¨ KeyBank refers to KeyCorp's subsidiary bank, KeyBank National Association.

¨ Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries.

¨ In April 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of this decision, Key has accounted for this business as a discontinued operation. We use the phrase continuing operations in this document to mean all of Key's business other than Austin.

¨ 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. As a result of the Supervisory Capital Assessment Program ("SCAP"), the banking regulators began supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. While not codified, analysts and banking regulators have assessed Key's capital adequacy using the Tier 1 common equity measure. You will find a more detailed explanation of total capital, Tier 1 capital and Tier 1 common equity and how they are calculated in the section entitled "Capital," which begins on page 87.

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 "goal," " objective," "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:
¨ Although management believes Key has fulfilled the requirement to generate $1.8 billion of additional Tier 1 common equity pursuant to the United States government's SCAP, a component of the United States Department of the Treasury's (the "U.S. Treasury") Capital Assistance Program ("CAP"), there can be no assurance that the regulators, including the U.S. Treasury and the Board of Governors of the Federal Reserve ("Federal Reserve"), will not require Key to generate additional capital, including Tier 1 common equity, in the future. Future capital raising and augmentation efforts may be dilutive to KeyCorp common shareholders and reduce the market price of KeyCorp's common shares.

¨ The credit ratings of KeyCorp and KeyBank are essential to maintaining liquidity. Further downgrades from the major credit ratings agencies 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.

¨ 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 ("FSP") 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 market price of KeyCorp's common shares could all suffer a material decline.

¨ The terms of the Capital Purchase Program ("CPP"), pursuant to which KeyCorp issued Fixed-Rate Cumulative Perpetual Preferred Stock, Series B ("Series B Preferred Stock") and a warrant to purchase common shares of KeyCorp to the U.S. Treasury, may limit KeyCorp's ability to return capital to shareholders and could be dilutive to KeyCorp common shares. If KeyCorp is unable to redeem such Series B Preferred Stock within five years, the dividend rate will increase substantially. In addition, redemption of the warrant could prove to be difficult or costly.

¨ 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 its profitability or affect Key's financial condition, including new regulations and programs imposed in connection with the Troubled Asset Relief Program ("TARP") provisions of the EESA, such as the FSP 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 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 Key's 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 goal is to achieve a return on average common equity at or above the respective median of its peer group. The strategy for achieving this goal is described under the heading "Corporate strategy" on page 18 of Key's 2008 Annual Report to Shareholders. Economic overview
During the second quarter of 2009, the United States economy showed signs of moderate improvement after experiencing the worst two consecutive quarters of contraction in more than 50 years. Consumers were constrained by further job losses in the second quarter, although the pace of job losses slowed as the quarter progressed. During the current quarter, 1.3 million Americans lost their jobs compared to 2.1 million in the first quarter of 2009. The unemployment rate reached 9.5%, its highest level in 26 years. The average unemployment rate rose to 9.3%, substantially higher than the average rate of 8.1% for the first quarter of 2009 and the average rate of 5.8% for all of 2008. Since the recession began in December 2007, 6.4 million jobs have been lost. Even in the face of continued job losses, consumers began to show more confidence as spending continued to show modest improvement. Spending rose at an average monthly rate of .1% for the quarter, compared to an average monthly increase of .4% in the first quarter of 2009 and an average monthly decline of .1% for all of 2008. The continuation of price discounts offered by retailers fueled the demand for products and services. Consumer prices in June 2009 fell 1.4% from June 2008, compared to an annual increase of 5% in June 2008 compared to June 2007. While businesses continued to reduce headcount and fixed investment, they were also successful in reducing inventory levels to better align with sales, thereby creating the potential for future increases in orders. Housing continued to drag on consumer wealth, confidence and spending levels; however, real estate prices began to show some signs of stabilization during the second quarter. Historically low mortgage rates, the slowed pace of foreclosures and perceived values by home buyers spurred activity in the housing market. Foreclosures increased by 33% in June 2009 from one year ago, which compares favorably to the 46% annual increase reported in March 2009. Existing homes sales rose by 7% and new home sales rose by 16% over the second quarter of 2008. While median prices in June 2009 for new and existing homes continued to decline year-over-year, prices rose on a linked-quarter basis. The median price of existing and new homes rose by 7% and 1%, respectively, from March 2009. Home building activity in June 2009 declined by 46% from the same month in 2008, but improved modestly from the first quarter, rising more than 12%.

The Federal Reserve held the federal funds target rate near zero during the second quarter of 2009 as the downside risks to the economy remained elevated. In general, other market interest rates increased for much of the quarter before declining slightly off their highs during the final days of the quarter. Much of the rise in interest rates was due to increased near-term economic optimism and heightened fears of future inflation, both sentiments that gradually faded by quarter-end. The benchmark two-year Treasury yield began the quarter at .80% and increased to 1.40% before settling at 1.11% on June 30, 2009. The ten-year Treasury yield, which began the quarter at 2.67%, reached 3.95% before closing the quarter at 3.54%. As credit concerns continued to ease, short-term interbank lending rates decreased by 60 basis points, and credit spreads for banks and financial firms narrowed dramatically during the quarter. Supervisory Capital Assessment Program
During the second quarter of 2009, the major U.S. banking organizations, including Key, were able to generate a substantial amount of additional capital. A significant portion of such capital was generated to strengthen the capitalization of the major U.S. banking organizations and to satisfy any applicable capital buffer requirements of the SCAP, implemented as a component of the CAP, which is part of the U.S. government's FSP announced in February 2009.
To implement the CAP, the Federal Reserve, the Federal Reserve Banks, the FDIC and the Office of the Comptroller of the Currency commenced a review, referred to as SCAP, of the capital of the nineteen largest U.S. banking institutions. As announced on May 7, 2009, the regulators determined that ten of these institutions needed to generate an additional capital buffer of approximately $75 billion, in the aggregate, within six months. Through the first half of July, these ten financial institutions have generated, in the aggregate, in excess of $75 billion of Tier 1 common equity towards fulfillment of the SCAP requirements. Approximately $57 billion of such capital was generated through equity offerings and exchange offers. Additionally, during this same period, the other nine SCAP participants, which were not required to raise any additional capital buffer, raised approximately $21 billion of capital from equity offerings.
Further information regarding the capital generated by KeyCorp is included in the "Capital" section under the heading "Financial Stability Plan" on page 93. 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 13.
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 June 30, 2009     Mountains and
dollars in millions                      Northwest       Great Lakes       Northeast       Nonregion (a)      Total

Average core deposits              $        13,726     $      14,454     $    13,380     $     1,607       $ 43,167
Percent of total                              31.8 %            33.5 %          31.0 %           3.7 %        100.0 %

Average commercial loans           $         6,392     $       4,203     $     3,249     $     1,300       $ 15,144
Percent of total                              42.2 %            27.8 %          21.4 %           8.6 %        100.0 %

Average home equity loans          $         4,539     $       2,937     $     2,666     $       145       $ 10,287
Percent of total                              44.1 %            28.6 %          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 18 on page 79 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 $1.8 billion, or 51%, since December 31, 2007. Additional information about the loan sales is included in the "Credit risk management" section, which begins on page 102. 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, of which $23 million relates to the discontinued operations of Austin Capital Management, Ltd. 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 and June 30, 2009, is included in Note 1 ("Basis of Presentation") under the heading "Goodwill and Other Intangible Assets" on page 8.
Effective January 1, 2008, Key adopted Statement of Financial Accounting Standards ("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 June 30, 2009, $15.4 billion, or 16%, of Key's total assets were measured at fair value on a recurring basis. Approximately 93% of these assets were classified as Level 1 or Level 2 within the fair value hierarchy. At June 30, 2009, $1.3 billion, or 1%, 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 June 30, 2009, $1.1 billion, or 1%, of Key's total assets were measured at fair value on a nonrecurring basis. Approximately 6% of these assets were classified as Level 1 or Level 2. At June 30, 2009, there were no liabilities measured at fair value on a nonrecurring basis.
During the first six months of 2009, management did not significantly alter the manner in which it applied Key's critical accounting policies or developed related assumptions and estimates.
Highlights of Key's Performance
Financial performance
For the second quarter of 2009, the net loss from continuing operations attributable to Key was $236 million, or $.69 per common share. Per share results for the current quarter are after preferred stock dividends of . . .