¨ 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

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.

¨ 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.

¨ 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.

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.

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).

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 . . .