KEYCORP /NEW/ - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2004

[ ] 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 0-850

(KEYCORP LOGO)

(Exact name of registrant as specified in its charter)


Ohio		34-6542451

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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 [ü] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ü] No [ ]

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		406,618,109 Shares

(Title of class)		(Outstanding at October 29, 2004)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


	September 30,			December 31,			September 30,
dollars in millions	2004			2003			2003
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	2,984		$	2,712		$	2,398
Short-term investments		2,753			1,604			1,776
Securities available for sale		7,182			7,638			7,550
Investment securities (fair value: $82, $104 and $113)		78			98			106
Other investments		1,341			1,092			1,103
Loans, net of unearned income of $1,995, $1,958 and $1,928		64,981			62,711			62,723
Less: Allowance for loan losses		1,251			1,406			1,405

Net loans		63,730			61,305			61,318
Premises and equipment		599			606			614
Goodwill		1,179			1,150			1,154
Other intangible assets		32			37			41
Corporate-owned life insurance		2,574			2,512			2,483
Accrued income and other assets		6,003			5,733			5,917

Total assets	$	88,455		$	84,487		$	84,460

LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	21,165		$	18,947		$	18,389
Savings deposits		1,976			2,083			2,079
Certificates of deposit ($100,000 or more)		4,715			4,891			4,887
Other time deposits		10,212			11,008			11,034

Total interest-bearing		38,068			36,929			36,389
Noninterest-bearing		12,008			11,175			10,947
Deposits in foreign office — interest-bearing		5,767			2,754			1,403

Total deposits		55,843			50,858			48,739
Federal funds purchased and securities sold under repurchase agreements		3,322			2,667			4,804
Bank notes and other short-term borrowings		2,853			2,947			2,707
Accrued expense and other liabilities		6,047			5,752			5,891
Long-term debt		13,444			15,294			15,342

Total liabilities		81,509			77,518			77,483
SHAREHOLDERS’ EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares, none issued		—			—			—
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 491,888,780 shares		492			492			492
Capital surplus		1,477			1,448			1,454
Retained earnings		7,197			6,838			6,732
Treasury stock, at cost (86,165,314, 75,394,536 and 72,622,333 shares)		(2,172	)		(1,801	)		(1,718	)
Accumulated other comprehensive income (loss)		(48	)		(8	)		17

Total shareholders’ equity		6,946			6,969			6,977

Total liabilities and shareholders’ equity	$	88,455		$	84,487		$	84,460

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
dollars in millions, except per share amounts	2004		2003		2004		2003
INTEREST INCOME
Loans	$	847	$	880	$	2,496	$	2,694
Taxable investment securities		1		—		1		—
Tax-exempt investment securities		1		2		3		5
Securities available for sale		84		77		250		274
Short-term investments		9		6		27		22
Other investments		10		6		26		19

Total interest income		952		971		2,803		3,014
INTEREST EXPENSE
Deposits		171		168		493		539
Federal funds purchased and securities sold under repurchase agreements		17		12		37		41
Bank notes and other short-term borrowings		8		13		29		46
Long-term debt, including capital securities		98		101		289		334

Total interest expense		294		294		848		960

NET INTEREST INCOME		658		677		1,955		2,054
Provision for loan losses		51		123		206		378

Net interest income after provision for loan losses		607		554		1,749		1,676
NONINTEREST INCOME
Trust and investment services income		135		138		421		399
Service charges on deposit accounts		84		93		254		276
Investment banking and capital markets income		52		53		163		142
Letter of credit and loan fees		42		37		119		99
Corporate-owned life insurance income		25		27		77		81
Net gains from loan securitizations and sales		21		39		47		68
Electronic banking fees		22		20		62		61
Net securities gains		—		2		7		9
Other income		55		54		163		159

Total noninterest income		436		463		1,313		1,294
NONINTEREST EXPENSE
Personnel		394		380		1,138		1,114
Net occupancy		57		56		176		171
Computer processing		49		43		141		131
Equipment		28		35		89		101
Marketing		26		30		79		88
Professional fees		27		30		81		87
Other expense		109		125		324		352

Total noninterest expense		690		699		2,028		2,044
INCOME BEFORE INCOME TAXES		353		318		1,034		926
Income taxes		101		91		293		257

NET INCOME	$	252	$	227	$	741	$	669

Per common share:
Net income	$	.62	$	.54	$	1.80	$	1.58
Net income — assuming dilution		.61		.53		1.78		1.57
Weighted-average common shares outstanding (000)		407,187		421,971		411,371		423,697
Weighted-average common shares and potential common shares outstanding (000)		411,575		425,669		416,002		426,968

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)


															Accumulated
												Treasury			Other
	Common Shares			Common		Capital			Retained			Stock,			Comprehensive			Comprehensive
dollars in millions, except per share amounts	Outstanding (000)			Shares		Surplus			Earnings			at Cost			Income (Loss)			Income^b
BALANCE AT DECEMBER 31, 2002		423,944		$	492	$	1,449		$	6,448		$	(1,593	)	$	39
Net income										669								$	669
Other comprehensive income (losses):
Net unrealized losses on securities available for sale, net of income taxes of ($35)^a																(56	)		(56	)
Net unrealized gains on derivative financial instruments, net of income taxes of $10																15			15
Foreign currency translation adjustments																19			19

Total comprehensive income																		$	647

Deferred compensation							8
Cash dividends declared on common shares ($.915 per share)										(385	)
Issuance of common shares and stock options granted under employee benefit and dividend reinvestment plans		2,822					(3	)					66
Repurchase of common shares		(7,500	)										(191	)

BALANCE AT SEPTEMBER 30, 2003		419,266		$	492	$	1,454		$	6,732		$	(1,718	)	$	17

BALANCE AT DECEMBER 31, 2003		416,494		$	492	$	1,448		$	6,838		$	(1,801	)	$	(8	)
Net income										741								$	741
Other comprehensive income (losses):
Net unrealized gains on securities available for sale, net of income taxes of $5^a																7			7
Net unrealized losses on derivative financial instruments, net of income taxes of ($24)																(41	)		(41	)
Foreign currency translation adjustments																(6	)		(6	)

Total comprehensive income																		$	701

Deferred compensation							15
Cash dividends declared on common shares ($.93 per share)										(382	)
Issuance of common shares and stock options granted under employee benefit and dividend reinvestment plans		5,767					14						140
Repurchase of common shares		(16,538	)										(511	)

BALANCE AT SEPTEMBER 30, 2004		405,723		$	492	$	1,477		$	7,197		$	(2,172	)	$	(48	)

(a) Net of reclassification adjustments.

(b) For the three months ended September 30, 2004 and 2003, comprehensive income was $287 million and $165 million, respectively.

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flow (Unaudited)


	Nine months ended
	September 30,
in millions	2004			2003
OPERATING ACTIVITIES
Net income	$	741		$	669
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		206			378
Depreciation and amortization expense		147			158
Net securities gains		(7	)		(9	)
Net gains from principal investing		(39	)		(32	)
Net gains from loan securitizations and sales		(47	)		(68	)
Deferred income taxes		185			13
Net increase in mortgage loans held for sale		(187	)		(19	)
Net increase in trading account assets		(489	)		(241	)
Other operating activities, net		(391	)		(103	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		119			746
INVESTING ACTIVITIES
Cash used in acquisitions, net of cash acquired		(31	)		(17	)
Net (increase) decrease in other short-term investments		(660	)		97
Purchases of securities available for sale		(1,399	)		(5,547	)
Proceeds from sales of securities available for sale		430			3,271
Proceeds from prepayments and maturities of securities available for sale		1,445			2,962
Purchases of investment securities		—			(19	)
Proceeds from prepayments and maturities of investment securities		19			45
Purchases of other investments		(407	)		(254	)
Proceeds from sales of other investments		155			64
Proceeds from prepayments and maturities of other investments		104			122
Net increase in loans, excluding acquisitions, sales and divestitures		(6,634	)		(3,859	)
Purchases of loans		(38	)		(453	)
Proceeds from loan securitizations and sales		4,234			3,716
Purchases of premises and equipment		(75	)		(73	)
Proceeds from sales of premises and equipment		6			11
Proceeds from sales of other real estate owned		60			47

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(2,791	)		113
FINANCING ACTIVITIES
Net increase (decrease) in deposits		4,997			(599	)
Net increase in short-term borrowings		561			826
Net proceeds from issuance of long-term debt, including capital securities		2,055			2,723
Payments on long-term debt, including capital securities		(3,887	)		(4,236	)
Purchases of treasury shares		(511	)		(191	)
Net proceeds from issuance of common stock		111			37
Cash dividends paid		(382	)		(385	)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		2,944			(1,825	)

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		272			(966	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		2,712			3,364

CASH AND DUE FROM BANKS AT END OF PERIOD	$	2,984		$	2,398

Additional disclosures relative to cash flow:
Interest paid	$	857		$	989
Income taxes paid		104			186
Noncash items:
Loans transferred to other real estate owned	$	78		$	75
Assets acquired		—			27
Liabilities assumed		383			10

See Notes to Consolidated Financial Statements (Unaudited).

Notes to Consolidated Financial Statements

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

The Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” in January 2003. This accounting guidance significantly changed how companies determine whether they must consolidate an entity depending on whether the entity is a voting rights entity or a variable interest entity (“VIE”). Interpretation No. 46 was effective immediately for entities created after January 31, 2003. As permitted, Key elected to adopt Interpretation No. 46 effective July 1, 2003, for entities created before February 1, 2003. In December 2003, the FASB issued modifications to Interpretation No. 46 (Revised Interpretation No. 46) as described under the heading “Accounting Pronouncement Adopted in 2004” on page 9.

Key consolidates a voting rights entity if Key has a controlling financial interest in the entity. In accordance with Revised Interpretation No. 46, Key consolidates a VIE if it is exposed to the majority of the VIE’s expected losses and/or residual returns (i.e., Key is considered to be the primary beneficiary). Variable interests include equity interests, subordinated debt, derivative contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments and other instruments.

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 a controlling interest) are accounted for using the equity method. Unconsolidated investments in voting rights entities or VIEs in which Key has a voting or economic interest of less than 20% are generally carried at cost. Investments held by KeyCorp’s broker/dealer and investment company subsidiaries (primarily principal investments) are carried at estimated fair value.

Prior to the adoption of Interpretation No. 46, KeyCorp generally determined whether consolidation of an entity was appropriate based on the nature and amount of equity contributed by third parties, the decision-making power granted to those parties and the extent of third-party control over the entity’s operating and financial policies. Entities controlled, generally through majority ownership, were consolidated and considered subsidiaries.

Qualifying special purpose entities, 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. Additional information on SFAS No. 140 is included in Note 1 (“Summary of Significant Accounting Policies”) of Key’s 2003 Annual Report to Shareholders under the heading “Loan Securitizations” on page 52.

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 results have been reclassified to conform to current reporting practices. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. When you read these financial statements, you should also look at the audited consolidated financial statements and related notes included in Key’s 2003 Annual Report to Shareholders.

Stock-Based Compensation

Through December 31, 2002, Key accounted for stock options issued to employees using the intrinsic value method outlined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” This method requires that compensation expense be recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the grant date. Key’s employee stock options generally have fixed terms and exercise prices that are equal to or greater than the fair value of Key’s common shares at the grant date. As a result, Key generally had not recognized compensation expense related to stock options.

Effective January 1, 2003, Key adopted the fair value method of accounting as outlined in SFAS No. 123, “Accounting for Stock-Based Compensation.” Management applied this change prospectively to all awards in accordance with the transition provisions of SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.”

SFAS No. 123 requires companies like Key that have used the intrinsic value method of accounting for employee stock options to provide pro forma disclosures of the net income and earnings per share effect of accounting for stock options using the fair value method. Management estimates the fair value of options granted using the Black-Scholes option-pricing model. This model was originally developed to estimate the fair value of exchange-traded equity options, which (unlike employee stock options) have no vesting period or transferability restrictions. As a result, the Black-Scholes model is not a perfect indicator of the value of an employee stock option, but it is commonly used for this purpose. The estimated weighted-average fair value of options granted by Key during the nine-month periods ended September 30, 2004 and 2003, was $5.63 and $4.24, respectively.

The Black-Scholes model requires several assumptions, which management developed and updates based on historical trends and current market observations. The level of accuracy achieved in deriving the estimated fair value of options is directly related to the accuracy of the underlying assumptions. The assumptions pertaining to options issued during the three- and nine-month periods ended September 30, 2004 and 2003, are shown in the following table.

Three months ended

Nine months ended

September 30,

2004

2003

2004

2003

Average option life

5.0 years

5.0 years

5.1 years

5.0 years

Future dividend yield

4.24

4.76

4.23

4.76

Share price volatility

.278

.280

.279

.280

Weighted-average risk-free interest rate

3.8

2.9

3.8

2.9

The model assumes that the estimated fair value of an option is amortized as compensation expense over the option’s vesting period. The pro forma effect of applying the fair value method of accounting to all forms of stock-based compensation (primarily stock options, restricted stock, discounted stock purchase plans and certain deferred compensation-related awards) for the three- and nine-month periods ended September 30, 2004 and 2003, is shown in the following table and would, if recorded, have been included in “personnel expense” on the income statement.


	Three months ended				Nine months ended
	September 30,				September 30,
in millions, except per share amounts	2004		2003		2004		2003
Net income, as reported	$	252	$	227	$	741	$	669
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		8		5		18		9
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		9		8		22		18

Net income — pro forma	$	251	$	224	$	737	$	660

Per common share:
Net income	$	.62	$	.54	$	1.80	$	1.58
Net income — pro forma		.62		.53		1.79		1.56
Net income assuming dilution		.61		.53		1.78		1.57
Net income assuming dilution — pro forma		.61		.53		1.77		1.55

As shown in the preceding table, the pro forma effect is calculated as the after-tax difference between compensation expense included in each period’s reported net income in accordance with the prospective application transition provisions of SFAS No. 148 and compensation expense that would have been recorded had all existing forms of stock-based compensation been accounted for under the fair value method of accounting. The information presented may not be indicative of the effect in future periods.

Accounting Pronouncement Adopted in 2004

Consolidation of variable interest entities. In December 2003, the FASB issued modifications to Interpretation No. 46 (Revised Interpretation No. 46) to provide additional scope exceptions, address certain implementation issues and promote a more consistent application. Revised Interpretation No. 46 supersedes Interpretation No. 46 and was adopted by Key in the first quarter of 2004. See Note 7 (“Variable Interest Entities”), which begins on page 19, for additional information on Key’s adoption of Revised Interpretation No. 46 and involvement with VIEs. The adoption of Revised Interpretation No. 46 did not have any material effect on Key’s financial condition or results of operations.

Accounting Pronouncements Pending Adoption

Medicare prescription law. In May 2004, the FASB issued Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Act”). The Act, which was enacted in December 2003 and takes effect in 2006, introduces a prescription drug benefit under Medicare (the “Medicare benefit”). It also provides a federal subsidy to sponsors of retiree healthcare benefit plans that offer prescription drug coverage to retirees that is at least actuarially equivalent to the Medicare benefit. In accordance with Staff Position No. 106-2, sponsoring companies must recognize the subsidy in the measurement of their plan’s accumulated postretirement benefit obligation (“APBO”) and net postretirement benefit cost. If actuarial equivalence cannot be determined, the sponsor must disclose the existence of the Act and the fact that the APBO and net postretirement benefit cost do not reflect any amount associated with the subsidy because the sponsor is unable to conclude whether the benefits provided by the plan are actuarially equivalent. In July 2004, proposed regulations necessary to fully implement the Act, including the manner in which actuarial equivalence must be determined, were issued by the Centers for Medicare and Medicaid Services. Until these regulations are final, which is expected to occur in early 2005, actuarial equivalence cannot be determined and Key’s APBO and net postretirement benefit cost will not reflect any amount associated with the subsidy. Adoption of this guidance is not expected to have any material effect on Key’s financial condition or results of operations.

Other-than-temporary impairment. In March 2004, the Emerging Issues Task Force (“EITF”), a standard setting body working under the auspices of the FASB, revised EITF No. 03-01, “The Meaning of Other than Temporary Impairment and its Application to Certain Investments.” In the revised guidance, the EITF reached a consensus regarding the model to be used in determining whether an investment is other-than-temporarily impaired. In September 2004, the FASB deferred the effective date of this other-than-temporary impairment evaluation guidance until clarifying guidance is issued. The adoption of EITF 03-01 is not expected to have any material effect on Key’s financial condition or results of operations. However, further evaluation will be required as additional clarifying guidance is issued by the FASB.

Accounting for certain loans or debt securities acquired in a transfer. In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued a Statement of Position that addresses the accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (structured as loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. As required by this pronouncement, Key will adopt this guidance for qualifying loans acquired after December 31, 2004. Adoption of this guidance is not expected to have any material effect on Key’s financial condition or results of operations.

2. Earnings Per Common Share

Key calculates its basic and diluted earnings per common share as follows:


	Three months ended				Nine months ended
	September 30,				September 30,
dollars in millions, except per share amounts	2004		2003		2004		2003
NET INCOME	$	252	$	227	$	741	$	669

WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		407,187		421,971		411,371		423,697
Effect of dilutive common stock options and other stock awards (000)		4,388		3,698		4,631		3,271

Weighted-average common shares and potential common shares outstanding (000)		411,575		425,669		416,002		426,968

EARNINGS PER COMMON SHARE
Net income per common share	$	.62	$	.54	$	1.80	$	1.58
Net income per common share — assuming dilution		.61		.53		1.78		1.57

During the three- and nine-month periods ended September 30, 2004, weighted-average options to purchase 6,096,289 and 5,827,414 common shares, respectively, at exercise prices ranging from $30.33 to $50.00 per option, were outstanding but not included in the calculation of net income per common share — assuming dilution. During the three- and nine-month periods ended September 30, 2003, weighted-average options to purchase 15,313,285 and 18,701,855 common shares, respectively, at exercise prices ranging from $24.38 to $50.00 per option, were outstanding but not included in the same calculation. These options were excluded from the calculation of net income per common share — assuming dilution because their exercise prices were greater than the average market price of the common shares during the periods for which the calculations were made. Therefore, their inclusion would have been antidilutive.

Additionally, during the three- and nine-month periods ended September 30, 2004, weighted-average contingently issuable performance-based awards for 516,102 and 418,940 common shares, respectively, were outstanding, but not included in the calculation of net income per common share — assuming dilution. These awards vest contingently upon Key’s achievement of certain cumulative three-year (2004-2006) financial performance targets and were not included in the calculation because the performance targets had not been attained.

3. Acquisitions

EverTrust Bank

On October 15, 2004, Key acquired EverTrust Bank, a state-chartered bank headquartered in Everett, Washington with assets and deposits of approximately $770 million and $570 million, respectively, for a total cash consideration of approximately $195 million.

Sterling Bank & Trust FSB

Effective July 22, 2004, Key purchased 10 branch offices and approximately $380 million of deposits of Sterling Bank & Trust FSB, a federally-chartered savings bank headquartered in Southfield, Michigan. The terms of the transaction are not material and have not been disclosed.

NewBridge Partners

On July 1, 2003, Key acquired NewBridge Partners LLC, an investment management firm headquartered in New York City with managed assets of $1.8 billion at the date of acquisition. The terms of the transaction are not material and have not been disclosed.

Acquisition Pending

American Express Business Finance Corporation

On October 22, 2004, Key entered into an agreement to acquire American Express Business Finance Corporation (“AEBF”), the equipment leasing unit of American Express’ small business division headquartered in Parsippany, New Jersey. AEBF has a leasing portfolio of approximately $1.5 billion. The transaction is expected to close in the fourth quarter, subject to regulatory approval. The terms of the transaction have not been disclosed.

4. Line of Business Results

Consumer Banking

Retail 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.

Small Business provides businesses that have annual sales revenues of $10 million or less with deposit, investment and credit products, and business advisory services.

Consumer Finance includes Indirect Lending and National Home Equity.

Indirect Lending offers automobile and marine loans to consumers through dealers and finances inventory for automobile and marine dealers. This business unit also provides federal and private education loans to students and their parents and processes payments on loans from private schools to parents.

National Home Equity provides both prime and nonprime mortgage and home equity loan products to individuals. These products originate outside of Key’s retail branch system. This business unit also works with mortgage brokers and home improvement contractors to provide home equity and home improvement solutions.

Corporate and Investment Banking

Corporate Banking provides products and services to large corporations, middle-market companies, financial institutions and government organizations. These products and services include commercial lending, treasury management, investment banking, derivatives and foreign exchange, equity and debt underwriting and trading, and syndicated finance.

KeyBank Real Estate Capital provides construction and interim lending, permanent debt placements and servicing, and equity and investment banking services to developers, brokers and owner-investors. This line of business deals exclusively with nonowner-occupied properties (i.e., generally properties for which the owner occupies less than 60% of the premises).

Key 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 Corporate Banking) if those businesses are principally responsible for maintaining the relationship with the client.

Investment Management Services

Investment Management Services includes Victory Capital Management and McDonald Financial Group.

Victory Capital Management manages or gives 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.

McDonald Financial Group offers financial, estate and retirement planning and asset management services to assist high-net-worth clients with their banking, brokerage, trust, portfolio management, insurance, charitable giving and related needs.

Other Segments

Other segments consist primarily of Corporate Treasury and Key’s Principal Investing unit.

Reconciling Items

Total assets included under “Reconciling Items” represent primarily 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 include certain items that are not allocated to the business segments because they are not reflective of their normal operations.

The table that spans pages 13 and 14 shows selected financial data for each major business group for the three- and nine-month periods ended September 30, 2004 and 2003. This table is accompanied by additional supplementary information for each of the lines of business that comprise these groups. The information was derived from the internal financial reporting system that management uses to monitor and manage Key’s financial performance. Accounting principles generally accepted in the United States guide 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. As such:

• Net interest income is determined by assigning a standard cost for funds used to assets or a standard credit for funds provided to liabilities 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 of the extent to which each line actually uses the services.

• Key’s consolidated provision for loan losses is allocated among the lines of business based primarily on their actual net charge-offs, adjusted periodically for loan growth and changes in risk profile. The level 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 51 of Key’s 2003 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 organization structure. The financial data reported for all periods presented in the tables reflect a number of changes that occurred during the first nine months of 2004:

• Key implemented a process of revenue sharing whereby revenues are split between the line of business servicing the client and the line that made the business referral based on the type of transaction involved.

• Key began to charge the net effect of funds transfer pricing to the lines of business based on the total loan and deposit balances of each line. The net effect of funds transfer pricing was formerly included in “Other Segments.”

• Key changed the methodology used in estimating the deferred tax benefits associated with lease financing.

• The methodology used to assign capital to the lines of business was revised to reflect only the risk directly attributable to each line.


							Corporate and						Investment
Three months ended September 30,	Consumer Banking						Investment Banking						Management Services
dollars in millions	2004			2003			2004			2003			2004			2003
SUMMARY OF OPERATIONS
Net interest income (TE)	$	453		$	454		$	234		$	235		$	60		$	60
Noninterest income		139			146			131			123			133			140

Total revenue (TE)^a		592			600			365			358			193			200
Provision for loan losses		51			70			(1	)		48			1			5
Depreciation and amortization expense		29			33			9			9			9			11
Other noninterest expense		323			322			178			165			140			151

Income (loss) before income taxes (TE)		189			175			179			136			43			33
Allocated income taxes and TE adjustments		71			65			67			51			16			12

Net income (loss)	$	118		$	110		$	112		$	85		$	27		$	21

Percent of consolidated net income		47	%		49	%		44	%		37	%		11	%		9	%
Percent of total segments net income		46			48			43			37			10			9

AVERAGE BALANCES
Loans	$	29,331		$	29,179		$	29,078		$	27,901		$	5,275		$	5,100
Total assets^a		31,855			31,687			33,993			32,157			6,614			6,228
Deposits		35,574			35,062			5,146			4,566			7,114			6,382

OTHER FINANCIAL DATA
Net loan charge-offs	$	52		$	70		$	23		$	48		$	1		$	5
Return on average allocated equity		23.25	%		21.07	%		14.87	%		11.08	%		17.58	%		13.93	%
Average full-time equivalent employees		8,227			8,231			2,487			2,433			2,620			2,780


							Corporate and						Investment
Nine months ended September 30,	Consumer Banking						Investment Banking						Management Services
dollars in millions	2004			2003			2004			2003			2004			2003
SUMMARY OF OPERATIONS
Net interest income (TE)	$	1,329		$	1,369		$	696		$	721		$	179		$	178
Noninterest income		385			386			386			357			420			395

Total revenue (TE)^a		1,714			1,755			1,082			1,078			599			573
Provision for loan losses		157			213			45			155			4			10
Depreciation and amortization expense		89			98			27			26			29			32
Other noninterest expense		942			941			493			482			435			446

Income (loss) before income taxes (TE)		526			503			517			415			131			85
Allocated income taxes and TE adjustments		197			188			193			153			49			32

Net income (loss)	$	329		$	315		$	324		$	262		$	82		$	53

Percent of consolidated net income		45	%		47	%		44	%		39	%		11	%		8	%
Percent of total segments net income		43			47			43			39			11			8

AVERAGE BALANCES
Loans	$	29,476		$	28,908		$	28,055		$	28,052		$	5,214		$	5,030
Total assets^a		32,025			31,413			32,968			32,422			6,441			6,009
Deposits		35,115			34,767			4,954			4,223			7,070			5,850

OTHER FINANCIAL DATA
Net loan charge-offs	$	184		$	213		$	101		$	200		$	6		$	12
Return on average allocated equity		21.58	%		20.52	%		14.43	%		11.35	%		18.04	%		11.99	%
Average full-time equivalent employees		8,162			8,195			2,445			2,406			2,628			2,861

(a) Substantially all revenue generated by Key’s major business groups is derived from clients resident 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.

TE = Taxable Equivalent, N/A = Not Applicable, N/M = Not Meaningful


Other Segments						Total Segments						Reconciling Items						Key
2004			2003			2004			2003			2004			2003			2004			2003

$	(33	)	$	(35	)	$	714		$	714		$	(34	)	$	(24	)	$	680		$	690
	31			51			434			460			2			3			436			463

	(2	)		16			1,148			1,174			(32	)		(21	)		1,116			1,153
	—			—			51			123			—			—			51			123
	—			—			47			53			—			—			47			53
	9			10			650			648			(7	)		(2	)		643			646

	(11	)		6			400			350			(25	)		(19	)		375			331
	(14	)		(8	)		140			120			(17	)		(16	)		123			104

$	3		$	14		$	260		$	230		$	(8	)	$	(3	)	$	252		$	227

	1	%		6	%		103	%		101	%		(3	)%		(1)	%		100	%		100	%
	1			6			100			100			N/A			N/A			N/A			N/A


$	490		$	747		$	64,174		$	62,927		$	182		$	151		$	64,356		$	63,078
	11,557			12,421			84,019			82,493			2,505			2,229			86,524			84,722
	4,833			2,834			52,667			48,844			(149	)		(145	)		52,518			48,699


	—			—		$	76		$	123			—			—		$	76		$	123
	N/M			N/M			17.30	%		15.08	%		N/M			N/M			14.62	%		13.06	%
	37			35			13,371			13,479			6,264			6,580			19,635			20,059


Other Segments						Total Segments						Reconciling Items						Key
2004			2003			2004			2003			2004			2003			2004			2003

$	(101	)	$	(100	)	$	2,103		$	2,168		$	(80	)	$	(65	)	$	2,023		$	2,103
	119			146			1,310			1,284			3			10			1,313			1,294

	18			46			3,413			3,452			(77	)		(55	)		3,336			3,397
	—			—			206			378			—			—			206			378
	2			2			147			158			—			—			147			158
	26			26			1,896			1,895			(15	)		(9	)		1,881			1,886

	(10	)		18			1,164			1,021			(62	)		(46	)		1,102			975
	(35	)		(26	)		404			347			(43	)		(41	)		361			306

$	25		$	44		$	760		$	674		$	(19	)	$	(5	)	$	741		$	669

	3	%		7	%		103	%		101	%		(3)	%		(1	)%		100	%		100	%
	3			6			100			100			N/A			N/A			N/A			N/A


$	543		$	852		$	63,288		$	62,842		$	134		$	143		$	63,422		$	62,985
	11,688			12,855			83,122			82,699			2,336			1,766			85,458			84,465
	3,968			3,245			51,107			48,085			(143	)		(96	)		50,964			47,989


	—			—		$	291		$	425			—			—		$	291		$	425
	N/M			N/M			16.96	%		14.86	%		N/M			N/M			14.36	%		12.98	%
	37			35			13,272			13,497			6,305			6,677			19,577			20,174

Supplementary information (Consumer Banking lines of business)


Three months ended September 30,	Retail Banking						Small Business						Consumer Finance
dollars in millions	2004			2003			2004			2003			2004			2003
Total revenue (taxable equivalent)	$	321		$	330		$	97		$	97		$	174		$	173
Provision for loan losses		15			14			12			17			24			39
Noninterest expense		212			211			55			52			85			92
Net income		59			66			19			18			40			26
Average loans		10,771			10,178			4,420			4,502			14,140			14,499
Average deposits		30,116			30,051			5,047			4,618			411			393
Net loan charge-offs		15			14			12			17			25			39
Return on average allocated equity		38.35	%		43.86	%		19.68	%		18.69	%		15.56	%		9.45	%
Average full-time equivalent employees		6,225			6,207			419			382			1,583			1,642


Nine months ended September 30,	Retail Banking						Small Business						Consumer Finance
dollars in millions	2004			2003			2004			2003			2004			2003
Total revenue (taxable equivalent)	$	945		$	992		$	284		$	289		$	485		$	474
Provision for loan losses		40			46			37			51			80			116
Noninterest expense		620			622			157			153			254			264
Net income		178			203			56			53			95			59
Average loans		10,567			9,855			4,448			4,524			14,461			14,529
Average deposits		29,902			30,054			4,832			4,351			381			362
Net loan charge-offs		40			46			40			51			104			116
Return on average allocated equity		39.56	%		45.54	%		19.58	%		18.75	%		12.05	%		7.32	%
Average full-time equivalent employees		6,152			6,179			417			374			1,593			1,642

Supplementary information (Corporate and Investment Banking lines of business)


Three months ended September 30,	Corporate Banking						KeyBank Real Estate Capital						Key Equipment Finance
dollars in millions	2004			2003			2004			2003			2004			2003
Total revenue (taxable equivalent)	$	190		$	196		$	104		$	102		$	71		$	60
Provision for loan losses		(7	)		43			—			—			6			5
Noninterest expense		110			108			45			41			32			25
Net income		54			28			37			38			21			19
Average loans		13,106			12,813			8,286			8,260			7,686			6,828
Average deposits		3,767			3,576			1,366			976			13			14
Net loan charge-offs		13			43			3			—			7			5
Return on average allocated equity		13.70	%		6.62	%		15.95	%		16.79	%		16.51	%		16.07	%
Average full-time equivalent employees		1,167			1,125			678			688			642			620


Nine months ended September 30,	Corporate Banking						KeyBank Real Estate Capital						Key Equipment Finance
dollars in millions	2004			2003			2004			2003			2004			2003
Total revenue (taxable equivalent)	$	577		$	595		$	283		$	292		$	222		$	191
Provision for loan losses		34			134			(4	)		(2	)		15			23
Noninterest expense		316			316			124			116			80			76
Net income		142			91			102			111			80			60
Average loans		12,628			12,916			7,889			8,396			7,538			6,740
Average deposits		3,708			3,329			1,232			881			14			13
Net loan charge-offs / (recoveries)		78			180			5			(2	)		18			22
Return on average allocated equity		11.95	%		7.06	%		14.89	%		16.47	%		21.46	%		17.36	%
Average full-time equivalent employees		1,143			1,115			673			678			629			613

5. Securities

Key classifies each security held into one of four categories: trading, available for sale, investment and other investments.

Trading account securities. These are debt and equity securities that are purchased and held by Key with the intent of selling them in the near term, and certain interests retained in loan securitizations. All of these assets are reported at fair value ($1.5 billion at September 30, 2004, and $1.0 billion at December 31, 2003, and September 30, 2003) and are included in “short-term investments” on the balance sheet. Realized and unrealized gains and losses on trading account securities are reported in “investment banking and capital markets income” on the income statement.

Securities available for sale. These include securities that Key intends to hold for an indefinite period of time and 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 and include debt and marketable equity securities with readily determinable fair values. Unrealized gains and losses (net of income taxes) deemed temporary are recorded in shareholders’ equity as a component of “accumulated other comprehensive income (loss).” Unrealized losses on specific securities deemed to be other-than-temporary are included in “net securities gains” on the income statement. Also included in “net securities gains” are actual gains and losses resulting from sales of specific securities.

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, classifying them as available for sale or as trading account assets.

“Other securities” held in the available for sale portfolio primarily are marketable equity securities.

Investment securities. These are debt securities that Key has the intent and ability to hold until maturity. Debt securities are carried at cost and adjusted for amortization of premiums and accretion of discounts using the interest method. This method produces a constant rate of return on the adjusted carrying amount. “Other securities” held in the investment securities portfolio are foreign bonds.

Other investments. Principal investments — investments in equity and mezzanine instruments made by Key’s Principal Investing unit — represent the majority of other investments and are carried at fair value ($817 million at September 30, 2004, $732 million at December 31, 2003, and $729 million at September 30, 2003). They include direct and indirect investments predominately in privately-held companies. Direct investments are those made in a particular company, while indirect investments are made through funds that include other investors. Changes in estimated fair values and actual gains and losses on sales of principal investments are included in “investment banking and capital markets income” on the income statement.

In addition to principal investments, other investments include equity and mezzanine instruments that do not have readily determinable fair values. These securities include certain real estate-related investments that are carried at estimated fair value, as well as other types of securities that are generally carried at cost. The carrying amount of the securities carried at cost is adjusted for declines in value that are considered to be other-than-temporary. These adjustments are included in “net securities gains” on the income statement.

The amortized cost, unrealized gains and losses, and approximate fair value of Key’s investment securities and securities available for sale are presented in the following tables. Gross unrealized gains and losses are represented by the difference between the amortized cost and the fair values 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 improve or worsen.


	September 30, 2004
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
in millions	Cost		Gains		Losses		Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	38		—		—	$	38
States and political subdivisions		20	$	1		—		21
Collateralized mortgage obligations		6,422		8	$	83		6,347
Other mortgage-backed securities		329		12		2		339
Retained interests in securitizations		109		79		—		188
Other securities		242		7		—		249

Total securities available for sale	$	7,160	$	107	$	85	$	7,182

INVESTMENT SECURITIES
States and political subdivisions	$	65	$	4		—	$	69
Other securities		13		—		—		13

Total investment securities	$	78	$	4		—	$	82


	December 31, 2003
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
in millions	Cost		Gains		Losses		Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	63	$	1		—	$	64
States and political subdivisions		23		—		—		23
Collateralized mortgage obligations		6,696		33	$	123		6,606
Other mortgage-backed securities		453		18		2		469
Retained interests in securitizations		105		70		—		175
Other securities		288		13		—		301

Total securities available for sale	$	7,628	$	135	$	125	$	7,638

INVESTMENT SECURITIES
States and political subdivisions	$	83	$	6		—	$	89
Other securities		15		—		—		15

Total investment securities	$	98	$	6		—	$	104


	September 30, 2003
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
in millions	Cost		Gains		Losses		Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	59		—		—	$	59
States and political subdivisions		24	$	1		—		25
Collateralized mortgage obligations		6,545		52	$	115		6,482
Other mortgage-backed securities		575		22		1		596
Retained interests in securitizations		120		64		—		184
Other securities		200		4		—		204

Total securities available for sale	$	7,523	$	143	$	116	$	7,550

INVESTMENT SECURITIES
States and political subdivisions	$	91	$	7		—	$	98
Other securities		15		—		—		15

Total investment securities	$	106	$	7		—	$	113

6. Loans

Key’s loans by category are summarized as follows:


	September 30,		December 31,		September 30,
in millions	2004		2003		2003
Commercial, financial and agricultural	$	18,118	$	17,012	$	17,118
Commercial real estate:
Commercial mortgage		6,710		5,677		5,822
Construction		5,120		4,978		5,236

Total commercial real estate loans		11,830		10,655		11,058
Commercial lease financing		8,969		8,522		8,123

Total commercial loans		38,917		36,189		36,299
Real estate — residential mortgage		1,509		1,613		1,665
Home equity		14,950		15,038		14,879
Consumer — direct		2,017		2,119		2,154
Consumer — indirect:
Automobile lease financing		120		305		400
Automobile loans		1,862		2,025		2,093
Marine		2,648		2,506		2,489
Other		620		542		561

Total consumer — indirect loans		5,250		5,378		5,543

Total consumer loans		23,726		24,148		24,241
Loans held for sale:
Real estate — commercial mortgage		314		154		210
Real estate — residential mortgage		24		18		59
Home equity		21		—		—
Education		1,979		2,202		1,914

Total loans held for sale		2,338		2,374		2,183

Total loans	$	64,981	$	62,711	$	62,723

Key uses interest rate swaps to manage interest rate risk; these swaps modify the repricing and maturity characteristics of certain loans. For more information about such swaps, see Note 19 (“Derivatives and Hedging Activities”), which begins on page 80 of Key’s 2003 Annual Report to Shareholders.

Changes in the allowance for loan losses are summarized as follows:


	Three months ended						Nine months ended
	September 30,						September 30,
in millions	2004			2003			2004			2003
Balance at beginning of period	$	1,276		$	1,405		$	1,406		$	1,452
Charge-offs		(113	)		(159	)		(410	)		(528	)
Recoveries		37			36			119			103

Net charge-offs		(76	)		(123	)		(291	)		(425	)
Provision for loan losses		51			123			206			378
Reclassification of allowance for credit losses on lending-related commitments^a		—			—			(70	)		—

Balance at end of period	$	1,251		$	1,405		$	1,251		$	1,405

(a) Included in “accrued expense and other liabilities” on the consolidated balance sheet.

7. 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 for it to conduct its activities without additional subordinated financial support from another party.

• The entity’s investors lack the ability to make decisions about the activities of the entity through voting rights or similar rights, the obligation to absorb the expected losses of the entity, or the right to receive the expected residual returns of the entity.

• 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.

In accordance with the guidance in Revised Interpretation No. 46, VIEs are consolidated by the party who is exposed to a majority of the VIE’s expected losses and/or residual returns (i.e., the primary beneficiary).

Transferors of assets to qualifying special purpose entities meeting the requirements of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are exempt from Revised Interpretation No. 46. As a result, substantially all of Key’s securitization trusts are exempt from consolidation. Interests in securitization trusts formed by Key that do not qualify for this scope exception are insignificant.

Key adopted Revised Interpretation No. 46 effective March 31, 2004. The adoption had no material effect on Key’s balance sheet or results of operations.

Key’s involvement with VIEs, including those consolidated and de-consolidated and those in which Key holds a significant interest, is described 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

Commercial paper conduit. Key, among others, refers third-party assets and borrowers and provides liquidity and credit enhancement to an asset-backed commercial paper conduit. At September 30, 2004, the conduit had assets of $388 million, of which $361 million are recorded in “loans” and $25 million are recorded in “securities available for sale” on the balance sheet. These assets serve as collateral for the conduit’s obligations to commercial paper holders. The commercial paper holders have no recourse to Key’s general credit other than through Key’s committed credit enhancement facility of $60 million.

Additional information pertaining to Key’s involvement with the conduit is included in Note 11 (“Contingent Liabilities and Guarantees”) under the heading “Guarantees” on page 26 and under the heading “Other Off-Balance Sheet Risk” on page 28.

Low-Income Housing Tax Credit (“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 are primarily investments in LIHTC operating partnerships, which totaled $451 million at September 30, 2004. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the funds’ limited obligations. In October 2003, management elected to discontinue this program. No new funds or LIHTC investments have been added since that date; however, Key continues to act as asset manager and provides occasional funding for existing funds. Additional information on return guarantee agreements with LIHTC investors is summarized in Note 11 under the heading “Guarantees.”

The partnership agreement for each guaranteed fund requires the fund to be dissolved by a certain date. Therefore, in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the noncontrolling interests associated with these funds are mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. In November 2003, the FASB indefinitely deferred the measurement and recognition provisions of SFAS No. 150 for mandatorily redeemable noncontrolling interests associated with finite-lived subsidiaries. Key currently accounts for these noncontrolling interests as minority interests and adjusts the financial statements each period for the investors’ share of fund profits and losses. At September 30, 2004, the settlement value of these noncontrolling interests was estimated to be between $546 million and $669 million, while the recorded value, including reserves, totaled $444 million.

Unconsolidated VIEs

LIHTC nonguaranteed funds. Key has determined that it is not the primary beneficiary of certain nonguaranteed funds it has formed and in which it has invested, although it continues to hold significant interests in those funds. At September 30, 2004, assets of these unconsolidated nonguaranteed funds were estimated to be $343 million. Key’s maximum exposure to loss from its involvement with these funds is minimal. In October 2003, management elected to discontinue this program.

Business trusts issuing mandatorily redeemable preferred capital securities. Key owns the common stock of business trusts that have issued corporation-obligated mandatorily redeemable preferred capital securities to third-party investors. The trusts’ only assets, which totaled $1.3 billion at September 30, 2004, are debentures issued by Key that the trusts acquired using proceeds from the issuance of preferred securities and common stock. The debentures are recorded in “long-term debt” and Key’s equity interest in the business trusts is recorded in “accrued income and other assets” on the balance sheet. Additional information on the trusts is included in Note 9 (“Capital Securities Issued by Unconsolidated Subsidiaries”), which begins on page 22.

LIHTC investments. Through the Retail Banking line of business, Key has also 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. At September 30, 2004, assets of these unconsolidated LIHTC operating partnerships totaled approximately $839 million. Key’s maximum exposure to loss from its involvement with these partnerships is the unamortized investment balance of $165 million at September 30, 2004, plus $55 million of tax credits claimed, but subject to recapture. During the third quarter of 2004, additional direct interests in LIHTC operating partnerships obtained by Key were not significant individually or in the aggregate.

Key has additional investments in LIHTC operating partnerships as a result of consolidating the LIHTC guaranteed funds discussed above. Total assets of these operating partnerships are approximately $1.9 billion at September 30, 2004. The tax credits and deductions associated with these properties are allocated to the funds’ investors based on their ownership percentages. Key’s exposure to loss from its involvement with these funds is discussed above. In October 2003, management elected to discontinue this program.

Commercial and residential real estate investments and principal investments. Through the KeyBank Real Estate Capital line of business, Key makes mezzanine investments in construction, acquisition and rehabilitation projects that Key has determined to be VIEs. Key receives underwriting and other fees from these VIEs and, for certain projects, may also provide the senior financing.

Key’s principal investing unit makes direct investments in equity and mezzanine instruments offered by individual companies, some of which Key has determined to be VIEs. These investments are held by nonregistered investment companies subject to the provisions of the AICPA Audit and Accounting Guide, “Audits of Investment Companies” (“Audit Guide”). 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. As a result, Key is not currently applying the accounting or disclosure provisions of Revised Interpretation No. 46 to its real estate mezzanine and principal investments, which remain unconsolidated.

8. Impaired Loans and Other Nonperforming Assets

Impaired loans totaled $101 million at September 30, 2004, compared with $340 million at December 31, 2003, and $459 million at September 30, 2003. Impaired loans averaged $128 million for the third quarter of 2004 and $479 million for the third quarter of 2003.

Key’s nonperforming assets were as follows:


	September 30,			December 31,			September 30,
in millions	2004			2003			2003
Impaired loans	$	101		$	340		$	459
Other nonaccrual loans		289			354			336

Total nonperforming loans		390			694			795
Other real estate owned (OREO)		60			61			69
Allowance for OREO losses		(5	)		(4	)		(4	)

OREO, net of allowance		55			57			65
Other nonperforming assets		15			2			2

Total nonperforming assets	$	460		$	753		$	862

At September 30, 2004, Key did not have any significant commitments to lend additional funds to borrowers with loans on nonperforming status.

When expected cash flows or collateral values do not justify the carrying amount of an impaired loan, the loan is assigned a specific allowance. Management calculates the extent of the impairment, which is the carrying amount of the loan less the estimated present value of future cash flows and the fair value of any existing collateral. The amount that management deems uncollectible (the impaired amount) is charged against the allowance for loan losses. Even when collateral value or other sources of repayment appear sufficient, if management remains uncertain about whether the loan will be repaid in full, an appropriate amount is specifically allocated in the allowance for loan losses. At September 30, 2004, Key had $55 million of impaired loans with a specifically allocated allowance for loan losses of $19 million, and $46 million of impaired loans that were carried at their estimated fair value without a specifically allocated allowance. At December 31, 2003, impaired loans included $183 million of loans with a specifically allocated allowance of $73 million, and $157 million that were carried at their estimated fair value without a specifically allocated allowance.

Key does not perform a loan-specific impairment valuation for smaller-balance, homogeneous, nonaccrual loans (shown in the preceding table as “Other nonaccrual loans”). These typically are consumer loans, including residential mortgages, home equity loans and various types of installment loans. Management applies historical loss experience rates to these loan portfolios, adjusted to reflect emerging credit trends and other factors, and then allocates a portion of the allowance for loan losses to each loan type.

9. Capital Securities Issued by Unconsolidated Subsidiaries

KeyCorp owns the outstanding common stock of business trusts that issued corporation-obligated mandatorily redeemable preferred capital securities (“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.

Prior to July 1, 2003, KeyCorp fully consolidated these business trusts. The capital securities were carried as liabilities on Key’s balance sheet; Key’s financial statements did not reflect the debentures or the related effects on the income statement because they were eliminated in consolidation.

In accordance with Interpretation No. 46, Key determined that these business trusts are VIEs for which it is not the primary beneficiary. Therefore, effective July 1, 2003, the trusts were de-consolidated and are accounted for using the equity method.

The characteristics of the business trusts and capital securities have not changed with the de-consolidation of the trusts. The capital securities provide an attractive source of funds since they constitute Tier 1 capital for regulatory reporting purposes, but have the same tax advantages as debt for federal income tax purposes. The Federal Reserve Board has proposed a rule that would allow bank holding companies to continue to treat capital securities as Tier 1 capital, but with stricter quantitative limits. Management believes that the effect of adopting the new rule, as proposed, will not have any material effect on Key’s financial condition.

To the extent the trusts have funds available to make payments, as guarantor, KeyCorp continues to unconditionally guarantee payment of:

• required distributions on the capital securities;

• the redemption price when a capital security is redeemed; and

• amounts due if a trust is liquidated or terminated.

During the first nine months of 2004, the business trusts repurchased $13 million of higher cost capital securities, and KeyCorp repurchased a like amount of the related debentures.

The capital securities, common stock and related debentures are summarized as follows:

Principal

Interest Rate

Maturity

Capital

Amount of

of Capital

Securities,

Common

Debentures,

Securities and

dollars in millions

Net of Discount^a

Stock

Net of Discount^b

Debentures^c

Debentures

September 30, 2004

KeyCorp Institutional Capital A

394

361

7.826

2026

KeyCorp Institutional Capital B

169

154

8.250

2026

KeyCorp Capital I

197

205

2.340

2028

KeyCorp Capital II

182

165

6.875

2029

KeyCorp Capital III

230

197

7.750

2029

KeyCorp Capital V

171

180

5.875

2033

KeyCorp Capital VI

6.125

2033

Total

1,419

1,339

6.654

—

December 31, 2003

1,426

1,352

6.548

—

September 30, 2003

1,379

1,286

6.596

—

(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. Prior to July 1, 2003, the capital securities constituted minority interests in the equity accounts of KeyCorp’s consolidated subsidiaries. Effective July 1, 2003, the business trusts were de-consolidated. Under a temporary ruling from the Federal Reserve Board, the capital securities will continue to qualify as Tier 1 capital under Federal Reserve Board guidelines, subject to certain restrictions and limitations. Included in certain capital securities at September 30, 2004, December 31, 2003, and September 30, 2003, are basis adjustments of $126 million, $120 million and $138 million, respectively, related to fair value hedges. See Note 19 (“Derivatives and Hedging Activities”), which begins on page 80 of Key’s 2003 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 December 1, 2006 (for debentures owned by Capital A), December 15, 2006 (for debentures owned by Capital B), 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 21, 2008 (for debentures owned by Capital V), and December 15, 2008 (for debentures owned by Capital VI); and, (ii) in whole at any time within 90 days after and during the continuation of a “tax event,” “investment company event” or a “capital treatment event” (as defined in the applicable offering circular). If the debentures purchased by Capital A or Capital B are redeemed before they mature, the redemption price will be the principal amount, plus a premium, plus any accrued but unpaid interest. If the debentures purchased by Capital I, Capital V, or Capital VI are redeemed before they mature, the redemption price will be 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 offering circular), 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.

(c) The interest rates for Capital A, Capital B, Capital II, Capital III, Capital V and Capital VI are fixed. Capital I has a floating interest rate equal to three-month LIBOR plus 74 basis points; it reprices quarterly. The rates shown as the total at September 30, 2004, December 31, 2003, and September 30, 2003, are weighted-average rates.

10. Pension and Other Postretirement Benefit Plans

Pension Plans

Net pension cost for all funded and unfunded plans includes the following components:


	Three months ended						Nine months ended
	September 30,						September 30,
in millions	2004			2003			2004			2003
Service cost of benefits earned	$	12		$	10		$	36		$	30
Interest cost on projected benefit obligation		14			14			42			40
Expected return on plan assets		(23	)		(19	)		(69	)		(57	)
Amortization of losses		11			5			17			15

Net pension cost	$	14		$	10		$	26		$	28

Other Postretirement Benefit Plans

Key sponsors a contributory postretirement healthcare plan. Key also sponsors life insurance plans covering certain grandfathered employees. These plans are principally noncontributory. Net postretirement benefit cost for these plans includes the following components:


	Three months ended						Nine months ended
	September 30,						September 30,
in millions	2004			2003			2004			2003
Service cost of benefits earned	$	1		$	1		$	3		$	3
Interest cost on accumulated postretirement benefit obligation		2			2			6			6
Expected return on plan assets		(1	)		(1	)		(3	)		(3	)
Amortization of unrecognized transition obligation		1			1			3			3
Amortization of losses		—			1			—			1

Net postretirement benefit cost	$	3		$	4		$	9		$	10

On December 8, 2003, the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Act”) was signed into law. The Act, which becomes effective in 2006, introduces a prescription drug benefit under Medicare (the “Medicare benefit”). It also provides a federal subsidy to sponsors of retiree healthcare benefit plans that offer prescription drug coverage to retirees that is at least actuarially equivalent to the Medicare benefit. In July 2004, proposed regulations necessary to fully implement the Act, including the manner in which actuarial equivalence must be determined, were issued by the Centers for Medicare and Medicaid Services. These regulations are expected to become final in early 2005. Accordingly, the accumulated postretirement benefit obligation and net periodic postretirement benefit cost disclosed in this note do not reflect the impact of the Act. Adoption of this guidance is not expected to have any material effect on Key’s financial condition or results of operations. Additional information pertaining to the Act is summarized in Note 1 under the heading “Accounting Pronouncements Pending Adoption” on page 9.

11. Contingent Liabilities and Guarantees

Legal Proceedings

Residual value insurance litigation. Key Bank USA, National Association (“Key Bank USA”) obtained two insurance policies from Reliance Insurance Company (“Reliance”) insuring the residual value of certain automobiles leased through Key Bank USA. The two policies (the “Policies”), the “4011 Policy” and the “4019 Policy,” together covered leases entered into during the period from January 1, 1997 to January 1, 2001.

The 4019 Policy contains an endorsement (“REINS-1 Endorsement”) stating that Swiss Reinsurance America Corporation (“Swiss Re”) will assume and reinsure 100% of Reliance’s obligations under the 4019 Policy in the event Reliance Group Holdings’ (“Reliance’s parent”) so-called “claims-paying ability” were to fall below investment grade. Key Bank USA also entered into an agreement (“Letter Agreement”) with Swiss Re and Reliance whereby Swiss Re agreed to issue to Key Bank USA an insurance policy on the same terms and conditions as the 4011 Policy in the event the financial condition of Reliance Group Holdings fell below a certain level. Around May 2000, the conditions under both the 4019 Policy and the Letter Agreement were triggered.

The 4011 Policy was canceled and replaced as of May 1, 2000, by a policy issued by North American Specialty Insurance Company (a subsidiary or affiliate of Swiss Re) (“the NAS Policy”). Tri-Arc Financial Services, Inc. (“Tri-Arc”) acted as agent for Reliance, Swiss Re and NAS. Since February 2000, Key Bank USA has been filing claims under the Policies, but none of these claims has been paid.

In July 2000, Key Bank USA filed a claim for arbitration against Reliance, Swiss Re, NAS and Tri-Arc seeking, among other things, a declaration of the scope of coverage under the Policies and for damages. On January 8, 2001, Reliance filed an action (litigation) against Key Bank USA in Federal District Court in Ohio seeking rescission or reformation of the Policies because they allegedly do not reflect the intent of the parties with respect to the scope of coverage and how and when claims were to be paid. Key filed an answer and counterclaim against Reliance, Swiss Re, NAS and Tri-Arc seeking, among other things, declaratory relief as to the scope of coverage under the Policies, damages for breach of contract and failure to act in good faith, and punitive damages. The parties agreed to proceed with this court action and to dismiss the arbitration without prejudice.

On May 29, 2001, the Commonwealth Court of Pennsylvania entered an order placing Reliance in a court supervised “rehabilitation” and purporting to stay all litigation against Reliance. On July 23, 2001, the Federal District Court in Ohio stayed the litigation to allow the rehabilitator to complete her task. On October 3, 2001, the court in Pennsylvania entered an order placing Reliance into liquidation and canceling all Reliance insurance policies as of November 2, 2001. On November 20, 2001, the Federal District Court in Ohio entered an order that, among other things, required Reliance to report to the Court on the progress of the liquidation. On January 15, 2002, Reliance filed a status report requesting the continuance of the stay for an indefinite period. On February 20, 2002, Key Bank USA asked the Court to allow the case to proceed against the parties other than Reliance, and the Court granted that motion on May 17, 2002. As of February 19, 2003, all claims against Tri-Arc were dismissed through a combination of court action and voluntary dismissal by Key Bank USA.

On August 4, 2004, the Court ruled on Key’s and Swiss Re’s motions for summary judgment on issues related to liability. In its written decision, which is publicly available, the Court held as a matter of law that Swiss Re breached its Letter Agreement with Key by not issuing a replacement policy covering the leases insured under Key’s 4011 Policy that were booked between October 1, 1998, and April 30, 2000. With respect to Key’s claims under the 4019 Policy, the Court held that Swiss Re is not entitled to judgment as a matter of law on Key’s claim that Swiss Re authorized Tri-Arc to issue the REINS-1 Endorsement. The Court also held that Swiss Re is not entitled to judgment as a matter of law on Key’s claim that Swiss Re acted in bad faith. The Court has revised the deadline for submitting summary judgment motions on issues related to damages from February 15, 2005, to May 13, 2005.

Management believes that Key Bank USA has valid insurance coverage or claims for damages relating to the residual value of automobiles leased through Key Bank USA during the four-year period ending January 1, 2001. With respect to each individual lease, however, it is not until the lease expires and the vehicle is sold that Key Bank USA can determine the existence and amount of any actual loss (i.e., the difference between the residual value provided for in the lease agreement and the vehicle’s actual market value at lease expiration). Key Bank USA’s actual total losses for which it will file claims will depend to a large measure upon the viability of, and pricing within, the market for used cars throughout the lease run-off period, which extends through 2006. The market for used cars varies.

Accordingly, the total expected loss on the portfolio for which Key Bank USA will file claims cannot be determined with certainty at this time. Claims filed by Key Bank USA through September 30, 2004, totaled approximately $377 million, and management currently estimates that approximately $11 million of additional claims may be filed through year-end 2006, bringing the total aggregate amount of actual and potential claims to $388 million. As discussed previously, a number of factors could affect Key Bank USA’s actual loss experience, which may be higher or lower than management’s current estimates.

Key is filing insurance claims for its losses and is recording as a receivable on its balance sheet a portion of the amount of the insurance claims as and when they are filed. Management believes the amount being recorded as a receivable due from the insurance carriers is appropriate to reflect the collectibility risk associated with the insurance litigation; however, litigation is inherently not without risk, and any actual recovery from the litigation may be more or less than the receivable. While management does not expect an adverse decision, if a court were to make an adverse final determination, such result would cause Key to record a material one-time expense during the period when such determination is made. An adverse determination would not have a material effect on Key’s financial condition, but could have a material adverse effect on Key’s results of operations in the quarter it occurs.

Investigations and Inquiries Involving the Mutual Fund, Brokerage and Annuity Industry. As previously reported, McDonald Investments Inc. (“McDonald”), a registered broker-dealer subsidiary of KeyCorp, has received subpoenas from the Securities and Exchange Commission and inquiries from the National Association of Securities Dealers (“NASD”) and the State of New York Attorney General, seeking documents and information as part of their investigations into trading activity involving the mutual fund, brokerage and annuity businesses. McDonald has responded to the various regulatory authorities and has been cooperating fully with their inquiries and investigation. McDonald has also conducted an internal review of its procedures and processes for executing customer orders for mutual fund share transactions. That review revealed no systemic late trading arrangements, although it did reveal four isolated instances of late trading from among the mutual fund transactions made during the relevant review period. None of those late trading transactions involved Key’s Victory Funds. The NASD recently notified McDonald that it had preliminarily determined to recommend unspecified disciplinary action against McDonald for its alleged failure to establish and maintain supervisory procedures reasonably designed to achieve compliance with regulations governing late trading and market timing of mutual funds. The NASD also cited McDonald’s alleged failure to appropriately supervise the market timing activities of certain former registered representatives at McDonald’s Chicago retail office, which McDonald closed in December 2003. McDonald will have an opportunity and expects to respond to the NASD’s preliminary determination and to present its views to the NASD prior to the possible institution of any enforcement proceeding. It is not known whether, and then to what extent, McDonald could receive further requests or be required to take action related to this matter in the future.

Other litigation. In the ordinary course of business, Key is subject to 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, could reasonably be expected to have a material adverse effect on Key’s financial condition or results of operations.

Guarantees

Key is a guarantor in various agreements with third parties. In accordance with Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” Key must recognize a liability on its balance sheet for the “stand ready” obligation associated with certain guarantees issued or modified on or after January 1, 2003. The accounting for guarantees existing prior to that date was not revised. The following table shows the types of guarantees (as defined by Interpretation No. 45) that Key had outstanding at September 30, 2004.


	Maximum Potential
	Undiscounted		Liability
in millions	Future Payments		Recorded
Financial Guarantees:
Standby letters of credit	$	10,672	$	37
Credit enhancement for asset-backed commercial paper conduit		60		—
Recourse agreement with FNMA		687		6
Return guarantee agreement with LIHTC investors		669		37
Default guarantees		33		1
Written interest rate caps^a		53		9

Total	$	12,174	$	90

(a) As of September 30, 2004, the weighted-average interest rate of written interest rate caps was 2.0%, and the weighted-average strike rate was 5.4%. Maximum potential undiscounted future payments were calculated assuming a 10% interest rate.

Standby letters of credit. These instruments obligate Key to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument, or fails to perform some contractual nonfinancial obligation. Standby letters of credit are issued by many of Key’s lines of business to address clients’ financing needs. If amounts are drawn under standby letters of credit, such amounts are treated as loans; they bear interest (generally at variable rates) and pose the same credit risk to Key as a loan. At September 30, 2004, Key’s standby letters of credit had a remaining weighted-average life of approximately 2 years, with remaining actual lives ranging from less than 1 year to as many as 14 years.

Credit enhancement for asset-backed commercial paper conduit. Key provides credit enhancement in the form of a committed facility to ensure the continuing operations of an asset-backed commercial paper conduit, which is owned by a third party and administered by an unaffiliated financial institution. The commitment to provide credit enhancement extends until September 23, 2005, and specifies that in the event of default by certain borrowers whose loans are held by the conduit, Key will provide financial relief to the conduit in an amount that is based on defined criteria that consider the level of credit risk involved and other factors.

At September 30, 2004, Key’s funding requirement under the credit enhancement facility totaled $60 million. However, there were no drawdowns under the facility during the nine-month period ended September 30, 2004. Key has no recourse or other collateral available to offset any amounts that may be funded under this credit enhancement facility. Management periodically evaluates Key’s commitments to provide credit enhancement to the conduit.

Recourse agreement with Federal National Mortgage Association. KeyBank National Association (“KBNA”) participates as a lender in the Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing (“DUS”) program. As a condition to FNMA’s delegation of responsibility for originating, underwriting and servicing mortgages, KBNA has agreed to assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan sold to FNMA. Accordingly, a reserve for such potential losses has been established and is maintained in an amount estimated by management to approximate the fair value of the liability undertaken by KBNA. At September 30, 2004, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 8 years and the unpaid principal balance outstanding of loans sold by KBNA as a participant in this program was approximately $2.1 billion. The maximum potential amount of undiscounted future payments that may be required under this program is equal to one-third of the principal balance of loans outstanding at September 30, 2004. If payment is required under this program, Key would have an interest in the collateral underlying the commercial mortgage loan on which the loss occurred.

Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KBNA, offered limited partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential rental properties that qualify for federal LIHTCs under Section 42 of the Internal Revenue Code. In certain partnerships, investors pay a fee to KAHC for a guaranteed return that is dependent on the financial performance of the property and the property’s ability to maintain its LIHTC status throughout a fifteen-year compliance period. If these two conditions are not met, Key is obligated to make any necessary payments to investors to provide the guaranteed return. In October 2003, management elected to discontinue new projects under this program. Additional information regarding these partnerships is included in Note 7 (“Variable Interest Entities”), which begins on page 19.

KAHC can effect changes in the management of the properties to improve performance. However, other than the underlying income stream from the properties, no recourse or collateral is available to offset the guarantee obligation. These guarantees have expiration dates that extend through 2018. Key meets its obligations pertaining to the guaranteed returns generally through the distribution of tax credits and deductions associated with the specific properties.

As shown in the preceding table, KAHC maintained a reserve in the amount of $37 million at September 30, 2004, which management believes will be sufficient to cover estimated future obligations under the guarantees. The maximum exposure to loss reflected in the preceding table represents undiscounted future payments due to investors for the return on and of their investments. In accordance with Interpretation No. 45, the amount of all fees received in consideration for any return guarantee agreements entered into or modified with LIHTC investors on or after January 1, 2003, has been recognized in the stand ready obligation.

Various types of default guarantees. Some lines of business provide or participate in guarantees that obligate Key to perform if the debtor fails to pay all or a portion of the subject indebtedness and/or related interest. These guarantees are generally undertaken when Key is supporting or protecting its underlying investment or where the risk profile of the debtor should provide an investment return. The terms of these default guarantees range from approximately 1 year to as many as 18 years. Although no collateral is held, Key would have recourse against the debtor for any payments made under a default guarantee.

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 September 30, 2004, these caps had a weighted-average life of approximately 5 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 with the fair value liability recorded in “accrued expense and other liabilities” on the balance sheet. Key’s potential amount of future payments under these obligations is mitigated by offsetting positions with third parties.

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 facility that supports asset-backed commercial paper conduit. Key provides liquidity to an asset-backed commercial paper conduit that is owned by a third party and administered by an unaffiliated financial institution. See further discussion of the conduit in Note 7. This liquidity facility obligates Key through November 4, 2006, to provide funding of up to $1.5 billion if required as a result of a disruption in credit markets or other factors. The amount available to be drawn, which is based on the amount of current commitments to borrowers in the conduit, was $708 million at September 30, 2004. However, there were no drawdowns under this committed facility at that time. Key’s commitment to provide liquidity is periodically evaluated by management.

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. Management’s past experience with these indemnifications has been that the amounts paid, if any, have not had a significant effect on Key’s financial condition or results of operations.

Intercompany guarantees. KeyCorp and primarily KBNA are parties to various guarantees that are undertaken to facilitate the ongoing business activities of other Key affiliates. These business activities encompass debt issuance, certain lease and insurance obligations, investments and securities, and certain leasing transactions involving clients.

Relationship with MasterCard International Inc. and Visa U.S.A. Inc. KBNA and Key Bank USA are members of MasterCard International Incorporated (“MasterCard”) and Visa U.S.A. Inc. (“Visa”). MasterCard’s charter documents and bylaws state that MasterCard may assess its members for certain liabilities that it incurs, including litigation liabilities. Visa’s charter documents state that Visa may fix fees payable by members in connection with Visa’s operations. We understand that descriptions of significant pending lawsuits and MasterCard’s and Visa’s positions regarding the potential impact of those lawsuits on members are set forth on MasterCard’s and Visa’s respective websites, as well as in MasterCard’s public filings with the Securities and Exchange Commission. Key is not a party to any significant litigation by third parties against MasterCard or Visa.

In June 2003, MasterCard and Visa agreed, independently, to settle a class-action lawsuit against them by Wal-Mart Stores Inc. and many other retailers. The lawsuit alleged that MasterCard and Visa violated federal antitrust laws by conspiring to monopolize the debit card services market and by requiring merchants that accept certain of their debit and credit card services to also accept their higher priced “off-line,” signature-verified debit card services. Under the terms of the settlements, which the court approved in December 2003, MasterCard and Visa have agreed to pay a total of approximately $3 billion, beginning August 1, 2003, over a 10-year period, to merchants who claim to have been harmed by their actions and to

lower the fees they charge merchants for their “off-line” signature-verified debit card services. Also, as of January 1, 2004, such merchants are not required to accept MasterCard or Visa debit card services when they accept MasterCard or Visa credit card services. Accordingly, management believes that the settlements will reduce fees earned by KBNA and Key Bank USA from off-line debit card transactions. Management estimates that the impact of the settlement on Key will be a reduction to pre-tax net income of less than $15 million in 2004. It is management’s understanding that certain retailers have opted-out of the class-action settlement and that additional suits have been filed against MasterCard and Visa seeking additional damage recovery. Management is unable at this time to estimate the possible impact on Key of any such actions.

12. Derivatives and Hedging Activities

Key, mainly through its lead bank, KBNA, is party to various derivative instruments, which are used for asset and liability management and trading purposes. The primary derivatives that Key uses are interest rate swaps, caps and futures, and foreign exchange forward contracts. All foreign exchange forward contracts and interest rate swaps and caps held are over-the-counter instruments. Generally, these instruments help Key meet clients’ financing needs and manage exposure to “market risk” — the possibility that economic value or net interest income will be adversely affected by changes in interest rates or other economic factors. However, like other financial instruments, these derivatives contain an element of “credit risk” — the possibility that Key will incur a loss because a counterparty fails to meet its contractual obligations.

At September 30, 2004, Key had $632 million of derivative assets and $82 million of derivative liabilities on its balance sheet that arose from derivatives that were being used for hedging purposes. As of the same date, derivative assets and liabilities classified as trading derivatives each totaled $1.1 billion. Derivative assets and liabilities are recorded at fair value in “accrued income and other assets” and “accrued expense and other liabilities,” respectively, on the balance sheet.

Counterparty credit risk

Swaps and caps present credit risk because the counterparty, which may be a bank or a broker/dealer, may not meet the terms of the contract. This risk is measured as the expected positive replacement value of contracts. To mitigate credit risk when managing its asset, liability and trading positions, Key deals exclusively with counterparties that have high credit ratings.

Key uses two additional means to manage exposure to credit risk on swap contracts. First, Key generally enters into bilateral collateral and master netting arrangements. These agreements provide for the net settlement of all contracts with a single counterparty in the event of default. Second, Key’s Credit Administration department monitors credit risk exposure to the counterparty on each interest rate swap to determine appropriate limits on Key’s total credit exposure and decide whether to demand collateral. If

Key determines that collateral is required, it is generally collected at the time this determination is made. Key generally holds collateral in the form of cash and highly rated treasury and agency-issued securities.

At September 30, 2004, Key was party to interest rate swaps and caps with 60 different counterparties. Among these were swaps and caps entered into to offset the risk of client exposure. Key had aggregate exposure of $568 million on these instruments to 37 of the counterparties. However, at September 30, Key held approximately $436 million in collateral to mitigate its credit exposure, resulting in net exposure of $132 million. The largest exposure to an individual counterparty was approximately $244 million, of which Key secured approximately $227 million in collateral.

Asset and Liability Management

Key uses a fair value hedging strategy to modify its exposure to interest rate risk and a cash flow hedging strategy to reduce the potential adverse impact of interest rate increases on future interest expense. For more information about these asset and liability management strategies, see Note 19 (“Derivatives and Hedging Activities”), which begins on page 80 of Key’s 2003 Annual Report to Shareholders.

The change in “accumulated other comprehensive income (loss)” resulting from cash flow hedges is as follows:



						Reclassification
	December 31,		2004			of Gains to			September 30,
in millions	2003		Hedging Activity			Net Income			2004
Accumulated other comprehensive income (loss) resulting from cash flow hedges		—	$	(34	)	$	(7	)	$	(41	)

Reclassifications of gains and losses from “accumulated other comprehensive income (loss)” to earnings coincide with the income statement impact of the hedged item through the payment of variable-rate interest on debt, the receipt of variable-rate interest on commercial loans and the sale or securitization of commercial real estate loans. Key expects to reclassify an estimated $1 million of net losses on derivative instruments from “accumulated other comprehensive loss” to earnings during the next twelve months.

Trading Portfolio

Key’s trading portfolio includes:

• interest rate swap contracts entered into to accommodate the needs of clients;

• positions with third parties that are intended to offset or mitigate the interest rate risk of client positions;

• foreign exchange forward contracts entered into to accommodate the needs of clients; and

• proprietary trading positions in financial assets and liabilities.

The fair values of these trading portfolio items are included in “accrued income and other assets” or “accrued expense and other liabilities” on the balance sheet. Adjustments to the fair values are included in “investment banking and capital markets income” on the income statement. Key has established a reserve in the amount of $16 million at September 30, 2004, which management believes will be sufficient to cover estimated future losses on the trading portfolio in the event of client default. Additional information pertaining to Key’s trading portfolio is summarized in Note 19 of Key’s 2003 Annual Report to Shareholders.

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 September 30, 2004 and 2003, and the related condensed consolidated statements of income for the three-month and nine-month periods then ended, and the condensed consolidated statements of changes in shareholders’ equity and cash flow for the nine-month periods ended September 30, 2004 and 2003. These financial statements are the responsibility of Key’s management.

We conducted our reviews 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 reviews, 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, 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flow for the year then ended not presented herein, and in our report dated January 16, 2004, 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, 2003, 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
November 2, 2004

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

This section generally reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly and year-to-date periods ended September 30, 2004 and 2003. 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 30. A description of Key’s business is included under the heading “Description of Business” on page 8 of Key’s 2003 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.

• KBNA refers to Key’s lead bank, KeyBank National Association.

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

• A KeyCenter is one of Key’s full-service retail banking facilities or branches.

• Key engages in capital markets activities. 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).

• All earnings per share data included in this discussion are presented on a diluted basis, which takes into account all common shares outstanding as well as potential common shares that could result from the exercise of outstanding stock options. Some tables also include basic earnings per share, which takes into account only common shares outstanding.

• 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 54.

Long-term goals

Key’s long-term goals are to achieve an annual return on average equity in the range of 16% to 18% and to grow earnings per common share at an annual rate of 8% to 10%. Our strategy for achieving these goals is described under the heading “Corporate Strategy” on page 9 of Key’s 2003 Annual Report to Shareholders.

Forward-looking statements

In addition to our long-term goals, this report may contain “forward-looking statements” about other issues like anticipated earnings, anticipated levels of net loan charge-offs and nonperforming assets, forecasted interest rate exposure, and anticipated improvement in profitability and competitiveness. These statements usually can be identified by the use of forward-looking language such as “our goal,” “our objective,” “our plan,” “will likely result,” “will be,” “are expected to,” “as planned,” “is anticipated,” “intends to,” “is projected,” or similar words.

Forward-looking statements pertaining to our goals and other matters are subject to assumptions, risks and uncertainties. For a variety of reasons, including the following, Key’s actual results could differ materially from those contained in or implied by forward-looking statements.

• Interest rates could change more quickly or more significantly than we expect, which may have an adverse effect on our financial results.

• If the economy or segments of the economy fail to continue to improve, the demand for new loans and the ability of borrowers to repay outstanding loans may decline.

• The stock and bond markets could suffer declines or disruptions, which may have adverse effects on our financial condition and that of our borrowers, and on our ability to raise money by issuing new securities.

• It could take us longer than we anticipate to implement strategic initiatives designed to increase revenues or manage expenses; we may be unable to implement certain initiatives; or the initiatives may be unsuccessful.

• Our assumptions made in connection with our financial and risk management modeling techniques and programs may prove to be inaccurate or erroneous.

• Acquisitions and dispositions of assets, business units or affiliates could adversely affect us in ways that management has not anticipated.

• We may become subject to new legal obligations or liabilities, or the resolution of pending litigation may have an adverse effect on our financial results.

• Terrorist activities or military actions could further 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 may become subject to new accounting, tax, or regulatory practices or requirements.

Significant accounting policies and estimates

Key’s business is dynamic and complex. Consequently, management must exercise judgment in choosing and applying accounting policies and methodologies in many areas. These choices are important; not only are they necessary to comply with accounting principles generally accepted in the United States, they also reflect management’s view of the most appropriate manner in which 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 50 of Key’s 2003 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 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. Key relies heavily on the use of assumptions and estimates in several areas, including accounting for the allowance for loan losses, loan securitizations, contingent liabilities and guarantees, principal investments, goodwill, and pension and other postretirement obligations. A brief discussion of each of these areas appears on pages 10 and 11 of Key’s 2003 Annual Report to Shareholders.

During the first nine months of 2004, there were no significant changes in the manner in which Key’s significant accounting policies were applied or in which related assumptions and estimates were developed. Additionally, no new significant accounting policies were adopted.

Highlights of Key’s Performance

Financial performance

The primary measures of Key’s financial performance for the third quarter and first nine months of 2004 and 2003 are summarized below.

• Net income for the third quarter of 2004 was $252 million, or $.61 per common share, compared with $239 million, or $.58 per share, for the previous quarter and $227 million, or $.53 per share, for the third quarter of 2003. For the first nine months of 2004, Key’s net income was $741 million, or $1.78 per common share, compared with $669 million, or $1.57 per share, for the comparable year-ago period.

• Key’s return on average equity was 14.62% for the third quarter of 2004, compared with 13.97% for the second quarter of 2004, and 13.06% for the year-ago quarter. For the first nine months of 2004, Key’s return on average equity was 14.36%, compared with 12.98% for the first nine months of 2003.

• Key’s third quarter 2004 return on average total assets was 1.16%, compared with a return of 1.13% for the previous quarter and 1.06% for the third quarter of 2003. For the first nine months of 2004, Key’s return on average total assets was 1.16%, compared with 1.06% for the comparable year-ago period.

Key’s top three priorities for 2004 are to profitably grow revenue, improve asset quality and maintain expense discipline. During the third quarter:

• Total revenue rose by $12 million from the prior quarter due to higher net interest income resulting from an improved net interest margin and an increase in average earning assets driven by stronger commercial loan growth. The growth in our commercial loan portfolio was broad-based and spread among a number of industry sectors.

• Asset quality continued to improve. Nonperforming loans fell for the eighth consecutive quarter and net loan charge-offs as a percentage of average loans fell to their lowest level since the second quarter of 2000.

• We continued to manage our expenses effectively as total noninterest expense was down relative to the year-ago quarter, although up from the prior quarter as a result of higher incentive accruals and employee benefit costs.

Further, we continue to effectively manage our capital. In that regard, during the third quarter, Key repurchased 2.5 million of its common shares and had a tangible equity to tangible assets ratio of 6.57% at September 30, 2004.

Despite these favorable trends and recent signs of an improving economy, Key’s noninterest income decreased by $10 million from the prior quarter and by $27 million from the third quarter of 2003. Lower income from investment banking and capital markets activities, and a slowdown in brokerage activities drove the decline from the second quarter, while a decline in net gains from loan securitizations and sales, and a decrease in service charges on deposit accounts accounted for the decline from the year-ago quarter.

Considering recent trends, we expect Key’s earnings to be in the range of $.60 to $.63 per share for the fourth quarter of 2004.

The reasons that Key’s revenue and expense components changed from those reported for the three- and nine-month periods ended September 30, 2003, are reviewed in greater detail throughout the remainder of the Management’s Discussion & Analysis section.

Figure 1 on page 35 summarizes Key’s financial performance for each of the past five quarters and the first nine months of 2004 and 2003.

Figure 1. Selected Financial Data


	2004									2003						Nine months ended September 30,
dollars in millions, except per share amounts	Third			Second			First			Fourth			Third			2004			2003
FOR THE PERIOD
Interest income	$	952		$	912		$	939		$	956		$	971		$	2,803		$	3,014
Interest expense		294			276			278			285			294			848			960
Net interest income		658			636			661			671			677			1,955			2,054
Provision for loan losses		51			74			81			123			123			206			378
Noninterest income		436			446			431			466			463			1,313			1,294
Noninterest expense		690			679			659			698			699			2,028			2,044
Income before income taxes		353			329			352			316			318			1,034			926
Net income		252			239			250			234			227			741			669

PER COMMON SHARE
Net income	$	.62		$	.58		$	.60		$	.56		$	.54		$	1.80		$	1.58
Net income — assuming dilution		.61			.58			.59			.55			.53			1.78			1.57
Cash dividends paid		.31			.31			.31			.305			.305			.93			.915
Book value at period end		17.12			16.77			16.98			16.73			16.64			17.12			16.64
Market price:
High		32.02			32.27			33.23			29.41			27.88			33.23			27.88
Low		29.00			28.23			28.63			25.55			24.86			28.23			22.31
Close		31.60			29.89			30.29			29.32			25.57			31.60			25.57
Weighted-average common shares (000)		407,187			410,292			416,680			420,043			421,971			411,371			423,697
Weighted-average common shares and potential common shares (000)		411,575			414,908			421,572			423,752			425,669			416,002			426,968

AT PERIOD END
Loans	$	64,981		$	64,016		$	62,513		$	62,711		$	62,723		$	64,981		$	62,723
Earning assets		76,335			74,990			73,269			73,143			73,258			76,335			73,258
Total assets		88,455			86,221			84,448			84,487			84,460			88,455			84,460
Deposits		55,843			52,423			49,931			50,858			48,739			55,843			48,739
Long-term debt		13,444			14,608			15,333			15,294			15,342			13,444			15,342
Shareholders’ equity		6,946			6,829			6,999			6,969			6,977			6,946			6,977

PERFORMANCE RATIOS
Return on average total assets		1.16	%		1.13	%		1.19	%		1.11	%		1.06	%		1.16	%		1.06	%
Return on average equity		14.62			13.97			14.47			13.37			13.06			14.36			12.98
Net interest margin (taxable equivalent)		3.61			3.57			3.74			3.78			3.73			3.64			3.81

CAPITAL RATIOS AT PERIOD END
Equity to assets		7.85	%		7.92	%		8.29	%		8.25	%		8.26	%		7.85	%		8.26	%
Tangible equity to tangible assets		6.57			6.64			6.98			6.94			6.94			6.57			6.94
Tier 1 risk-based capital		7.72			7.93			8.10			8.35			8.23			7.74			8.23
Total risk-based capital		11.67			12.07			12.22			12.57			12.48			11.66			12.48
Leverage		8.27			8.34			8.45			8.55			8.37			8.27			8.37

OTHER DATA
Average full-time equivalent employees		19,635			19,514			19,585			19,745			20,059			19,577			20,174
KeyCenters		921			902			903			906			900			921			900

Strategic developments

We recently completed three acquisitions that have strengthened our market share positions. During the third quarter, we acquired 10 branch offices and approximately $380 million of deposits of Sterling Bank & Trust FSB in the affluent, high-growth Detroit suburbs, and certain net assets of American Capital Resource, Inc., based in Atlanta. American Capital Resource is the fourth commercial real estate acquisition that we have made in the last five years as part of our ongoing strategy to expand Key’s commercial mortgage finance and servicing capabilities. Early in the fourth quarter, we completed the acquisition of EverTrust Bank, in Everett, Washington, with 12 branch offices and approximately $770 million in assets and $570 million in deposits.

In addition, on October 22, 2004, we announced plans to acquire AEBF, the equipment leasing unit of American Express’ small business division headquartered in Parsippany, New Jersey. AEBF provides capital for small and middle market businesses, mostly in the healthcare, information technology, office products, and commercial vehicle/construction industries, and has a leasing portfolio of approximately $1.5 billion. This acquisition is expected to expand our office network for small-ticket lease solutions to over 70 markets across the country.

Line of Business Results

This section summarizes the financial performance and related strategic developments of each of Key’s three major business groups: Consumer Banking, Corporate and Investment Banking, and Investment Management Services. To better understand this discussion, see Note 4 (“Line of Business Results”), which begins on page 11. Note 4 includes a brief description of the products and services offered by each of the three major business groups, more detailed financial information pertaining to the groups and their respective lines of business, and explanations of “Other Segments” and “Reconciling Items.”

Figure 2 summarizes the contribution made by each major business group to Key’s taxable-equivalent revenue and net income for the three- and nine-month periods ended September 30, 2004 and 2003.

Figure 2. Major Business Groups — Taxable-Equivalent Revenue and Net Income


	Three months ended												Nine months ended
	September 30,						Change						September 30,						Change
dollars in millions	2004			2003			Amount			Percent			2004			2003			Amount			Percent
Revenue (taxable equivalent)
Consumer Banking	$	592		$	600		$	(8	)		(1.3	)%	$	1,714		$	1,755		$	(41	)		(2.3	)%
Corporate and Investment Banking		365			358			7			2.0			1,082			1,078			4			.4
Investment Management Services		193			200			(7	)		(3.5	)		599			573			26			4.5
Other Segments		(2	)		16			(18	)	NM				18			46			(28	)		(60.9	)

Total segments		1,148			1,174			(26	)		(2.2	)		3,413			3,452			(39	)		(1.1	)
Reconciling items		(32	)		(21	)		(11	)		(52.4	)		(77	)		(55	)		(22	)		(40.0	)

Total	$	1,116		$	1,153		$	(37	)		(3.2	)%	$	3,336		$	3,397		$	(61	)		(1.8	)%

Net income (loss)
Consumer Banking	$	118		$	110		$	8			7.3	%	$	329		$	315		$	14			4.4	%
Corporate and Investment Banking		112			85			27			31.8			324			262			62			23.7
Investment Management Services		27			21			6			28.6			82			53			29			54.7
Other Segments		3			14			(11	)		(78.6	)		25			44			(19	)		(43.2	)

Total segments		260			230			30			13.0			760			674			86			12.8
Reconciling items		(8	)		(3	)		(5	)		(166.7	)		(19	)		(5	)		(14	)		(280.0	)

Total	$	252		$	227		$	25			11.0	%	$	741		$	669		$	72			10.8	%

N/M = Not Meaningful

Consumer Banking

As shown in Figure 3, net income for Consumer Banking was $118 million for the third quarter of 2004, representing an $8 million increase from the year-ago quarter. The increase was attributable to a substantially lower provision for loan losses, offset in part by a decrease in noninterest income.

The provision for loan losses decreased by $19 million as a result of improved asset quality in Consumer Finance and Small Business lines of business.

Noninterest income decreased by $7 million, or 5%, from the third quarter of 2003, due largely to an $11 million decline in net gains from loan securitizations and sales in the Consumer Finance line of business and a $6 million decrease in service charges on deposit accounts, primarily in Retail Banking. These reductions were offset partially by a $7 million decrease in net losses incurred on the residual values of leased vehicles.

Effective July 22, 2004, we acquired 10 branch offices and the deposits of Sterling Bank in the affluent, high-growth Detroit suburbs. In addition, we completed the acquisition of EverTrust Bank, in Everett, Washington, with 12 branch offices and approximately $770 million in assets and $570 million in deposits, effective October 15, 2004. These acquisitions have strengthened our Consumer Banking market share positions.

Figure 3. Consumer Banking


	Three months ended												Nine months ended
	September 30,						Change						September 30,						Change
dollars in millions	2004			2003			Amount			Percent			2004			2003			Amount			Percent
Summary of operations
Net interest income (TE)	$	453		$	454		$	(1	)		(.2	)%	$	1,329		$	1,369		$	(40	)		(2.9	)%
Noninterest income		139			146			(7	)		(4.8	)		385			386			(1	)		(.3	)

Total revenue (TE)		592			600			(8	)		(1.3	)		1,714			1,755			(41	)		(2.3	)
Provision for loan losses		51			70			(19	)		(27.1	)		157			213			(56	)		(26.3	)
Noninterest expense		352			355			(3	)		(.8	)		1,031			1,039			(8	)		(.8	)

Income before income taxes (TE)		189			175			14			8.0			526			503			23			4.6
Allocated income taxes and TE adjustments		71			65			6			9.2			197			188			9			4.8

Net income	$	118		$	110		$	8			7.3	%	$	329		$	315		$	14			4.4	%

Percent of consolidated net income		47	%		49	%		N/A			N/A			45	%		47	%		N/A			N/A
Average balances
Loans	$	29,331		$	29,179		$	152			.5	%	$	29,476		$	28,908		$	568			2.0	%
Total assets		31,855			31,687			168			.5			32,025			31,413			612			1.9
Deposits		35,574			35,062			512			1.5			35,115			34,767			348			1.0

TE = Taxable Equivalent, N/A = Not Applicable


Additional Consumer Banking Data
	Three months ended												Nine months ended
	September 30,						Change						September 30,				Change
dollars in millions	2004			2003			Amount			Percent			2004		2003		Amount			Percent
Average deposits outstanding
Noninterest-bearing	$	5,750		$	5,746		$	4			.1	%	$	5,637	$	5,515	$	122			2.2	%
Money market deposit accounts and other savings		16,973			15,586			1,387			8.9			16,312		15,111		1,201			7.9
Time		12,851			13,730			(879	)		(6.4	)		13,166		14,141		(975	)		(6.9	)

Total deposits	$	35,574		$	35,062		$	512			1.5	%	$	35,115	$	34,767	$	348			1.0	%

Home equity loans
Retail Banking and Small Business
Average balance	$	8,810		$	8,257
Average loan-to-value ratio		72	%		72	%
Percent first lien positions		60			58
National Home Equity
Average balance	$	4,502		$	5,164
Average loan-to-value ratio		71	%		74	%
Percent first lien positions		76			82

Other data
On-line clients / household penetration		938,540/44	%		722,172/37	%
KeyCenters		921			900
Automated teller machines		2,187			2,158

Corporate and Investment Banking

Net income for Corporate and Investment Banking was $112 million for the third quarter of 2004, up from $85 million for the same period last year. A significant decrease in the provision for loan losses and growth in noninterest income drove the improvement and more than offset an increase in noninterest expense.

The provision for loan losses decreased by $49 million, reflecting improved asset quality in the Corporate Banking line of business.

Noninterest income rose by $8 million, or 7%, due largely to increases of $5 million in both non-yield-related loan fees and income from investment banking and capital markets activities. In addition, Key Equipment Finance recorded net gains of $5 million on the residual values of leased equipment in the third quarter of 2004, compared with a small net loss in the year-ago quarter. These favorable results were offset in part by a decrease in net gains from loan sales.

Noninterest expense increased by $13 million, or 7%, due primarily to an $8 million increase in personnel expense.

Effective August 11, 2004, we completed the acquisition of certain net assets of American Capital Resource, Inc., based in Atlanta. This is the fourth commercial real estate acquisition that we have made in the last five years as part of our ongoing strategy to expand Key’s commercial mortgage finance and servicing capabilities.

Figure 4. Corporate and Investment Banking


	Three months ended												Nine months ended
	September 30,						Change						September 30,						Change
dollars in millions	2004			2003			Amount			Percent			2004			2003			Amount			Percent
Summary of operations
Net interest income (TE)	$	234		$	235		$	(1	)		(.4	)%	$	696		$	721		$	(25	)		(3.5	)%
Noninterest income		131			123			8			6.5			386			357			29			8.1

Total revenue (TE)		365			358			7			2.0			1,082			1,078			4			.4
Provision for loan losses		(1	)		48			(49	)	NM				45			155			(110	)		(71.0	)
Noninterest expense		187			174			13			7.5			520			508			12			2.4

Income before income taxes (TE)		179			136			43			31.6			517			415			102			24.6
Allocated income taxes and TE adjustments		67			51			16			31.4			193			153			40			26.1

Net income	$	112		$	85		$	27			31.8	%	$	324		$	262		$	62			23.7	%

Percent of consolidated net income		44	%		37	%		N/A			N/A			44	%		39	%		N/A			N/A
Average balances
Loans	$	29,078		$	27,901		$	1,177			4.2	%	$	28,055		$	28,052		$	3			—
Total assets		33,993			32,157			1,836			5.7			32,968			32,422			546			1.7	%
Deposits		5,146			4,566			580			12.7			4,954			4,223			731			17.3

TE = Taxable Equivalent, N/M = Not Meaningful, N/A = Not Applicable

Investment Management Services

Net income for Investment Management Services was $27 million for the third quarter of 2004, up from $21 million for the third quarter of last year. The positive effects of a decrease in noninterest expense and a reduction in the provision for loan losses more than offset a decline in noninterest income.

Noninterest expense declined by $13 million, or 8%, due to a variety of factors, including decreases in computer processing costs and indirect charges.

The provision for loan losses decreased by $4 million, reflecting improved asset quality in the McDonald Financial Group.

Noninterest income decreased by $7 million, or 5%, due largely to a $4 million decline in brokerage commissions and lower income from the sales of annuities.

Figure 5. Investment Management Services


	Three months ended												Nine months ended
	September 30,						Change						September 30,						Change
dollars in millions	2004			2003			Amount			Percent			2004			2003			Amount			Percent
Summary of operations
Net interest income (TE)	$	60		$	60			—			—		$	179		$	178		$	1			.6	%
Noninterest income		133			140		$	(7	)		(5.0	)%		420			395			25			6.3

Total revenue (TE)		193			200			(7	)		(3.5	)		599			573			26			4.5
Provision for loan losses		1			5			(4	)		(80.0	)		4			10			(6	)		(60.0	)
Noninterest expense		149			162			(13	)		(8.0	)		464			478			(14	)		(2.9	)

Income before income taxes (TE)		43			33			10			30.3			131			85			46			54.1
Allocated income taxes and TE adjustments		16			12			4			33.3			49			32			17			53.1

Net income	$	27		$	21		$	6			28.6	%	$	82		$	53		$	29			54.7	%

Percent of consolidated net income		11	%		9	%		N/A			N/A			11	%		8	%		N/A			N/A
Average balances
Loans	$	5,275		$	5,100		$	175			3.4	%	$	5,214		$	5,030		$	184			3.7	%
Total assets		6,614			6,228			386			6.2			6,441			6,009			432			7.2
Deposits		7,114			6,382			732			11.5			7,070			5,850			1,220			20.9

TE = Taxable Equivalent, N/A = Not Applicable

Additional Investment Management Services Data

September 30,

December 31,

September 30,

dollars in billions

2004

2003

Assets under management

70.9

68.7

65.0

Nonmanaged and brokerage assets

67.6

66.4

63.4

Other Segments

Other segments consist primarily of Corporate Treasury and Key’s Principal Investing unit. These segments generated net income of $3 million for the third quarter of 2004, compared with $14 million for the same period last year. Declines in net gains from principal investing and the sales of securities, lower income from corporate-owned life insurance and additional revenue recorded in the third quarter of 2003 in connection with the demutualization of an insurance company in which Key was a policy holder contributed to the decrease.

Results of Operations

Net interest income

Key’s principal source of earnings is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and yield-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 use of derivative instruments to manage interest rate risk;

• market interest rate fluctuations; and

• asset quality.

To make it easier to compare results among several periods and the yields on various types of earning assets, some of which are taxable and others which are 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 6, which spans pages 42 and 43, 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 accounting principles generally accepted in the United States (“GAAP”).

Taxable-equivalent net interest income for the third quarter of 2004 was $680 million, compared with $690 million one year ago. This reduction reflects the adverse effect of a lower net interest margin, which decreased 12 basis points to 3.61%. A basis point is equal to one one-hundredth of a percentage point (e.g., 12 basis points equals .12%). 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. During the same period, average earning assets grew by 2% to $75.3 billion.

The combination of a soft economy and growth in core deposits have affected the net interest margin, as well as the size and composition of Key’s earning assets portfolio. Over the past twelve months, average core deposits have grown by $1.9 billion, or 5%, while average earning assets increased by $1.6 billion, or 2%. Due to generally weak loan demand, the excess funds from core deposits have been used primarily to reduce short-term borrowings or long-term debt.

Specific factors, which led to the decrease in Key’s net interest margin over the past twelve months, are as follows:

• During the first half of 2004, we repositioned our balance sheet in anticipation of interest rate increases by allowing interest rate swaps to mature without replacing them, and by selling selected loan portfolios.

• During the third quarter of 2003, we experienced exceptionally high levels of prepayments on our investment and consumer loan portfolios as a result of the low interest rate environment.

• Over the past year, competitive market conditions precluded us from reducing interest rates on deposit accounts.

• Although the demand for commercial loans improved during the second and third quarters of 2004, during the two preceding quarters the demand for commercial loans was weak.

Average earning assets for the third quarter of 2004 totaled $75.3 billion, which was $1.6 billion, or 2%, higher than the third quarter 2003 level. The growth in commercial lending and short-term investments more than offset declines in consumer loans outstanding and securities available for sale. The decline in consumer loans was due to loan sales and management’s efforts to exit certain businesses.

Since December 31, 2002, the growth and composition of Key’s loan portfolio has been affected by the following actions:

• Key sold commercial mortgage loans of $1.4 billion during the first nine months of 2004 and $1.7 billion during all of 2003. Since some of these loans have been sold with limited recourse (i.e., the risk that Key will be held accountable for certain events or representations made in the sales), Key established a loss reserve of an amount estimated by management to be appropriate to reflect the recourse risk. More information about the related recourse agreement is provided in Note 11 (“Contingent Liabilities and Guarantees”) under the section entitled “Recourse agreement with Federal National Mortgage Association” on page 27.

• Key sold education loans of $1.2 billion ($987 million through securitizations) during the first nine months of 2004 and $1.2 billion ($998 million through securitizations) during all of 2003. Key has used the securitization market for education loans as a cost effective means of diversifying its funding sources.

• Key sold other loans (primarily home equity and residential real estate loans) totaling $1.7 billion during the first nine months of 2004 and $1.8 billion during all of 2003. The sales of these long-term, fixed-rate loans were driven in part by management’s strategy for achieving the desired interest rate and credit risk profiles for Key.

• During the third quarter of 2003, Key consolidated an asset-backed commercial paper conduit as a result of an accounting change. This consolidation added approximately $200 million to Key’s commercial loan portfolio. More information about this change, required by Interpretation No. 46, “Consolidation of Variable Interest Entities,” is provided in Note 7 (“Variable Interest Entities”), which begins on page 19.

• During the first quarter of 2003, Key acquired a $311 million commercial lease financing portfolio and a $71 million commercial loan portfolio from a Canadian financial institution. The acquisition of these portfolios further diversified our asset base and has generated additional equipment financing opportunities.

• During the second quarter of 2001, management announced that Key would exit the automobile leasing business, de-emphasize indirect prime automobile lending outside of Key’s primary geographic markets and discontinue certain credit-only commercial relationships. As of September 30, 2004, the affected portfolios, in the aggregate, have declined by approximately $554 million since September 30, 2003, and $5.0 billion since the date of the announcement.

Figure 6. Average Balance Sheets, Net Interest Income and Yields/Rates

Third Quarter 2004

Second Quarter 2004

Average

Yield/

Average

Yield/

dollars in millions

Balance

Interest

Rate

Balance

Interest

Rate

ASSETS

Loans^a,b

Commercial, financial and agricultural

18,088

198

4.34

17,392

189

4.36

Real estate — commercial mortgage

6,448

4.99

6,071

4.94

Real estate — construction

4,825

5.15

4,716

4.79

Commercial lease financing

8,808

126

5.72

8,729

127

5.83

Total commercial loans

38,169

467

4.87

36,908

446

4.86

Real estate — residential

1,511

5.79

1,568

6.09

Home equity

14,844

212

5.67

14,631

201

5.53

Consumer — direct

2,059

7.35

2,058

7.41

Consumer — indirect lease financing

144

10.07

199

9.74

Consumer — indirect other

5,153

7.56

5,137

7.39

Total consumer loans

23,711

372

6.26

23,593

363

6.17

Loans held for sale

2,476

4.74

2,602

4.28

Total loans

64,356

869

5.38

63,103

837

5.33

Taxable investment securities

4.22

—

4.20

Tax-exempt investment securities^a

9.64

9.73

Total investment securities

8.65

8.72

Securities available for sale^a,c

6,982

4.88

7,130

4.37

Short-term investments

2,527

1.50

2,384

1.44

Other investments^c

1,328

2.98

1,167

2.79

Total earning assets

75,272

974

5.16

73,874

934

5.07

Allowance for loan losses

(1,270

)

(1,237

)

Accrued income and other assets

12,522

12,678

86,524

85,315

LIABILITIES AND SHAREHOLDERS’ EQUITY

NOW and money market deposit accounts

20,454

.77

19,753

.67

Savings deposits

1,986

.22

2,040

.23

Certificates of deposit ($100,000 or more)^d

4,852

3.60

4,727

3.77

Other time deposits

10,348

2.81

10,591

2.87

Deposits in foreign office

3,593

1.47

2,635

1.05

Total interest-bearing deposits

41,233

171

1.65

39,746

161

1.63

Federal funds purchased and securities sold under repurchase agreements

5,032

1.35

4,483

.93

Bank notes and other short-term borrowings

2,614

1.33

2,512

1.43

Long-term debt^d

13,415

3.01

14,465

2.74

Total interest-bearing liabilities

62,294

294

1.90

61,206

276

1.82

Noninterest-bearing deposits

11,285

11,010

Accrued expense and other liabilities

6,090

6,220

Shareholders’ equity

6,855

6,879

86,524

85,315

Interest rate spread (TE)

3.26

3.25

Net interest income (TE) and net interest margin (TE)

680

3.61

658

3.57

TE adjustment^a

Net interest income, GAAP basis

658

636

(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) Yield is calculated on the basis of amortized cost.

(d) Rate calculation excludes basis adjustments related to fair value hedges. See Note 19 (“Derivatives and Hedging Activities”), which begins on page 80 of Key’s 2003 Annual Report to Shareholders, for an explanation of fair value hedges.

TE = Taxable Equivalent

Figure 6. Average Balance Sheets, Net Interest Income and Yields/Rates (Continued)


First Quarter 2004								Fourth Quarter 2003								Third Quarter 2003
Average					Yield/			Average					Yield/			Average					Yield/
Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
$	17,037		$	190		4.50	%	$	16,847		$	198		4.69	%	$	17,188		$	202		4.65	%
	5,750			72		5.00			5,812			76		5.21			5,859			77		5.21
	4,856			58		4.79			5,138			68		5.22			5,196			66		5.05
	8,536			127		5.96			8,172			122		5.95			7,995			118		5.91

	36,179			447		4.96			35,969			464		5.14			36,238			463		5.07
	1,589			25		6.21			1,639			25		6.32			1,707			28		6.43
	14,963			210		5.64			14,999			209		5.54			14,862			218		5.80
	2,083			40		7.69			2,138			38		7.12			2,162			39		7.19
	266			6		9.72			350			9		9.65			460			11		9.60
	5,389			105		7.79			5,116			106		8.16			5,123			105		8.23

	24,290			386		6.37			24,242			387		6.34			24,314			401		6.55
	2,327			23		4.07			2,353			26		4.47			2,526			29		4.53

	62,796			856		5.47			62,564			877		5.58			63,078			893		5.62
	17			—		4.36			17			1		4.35			14			—		4.46
	79			2		9.71			85			2		9.75			91			2		9.76

	96			2		8.79			102			3		8.88			105			2		9.07
	7,516			88		4.70			7,474			82		4.39			7,877			77		3.91
	1,859			9		1.95			1,855			8		1.73			1,531			6		1.70
	1,114			8		2.78			1,118			8		2.70			1,032			6		2.68

	73,381			963		5.27			73,113			978		5.32			73,623			984		5.32
	(1,378	)							(1,398	)							(1,396	)
	12,522								12,285								12,495

$	84,525							$	84,000							$	84,722


$	18,882			29		.61		$	18,760			31		.65		$	18,381			35		.75
	2,052			1		.23			2,069			2		.39			2,092			2		.48
	4,883			46		3.81			4,886			45		3.77			4,898			46		3.78
	10,957			80		2.96			11,023			81		2.91			11,073			81		2.89
	2,167			5		.97			1,750			5		.96			1,627			4		1.04

	38,941			161		1.67			38,488			164		1.69			38,071			168		1.76

	4,068			10		.96			3,953			9		.93			5,133			12		.93
	2,603			12		1.81			2,698			14		1.92			2,559			13		2.05
	15,229			95		2.63			15,214			98		2.64			15,421			101		2.68

	60,841			278		1.86			60,353			285		1.89			61,184			294		1.93
	10,660								10,904								10,628
	6,077								5,797								6,016
	6,947								6,946								6,894

$	84,525							$	84,000							$	84,722

						3.41	%							3.43	%							3.39	%

				685		3.74	%					693		3.78	%					690		3.73	%

				24								22								13

			$	661							$	671							$	677

Figure 7 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 49, contains more discussion about changes in earning assets and funding sources.

Figure 7. Components of Net Interest Income Changes


	From three months ended September 30, 2003									From nine months ended September 30, 2003
	to three months ended September 30, 2004									to nine months ended September 30, 2004
	Average			Yield/			Net			Average			Yield/			Net
in millions	Volume			Rate			Change			Volume			Rate			Change
INTEREST INCOME
Loans	$	18		$	(42	)	$	(24	)	$	19		$	(197	)	$	(178	)
Taxable investment securities		—			1			1			—			1			1
Tax-exempt investment securities		—			(1	)		(1	)		(3	)		—			(3	)
Securities available for sale		(9	)		16			7			(27	)		3			(24	)
Short-term investments		4			(1	)		3			8			(3	)		5
Other investments		2			2			4			4			3			7

Total interest income (taxable equivalent)		15			(25	)		(10	)		1			(193	)		(192	)
INTEREST EXPENSE
NOW and money market deposit accounts		4			—			4			13			(30	)		(17	)
Savings deposits		—			—			—			—			(4	)		(4	)
Certificates of deposit ($100,000 or more)		—			(2	)		(2	)		2			(9	)		(7	)
Other time deposits		(5	)		(3	)		(8	)		(17	)		(9	)		(26	)
Deposits in foreign office		6			3			9			8			—			8

Total interest-bearing deposits		5			(2	)		3			6			(52	)		(46	)
Federal funds purchased and securities sold under repurchase agreements		—			5			5			(4	)		—			(4	)
Bank notes and other short-term borrowings		—			(5	)		(5	)		—			(17	)		(17	)
Long-term debt		(14	)		11			(3	)		(40	)		(5	)		(45	)

Total interest expense		(9	)		9			—			(38	)		(74	)		(112	)

Net interest income (taxable equivalent)	$	24		$	(34	)	$	(10	)	$	39		$	(119	)	$	(80	)

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.

Noninterest income

Noninterest income for the third quarter of 2004 was $436 million, down $27 million, or 6%, from the same period last year. For the first nine months of the year, noninterest income was $1.3 billion, representing an increase of $19 million, or 1%, from the first nine months of 2003.

As shown in Figure 8, the decrease in noninterest income from the year-ago quarter was due largely to declines of $18 million in net gains from loan securitizations and sales, and $9 million in service charges on deposit accounts. These reductions were partially offset by net gains of $4 million on the residual values of leased vehicles and equipment in the third quarter of 2004, compared with net losses of $9 million for the same period last year. These net gains and losses are included in “Miscellaneous income.”

Stronger financial markets drove the year-to-date increase. Income from trust and investment services rose by $22 million, while income from investment banking and capital markets activities grew by $21 million, and letter of credit and loan fees increased by $20 million. In addition, Key recorded net gains of $10 million on the residual values of leased vehicles and equipment during the first nine months of 2004, compared with net losses of $28 million during the first nine months of 2003. These favorable results were partially offset by a $22 million reduction in service charges on deposit accounts, a $21 million decrease in net gains from loan sales and securitizations, and declines in a variety of other items included in “Miscellaneous income.”

Figure 8. Noninterest Income


	Three months ended										Nine months ended
	September 30,				Change						September 30,				Change
dollars in millions	2004		2003		Amount			Percent			2004		2003		Amount			Percent
Trust and investment services income	$	135	$	138	$	(3	)		(2.2	)%	$	421	$	399	$	22			5.5	%
Service charges on deposit accounts		84		93		(9	)		(9.7	)		254		276		(22	)		(8.0	)
Investment banking and capital markets income		52		53		(1	)		(1.9	)		163		142		21			14.8
Letter of credit and loan fees		42		37		5			13.5			119		99		20			20.2
Corporate-owned life insurance income		25		27		(2	)		(7.4	)		77		81		(4	)		(4.9	)
Net gains from loan securitizations and sales		21		39		(18	)		(46.2	)		47		68		(21	)		(30.9	)
Electronic banking fees		22		20		2			10.0			62		61		1			1.6
Net securities gains		—		2		(2	)		(100.0	)		7		9		(2	)		(22.2	)
Other income:
Insurance income		10		12		(2	)		(16.7	)		34		38		(4	)		(10.5	)
Loan securitization servicing fees		2		2		—			—			4		6		(2	)		(33.3	)
Credit card fees		3		2		1			50.0			9		8		1			12.5
Miscellaneous income		40		38		2			5.3			116		107		9			8.4

Total other income		55		54		1			1.9			163		159		4			2.5

Total noninterest income	$	436	$	463	$	(27	)		(5.8	)%	$	1,313	$	1,294	$	19			1.5	%

The following discussion explains the composition of certain components of Key’s noninterest income and the factors that caused those components to change.

Trust and investment services income. Trust and investment services is Key’s largest source of noninterest income. The primary components of revenue generated by these services are shown in Figure 9.

The decrease in trust and investment services income from the third quarter of 2003 was attributable to a slowdown in brokerage activities, while the year-to-date increase was due primarily to a rise in the market value of assets under management, reflecting improvements in the equity markets.

Figure 9. Trust and Investment Services Income


	Three months ended										Nine months ended
	September 30,				Change						September 30,				Change
dollars in millions	2004		2003		Amount			Percent			2004		2003		Amount			Percent
Brokerage commissions and fee income	$	61	$	66	$	(5	)		(7.6	)%	$	197	$	196	$	1			.5	%
Personal asset management and custody fees		41		39		2			5.1			125		111		14			12.6
Institutional asset management and custody fees		9		10		(1	)		(10.0	)		28		29		(1	)		(3.4	)
All other fees		24		23		1			4.3			71		63		8			12.7

Total trust and investment services income	$	135	$	138	$	(3	)		(2.2	)%	$	421	$	399	$	22			5.5	%

A significant portion of Key’s trust and investment services income is based on the value of assets under management. At September 30, 2004, Key’s bank, trust and registered investment advisory subsidiaries had assets under management of $71.2 billion, representing a 10% increase from $65.0 billion at September 30, 2003. Although the increase in the market value of assets under management was the primary cause of the year-to-date increase in this revenue component, the repricing of services and the July 1, 2003, acquisition of NewBridge Partners LLC also contributed to the improvement. The composition of Key’s assets under management is shown in Figure 10.

Figure 10. Assets Under Management


	2004						2003
in millions	Third		Second		First		Fourth		Third
Assets under management by investment type:
Equity	$	32,431	$	32,299	$	31,898	$	31,768	$	28,839
Fixed income		19,619		18,749		18,168		17,355		17,300
Money market		19,183		18,952		19,332		19,580		18,901

Total	$	71,233	$	70,000	$	69,398	$	68,703	$	65,040

Proprietary mutual funds included in assets under management:
Equity	$	3,408	$	3,426	$	3,327	$	3,165	$	2,777
Fixed income		860		866		970		1,015		1,087
Money market		9,050		9,275		9,397		10,188		10,205

Total	$	13,318	$	13,567	$	13,694	$	14,368	$	14,069

Service charges on deposit accounts. The decrease in service charges on deposit accounts for both the quarterly and year-to-date periods was due primarily to lower overdraft and maintenance fees. Maintenance fees were lower because a higher proportion of Key’s clients have elected to use Key’s free checking products.

Investment banking and capital markets income. As shown in Figure 11, stronger financial markets contributed to a significant increase in investment banking income for both the quarterly and year-to-date periods.

Key’s principal investing income is susceptible to volatility since most of it is derived from mezzanine debt and equity investments in small to medium-sized businesses, some of which are in relatively early stages of economic development and strategy implementation. Principal investments consist of direct and indirect investments in predominantly privately-held companies and are carried on the balance sheet at fair value ($817 million at September 30, 2004, and $729 million at September 30, 2003). Thus, the net gains presented in Figure 11 stem from changes in estimated fair values, as well as actual gains and losses on sales of principal investments.

Figure 11. Investment Banking and Capital Markets Income


	Three months ended											Nine months ended
	September 30,					Change						September 30,				Change
dollars in millions	2004			2003		Amount			Percent			2004		2003		Amount			Percent
Investment banking income	$	36		$	24	$	12			50.0	%	$	92	$	70	$	22			31.4	%
Net gains from principal investing		10			16		(6	)		(37.5	)		39		32		7			21.9
Foreign exchange income		7			10		(3	)		(30.0	)		31		25		6			24.0
Net gain from sale of other investments		1			—		1			N/M			1		—		1			N/M
Dealer trading and derivatives income (loss)		(2	)		3		(5	)		N/M			—		15		(15	)		(100.0	)

Total investment banking and capital markets income	$	52		$	53	$	(1	)		(1.9	)%	$	163	$	142	$	21			14.8	%

N/M = Not Meaningful

Letter of credit and loan fees. The increase in letter of credit and loan fees for both the quarterly and year-to-date periods was attributable largely to higher syndication fees generated by the Corporate Banking line of business. The year-to date increase also reflected growth in letter of credit fees.

Net gains from loan securitizations and sales. Gains or losses may result from the securitizations and/or sales of loans undertaken from time to time to achieve desired interest rate and credit risk profiles, to improve the profitability of the overall loan portfolio, or as a cost effective means of diversifying funding sources. During the third quarter of 2004, Key recorded net gains of $21 million from the sales of $1.7 billion of loans, compared with net gains of $39 million from the sale of $2.1 billion of loans during the year-ago quarter. The types of loans sold during each of these respective periods are presented in Figure 16 on page 51.

Other income. The increase in other income for both the quarterly and year-to-date periods was due largely to net gains of $4 million on the residual values of leased vehicles and equipment recorded in the current quarter, compared with net losses of $9 million recorded for the year ago quarter in “Miscellaneous income.” During the first nine months of 2004, Key recorded net residual value gains of $10 million, compared with net losses of $28 million during the first nine months of 2003. These positive results were moderated by a variety of other items, including various fees and gains recognized during the first nine months of 2003 that are not present in the current year.

Noninterest expense

Noninterest expense for the third quarter of 2004 was $690 million, down $9 million, or 1%, from the same period last year. For the first nine months of the year, noninterest expense was $2.0 billion, representing a decrease of $16 million, or less than 1%, from the first nine months of 2003.

As shown in Figure 12, the decrease in noninterest expense from the year-ago quarter was spread among a number of categories and offset in part by higher costs associated with personnel and computer processing.

The year-to-date decrease in noninterest expense also resulted from reductions in most categories, with the largest decline occurring in franchise and business tax expense. The $18 million decrease in these taxes includes a $7 million reduction stemming from the reversal of an overaccrual of certain businesses taxes in the first quarter of 2004. These improved results were partially offset by increases in personnel expense and computer processing costs.

Figure 12. Noninterest Expense


	Three months ended										Nine months ended
	September 30,				Change						September 30,				Change
dollars in millions	2004		2003		Amount			Percent			2004		2003		Amount			Percent
Personnel	$	394	$	380	$	14			3.7	%	$	1,138	$	1,114	$	24			2.2	%
Net occupancy		57		56		1			1.8			176		171		5			2.9
Computer processing		49		43		6			14.0			141		131		10			7.6
Equipment		28		35		(7	)		(20.0	)		89		101		(12	)		(11.9	)
Marketing		26		30		(4	)		(13.3	)		79		88		(9	)		(10.2	)
Professional fees		27		30		(3	)		(10.0	)		81		87		(6	)		(6.9	)
Other expense:
Postage and delivery		13		15		(2	)		(13.3	)		39		43		(4	)		(9.3	)
Telecommunications		8		8		—			—			22		24		(2	)		(8.3	)
Franchise and business taxes		9		10		(1	)		(10.0	)		17		35		(18	)		(51.4	)
OREO expense, net		3		5		(2	)		(40.0	)		14		10		4			40.0
Miscellaneous expense		76		87		(11	)		(12.6	)		232		240		(8	)		(3.3	)

Total other expense		109		125		(16	)		(12.8	)		324		352		(28	)		(8.0	)

Total noninterest expense	$	690	$	699	$	(9	)		(1.3	)%	$	2,028	$	2,044	$	(16	)		(.8	)%

Average full-time equivalent employees		19,635		20,059		(424	)		(2.1	)%		19,577		20,174		(597	)		(3.0	)%

The following discussion explains the composition of Key’s personnel expense and the factors that caused the change in this major component of noninterest expense.

Personnel. As shown in Figure 13, personnel expense, the largest category of Key’s noninterest expense, rose by $24 million, or 2%, from the first nine months of 2003. This increase resulted from higher incentive compensation accruals and an increase in stock-based compensation. These increases were offset in part by reductions in all other components of personnel expense, with the largest decline occurring in salaries expense.

Figure 13. Personnel Expense


	Three months ended										Nine months ended
	September 30,				Change						September 30,				Change
dollars in millions	2004		2003		Amount			Percent			2004		2003		Amount			Percent
Salaries	$	213	$	215	$	(2	)		(.9	)%	$	632	$	647	$	(15	)		(2.3	)%
Incentive compensation		103		94		9			9.6			280		244		36			14.8
Employee benefits		63		63		—			—			193		198		(5	)		(2.5	)
Stock-based compensation		12		8		4			50.0			27		15		12			80.0
Severance		3		—		3			N/M			6		10		(4	)		(40.0	)

Total personnel expense	$	394	$	380	$	14			3.7	%	$	1,138	$	1,114	$	24			2.2	%

N/M = Not Meaningful

One of management’s top three priorities for 2004 is to manage Key’s expenses effectively. The level of Key’s personnel expense continues to reflect the disciplined approach that we have taken to control Key’s expenses over the past several years. We will continue to evaluate staffing levels and to make appropriate changes when they can be accomplished without damaging either customer service or our ability to develop higher return businesses. For the third quarter of 2004, the number of average full-time equivalent employees was 19,635, compared with 19,514 for the second quarter of 2004 and 20,059 for the year-ago quarter.

Income taxes

The provision for income taxes was $101 million for the third quarter of 2004, compared with $91 million for the comparable period in 2003. The effective tax rate, which is the provision for income taxes as a percentage of income before income taxes, was 28.6% for both the third quarter of 2004 and 2003. For the first nine months of 2004, the provision for income taxes was $293 million, compared with $257 million for the first nine months of 2003. The effective tax rates for these periods were 28.3% and 27.8%, respectively.

For the year-to-date period, the increase in the effective tax rate reflected a lower tax deduction for dividends paid to the employee stock ownership plan. In addition, tax-exempt interest income and income from corporate-owned life insurance each represented a lower percentage of income before income taxes in the current year than in the first nine months of 2003. The increase in the effective tax rate was moderated, however, by the effect of certain actions taken by Key with regard to its commercial lease financing activities. As discussed below, Key has transferred the management of residual values of certain equipment leases to a foreign subsidiary in a lower tax jurisdiction. A larger number of such leases were transferred during the first nine months of 2004 than during the same period last year.

The effective tax rates for both the current and prior year are substantially below Key’s combined statutory federal and state rate of 37.5%. In part, this is because portions of the equipment leasing portfolio became subject to a lower income tax rate in the latter half of 2001 when Key transferred responsibility for the management of portions of that portfolio to a foreign subsidiary in a lower tax jurisdiction. Since Key intends to permanently reinvest the earnings of this subsidiary, no deferred income taxes have been recorded on those earnings in accordance with SFAS No. 109, “Accounting for Income Taxes.” Other factors that account for the difference between the effective and statutory tax rates in the current and prior year include tax deductions associated with dividends paid to Key’s 401(k) savings plan, income from investments in tax-advantaged assets (such as tax-exempt securities and corporate-owned life insurance) and credits associated with investments in low-income housing projects.

Financial Condition

Loans

At September 30, 2004, total loans outstanding were $65.0 billion, compared with $62.7 billion at December 31, 2003, and September 30, 2003. The composition of Key’s loan portfolio at each of these dates is presented in Note 6 (“Loans”) on page 18. The growth in our loans over the past twelve months was largely attributable to the stronger demand for commercial loans during the first nine months of 2004 in an improving economy. This growth was moderated by several factors:

• Loan sales completed to improve the profitability of the overall portfolio or to accommodate our asset/liability management needs;

• Weak commercial loan demand during 2003 due to a soft economy; and

• Our decision to exit the automobile leasing business, de-emphasize indirect prime automobile lending and discontinue certain credit-only commercial relationships.

Over the past several years, we have used alternative funding sources like loan sales and securitizations to support our loan origination capabilities. In addition, several acquisitions have improved our ability to generate and securitize new loans, especially in the area of commercial real estate.

Commercial loan portfolio. Commercial loans outstanding increased by $2.6 billion, or 7%, from one year ago. Over the past year, all major segments of the commercial loan portfolio experienced growth with the exception of construction loans, reflecting improvement in the economy. This growth was broad-based and spread among a number of industry sectors.

Equipment lease financing is a specialty business in which Key believes it has both the scale and array of products to compete on a world-wide basis. This business has shown strong growth during the past twelve months and we recently announced plans to expand the business by acquiring AEBF. This acquisition is scheduled to close in the fourth quarter and is expected to expand our office network for small-ticket lease financing to over 70 markets across the country.

Commercial real estate loans related to both owner and nonowner-occupied properties constitute one of the largest segments of Key’s commercial loan portfolio. At September 30, 2004, Key’s commercial real estate portfolio included mortgage loans of $6.7 billion and construction loans of $5.1 billion. The average size of a mortgage loan was $.5 million and the largest mortgage loan had a balance of $60 million. The average size of a construction loan commitment was $7 million. The largest construction loan commitment was $59 million, of which $28 million was outstanding.

Key conducts its commercial real estate lending business through two primary sources: a 12-state banking franchise and KeyBank Real Estate Capital, a national line of business that cultivates relationships both within and beyond the branch system. The KeyBank Real Estate Capital line of business deals exclusively with nonowner-occupied properties (generally properties in which the owner occupies less than 60% of the premises) and accounted for approximately 55% of Key’s total average commercial real estate loans during the third quarter of 2004. Our commercial real estate business as a whole focuses on larger real estate developers and, as shown in Figure 14, is diversified by both industry type and geography.

Figure 14. Commercial Real Estate Loans


September 30, 2004	Geographic Region										Percent of
dollars in millions	East		Midwest		Central		West		Total		Total
Nonowner-occupied:
Multi-family properties	$	566	$	549	$	444	$	672	$	2,231		18.9	%
Retail properties		233		594		73		182		1,082		9.2
Office buildings		70		50		183		198		501		4.2
Residential properties		294		84		187		401		966		8.2
Warehouses		62		99		52		97		310		2.6
Manufacturing facilities		1		21		7		14		43		.4
Hotels/Motels		4		3		1		9		17		.1
Health facility		—		—		21		18		39		.3
Other		394		195		64		236		889		7.5

		1,624		1,595		1,032		1,827		6,078		51.4
Owner-occupied		1,175		2,128		642		1,807		5,752		48.6

Total	$	2,799	$	3,723	$	1,674	$	3,634	$	11,830		100.0	%

Nonowner-occupied:
Nonperforming loans	$	1	$	2		—		—	$	3		N/M
Accruing loans past due 90 days or more		1		9		—		—		10		N/M
Accruing loans past due 30 through 89 days		11		16		—	$	5		32		N/M

N/M = Not Meaningful

Consumer loan portfolio. As shown in Note 6, consumer loans outstanding decreased by $515 million, or 2%, from one year ago. The decline was due primarily to the sales of certain long-term, fixed-rate loans, including broker-originated home equity loans within the Key Home Equity Services division, and an indirect recreational vehicle portfolio. These sales were completed as part of our strategy for achieving the desired interest rate and credit risk profiles for Key. In addition, automobile lease financing receivables and loans declined as a result of our decision to exit the automobile leasing business and to de-emphasize indirect prime automobile lending. During the same period, residential real estate loans decreased as most of the new loans originated by Key over the past twelve months were originated for sale. Additionally, a prolonged period of low interest rates has resulted in continued mortgage prepayment activity. The overall decline in consumer loans was offset in part by growth in home equity loans generated by the Retail Banking line of business and by Champion Mortgage Company discussed below.

Excluding loan sales and portfolio acquisitions, consumer loans would have increased by $601 million, or 2%, during the past twelve months.

The home equity portfolio is by far the largest segment of Key’s consumer loan portfolio. Key’s home equity portfolio is derived primarily from our Retail Banking line of business (57% of the home equity portfolio at September 30, 2004) and the National Home Equity unit within our Consumer Finance line of business.

The National Home Equity unit has two components: Champion Mortgage Company, a home equity finance company, and Key Home Equity Services, which purchases individual loans from an extensive network of correspondents and agents.

Figure 15 summarizes Key’s home equity loan portfolio 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 15. Home Equity Loans


	2004									2003
dollars in millions	Third			Second			First			Fourth			Third
SOURCES OF LOANS OUTSTANDING AT PERIOD END
Retail Banking (KeyCenters) and Small Business	$	8,937		$	8,711		$	8,490		$	8,370		$	8,324
McDonald Financial Group and other sources		1,535			1,538			1,500			1,483			1,455

Champion Mortgage Company		2,882			2,879			2,842			2,857			2,747
Key Home Equity Services division		1,596			1,625			1,651			2,328			2,353

National Home Equity unit		4,478			4,504			4,493			5,185			5,100

Total	$	14,950		$	14,753		$	14,483		$	15,038		$	14,879

Nonperforming loans at period end	$	149		$	151		$	161		$	153		$	151
Net charge-offs for the period		7			10			16			15			14
Yield for the period		5.67	%		5.53	%		5.64	%		5.54	%		5.80	%

Sales and securitizations. During the past twelve months, Key sold $2.0 billion of commercial real estate loans, $1.3 billion of education loans ($1.1 billion through securitizations), $915 million of home equity loans, $390 million of residential real estate loans, $375 million of commercial loans and leases, and $283 million of indirect consumer loans.

Among the factors that Key considers in determining which loans to securitize are:

• whether the characteristics of a specific loan portfolio make it conducive to securitization;

• the relative cost of funds;

• the level of credit risk; and

• capital requirements.

Figure 16 summarizes Key’s loan sales (including securitizations) for the first nine months of 2004 and all of 2003.

Figure 16. Loans Sold


			Commercial		Commercial		Residential		Home		Consumer
in millions	Commercial		Real Estate		Lease Financing		Real Estate		Equity		–Indirect		Education		Total
2004
Third quarter	$	80	$	508		—	$	79	$	85		—	$	976	$	1,728
Second quarter		87		652	$	5		121		70	$	283		104		1,322
First quarter		130		198		—		61		664		—		138		1,191

Total	$	297	$	1,358	$	5	$	261	$	819	$	283	$	1,218	$	4,241

2003
Fourth quarter	$	73	$	599		—	$	129	$	96		—	$	96	$	993
Third quarter		120		423		—		211		473		—		895		2,122
Second quarter		67		408		—		184		134		—		85		878
First quarter		52		253		—		147		112		—		109		673

Total	$	312	$	1,683		—	$	671	$	815		—	$	1,185	$	4,666

Figure 17 shows loans that are either administered or serviced by Key, but not recorded on the balance sheet. Included are loans that have been both securitized and sold, or simply sold outright. In the event of default, Key is subject to recourse with respect to approximately $687 million of the $34.4 billion of loans administered or serviced at September 30, 2004. Additional information about this recourse arrangement is included in Note 11 (“Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with Federal National Mortgage Association” on page 27.

Key derives income from two sources when we sell or securitize loans but retain the right to administer or service them. We earn noninterest income (recorded as “other income”) from servicing or administering the loans, and we earn interest income from any securitized assets retained. In addition, escrow deposits collected in connection with the servicing of commercial real estate loans have contributed to the growth in Key’s average noninterest-bearing deposits over the past twelve months.

Figure 17. Loans Administered or Serviced

September 30,

June 30,

March 31,

December 31,

September 30,

in millions

2004

2003

Commercial real estate loans

29,098

27,861

25,708

25,376

24,379

Education loans

4,978

4,327

4,465

4,610

4,750

Home equity loans

147

168

191

215

283

Commercial loans

192

180

174

167

153

Total

34,415

32,536

30,538

30,368

29,565

Securities

At September 30, 2004, the securities portfolio totaled $8.6 billion and included $7.2 billion of securities available for sale, $78 million of investment securities and $1.3 billion of other investments (primarily principal investments). In comparison, the total portfolio at December 31, 2003, was $8.8 billion, including $7.6 billion of securities available for sale, $98 million of investment securities and $1.1 billion of other investments. The weighted-average maturity of the portfolio was 2.7 years at September 30, 2004, compared with 3.1 years at December 31, 2003.

The size and composition of Key’s securities portfolio are dependent largely on our needs for liquidity and the extent to which we are required or elect to hold these assets as collateral to secure public and trust deposits. Although debt securities are generally used for this purpose, other assets, such as securities purchased under resale agreements, may be used temporarily when they provide more favorable yields.

Securities available for sale. The vast majority of Key’s securities available for sale portfolio consist of collateralized mortgage obligations that provide a source of interest income and serve as collateral in connection with pledging requirements. A collateralized mortgage obligation (“CMO”) is a debt security that is secured by a pool of mortgages, mortgage-backed securities, U.S. government securities, corporate debt obligations or other bonds. At September 30, 2004, Key had $6.7 billion invested in collateralized mortgage obligations and other mortgage-backed securities in the available-for-sale portfolio, compared with $7.1 billion at December 31, 2003, and September 30, 2003. Substantially all of Key’s mortgage-backed securities are issued or backed by federal agencies. The CMO securities held by Key are shorter-maturity class bonds that are structured to have more predictable cash flows than other longer-term class bonds during periods of rising interest rates.

Figure 18 shows the composition, yields and remaining maturities of Key’s securities available for sale. For more information about securities, including gross unrealized gains and losses by type of security, see Note 5 (“Securities”), which begins on page 16.

Figure 18. Securities Available for Sale


										Other
	U.S. Treasury,			States and			Collateralized			Mortgage-			Retained									Weighted
	Agencies and			Political			Mortgage			Backed			Interests in			Other						Average
dollars in millions	Corporations			Subdivisions			Obligations^a			Securities^a			Securitizations^a			Securities^c			Total			Yield^b
SEPTEMBER 30, 2004
Remaining maturity:
One year or less	$	28			—		$	65		$	9		$	19		$	140		$	261			6.04	%
After one through five years		6		$	4			6,254			268			125			94			6,751			4.10
After five through ten years		2			7			13			53			19			11			105			7.50
After ten years		2			10			15			9			25			4			65			9.00

Fair value	$	38		$	21		$	6,347		$	339		$	188		$	249		$	7,182			—
Amortized cost		38			20			6,422			329			109			242			7,160			4.25	%
Weighted average yield		2.35	%		7.58	%		3.75	%		5.68	%		31.29	%		2.84	%^b		4.25	%		—
Weighted average maturity	1.9 years			10.8 years			2.6 years			3.1 years			6.2 years			2.7 years			2.7 years				—

DECEMBER 31, 2003
Fair value	$	64		$	23		$	6,606		$	469		$	175		$	301		$	7,638			—
Amortized cost		63			23			6,696			453			105			288			7,628			4.54	%

SEPTEMBER 30, 2003
Fair value	$	59		$	25		$	6,482		$	596		$	184		$	204		$	7,550			—
Amortized cost		59			24			6,545			575			120			200			7,523			4.77	%

(a) Maturity is based upon expected average lives rather than contractual terms.

(b) Weighted-average yields are calculated based on amortized cost and exclude equity securities of $128 million that have no stated yield. Such yields have been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%.

(c) Includes marketable equity securities with no stated maturity.

Investment securities. Securities issued by states and political subdivisions account for the majority of Key’s investment securities. Figure 19 shows the composition, yields and remaining maturities of these securities.

Figure 19. Investment Securities


	States and						Weighted
	Political		Other				Average
dollars in millions	Subdivisions		Securities		Total		Yield^a
SEPTEMBER 30, 2004
Remaining maturity:
One year or less	$	21		—	$	21		9.78	%
After one through five years		38	$	13		51		7.39
After five through ten years		6		—		6		8.73
After ten years		—		—		—		9.23

Amortized cost	$	65	$	13	$	78		8.15	%
Fair value		69		13		82		—
Weighted-average maturity	2.2 years		3.5 years		2.5 years			—

DECEMBER 31, 2003
Amortized cost	$	83	$	15	$	98		8.50	%
Fair value		89		15		104		—

SEPTEMBER 30, 2003
Amortized cost	$	91	$	15	$	106		8.57	%
Fair value		98		15		113		—

(a) Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%.

Other investments. Principal investments — investments in equity and mezzanine instruments made by Key’s Principal Investing unit — are carried at fair value, which aggregated $817 million at September 30, 2004, $732 million at December 31, 2003, and $729 million at September 30, 2003. They represent approximately 61% of other investments at September 30, 2004, and include direct and indirect investments predominately in privately-held companies. Direct investments are those made in a particular company, while indirect investments are made through funds that include other investors.

In addition to principal investments, other investments include securities that do not have readily determinable fair values. These securities include certain real estate-related investments. Neither these securities nor principal investments have stated maturities.

Deposits and other sources of funds

“Core deposits” — domestic deposits other than certificates of deposit of $100,000 or more — are Key’s primary source of funding. During the third quarter of 2004, core deposits averaged $44.1 billion, and represented 59% of the funds Key used to support earning assets, compared with $42.2 billion and 57%, respectively, during the same quarter in 2003. The composition of Key’s deposits is shown in Figure 6, which spans pages 42 and 43.

The increase in the level of Key’s average core deposits during the past twelve months was due to higher levels of NOW accounts, money market deposit accounts and noninterest-bearing deposits. During the same period, time deposits decreased by 7%. These results reflect client preferences for investments that provide high levels of liquidity in a low interest rate environment. Average noninterest-bearing deposits also increased as we intensified our cross-selling efforts, focused sales and marketing efforts on our free checking products, and collected more escrow deposits associated with the servicing of commercial real estate loans.

Purchased funds, comprising large certificates of deposit, deposits in the foreign branch and short-term borrowings, averaged $16.1 billion during the third quarter of 2004, compared with $14.2 billion during the year-ago quarter. The increase was attributable to a higher level of foreign branch deposits. These deposits have grown over the past several quarters due in part to increased funding needs stemming from stronger demand for commercial loans.

We continue to consider loan sales and securitizations as a funding alternative when market conditions are favorable.

Capital

Shareholders’ equity. Total shareholders’ equity at September 30, 2004, was $6.9 billion, down $23 million from the balance at December 31, 2003. Repurchases of common shares and net unrealized losses on derivative financial instruments caused the decrease. Other factors contributing to the change in shareholders’ equity during the first nine months of 2004 are shown in the Consolidated Statements of Changes in Shareholders’ Equity presented on page 5.

Changes in common shares outstanding. Share repurchases and other activities that caused the change in Key’s outstanding common shares over the past five quarters are summarized in Figure 20 below.

Figure 20. Changes in Common Shares Outstanding

in thousands

3Q04

2Q04

1Q04

4Q03

3Q03

Shares outstanding at beginning of period

407,243

412,153

416,494

419,266

421,074

Issuance of shares under employee benefit and dividend reinvestment plans

980

1,128

3,659

1,228

692

Repurchase of common shares

(2,500

)

(6,038

)

(8,000

)

(4,000

)

(2,500

)

Shares outstanding at end of period

405,723

407,243

412,153

416,494

419,266

Key repurchases its common shares periodically under a repurchase program authorized by Key’s Board of Directors. Key’s repurchase activity for each of the three months ended September 30, 2004, is summarized in Figure 21.

Figure 21. Share Repurchases


					Number of		Remaining Number
					Shares Purchased		of Shares that may
	Number of		Average		under a Publicly		be Purchased Under
	Shares		Price Paid		Announced		the Program as
in thousands, except per share data	Purchased		per Share		Program^a		of each Month-End^a
July 1-31, 2004		612	$	30.14		612		31,349
August 1-31, 2004		1,888		30.58		1,888		29,461
September 1-30, 2004		—		—		—		29,461

Total		2,500	$	30.47		2,500

(a) In July 2004, the Board of Directors authorized the repurchase of 25,000,000 common shares, in addition to the shares remaining from the repurchase program authorized in September 2003. This action brings the total repurchase authorization to 31,961,248 shares. These shares may be repurchased in the open market or through negotiated transactions. The program does not have an expiration date.

At September 30, 2004, Key had 86,165,314 treasury shares. Management expects to reissue those shares from time-to-time to support the employee stock purchase, stock option and dividend reinvestment plans, and for other corporate purposes. During the first nine months of 2004, Key reissued 5,767,974 treasury shares.

Capital adequacy. Capital adequacy is an important indicator of financial stability and performance. Overall, Key’s capital position remains strong: the ratio of total shareholders’ equity to total assets was 7.85% at September 30, 2004, and 8.26% at September 30, 2003. Key’s ratio of tangible equity to tangible assets was 6.57% at September 30, 2004. Management believes that Key’s strong capital position provides the flexibility to take advantage of investment opportunities, to repurchase shares when appropriate and to pay dividends.

Banking industry regulators prescribe minimum capital ratios for bank holding companies and their banking subsidiaries. Note 14 (“Shareholders’ Equity”), which begins on page 70 of Key’s 2003 Annual Report to Shareholders, explains the implications of failing to meet specific capital requirements imposed by the banking regulators. Risk-based capital guidelines require a minimum level of capital as a percent of “risk-weighted assets,” which is total assets plus certain off-balance sheet items, both adjusted for predefined credit risk factors. Currently, banks and bank holding companies must maintain, at a minimum, Tier 1 capital as a percent of risk-weighted assets of 4.00%, and total capital as a percent of risk-weighted assets of 8.00%. As of September 30, 2004, Key’s Tier 1 capital ratio was 7.72%, and its total capital ratio was 11.67%.

Another indicator of capital adequacy, the leverage ratio, is defined as Tier 1 capital as a percentage of average quarterly tangible assets. Leverage ratio requirements vary with the condition of the financial institution. Bank holding companies that either have the highest supervisory rating or have implemented the Federal Reserve’s risk-adjusted measure for market risk—as KeyCorp has—must maintain a minimum

leverage ratio of 3.00%. All other bank holding companies must maintain a minimum ratio of 4.00%. As of September 30, 2004, Key had a leverage ratio of 8.27%.

Federal bank regulators group FDIC-insured depository institutions into five categories, ranging from “critically undercapitalized” to “well capitalized.” Both of Key’s affiliate banks qualified as “well capitalized” at September 30, 2004, since each exceeded the prescribed thresholds of 10.00% for total capital, 6.00% for Tier 1 capital and 5.00% for the leverage ratio. If these provisions applied to bank holding companies, Key would also qualify as “well capitalized” at September 30, 2004. The FDIC-defined capital categories serve a limited supervisory function. Investors should not treat them as a representation of the overall financial condition or prospects of KeyCorp or its affiliate banks.

Figure 22 presents the details of Key’s regulatory capital position at September 30, 2004, December 31, 2003 and September 30, 2003.

Figure 22. Capital Components and Risk-Weighted Assets


	September 30,			December 31,			September 30,
dollars in millions	2004			2003			2003
TIER 1 CAPITAL
Common shareholders’ equity^a	$	6,972		$	6,961		$	6,937
Qualifying capital securities		1,292			1,306			1,247
Less: Goodwill		1,179			1,150			1,154
Other assets^b		75			61			67

Total Tier 1 capital		7,010			7,056			6,963

TIER 2 CAPITAL
Allowance for losses on loans and lending-related commitments		1,147			1,079			1,083
Net unrealized gains on equity securities available for sale		2			5			—
Qualifying long-term debt		2,439			2,475			2,513

Total Tier 2 capital		3,588			3,559			3,596

Total risk-based capital	$	10,598		$	10,615		$	10,559

RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet	$	70,161		$	67,675		$	67,796
Risk-weighted off-balance sheet exposure		21,974			18,343			18,480
Less: Goodwill		1,179			1,150			1,154
Other assets^b		568			336			370
Plus: Market risk-equivalent assets		609			244			213

Gross risk-weighted assets		90,997			84,776			84,965
Less: Excess allowance for losses on loans and lending-related commitments		169			327			322

Net risk-weighted assets	$	90,828		$	84,449		$	84,643

AVERAGE QUARTERLY TOTAL ASSETS	$	86,524		$	84,000		$	84,722

CAPITAL RATIOS
Tier 1 risk-based capital ratio		7.72	%		8.35	%		8.23	%
Total risk-based capital ratio		11.67			12.57			12.48
Leverage ratio^c		8.27			8.55			8.37

(a) Common shareholders’ equity does not include net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities) or net gains or losses on cash flow hedges.

(b) Other assets deducted from Tier 1 capital consist of intangible assets (excluding goodwill) recorded after February 19, 1992, deductible portions of purchased mortgage servicing rights and deductible portions of nonfinancial equity investments.

Other assets deducted from risk-weighted assets consist of intangible assets (excluding goodwill) recorded after February 19, 1992, deductible portions of purchased mortgage servicing rights and deductible portions of nonfinancial equity investments.

(c) This ratio is Tier 1 capital divided by average quarterly total assets less goodwill, the nonqualifying intangible assets described in footnote (b) and deductible portions of nonfinancial equity investments.

Risk Management

Overview

Certain risks are inherent in the business activities conducted by financial services companies. As such, the ability to properly and effectively identify, measure, monitor and report such risks is essential to maintaining a company’s safety and soundness and to maximizing its profitability. Management believes that the most significant risks to which Key is exposed are market risk, credit risk, liquidity risk and operational risk. Each of these types of risk is defined and discussed in greater detail in the remainder of this section.

Key’s Board of Directors (“Board”) has established and follows a corporate governance program that serves as the foundation for managing and mitigating risk. In accordance with this program, the Board focuses on the interests of shareholders, encourages strong internal controls, demands management accountability, advocates adherence to Key’s code of ethics and administers an annual self-assessment process. The Board has established separate Audit and Finance Committees, whose appointed members play an integral role in helping the Board meet its risk oversight responsibilities. The responsibilities of these two committees are summarized on page 33 of Key’s 2003 Annual Report to Shareholders.

Market risk management

The values of some financial instruments vary not only with changes in market interest rates, but also with changes in foreign exchange rates, factors influencing valuations in the equity securities markets and other market-driven rates or prices. For example, the value of a fixed-rate bond will decline if market interest rates increase. Similarly, the value of the U.S. dollar regularly fluctuates in relation to other currencies. When the value of an instrument is tied to such external factors, the holder faces “market risk.” Most of Key’s market risk is derived from interest rate fluctuations.

Interest rate risk management

Key’s Asset/Liability Management Policy Committee (“ALCO”) has developed a program to measure and manage interest rate risk. This senior management committee is also responsible for approving Key’s asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing Key’s interest rate sensitivity exposure.

Factors contributing to interest rate exposure. Key uses interest rate exposure models to quantify the potential impact that a variety of possible interest rate scenarios may have on earnings and the economic value of equity. The various scenarios estimate the level of Key’s interest rate exposure arising from option risk, basis risk and gap risk. Each of these types of risk is defined in the discussion of market risk management, which begins on page 33 of Key’s 2003 Annual Report to Shareholders.

Measurement of short-term interest rate exposure. Key uses a simulation model to measure interest rate risk. The model estimates the impact that various changes in the overall level of market interest rates would have on net interest income over one-and two-year time periods. The results help Key develop strategies for managing exposure to interest rate risk.

Like any forecasting technique, interest rate simulation modeling is based on a large number of assumptions and judgments, related primarily to loan and deposit growth, asset and liability prepayments, interest rate variations, product pricing, and on- and off-balance sheet management strategies. Management believes that the assumptions used are reasonable. Nevertheless, simulation modeling produces only a sophisticated estimate, not a precise calculation of exposure.

Key’s risk management guidelines call for preventive measures to be taken if simulation modeling demonstrates that a gradual 200 basis point increase or decrease in short-term rates over the next twelve months, defined as a stressed interest rate scenario, would adversely affect net interest income over the same period by more than 2%. Key is operating within these guidelines.

When an increase in short-term interest rates is expected to generate lower net interest income, the balance sheet is said to be “liability-sensitive,” meaning that rates paid on deposits and other liabilities respond more quickly to market forces than yields on loans and other assets. Conversely, when an increase in short-term interest rates is expected to generate greater net interest income, the balance sheet is said to be “asset-sensitive,” meaning that yields on loans and other assets respond more quickly to market forces than rates paid on deposits and other liabilities. Key has historically maintained a modest liability-sensitive position to increasing interest rates under our “standard” risk assessment. Management actively monitors the risk of rising interest rates and takes preventive actions, when deemed necessary, with the objective of assuring that net interest income at risk does not exceed internal guidelines. In addition, since rising rates typically reflect an improving economy, management expects that Key’s lines of business could increase their portfolios of market-rate loans and deposits, which would further mitigate the effect of rising rates on Key’s interest expense.

For purposes of simulation modeling, we estimate net interest income starting with current market interest rates and assume that those rates will not change in future periods. Then, we measure the amount of net interest income at risk by gradually increasing or decreasing the Federal Funds target rate by 200 basis points over the next twelve months. At the same time, we adjust other market interest rates, such as U.S. Treasury, LIBOR, and interest rate swap rates, but not as dramatically. These market interest rate assumptions form the basis for our “standard” risk assessment in a stressed period for interest rate changes. We also assess rate risk assuming that market interest rates move faster or slower, and that the magnitude of change results in “steeper” or “flatter” yield curves.

Short-term interest rates were relatively low at September 30, 2004. To make the working model more realistic in these circumstances, management modified Key’s standard rate scenario of a gradual decrease of 200 basis points over twelve months to a gradual decrease of 100 basis points over six months and no change over the following six months.

In addition to modeling interest rates as described above, Key models the balance sheet in three distinct ways to forecast changes over different periods and under different conditions. Our initial simulation of net interest income assumes that the composition of the balance sheet will not change over the next year. Another simulation, using Key’s “most likely balance sheet,” assumes that the balance sheet will grow at levels consistent with consensus economic forecasts. Finally, we simulate the impact of increasing market interest rates in the second year of a two-year time horizon. The first year of this simulation is identical to the “most likely balance sheet” simulation, except that we assume market interest rates do not change. For more information on the specific assumptions used by Key in each of these simulations, see the section entitled “Measurement of short-term interest rate exposure,” which begins on page 33 of Key’s 2003 Annual Report to Shareholders.

As of September 30, 2004, based on the results of our simulation model using Key’s “most likely balance sheet,” and assuming that management does not take action to alter the outcome, Key would expect net interest income to increase by approximately .09% if short-term interest rates gradually increase by 200 basis points over the next twelve months. Consequently, if short-term interest rates gradually decrease by 100 basis points over the next six months, net interest income would be expected to decrease by approximately 1.34% over the next year.

The results of the above scenarios reflect the fact that Key’s balance sheet is currently asset-sensitive to changes in short-term interest rates. Key’s asset sensitive position to a decrease in interest rates stems from the fact that short-term rates are at historically low levels. Consequently, the results of the simulation model reflect management’s assumption that yields on earning assets will decline, while the opportunity to decrease interest rates on deposits is limited. To mitigate the risk of a potentially adverse effect on earnings, management is using interest rate contracts while maintaining the flexibility to lower rates on deposits, if necessary.

The results of the “most likely balance sheet” simulation form the basis for our “standard” risk assessment that is performed monthly and reported to Key’s risk governance committees in accordance with ALCO policy. There are a variety of factors that can influence the results of the simulation. Assumptions we make about loan and deposit growth strongly influence funding, liquidity, and interest rate sensitivity. Figure 25

(“Net Interest Income Volatility”) on page 35 of Key’s 2003 Annual Report to Shareholders illustrates the variability of the simulation results that can arise from changing certain major assumptions.

As of September 30, 2004, based on the results of our model in which we simulate the impact of increasing market interest rates in the second year of a two-year time horizon using the “most likely balance sheet,” and assuming that management does not take action to alter the outcome, Key would expect net interest income in the second year to increase by approximately .38% if short-term interest rates gradually increase by 200 basis points during that year. Conversely, if short-term interest rates gradually decrease by 100 basis points over the first six months of the second year, net interest income would be expected to decrease by approximately 1.14% during that year.

As described previously, Key would be in an asset-sensitive position in the second year of the “most likely balance sheet” simulation because many of the interest rate swaps used for asset/liability management purposes would have matured, and our natural business flows are biased towards more rate sensitive loans compared with deposits.

Measurement of long-term interest rate exposure. Key uses an economic value of equity model to complement short-term interest rate risk analysis. The benefit of this model is that it measures exposure to interest rate changes over time frames longer than two years. The economic value of Key’s equity is determined by aggregating the present value of projected future cash flows for asset, liability and derivative positions based on the current yield curve. However, economic value does not represent the fair values of asset, liability and derivative positions since it does not consider factors like credit risk and liquidity.

Key’s guidelines for risk management call for preventive measures to be taken if an immediate 200 basis point increase or decrease in interest rates is estimated to reduce the economic value of equity by more than 15%. Key is operating within these guidelines. Certain short-term interest rates were limited to reductions of less than 200 basis points because they were already unusually low.

Management of interest rate exposure. Management uses the results of short-term and long-term interest rate exposure models to formulate strategies to improve balance sheet positioning, earnings, or both, within the bounds of Key’s interest rate risk, liquidity and capital guidelines.

We actively manage our interest rate sensitivity through investment securities, debt issuance and derivatives. Interest rate swaps are the primary tool we use to modify our interest rate sensitivity and our asset and liability durations. During 2003, management focused on interest rate swap maturities of two years or less to preserve the flexibility of changing from “liability sensitive” to “asset sensitive” in a relatively short period of time. During the past twelve months, management has limited its use of interest rate swaps to move toward an “asset sensitive” interest rate risk profile. The decision to use these instruments rather than securities, debt or other on-balance sheet alternatives depends on many factors, including the mix and cost of funding sources, liquidity and capital requirements, and interest rate implications. Figure 23 shows the maturity structure for all swap positions held for asset/liability management purposes. These positions 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. For example, fixed-rate debt is converted to floating rate through a “receive fixed, pay variable” interest rate swap. For more information about how Key uses interest rate swaps to manage its balance sheet, see Note 12 (“Derivatives and Hedging Activities”), which begins on page 29.

Figure 23. Portfolio Swaps By Interest Rate Risk Management Strategy

September 30, 2004

September 30, 2003

Notional

Fair

Maturity

Weighted-Average Rate

Notional

Fair

dollars in millions

Amount

Value

(Years)

Receive

Pay

Amount

Value

Receive fixed/pay variable — conventional A/LM^a

8,725

2.3

1.8

13,475

156

Receive fixed/pay variable — conventional debt

5,669

305

6.8

5.3

1.8

5,268

400

Pay fixed/receive variable — conventional debt

1,087

(34

)

4.7

2.3

4.9

1,451

(111

)

Pay fixed/receive variable — forward starting

—

1.3

3.5

3.8

—

Foreign currency — conventional debt

1,872

269

2.0

3.0

2.1

1,221

263

Basis swaps^b

9,700

)

1.3

1.7

10,145

)

Total portfolio swaps

27,065

547

2.5

2.8

1.9

31,560

706

(a) Portfolio swaps designated as A/LM are used to manage interest rate risk tied to both assets and liabilities.

(b) These portfolio swaps are not designated as hedging instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

Trading portfolio risk management

Key’s trading portfolio is described in Note 12.

Management uses a value at risk (“VAR”) model to estimate the potential adverse effect of changes in interest and foreign exchange rates and equity prices on the fair value of Key’s trading portfolio. Using statistical methods, this model estimates the maximum potential one-day loss with 95% probability. At September 30, 2004, Key’s aggregate daily VAR was $1.5 million, compared with $1.3 million at September 30, 2003. Aggregate daily VAR averaged $1.3 million for the first nine months of 2004, compared with $1.2 million for the same period last year. VAR modeling augments other controls that Key uses to mitigate the market risk exposure of the trading portfolio. These controls include loss and portfolio size limits that are based on market liquidity and the level of activity and volatility of trading products.

Credit risk management

Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. It is inherent in the financial services industry and results from extending credit to clients, purchasing securities and entering into financial derivative contracts.

Credit policy, approval and evaluation. Key manages its credit risk exposure through a multi-faceted program. Independent committees approve both retail and commercial credit policies. Once approved, these policies are communicated throughout Key to ensure consistency in our approach to granting credit. For more information about Key’s credit policies, as well as related approval and evaluation processes, see the section entitled “Credit policy, approval and evaluation,” on page 37 of Key’s 2003 Annual Report to Shareholders.

Allowance for loan losses. The allowance for loan losses at September 30, 2004, was $1.251 billion, or 1.93% of loans. This compares with $1.405 billion, or 2.24% of loans, at September 30, 2003. The allowance includes $19 million that was specifically allocated for impaired loans of $55 million at September 30, 2004, compared with $93 million that was allocated for impaired loans of $286 million one year ago. For more information about impaired loans, see Note 8 (“Impaired Loans and Other Nonperforming Assets”) on page 21. At September 30, 2004, the allowance for loan losses was 320.77% of nonperforming loans, compared with 176.73% at September 30, 2003.

During the first quarter of 2004, Key reclassified $70 million of its allowance for loan losses to a separate allowance for probable credit losses inherent in lending-related commitments. First quarter earnings and prior period balances were not affected by this reclassification. The separate allowance is included in “accrued expense and other liabilities” on the balance sheet.

Management estimates the appropriate level of the allowance for loan losses on a quarterly (and at times more frequent) basis. The methodology used is described in Note 1 (“Summary of Significant Accounting

Policies”) under the heading “Allowance for Loan Losses” on page 51 of Key’s 2003 Annual Report to Shareholders. Briefly, management assigns a specific allowance to an impaired loan when the carrying amount of the loan exceeds the estimated present value of related future cash flows and the fair value of any existing collateral. The allowance for loan losses arising from nonimpaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics and by exercising judgment to assess the impact of factors such as changes in economic conditions, credit policies or underwriting standards, and the level of credit risk associated with specific industries and markets. The aggregate balance of the allowance for loan losses at September 30, 2004, represents management’s best estimate of the losses inherent in the loan portfolio at that date.

The level of watch credits in the commercial portfolio has been progressively decreasing since the end of 2002. Watch credits are loans with the potential for further deterioration in quality due to the debtor’s current financial condition and related inability to perform in accordance with the terms of the loan. The commercial loan portfolios with the most significant decreases in watch credits were commercial real estate and institutional (formerly known as “large corporate”). These changes reflect the fluctuations that occur in loan portfolios from time to time, underscoring the benefits of Key’s strategy to limit the concentration of credit risk in any single portfolio.

As shown in Figure 24, the decrease in Key’s allowance for loan losses since September 30, 2003, was attributable to developments in both the commercial and consumer loan portfolios. These developments included the first quarter 2004 reclassification of $70 million of Key’s allowance for loan losses to a separate allowance for probable credit losses inherent in lending-related commitments, stabilizing credit quality trends in certain commercial portfolios and weak demand for commercial loans in a soft economy. The decrease in the allowance also reflects declines in automobile lease financing receivables and loans that resulted from our decision to exit the automobile leasing business and to de-emphasize indirect prime automobile lending. In addition, during the second quarter of 2004, we sold Key’s indirect recreational vehicle loan portfolio.

During the second quarter of 2004, the portion of the allowance for loan losses allocated to Key’s commercial loan portfolio at December 31, 2003, and September 30, 2003, was reallocated among the various segments of that portfolio to more accurately reflect the inherent risk embedded in those segments. The reallocation did not change the total allowance previously allocated to either commercial loans or the loan portfolio as a whole.

Figure 24. Allocation of the Allowance for Loan Losses


	September 30, 2004					December 31, 2003					September 30, 2003
			Percent of					Percent of					Percent of
			Loan Type to					Loan Type to					Loan Type to
dollars in millions	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
Commercial, financial and agricultural	$	639		27.9	%	$	799		27.1	%	$	810		27.3	%
Real estate — commercial mortgage		40		10.3			42		9.1			44		9.3
Real estate — construction		166		7.9			148		7.9			140		8.3
Commercial lease financing		179		13.8			152		13.6			146		13.0

Total commercial loans		1,024		59.9			1,141		57.7			1,140		57.9
Real estate — residential mortgage		3		2.3			3		2.5			3		2.7
Home equity		59		23.0			77		24.0			76		23.7
Consumer — direct		46		3.1			47		3.4			47		3.4
Consumer — indirect lease financing		3		.2			8		.5			10		.6
Consumer — indirect other		103		7.9			118		8.1			119		8.2

Total consumer loans		214		36.5			253		38.5			255		38.6
Loans held for sale		13		3.6			12		3.8			10		3.5

Total	$	1,251		100.0	%	$	1,406		100.0	%	$	1,405		100.0	%

Net loan charge-offs. Net loan charge-offs for the third quarter of 2004 totaled $76 million, or .47% of average loans. Key’s net loan charge-offs have declined for seven consecutive and ten of the last eleven quarters. As a percentage of average loans, they fell to their lowest level since the second quarter of 2000. These results compare with net charge-offs of $123 million, or .77% of average loans, for the same period last year. The composition of Key’s loan charge-offs and recoveries by type of loan is shown in Figure 25. The decrease in net charge-offs from the year-ago quarter occurred primarily in the middle market and financial sponsors (formerly known as “structured finance”) segments of the commercial, financial and agricultural loan portfolio, and in the indirect consumer loan portfolio.

Figure 25. Summary of Loan Loss Experience


	Three months ended						Nine months ended
	September 30,						September 30,
dollars in millions	2004			2003			2004			2003
Average loans outstanding during the period	$	64,356		$	63,078		$	63,422		$	62,985

Allowance for loan losses at beginning of period	$	1,276		$	1,405		$	1,406		$	1,452
Loans charged off:
Commercial, financial and agricultural		35			61			130			225

Real estate — commercial mortgage		6			11			24			36
Real estate — construction		—			1			5			5

Total commercial real estate loans^a		6			12			29			41
Commercial lease financing		9			14			34			45

Total commercial loans		50			87			193			311

Real estate — residential mortgage		6			2			12			5
Home equity		9			15			37			44
Consumer — direct		9			12			32			37
Consumer — indirect lease financing		1			3			6			12
Consumer — indirect other		38			40			130			119

Total consumer loans		63			72			217			217

		113			159			410			528
Recoveries:
Commercial, financial and agricultural		10			11			36			27

Real estate — commercial mortgage		1			2			3			10
Real estate — construction		—			—			4			3

Total commercial real estate loans^a		1			2			7			13
Commercial lease financing		3			6			10			11

Total commercial loans		14			19			53			51

Real estate — residential mortgage		—			—			1			1
Home equity		2			1			4			4
Consumer — direct		3			3			7			7
Consumer — indirect lease financing		1			2			3			5
Consumer — indirect other		17			11			51			35

Total consumer loans		23			17			66			52

		37			36			119			103

Net loans charged off		(76	)		(123	)		(291	)		(425	)
Provision for loan losses		51			123			206			378
Reclassification of allowance for credit losses on lending-related commitments^b		—			—			(70	)		—

Allowance for loan losses at end of period	$	1,251		$	1,405		$	1,251		$	1,405

Net loan charge-offs to average loans		.47	%		.77	%		.61	%		.90	%
Allowance for loan losses to period-end loans		1.93			2.24			1.93			2.24
Allowance for loan losses to nonperforming loans		320.77			176.73			320.77			176.73

(a) See Figure 14 on page 50 and the accompanying discussion on page 49 for more information related to Key’s commercial real estate portfolio.

(b) Included in “accrued expense and other liabilities” on the consolidated balance sheet.

Nonperforming assets. Figure 26 shows the composition of Key’s nonperforming assets, which have declined for eight consecutive quarters. These assets totaled $460 million at September 30, 2004, and represented .71% of loans, other real estate owned (known as “OREO”) and other nonperforming assets, compared with $753 million, or 1.20%, at December 31, 2003, and $862 million, or 1.37%, at September 30, 2003.

Figure 26. Summary of Nonperforming Assets and Past Due Loans


	September 30,			June 30,			March 31,			December 31,			September 30,
dollars in millions	2004			2004			2004			2003			2003
Commercial, financial and agricultural	$	61		$	114		$	191		$	252		$	345

Real estate — commercial mortgage		49			61			72			85			89
Real estate — construction		1			1			12			25			38

Total commercial real estate loans^a		50			62			84			110			127
Commercial lease financing		74			59			84			103			108

Total commercial loans		185			235			359			465			580

Real estate — residential mortgage		36			38			39			39			36
Home equity		149			151			161			153			151
Consumer — direct		4			13			10			14			12
Consumer — indirect lease financing		1			2			2			3			3
Consumer — indirect other		15			15			16			20			13

Total consumer loans		205			219			228			229			215

Total nonperforming loans		390			454			587			694			795

OREO		60			71			76			61			69
Allowance for OREO losses		(5	)		(8	)		(5	)		(4	)		(4	)

OREO, net of allowance		55			63			71			57			65
Other nonperforming assets		15			23			12			2			2

Total nonperforming assets	$	460		$	540		$	670		$	753		$	862

Accruing loans past due 90 days or more	$	139		$	114		$	127		$	152		$	165
Accruing loans past due 30 through 89 days		602			622			559			613			710

Nonperforming loans to period-end loans		.60	%		.71	%		.94	%		1.11	%		1.27	%
Nonperforming assets to period-end loans plus OREO and other nonperforming assets		.71			.84			1.07			1.20			1.37

(a) See Figure 14 on page 50 and the accompanying discussion on page 49 for more information related to Key’s commercial real estate portfolio.

The substantial reduction in nonperforming loans during the third quarter was attributable largely to decreases in the middle market, small business and media portfolios. At September 30, 2004, our 20 largest nonperforming loans totaled $114 million, representing 29% of total loans on nonperforming status.

Information pertaining to the credit exposure by industry classification inherent in the largest sector of Key’s loan portfolio, commercial, financial and agricultural loans, is presented in Figure 27. The approximate effects of various types of activity that caused the change in Key’s nonperforming loans during each of the last five quarters are presented in Figure 28.

Figure 27. Commercial, Financial and Agricultural Loans


					Nonperforming Loans
September 30, 2004	Total		Loans				% of Loans
dollars in millions	Commitments^a		Outstanding		Amount		Outstanding
Industry classification:
Manufacturing	$	10,227	$	3,217	$	14		.4	%
Services		7,942		2,401		11		.5
Financial services		4,260		1,158		—		—
Retail trade		4,835		2,635		5		.2
Property management		4,243		1,525		3		.2
Wholesale trade		2,976		1,316		3		.2
Public utilities		3,061		377		—		—
Building contractors		1,652		750		4		.5
Insurance		1,961		155		—		—
Communications		1,189		348		—		—
Agriculture/forestry/fishing		978		657		8		1.2
Transportation		848		376		6		1.6
Public administration		1,148		249		—		—
Mining		564		148		1		.7
Individuals		108		76		—		—
Other		3,359		2,730		6		.2

Total	$	49,351	$	18,118	$	61		.3	%

(a) Total commitments include unfunded loan commitments, unfunded letters of credit (net of amounts conveyed to others) and loans outstanding.

Figure 28. Summary of Changes in Nonperforming Loans


	2004									2003
in millions	Third			Second			First			Fourth			Third
Balance at beginning of period	$	454		$	587		$	694		$	795		$	837
Loans placed on nonaccrual status		94			68			145			111			240
Charge-offs		(76	)		(104	)		(111	)		(123	)		(123	)
Loans sold		(35	)		(33	)		(58	)		(40	)		(73	)
Payments		(32	)		(62	)		(56	)		(46	)		(73	)
Transfers to OREO		—			—			(11	)		—			(6	)
Loans returned to accrual status		(15	)		(2	)		(16	)		(3	)		(7	)

Balance at end of period	$	390		$	454		$	587		$	694		$	795

Liquidity risk management

“Liquidity” measures whether an entity has sufficient cash flow to meet its financial obligations when due. Key has sufficient liquidity when it can meet its obligations to depositors, borrowers and creditors at a reasonable cost, on a timely basis, and without adverse consequences. KeyCorp has sufficient liquidity when it can pay dividends to shareholders, service its debt, and support customary corporate operations and activities, including acquisitions, at a reasonable cost, in a timely manner and without adverse consequences.

Liquidity

Key’s liquidity could be adversely affected by both direct and indirect circumstances. An example of a direct (but hypothetical) event would be a significant downgrade in Key’s public credit rating by a rating agency due to deterioration in asset quality, a large charge to earnings, or a significant merger or acquisition. Examples of indirect (but hypothetical) events unrelated to Key that could have market-wide consequences would be terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation or rumors about Key or the banking industry in general may adversely affect the cost and availability of normal funding sources.

Liquidity for Key

Key’s Corporate Treasury monitors the overall mix of funding sources with the objective of maintaining an appropriate mix in light of the structure of the asset portfolios. We use several tools, as described on pages 41 and 42 of Key’s 2003 Annual Report to Shareholders, to maintain sufficient liquidity.

Key’s largest cash flows relate to both investing and financing activities. Over the past two years, the primary sources of cash from investing activities have been loan securitizations and sales, and the sales, prepayments and maturities of securities available for sale. Investing activities that have required the greatest use of cash include lending and the purchases of new securities.

Over the past two years, the primary sources of cash from financing activities have been the growth in deposits and the issuance of long-term debt. During the same period, outlays of cash have been made to repay debt issued in prior periods and, prior to 2004, to reduce the level of short-term borrowings. Management has relied more heavily on short-term borrowings to fund the growth in earning assets since the end of 2003. This approach is attributable to the moderate growth in core deposits that has occurred over the past nine months and management’s desire to achieve a mix of short- and long-term borrowings that is consistent with Key’s liquidity management objectives.

The Consolidated Statements of Cash Flow on page 6 summarize Key’s sources and uses of cash by type of activity for the nine-month periods ended September 30, 2004 and 2003.

Liquidity for KeyCorp

KeyCorp has met its liquidity requirements principally through regular dividends from affiliate banks. Federal banking law limits the amount of capital distributions that banks can make to their holding companies without obtaining prior regulatory approval. A national bank’s dividend paying capacity is affected by several factors, including the amount of its net profits (as defined by statute) for the two previous calendar years, and net profits for the current year up to the date of dividend declaration.

During the first nine months of 2004, affiliate banks paid KeyCorp a total of $586 million in dividends. As of the close of business on September 30, 2004, the affiliate banks had an additional $625 million available to pay dividends to KeyCorp without prior regulatory approval and remain well-capitalized under the FDIC-defined capital categories. KeyCorp generally maintains excess funds in short-term investments in an amount sufficient to meet projected debt maturities over the next twelve months.

Effective October 1, 2004, KeyCorp merged Key Bank USA into KBNA forming a single bank affiliate. Although this internal merger had no effect on Key’s third-party obligations or the programs discussed in the following section, it had an immediate positive effect on KBNA’s dividend paying capacity.

Additional sources of liquidity

Management has implemented several programs that enable KeyCorp and KBNA to raise money in the public and private markets when necessary. The proceeds from all of these programs can be used for general corporate purposes, including acquisitions. Each of the programs is replaced or renewed as needed.

Bank note program. During the first nine months of 2004, the affiliate banks issued $400 million in notes under Key’s bank note program. These notes have original maturities in excess of one year and are included in “long-term debt.” Key’s bank note program provides for the issuance of both long- and short-term debt of up to $20.0 billion. At September 30, 2004, $16.2 billion was available for future issuance by KBNA under this program.

Euro note program. Under Key’s euro note program, KeyCorp and KBNA may issue both long- and short-term debt of up to $10.0 billion in the aggregate. The notes are offered exclusively to non-U.S. investors and can be denominated in U.S. dollars and foreign currencies. There were $706 million of borrowings issued under this program during the first nine months of 2004. At September 30, 2004, $7.0 billion was available for future issuance.

KeyCorp medium-term note program. In November 2001, KeyCorp registered, under a universal shelf registration statement filed with the Securities and Exchange Commission (“SEC”), $2.2 billion of securities. At September 30, 2004, the entire amount registered had been allocated for the issuance of medium-term notes and the unused capacity totaled $429 million.

Commercial paper. KeyCorp has a commercial paper program that provides funding availability of up to $500 million. As of September 30, 2004, there were no borrowings outstanding under the commercial paper program.

Key has a separate commercial paper program that provides funding availability of up to $1.0 billion in Canadian currency or the equivalent in U.S. currency. As of September 30, 2004, borrowings outstanding under this commercial paper program totaled $781 million in Canadian currency and an additional $44 million in U.S. currency (equivalent to $58 million in Canadian currency).

Key’s debt ratings are shown in Figure 29 below. Management believes that these debt ratings, under normal conditions in the capital markets, allow for future offerings of securities by KeyCorp or KBNA that would be marketable to investors at a competitive cost.

Figure 29. Debt Ratings

Senior

Subordinated

Short-term

Long-Term

Capital

September 30, 2004

Borrowings

Debt

Securities

KeyCorp

Standard & Poor’s

A-2

A-

BBB+

BBB

Moody’s

P-1

Fitch

A-

KBNA

Standard & Poor’s

A-1

A-

N/A

Moody’s

P-1

N/A

Fitch

A-

N/A

Key Nova Scotia Funding Company (“KNSF”)

Dominion Bond Rating Service^a

R-1 (Middle)

N/A

(a) Reflects the guarantee by KBNA of KNSF’s issuance of Canadian commercial paper.

N/A=Not Applicable

Operational risk management

Key, like all businesses, is subject to operational risk, which represents the risk of loss resulting from human error, inadequate or failed internal processes and systems, and external events, including legal proceedings. Resulting losses could take the form of explicit charges, increased operational costs, harm to Key’s reputation or forgone opportunities. Key seeks to mitigate operational risk through a system of internal controls that are designed to keep operational risks at appropriate levels. For more information on Key’s efforts to monitor and manage its operational risk, see page 43 of Key’s 2003 Annual Report to Shareholders.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The information presented in the Market Risk Management section, which begins on page 57 in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, is incorporated herein by reference.

Item 4. Controls and Procedures

As a bank holding company, KeyCorp is subject to the internal control reporting requirements of the Federal Deposit Insurance Corporation Improvement Act, which became effective in 1993 (“FDICIA”). FDICIA requires our Chief Executive Officer and Chief Financial Officer to annually assess the effectiveness of our internal controls over financial reporting, including those controls relating to the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. In addition, under FDICIA, our independent auditors have annually examined and attested to, without qualification, management’s assertions regarding the effectiveness of our internal controls. Accordingly, we have had an established process of maintaining and evaluating our internal controls over financial reporting.

In connection with the enactment on July 30, 2002, of the Sarbanes-Oxley Act of 2002 and the promulgation of a number of new regulations since then, our management has also focused on our “disclosure controls and procedures,” which are those controls and procedures designed to ensure that financial and nonfinancial information required to be disclosed in KeyCorp’s reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and that such information is accumulated and communicated to KeyCorp’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In light of these requirements, we have engaged in a process of reviewing our disclosure controls and procedures. As a result of our review, and although we believe that our pre-existing disclosure controls and procedures were effective in enabling us to comply with our disclosure obligations, we implemented enhancements, which included establishing a disclosure committee and generally formalizing and documenting disclosure controls and procedures that we already had in place.

As of the end of the period covered by this report, KeyCorp carried out an evaluation, under the supervision and with the participation of its management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of KeyCorp’s disclosure controls and procedures. Based upon that evaluation, KeyCorp’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective, in all material respects, as of the end of the period covered by this report.

In conjunction with its normal on-going risk management and risk review process, and consistent with the requirements of recently adopted SEC regulations, management is undertaking a further comprehensive evaluation of its internal control over financial reporting that may result in additional future refinements to our existing framework.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information presented in Note 11 (“Contingent Liabilities and Guarantees”), which begins on page 25 of the Notes to Consolidated Financial Statements, is incorporated herein by reference.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The information presented in the “Capital” section of the Management’s Discussion & Analysis in Figure 21 on page 55 is incorporated herein by reference.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

15 Acknowledgment of Independent Registered Public Accounting Firm.

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

July 16, 2004 — Item 7. Financial Statements and Exhibits and Item 12. Results of Operations and Financial Condition. Reporting that on July 16, 2004, the Registrant issued a press release announcing its earnings results for the three- and six- month periods ended June 30, 2004, and provided a slide presentation reviewed in the related conference call/webcast.

September 17, 2004 — Section 1. Registrant’s Business and Operations — Item 1.01 Entry into a Material Definitive Agreement and Section 9. Financial Statements and Exhibits — Item 9.01 Financial Statements and Exhibits. Reporting that on September 16, 2004, the Registrant amended the change of control agreements with its senior officers and approved a letter agreement with its new Executive Vice President and Chief Information Officer regarding terms of employment.

No other reports on Form 8-K were filed during the three-month period ended September 30, 2004.

Information Available on Website

KeyCorp makes available free of charge on its website, www.Key.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after KeyCorp electronically files such material with, or furnishes it to, the Securities and Exchange Commission.


	Page Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets — September 30, 2004, December 31, 2003 and September 30, 2003		3

Consolidated Statements of Income — Three and nine months ended September 30, 2004 and 2003		4

Consolidated Statements of Changes in Shareholders’ Equity — Nine months ended September 30, 2004 and 2003		5

Consolidated Statements of Cash Flow — Nine months ended September 30, 2004 and 2003		6

Notes to Consolidated Financial Statements		7

Report of Independent Registered Public Accounting Firm		31

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		32

Item 3. Quantitative and Qualitative Disclosure about Market Risk		67

Item 4. Controls and Procedures		67

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		67

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		67

Item 6. Exhibits and Reports on Form 8-K		68

Signature		69

Exhibits		70
Exhibit 15 ACKNOWLEDGMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 31.1 CEO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2 CFO CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1 CEO CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2 CFO CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

•		Net interest income is determined by assigning a standard cost for funds used to assets or a standard credit for funds provided to liabilities 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 of the extent to which each line actually uses the services.

•		Key’s consolidated provision for loan losses is allocated among the lines of business based primarily on their actual net charge-offs, adjusted periodically for loan growth and changes in risk profile. The level 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 51 of Key’s 2003 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.

•		Key implemented a process of revenue sharing whereby revenues are split between the line of business servicing the client and the line that made the business referral based on the type of transaction involved.

•		Key began to charge the net effect of funds transfer pricing to the lines of business based on the total loan and deposit balances of each line. The net effect of funds transfer pricing was formerly included in “Other Segments.”

•		Key changed the methodology used in estimating the deferred tax benefits associated with lease financing.

•		The methodology used to assign capital to the lines of business was revised to reflect only the risk directly attributable to each line.

•		The entity does not have sufficient equity for it to conduct its activities without additional subordinated financial support from another party.

•		The entity’s investors lack the ability to make decisions about the activities of the entity through voting rights or similar rights, the obligation to absorb the expected losses of the entity, or the right to receive the expected residual returns of the entity.

•		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.

•		required distributions on the capital securities;

•		the redemption price when a capital security is redeemed; and

•		amounts due if a trust is liquidated or terminated.

•		interest rate swap contracts entered into to accommodate the needs of clients;

•		positions with third parties that are intended to offset or mitigate the interest rate risk of client positions;

•		foreign exchange forward contracts entered into to accommodate the needs of clients; and

•		proprietary trading positions in financial assets and liabilities.

•		*KeyCorp* refers solely to the parent holding company.

•		*KBNA* refers to Key’s lead bank, KeyBank National Association.

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

•		A *KeyCenter* is one of Key’s full-service retail banking facilities or branches.

•		Key engages in *capital markets activities*. 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).

•		All earnings per share data included in this discussion are presented on a *diluted* basis, which takes into account all common shares outstanding as well as potential common shares that could result from the exercise of outstanding stock options. Some tables also include *basic* earnings per share, which takes into account only common shares outstanding.

•		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 54.

•		Interest rates could change more quickly or more significantly than we expect, which may have an adverse effect on our financial results.

•		If the economy or segments of the economy fail to continue to improve, the demand for new loans and the ability of borrowers to repay outstanding loans may decline.

•		The stock and bond markets could suffer declines or disruptions, which may have adverse effects on our financial condition and that of our borrowers, and on our ability to raise money by issuing new securities.

•		It could take us longer than we anticipate to implement strategic initiatives designed to increase revenues or manage expenses; we may be unable to implement certain initiatives; or the initiatives may be unsuccessful.

•		Our assumptions made in connection with our financial and risk management modeling techniques and programs may prove to be inaccurate or erroneous.

•		Acquisitions and dispositions of assets, business units or affiliates could adversely affect us in ways that management has not anticipated.

•		We may become subject to new legal obligations or liabilities, or the resolution of pending litigation may have an adverse effect on our financial results.

•		Terrorist activities or military actions could further 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 may become subject to new accounting, tax, or regulatory practices or requirements.

•		Net income for the third quarter of 2004 was $252 million, or $.61 per common share, compared with $239 million, or $.58 per share, for the previous quarter and $227 million, or $.53 per share, for the third quarter of 2003. For the first nine months of 2004, Key’s net income was $741 million, or $1.78 per common share, compared with $669 million, or $1.57 per share, for the comparable year-ago period.

•		Key’s return on average equity was 14.62% for the third quarter of 2004, compared with 13.97% for the second quarter of 2004, and 13.06% for the year-ago quarter. For the first nine months of 2004, Key’s return on average equity was 14.36%, compared with 12.98% for the first nine months of 2003.

•		Key’s third quarter 2004 return on average total assets was 1.16%, compared with a return of 1.13% for the previous quarter and 1.06% for the third quarter of 2003. For the first nine months of 2004, Key’s return on average total assets was 1.16%, compared with 1.06% for the comparable year-ago period.

•		Total revenue rose by $12 million from the prior quarter due to higher net interest income resulting from an improved net interest margin and an increase in average earning assets driven by stronger commercial loan growth. The growth in our commercial loan portfolio was broad-based and spread among a number of industry sectors.

•		Asset quality continued to improve. Nonperforming loans fell for the eighth consecutive quarter and net loan charge-offs as a percentage of average loans fell to their lowest level since the second quarter of 2000.

•		We continued to manage our expenses effectively as total noninterest expense was down relative to the year-ago quarter, although up from the prior quarter as a result of higher incentive accruals and employee benefit costs.

•		the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities;

•		the use of derivative instruments to manage interest rate risk;

•		market interest rate fluctuations; and

•		asset quality.

•		During the first half of 2004, we repositioned our balance sheet in anticipation of interest rate increases by allowing interest rate swaps to mature without replacing them, and by selling selected loan portfolios.

•		During the third quarter of 2003, we experienced exceptionally high levels of prepayments on our investment and consumer loan portfolios as a result of the low interest rate environment.

•		Over the past year, competitive market conditions precluded us from reducing interest rates on deposit accounts.

•		Although the demand for commercial loans improved during the second and third quarters of 2004, during the two preceding quarters the demand for commercial loans was weak.

•		Key sold commercial mortgage loans of $1.4 billion during the first nine months of 2004 and $1.7 billion during all of 2003. Since some of these loans have been sold with limited recourse (i.e., the risk that Key will be held accountable for certain events or representations made in the sales), Key established a loss reserve of an amount estimated by management to be appropriate to reflect the recourse risk. More information about the related recourse agreement is provided in Note 11 (“Contingent Liabilities and Guarantees”) under the section entitled “Recourse agreement with Federal National Mortgage Association” on page 27.

•		Key sold education loans of $1.2 billion ($987 million through securitizations) during the first nine months of 2004 and $1.2 billion ($998 million through securitizations) during all of 2003. Key has used the securitization market for education loans as a cost effective means of diversifying its funding sources.

•		Key sold other loans (primarily home equity and residential real estate loans) totaling $1.7 billion during the first nine months of 2004 and $1.8 billion during all of 2003. The sales of these long-term, fixed-rate loans were driven in part by management’s strategy for achieving the desired interest rate and credit risk profiles for Key.

•		During the third quarter of 2003, Key consolidated an asset-backed commercial paper conduit as a result of an accounting change. This consolidation added approximately $200 million to Key’s commercial loan portfolio. More information about this change, required by Interpretation No. 46, “Consolidation of Variable Interest Entities,” is provided in Note 7 (“Variable Interest Entities”), which begins on page 19.

•		During the first quarter of 2003, Key acquired a $311 million commercial lease financing portfolio and a $71 million commercial loan portfolio from a Canadian financial institution. The acquisition of these portfolios further diversified our asset base and has generated additional equipment financing opportunities.

•		During the second quarter of 2001, management announced that Key would exit the automobile leasing business, de-emphasize indirect prime automobile lending outside of Key’s primary geographic markets and discontinue certain credit-only commercial relationships. As of September 30, 2004, the affected portfolios, in the aggregate, have declined by approximately $554 million since September 30, 2003, and $5.0 billion since the date of the announcement.

(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)		Yield is calculated on the basis of amortized cost.

(d)		Rate calculation excludes basis adjustments related to fair value hedges. See Note 19 (“Derivatives and Hedging Activities”), which begins on page 80 of Key’s 2003 Annual Report to Shareholders, for an explanation of fair value hedges.

•		Loan sales completed to improve the profitability of the overall portfolio or to accommodate our asset/liability management needs;

•		Weak commercial loan demand during 2003 due to a soft economy; and

•		Our decision to exit the automobile leasing business, de-emphasize indirect prime automobile lending and discontinue certain credit-only commercial relationships.

•		whether the characteristics of a specific loan portfolio make it conducive to securitization;

•		the relative cost of funds;

•		the level of credit risk; and

•		capital requirements.

(b)		Other assets deducted from Tier 1 capital consist of intangible assets (excluding goodwill) recorded after February 19, 1992, deductible portions of purchased mortgage servicing rights and deductible portions of nonfinancial equity investments.

		Other assets deducted from risk-weighted assets consist of intangible assets (excluding goodwill) recorded after February 19, 1992, deductible portions of purchased mortgage servicing rights and deductible portions of nonfinancial equity investments.

(c)		This ratio is Tier 1 capital divided by average quarterly total assets less goodwill, the nonqualifying intangible assets described in footnote (b) and deductible portions of nonfinancial equity investments.

15		Acknowledgment of Independent Registered Public Accounting Firm.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		July 16, 2004 — Item 7. Financial Statements and Exhibits and Item 12. Results of Operations and Financial Condition. Reporting that on July 16, 2004, the Registrant issued a press release announcing its earnings results for the three- and six- month periods ended June 30, 2004, and provided a slide presentation reviewed in the related conference call/webcast.

		September 17, 2004 — Section 1. Registrant’s Business and Operations — Item 1.01 Entry into a Material Definitive Agreement and Section 9. Financial Statements and Exhibits — Item 9.01 Financial Statements and Exhibits. Reporting that on September 16, 2004, the Registrant amended the change of control agreements with its senior officers and approved a letter agreement with its new Executive Vice President and Chief Information Officer regarding terms of employment.

		No other reports on Form 8-K were filed during the three-month period ended September 30, 2004.


	KEYCORP

	(Registrant)

Date: November 4, 2004	/s/ Lee Irving

	By:	Lee Irving
		Executive Vice President
		and Chief Accounting Officer