¨ We engage in capital markets activities primarily through business conducted by our National Banking group. These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients' financing needs and for proprietary trading purposes), and conduct transactions in foreign currencies (both to accommodate clients' needs and to benefit from fluctuations in exchange rates).

¨ For regulatory purposes, capital is divided into two classes. Federal regulations prescribe that at least one-half of a bank or bank holding company's total risk-based capital must qualify as Tier 1 capital. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. As a result of the 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 included in any capital regulations, analysts and banking regulators have assessed 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 93.

A comprehensive list of acronyms and abbreviations used throughout this Form 10-Q is included in Note 1 ("Basis of Presentation"), which begins on page 7. Forward-looking statements
This report and other reports filed by KeyCorp under the Securities Exchange Act of 1934, as amended, or registration statements filed by KeyCorp 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 our 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 our current expectations, forecasts of future events or long-term goals and, by their nature, are subject to assumptions, risks and uncertainties. Although we believe 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:
¨ Recent indications of an improving economy may prove to be incorrect.

¨ Should the economy deteriorate from its present state or languish for a prolonged period, businesses and industries in regions in which we have significant investments or assets could be materially impacted, adversely affecting credit quality trends and our ability to generate loans.

¨ The EESA, the American Recovery and Reinvestment Act of 2009, the FSP, which was 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, our business, financial condition, results of operations, access to credit and the market price of our common shares could all suffer a material decline.

¨ As a financial services company, we are disproportionately affected by certain economic indicators such as unemployment and real estate asset prices.

¨ Should the fundamentals of the commercial real estate market continue to deteriorate, our financial condition could be adversely affected.

¨ Asset price deterioration has had (and may continue to have) a negative effect on the valuation of many of the asset categories represented on our balance sheet.

¨ Although we have 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 U.S. Treasury's CAP, there can be no assurance that our regulators, including the U.S. Treasury and the Federal Reserve, will not require us to generate additional capital, including Tier 1 common equity, in the future. Future capital raising and augmentation efforts may be dilutive to our common shareholders and reduce the market price of our 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 our 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 our 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 we expect, which may have an adverse effect on our financial results.

¨ Trade, monetary and fiscal policies of various governmental bodies may affect the economic environment in which we operate, as well as our 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 us.

¨ The terms of the CPP, pursuant to which KeyCorp issued Series B Preferred Stock and a warrant to purchase KeyCorp common shares to the U.S. Treasury, may limit our ability to return capital to shareholders and could be dilutive to our common shares. If we are 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.

¨ Our 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 FNMA and FHLMC, 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 we have significant operations or assets, and, among other things, may materially impact credit quality in existing portfolios and/or our 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, our allowance for loan losses may be insufficient if the estimates and judgments we used to establish the allowance prove to be inaccurate.

¨ We 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.

¨ We may become subject to new or heightened legal standards and regulatory requirements, practices or expectations, which may impede our profitability or affect our financial condition, including new regulations and programs imposed in connection with the 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 FDIC's TLGP.

¨ It could take us longer than anticipated to implement strategic initiatives, including those designed to grow revenue or manage expenses; we may be unable to implement certain initiatives; or the initiatives we employ may be unsuccessful.

¨ Increases in FDIC premiums and fees, as well as proposed prepayments of FDIC premiums imposed on us due to the FDIC's restoration plan for the DIF established on October 7, 2008, as amended, and continued difficulties experienced by financial institutions, as well as debt-guarantee fees imposed on KeyBank and KeyCorp may have an adverse effect on our results of operations.

¨ Acquisitions and dispositions of assets, business units or affiliates could adversely affect us in ways that we have not anticipated.

¨ We are 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 our results of operations.

¨ We may have difficulty attracting and/or retaining key executives and/or relationship managers at compensation levels necessary to maintain a competitive market position.

¨ We 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 our financial results or capital.

¨ We 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 our financial results or condition and that of our borrowers.

¨ We have 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 we operate 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 our current expectations and forecasts regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. The factors discussed above are not intended to be a complete summary of all risks and uncertainties that may affect our business, the financial services industry and financial markets. Though we strive to monitor and mitigate risk, we cannot anticipate all potential economic, operational and financial developments that may have an adverse impact on our operations and financial results. Forward-looking statements speak only as of the date they are made, and we do 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 KeyCorp's SEC filings, including this and KeyCorp's other reports on Forms 8-K, 10-K and 10-Q and KeyCorp'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
Our long-term financial goal is to achieve a return on average common equity at or above the respective median of our peer group. The strategy for achieving this goal is described under the heading "Corporate strategy" on page 18 of KeyCorp's 2008 Annual Report to Shareholders. Economic overview
During the third quarter of 2009, the United States economy stabilized. Consumers were constrained by further job losses in the third quarter, although the pace of job losses slowed as the quarter progressed. During the current quarter, 768,000 Americans lost their jobs, compared to 1.3 million in the second quarter of 2009. The unemployment rate reached 9.8%, its highest level in 26 years. The average unemployment rate rose to 9.6%, exceeding the average rate of 9.3% for the second quarter of 2009 and substantially higher than the average rate of 5.8% for all of 2008. Since the recession began in December 2007, the United States economy has lost 7.2 million jobs.
Even in the face of continued job losses, consumers began to show more confidence as spending improved modestly. Spending rose at an average monthly rate of .4% for the quarter, compared to an average monthly increase of .1% in the second quarter of 2009 and an average monthly decline of .1% for all of 2008. The continuation of price discounts offered by retailers increased the demand for products and services. Consumer prices in September 2009 fell 1.3% from September 2008, compared to an annual increase of 4.9% in September 2008, compared to September 2007. The government's Car Allowance Rebate System, known as "Cash for Clunkers," resulted in an increase in retail sales of approximately 4% during August. 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. Gross domestic product in the third and fourth quarters of 2009 is expected to benefit from a build up in inventories.
Housing continued to drag on consumer wealth, confidence and spending levels; however, real estate prices continued to show some signs of stabilization during the third quarter. Historically low mortgage rates, the availability of a first-time home buyer tax credit and perceived values by buyers spurred activity in the housing market. Foreclosures increased by 29% in September 2009 from one year ago, which compares favorably to the 34% annual increase reported in June 2009. Existing home sales increased by 14% and new home sales increased 1%, on a linked-quarter basis. Median prices in September 2009 for new and existing homes declined on a year-over-year and linked-quarter basis. The median price of existing homes fell by 3.9% and the median price of new homes fell by 4.6% from June 2009. Home building activity in September 2009 declined by 28% from the same month in 2008, but was flat compared to the second quarter.

The Federal Reserve held the federal funds target rate near zero during the third quarter of 2009 as the downside risks to the economy remained elevated. In general, other market interest rates increased early in the quarter before ending the quarter below their starting points. 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. The benchmark two-year Treasury yield began the quarter at 1.11% and increased to 1.30% before settling at .96% on September 30, 2009. The ten-year Treasury yield, which began the quarter at 3.54%, reached 3.85% before closing the quarter at 3.31%. As credit concerns continued to ease, short-term interbank lending rates decreased by 31 basis points, and credit spreads for banks and financial firms continued to narrow dramatically during the quarter.
As the quarter ended, various Federal Reserve reports stated that although the recession appears to be over, growth will be sluggish into 2010 and interest rates will remain low for an extended period of time. The Federal Reserve announced that it will begin to unwind some of the current liquidity programs. FDIC Developments
With liquidity concerns of financial institutions stabilizing, in October 2009, the FDIC adopted a final rule for concluding the debt guarantee component of the TLGP. Under the final rule, qualifying financial institutions were permitted to issue FDIC-guaranteed debt until October 31, 2009, with the FDIC's guarantee expiring no later than December 31, 2012. However, the FDIC has establish a limited emergency guarantee facility that permits insured depository institutions and certain other participating entities that have issued FDIC-guaranteed debt under the TLGP by September 9, 2009, to apply to the FDIC to issue FDIC-guaranteed debt for an additional six months (i.e., the FDIC will guarantee senior unsecured debt issued on or before April, 30, 2010). We have no plans to issue any additional debt under the TLGP.
On September 1, 2009, a final rule published in the Federal Register announced the FDIC's extension of the transaction account guarantee component of the TLGP for a period of six months until June 30, 2010, for those institutions currently participating in this program. Institutions that elect to participate in the extension will experience an increase in their quarterly annualized fee from 10 basis points to between 15 and 25 basis points based on their risk rating. On November 2, 2009, KeyBank chose to continue its participation in the program. Further information on the TLGP-related developments is included in the "Capital" section under the heading "Temporary Liquidity Guarantee Program" on page 98.
Also, in September 2009, the FDIC proposed an amended DIF restoration plan that would require depository institutions, such as KeyBank, to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the third and fourth quarters of 2009 and for all of 2010, 2011 and 2012. For further information on the proposed amendment to the restoration plan, see the section entitled "Deposits and other sources of funds," which begins on page 92. Demographics
The extent to which our 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 our two major business groups, Community Banking and National Banking, operate.
The 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 internally defined geographic regions: Rocky Mountains and Northwest, Great Lakes, and Northeast. The 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 16.

Figure 1 shows the geographic diversity of our 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 September 30, 2009     Mountains and
dollars in millions                           Northwest       Great Lakes       Northeast       Nonregion (a)        Total

Average core deposits                    $       13,907      $     14,494      $   13,571       $       1,621     $ 43,593
Percent of total                                   31.9 %            33.3 %          31.1 %               3.7 %      100.0 %

Average commercial loans                 $        6,129      $      3,928      $    3,096       $       1,274     $ 14,427
Percent of total                                   42.5 %            27.2 %          21.5 %               8.8 %      100.0 %

Average home equity loans                $        4,493      $      2,910      $    2,638       $         147     $ 10,188
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 our three Community Banking regions.

Figure 18 on page 85 shows the diversity of our 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. Deteriorating market conditions in the residential properties segment of the commercial real estate construction portfolio, principally in Florida and southern California, have caused a significant increase in the levels of our nonperforming loans and net charge-offs since mid-2007. We have taken aggressive steps to reduce exposure in this segment of the loan portfolio. As previously reported, during the fourth quarter of 2007, we announced our decision to cease conducting business with nonrelationship homebuilders outside of the 14-state Community Banking footprint. During the second quarter of 2008, we initiated a process to further reduce exposure through the sale of certain loans. As a result of these actions, we have reduced the outstanding balances in the residential properties segment of the commercial real estate loan portfolio by $2.0 billion, or 56%, since December 31, 2007. Additional information about the loan sales is included in the "Credit risk management" section, which begins on page 108.
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 we record certain assets (primarily commercial real estate loans and securities held for sale or trading).
Additionally, during the first quarter of 2009 we 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, we recorded an after-tax noncash accounting charge of $187 million, of which $23 million relates to the discontinued operations of Austin. As a result of this charge and a similar after-tax charge of $420 million recorded during the fourth quarter of 2008, we have now written off all of the goodwill that had been assigned to our National Banking reporting unit. Critical accounting policies and estimates Our business is dynamic and complex. Consequently, we must exercise judgment in choosing and applying accounting policies and methodologies. These choices are critical; not only are they necessary to comply with GAAP, they also reflect our view of the appropriate way to record and report our 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 KeyCorp's 2008 Annual Report to Shareholders, should be reviewed for a greater understanding of how our financial performance is recorded and reported. In our opinion, some accounting policies are more likely than others to have a significant effect on our financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance, or require us 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.

We rely 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 KeyCorp's 2008 Annual Report to Shareholders. Information about our review of goodwill and other intangible assets for impairment is included in Note 1 ("Basis of Presentation") under the heading "Goodwill and Other Intangible Assets" on page 8.
Effective January 1, 2008, we adopted the applicable accounting guidance for fair value measurements and disclosures, 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, we determine the fair value of our assets and liabilities using internally developed models, which are based on our judgment, assumptions and estimates regarding credit quality, liquidity, interest rates and other relevant inputs. Our 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 KeyCorp's 2008 Annual Report to Shareholders and in Note 20 ("Fair Value Measurements"), which begins on page 118 of that report.
At September 30, 2009, $19.6 billion, or 20%, of our total assets were measured . . .