨   Key may have difficulty attracting and/or retaining key executives and/or relationship managers at compensation levels necessary to maintain a competitive market position.
 
¨   Key may experience operational or risk management failures due to technological or other factors.
 
¨   Changes in accounting principles or in tax laws, rules and regulations could have an adverse effect on Key’s financial results or capital.
 
¨   Key may become subject to new legal obligations or liabilities, or the unfavorable resolution of pending litigation may have an adverse effect on our financial results or capital.

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¨   Terrorist activities or military actions could disrupt the economy and the general business climate, which may have an adverse effect on Key’s financial results or condition and that of its borrowers.
 
¨   Key has leasing offices and clients throughout the world. Economic and political uncertainties resulting from terrorist attacks, military actions or other events that affect countries in which Key operates may have an adverse effect on those leasing clients and their ability to make timely payments.
Forward-looking statements are not historical facts but instead represent only management’s current expectations and forecasts regarding future events, many of which, by their nature, are inherently uncertain and outside of Key’s control. The factors discussed above are not intended to be a complete summary of all risks and uncertainties that may affect Key’s business, the financial services industry and financial markets. Though management strives to monitor and mitigate risk, management cannot anticipate all potential economic, operational and financial developments that may have an adverse impact on Key’s operations and financial results. Forward-looking statements speak only as of the date they are made, and Key does not undertake any obligation to revise any forward-looking statement to reflect subsequent events.
Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in Key’s Securities and Exchange Commission (“SEC”) filings, including this and Key’s other reports on Forms 8-K, 10-K and 10-Q and Key’s registration statements under the Securities Act of 1933, as amended, all of which are accessible on the SEC’s website at www.sec.gov.
Long-term goals
Key’s long-term financial goals are to grow its earnings per common share and achieve a return on average common equity at rates at or above the respective median of our peer group. The strategy for achieving these goals is described under the heading “Corporate strategy” on page 18 of Key’s 2008 Annual Report to Shareholders.
Economic overview
During the first quarter of 2009, the United States economy continued to contract as 2.1 million Americans lost their jobs and the unemployment rate reached 8.5%, its highest level in 26 years. Job losses spread to all major industries and geographic areas, and resulted in the most severe quarter for job losses since 1945. During the current quarter, the average unemployment rate rose to 8.1%, substantially higher than the average rate of 6.9% for the fourth quarter of 2008 and the average rate of 5.8% for all of 2008. Since the recession began in December 2007, 5.2 million jobs have been lost.
Consumer confidence remained at a very low level, although the consumer did begin to show some resiliency during the quarter. Consumer spending rose at an average monthly rate of .4% for the quarter, compared to an average monthly decline of 1.0% in the fourth quarter of 2008 and an average monthly decline of .1% for all of 2008. Price discounts offered by retailers were believed to be a catalyst for the renewed spending. Consumer prices in March 2009 fell .4% from March 2008, compared to an annual increase of 4% in March 2008 compared to March 2007. This was the first annual decline in consumer prices since 1955.
Deterioration in the housing sector slowed as lower mortgage rates and home prices drew buyers back into the real estate market. Existing and new home sales fell by 4% during the first quarter of 2009. Although the pace of home sale declines slowed during the quarter, home building activity remained near record low levels. March 2009 housing starts declined 48% from the same month last year and 9% from December 2008. During the first quarter, home values also continued to decline. By March 2009, the median price of existing and new homes had fallen by more than 12% from the levels reported for the same month last year. Existing home values showed some signs of stabilization during the quarter, as median prices fell only .3% from December 2008. Lower prices continue to reflect the elevated levels of foreclosures, which rose by 46% from March 2008.

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Market interest rates were mixed over the quarter. The benchmark two-year Treasury yield began the quarter at .77% and increased to .80% at March 31, 2009, and the ten-year Treasury yield, which began the quarter at 2.21%, closed the quarter at 2.67%. Additionally, short-term interbank lending rates decreased by 23 basis points as credit concerns eased somewhat. Regional banking institutions, such as Key, continued to utilize the FDIC’s TLGP as their only source of unsecured term funding.
The Federal Reserve held the federal funds target rate near zero during the first quarter of 2009 as the downside risks to the global economy remained elevated. In further efforts to promote market liquidity and decrease lending rates, the Federal Reserve also increased its purchases of agency debt, agency mortgage-backed securities and U.S. Treasury securities. Additionally, in February 2009, the Secretary of the U.S. Treasury, in conjunction with other financial institution regulators, announced the Financial Stability Plan, a summary of which is provided in the following section.
Financial Stability Plan
On February 10, 2009, the U.S. Treasury announced its Financial Stability Plan to alleviate uncertainty, restore confidence, and address liquidity and capital constraints. The key components of the Financial Stability Plan are the CAP, the Term Asset-Backed Securities Loan Facility (“TALF”), the Public-Private Investment Program (“PPIP”), the Affordable Housing and Foreclosure Mitigation Efforts Initiative, and the Small Business and Community Lending Initiative designed to increase lending to small businesses. Additional information regarding certain key aspects of the TALF and PPIP is provided below. Information regarding the CAP is included in the “Capital” section under the heading “Financial Stability Plan” on page 79.
The Term Asset-Backed Securities Loan Facility. The TALF is a joint program of the Federal Reserve and the U.S. Treasury to improve credit markets by addressing the securitization markets. Prior to the market disruption, securitization market demand enabled banks to sell loans in the form of asset-backed securities at relatively low yields. This, in turn, allowed lenders to increase the availability of credit and extend credit to consumers and businesses at lower rates. The continued disruption of the securitization markets has resulted in a severe reduction in the availability of credit and an increase in the cost of credit for consumers and businesses. Under the first phase of TALF, which commenced in February 2009, the Federal Reserve Bank of New York will lend up to $200 billion on a collateralized, nonrecourse basis to holders of eligible asset-backed securities in order to stimulate investor demand for these securities, and increase the availability of new credit to consumers and businesses.
Public-Private Investment Program. On March 23, 2009, the FDIC, the Federal Reserve, and the U. S. Treasury announced the PPIP for “legacy assets.” The program is designed to provide liquidity for the purchase, by third parties, of these so-called “troubled assets” on the balance sheets of financial institutions. The “legacy assets” consist of both real estate loans held directly and securities backed by loan portfolios (“Legacy Assets”).
Earlier in the decade, the combination of lower interest rates and strong demand in the securitization markets for loans sold in the form of asset-backed securities resulted in increased credit availability for real estate loans. The increase in the availability of credit kept demand for housing strong, and, in turn allowed housing prices to continue to rise causing the resulting housing bubble, which eventually burst in 2007 and generated losses for investors and banks. The resulting need by investors and banks to reduce risk, as the housing bubble burst, triggered a wide-scale deleveraging of balance sheets, which led to “fire sales” of these distressed assets. As prices declined, many traditional investors exited these markets, causing declines in market liquidity. As a result, a negative cycle developed where declining asset prices triggered further deleveraging, which in turn led to further price declines.
The excessive discounts embedded in some Legacy Asset prices are now straining the capital of U.S. financial institutions, limiting their ability to lend and increasing the cost of credit throughout the financial system. The resulting lack of clarity about the value of these Legacy Assets has made it difficult for some financial institutions to raise new private capital on their own.

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The PPIP is still in the process of being implemented by the agencies, but, if successful, could generate demand for the purchase of Legacy Assets from financial institutions and restore the source of capital provided by an active securitization market.
Demographics
The extent to which Key’s business has been affected by continued volatility and weakness in the housing market is directly related to the state of the economy in the regions in which its two major business groups, Community Banking and National Banking, operate.
Key’s Community Banking group serves consumers and small to mid-sized businesses by offering a variety of deposit, investment, lending and wealth management products and services. These products and services are provided through a 14-state branch network organized into three geographic regions defined by management: Rocky Mountains and Northwest, Great Lakes and Northeast. Key’s National Banking group includes those corporate and consumer business units that operate nationally, within and beyond our 14-state branch network, as well as internationally. The specific products and services offered by the Community and National Banking groups are described in Note 4 (“Line of Business Results”), which begins on page 11.
Figure 1 shows the geographic diversity of the Community Banking group’s average core deposits, commercial loans and home equity loans.
Figure 1. Community Banking Geographic Diversity
                                         
    Geographic Region              
    Rocky                          
Three months ended March 31, 2009   Mountains and                          
dollars in millions   Northwest     Great Lakes     Northeast     Nonregion (a)     Total  
 
Average core deposits
  $ 13,429     $ 14,124     $ 13,172     $ 1,631     $ 42,356  
Percent of total
    31.7 %     33.3 %     31.1 %     3.9 %     100.0 %
 
                                       
Average commercial loans
  $ 6,610     $ 4,553     $ 3,298     $ 1,366     $ 15,827  
Percent of total
    41.8 %     28.8 %     20.8 %     8.6 %     100.0 %
 
                                       
Average home equity loans
  $ 4,519     $ 2,947     $ 2,663     $ 144     $ 10,273  
Percent of total
    44.0 %     28.7 %     25.9 %     1.4 %     100.0 %
 
(a)   Represents core deposit, commercial loan and home equity loan products centrally managed outside of the three Community Banking regions.
Figure 17 on page 67 shows the diversity of Key’s commercial real estate lending business based on industry type and location. The homebuilder loan portfolio within the National Banking group has been adversely affected by the downturn in the U.S. housing market. The deteriorating market conditions in the residential properties segment of Key’s commercial real estate construction portfolio, principally in Florida and southern California, have caused Key to experience a significant increase in the levels of nonperforming loans and net charge-offs since mid-2007. Management has taken aggressive steps to reduce Key’s exposure in this segment of the loan portfolio. As previously reported, during the fourth quarter of 2007, Key announced its decision to cease conducting business with nonrelationship homebuilders outside of its 14-state Community Banking footprint. During the second quarter of 2008, Key initiated a process to further reduce exposure through the sale of certain loans. As a result of these actions, Key has reduced the outstanding balances in the residential properties segment of the commercial real estate loan portfolio by $1.729 billion, or 48%, over the past twelve months. Additional information about the loan sales is included in the “Credit risk management” section, which begins on page 88.
Results for the National Banking group have also been affected adversely by increasing credit costs and volatility in the capital markets, leading to declines in the market values of assets under management and the market values at which Key records certain assets (primarily commercial real estate loans and securities held for sale or trading).

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Additionally, during the first quarter of 2009 management determined that the estimated fair value of the National Banking reporting unit was less than the carrying amount, reflecting the impact of continued weakness in the financial markets. As a result, Key recorded an after-tax noncash accounting charge of $187 million. As a result of this charge and a similar after-tax charge of $420 million recorded during the fourth quarter of 2008, Key has now written off all of the goodwill that had been assigned to its National Banking reporting unit.
Critical accounting policies and estimates
Key’s business is dynamic and complex. Consequently, management must exercise judgment in choosing and applying accounting policies and methodologies. These choices are critical; not only are they necessary to comply with U.S. generally accepted accounting principles (“GAAP”), they also reflect management’s view of the appropriate way to record and report Key’s overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Significant Accounting Policies”), which begins on page 77 of Key’s 2008 Annual Report to Shareholders, should be reviewed for a greater understanding of how Key’s financial performance is recorded and reported.
In management’s opinion, some accounting policies are more likely than others to have a significant effect on Key’s financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance, or require management to exercise judgment and to make assumptions and estimates that affect amounts reported in the financial statements. Because these assumptions and estimates are based on current circumstances, they may change over time or prove to be inaccurate.
Management relies heavily on the use of judgment, assumptions and estimates to make a number of core decisions, including accounting for the allowance for loan losses; contingent liabilities, guarantees and income taxes; derivatives and related hedging activities; and assets and liabilities that involve valuation methodologies. A brief discussion of each of these areas appears on pages 20 through 23 of Key’s 2008 Annual Report to Shareholders. Information about Key’s review of goodwill and other intangible assets for impairment as of March 31, 2009, is included in Note 1 (“Basis of Presentation”) under the heading “Goodwill and Other Intangible Assets” on page 7.
Effective January 1, 2008, Key adopted SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In the absence of quoted market prices, management determines the fair value of Key’s assets and liabilities using internally developed models, which are based on management’s judgment, assumptions and estimates regarding credit quality, liquidity, interest rates and other relevant inputs. Key’s adoption of this accounting guidance and the process used to determine fair values are more fully described in Note 1 under the heading “Fair Value Measurements” on page 82 of Key’s 2008 Annual Report to Shareholders and in Note 20 (“Fair Value Measurements”), which begins on page 118 of that report.
At March 31, 2009, $12.644 billion, or 13%, of Key’s total assets were measured at fair value on a recurring basis. More than 88% of these assets were classified as Level 1 or Level 2 within the fair value hierarchy. At March 31, 2009, $1.437 billion, or 2%, of Key’s total liabilities were measured at fair value on a recurring basis. Substantially all of these liabilities were classified as Level 1 or Level 2.
At March 31, 2009, $332 million, or less than 1%, of Key’s total assets were measured at fair value on a nonrecurring basis. Less than 1% of these assets were classified as Level 1 or Level 2. At March 31, 2009, there were no liabilities measured at fair value on a nonrecurring basis.
During the first quarter of 2009, management did not significantly alter the manner in which it applied Key’s critical accounting policies or developed related assumptions and estimates.

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Highlights of Key’s Performance
Financial performance
For the first quarter of 2009, the net loss attributable to Key was $488 million, or $1.09 per common share. This compares to net income attributable to Key of $218 million, or $.54 per diluted common share, for the first quarter of 2008. The loss for the current quarter was primarily the result of an increase in the provision for loan losses and a noncash accounting charge for goodwill and other intangible assets impairment.
In light of the prevailing economic environment during the first quarter of 2009, Key continued to build its loan loss reserves by recording an $875 million provision for loan losses, which exceeded net loan charge-offs by $383 million. As a result, Key’s March 31, 2009, allowance for loan losses rose to $2.186 billion, or 2.97% of period-end loans, from $1.803 billion, or 2.36% at December 31, 2008, and $1.298 billion, or 1.70% one year ago.
Additionally, the company determined that the estimated fair value of its National Banking reporting unit was less than the carrying amount, reflecting continued weakness in the financial markets. Based on the results of additional impairment testing for this reporting unit, Key recorded an after-tax noncash accounting charge of $187 million for the impairment of goodwill and other intangible assets. Importantly, this adjustment did not affect Key’s regulatory and tangible capital ratios. With this charge, Key has now written off all of the goodwill that had been assigned to its National Banking reporting unit.
Through this difficult credit cycle, management has maintained their focus on sustaining Key’s strong capital position, preserving Key’s relationship business model and carefully managing expenses to ensure Key’s readiness to respond to business opportunities when conditions improve.
In April 2009, Key’s Board of Directors expressed its intention to reduce Key’s quarterly dividend on common shares to $.01 per share from $.0625 per share, commencing in the second quarter of 2009, an action that will retain approximately $100 million of capital on an annual basis. At March 31, 2009, Key’s risk-based capital ratios continued to significantly exceed the “well-capitalized” standard for banks established by the banking regulators. Key had a Tier 1 capital ratio of 11.22%, a total capital ratio of 15.18% and a tangible common equity ratio of 6.06%.
Despite the challenging economic environment, Key’s Community Banking group continues to benefit from its relationship banking strategy as evidenced by solid loan and deposit growth. Compared to the first quarter of 2008, average loans grew by $855 million, or 3%, and average deposits rose by $1.783 billion, or 4%. Although Key continues to move forward in exiting low-return, nonrelationship businesses, progress has been slower than anticipated due to general weakness in the economy and restricted liquidity. Additional information pertaining to Key’s exit loan portfolio and the progress made in reducing total residential property exposure in commercial real estate is presented in the section entitled “Credit risk management,” which begins on page 88.
While all financial institutions are experiencing higher costs associated with collection efforts and an increase in deposit insurance premiums, Key has taken a proactive approach to managing its expenses. Excluding the goodwill and other intangible assets impairment charge recorded during the first quarter of 2009, Key’s noninterest expense was up 2% from the year-ago quarter. Over the past twelve months, Key has reduced the number of its average full-time equivalent employees by more than 5%, due in large part to actions taken to exit or de-emphasize certain businesses, including private student lending and lending to homebuilders. Additionally, Key continues to look for opportunities to streamline operations and to achieve cost efficiency by deploying new technology.
Key is also working to meet the funding needs of its clients while carefully managing the associated risk. During the first quarter of 2009, Key originated approximately $7.8 billion in new or renewed loans and commitments to consumers and businesses.

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Significant items that affect the comparability of Key’s financial performance for the current, prior and year-ago quarters are shown in Figure 2. Events leading to the recognition of these items, as well as other factors that contributed to the changes in Key’s revenue and expense components, are reviewed in detail throughout the remainder of the Management’s Discussion & Analysis section.
Figure 2. Significant Items Affecting the Comparability of Earnings
                                                                                 
    Three months ended     Three months ended     Three months ended  
    March 31, 2009     December 31, 2008     March 31, 2008  
    Pre-tax     After-tax     Impact on     Pre-tax     After-tax     Impact on     Pre-tax     After-tax     Impact on  
in millions, except per share amounts   Amount     Amount     EPS     Amount     Amount     EPS     Amount     Amount     EPS  
 
Provision for loan losses in excess of net charge-offs
  $ (383 )   $ (239 )   $ (.49 )   $ (252 )   $ (158 )   $ (.32 )   $ (66 )   $ (42 )   $ (.10 )
Noncash charge for intangible assets impairment
    (223 )     (187 )     (.38 )     (465 )     (420 )     (.85 )                  
Net (losses) gains from principal investing
    (72 )     (45 )     (.09 )     (37 )     (23 )     (.05 )     11       7       .02  
Severance and other exit costs
    (8 )     (5 )     (.01 )     (31 )     (20 )     (.04 )     (6 )     (4 )     (.01 )
Gain from sale/redemption of Visa Inc. shares
    105       65       .13                         165       103       .26  
Realized and unrealized gains (losses) on loan and securities portfolios held for sale or trading
    2       1             (18 )     (11 )     (.02 )     (128 )     (80 )     (.20 )
U.S. taxes on accumulated earnings of Canadian leasing operation
                            (68 )     (.14 )                  
(Charges) credits related to leveraged lease tax litigation
                      (18 )     120  (a)     .24       (3 )     (38 )     (.10 )
 
(a)   Represents $120 million of previously accrued interest recovered in connection with Key’s opt-in to the Internal Revenue Service (“IRS”) global tax settlement.
 
EPS   = Earnings per common share
Key’s financial performance for each of the past five quarters is summarized in Figure 3.

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Figure 3. Selected Financial Data
                                         
    2009     2008  
dollars in millions, except per share amounts   First     Fourth     Third     Second     First  
 
FOR THE PERIOD
                                       
Interest income
  $ 1,032     $ 1,163     $ 1,232     $ 880     $ 1,354  
Interest expense
    418       524       533       522       641  
Net interest income
    614  (a)     639  (a)     699       358       713  (a)
Provision for loan losses
    875       594       407       647       187  
Noninterest income
    492       395       398       555       530  
Noninterest expense
    973       1,302       761       782       733  
(Loss) income before income taxes
    (742 )     (862 )     (71 )     (516 )     323  
Net (loss) income attributable to Key
    (488 ) (a)     (524 )  (a)     (36 )     (1,126 )     218  (a)
Net (loss) income attributable to Key common shareholders
    (536 ) (a)     (554 )  (a)     (48 )     (1,126 )     218  (a)
 
PER COMMON SHARE
                                       
Net (loss) income attributable to Key
  $ (1.09 )   $ (1.13 )   $ (.10 )   $ (2.70 )   $ .55  
Net (loss) income attributable to Key — assuming dilution
    (1.09 ) (a)     (1.13 )  (a)     (.10 )     (2.70 )     .54  (a)
 
Cash dividends paid
    .0625       .0625       .1875       .375       .375  
Book value at period end
    13.82       14.97       16.16       16.59       21.48  
Tangible book value at period end
    11.76       12.41       12.66       13.00       17.07  
Market price:
                                       
High
    9.35       15.20       15.25       26.12       27.23  
Low
    4.83       4.99       7.93       10.00       19.00  
Close
    7.87       8.52       11.94       10.98       21.95  
Weighted-average common shares outstanding (000)
    492,813       492,311       491,179       416,629       399,121  
Weighted-average common shares and potential common shares outstanding (000)
    492,813       492,311       491,179       416,629       399,769  
 
AT PERIOD END
                                       
Loans
  $ 73,703     $ 76,504     $ 76,705     $ 75,855     $ 76,444  
Earning assets
    89,042       94,020       90,257       89,893       89,719  
Total assets
    97,834       104,531       101,290       101,544       101,492  
Deposits
    65,996       65,260       64,678       64,396       64,702  
Long-term debt
    14,978       14,995       15,597       15,106       14,337  
Key common shareholders’ equity
    6,892       7,408       7,993       8,056       8,592  
Key shareholders’ equity
    9,968       10,480       8,651       8,706       8,592  
 
PERFORMANCE RATIOS
                                       
Return on average total assets
    (1.91 )% (a)     (1.93 )% (a)     (.14 )%     (4.38) %     .85 %  (a)
Return on average common equity
    (29.87 ) (a)     (27.65 )  (a)     (2.36 )     (53.35 )     10.38  (a)
Net interest margin (taxable equivalent)
    2.77       2.76  (a)     3.13       (.44 )     3.14  (a)
 
CAPITAL RATIOS AT PERIOD END
                                       
Key shareholders’ equity to assets
    10.19 %     10.03 %     8.54 %     8.57 %     8.47 %
Tangible Key shareholders’ equity to tangible assets
    9.23       8.92       6.95       6.98       6.85  
Tangible common equity to tangible assets
    6.06       5.95       6.29       6.32       6.85  
Tier 1 risk-based capital
    11.22       10.92       8.55       8.53       8.33  
Total risk-based capital
    15.18       14.82       12.40       12.41       12.34  
Leverage
    11.19       11.05       9.28       9.34       9.15  
 
TRUST AND BROKERAGE ASSETS
                                       
Assets under management
  $ 60,164     $ 64,717     $ 76,676     $ 80,998     $ 80,453  
Nonmanaged and brokerage assets
    21,786       22,728       27,187       29,905       30,532  
 
OTHER DATA
                                       
Average full-time-equivalent employees
    17,468       17,697       18,098       18,164       18,426  
Branches
    989       986       986       985       985  
 
(a)   See Figure 4 on page 52, which presents certain earnings data and performance ratios, excluding charges (credits) related to goodwill and other intangible assets impairment, and the tax treatment of certain leveraged lease financing transactions disallowed by the IRS. Figure 4 reconciles certain GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

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Figure 4 presents certain earnings data and performance ratios, excluding charges (credits) related to goodwill and other intangible assets impairment, and the tax treatment of certain leveraged lease financing transactions disallowed by the IRS (non-GAAP). Eliminating the effects of significant items that are generally nonrecurring facilitates the analysis of results by presenting them on a more comparable basis. Figure 4 also reconciles the GAAP performance measures to the corresponding non-GAAP measures. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
Figure 4. GAAP to Non-GAAP Reconciliations
                         
    Three months ended  
dollars in millions, except per share amounts   3-31-09     12-31-08     3-31-08  
 
NET (LOSS) INCOME
                       
Net (loss) income attributable to Key (GAAP)
  $ (488 )   $ (524 )   $ 218  
Charges related to intangible assets impairment, after tax
    187       420        
(Credits) charges related to leveraged lease tax litigation, after tax
          (120 )     38  
 
Net (loss) income attributable to Key, excluding charges (credits) related to intangible assets   impairment and leveraged lease tax litigation (non-GAAP)
  $ (301 )   $ (224 )   $ 256  
 
                 
 
Preferred dividends and amortization of discount on Series B Preferred Stock
  $ 48     $ 30        
 
                       
Net (loss) income attributable to Key common shareholders (GAAP)
  $ (536 )   $ (554 )   $ 218  
Net (loss) income attributable to Key common shareholders, excluding charges (credits) related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)
    (349 )     (254 )     256  
 
                       
PER COMMON SHARE
                       
Net (loss) income attributable to Key — assuming dilution (GAAP)
  $ (1.09 )   $ (1.13 )   $ .54  
Net (loss) income attributable to Key, excluding charges (credits) related to intangible assets impairment and leveraged lease tax litigation — assuming dilution (non-GAAP)
    (.71 )     (.52 )     .64  
 
                       
PERFORMANCE RATIOS
                       
Return on average total assets: (a)
                       
Average total assets
  $ 103,815     $ 107,735     $ 103,356  
Return on average total assets (GAAP)
    (1.91 )%     (1.93 )%     .85 %
Return on average total assets, excluding charges (credits) related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)
    (1.18 )     (.83 )     1.00  
 
                       
Return on average common equity: (a)
                       
Average common equity
  $ 7,277     $ 7,971     $ 8,445  
Return on average common equity (GAAP)
    (29.87 )%     (27.65 )%     10.38 %
Return on average common equity, excluding charges (credits) related to intangible assets impairment and leveraged lease tax litigation (non-GAAP)
    (19.45 )     (12.68 )     12.19  
 
                       
NET INTEREST INCOME AND MARGIN
                       
Net interest income:
                       
Net interest income (GAAP)
  $ 614     $ 639     $ 713  
Charges related to leveraged lease tax litigation, pre-tax
          18       3  
 
Net interest income, excluding charges related to leveraged lease tax
litigation (non-GAAP)
  $ 614     $ 657     $ 716  
 
                 
 
 
                       
Net interest income/margin (TE):
                       
Net interest income (loss) (TE) (as reported)
  $ 620     $ 646     $ 704  
Charges related to leveraged lease tax
litigation, pre-tax (TE)
          18       34  
 
Net interest income, excluding charges related to leveraged lease tax
litigation (TE) (adjusted basis)
  $ 620     $ 664     $ 738  
 
                 
 
Net interest margin (TE) (as reported)  (a)
    2.77 %     2.76 %     3.14 %
Impact of charges related to leveraged lease tax litigation, pre-tax (TE)  (a)
          .08       .15  
 
Net interest margin, excluding charges related to leveraged lease tax
litigation (TE) (adjusted basis)  (a)
    2.77 %     2.84 %     3.29 %
 
                 
 
(a)   Income statement amount has been annualized in calculation of percentage.
 
TE = Taxable Equivalent, GAAP = U.S. generally accepted accounting principles

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As shown in Figure 4, during the first quarter of 2009, Key recorded an after-tax charge of $187 million, or $.38 per common share, for the impairment of goodwill and other intangible assets related to the National Banking reporting unit. In the prior quarter, Key recorded an after-tax charge of $420 million, or $.85 per common share, as a result of its annual goodwill impairment testing for the same reporting unit. Key has now written off all of the goodwill that had been assigned to its National Banking reporting unit.
Additionally, during the fourth quarter of 2008, Key recorded an after-tax credit of $120 million, or $.24 per common share, in connection with its opt-in to the IRS global tax settlement. During the first quarter of 2008, Key increased its tax reserves for certain lease in, lease out transactions and recalculated its lease income in accordance with prescribed accounting standards, resulting in after-tax charges of $38 million, or $.10 per common share.
Strategic developments
Management initiated the following actions during 2008 to support Key’s corporate strategy, which is described under the heading “Corporate Strategy” on page 18 of Key’s 2008 Annual Report to Shareholders.
¨   During the third quarter of 2008, Key decided to exit retail and floor-plan lending for marine and recreational vehicle products, and to limit new education loans to those backed by government guarantee. Key also determined that it will cease lending to homebuilders within its 14-state Community Banking footprint. This came after Key began to reduce its business with nonrelationship homebuilders outside that footprint in December 2007.
 
¨   On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the holding company for Union State Bank, a 31-branch state-chartered commercial bank headquartered in Orangeburg, New York. The acquisition doubles Key’s branch presence in the attractive Lower Hudson Valley area.

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Line of Business Results
This section summarizes the financial performance and related strategic developments of Key’s two major business groups, Community Banking and National Banking. To better understand this discussion, see Note 4 (“Line of Business Results”), which begins on page 11. Note 4 describes the products and services offered by each of these business groups, provides more detailed financial information pertaining to the groups and their respective lines of business, and explains “Other Segments” and “Reconciling Items.”
Figure 5 summarizes the contribution made by each major business group to Key’s taxable-equivalent revenue and net (loss) income attributable to Key for the three-month periods ended March 31, 2009 and 2008.
Figure 5. Major Business Groups — Taxable-Equivalent Revenue and Net (Loss)
Income Attributable to Key
                                 
    Three months ended March 31,     Change  
dollars in millions   2009     2008     Amount     Percent  
 
REVENUE (TE)
                               
 
Community Banking
  $ 604     $ 629     $ (25 )     (4.0 )%
National Banking  (a)
    537       439       98       22.3  
Other Segments
    (78 )     28       (106 )     N/M  
 
Total Segments
    1,063       1,096       (33 )     (3.0 )
Reconciling Items  (b)
    49       138       (89 )     (64.5 )
 
Total
  $ 1,112     $ 1,234     $ (122 )     (9.9 )%
 
                       
 
                               
NET (LOSS) INCOME ATTRIBUTABLE TO KEY
                               
Community Banking
  $ 33     $ 116     $ (83 )     (71.6) %
National Banking  (a)
    (571 )     (24 )     (547 )     N/M  
Other Segments
    (37 )     21       (58 )     N/M  
 
Total Segments
    (575 )     113       (688 )     N/M  
Reconciling Items  (b)
    87       105       (18 )     (17.1 )
 
Total
  $ (488 )   $ 218     $ (706 )     N/M  
 
                       
 
(a)   National Banking’s results for the first quarter of 2009 include a noncash charge for goodwill and other intangible assets impairment of $223 million ($187 million after tax). During the first quarter of 2008, National Banking’s taxable-equivalent revenue and net results were reduced by $34 million and $21 million, respectively, as a result of its involvement with certain leveraged lease financing transactions which were challenged by the IRS.
 
(b)   Reconciling Items for the first quarter of 2009 include a $105 million ($65 million after tax) gain from the sale of Key’s remaining equity interest in Visa Inc. For the first quarter of 2008, Reconciling Items include a $165 million ($103 million after tax) gain from the partial redemption of Key’s equity interest in Visa Inc. and a $17 million charge to income taxes for the interest cost associated with the increase to Key’s tax reserves for certain lease in, lease out transactions.
 
TE = Taxable Equivalent, N/M = Not Meaningful
Community Banking summary of operations
As shown in Figure 6, Community Banking recorded net income of $33 million for the first quarter of 2009, compared to $116 million for the year-ago quarter. Increases in the provision for loan losses and noninterest expense, coupled with decreases in net interest income and noninterest income caused the decline.
Taxable-equivalent net interest income declined by $7 million, or 2%, from the first quarter of 2008, due primarily to tighter loan spreads. Average earning assets rose by $911 million, or 3%, from the year-ago quarter, due to growth in both the commercial and consumer loan portfolios. Average deposits increased by $1.783 billion, or 4%, reflecting growth in certificates of deposit and noninterest-bearing deposits. A decline in money market deposit accounts partially offset this growth.
Noninterest income decreased by $18 million, or 9%, from the year-ago quarter, largely as a result of lower income from trust and investment services caused by declines in the financial markets, and a reduction in service charges on deposit accounts. Also contributing to the decrease was a reduction in investment banking and capital markets income, due primarily to lower income from derivatives. These reductions were partially offset by growth in bank channel investment product sales income.

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The provision for loan losses rose by $63 million compared to the first quarter of 2008, reflecting a $24 million increase in net loan charge-offs, primarily from the home equity and commercial loan portfolios. Community Banking’s provision for loan losses for the first quarter of 2009 exceeded its net loan charge-offs by $27 million as the company continued to build reserves in a weak economy.
Noninterest expense grew by $45 million, or 11%, from the year-ago quarter as a result of an increase in the FDIC deposit insurance assessment, a rise in internally allocated overhead and a reduction in the credit for losses on lending-related commitments. This expense growth was partially offset by a decline in personnel expense, due primarily to reductions in incentive compensation accruals and severance expense.
Figure 6. Community Banking
                                 
    Three months ended March 31,     Change  
dollars in millions   2009     2008     Amount     Percent  
 
SUMMARY OF OPERATIONS
                               
Net interest income (TE)
  $ 415     $ 422     $ (7 )     (1.7 )%
Noninterest income
    189       207       (18 )     (8.7 )
 
Total revenue (TE)
    604       629       (25 )     (4.0 )
Provision for loan losses
    81       18       63       350.0  
Noninterest expense
    470       425       45       10.6  
 
Income before income taxes (TE)
    53       186       (133 )     (71.5 )
Allocated income taxes and TE adjustments
    20       70       (50 )     (71.4 )
 
Net income
  $ 33     $ 116     $ (83 )     (71.6) %
 
                         
 
                               
AVERAGE BALANCES
                               
Loans and leases
  $ 28,940     $ 28,085     $ 855       3.0 %
Total assets
    31,949       31,016       933       3.0  
Deposits
    51,560       49,777       1,783       3.6  
 
                               
Assets under management at period end
  $ 14,205     $ 20,049     $ (5,844 )     (29.1) %
 
TE = Taxable Equivalent
ADDITIONAL COMMUNITY BANKING DATA
                                 
    Three months ended March 31,     Change  
dollars in millions   2009     2008     Amount     Percent  
AVERAGE DEPOSITS OUTSTANDING
                               
NOW and money market deposit accounts
  $ 17,368     $ 19,865     $ (2,497 )     (12.6 )%
Savings deposits
    1,721       1,754       (33 )     (1.9 )
Certificates of deposits ($100,000 or more)
    8,490       6,450       2,040       31.6  
Other time deposits
    14,723       12,764       1,959       15.3  
Deposits in foreign office
    713       1,263       (550 )     (43.5 )
Noninterest-bearing deposits
    8,545       7,681       864       11.2  
 
Total deposits
  $ 51,560     $ 49,777     $ 1,783       3.6 %
 
                         
 
HOME EQUITY LOANS
                               
Average balance
  $ 10,273     $ 9,693                  
Weighted-average loan-to-value ratio (at date of origination)
    70 %     70 %                
Percent first lien positions
    53       56                  
                 
OTHER DATA
                               
Branches
    989       985                  
Automated teller machines
    1,479       1,479                  
                 
National Banking summary of operations
As shown in Figure 7, National Banking recorded a net loss attributable to Key of $571 million for the first quarter of 2009, compared to $24 million for the same period one year ago. During the first quarter of 2009, results were adversely affected by a goodwill and other intangible assets impairment charge of $223 million ($187 million after tax). This impairment charge was triggered by a reduction in the estimated fair value of the National Banking reporting unit caused by continued weakness in the financial markets. As of March 31, 2009, there was no goodwill remaining in the National Banking reporting unit. Also contributing to the decline in performance was a substantially higher provision for loan losses, lower net interest income and an increase in noninterest expense, offset in part by growth in noninterest income.

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Taxable-equivalent net interest income decreased by $52 million, or 15%, from the first quarter of 2008, due primarily to tighter loan and deposit spreads, and higher levels of nonperforming loans and net loan charge-offs. Average earning assets decreased by $1.537 billion, or 3%, from the year-ago quarter, reflecting reductions in the commercial, home equity and held-for-sale loan portfolios. Average deposits rose by $337 million, or 3%, as growth in certificates of deposit more than offset declines in money market deposit accounts and noninterest-bearing deposits.
Noninterest income rose by $150 million, or 149%, from the first quarter of 2008. The improvement reflects net loan sale gains of $3 million in the current quarter, compared to net losses of $105 million in the year-ago quarter. Additionally, results from investment banking and capital markets activities improved by $30 million as National Banking recorded dealer trading and derivatives income of $9 million in the first quarter of 2009, compared to losses of $32 million one year ago when a $53 million write-down of certain trading instruments was recorded. This improvement was offset in part by a $12 million reduction in investment banking income. Also contributing to the growth in noninterest income was a $19 million increase in gains on leased equipment.
The provision for loan losses rose by $620 million, due primarily to higher levels of net loan charge-offs from the commercial and financial, commercial real estate, education and marine loan portfolios. National Banking’s provision for loan losses for the first quarter of 2009 exceeded its net loan charge-offs by $351 million as the company continued to build reserves in a weak economy.
Excluding the goodwill and other intangible assets impairment charge recorded during the first quarter of 2009, noninterest expense increased by $6 million, or 2%, from the first quarter of 2008, reflecting a decrease in the credit for losses on lending-related commitments, an increase in the FDIC deposit insurance assessment and higher internally allocated support costs. The adverse effect of these factors was offset in part by lower personnel expense, due primarily to a reduction in incentive compensation accruals and a 19% reduction in the number of average full-time equivalent employees.
Figure 7. National Banking
                                 
    Three months ended March 31,     Change  
dollars in millions   2009     2008     Amount     Percent  
 
SUMMARY OF OPERATIONS
                               
Net interest income (TE)
  $ 286     $ 338  (a)   $ (52 )     (15.4 )%
Noninterest income
    251       101       150       148.5  
 
Total revenue (TE)
    537       439       98       22.3  
Provision for loan losses
    789       169       620       366.9  
Noninterest expense
    537  (a)     308       229       74.4  
 
Net loss before income taxes (TE)
    (789 )     (38 )     (751 )     N/M  
Allocated income taxes and TE adjustments
    (216 )     (14 )     (202 )     N/M  
 
Net loss
    (573 )     (24 )     (549 )     N/M  
Less: Net loss attributable to noncontrolling interests
    (2 )           (2 )     (100.0 )
 
Net loss attributable to Key
  $ (571 )   $ (24 )   $ (547 )     N/M  
 
                               
 
                               
AVERAGE BALANCES
                               
Loans and leases
  $ 46,197     $ 44,162     $ 2,035       4.6 %
Loans held for sale
    1,078       4,932       (3,854 )     (78.1 )
Total assets
    54,810       56,193       (1,383 )     (2.5 )
Deposits
    12,214       11,877       337       2.8  
 
                               
Assets under management at period end
  $ 45,959     $ 60,404     $ (14,445 )     (23.9) %
 
(a)   National Banking’s results for the first quarter of 2009 include a noncash charge for goodwill and other intangible assets impairment of $223 million ($187 million after tax). During the first quarter of 2008, National Banking’s taxable-equivalent net interest income and net income were reduced by $34 million and $21 million, respectively, as a result of its involvement with with certain leveraged lease financing transactions which were challenged by the IRS.
 
TE = Taxable Equivalent, N/M = Not Meaningful
Other Segments
Other Segments consist of Corporate Treasury and Key’s Principal Investing unit. These segments generated a net loss attributable to Key of $37 million for the first quarter of 2009, compared to net income attributable to Key of $21 million for the same period last year. These results reflect net losses of $72 million from principal investing in the first quarter of 2009, compared to net gains of $11 million for the same period last year.

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Results of Operations
Net interest income
One of Key’s principal sources of revenue is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:
¨   the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities;
 
¨   the volume and value of net free funds, such as noninterest-bearing deposits and equity capital;
 
¨   the use of derivative instruments to manage interest rate risk;
 
¨   interest rate fluctuations and competitive conditions within the marketplace; and
 
¨   asset quality.
To make it easier to compare results among several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a “taxable-equivalent basis” (i.e., as if it were all taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $154, an amount that — if taxed at the statutory federal income tax rate of 35% — would yield $100.
Figure 8, which spans pages 59 and 60, shows the various components of Key’s balance sheet that affect interest income and expense, and their respective yields or rates over the past five quarters. This figure also presents a reconciliation of taxable-equivalent net interest income for each of those quarters to net interest income reported in accordance with GAAP. The net interest margin, which is an indicator of the profitability of the earning assets portfolio, is calculated by dividing net interest income by average earning assets.
Key’s taxable-equivalent net interest income was $620 million for the first quarter of 2009, compared to $704 million for the year-ago quarter. The net interest margin for the current quarter declined to 2.77% from 3.14% for the first quarter of 2008. During the past year, the net interest margin has remained under pressure as the fall in the federal funds target rate has caused interest rates on earning assets to decline more rapidly than the rates paid for interest-bearing liabilities. Competition for deposits and a shift in deposit mix to higher costing certificates of deposit have contributed to a lower net interest margin. In addition, earning asset yields have been compressed as a result of the higher levels of nonperforming loans.
Compared to the fourth quarter of 2008, taxable-equivalent net interest income decreased by $26 million, and the net interest margin was essentially unchanged. During the first quarter, the net interest margin began to stabilize as deposits repriced and the volume of lower-yielding assets decreased as liquidity improved in the commercial paper market for certain customer segments. These positive developments were moderated by a higher level of nonperforming loans. Average earning assets decreased by $3.242 billion, or 3%, reflecting improved liquidity for commercial customers in the commercial paper market and a reduction in the demand for standby credit. Runoff in Key’s exit portfolio, net charge-offs and a lower federal funds sold position also contributed to the decrease in earning assets compared to the fourth quarter of last year.

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Since January 1, 2008, the growth and composition of Key’s earning assets have been affected by the following actions:
¨   During the first quarter of 2008, Key increased its loan portfolio (primarily commercial real estate and consumer loans) through the acquisition of U.S.B. Holding Co., Inc., the holding company for Union State Bank, a 31-branch state-chartered commercial bank headquartered in Orangeburg, New York.
 
¨   Key sold $192 million of commercial real estate loans during the first quarter of 2009 and $2.244 billion during all of 2008. Since some of these loans have been sold with limited recourse (i.e., there is a risk that Key will be held accountable for certain events or representations made in the sales agreements), Key established and has maintained a loss reserve in an amount that management believes is appropriate. More information about the related recourse agreement is provided in Note 14 (“Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with Federal National Mortgage Association” on page 28. In late March 2009, Key transferred $1,474 billion of loans from the construction portfolio to the commercial mortgage portfolio in accordance with regulatory guidelines for the classification of loans that have reached a completed status. In June 2008, Key transferred $384 million of commercial real estate loans ($719 million, net of $335 million in net charge-offs) from the held-to-maturity loan portfolio to held-for-sale status as part of a process undertaken to aggressively reduce Key’s exposure in the residential properties segment of the construction loan portfolio through the sale of certain loans. Additional information about the status of this process is included in the section entitled “Loans and loans held for sale” under the heading “Commercial real estate loans” on page 67.
 
¨   Key sold $109 million of education loans during the first quarter of 2009 and $121 million during all of 2008. In March 2008, Key transferred $3.284 billion of education loans from held-for-sale status to the held-to-maturity loan portfolio in recognition of the fact that the secondary markets for these loans have been adversely affected by market liquidity issues.
 
¨   Key sold $311 million of other loans (including $302 million of residential mortgage loans) during the first quarter of 2009 and $932 million during all of 2008.

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Figure 8. Average Balance Sheets, Net Interest Income and Yields/Rates
                                                 
    First Quarter 2009     Fourth Quarter 2008  
    Average             Yield/     Average             Yield/  
dollars in millions   Balance     Interest     Rate     Balance     Interest     Rate  
 
ASSETS
                                               
Loans (a),(b)
                                               
Commercial, financial and agricultural 
  $ 26,427     $ 278       4.26 %   $ 27,662     $ 346       4.98 %
Real estate — commercial mortgage
    10,965  (c)     140       5.20       10,707       151       5.63  
Real estate — construction
    7,511  (c)     84       4.54       7,686       100       5.16  
Commercial lease financing 
    8,790       94       4.28       9,186       78       3.38  (d)
 
Total commercial loans
    53,693       596       4.50       55,241       675       4.87  
Real estate — residential
    1,776       27       6.00       1,903       29       6.00  
Home equity: 
                                               
Community Banking
    10,273       114       4.49       10,037       129       5.13  
National Banking
    1,040       19       7.52       1,088       21       7.62  
 
Total home equity loans
    11,313       133       4.77       11,125       150       5.37  
Consumer other — Community Banking
    1,225       32       10.56       1,260       30       9.57  
Consumer other — National Banking:
                                               
Marine
    3,331       52       6.24       3,467       55       6.32  
Education
    3,717       43       4.59       3,661       56       6.19  
Other
    274       5       7.97       288       6       8.22  
 
Total consumer other — National Banking
    7,322       100       5.47       7,416       117       6.33  
 
Total consumer loans
    21,636       292       5.43       21,704       326       6.00  
 
Total loans
    75,329       888       4.77       76,945       1,001       5.19  
Loans held for sale
    1,197       12       4.07       1,495       18       4.84  
Securities available for sale (a),(e)
    8,310       109       5.33       8,269       111       5.39  
Held-to-maturity securities (a)
    25       1       9.84       27       2       10.74  
Trading account assets
    1,348       13       3.97       1,416       17       4.81  
Short-term investments
    2,450       3       .47       3,715       8       .88  
Other investments (e)
    1,523       12       2.80       1,557       13       3.06  
 
Total earning assets
    90,182       1,038       4.64       93,424       1,170       4.98  
Allowance for loan losses
    (2,067 )                     (1,676 )                
Accrued income and other assets
    15,700                       15,987                  
 
Total assets
  $ 103,815                     $ 107,735                  
 
                                           
 
                                               
LIABILITIES
                                               
NOW and money market deposit accounts
  $ 23,957       38       .65     $ 24,919       78       1.24  
Savings deposits
    1,744             .09       1,722       1       .16  
Certificates of deposit ($100,000 or more) (f)
    12,455       121       3.93       11,270       118       4.20  
Other time deposits
    14,737       140       3.85       14,560       146       3.98  
Deposits in foreign office
    1,259       1       .21       1,300       3       .90  
 
Total interest-bearing deposits
    54,152       300       2.24       53,771       346       2.56  
Federal funds purchased and securities sold under repurchase agreements 
    1,545       1       .31       1,727       4       .86  
Bank notes and other short-term borrowings 
    4,405       6       .58       9,205       31       1.36  
Long-term debt  (f)
    14,760       111       3.20       14,557       143       4.08  
 
Total interest-bearing liabilities
    74,862       418       2.29       79,260       524       2.65  
Noninterest-bearing deposits
    11,232                       10,860                  
Accrued expense and other liabilities
    7,163                       7,524                  
 
Total liabilities
    93,257                       97,644                  
 
                                               
EQUITY
                                               
Key shareholders’ equity
    10,352                       9,888                  
Noncontrolling interests
    206                       203                  
 
Total equity
    10,558                       10,091                  
 
Total liabilities and equity
  $ 103,815                     $ 107,735                  
 
                                           
 
                                               
Interest rate spread (TE)
                    2.35 %                     2.33 %
 
Net interest income (TE) and net interest margin (TE)
            620       2.77 %             646  (c)     2.76 (c)
 
                                           
TE adjustment (a)
            6                       7          
 
Net interest income, GAAP basis
          $ 614                     $ 639          
 
                                           
 
Average balances have not been restated to reflect Key’s January 1, 2008, adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” and FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation 39.”
(a)   Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%.
 
(b)   For purposes of these computations, nonaccrual loans are included in average loan balances.
 
(c)   In late March 2009, Key transferred $1.474 billion of loans from the construction portfolio to the commercial mortgage portfolio in accordance with regulatory guidelines for the classification of loans that have reached a completed status.
 
(d)   During the fourth quarter of 2008, Key’s taxable-equivalent net interest income was reduced by $18 million as a result of an agreement reached with the IRS on all material aspects related to the IRS global tax settlement pertaining to certain leveraged lease financing transactions. Excluding this reduction, the taxable-equivalent yield on Key’s commercial lease financing portfolio would have been 4.17% for the fourth quarter of 2008, and Key’s taxable-equivalent net interest margin would have been 2.84%. During the second quarter of 2008, Key’s taxable-equivalent net interest income was reduced by $838 million following an adverse federal court decision on Key’s tax treatment of a leveraged sale-leaseback transaction. Excluding this reduction, the taxable-equivalent yield on Key’s commercial lease financing portfolio would have been 5.25% for the second quarter of 2008, and Key’s taxable-equivalent net interest margin would have been 3.32%. During the first quarter of 2008. Key increased its tax reserves for certain lease in, lease out transactions and recalculated its lease income in accordance with prescribed accounting standards. These actions reduced Key’s first quarter 2008 taxable-equivalent net interest income by $34 million. Excluding this reduction, the taxable-equivalent yield on Key’s commercial lease financing portfolio would have been 5.27% for the first quarter of 2008, and Key’s taxable-equivalent net interest margin would have been 3.29%.

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Figure 8. Average Balance Sheets, Net Interest Income and Yields/Rates (Continued)
                                                                         
Third Quarter 2008       Second Quarter 2008   First Quarter 2008
Average             Yield/         Average             Yield/     Average             Yield/  
Balance     Interest     Rate         Balance     Interest     Rate     Balance     Interest     Rate  
 
                                                                         
                                                                         
$ 26,345     $ 356       5.38 %  
 
  $ 26,057     $ 352       5.42 %   $ 25,411     $ 392       6.21 %
  10,718       158       5.87    
 
    10,593       156       5.91       10,283       175       6.84  
  7,806       109       5.53    
 
    8,484       118       5.61       8,468       134       6.36  
  9,585       108       4.52    
 
    9,798       (709 )     (28.94 (d)     10,004       98       3.91  (d)
 
  54,454       731       5.35    
 
    54,932       (83 )     (.58 )     54,166       799       5.93  
  1,899       28       6.04    
 
    1,918       30       6.12       1,916       30       6.29  
                                                                         
  9,887       141       5.64    
 
    9,765       140       5.78       9,693       154       6.38  
  1,138       22       7.65    
 
    1,200       23       7.68       1,260       24       7.74  
 
  11,025       163       5.85    
 
    10,965       163       5.99       10,953       178       6.54  
  1,264       33       10.37    
 
    1,271       33       10.34       1,305       34       10.59  
                                                                         
  3,586       57       6.33    
 
    3,646       56       6.26       3,646       58       6.31  
  3,635       54       5.90    
 
    3,595       53       5.88       363       7       8.04  
  308       6       8.22    
 
    325       7       8.21       339       7       8.32  
 
  7,529       117       6.20    
 
    7,566       116       6.16       4,348       72       6.61  
 
  21,717       341       6.25    
 
    21,720       342       6.32       18,522       314       6.81  
 
  76,171       1,072       5.60    
 
    76,652       259       1.37       72,688       1,113       6.15  
  1,723       21       4.76    
 
    1,356       20       5.94       4,984       87       7.01  
  8,266       110       5.38    
 
    8,315       111       5.40       8,419       110       5.28  
  27       1       13.81    
 
    25             11.47       29       1       11.02  
  1,579       16       4.02    
 
    1,041       10       3.88       1,075       13       4.84  
  794       6       3.44    
 
    773       8       3.83       1,165       9       3.18  
  1,563       12       2.87    
 
    1,580       14       3.09       1,552       12       3.05  
 
  90,123       1,238       5.47    
 
    89,742       422       1.89       89,912       1,345       6.01  
  (1,498 )                  
 
    (1,338 )                     (1,236 )                
  14,531                    
 
    14,886                       14,680                  
 
$ 103,156                    
 
  $ 103,290                     $ 103,356                  
                     
 
                                           
                       
 
                                               
                       
 
                                               
$ 26,657       108       1.61    
 
  $ 27,158       102       1.51     $ 26,996       139       2.07  
  1,783       1       .21    
 
    1,815       1       .27       1,865       3       .62  
  9,506       97       4.05    
 
    8,670       88       4.09       8,072       95       4.72  
  13,118       129       3.92    
 
    12,751       135       4.27       12,759       146       4.59  
  2,762       12       1.77    
 
    4,121       21       1.95       5,853       45       3.13  
 
  53,826       347       2.57    
 
    54,515       347       2.56       55,545       428       3.10  
                       
 
                                               
  2,546       10       1.58    
 
    3,267       15       1.86       3,863       28       2.91  
  4,843       34       2.72    
 
    4,770       27       2.26       4,934       39       3.22  
  15,123       142       3.91    
 
    14,620       133       3.87       13,238       146       4.71  
 
  76,338       533       2.80    
 
    77,172       522       2.75       77,580       641       3.36  
  10,756                    
 
    10,617                       10,741                  
  7,152                    
 
    6,706                       6,389                  
 
  94,246                    
 
    94,495                       94,710                  
                       
 
                                               
                                                                         
  8,734                    
 
    8,617                       8,445                  
  176                    
 
    178                       201                  
 
  8,910                    
 
    8,795                       8,646                  
 
$ 103,156                    
 
  $ 103,290                     $ 103,356                  
                     
 
                                           
                       
 
                                               
                  2.67 %  
 
                    (.86 )%                     2.65 %
 
          705       3.13 %  
 
            (100 (c)     (.44 )% (c)             704  (c)     3.14 (c)
                     
 
                                           
          6            
 
            (458 )                     (9 )        
 
        $ 699            
 
          $ 358                     $ 713          
                     
 
                                           
 
(e)   Yield is calculated on the basis of amortized cost.
 
(f)   Rate calculation excludes basis adjustments related to fair value hedges.
 
TE = Taxable Equivalent, GAAP = U.S. generally accepted accounting principles

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Figure 9 shows how the changes in yields or rates and average balances from the prior year affected net interest income. The section entitled “Financial Condition,” which begins on page 67, contains more discussion about changes in earning assets and funding sources.
Figure 9. Components of Net Interest Income Changes
                         
    From three months ended March 31, 2008  
    to three months ended March 31, 2009  
    Average     Yield/     Net  
in millions   Volume     Rate     Change  
 
INTEREST INCOME
                       
Loans
  $ 39     $ (264 )   $ (225 )
Loans held for sale
    (48 )     (27 )     (75 )
Securities available for sale
    (1 )           (1 )
Trading account assets
    3       (3 )      
Short-term investments
    5       (11 )     (6 )
 
Total interest income (TE)
    (2 )     (305 )     (307 )
 
                       
INTEREST EXPENSE
                       
NOW and money market deposit accounts
    (14 )     (87 )     (101 )
Savings deposits
          (3 )     (3 )
Certificates of deposit ($100,000 or more)
    45       (19 )     26  
Other time deposits
    21       (27 )     (6 )
Deposits in foreign office
    (21 )     (23 )     (44 )
 
Total interest-bearing deposits
    31       (159 )     (128 )
Federal funds purchased and securities sold under repurchase agreements
    (11 )     (16 )     (27 )
Bank notes and other short-term borrowings
    (4 )     (29 )     (33 )
Long-term debt
    15       (50 )     (35 )
 
Total interest expense
    31       (254 )     (223 )
 
Net interest income (TE)
  $ (33 )   $ (51 )   $ (84 )
 
                 
 
The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.
TE = Taxable Equivalent
Noninterest income
Key’s noninterest income was $492 million for the first quarter of 2009, compared to $530 million for the year-ago quarter. As shown in Figure 11, the decrease was attributable to two primary factors. Key recorded net losses of $72 million from principal investing in the first quarter of 2009, compared to net gains of $11 million for the same period last year. In addition, Key recorded a $105 million gain from the sale of Visa Inc. shares during the first quarter of 2009, compared to a $165 million gain from the partial redemption of shares one year ago. Excluding principal investing activities and the gains associated with the Visa shares, Key’s noninterest income was up $105 million from the first quarter of 2008. Contributing to this improvement was a $19 million increase in gains on leased equipment (included in “miscellaneous income”) and a $10 million increase in income from investment banking and capital markets activities. In addition, Key had net gains of $8 million from loan sales in the current quarter, compared to net losses of $101 million for the same period last year. The increase attributable to these factors was offset in part by net losses of $14 million from securities in the current year and a $12 million reduction in income from trust and investment services.
The trend in the major components of Key’s fee-based income over the past five quarters is shown in Figure 10.

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Figure 10. Fee-Based Income — Major Components
                                         
    2009     2008  
in millions   First     Fourth     Third     Second     First  
 
Trust and investment services income
  $ 117     $ 138     $ 133     $ 138     $ 129  
Service charges on deposit accounts
    82       90       94       93       88  
Operating lease income
    61       64       69       68       69  
Letter of credit and loan fees
    38       42       53       51       37  
Corporate-owned life insurance income
    27       33       28       28       28  
Electronic banking fees
    24       25       27       27       24  
Insurance income
    18       15       15       20       15  
Investment banking and capital markets income (loss)
    18       6       (31 )     80       8  
Net (losses) gains from principal investing
    (72 )     (37 )     (14 )     (14 )     11  
 
The following discussion explains the composition of certain elements of Key’s noninterest income shown in Figure 11 and the factors that caused those elements to change.
Figure 11. Noninterest Income
                                 
    Three months ended March 31,     Change  
dollars in millions   2009     2008     Amount     Percent  
 
Trust and investment services income
  $ 117     $ 129     $ (12 )     (9.3 )%
Service charges on deposit accounts
    82       88       (6 )     (6.8 )
Operating lease income
    61       69       (8 )     (11.6 )
Letter of credit and loan fees
    38       37       1       2.7  
Corporate-owned life insurance income
    27       28       (1 )     (3.6 )
Electronic banking fees
    24       24              
Insurance income
    18       15       3       20.0  
Investment banking and capital markets income
    18       8       10       125.0  
Net securities (losses) gains
    (14 )     3       (17 )     N/M  
Net (losses) gains from principal investing
    (72 )     11       (83 )     N/M  
Net gains (losses) from loan securitizations and sales
    8       (101 )     109       N/M  
Gain from sale/redemption of Visa Inc. shares
    105       165       (60 )     (36.4 )
Other income:
                               
Loan securitization servicing fees
    4       4              
Credit card fees
    3       4       (1 )     (25.0 )
Miscellaneous income
    73       46       27       58.7  
 
Total other income
    80       54       26       48.1  
 
Total noninterest income
  $ 492     $ 530     $ (38 )     (7.2 )%
 
                       
 
N/M = Not Meaningful
Trust and investment services income. Trust and investment services are Key’s largest source of noninterest income. The primary components of revenue generated by these services are shown in Figure 12. The reduction from the first quarter of 2008 is attributable to decreases in both personal and institutional asset management income, offset in part by higher income from brokerage commissions and fees.
Figure 12. Trust and Investment Services Income
                                 
    Three months ended March 31,     Change  
dollars in millions   2009     2008     Amount     Percent  
 
Brokerage commissions and fee income
  $ 38     $ 33     $ 5       15.2 %
Personal asset management and custody fees
    33       41       (8 )     (19.5 )
Institutional asset management and custody fees
    46       55       (9 )     (16.4 )
 
Total trust and investment services income
  $ 117     $ 129     $ (12 )     (9.3 )%
 
                       
 

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A significant portion of Key’s trust and investment services income depends on the value and mix of assets under management. At March 31, 2009, Key’s bank, trust and registered investment advisory subsidiaries had assets under management of $60.164 billion, compared to $80.453 billion at March 31, 2008. As shown in Figure 13, most of the decrease was attributable to the equity and securities lending portfolios. The value of the equity portfolio declined because of weakness in the equity markets. The decline in the securities lending portfolio was due in part to increased volatility in the fixed income markets and actions taken by management to maintain sufficient liquidity within the portfolio. When clients’ securities are lent out, the borrower must provide Key with cash collateral, which is invested during the term of the loan. The difference between the revenue generated from the investment and the cost of the collateral is shared with the lending client. This business, although profitable, generates a significantly lower rate of return (commensurate with the lower level of risk) than other types of assets under management. Key’s portfolio of hedge funds, which grew by 21% over the past twelve months, generates a substantially higher rate of return and served to moderate the overall decrease in trust and investment services income.
Figure 13. Assets Under Management
                                         
    2009     2008  
dollars in millions   First     Fourth     Third     Second     First  
 
Assets under management by investment type:
                                       
Equity
  $ 26,508     $ 29,384     $ 37,131     $ 40,446     $ 39,800  
Securities lending
    12,275       12,454       16,538       17,756       18,476  
Fixed income
    9,892       9,819       10,461       10,823       10,598  
Money market
    9,269       10,520       9,679       9,604       9,746  
Hedge funds
    2,220       2,540       2,867       2,369       1,833  
 
Total
  $ 60,164     $ 64,717     $ 76,676     $ 80,998     $ 80,453  
 
                             
Proprietary mutual funds included in assets under management:
                                       
Money market
  $ 6,439     $ 7,458     $ 6,871     $ 7,178     $ 7,131  
Equity
    5,149       5,572       6,771       7,202       6,556  
Fixed income
    674       640       633       617       631  
 
Total
  $ 12,262     $ 13,670     $ 14,275     $ 14,997     $ 14,318  
 
                             
 
Service charges on deposit accounts. Service charges on deposit accounts decreased from the first quarter of 2008, due primarily to a reduction in overdraft fees resulting from lower transaction volume. Key’s corporate clients have been focusing on reducing their transaction service charges by maintaining higher balances in their noninterest-bearing deposit accounts.
Operating lease income. The decrease in operating lease income compared to the year-ago quarter is attributable to a lower volume of activity in the Equipment Finance line of business. Depreciation expense related to the leased equipment is presented in Figure 15 as “operating lease expense.”
Investment banking and capital markets income.As shown in Figure 14, investment banking and capital markets income increased from the first three months of 2008 as Key recorded dealer trading and derivatives income of $2 million in the first quarter of 2009, compared to losses of $21 million one year ago when the National Banking group recorded a $53 million write-down of certain trading instruments. This improvement was offset in part by an $11 million reduction in investment banking income.
Figure 14. Investment Banking and Capital Markets Income
                                 
    Three months ended March 31,     Change  
dollars in millions   2009     2008     Amount     Percent  
 
Investment banking income
  $ 11     $ 22     $ (11 )     (50.0 )%
Losses from other investments
    (8 )     (6 )     (2 )     (33.3 )
Dealer trading and derivatives income (loss)
    2       (21 )     23       N/M  
Foreign exchange income
    13       13              
 
Total investment banking and capital markets income
  $ 18     $ 8     $ 10       125.0 %
 
                       
 
N/M = Not Meaningful
Net (losses) gains from principal investing. Principal investments consist of direct and indirect investments in predominantly privately held companies. Key’s principal investing income is susceptible to

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volatility since most of it is derived from mezzanine debt and equity investments in small to medium-sized businesses. These investments are carried on the balance sheet at fair value ($932 million at March 31, 2009, $990 million at December 31, 2008, and $1.020 billion at March 31, 2008). The net (losses) gains presented in Figure 11 derive from changes in fair values as well as sales of principal investments.
Net gains (losses) from loan securitizations and sales. Key sells or securitizes loans to achieve desired interest rate and credit risk profiles, to improve the profitability of the overall loan portfolio or to diversify funding sources. During the first quarter of 2009, Key recorded $8 million of net gains from loan sales, compared to net losses of $101 million from loan sales and write-downs during the first quarter of 2008. The losses recorded for the year-ago quarter were due primarily to volatility in the fixed income markets and the related housing correction. Approximately $84 million of these losses pertained to commercial real estate loans held for sale. The types of loans sold during 2009 and 2008 are presented in Figure 19 on page 70. In March 2008, Key transferred $3.284 billion of education loans from held-for-sale status to the loan portfolio. The secondary markets for these loans have been adversely affected by market liquidity issues, making securitizations impractical and prompting the company’s decision to move these loans to a held-to-maturity classification.
Noninterest expense
Key’s noninterest expense was $973 million for the first quarter of 2009, compared to $733 million for the same period last year. Excluding a goodwill and other intangible assets impairment charge of $223 million recorded in the current quarter, noninterest expense was up $17 million, or 2%. As shown in Figure 15, personnel expense decreased by $47 million, primarily as a result of lower incentive compensation accruals and a reduction in salaries expense. The reduction in personnel expense was more than offset by a $64 million increase in nonpersonnel expense (excluding the goodwill and other intangible assets impairment charge), due primarily to a $27 million credit for losses on lending-related commitments recorded in the first quarter of 2008 and a $28 million increase in the FDIC deposit insurance assessment. The higher deposit insurance assessment is a result of actions recently taken by the FDIC to restore the Deposit Insurance Fund to the minimum level acceptable under current law. More specific information regarding the FDIC’s actions is included in the section entitled “Deposits and other sources of funds,” which begins on page 73. Additionally, professional fees rose by $12 million.
Figure 15. Noninterest Expense
                                 
    Three months ended March 31,     Change  
dollars in millions   2009     2008     Amount     Percent  
 
Personnel
  $ 362     $ 409     $ (47 )     (11.5 )%
Net occupancy
    66       66              
Operating lease expense
    50       58       (8 )     (13.8 )
Computer processing
    47       47              
Professional fees
    35       23       12       52.2  
FDIC assessment
    30       2       28       N/M  
Equipment
    22       24       (2 )     (8.3 )
Marketing
    14       14              
Intangible assets impairment
    223             223       N/M  
Other expense:
                               
Postage and delivery
    8       11       (3 )     (27.3 )
Franchise and business taxes
    9       8       1       12.5  
Telecommunications
    7       8       (1 )     (12.5 )
Credit for losses on lending-related commitments
          (27 )     27       (100.0 )
Miscellaneous expense
    100       90       10       11.1  
 
Total other expense
    124       90       34       37.8  
 
Total noninterest expense
  $ 973     $ 733     $ 240       32.7 %
 
                       
 
                               
Average full-time equivalent employees
    17,468       18,426       (958 )     (5.2 )%
 
N/M = Not Meaningful
The following discussion explains the composition of certain elements of Key’s noninterest expense and the factors that caused those elements to change.

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Personnel. As shown in Figure 16, personnel expense, the largest category of Key’s noninterest expense, decreased by $47 million, or 12%, from the first quarter of 2008. The decrease was due primarily to lower accruals for incentive compensation and a reduction in salaries expense stemming from a 5% decline in the number of average full-time equivalent employees. These reductions were offset in part by higher costs associated with employee benefits. As previously reported, Key expects to experience a substantial increase in pension expense in 2009. The increase is due primarily to an anticipated rise in the amortization of losses associated with the 2008 decrease in the value of pension plan assets caused by steep declines in the capital markets.
Figure 16. Personnel Expense
                                 
    Three months ended March 31,     Change  
dollars in millions   2009     2008     Amount     Percent  
 
Salaries
  $ 225     $ 239     $ (14 )     (5.9 )%
Incentive compensation
    37       74       (37 )     (50.0 )
Employee benefits
    83       76       7       9.2  
Stock-based compensation
    9       14       (5 )     (35.7 )
Severance
    8       6       2       33.3  
 
Total personnel expense
  $ 362     $ 409     $ (47 )     (11.5 )%
 
                       
 
The average number of full-time equivalent employees was 17,468 for the first quarter of 2009, compared to 18,426 for the same period last year.
Operating lease expense. The decrease in operating lease expense compared to the year-ago quarter is attributable to a lower volume of activity in the Equipment Finance line of business. Income related to the rental of leased equipment is presented in Figure 11 as “operating lease income.”
Professional fees. The increase in professional fees compared to the first three months of 2008 is due to increased collection efforts on loans, the outsourcing of certain services and other corporate initiatives.
Intangible assets impairment. During the first quarter of 2009, Key determined that the estimated fair value of its National Banking reporting unit was less than the carrying amount, reflecting continued weakness in the financial markets. As a result, Key recorded a pre-tax noncash accounting charge of $223 million. As a result of this charge, Key has now written off all of the goodwill that had been assigned to its National Banking reporting unit.
Income taxes
Key recorded a tax benefit of $244 million for the first quarter of 2009, compared to a provision of $104 million for the comparable period in 2008. The tax benefit was largely attributable to the continuation of a difficult economic environment and the resulting increase in Key’s provision for loan losses, which contributed to the loss recorded for the current quarter.
During the first quarter of 2009, Key recorded a $223 million charge for intangible assets impairment of which $127 million is not deductible for tax purposes. Excluding this charge and the related tax benefit. Key’s effective tax rate was 40.1% for the first quarter of 2009, compared to 32.2% for the first three months of 2008. The higher effective tax rate in 2009 reflects the combined effects of the loss recorded in the current year and the permanent tax differences described on page 66.

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On an adjusted basis, the effective tax rates for both the current and prior year differ from Key’s combined federal and state statutory tax rate of 37.5%, primarily because Key generates income from investments in tax-advantaged assets such as corporate-owned life insurance, earns credits associated with investments in low-income housing projects, and records tax deductions associated with dividends paid to Key’s common shares held in the 401 (k) savings plan.
In the ordinary course of business, Key enters into certain types of lease financing transactions that result in tax deductions. The IRS has completed audits of Key’s income tax returns for a number of prior years and has disallowed the tax deductions taken in connection with these transactions. On February 13, 2009, Key and the IRS entered into a closing agreement that resolves substantially all outstanding leveraged lease financing tax issues. Key expects the remaining issues to be settled with the IRS in the near future with no additional tax or interest liability to Key. Additional information pertaining to the contested lease financing transactions, the related charges and the settlement is included in Note 17 (“Income Taxes”), which begins on page 110 of Key’s 2008 Annual Report to Shareholders.

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Financial Condition
Loans and loans held for sale
At March 31, 2009, total loans outstanding were $73.703 billion, compared to $76.504 billion at December 31, 2008, and $76.444 billion at March 31, 2008. The decrease in the current quarter reflects reductions in most of Key’s loan portfolios, with the largest decline experienced in the commercial portfolio.
Commercial loan portfolio
Commercial loans outstanding decreased by $2.506 billion, or 5%, from the year ago quarter. Virtually all of the decrease occurred during the current quarter as a result of improved liquidity for clients in the commercial paper market, a reduction in the demand for standby credit, runoff in Key’s exit loan portfolio and net loan charge-offs.
Commercial real estate loans. Commercial real estate loans for both owner- and nonowner-occupied properties constitute one of the largest segments of Key’s commercial loan portfolio. At March 31, 2009, Key’s commercial real estate portfolio included mortgage loans of $12.057 billion and construction loans of $6.208 billion. The average mortgage loan originated during the first quarter of 2009 was $2 million, and the largest mortgage loan at March 31, 2009, had a balance of $123 million. At March 31, 2009, the average construction loan commitment was $5 million. The largest construction loan commitment was $65 million, all of which was outstanding.
Key’s commercial real estate lending business is conducted through two primary sources: a 14-state banking franchise, and Real Estate Capital and Corporate Banking Services, a national line of business that cultivates relationships both within and beyond the branch system. This line of business deals exclusively with nonowner-occupied properties (generally properties for which at least 50% of the debt service is provided by rental income from nonaffiliated third parties) and accounted for approximately 62% of Key’s average commercial real estate loans during the first quarter of 2009. Key’s commercial real estate business generally focuses on larger real estate developers and, as shown in Figure 17, is diversified by both industry type and geographic location of the underlying collateral.
Figure 17. Commercial Real Estate Loans
                                                                                   
March 31, 2009   Geographic Region             Percent of       Commercial        
dollars in millions   Northeast     Southeast     Southwest     Midwest     Central     West     Total     Total       Mortgage     Construction  
       
Nonowner-occupied:
                                                                                 
Retail properties
  $ 213     $ 793     $ 234     $ 762     $ 381     $ 478     $ 2,861       15.7 %     $ 1,496     $ 1,365  
Multifamily properties
    318       658       453       268       508       457       2,662       14.6         1,570       1,092  
Residential properties
    343       469       73       145       233       576       1,839       10.1         295       1,544  
Office buildings
    362       137       101       162       209       427       1,398       7.6         851       547  
Health facilities
    240       156       39       231       158       301       1,125       6.1         995       130  
Land and development
    127       196       203       55       176       188       945       5.2         403       542  
Warehouses
    115       223       24       85       62       171       680       3.7         479       201  
Hotels/Motels
    55       96             15       23       62       251       1.4         185       66  
Manufacturing facilities
    35             17       28             29       109       .6         66       43  
Other
    306       203       4       105       177       140       935       5.1         792       143  
       
 
    2,114       2,931       1,148       1,856       1,927       2,829       12,805       70.1         7,132       5,673  
Owner-occupied
    1,159       251       92       1,501       469       1,988       5,460       29.9         4,925       535  
       
Total
  $ 3,273     $ 3,182     $ 1,240     $ 3,357     $ 2,396     $ 4,817     $ 18,265       100.0 %     $ 12,057     $ 6,208  
 
                                                             
       
Nonowner-occupied:
                                                                                 
Nonperforming loans
  $ 65     $ 217     $ 115     $ 57     $ 43     $ 207     $ 704       N/M       $ 167     $ 537  
Accruing loans past due 90 days or more
    42       36       23       5       36       85       227       N/M         125       102  
Accruing loans past due 30 through 89 days
    93       195       94       15       71       66       534       N/M         169       365  
       
Northeast –   Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont
Southeast –   Alabama, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, Washington D.C. and West Virginia
Southwest –   Arizona, Nevada and New Mexico
Midwest –   Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin
Central –   Arkansas, Colorado, Oklahoma, Texas and Utah
West –   Alaska, California, Hawaii, Idaho, Montana, Oregon, Washington and Wyoming
 
N/M = Not Meaningful

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In the first quarter of 2009, nonperforming loans related to Key’s nonowner-occupied properties rose by $221 million, due in part to the continuation of deteriorating market conditions in both the income properties and residential properties segments of Key’s commercial real estate construction portfolio. As previously reported, Key has undertaken a process to reduce its exposure in the residential properties segment of its construction loan portfolio through the sale of certain loans. In conjunction with these efforts, Key transferred $384 million of commercial real estate loans ($719 million, net of $335 million in net charge-offs) from the held-to-maturity loan portfolio to held-for-sale status in June 2008. Key’s ability to sell these loans has been hindered by continued disruption in the financial markets which has precluded the ability of certain potential buyers to obtain the necessary funding. The balance of this portfolio has been reduced to $70 million at March 31, 2009, primarily as a result of cash proceeds from loan sales, transfers to other real estate owned (“OREO”), and both realized and unrealized losses. Key will continue to pursue the sale or foreclosure of the remaining loans, all of which are on nonperforming status.
During the last half of 2008, Key ceased lending to homebuilders within its 14-state Community Banking footprint.
Commercial lease financing. Management believes Key has both the scale and array of products to compete in the specialty of equipment lease financing. Key conducts these financing arrangements through the Equipment Finance line of business. Commercial lease financing receivables represented 16% of commercial loans at March 31, 2009, compared to 18% at March 31, 2008.
Consumer loan portfolio
Consumer loans outstanding decreased by $235 million, or 1%, from one year ago. As shown in Figure 35 on page 94, $193 million, or 82%, of the reduction came from Key’s exit loan portfolio (primarily the marine segment) during the first quarter of 2009.
The home equity portfolio is by far the largest segment of Key’s consumer loan portfolio. A significant amount of this portfolio (91% at March 31, 2009) is derived primarily from the Regional Banking line of business within the Community Banking group; the remainder originated from the Consumer Finance line of business within the National Banking group and has been in a runoff mode since the fourth quarter of 2007.
Figure 18 summarizes Key’s home equity loan portfolio by source at the end of each of the last five quarters, as well as certain asset quality statistics and yields on the portfolio as a whole.
Figure 18. Home Equity Loans
                                         
    2009     2008  
dollars in millions   First     Fourth     Third     Second     First  
 
SOURCES OF PERIOD-END LOANS
                                       
Community Banking
  $ 10,290     $ 10,124     $ 9,970     $ 9,851     $ 9,678  
National Banking
    998       1,051       1,101       1,153       1,220  
 
Total
  $ 11,288     $ 11,175     $ 11,071     $ 11,004     $ 10,898  
 
                             
 
Nonperforming loans at period end
  $ 110     $ 91     $ 86     $ 75     $ 74  
Net loan charge-offs for the period
    32       31       21       19       15  
Yield for the period
    4.77 %     5.37 %     5.85 %     5.99 %     6.54 %
 
Management expects the level of Key’s consumer loan portfolio to decrease in the future as a result of actions taken to exit low-return, indirect businesses. In December 2007, Key decided to exit dealer-originated home improvement lending activities, which are largely out-of-footprint. During the last half of 2008, Key exited retail and floor-plan lending for marine and recreational vehicle products, and began to limit new education loans to those backed by government guarantee.

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Loans held for sale
As shown in Note 6 (“Loans and Loans Held for Sale”), which begins on page 17, Key’s loans held for sale were $1.124 billion at March 31, 2009, compared to $1.027 billion at December 31, 2008, and $1.674 billion at March 31, 2008.
At March 31, 2009, Key’s loans held for sale included $301 million of commercial mortgage loans. In the absence of quoted market prices, management uses valuation models to measure the fair value of these loans and adjusts the amount recorded on the balance sheet if fair value falls below recorded cost. The models are based on assumptions related to prepayment speeds, default rates, funding cost and discount rates. In light of the volatility in the financial markets, management has reviewed Key’s assumptions and determined that they reflect current market conditions. As a result, no significant adjustments to the assumptions were required during the first quarter of 2009.
During the first quarter of 2009, Key recorded net unrealized losses of $18 million and net realized losses of $14 million on its loans held for sale portfolio. Key records these transactions in “net gains (losses) from loan securitizations and sales” on the income statement. Key has not been significantly impacted by market volatility in the subprime mortgage lending industry, having exited this business in the fourth quarter of 2006.
Sales and securitizations
As market conditions allow, Key continues to utilize alternative funding sources like loan sales and securitizations to support its loan origination capabilities. In addition, certain acquisitions completed over the past several years have improved Key’s ability under favorable market conditions to originate and sell new loans, and to securitize and service loans originated by others, especially in the area of commercial real estate.
During the first quarter of 2009, Key sold $302 million of residential real estate loans, $192 million of commercial real estate loans, $109 million of education loans and $9 million of commercial loans and leases. Most of these sales came from the held-for-sale portfolio. Due to unfavorable market conditions, Key has not securitized any of its education loans since 2006 and does not anticipate entering into any securitizations of this type in the foreseeable future.
Among the factors that Key considers in determining which loans to sell or securitize are:
¨   whether particular lending businesses meet established performance standards or fit with Key’s relationship banking strategy;
 
¨   Key’s asset/liability management needs;
 
¨   whether the characteristics of a specific loan portfolio make it conducive to securitization;
 
¨   the cost of alternative funding sources;
 
¨   the level of credit risk;
 
¨   capital requirements; and
 
¨   market conditions and pricing.

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Figure 19 summarizes Key’s loan sales for the first three months of 2009 and all of 2008.
Figure 19. Loans Sold (Including Loans Held for Sale)
                                                         
            Commercial     Commercial     Residential             Consumer        
in millions   Commercial     Real Estate     Lease Financing     Real Estate     Education     — Direct     Total  
 
2009
                                                       
First quarter
  $ 9     $ 192           $ 302     $ 109           $ 612  
 
2008                                                        
Fourth quarter
  $ 10     $ 580           $ 222     $ 1           $ 813  
Third quarter
    11       699             197       10     $ 9       926  
Second quarter
    19       761     $ 38       213       38             1,069  
First quarter
    14       204       29       170       72             489  
 
Total
  $ 54     $