10-Q 1 l14704ae10vq.htm KEYCORP 10-Q KeyCorp 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
     
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
or
     
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ To ______
Commission File Number 0-850
(KEYCORP LOGO)
KeyCorp
 
(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 þ   No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ   No o
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   409,307,404 Shares
     
(Title of class)   (Outstanding at July 29, 2005)
 
 

 


KEYCORP
 
TABLE OF CONTENTS
             
        Page Number
  Financial Statements        
 
           
 
  Consolidated Balance Sheets — June 30, 2005, December 31, 2004 and June 30, 2004     3  
 
           
 
  Consolidated Statements of Income — Three and six months ended June 30, 2005 and 2004     4  
 
           
 
  Consolidated Statements of Changes in Shareholders’ Equity — Six months ended June 30, 2005 and 2004     5  
 
           
 
  Consolidated Statements of Cash Flow — Six months ended June 30, 2005 and 2004     6  
 
           
 
  Notes to Consolidated Financial Statements     7  
 
           
 
  Report of Independent Registered Public Accounting Firm     30  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
 
           
  Quantitative and Qualitative Disclosure about Market Risk     68  
 
           
  Controls and Procedures     68  
 
           
PART II. OTHER INFORMATION
       
 
           
  Legal Proceedings     68  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     68  
 
           
  Submission of Matters to a Vote of Security Holders     69  
 
           
  Exhibits     69  
 
           
 
  Signature     70  
 
           
 
  Exhibits     71  
 Exhibit 15 List
 Exhibit 31.1 Certification 302-CEO
 Exhibit 31.2 Certification 302-CFO
 Exhibit 32.1 Certification 906-CEO
 Exhibit 32.2 Certification 906-CFO

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
                         
    June 30,     December 31,     June 30,  
dollars in millions   2005     2004     2004  
 
    (Unaudited)             (Unaudited)  
ASSETS
                       
Cash and due from banks
  $ 2,968     $ 2,454     $ 2,313  
Short-term investments
    1,845       1,472       2,639  
Securities available for sale
    7,271       7,451       7,023  
Investment securities (fair value: $61, $74 and $85)
    59       71       81  
Other investments
    1,409       1,421       1,231  
Loans, net of unearned income of $2,157, $2,227 and $2,009
    67,964       67,725       63,390  
Less: Allowance for loan losses
    1,100       1,138       1,276  
 
Net loans
    66,864       66,587       62,114  
Premises and equipment
    576       603       600  
Goodwill
    1,342       1,359       1,150  
Other intangible assets
    101       87       31  
Corporate-owned life insurance
    2,639       2,608       2,550  
Accrued income and other assets
    5,941       6,634       6,499  
 
Total assets
  $ 91,015     $ 90,747     $ 86,231  
     
 
LIABILITIES
                       
Deposits in domestic offices:
                       
NOW and money market deposit accounts
  $ 22,071     $ 21,748     $ 19,956  
Savings deposits
    2,022       1,970       2,014  
Certificates of deposit ($100,000 or more)
    5,094       4,697       4,630  
Other time deposits
    10,794       10,435       10,342  
 
Total interest-bearing
    39,981       38,850       36,942  
Noninterest-bearing
    12,158       11,581       10,940  
Deposits in foreign office — interest-bearing
    5,924       7,411       4,541  
 
Total deposits
    58,063       57,842       52,423  
Federal funds purchased and securities sold under repurchase agreements
    2,824       2,145       3,794  
Bank notes and other short-term borrowings
    3,315       2,515       2,598  
Accrued expense and other liabilities
    5,873       6,282       5,979  
Long-term debt
    13,588       14,846       14,608  
 
Total liabilities
    83,663       83,630       79,402  
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
    1,504       1,491       1,469  
Retained earnings
    7,574       7,284       7,072  
Treasury stock, at cost (83,657,893, 84,319,111 and 84,646,118 shares)
    (2,132 )     (2,128 )     (2,121 )
Accumulated other comprehensive loss
    (86 )     (22 )     (83 )
 
Total shareholders’ equity
    7,352       7,117       6,829  
 
Total liabilities and shareholders’ equity
  $ 91,015     $ 90,747     $ 86,231  
     
 
 
See Notes to Consolidated Financial Statements (Unaudited).

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Consolidated Statements of Income (Unaudited)
                                 
    Three months ended June 30,     Six months ended June 30,  
dollars in millions, except per share amounts   2005     2004     2005     2004  
 
INTEREST INCOME
                               
Loans
  $ 999     $ 809     $ 1,965     $ 1,634  
Investment securities
    1       1       2       2  
Securities available for sale
    80       78       160       166  
Short-term investments
    12       9       22       18  
Other investments
    24       8       32       16  
 
Total interest income
    1,116       905       2,181       1,836  
 
INTEREST EXPENSE
                               
Deposits
    238       161       444       322  
Federal funds purchased and securities sold under repurchase agreements
    25       10       50       20  
Bank notes and other short-term borrowings
    19       9       36       21  
Long-term debt
    141       96       272       191  
 
Total interest expense
    423       276       802       554  
 
 
NET INTEREST INCOME
    693       629       1,379       1,282  
Provision for loan losses
    20       74       64       155  
 
Net interest income after provision for loan losses
    673       555       1,315       1,127  
 
NONINTEREST INCOME
                               
Trust and investment services income
    135       141       273       286  
Service charges on deposit accounts
    76       86       146       170  
Investment banking and capital markets income
    52       73       119       119  
Letter of credit and loan fees
    47       37       87       70  
Corporate-owned life insurance income
    24       25       52       52  
Electronic banking fees
    24       22       46       40  
Net gains from loan securitizations and sales
    10       1       29       26  
Net securities gains (losses)
    1       7       (5 )     7  
Other income
    117       99       239       198  
 
Total noninterest income
    486       491       986       968  
 
NONINTEREST EXPENSE
                               
Personnel
    386       371       776       744  
Net occupancy
    55       61       146       119  
Computer processing
    50       48       101       92  
Equipment
    28       30       56       61  
Professional fees
    30       29       58       54  
Marketing
    34       30       59       53  
Other expense
    170       148       326       291  
 
Total noninterest expense
    753       717       1,522       1,414  
 
INCOME BEFORE INCOME TAXES
    406       329       779       681  
Income taxes
    115       90       224       192  
 
 
NET INCOME
  $ 291     $ 239     $ 555     $ 489  
     
 
Per common share:
                               
Net income
  $ .71     $ .58     $ 1.36     $ 1.18  
Net income — assuming dilution
    .70       .58       1.34       1.17  
Weighted-average common shares outstanding (000)
    408,754       410,292       408,510       413,486  
Weighted-average common shares and potential common shares outstanding (000)
    414,309       414,908       414,037       418,240  
 
See Notes to Consolidated Financial Statements (Unaudited).

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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  
 
BALANCE AT DECEMBER 31, 2003
    416,494     $ 492     $ 1,448     $ 6,838     $ (1,801 )   $ (8 )        
Net income
                            489                     $ 489  
Other comprehensive income (losses):
                                                       
Net unrealized losses on securities available for sale, net of income taxes of ($24) a
                                            (41 )     (41 )
Net unrealized losses on derivative financial instruments, net of income taxes of ($20)
                                            (35 )     (35 )
Foreign currency translation adjustments
                                            1       1  
 
                                                     
Total comprehensive income
                                                  $ 414  
 
                                                     
Deferred compensation
                    10                                  
Cash dividends declared on common shares ($.62 per share)
                            (255 )                
Issuance of common shares under employee benefit and dividend reinvestment plans
    4,787               11               116          
Repurchase of common shares
    (14,038 )                             (436 )        
 
BALANCE AT JUNE 30, 2004
    407,243     $ 492     $ 1,469     $ 7,072     $ (2,121 )   $ (83 )
                                       
 
BALANCE AT DECEMBER 31, 2004
    407,570     $ 492     $ 1,491     $ 7,284     $ (2,128 )   $ (22 )        
Net income
                            555                     $ 555  
Other comprehensive losses:
                                                       
Net unrealized losses on securities available for sale, net of income taxes of ($8) a
                                            (16 )     (16 )
Net unrealized losses on derivative financial instruments, net of income taxes of ($8)
                                            (14 )     (14 )
Foreign currency translation adjustments
                                            (33 )     (33 )
Minimum pension liability adjustment, net of income taxes of ($1)
                                            (1 )     (1 )
 
                                                     
Total comprehensive income
                                                  $ 491  
 
                                                     
Deferred compensation
                    26                                  
Cash dividends declared on common shares ($.65 per share)
                            (265 )                        
Issuance of common shares under employee benefit and dividend reinvestment plans
    3,161               (13 )             80          
Repurchase of common shares
    (2,500 )                             (84 )        
 
BALANCE AT JUNE 30, 2005
    408,231     $ 492     $ 1,504     $ 7,574     $ (2,132 )   $ (86 )
                                       
 
(a) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements (Unaudited)

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Consolidated Statements of Cash Flow (Unaudited)
                 
    Six months ended June 30,  
in millions   2005     2004  
 
OPERATING ACTIVITIES
               
Net income
  $ 555     $ 489  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    64       155  
Depreciation expense and software amortization
    174       176  
Net securities (gains) losses
    5       (7 )
Net gains from principal investing
    (13 )     (29 )
Net gains from loan securitizations and sales
    (29 )     (26 )
Deferred income taxes
    48       82  
Net increase in mortgage loans held for sale
    (233 )     (219 )
Net (increase) decrease in trading account assets
    114       (453 )
Other operating activities, net
    (411 )     (320 )
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    274       (152 )
INVESTING ACTIVITIES
               
Cash used in acquisitions, net of cash acquired
    (7 )      
Net increase in other short-term investments
    (487 )     (582 )
Purchases of securities available for sale
    (1,466 )     (911 )
Proceeds from sales of securities available for sale
    57       33  
Proceeds from prepayments and maturities of securities available for sale
    1,547       1,425  
Proceeds from prepayments and maturities of investment securities
    12       16  
Purchases of other investments
    (209 )     (252 )
Proceeds from sales of other investments
    168       78  
Proceeds from prepayments and maturities of other investments
    43       58  
Net increase in loans, excluding acquisitions, sales and divestitures
    (2,166 )     (3,807 )
Purchases of loans
    (11 )     (33 )
Proceeds from loan securitizations and sales
    2,061       2,501  
Purchases of premises and equipment
    (27 )     (50 )
Proceeds from sales of premises and equipment
    7       4  
Proceeds from sales of other real estate owned
    47       35  
 
NET CASH USED IN INVESTING ACTIVITIES
    (431 )     (1,485 )
FINANCING ACTIVITIES
               
Net increase in deposits
    227       1,588  
Net increase in short-term borrowings
    1,479       778  
Net proceeds from issuance of long-term debt
    1,752       1,349  
Payments on long-term debt
    (2,495 )     (1,875 )
Purchases of treasury shares
    (84 )     (436 )
Net proceeds from issuance of common stock
    57       89  
Cash dividends paid
    (265 )     (255 )
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    671       1,238  
 
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
    514       (399 )
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD
    2,454       2,712  
 
CASH AND DUE FROM BANKS AT END OF PERIOD
  $ 2,968     $ 2,313  
 
Additional disclosures relative to cash flow:
               
Interest paid
  $ 765     $ 556  
Income taxes paid
    193       132  
Noncash items:
               
Net transfer of loans to other real estate owned
  $ 32     $ 50  
 
See Notes to Consolidated Financial Statements (Unaudited).

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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.
Key consolidates any voting rights entity in which it has a controlling financial interest. In accordance with Financial Accounting Standards Board (“FASB”) Revised Interpretation No. 46, a variable interest entity (“VIE”) is consolidated if Key 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 contracts, agreements and financial instruments.
Key uses the equity method to account for unconsolidated investments in voting rights entities or VIEs in which it 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). 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.
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. Information on SFAS No. 140 is included in Note 1 (“Summary of Significant Accounting Policies”) of Key’s 2004 Annual Report to Shareholders under the heading “Loan Securitizations” on page 57.
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. In light of changes in industry reporting practice, during the second quarter of 2005 Key reclassified its operating leases from “loans” to “accrued income and other assets” for all periods presented. The rental income and depreciation expense associated with these leases were similarly reclassified from “net interest income” to “other income” and to “other expense,” respectively. The reclassification of these leases, which have historically represented less than one percent of Key’s total earning assets, had no effect on net income in any of the periods for which the reclassification was made.
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 2004 Annual Report to Shareholders.
Stock-Based Compensation
Effective January 1, 2003, Key adopted the fair value method of accounting as outlined in SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” amended SFAS No. 123 to provide three alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock compensation: (i) the prospective method; (ii) the modified prospective method; and (iii) the retroactive restatement method. Key opted to apply the new accounting rules prospectively to all awards in accordance with the transition provisions of SFAS No. 148.

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SFAS No. 123 requires companies like Key that have used the intrinsic value method to account 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 six-month periods ended June 30, 2005 and 2004, was $7.12 and $6.50, respectively.
The Black-Scholes model requires several assumptions, which management developed and updates based on historical trends and current market observations. The accuracy of these assumptions is critical to management’s ability to accurately estimate the fair value of options. The assumptions pertaining to options issued during the three- and six-month periods ended June 30, 2005 and 2004, are shown in the following table.
                                 
    Three months ended June 30,   Six months ended June 30,
    2005     2004     2005     2004  
 
Average option life
  6.0 years     6.0 years     6.0 years     6.0 years  
Future dividend yield
    3.91 %     4.16 %     3.96 %     4.05 %
Share price volatility
    .286       .292       .286       .292  
Weighted-average risk-free interest rate
    3.9 %     4.3 %     4.0 %     3.7 %
 
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, performance shares, discounted stock purchase plans and certain deferred compensation-related awards) for the three- and six-month periods ended June 30, 2005 and 2004, is shown in the following table and would, if recorded, have been included in “personnel expense” on the income statement.
                                         
            Three months ended June 30,   Six months ended June 30,
in millions, except per share amounts   2005     2004     2005     2004  
 
Net income, as reported   $ 291     $ 239     $ 555     $ 489  
Add:
  Stock-based employee compensation expense included in reported net income, net of related tax effects:                                
 
     Stock options expense     3       2       6       4  
 
     All other stock-based employee compensation expense     3       3       7       6  
 
 
            6       5       13       10  
 
                                       
Deduct:
  Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects:                                
 
     Stock options expense     3       4       6       7  
 
     All other stock-based employee compensation expense     3       3       7       6  
 
 
            6       7       13       13  
 
Net income — pro forma   $ 291     $ 237     $ 555     $ 486  
 
                                       
Per common share:                                
     Net income   $ .71     $ .58     $ 1.36     $ 1.18  
     Net income — pro forma     .71       .58       1.36       1.18  
     Net income assuming dilution     .70       .58       1.34       1.17  
     Net income assuming dilution — pro forma     .70       .57       1.34       1.16  
 
As shown in the above table, the pro forma effect is calculated as the after-tax difference between: (i) compensation expense included in each period’s reported net income in accordance with the prospective application transition provisions of SFAS No. 148, and (ii) 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.
 

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Accounting Pronouncements Adopted in 2005
SEC guidance on lease accounting. In February 2005, the Securities and Exchange Commission (“SEC”) issued interpretive guidance related to the accounting for operating leases that focused on three areas: (i) the amortization of leasehold improvements by a lessee where the lease term includes renewal options; (ii) rent recognition when the lease term contains a period where there are free or reduced rents (commonly referred to as “rent holidays”); and (iii) incentives related to leasehold improvements provided by a lessor to a lessee. As a result of this interpretive guidance, Key recorded a $30 million net occupancy charge during the first quarter of 2005 to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis.
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 adopted this guidance for qualifying loans acquired after December 31, 2004. Adoption of this guidance did not have any material effect on Key’s financial condition or results of operations.
Accounting Pronouncements Pending Adoption
Consolidation of Limited Partnerships. In June 2005, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners of a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” which provides guidance in determining whether a general partner controls a limited partnership. Issue No. 04-5 is effective for all limited partnerships created or modified after June 29, 2005, and for all other limited partnerships at the beginning of the first interim period in fiscal years beginning after December 15, 2005 (January 1, 2006 for Key). As of June 30, 2005, this guidance had no material effect on Key’s financial condition or results of operations. Management is currently evaluating the potential impact of Issue No. 04-5 for Key’s limited partnership interests for which this guidance is not yet effective. Adoption of this guidance is not expected to have any material effect on Key’s financial condition or results of operations.
Accounting Changes and Error Corrections. In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which addresses the accounting for and reporting of accounting changes and error corrections. This guidance requires retrospective application for the reporting of voluntary changes in accounting principles and changes required by an accounting pronouncement when transition provisions are not specified. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (January 1, 2006 for Key). Adoption of this guidance is not expected to have any material effect on Key’s financial condition or results of operations.
Share-based payments. In December 2004, the FASB issued SFAS No. 123R, which requires companies to recognize in the income statement the fair value of stock options and other equity-based compensation issued to employees. As discussed under the heading “Stock-Based Compensation” on page 7, Key adopted the fair value method of accounting as outlined in SFAS No. 123 effective January 1, 2003, using the prospective method. SFAS No. 123R replaces SFAS No. 123 and changes certain aspects of this accounting guidance for recognizing the fair value of stock compensation. SFAS No. 123R was to be effective for public companies for interim or annual periods beginning after June 15, 2005. However, in April 2005, the SEC delayed the effective date to the first interim period of the first fiscal year beginning after June 15, 2005 (January 1, 2006 for Key). Recently, both the SEC and the FASB issued interpretative guidance related to SFAS No. 123R. Management is currently evaluating the potential impact of this collective guidance, which is not expected to be material to Key’s financial condition or results of operations.
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
 

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of 2003.” The Medicare Modernization Act, which was enacted in December 2003 and takes effect in 2006, introduces a prescription drug benefit under Medicare. 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.
In January 2005, the Centers for Medicare and Medicaid Services issued the final regulations necessary to fully implement the Act, including the manner in which actuarial equivalence must be determined. Management expects that the prescription drug coverage related to Key’s retiree healthcare benefit plan will be actuarially equivalent, and that the subsidy will not have any material effect on Key’s APBO and net postretirement cost.
2.  Earnings Per Common Share
Key calculates its basic and diluted earnings per common share as follows:
                                 
    Three months ended June 30,   Six months ended June 30,
dollars in millions, except per share amounts   2005     2004     2005     2004  
 
NET INCOME
  $ 291     $ 239     $ 555     $ 489  
 
                               
 
WEIGHTED-AVERAGE COMMON SHARES
                               
Weighted-average common shares outstanding (000)
    408,754       410,292       408,510       413,486  
Effect of dilutive common stock options and other stock awards (000)
    5,555       4,616       5,527       4,754  
 
Weighted-average common shares and potential common shares outstanding (000)
    414,309       414,908       414,037       418,240  
 
                               
 
EARNINGS PER COMMON SHARE
                               
Net income per common share
  $ .71     $ .58     $ 1.36     $ 1.18  
Net income per common share — assuming dilution
    .70       .58       1.34       1.17  
 
3.  Acquisitions
American Express Business Finance Corporation
On December 1, 2004, Key acquired American Express Business Finance Corporation (“AEBF”), the equipment leasing unit of American Express’ small business division. AEBF had lease financing receivables of approximately $1.5 billion at the date of acquisition. The terms of the transaction are not material.
EverTrust Financial Group, Inc.
On October 15, 2004, Key acquired EverTrust Financial Group, Inc. (“EverTrust”), the holding company for EverTrust Bank, a state-chartered bank headquartered in Everett, Washington. EverTrust had assets of approximately $780 million and deposits of approximately $570 million at the date of acquisition. On November 12, 2004, EverTrust Bank was merged into KeyBank National Association (“KBNA”). The terms of the transaction are not material.
Sterling Bank & Trust FSB
Effective July 22, 2004, Key purchased ten 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.
Acquisition Pending as of June 30, 2005
Malone Mortgage Company
On July 1, 2005, Key acquired Malone Mortgage Company, a mortgage company headquartered in Dallas, Texas that serviced approximately $1.2 billion in loans at the date of acquisition. The terms of the transaction are not material.

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4.  Line of Business Results
Consumer Banking
Community Banking includes Retail Banking, Small Business and McDonald Financial Group.
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 typically have annual sales revenues of $10 million or less with deposit, investment and credit products, and business advisory services.
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.
Consumer Finance includes Indirect Lending and National Home Equity.
Indirect Lending offers 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 that private schools make 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 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.
Through its Victory Capital Management unit, Corporate Banking also 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.
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.
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

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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 six-month periods ended June 30, 2005 and 2004. This table is accompanied by 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. U.S. generally accepted accounting principles 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. According to our policies:
     
¨
  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 regarding the extent to which each line actually uses the services.
 
   
¨
  Key’s consolidated provision for loan losses is allocated among the lines of business 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 56 of Key’s 2004 Annual Report to Shareholders.
 
   
¨
  Income taxes are allocated based on the statutory federal income tax rate of 35% (adjusted for tax-exempt interest income, income from corporate-owned life insurance and tax credits associated with investments in low-income housing projects) and a blended state income tax rate (net of the federal income tax benefit) of 2.5%.
 
   
¨
  Capital is assigned based on management’s assessment of economic risk factors (primarily credit, operating and market risk) directly attributable to each line.
Developing and applying the methodologies that management uses to allocate items among Key’s lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect accounting enhancements, changes in the risk profile of a particular business or changes in Key’s organizational structure. The financial data reported for all periods presented in the tables reflect a number of changes that occurred during the first six months of 2005:
     
¨
  Key reorganized and renamed some of its business groups and lines of business. The Investment Management Services group, which included McDonald Financial Group and Victory Capital Management, was disbanded. McDonald Financial Group, along with Retail Banking and Small Business, is now included as part of the Community Banking line of business within the Consumer Banking group. Victory Capital Management is included as part of the Corporate Banking line within the Corporate and Investment Banking group.
 
   
¨
  Key began to charge the net consolidated effect of funds transfer pricing related to estimated deferred tax benefits associated with lease financing to the lines of business. In the past, this amount was included in “Other Segments.”
 
   
¨
  Methodologies used to allocate certain overhead costs and a portion of the provision for loan losses were refined.

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                    Corporate and        
Three months ended June 30,   Consumer Banking     Investment Banking     Other Segments  
dollars in millions   2005     2004     2005     2004     2005     2004  
 
SUMMARY OF OPERATIONS
                                               
Net interest income (TE)
  $ 473     $ 470     $ 292     $ 231     $ (19 )   $ (34 )
Noninterest income
    233       220       231       222       27       49  
 
Total revenue (TE)a
    706       690       523       453       8       15  
Provision for loan losses
    22       49       (2 )     25              
Depreciation and amortization expense
    35       37       52       50              
Other noninterest expense
    449       438       222       190       7       7  
 
Income (loss) before income taxes (TE)
    200       166       251       188       1       8  
Allocated income taxes and TE adjustments
    75       62       94       70       (9 )     (7 )
 
Net income (loss)
  $ 125     $ 104     $ 157     $ 118     $ 10     $ 15  
 
                                   
 
                                               
Percent of consolidated net income
    43 %     44 %     54 %     49 %     3 %     6 %
Percent of total segments net income
    43       44       54       50       3       6  
 
AVERAGE BALANCES
                                               
Loans
  $ 32,105     $ 33,813     $ 34,943     $ 28,012     $ 407     $ 544  
Total assetsa
    35,369       37,420       40,684       33,917       11,622       11,562  
Deposits
    41,567       39,305       9,691       7,867       5,121       3,823  
 
OTHER FINANCIAL DATA
                                               
Net loan charge-offs
  $ 32     $ 64     $ 16     $ 40              
Return on average allocated equity
    20.76 %     16.99 %     17.87 %     14.95 %     N/M       N/M  
Average full-time equivalent employees
    9,976       10,415       3,250       2,828       40       37  
 
                                                 
                    Corporate and        
Six months ended June 30,   Consumer Banking     Investment Banking     Other Segments  
dollars in millions   2005     2004     2005     2004     2005     2004  
 
SUMMARY OF OPERATIONS
                                               
Net interest income (TE)
  $ 971     $ 957     $ 565     $ 467     $ (57 )   $ (68 )
Noninterest income
    462       450       447       429       77       87  
 
Total revenue (TE)a
    1,433       1,407       1,012       896       20       19  
Provision for loan losses
    70       110       (6 )     45              
Depreciation and amortization expense
    70       76       104       100              
Other noninterest expense
    890       856       422       376       16       14  
 
Income (loss) before income taxes (TE)
    403       365       492       375       4       5  
Allocated income taxes and TE adjustments
    151       137       184       141       (19 )     (18 )
 
Net income (loss)
  $ 252     $ 228     $ 308     $ 234     $ 23     $ 23  
 
                                   
 
                                               
Percent of consolidated net income
    45 %     46 %     56 %     48 %     4 %     5 %
Percent of total segments net income
    43       47       53       48       4       5  
 
AVERAGE BALANCES
                                               
Loans
  $ 32,726     $ 33,971     $ 34,559     $ 27,697     $ 422     $ 570  
Total assetsa
    36,144       37,348       40,289       33,576       11,802       11,754  
Deposits
    41,316       39,117       9,238       7,673       5,510       3,531  
 
OTHER FINANCIAL DATA
                                               
Net loan charge-offs
  $ 72     $ 136     $ 30     $ 79              
Return on average allocated equity
    20.65 %     18.56 %     17.57 %     14.86 %     N/M       N/M  
Average full-time equivalent employees
    10,057       10,416       3,276       2,820       39       37  
 
(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.
 
(b)   “Other noninterest expense” includes a $30 million ($19 million after tax) charge recorded during the first quarter of 2005 to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis.
TE = Taxable Equivalent, N/A = Not Applicable, N/M = Not Meaningful

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    Total Segments     Reconciling Items     Key  
    2005     2004     2005     2004     2005     2004  
 
 
                                               
 
  $ 746     $ 667     $ (23 )   $ (16 )   $ 723     $ 651  
 
    491       491       (5 )           486       491  
 
    1,237       1,158       (28 )     (16 )     1,209       1,142  
    20       74                   20       74  
    87       87                   87       87  
    678       635       (12 )     (5 )     666       630  
 
    452       362       (16 )     (11 )     436       351  
 
    160       125       (15 )     (13 )     145       112  
 
  $ 292     $ 237     $ (1 )   $ 2     $ 291     $ 239  
 
                                   
 
                                               
    100 %     99 %           1 %     100 %     100 %
    100       100       N/A       N/A       N/A       N/A  
 
 
                                               
 
  $ 67,455     $ 62,369     $ 205     $ 115     $ 67,660     $ 62,484  
 
    87,675       82,899       2,240       2,424       89,915       85,323  
 
    56,379       50,995       (243 )     (239 )     56,136       50,756  
 
 
                                               
 
  $ 48     $ 104                 $ 48     $ 104  
 
    18.39 %     15.83 %     N/M       N/M       16.15 %     13.97 %
 
 
    13,266       13,280       6,163       6,234       19,429       19,514  
 

                                                 
    Total Segments     Reconciling Items     Key  
    2005     2004     2005     2004     2005     2004  
 
 
                                               
 
  $ 1,479     $ 1,356     $ (42 )   $ (28 )   $ 1,437     $ 1,328  
 
    986       966             2       986       968  
 
 
    2,465       2,322       (42 )     (26 )     2,423       2,296  
 
    64       155                   64       155  
 
    174       176                   174       176  
 
    1,328       1,246       20 b     (8 )     1,348       1,238  
 
 
    899       745       (62 )     (18 )     837       727  
 
 
    316       260       (34 )     (22 )     282       238  
 
 
  $ 583     $ 485     $ (28 )   $ 4     $ 555     $ 489  
 
                                   
 
                                               
 
    105 %     99 %     (5 )%     1 %     100 %     100 %
 
    100       100       N/A       N/A       N/A       N/A  
 
 
                                               
 
  $ 67,707     $ 62,238     $ 151     $ 109     $ 67,858     $ 62,347  
 
    88,235       82,678       2,199       2,251       90,434       84,929  
 
    56,064       50,321       (217 )     (142 )     55,847       50,179  
 
 
                                               
 
  $ 102     $ 215                 $ 102     $ 215  
 
    18.32 %     16.14 %     N/M       N/M       15.63 %     14.22 %
 
 
    13,372       13,273       6,162       6,275       19,534       19,548  
 

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Supplementary information (Consumer Banking lines of business)
                                 
Three months ended June 30,   Community Banking     Consumer Finance  
dollars in millions   2005     2004     2005     2004  
 
Total revenue (taxable equivalent)
  $ 566     $ 547     $ 140     $ 143  
Provision for loan losses
    18       25       4       24  
Noninterest expense
    392       391       92       84  
Net income
    97       82       28       22  
Average loans
    19,791       19,487       12,314       14,326  
Average deposits
    41,128       38,940       439       365  
Net loan charge-offs
    21       27       11       37  
Return on average allocated equity
    25.36 %     23.51 %     12.81 %     8.29 %
Average full-time equivalent employees
    8,438       8,833       1,538       1,582  
 
                                 
Six months ended June 30,   Community Banking     Consumer Finance  
dollars in millions   2005     2004     2005     2004  
 
Total revenue (taxable equivalent)
  $ 1,122     $ 1,097     $ 311     $ 310  
Provision for loan losses
    38       54       32       56  
Noninterest expense
    791       763       169       169  
Net income
    183       175       69       53  
Average loans
    19,863       19,347       12,863       14,624  
Average deposits
    40,896       38,750       420       367  
Net loan charge-offs
    47       57       25       79  
Return on average allocated equity
    24.06 %     25.08 %     14.99 %     10.01 %
Average full-time equivalent employees
    8,479       8,813       1,578       1,603  
 
Supplementary information (Corporate and Investment Banking lines of business)
                                                 
Three months ended June 30,   Corporate Banking     KeyBank Real Estate Capital     Key Equipment Finance  
dollars in millions   2005     2004     2005     2004     2005     2004  
 
Total revenue (taxable equivalent)
  $ 258     $ 262     $ 139     $ 91     $ 126     $ 100  
Provision for loan losses
    (6 )     25       (7 )     (4 )     11       4  
Noninterest expense
    144       141       55       43       75       56  
Net income
    75       60       57       33       25       25  
Average loans
    15,089       13,150       10,962       7,752       8,892       7,110  
Average deposits
    7,952       6,651       1,728       1,202       11       14  
Net loan charge-offs (recoveries)
    11       36       3       (1 )     2       5  
Return on average allocated equity
    17.75 %     13.73 %     21.33 %     14.49 %     13.23 %     20.03 %
Average full-time equivalent employees
    1,513       1,523       774       673       963       632  
 
                                                 
Six months ended June 30,   Corporate Banking     KeyBank Real Estate Capital     Key Equipment Finance  
dollars in millions   2005     2004     2005     2004     2005     2004  
 
Total revenue (taxable equivalent)
  $ 516     $ 511     $ 243     $ 179     $ 253     $ 206  
Provision for loan losses
    (12 )     39       (1 )     (3 )     7       9  
Noninterest expense
    278       282       100       81       148       113  
Net income
    157       118       90       63       61       53  
Average loans
    15,095       12,988       10,543       7,688       8,921       7,021  
Average deposits
    7,605       6,494       1,622       1,165       11       14  
Net loan charge-offs
    21       67       6       1       3       11  
Return on average allocated equity
    18.54 %     13.57 %     16.93 %     13.77 %     16.27 %     21.40 %
Average full-time equivalent employees
    1,520       1,528       766       670       990       622  
 

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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 ($749 million at June 30, 2005, $863 million at December 31, 2004, and $1.5 billion at June 30, 2004) 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 are 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.” Unrealized losses on specific securities deemed to be “other-than-temporary” are included in “net securities gains (losses)” on the income statement. Also included in “net securities gains (losses)” 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, 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 ($814 million at June 30, 2005, $816 million at December 31, 2004, and $788 million at June 30, 2004). These include direct and indirect investments — predominantly 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 generally are 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 (losses)” 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.

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    June 30, 2005  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 270                 $ 270  
States and political subdivisions
    19     $ 1             20  
Collateralized mortgage obligations
    6,498       3     $ 103       6,398  
Other mortgage-backed securities
    274       7       2       279  
Retained interests in securitizations
    97       80             177  
Other securities
    117       10             127  
 
Total securities available for sale
  $ 7,275     $ 101     $ 105     $ 7,271  
 
                       
 
                               
 
INVESTMENT SECURITIES
                               
States and political subdivisions
  $ 46     $ 2           $ 48  
Other securities
    13                   13  
 
Total investment securities
  $ 59     $ 2           $ 61  
 
                       
 
                               
 
                                 
    December 31, 2004  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 227                 $ 227  
States and political subdivisions
    21     $ 1             22  
Collateralized mortgage obligations
    6,460       5     $ 95       6,370  
Other mortgage-backed securities
    322       10       2       330  
Retained interests in securitizations
    103       90             193  
Other securities
    298       11             309  
 
Total securities available for sale
  $ 7,431     $ 117     $ 97     $ 7,451  
 
                       
 
                               
 
INVESTMENT SECURITIES
                               
States and political subdivisions
  $ 58     $ 3           $ 61  
Other securities
    13                   13  
 
Total investment securities
  $ 71     $ 3           $ 74  
 
                       
 
                               
 
                                 
    June 30, 2004  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
in millions   Cost     Gains     Losses     Value  
 
SECURITIES AVAILABLE FOR SALE
                               
U.S. Treasury, agencies and corporations
  $ 62                 $ 62  
States and political subdivisions
    21                   21  
Collateralized mortgage obligations
    6,395     $ 3     $ 142       6,256  
Other mortgage-backed securities
    364       12       4       372  
Retained interests in securitizations
    101       72             173  
Other securities
    135       4             139  
 
Total securities available for sale
  $ 7,078     $ 91     $ 146     $ 7,023  
 
                       
 
                               
 
INVESTMENT SECURITIES
                               
States and political subdivisions
  $ 68     $ 4           $ 72  
Other securities
    13                   13  
 
Total investment securities
  $ 81     $ 4           $ 85  
 
                       
 
                               
 

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6. Loans
Key’s loans by category are summarized as follows:
                         
    June 30,     December 31,     June 30,  
in millions   2005     2004     2004  
 
Commercial, financial and agricultural
  $ 19,849     $ 19,343     $ 17,721  
Commercial real estate:
                       
Commercial mortgage
    7,999       7,534       6,312  
Construction
    6,239       5,505       4,863  
 
Total commercial real estate loans
    14,238       13,039       11,175  
Commercial lease financing
    10,113       10,155       8,166  
 
Total commercial loans
    44,200       42,537       37,062  
Real estate — residential mortgage
    1,449       1,456       1,542  
Home equity
    13,921       14,062       14,753  
Consumer — direct
    1,797       1,987       2,074  
Consumer — indirect:
                       
Automobile lease financing
    43       89       170  
Automobile loans
                1,910  
Marine
    2,665       2,624       2,640  
Other
    615       617       598  
 
Total consumer — indirect loans
    3,323       3,330       5,318  
 
Total consumer loans
    20,490       20,835       23,687  
Loans held for sale:
                       
Real estate — commercial mortgage
    519       283       369  
Real estate — residential mortgage
    23       26       22  
Home equity
    1       29       13  
Education
    2,586       2,278       2,237  
Automobile
    145       1,737        
 
Total loans held for sale
    3,274       4,353       2,641  
 
Total loans
  $ 67,964     $ 67,725     $ 63,390  
 
                 
 
                       
 
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 84 of Key’s 2004 Annual Report to Shareholders.
Changes in the allowance for loan losses are summarized as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
in millions   2005     2004     2005     2004  
 
Balance at beginning of period
  $ 1,128     $ 1,306     $ 1,138     $ 1,406  
Charge-offs
    (75 )     (148 )     (153 )     (297 )
Recoveries
    27       44       51       82  
 
Net charge-offs
    (48 )     (104 )     (102 )     (215 )
Provision for loan losses
    20       74       64       155  
Reclassification of allowance for credit losses on lending-related commitments a
                      (70 )
 
Balance at end of period
  $ 1,100     $ 1,276     $ 1,100     $ 1,276  
 
                       
 
                               
 
(a)   Included in “accrued expense and other liabilities” on the consolidated balance sheet.

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Changes in the allowance for credit losses on lending-related commitments are summarized as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
in millions   2005     2004     2005     2004  
 
Balance at beginning of period
  $ 55     $ 70     $ 66        
Reclassification of allowance for credit losses a
                    $ 70  
Provision for losses on lending-related commitments
    2       (7 )     (9 )     (7 )
 
Balance at end of period
  $ 57     $ 63     $ 57     $ 63  
 
                       
 
                               
 
(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 certain criteria specified in Revised Interpretation No. 46. This interpretation requires VIEs to be consolidated by the party who is exposed to the majority of the VIE’s expected losses and/or residual returns (i.e., the primary beneficiary).
Key’s VIEs, including those consolidated and those in which Key holds a significant interest, are summarized below. Key defines a “significant interest” in a VIE as a subordinated interest that exposes Key to a significant portion, but not the majority, of the VIE’s expected losses or residual returns.
                         
    Consolidated VIEs     Unconsolidated VIEs  
                    Maximum  
in millions   Total Assets     Total Assets     Exposure to Loss  
 
June 30, 2005
                       
Commercial paper conduit
  $ 556       N/A       N/A  
Low-income housing tax credit (“LIHTC”) funds
    374     $ 273        
Business trusts issuing mandatorily redeemable preferred capital securities
    N/A       1,597        
LIHTC investments
    N/A       694     $ 217  
 
N/A = Not Applicable
The noncontrolling interests associated with the consolidated LIHTC guaranteed funds are considered mandatorily redeemable instruments in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The FASB has indefinitely deferred the measurement and recognition provisions of SFAS No. 150 for mandatorily redeemable noncontrolling interests associated with finite-lived subsidiaries, such as Key’s LIHTC guaranteed funds. At June 30, 2005, the settlement value of these noncontrolling interests, which are accounted for by Key as minority interests, was estimated to be between $483 million and $584 million, while the recorded value, including reserves, totaled $391 million.
Key’s Principal Investing unit and the KeyBank Real Estate Capital line of business make equity and mezzanine investments in entities, some of which are VIEs. These investments are held by nonregistered investment companies subject to the provisions of the AICPA Audit and Accounting Guide, “Audits of Investment Companies.” 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 principal and real estate mezzanine and equity investments, which remain unconsolidated.
Additional information pertaining to Revised Interpretation No. 46 and the activities of the specific VIEs with which Key is involved is provided in Note 8 (“Loan Securitizations, Servicing and Variable Interest Entities”) of Key’s 2004 Annual Report to Shareholders under the heading “Variable Interest Entities” on page 69.

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8. Impaired Loans and Other Nonperforming Assets
Impaired loans totaled $88 million at June 30, 2005, compared with $91 million at December 31, 2004, and $154 million at June 30, 2004. Impaired loans averaged $99 million for the second quarter of 2005 and $208 million for the second quarter of 2004.
Key’s nonperforming assets were as follows:
                         
    June 30,     December 31,     June 30,  
in millions   2005     2004     2004  
 
Impaired loans
  $ 88     $ 91     $ 154  
Other nonaccrual loans
    205       225       300  
 
Total nonperforming loans
    293       316       454  
Other real estate owned (OREO)
    33       53       71  
Allowance for OREO losses
    (2 )     (4 )     (8 )
 
OREO, net of allowance
    31       49       63  
Other nonperforming assets
    14       14       23  
 
Total nonperforming assets
  $ 338     $ 379     $ 540  
 
                 
 
                       
 
At June 30, 2005, 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 cast doubt on 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. That amount – effectively the amount that management deems uncollectible – 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 June 30, 2005, Key had $30 million of impaired loans with a specifically allocated allowance for loan losses of $8 million, and $58 million of impaired loans that were carried at their estimated fair value without a specifically allocated allowance. At December 31, 2004, impaired loans included $38 million of loans with a specifically allocated allowance of $12 million, and $53 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 smaller-balance commercial loans and consumer loans, including residential mortgages, home equity loans and various types of installment loans. Management applies historical loss experience rates to these loans, adjusted to reflect emerging credit trends and other factors, and then allocates a portion of the allowance for loan losses to each loan type.

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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. During the first quarter of 2005, the Federal Reserve Board adopted a final rule that allows bank holding companies to continue to treat capital securities as Tier 1 capital, but with stricter quantitative limits that take effect after a five-year transition period ending March 31, 2009. Management believes that the new rule 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 six months of 2005, the business trusts did not repurchase any capital securities or related debentures.
In April 2005, KeyCorp and two affiliated business trusts, KeyCorp Capital VII and KeyCorp Capital VIII, filed a registration statement with the SEC for the issuance of up to $501 million of capital securities of KeyCorp Capital VII and KeyCorp Capital VIII. On June 13, 2005, $250 million of securities were issued by the KeyCorp Capital VII trust.

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The capital securities, common stock and related debentures are summarized as follows:
                                         
                    Principal     Interest Rate     Maturity  
    Capital             Amount of     of Capital     of Capital  
    Securities,     Common     Debentures,     Securities and     Securities and  
dollars in millions   Net of Discounta     Stock     Net of Discountb     Debenturesc     Debentures  
 
June 30, 2005
                                       
KeyCorp Institutional Capital A
  $ 381     $ 11     $ 361       7.826 %     2026  
KeyCorp Institutional Capital B
    164       4       154       8.250       2026  
KeyCorp Capital I
    197       8       205       3.840       2028  
KeyCorp Capital II
    191       8       165       6.875       2029  
KeyCorp Capital III
    246       8       197       7.750       2029  
KeyCorp Capital V
    176       5       180       5.875       2033  
KeyCorp Capital VI
    76       2       77       6.125       2033  
KeyCorp Capital VII
    250       8       258       5.700       2035  
 
Total
  $ 1,681     $ 54     $ 1,597       6.684 %      
 
                 
 
December 31, 2004
  $ 1,399     $ 46     $ 1,339       6.704 %      
 
                 
 
June 30, 2004
  $ 1,365     $ 46     $ 1,339       6.568 %      
 
                 
 
(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 that issued the capital securities were de-consolidated. The capital securities continue to qualify as Tier 1 capital under Federal Reserve Board guidelines. Included in certain capital securities at June 30, 2005, December 31, 2004, and June 30, 2004, are basis adjustments of $138 million, $106 million and $72 million, respectively, related to fair value hedges. See Note 19 (“Derivatives and Hedging Activities”), which begins on page 84 of Key’s 2004 Annual Report to Shareholders, for an explanation of fair value hedges.
 
(b)   KeyCorp has certain rights 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, Capital VI, or Capital VII 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, Capital VI and Capital VII 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 June 30, 2005, December 31, 2004, and June 30, 2004, are weighted-average rates.

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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     Six months ended  
    June 30,     June 30,  
in millions   2005     2004     2005     2004  
 
Service cost of benefits earned
  $ 4     $ 12     $ 17     $ 24  
Interest cost on projected benefit obligation
    6       14       21       28  
Expected return on plan assets
    (7 )     (23 )     (31 )     (46 )
Amortization of prior service benefit
                (1 )      
Amortization of losses
    2       3       8       6  
 
Net pension cost
  $ 5     $ 6     $ 14     $ 12  
 
                       
 
                               
 
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     Six months ended  
    June 30,     June 30,  
in millions   2005     2004     2005     2004  
 
Service cost of benefits earned
  $ 1     $ 1     $ 2     $ 2  
Interest cost on accumulated postretirement benefit obligation
    2       2       4       4  
Expected return on plan assets
    (1 )     (1 )     (2 )     (2 )
Amortization of unrecognized transition obligation
    1       1       2       2  
Amortization of cumulative net loss
    1             2        
 
Net postretirement benefit cost
  $ 4     $ 3     $ 8     $ 6  
 
                       
 
                               
 
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 as well as a federal subsidy to sponsors of retiree healthcare benefit plans that offer “qualified” prescription drug coverage to retirees.
In January 2005, the Centers for Medicare and Medicaid Services issued the final regulations necessary to fully implement the Act, including the manner in which actuarial equivalence must be determined. Management expects that the prescription drug coverage related to Key’s retiree healthcare benefit plan will be actuarially equivalent, and that the subsidy will not have any material effect on Key’s APBO and net postretirement cost.
11. Income Taxes
The American Jobs Creation Act of 2004 provides for a special one-time tax deduction equal to 85 percent of certain foreign earnings that are “repatriated.” Management is in the process of reviewing Key’s foreign operations to determine the potential amount of the deduction and, therefore, is currently unable to provide a reasonable estimate of the amount of unremitted earnings that may be repatriated or the related effect on Key’s income taxes. Management anticipates that the special one-time deduction will not have any material effect on Key’s financial condition or results of operations.
In the normal course of business, Key enters into various types of lease financing transactions. The Internal Revenue Service (“IRS”) has completed an audit of Key’s income tax returns for the 1995 through 1997 tax years and has proposed to disallow all deductions taken in those years that relate to certain leveraged lease financing transactions commonly referred to as Lease-In, Lease-Out (“LILO”) transactions. In addition, the

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IRS is currently examining Key’s returns for the 1998 through 2000 tax years and has similarly proposed to disallow deductions for LILO transactions. The preliminary outcome of the IRS audit of Key’s returns for the 1995 through 1997 tax years is on appeal within the IRS, and settlement discussions are ongoing. Although the ultimate resolution of this matter is unknown, Key has provided tax reserves that management currently believes are adequate based on its assessment of Key’s tax position.
Key has also entered into other types of leveraged lease financing transactions that are being examined by the IRS and has been informed that the IRS intends to disallow all deductions related to such transactions. Management believes that the deductions taken by Key are appropriate based on the relevant statutory, regulatory and judicial authority in effect at the time the lease financing transactions were entered into and the tax returns were filed. However, if the IRS were to be successful in disallowing the deductions, Key would potentially owe additional taxes, interest and penalties that could have a material effect on its results of operations in the period in which incurred.
In July 2005, the FASB issued two drafts of proposed tax-related guidance for public comment. The first proposal provides additional guidance regarding the application of SFAS No. 13, “Accounting for Leases,” that would affect the timing under which earnings from leveraged lease financing transactions would be recognized when changes or projected changes in the timing of cash flows, including those due to or expected to be due to settlements of tax matters, occur. The second provides guidance on the accounting for uncertain tax positions and would require that a tax position meet a “probable recognition threshold” for it to be recognized in the financial statements.
If finalized as drafted, the guidance in these two proposals could result in an initial one-time charge to earnings stemming from changes in the timing or projected timing of cash flows related to lease financing transactions and/or the possibility that uncertain tax positions may not meet the “probable recognition threshold.” However, future earnings would be expected to increase over the remaining term of the lease by approximately the same amount as the one-time charge. The new guidance would be effective for years ending after December 15, 2005 (year ending December 31, 2005, for Key).
12. Contingent Liabilities and Guarantees
Legal Proceedings
Residual value insurance litigation. 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. From February 2000 through September 2004, Key Bank USA filed claims, and since October 2004, KBNA (successor to Key Bank USA) has been filing claims under the Policies, but none of these claims has been paid.

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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. On March 21, 2005, the Court, in response to the parties’ joint motion and related agreement to allow more time for the completion of the damages discovery process, entered an order establishing a new damages discovery schedule, including an extension of the deadline for submitting summary judgment motions on issues related to damages to December 9, 2005.
Management believes that KBNA (successor to 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 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) can be determined.
Accordingly, the total expected loss on the portfolio for which KBNA (and Key Bank USA) will have filed claims cannot be determined with certainty at this time. Claims filed through June 30, 2005, totaled approximately $382 million, and management currently estimates that approximately $5 million of additional claims may be filed through year-end 2006, bringing the total aggregate amount of actual and potential claims to $387 million. During the litigation, Key has carefully analyzed its claims, both internally and with the assistance of outside expert consultants. Based on the analysis completed through April 30, 2005, Key currently expects to seek recovery of insured residual value losses in the range of approximately $342 million to $357 million, in addition to interest and other damages attributable to Swiss Re’s denial of coverage.
Key is filing insurance claims for its losses and has recorded as a receivable on its balance sheet a portion of the amount of the insurance claims. 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

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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.
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.
Guarantees
Key is a guarantor in various agreements with third parties. The following table shows the types of guarantees that Key had outstanding at June 30, 2005. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Guarantees” on page 59 of Key’s 2004 Annual Report to Shareholders.
                 
    Maximum Potential        
    Undiscounted     Liability  
in millions   Future Payments     Recorded  
 
Financial Guarantees:
               
Standby letters of credit
  $ 11,896     $ 41  
Credit enhancement for asset-backed commercial paper conduit
    73        
Recourse agreement with FNMA
    618       8  
Return guarantee agreement with LIHTC investors
    584       38  
Default guarantees
    37       1  
Written interest rate capsa
    68       3  
 
Total
  $ 13,276     $ 91  
 
           
 
 
(a)   As of June 30, 2005, the weighted-average interest rate of written interest rate caps was 3.3%, and the weighted-average strike rate was 4.8%. 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 entered into 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 June 30, 2005, Key’s standby letters of credit had a remaining weighted-average life of approximately two years, with remaining actual lives ranging from less than one year to as many as thirteen 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 June 30, 2005, Key’s maximum potential funding requirement under the credit enhancement facility totaled $73 million. However, there were no drawdowns under the facility during the six-month period ended June 30, 2005. 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.

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Recourse agreement with Federal National Mortgage 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 June 30, 2005, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of nine years and the unpaid principal balance outstanding of loans sold by KBNA as a participant in this program was approximately $2.0 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 June 30, 2005. 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. Key Affordable Housing Corporation (“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 confirmed 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.
No recourse or collateral is available to offset the guarantee obligation other than the underlying income stream from the properties. 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 table on page 26, KAHC maintained a reserve in the amount of $38 million at June 30, 2005, 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, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” 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 liability recorded.
Various types of default guarantees. Some lines of business provide or participate in guarantees that obligate Key to perform if the debtor fails to satisfy all of its payment obligations to third parties. 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 less than one year to as many as seventeen 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 June 30, 2005, these caps had a weighted-average life of approximately two 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.

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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. This liquidity facility obligates Key through November 5, 2007, to provide funding of up to $1.9 billion if required as a result of a disruption in credit markets or other factors that preclude the issuance of commercial paper by the conduit. The amount available to be drawn, which is based on the amount of current commitments to borrowers in the conduit, was $1.1 billion at June 30, 2005. 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 certain other Key affiliates are parties to various guarantees that facilitate the ongoing business activities of other Key affiliates. These business activities encompass debt issuance, certain lease and insurance obligations, investments and securities, and certain leasing transactions involving clients.
13. Derivatives and Hedging Activities
Key, mainly through its subsidiary 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 June 30, 2005, Key had $323 million of derivative assets and $164 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

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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 June 30, 2005, Key was party to interest rate swaps and caps with 58 different counterparties. Among these were swaps and caps entered into to offset the risk of client exposure. Key had aggregate exposure of $268 million on these instruments to 36 of the counterparties. However, at June 30, Key held approximately $170 million in collateral to mitigate its credit exposure, resulting in net exposure of $98 million. The largest exposure to an individual counterparty was approximately $117 million, of which Key secured approximately $102 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 84 of Key’s 2004 Annual Report to Shareholders.
The change in “accumulated other comprehensive income (loss)” resulting from cash flow hedges is as follows:
                                 
                    Reclassification        
    December 31,     2005     of Losses to     June 30,  
in millions   2004     Hedging Activity     Net Income     2005  
 
Accumulated other comprehensive income (loss) resulting from cash flow hedges
  $ (40 )   $ (25 )   $ 11     $ (54 )
 
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 $.4 million of net losses on derivative instruments from “accumulated other comprehensive income (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 June 30, 2005, 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 2004 Annual Report to Shareholders.

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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
KeyCorp
We have reviewed the condensed consolidated balance sheets of KeyCorp and subsidiaries (“Key”) as of June 30, 2005 and 2004, and the related condensed consolidated statements of income for the three-month and six-month periods then ended, and the condensed consolidated statements of changes in shareholders’ equity and cash flow for the six-month periods ended June 30, 2005 and 2004. 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, 2004, 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 February 25, 2005, 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, 2004, 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
August 2, 2005

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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 June 30, 2005 and 2004. 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 29. A description of Key’s business is included under the heading “Description of Business” on page 10 of Key’s 2004 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 and other stock awards. Some of the financial information 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 53.
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 11 of Key’s 2004 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. 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.

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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 factors, 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.
 
   
¨
  Increased competitive pressure among financial services companies may adversely affect our ability to market our products and services.
 
   
¨
  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.
 
   
¨
  Acquisitions and dispositions of assets, business units or affiliates could adversely affect us in ways that management has not anticipated.
 
   
¨
  We may experience operational or risk management failures due to technological or other factors.
 
   
¨
  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.
Critical accounting policies and estimates
Key’s business is dynamic and complex. Consequently, management must exercise judgment in choosing and applying accounting policies and methodologies in many areas. These choices are important; not only are they necessary to comply with U.S. generally accepted accounting principles, but 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 55 of Key’s 2004 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 12 and 13 of Key’s 2004 Annual Report to Shareholders.
During the first six months of 2005, 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.

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Highlights of Key’s Performance
Financial performance
The primary measures of Key’s financial performance for the second quarter and first six months of 2005 and 2004 are summarized below. Our solid second quarter results reflect continued improvement in Key’s operating fundamentals, as well as the positive effects of our longer-term strategic activities.
     
¨
  Net income for the second quarter of 2005 was $291 million, or $.70 per common share, compared with $264 million, or $.64 per share, for the previous quarter and $239 million, or $.58 per share, for the second quarter of 2004. For the first six months of 2005, net income was $555 million, or $1.34 per common share, compared with $489 million, or $1.17 per share, for the first half of 2004.
 
   
¨
  Key’s return on average equity was 16.15% for the second quarter of 2005, compared with a return of 15.09% for the prior quarter and 13.97% for the year-ago quarter. For the first six months of 2005, Key’s return on average equity was 15.63%, compared with 14.22% for the first six months of 2004.
 
   
¨
  Key’s second quarter 2005 return on average total assets was 1.30%, compared with a return of 1.18% for the previous quarter and 1.13% for the second quarter of 2004. For the first six months of 2005, Key’s return on average total assets was 1.24%, compared with 1.16% for the same period last year.
Key’s top three priorities for 2005 are to profitably grow revenue, maintain asset quality and maintain a disciplined approach to managing expenses. During the second quarter:
     
¨
  Total revenue grew by $59 million from the second quarter of 2004 as a result of an increase in net interest income. Current year results benefited from a better net interest margin, strong commercial loan growth and an increase in core deposits. 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 decreased for the eleventh consecutive quarter and net loan charge-offs, as a percentage of average loans, remained at their lowest level since the fourth quarter of 1995. While a stronger economy contributed to these positive changes, they also reflect strategic business mix changes we’ve made to improve Key’s risk profile.
Further, we continue to effectively manage our capital through dividends paid to shareholders; share repurchases, when appropriate; and investing in our higher-growth businesses. Key’s tangible equity to tangible assets ratio was 6.60% at June 30, 2005, and is within our targeted range of 6.25% to 6.75%.
Considering recent trends, we expect Key’s earnings to be in the range of $.64 to $.68 per share for the third quarter of 2005 and $2.60 to $2.70 per share for the full year.
The primary reasons that Key’s revenue and expense components changed from those reported for the three- and six-month periods ended June 30, 2004, are reviewed in greater detail throughout the remainder of the Management’s Discussion and Analysis section.
Strategic developments
Our financial performance has improved due in part to a number of specific actions taken over the past year that have strengthened our market share positions and support our strategy of focusing on businesses that enable us to build relationships with our clients.
     
¨
  During the fourth quarter of 2004, we sold our broker-originated home equity loan portfolio and reclassified our indirect automobile loan portfolio to held-for-sale status. These businesses were identified for exit because they did not meet our performance standards or fit with our relationship banking strategy. We completed the sale of the prime segment of the indirect automobile loan

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  portfolio during the first quarter of 2005 and the sale of the nonprime segment in the second quarter. We will, however, continue to build our floor plan financing business with automobile dealers.
     
¨
  Effective December 1, 2004, we acquired American Express Business Finance Corporation (“AEBF”), the equipment leasing unit of American Express’ small business division. This company provides capital for small and middle market businesses, mostly in the healthcare, information technology, office products, and commercial vehicle/construction industries, and had a leasing portfolio of approximately $1.5 billion at date of acquisition. During the second quarter of 2005, we completed the integration of AEBF into Key Equipment Finance, our leasing line of business.
 
   
¨
  Effective October 15, 2004, we acquired EverTrust Financial Group, Inc. (“EverTrust”), the holding company for EverTrust Bank, a state-chartered bank headquartered in Everett, Washington with twelve branch offices. EverTrust had assets of approximately $780 million and deposits of approximately $570 million at the date of acquisition.
 
   
¨
  Effective August 11, 2004, we acquired certain net assets of American Capital Resource, Inc., based in Atlanta, Georgia. This is the fourth commercial real estate acquisition we have made since January 31, 2000, as part of our ongoing strategy to expand Key’s commercial mortgage finance and servicing capabilities.
 
   
¨
  Effective July 22, 2004, we acquired ten branch offices and approximately $380 million of deposits of Sterling Bank & Trust FSB in suburban Detroit, Michigan.
In addition, during the second quarter of 2005, we announced plans to further expand our Federal Housing Administration (“FHA”) financing and servicing capabilities by acquiring Malone Mortgage Company, based in Dallas, Texas.
Figure 1 summarizes Key’s financial performance for each of the past five quarters.

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Figure 1. Selected Financial Data
                                                         
    2005   2004   Six months ended June 30,
dollars in millions, except per share amounts   Second   First   Fourth   Third   Second   2005   2004
 
FOR THE PERIOD
                                                       
Interest income
  $ 1,116     $ 1,065     $ 1,005     $ 945     $ 905     $ 2,181     $ 1,836  
Interest expense
    423       379       333       294       276       802       554  
Net interest income
    693       686       672       651       629       1,379       1,282  
Provision for loan losses
    20       44       (21 )     51       74       64       155  
Noninterest income
    486       500       479       482       491       986       968  
Noninterest expense
    753       769       818       729       717       1,522       1,414  
Income before income taxes
    406       373       354       353       329       779       681  
Net income
    291       264       213       252       239       555       489  
 
PER COMMON SHARE
                                                       
Net income
  $ .71     $ .65     $ .52     $ .62     $ .58     $ 1.36     $ 1.18  
Net income — assuming dilution
    .70       .64       .51       .61       .58       1.34       1.17  
Cash dividends paid
    .325       .325       .31       .31       .31       .65       .62  
Book value at period end
    18.01       17.58       17.46       17.12       16.77       18.01       16.77  
Market price:
                                                       
High
    33.80       34.07       34.50       32.02       32.27       34.07       33.23  
Low
    31.52       31.00       31.35       29.00       28.23       31.00       28.23  
Close
    33.15       32.45       33.90       31.60       29.89       33.15       29.89  
Weighted-average common shares (000)
    408,754       408,264       408,243       407,187       410,292       408,510       413,486  
Weighted-average common shares and potential common shares (000)
    414,309       413,762       413,727       411,575       414,908       414,037       418,240  
 
AT PERIOD END
                                                       
Loans
  $ 67,964     $ 67,549     $ 67,725     $ 64,306     $ 63,390     $ 67,964     $ 63,390  
Earning assets
    78,548       77,937       78,140       75,660       74,364       78,548       74,364  
Total assets
    91,015       90,276       90,747       88,463       86,231       91,015       86,231  
Deposits
    58,063       57,127       57,842       55,843       52,423       58,063       52,423  
Long-term debt
    13,588       14,100       14,846       13,444       14,608       13,588       14,608  
Shareholders’ equity
    7,352       7,162       7,117       6,946       6,829       7,352       6,829  
 
PERFORMANCE RATIOS
                                                       
Return on average total assets
    1.30 %     1.18 %     .95 %     1.16 %     1.13 %     1.24 %     1.16 %
Return on average equity
    16.15       15.09       11.99       14.62       13.97       15.63       14.22  
Net interest margin (taxable equivalent)
    3.71       3.66       3.63       3.60       3.56       3.69       3.64  
 
CAPITAL RATIOS AT PERIOD END
                                                       
Equity to assets
    8.08 %     7.93 %     7.84 %     7.85 %     7.92 %     8.08 %     7.92 %
Tangible equity to tangible assets
    6.60       6.43       6.35       6.57       6.64       6.60       6.64  
Tier 1 risk-based capital
    7.68       7.34       7.22       7.72       7.93       7.68       7.93  
Total risk-based capital
    11.72       11.58       11.47       11.67       12.07       11.72       12.07  
Leverage
    8.49       7.91       7.96       8.27       8.34       8.49       8.34  
 
OTHER DATA
                                                       
Average full-time equivalent employees
    19,429       19,571       19,575       19,635       19,514       19,534       19,548  
KeyCenters
    945       940       935       921       902       945       902  
 

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Line of Business Results
This section summarizes the financial performance and related strategic developments of each of Key’s two major business groups: Consumer Banking, and Corporate and Investment Banking. 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 two 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 six-month periods ended June 30, 2005 and 2004.
Figure 2. Major Business Groups — Taxable-Equivalent Revenue and Net Income
                                                                 
    Three months ended June 30,   Change   Six months ended June 30,   Change
dollars in millions   2005   2004   Amount   Percent   2005   2004   Amount   Percent
 
Revenue (taxable equivalent)
                                                               
Consumer Banking
  $ 706     $ 690     $ 16       2.3 %   $ 1,433     $ 1,407     $ 26       1.8 %
Corporate and Investment Banking
    523       453       70       15.5       1,012       896       116       12.9  
Other Segments
    8       15       (7 )     (46.7 )     20       19       1       5.3  
 
Total segments
    1,237       1,158       79       6.8       2,465       2,322       143       6.2  
Reconciling items
    (28 )     (16 )     (12 )     (75.0 )     (42 )     (26 )     (16 )     (61.5 )
 
Total
  $ 1,209     $ 1,142     $ 67       5.9 %   $ 2,423     $ 2,296     $ 127       5.5 %
 
                                                               
 
                                                               
Net income (loss)
                                                               
Consumer Banking
  $ 125     $ 104     $ 21       20.2 %   $ 252     $ 228     $ 24       10.5 %
Corporate and Investment Banking
    157       118       39       33.1       308       234       74       31.6  
Other Segments
    10       15       (5 )     (33.3 )     23       23              
 
Total segments
    292       237       55       23.2       583       485       98       20.2  
Reconciling items
    (1 )     2       (3 )     N/M       (28 )a     4       (32 )     N/M  
 
Total
  $ 291     $ 239     $ 52       21.8 %   $ 555     $ 489     $ 66       13.5 %
 
                                                               
 
(a)   Includes a $30 million ($19 million after tax) charge recorded during the first quarter of 2005 to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis.
N/M = Not Meaningful
Consumer Banking
As shown in Figure 3, net income for Consumer Banking was $125 million for the second quarter of 2005, up from $104 million for the year-ago quarter. Increases in both net interest income and noninterest income, along with a significant reduction in the provision for loan losses drove the improvement and more than offset an increase in noninterest expense.
Taxable-equivalent net interest income increased by $3 million, or 1%, from the second quarter of 2004, due to growth in, and a more favorable interest rate spread on, average deposits. The positive effects of these factors were moderated by a less favorable interest rate spread on earning assets and a decline in average loans, due largely to the sale of the higher-yielding broker-originated home equity and indirect automobile loan portfolios within the Consumer Finance line.
Noninterest income increased by $13 million, or 6%, due primarily to net gains of $5 million from loan securitizations and sales in the current year, compared with net losses of $5 million in the year-ago quarter.
The provision for loan losses decreased by $27 million, or 55%, primarily as a result of the loan sales discussed above.
Noninterest expense increased by $9 million, or 2%, due primarily to higher costs associated with loan servicing, reserves established to absorb potential noncredit-related losses from our education lending

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business, and various indirect charges. These adverse changes were partially offset by decreases in both personnel and net occupancy expenses.
Figure 3. Consumer Banking
                                                                 
    Three months ended June 30,   Change   Six months ended June 30,   Change
dollars in millions   2005   2004   Amount   Percent   2005   2004   Amount   Percent
 
Summary of operations
                                                               
Net interest income (TE)
  $ 473     $ 470     $ 3       .6 %   $ 971     $ 957     $ 14       1.5 %
Noninterest income
    233       220       13       5.9       462       450       12       2.7  
 
Total revenue (TE)
    706       690       16       2.3       1,433       1,407       26       1.8  
Provision for loan losses
    22       49       (27 )     (55.1 )     70       110       (40 )     (36.4 )
Noninterest expense
    484       475       9       1.9       960       932       28       3.0  
 
Income before income taxes (TE)
    200       166       34       20.5       403       365       38       10.4  
Allocated income taxes and TE adjustments
    75       62       13       21.0       151       137       14       10.2  
 
Net income
  $ 125     $ 104     $ 21       20.2 %   $ 252     $ 228     $ 24       10.5 %
 
                                                               
 
                                                               
Percent of consolidated net income
    43 %     44 %     N/A       N/A       45 %     46 %     N/A       N/A  
 
                                                               
Average balances
                                                               
Loans
  $ 32,105     $ 33,813     $ (1,708 )     (5.1 )%   $ 32,726     $ 33,971     $ (1,245 )     (3.7) %
Total assets
    35,369       37,420       (2,051 )     (5.5 )     36,144       37,348       (1,204 )     (3.2 )
Deposits
    41,567       39,305       2,262       5.8       41,316       39,117       2,199       5.6  
 
TE = Taxable Equivalent, N/A = Not Applicable
Additional Consumer Banking Data
                                                                 
    Three months ended June 30,   Change   Six months ended June 30,   Change
dollars in millions   2005   2004   Amount   Percent   2005   2004   Amount   Percent
 
Average deposits outstanding
                                                               
Noninterest-bearing
  $ 6,816     $ 6,394     $ 422       6.6 %   $ 6,712     $ 6,320     $ 392       6.2 %
Money market and other savings
    20,323       18,923       1,400       7.4       20,306       18,576       1,730       9.3  
Time
    14,428       13,988       440       3.1       14,298       14,221       77       .5  
 
Total deposits
  $ 41,567     $ 39,305     $ 2,262       5.8 %   $ 41,316     $ 39,117     $ 2,199       5.6 %
 
                                                               
 
                                                               
 
Home equity loans
                                                               
Community Banking
                                                               
Average balance
  $ 10,397     $ 10,102                                                  
Average loan-to-value ratio
    71 %     72 %                                                
Percent first lien positions
    61       60                                                  
National Home Equity
                                                               
Average balance
  $ 3,498     $ 4,504                                                  
Average loan-to-value ratio
    65 %     72 %                                                
Percent first lien positions
    67       78                                                  
                                                 
Other data
                                                               
On-line households / household penetration
    595,411/47 %     524,150/42 %                                                
KeyCenters
    945       902                                                  
Automated teller machines
    2,205       2,166                                                  
                                                 
Corporate and Investment Banking
As shown in Figure 4, net income for Corporate and Investment Banking was $157 million for the second quarter of 2005, up from $118 million for the same period last year. Increases in both net interest income and noninterest income, along with a significant reduction in the provision for loan losses drove the improvement. These positive changes were offset in part by an increase in noninterest expense.
Taxable-equivalent net interest income increased by $61 million, or 26%, from the second quarter of 2004, due primarily to strong growth in average loans and leases, as well as deposits. Average loans and leases rose by $6.9 billion, or 25%, reflecting improvements in each of the primary lines of business. An increase in lease financing receivables in the Key Equipment Finance line was bolstered by the acquisition of American Express Business Finance Corporation during the fourth quarter of 2004.
Noninterest income rose by $9 million, or 4%, due largely to an increase in non-yield-related loan fees. This growth was moderated by a decrease in income from investment banking and capital markets activities.
The provision for loan losses was a credit of $2 million for the second quarter of 2005, compared with expense of $25 million for the year-ago quarter. The reduction from the second quarter of 2004 reflected improved asset quality in the Corporate Banking and KeyBank Real Estate Capital lines of business.

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Noninterest expense rose by $34 million, or 14%, as expansion of the business and improved profitability led to increases in personnel and various other expense categories. During the second quarter of 2005, we completed the integration of American Express Business Finance Corporation into Key Equipment Finance.
In June 2005, we announced plans to further expand our FHA financing and servicing capabilities by acquiring Malone Mortgage Company, based in Dallas, Texas. This is one in a series of acquisitions that we have initiated over the past several years to build upon the success we have experienced in our commercial mortgage origination and servicing area.
Figure 4. Corporate and Investment Banking
                                                                 
    Three months ended June 30,     Change     Six months ended June 30,     Change  
dollars in millions   2005     2004     Amount     Percent     2005     2004     Amount     Percent  
 
Summary of operations
                                                               
Net interest income (TE)
  $ 292     $ 231     $ 61       26.4 %   $ 565     $ 467     $ 98       21.0 %
Noninterest income
    231       222       9       4.1       447       429       18       4.2  
 
 
                                                               
Total revenue (TE)
    523       453       70       15.5       1,012       896       116       12.9  
Provision for loan losses
    (2 )     25       (27 )     N/M       (6 )     45       (51 )     N/M  
Noninterest expense
    274       240       34       14.2       526       476       50       10.5  
 
 
                                                               
Income before income taxes (TE)
    251       188       63       33.5       492       375       117       31.2  
Allocated income taxes and TE adjustments
    94       70       24       34.3       184       141       43       30.5  
 
 
                                                               
Net income
  $ 157     $ 118     $ 39       33.1 %   $ 308     $ 234     $ 74       31.6 %
 
                                                   
 
                                                               
Percent of consolidated net income
    54 %     49 %     N/A       N/A       56 %     48 %     N/A       N/A  
 
                                                               
Average balances
                                                               
 
                                                               
Loans
  $ 34,943     $ 28,012     $ 6,931       24.7 %   $ 34,559     $ 27,697     $ 6,862       24.8 %
Total assets
    40,684       33,917       6,767       20.0       40,289       33,576       6,713       20.0  
Deposits
    9,691       7,867       1,824       23.2       9,238       7,673       1,565       20.4  
 
TE = Taxable Equivalent, N/A = Not Applicable
                                                                 
Additional Corporate and Investment Banking Data   Three months ended June 30,     Change     Six months ended June 30,     Change  
dollars in millions   2005     2004     Amount     Percent     2005     2004     Amount     Percent  
 
Average lease financing receivables managed by Key Equipment Financea
                                                               
Receivables held in Key Equipment Finance portfolio
  $ 7,950     $ 6,209     $ 1,741       28.0 %   $ 7,988     $ 6,135     $ 1,853       30.2 %
Receivables assigned to other lines of business
    2,034       1,901       133       7.0       2,031       1,896       135       7.1  
 
Total lease financing receivables managed
  $ 9,984     $ 8,110     $ 1,874       23.1 %   $ 10,019     $ 8,031     $ 1,988       24.8 %
 
                                                   
 
                                                               
 
(a)   Includes lease financing receivables held in portfolio and those assigned to other lines of business (primarily Corporate Banking) if those businesses are principally responsible for maintaining the relationship with the client.
Other Segments
Other segments consist primarily of Corporate Treasury and Key’s Principal Investing unit. These segments generated net income of $10 million for the second quarter of 2005, compared with net income of $15 million for the same period last year. Declines in net gains from principal investing and the sales of securities drove the decrease.

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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 loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:
¨ the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities;

¨ the 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 5, which spans pages 41 and 42, 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 U.S. generally accepted accounting principles (“GAAP”).
Taxable-equivalent net interest income for the second quarter of 2005 was $723 million, representing a $72 million, or 11%, increase from the year-ago quarter. This growth was attributable to an increase in average earning assets, due primarily to strong growth in all major components of the commercial loan portfolio, and a higher net interest margin, which increased 15 basis points to 3.71%. A basis point is equal to one one-hundredth of a percentage point, meaning 15 basis points equals .15%. 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 and annualizing the result.
During the second quarter of 2005, the net interest margin benefited from a principal investing distribution of $15 million received in the form of dividends and interest. This distribution added approximately 8 basis points to the net interest margin for the current quarter. Strong growth in commercial loans, deposits and noninterest-bearing funds, along with a slight asset-sensitive interest rate risk position in a rising interest rate environment, also contributed to the improvement from the year-ago quarter. The increase in the net interest margin caused by these factors was offset in part by the effects of actions taken by Key to exit certain assets that had higher yields and credit costs, which did not fit its relationship banking strategy.
Average earning assets for the second quarter of 2005 totaled $78.1 billion, which was $4.8 billion, or 7%, higher than the second quarter 2004 level. The growth in commercial lending more than offset the decline in consumer loans resulting from loan sales and management’s efforts to exit certain credit-only relationship portfolios.

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Since December 31, 2003, the growth and composition of Key’s loan portfolio has been affected by the following actions:
¨   During the fourth quarter of 2004, Key acquired EverTrust, in Everett, Washington with a loan portfolio (primarily commercial real estate loans) of approximately $685 million at the date of acquisition. In the same quarter, Key acquired AEBF with a commercial lease financing portfolio of approximately $1.5 billion.
¨   Key sold commercial mortgage loans of $725 million during the first six months of 2005 and $2.1 billion during all of 2004. Since some of these loans have been sold with limited recourse (i.e., there is a risk that Key will be held accountable for certain events or representations made in the sales), Key established and has maintained a loss reserve of an amount estimated by management to be appropriate. More information about the related recourse agreement is provided in Note 12 (“Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with Federal National Mortgage Association” on page 27.
¨   Key sold education loans of $336 million ($112 million through securitizations) during the first half of 2005 and $1.3 billion ($1.1 billion through securitizations) during all of 2004. 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 indirect consumer loans) totaling $1.9 billion during the first six months of 2005 and $2.9 billion during all of 2004. During the first quarter of 2005, Key completed the sale of $992 million of indirect automobile loans, representing the prime segment of that portfolio. In April 2005, Key completed the sale of $635 million of loans, representing the nonprime segment. During the fourth quarter of 2004, Key sold $978 million of broker-originated home equity loans. The decision to sell these loans was driven by management’s strategies for improving Key’s returns and achieving desired interest rate and credit risk profiles.

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Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates
                                                 
    Second Quarter 2005     First Quarter 2005  
    Average             Yield/     Average             Yield/  
dollars in millions   Balance     Interest     Rate     Balance     Interest     Rate  
 
ASSETS
                                               
Loansa,b
                                               
Commercial, financial and agricultural
  $ 20,019     $ 266       5.32 %   $ 19,796     $ 238       4.88 %
Real estate — commercial mortgage
    7,845       120       6.15       7,602       108       5.74  
Real estate — construction
    6,116       98       6.45       5,633       81       5.81  
Commercial lease financing
    9,984       158       6.33       10,055       158       6.31  
 
Total commercial loans
    43,964       642       5.86       43,086       585       5.49  
Real estate — residential
    1,460       22       6.04       1,449       22       5.99  
Home equity
    13,904       225       6.49       13,986       213       6.19  
Consumer — direct
    1,835       36       7.93       1,932       38       7.88  
Consumer — indirect lease financing
    53       1       10.76       77       2       10.26  
Consumer — indirect other
    3,275       50       6.07       3,248       52       6.42  
 
Total consumer loans
    20,527       334       6.53       20,692       327       6.39  
Loans held for sale
    3,169       53       6.61       4,281       81       7.64  
 
Total loans
    67,660       1,029       6.09       68,059       993       5.90  
Investment securitiesa
    65       1       8.42       70       2       8.66  
Securities available for salec
    7,081       80       4.54       7,226       80       4.43  
Short-term investments
    1,799       12       2.58       1,679       10       2.43  
Other investmentsc
    1,455       24       6.42       1,423       8       2.25  
 
Total earning assets
    78,060       1,146       5.88       78,457       1,093       5.62  
Allowance for loan losses
    (1,124 )                     (1,133 )                
Accrued income and other assets
    12,979                       13,634                  
 
 
                                               
 
  $ 89,915                     $ 90,958                  
 
                                           
 
                                               
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                               
NOW and money market deposit accounts
  $ 22,301       77       1.39     $ 21,619       55       1.03  
Savings deposits
    1,999       1       .26       1,957       1       .24  
Certificates of deposit ($100,000 or more)d
    4,999       46       3.70       4,895       44       3.65  
Other time deposits
    10,806       82       3.05       10,589       76       2.90  
Deposits in foreign office
    4,314       32       2.96       4,963       30       2.45  
 
Total interest-bearing deposits
    44,419       238       2.16       44,023       206       1.90  
Federal funds purchased and securities sold under repurchase agreements
    3,830       25       2.67       4,475       25       2.24  
Bank notes and other short-term borrowings
    2,792       19       2.72       2,947       17       2.38  
Long-term debtd
    13,929       141       4.11       14,785       131       3.77  
 
Total interest-bearing liabilities
    64,970       423       2.62       66,230       379       2.34  
Noninterest-bearing deposits
    11,717                       11,534                  
Accrued expense and other liabilities
    6,000                       6,100                  
Shareholders’ equity
    7,228                       7,094                  
 
 
                                               
 
  $ 89,915                     $ 90,958                  
 
                                           
 
                                               
Interest rate spread (TE)
                    3.26 %                     3.28 %
 
Net interest income (TE) and net
                                               
interest margin (TE)
            723       3.71 %             714       3.66 %
 
                                           
TE adjustmenta
            30                       28          
 
Net interest income, GAAP basis
          $ 693                     $ 686          
 
 
(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 84 of Key’s 2004 Annual Report to Shareholders, for an explanation of fair value hedges.
TE = Taxable Equivalent

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Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates (Continued)
                                                                 
Fourth Quarter 2004   Third Quarter 2004   Second Quarter 2004
Average           Yield/   Average           Yield/   Average           Yield/
Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate
 
 
 
 
$18,524
  $ 214       4.60 %   $ 18,088     $ 198       4.34 %   $ 17,392     $ 189       4.36 %
 
7,361
    99       5.38       6,448       81       4.99       6,071       74       4.94  
5,291
    74       5.53       4,825       62       5.15       4,716       56       4.79  
8,829
    129       5.89       8,182       119       5.77       8,110       120       5.90  
 
40,005
    516       5.15       37,543       460       4.87       36,289       439       4.86  
1,493
    23       5.93       1,511       21       5.79       1,568       24       6.09  
14,696
    219       5.94       14,844       212       5.67       14,631       201       5.53  
2,007
    38       7.62       2,059       38       7.35       2,058       38       7.41  
 
104
    3       10.02       144       4       10.07       199       5       9.74  
5,076
    96       7.55       5,153       97       7.56       5,137       95       7.39  
 
23,376
    379       6.45       23,711       372       6.26       23,593       363       6.17  
2,635
    33       5.07       2,476       30       4.74       2,602       28       4.28  
 
66,016
    928       5.61       63,730       862       5.38       62,484       830       5.33  
75
    2       8.53       79       2       8.65       90       2       8.72  
7,233
    81       4.48       6,982       84       4.88       7,130       78       4.37  
2,100
    11       2.00       2,527       9       1.50       2,384       9       1.44  
1,417
    9       2.56       1,328       10       2.98       1,167       8       2.79  
 
76,841
    1,031       5.35       74,646       967       5.16       73,255       927       5.07  
(1,251
)                   (1,270 )                     (1,237 )                
13,658
                    13,156                       13,305                  
 
 
$89,248
                  $ 86,532                     $ 85,323                  
 
                                                               
 
                                                               
 
 
 
$21,591
    46       .84     $ 20,454       39       .77     $ 19,753       33       .67  
1,951
    1       .23       1,986       2       .22       2,040       1       .23  
 
4,871
    44       3.66       4,852       44       3.60       4,727       44       3.77  
10,366
    75       2.89       10,348       73       2.81       10,591       76       2.87  
3,506
    18       1.96       3,593       13       1.47       2,635       7       1.05  
 
42,285
    184       1.73       41,233       171       1.65       39,746       161       1.63  
 
5,085
    23       1.81       5,032       17       1.35       4,483       10       .93  
 
2,793
    13       1.79       2,614       8       1.33       2,512       9       1.43  
14,119
    113       3.36       13,415       98       3.01       14,465       96       2.74  
 
64,282
    333       2.08       62,294       294       1.90       61,206       276       1.82  
11,804
                    11,285                       11,010                  
6,095
                    6,098                       6,228                  
7,067
                    6,855                       6,879                  
 
 
$89,248
                  $ 86,532                     $ 85,323                  
 
                                                               
 
                                                               
 
            3.27 %                     3.26 %                     3.25 %
 
 
 
    698       3.63 %             673       3.60 %             651       3.56 %
 
                                                               
 
    26                       22                       22          
 
 
  $ 672                     $ 651                     $ 629          
 
                                                               
 

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Figure 6 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 48, contains more discussion about changes in earning assets and funding sources.
Figure 6. Components of Net Interest Income Changes
                                                 
    From three months ended June 30, 2004     From six months ended June 30, 2004  
    to three months ended June 30, 2005     to six months ended June 30, 2005  
    Average     Yield/     Net     Average     Yield/     Net  
in millions   Volume     Rate     Change     Volume     Rate     Change  
 
INTEREST INCOME
                                               
Loans
  $ 72     $ 127     $ 199     $ 156     $ 188     $ 344  
Investment securities
          (1 )     (1 )     (1 )           (1 )
Securities available for sale
          2       2       (4 )     (2 )     (6 )
Short-term investments
    (3 )     6       3       (4 )     8       4  
Other investments
    2       14       16       5       11       16  
 
Total interest income (taxable equivalent)
    71       148       219       152       205       357  
 
                                               
INTEREST EXPENSE
                                               
NOW and money market deposit accounts
    5       39       44       9       61       70  
Certificates of deposit ($100,000 or more)
    2             2       3       (3 )      
Other time deposits
    2       4       6       (1 )     3       2  
Deposits in foreign office
    6       19       25       18       32       50  
 
Total interest-bearing deposits
    15       62       77       29       93       122  
Federal funds purchased and securities sold under repurchase agreements
    (1 )     16       15       (1 )     31       30  
Bank notes and other short-term borrowings
    1       9       10       3       12       15  
Long-term debt
    (4 )     49       45       (6 )     87       81  
 
Total interest expense
  11     136     147     25     223   248  
 
Net interest income (taxable equivalent)
  $ 60     $ 12     $ 72     $ 127     $ (18 )   $ 109  
 
                                   
 
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 second quarter of 2005 was $486 million, compared with $491 million for the same period last year. For the first six months of the year, noninterest income was $986 million, representing an increase of $18 million, or 2%, from the first six months of 2004.
As shown in Figure 7, the slight decline in noninterest income from the year-ago quarter was due largely to income from investment banking and capital markets activities, which decreased by $21 million as a result of lower net gains from principal investing and a decline in investment banking income. Also contributing to the decrease in total noninterest income was a $10 million reduction in service charges on deposit accounts. A $10 million increase in letter of credit and loan fees, as well as comparable increases in net gains from loan securitizations and sales, and various service charges (included in “miscellaneous income”) substantially offset these adverse results.
For the year-to-date period, the growth in noninterest income from the same period last year reflected a $17 million increase in letter of credit and loan fees, an $8 million increase in loan securitization servicing fees, and an $11 million increase in net gains on the residual values of leased vehicles and equipment (included in “miscellaneous income”). These positive results were partially offset by decreases in a number of other revenue components, including a $24 million reduction in service charges on deposit accounts.

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Figure 7. Noninterest Income
                                                                 
    Three months ended June 30,     Change     Six months ended June 30,     Change  
dollars in millions   2005     2004     Amount     Percent     2005     2004     Amount     Percent  
 
Trust and investment services income
  $ 135     $ 141     $ (6 )     (4.3 )%   $ 273     $ 286     $ (13 )     (4.5 )%
Service charges on deposit accounts
    76       86       (10 )     (11.6 )     146       170       (24 )     (14.1 )
Investment banking and capital markets income
    52       73       (21 )     (28.8 )     119       119              
Letter of credit and loan fees
    47       37       10       27.0       87       70       17       24.3  
Corporate-owned life insurance income
    24       25       (1 )     (4.0 )     52       52              
Electronic banking fees
    24       22       2       9.1       46       40       6       15.0  
Net gains from loan securitizations and sales
    10       1       9       900.0       29       26       3       11.5  
Net securities gains (losses)
    1       7       (6 )     (85.7 )     (5 )     7       (12 )     N/M  
Other income:
                                                               
Operating lease income
    48       45       3       6.7       94       91       3       3.3  
Insurance income
    10       14       (4 )     (28.6 )     21       25       (4 )     (16.0 )
Loan securitization servicing fees
    5       1       4       400.0       10       2       8       400.0  
Credit card fees
    5       3       2       66.7       8       6       2       33.3  
Miscellaneous income
    49       36       13       36.1       106       74       32       43.2  
 
Total other income
    117       99       18       18.2       239       198       41       20.7  
 
Total noninterest income
  $ 486     $ 491     $ (5 )     (1.0 )%   $ 986     $ 968     $ 18       1.9 %
 
                                                   
 
N/M = Not Meaningful
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 8.
Figure 8. Trust and Investment Services Income
                                                                 
    Three months ended June 30,     Change     Six months ended June 30,     Change  
dollars in millions   2005     2004     Amount     Percent     2005     2004     Amount     Percent  
 
Brokerage commissions and fee income
  $ 62     $ 66     $ (4 )     (6.1 )%   $ 125     $ 136     $ (11 )     (8.1) %
Personal asset management and custody fees
    38       39       (1 )     (2.6 )     76       79       (3 )     (3.8 )
Institutional asset management and custody fees
    35       36       (1 )     (2.8 )     72       71       1       1.4  
 
Total trust and investment services income
  $ 135     $ 141     $ (6 )     (4.3 )%   $ 273     $ 286     $ (13 )     (4.5 )%
 
                                                   
 
The decrease in trust and investment services income for both the quarterly and year-to-date periods was attributable primarily to a slowdown in brokerage activities.
A significant portion of Key’s trust and investment services income depends on the value of assets under management. At June 30, 2005, Key’s bank, trust and registered investment advisory subsidiaries had assets under management of $76.8 billion, representing a 10% increase from $70.0 billion at June 30, 2004. As shown in Figure 9, 80% of the increase was attributable to Key’s securities lending business. When clients’ securities are lent to a borrower, the borrower must provide Key with cash collateral, which is invested during the term of the loan. The difference between the revenue generated from the investment and the cost of the collateral is then shared with the client. This business, although profitable, generates a significantly lower rate of return (commensurate with the lower level of risk inherent in the business) than other types of assets under management.

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Figure 9. Assets Under Management
                                         
    2005     2004  
in millions   Second     First     Fourth     Third     Second  
 
Assets under management by investment type:
                                       
Equity
  $ 34,959     $ 34,374     $ 34,788     $ 32,431     $ 32,299  
Fixed income
    11,957       12,754       12,885       12,514       11,638  
Money market
    9,355       9,857       10,802       10,748       10,966  
Securities lending
    20,536       19,349       16,082       15,540       15,097  
 
Total
  $ 76,807     $ 76,334     $ 74,557     $ 71,233     $ 70,000  
 
                             
 
                                       
Proprietary mutual funds included in assets under management:
                                       
Equity
  $ 3,911     $ 3,770     $ 3,651     $ 3,408     $ 3,426  
Fixed income
    767       767       827       860       866  
Money market
    7,758       8,174       9,103       9,050       9,275  
 
Total
  $ 12,436     $ 12,711     $ 13,581     $ 13,318     $ 13,567  
 
                             
 
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 a reduction in the level of overdraft, maintenance and account analysis fees charged to clients. The decline in overdraft fees reflects enhanced capabilities such as “real time” posting that allow clients to better manage their accounts. Maintenance fees were lower because a higher proportion of Key’s clients have elected to use Key’s free checking products. The decrease in account analysis fees was attributable to the rising interest rate environment in which clients have elected to pay for services with compensating balances.
Investment banking and capital markets income. As shown in Figure 10, lower income from investment banking activities and a reduction in net gains from principal investing drove the decrease in investment banking and capital markets income, compared with the second quarter of 2004. For the year to-date period, total investment banking and capital markets income was unchanged from the first six months of 2004 as decreases in the revenue components discussed above were offset by improved results from dealer trading and derivatives, and higher income from other investments. Of the $27 million improvement in income from dealer trading and derivatives, $11 million represented derivative income recorded during the first quarter of 2005 in connection with the anticipated sale of the indirect automobile loan portfolios completed in March and April 2005.
Figure 10. Investment Banking and Capital Markets Income
                                                                 
    Three months ended June 30,     Change     Six months ended June 30,     Change  
dollars in millions   2005     2004     Amount     Percent     2005     2004     Amount     Percent  
 
Investment banking income
  $ 19     $ 29     $ (10 )     (34.5 )%   $ 36     $ 51     $ (15 )     (29.4 )%
Net gains from principal investing
    1       19       (18 )     (94.7 )     13       29       (16 )     (55.2 )
Foreign exchange income
    9       11       (2 )     (18.2 )     18       24       (6 )     (25.0 )
Dealer trading and derivatives income
    10       7       3       42.9       29       2       27       N/M  
Income from other investments
    13       7       6       85.7       23       13       10       76.9  
 
Total investment banking and capital markets income
  $ 52     $ 73     $ (21 )     (28.8 )%   $ 119     $ 119              
 
                                                 
 
N/M = Not Meaningful
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. Principal investments consist of direct and indirect investments in predominantly privately held companies and are carried on the balance sheet at fair value ($814 million at June 30, 2005, and $788 million at June 30, 2004). Thus, the net gains presented in Figure 10 stem from changes in estimated fair values as well as actual gains and losses on sales of principal investments. As discussed earlier, during the second quarter of 2005, Key received a $15 million distribution in the form of dividends and interest from principal investing activities. This revenue was recorded in net interest income. Had it been recorded in noninterest income, principal investing income would have been comparable to the level reported for the same period last year.

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Letter of credit and loan fees. The increase in non-yield-related loan fees for both the quarterly and year-to-date periods was due primarily to higher syndication, origination and commitment fees generated by the Corporate Banking and KeyBank Real Estate Capital lines of business. These improved results reflect the stronger demand for commercial loans and a more disciplined approach to pricing, which considers overall customer relationships.
Net gains from loan securitizations and sales. Key sells or securitizes loans to achieve desired interest rate and credit risk profiles, to improve the profitability of the overall loan portfolio or to diversify funding sources. During the first quarter of 2005, Key completed the sale of the prime segment of its indirect automobile loan portfolio, resulting in a gain of $19 million. However, this gain was substantially offset by a $9 million impairment charge in the education lending business recorded during the same quarter. The types of loans sold during 2004 and the first six months of 2005 are presented in Figure 15 on page 50.
Noninterest expense
Noninterest expense for the second quarter of 2005 was $753 million, compared with $717 million for the second quarter of 2004. For the first six months of the year, noninterest expense was $1.5 billion, compared with $1.4 billion for the first half of last year.
As shown in Figure 11, higher costs associated with personnel and an increase in “miscellaneous expense” drove the increase from the year-ago quarter. The increase in miscellaneous expense was attributable in part to an $11 million reserve established in the current quarter to absorb potential noncredit-related losses from Key’s education lending business. In addition, miscellaneous expense for the second quarter of 2005 included a $2 million provision for probable losses inherent in lending-related commitments, compared with a $7 million credit for the same period last year.
For the year-to-date period, the increase in noninterest expense was due largely to increases in the personnel (see further discussion on page 47), net occupancy and “miscellaneous expense” components. The increase in net occupancy expense resulted from a $30 million charge recorded during the first quarter of 2005 to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis. The growth in miscellaneous expense was due primarily to a $20 million contribution to the Key Foundation recorded during the first quarter that will be used to fund future contributions.
Figure 11. Noninterest Expense
                                                                 
    Three months                     Six months        
    ended June 30,     Change     ended June 30,     Change  
dollars in millions   2005     2004     Amount     Percent     2005     2004     Amount     Percent  
 
Personnel
  $ 386     $ 371     $ 15       4.0 %   $ 776     $ 744     $ 32       4.3 %
Net occupancy
    55       61       (6 )     (9.8 )     146       119       27       22.7  
Computer processing
    50       48       2       4.2       101       92       9       9.8  
Equipment
    28       30       (2 )     (6.7 )     56       61       (5 )     (8.2 )
Professional fees
    30       29       1       3.4       58       54       4       7.4  
Marketing
    34       30       4       13.3       59       53       6       11.3  
Other expense:
                                                               
Operating lease expense
    40       38       2       5.3       78       76       2       2.6  
Postage and delivery
    12       13       (1 )     (7.7 )     25       26       (1 )     (3.8 )
Telecommunications
    8       7       1       14.3       15       14       1       7.1  
Franchise and business taxes
    9       9                   17       8       9       112.5  
OREO expense, net
    2       7       (5 )     (71.4 )     4       11       (7 )     (63.6 )
Provision for losses on lending-related commitments
    2       (7 )     9       N/M       (9 )     (7 )     (2 )     (28.6 )
Miscellaneous expense
    97       81       16       19.8       196       163       33       20.2  
 
Total other expense
    170       148       22       14.9       326       291       35       12.0  
 
Total noninterest expense
  $ 753     $ 717     $ 36       5.0 %   $ 1,522     $ 1,414     $ 108       7.6 %
 
                                               
 
                                                               
Average full-time equivalent employees
    19,429       19,514       (85 )     (.4 )%     19,534       19,548       (14 )     (.1 )%
 
N/M = Not Meaningful
Personnel. As shown in Figure 12, personnel expense, the largest category of Key’s noninterest expense, rose by $32 million, or 4%, from the first six months of 2004, reflecting increases in all personnel expense components with the exception of incentive compensation.

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Figure 12. Personnel Expense
                                                                 
    Three months ended June 30,     Change     Six months ended June 30,     Change  
dollars in millions   2005     2004     Amount     Percent     2005     2004     Amount     Percent  
 
Salaries
  $ 218     $ 210     $ 8       3.8 %   $ 436     $ 419     $ 17       4.1 %
Incentive compensation
    92       92                   172       177       (5 )     (2.8 )
Employee benefits
    65       59       6       10.2       140       130       10       7.7  
Stock-based compensation
    9       8       1       12.5       20       15       5       33.3  
Severance
    2       2                   8       3       5       166.7  
 
Total personnel expense
  $ 386     $ 371     $ 15       4.0 %   $ 776     $ 744     $ 32       4.3 %
 
                                               
 
For the second quarter of 2005, the average number of full-time equivalent employees was 19,429, compared with 19,571 for the first quarter of 2005 and 19,514 for the year-ago quarter.
Franchise and business taxes. The increase in franchise and business taxes from the first half of 2004 shown in Figure 11 was largely the result of a $7 million adjustment recorded during the first quarter of 2004 to reverse certain business taxes that had been overaccrued.
Income taxes
The provision for income taxes was $115 million for the second quarter of 2005, compared with $90 million for the comparable period in 2004. The effective tax rate, which is the provision for income taxes as a percentage of income before income taxes, was 28.3% for the second quarter of 2005, compared with 27.4% for the year-ago quarter. For the first six months of 2005, the provision for income taxes was $224 million, compared with $192 million for the first half of 2004. The effective tax rates for these periods were 28.8% and 28.2%, respectively.
The effective tax rates for both the current and prior year are substantially below Key’s combined federal and state tax rate of 37.5%, due primarily to income from investments in tax-advantaged assets such as corporate-owned life insurance, and credits associated with investments in low-income housing projects. In addition, a lower tax rate is applied to portions of the equipment lease portfolio that are managed by a foreign subsidiary in a lower tax jurisdiction. Since Key intends to permanently reinvest the earnings of this foreign subsidiary overseas, no deferred income taxes are recorded on those earnings in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.”
The increases in the effective tax rates from those reported for the comparable quarterly and year-to-date periods last year reflected the fact that 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, while the level of state income taxes represented a higher percentage. The increase in the quarterly effective tax rate also reflected a lower tax benefit associated with the equipment lease portfolio. Increases in the effective rates from those reported one year ago were moderated by higher dividends received deductions.

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Financial Condition
Loans
At June 30, 2005, total loans outstanding were $68.0 billion, compared with $67.7 billion at December 31, 2004, and $63.4 billion at June 30, 2004. 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 attributable largely to the stronger demand for commercial loans in an improving economy. In addition, commercial loan growth was bolstered by the acquisitions of EverTrust and AEBF during the fourth quarter of 2004.
The growth of the total loan portfolio was moderated by loan sales completed to improve the profitability or risk profile of the overall portfolio, or to accommodate our asset/liability management needs. These transactions included the sales of the prime and nonprime segments of Key’s indirect automobile loan portfolio, which were completed in the first and second quarters of 2005, respectively, and the fourth quarter 2004 sale of Key’s broker-originated home equity loan portfolio, all of which were a result of our decision to exit these businesses.
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 originate and sell new loans, and to securitize and service loans generated by others, especially in the area of commercial real estate.
Commercial loan portfolio. Commercial loans outstanding increased by $7.1 billion, or 19%, from one year ago. Over the past year, all major segments of the commercial loan portfolio experienced growth, reflecting improvement in the economy. In addition, acquisitions added an aggregate $2.1 billion to outstanding balances, primarily in the lease financing and commercial mortgage portfolios. The growth in the commercial loan portfolio 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 showed strong growth during the past twelve months and benefited from the fourth quarter 2004 acquisition of AEBF, the equipment leasing unit of American Express’ small business division. This acquisition added approximately $1.5 billion of receivables to Key’s commercial lease financing portfolio.
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 June 30, 2005, Key’s commercial real estate portfolio included mortgage loans of $8.0 billion and construction loans of $6.2 billion. The average size of a mortgage loan was $.6 million and the largest mortgage loan had a balance of $84 million. The average size of a construction loan commitment was $7 million. The largest construction loan commitment was $107 million, of which $22 million was outstanding.
Key conducts its commercial real estate lending business through two primary sources: a thirteen-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 60% of Key’s total average commercial real estate loans during the second quarter of 2005. Our commercial real estate business as a whole focuses on larger real estate developers and, as shown in Figure 13, is diversified by both industry type and geography.
In June 2005, we announced plans to further expand our FHA financing and servicing capabilities by acquiring Malone Mortgage Company, based in Dallas, Texas. This is one in a series of acquisitions that we have initiated over the past several years to build upon the success we have experienced in our commercial mortgage origination and servicing area.

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Figure 13. Commercial Real Estate Loans
                                                 
June 30, 2005   Geographic Region             Percent of  
dollars in millions   East     Midwest     Central     West     Total     Total  
 
Nonowner-occupied:
                                               
Multi-family properties
  $ 612     $ 597     $ 539     $ 687     $ 2,435       17.1 %
Residential properties
    438       156       224       699       1,517       10.7  
Retail properties
    186       561       203       129       1,079       7.7  
Warehouses
    160       150       83       108       501       3.5  
Land and Development
    180       58       89       107       434       3.0  
Office buildings
    123       92       96       104       415       2.9  
Manufacturing facilities
    8       24       5       13       50       .3  
Hotels/Motels
    3       36       1       3       43       .3  
Health facility
    14       3             20       37       .3  
Other
    327       291       12       30       660       4.6  
 
 
    2,051       1,968       1,252       1,900       7,171       50.4  
Owner-occupied
    1,687       2,523       772       2,085       7,067       49.6  
 
Total
  $ 3,738     $ 4,491     $ 2,024     $ 3,985     $ 14,238       100.0 %
 
                                   
 
Nonowner-occupied:
                                               
Nonperforming loans
  $ 3     $ 3                 $ 6       N/M  
Accruing loans past due 90 days or more
          7                   7       N/M  
Accruing loans past due 30 through 89 days
    40       20     $ 1     $ 13       74       N/M  
 
N/M = Not Meaningful
Consumer loan portfolio. As shown in Note 6, consumer loans outstanding decreased by $3.2 billion, or 13%, from one year ago. The decline was due primarily to two factors. In December 2004, we reclassified $1.7 billion of indirect automobile loans to held-for-sale status in anticipation of their sale. During the first and second quarters of 2005, we completed the sales of the prime and nonprime segments of this portfolio, respectively. In addition, since June 30, 2004, we sold $1.1 billion of broker-originated home equity loans within the Key Home Equity Services division. Most of these loans were sold during the fourth quarter as a result of our decision to exit this business. The loan sales discussed above are part of our strategy for improving Key’s returns and achieving desired interest rate and credit risk profiles.
During the same period, residential real estate loans decreased because most of the new loans originated by Key over the past twelve months were originated for sale. The overall decline in consumer loans was offset in part by growth in home equity loans generated by the Community Banking line of business discussed below.
Excluding loan sales, acquisitions and the reclassification of the indirect automobile loan portfolio to held-for-sale status, consumer loans would have decreased only slightly 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 Community Banking line of business (75% of the home equity portfolio at June 30, 2005) 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. As discussed above, in the fourth quarter of 2004, we sold $978 million of broker-originated loans within the Key Home Equity Services division as a result of our decision to exit this business.
Figure 14 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.

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Figure 14. Home Equity Loans
                                         
    2005     2004  
dollars in millions   Second     First     Fourth     Third     Second  
 
SOURCES OF LOANS OUTSTANDING AT PERIOD END
                                       
Community Banking
  $ 10,404     $ 10,416     $ 10,554     $ 10,472     $ 10,249  
 
Champion Mortgage Company
    2,817       2,869       2,866       2,882       2,879  
Key Home Equity Services division
    700       651       642       1,596       1,625  
 
National Home Equity unit
    3,517       3,520       3,508       4,478       4,504  
 
Total
  $ 13,921     $ 13,936     $ 14,062     $ 14,950     $ 14,753  
 
                             
 
Nonperforming loans at period end
  $ 74     $ 76     $ 80     $ 149     $ 151  
Net charge-offs for the period
    5       5       24       7       10  
Yield for the period
    6.49 %     6.19 %     5.94 %     5.67 %     5.53 %
 
Sales and securitizations. During the past twelve months, Key sold $2.0 billion of commercial real estate loans, $1.4 billion of education loans ($1.2 billion through securitizations), $1.6 billion of indirect consumer loans, $1.2 billion of home equity loans, $375 million of residential real estate loans, and $162 million of commercial loans.
Among the factors that Key considers in determining which loans to sell or securitize are:
¨   whether particular lending businesses meet our performance standards or fit with our relationship banking strategy;
¨   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 15 summarizes Key’s loan sales (including securitizations) for the first half of 2005 and all of 2004.
Figure 15. Loans Sold
                                                                 
            Commercial     Commercial     Residential     Home     Consumer              
in millions   Commercial     Real Estate     Lease Financing     Real Estate     Equity     —Indirect     Education     Total  
 
2005                                                                
Second quarter
  $ 21     $ 336           $ 99           $ 635     $ 128     $ 1,219  
First quarter
    18       389             98     $ 31       992       208       1,736  
 
Total
  $ 39     $ 725           $ 197     $ 31     $ 1,627     $ 336     $ 2,955  
 
                                               
2004                                                                
Fourth quarter
  $ 43     $ 760           $ 99     $ 1,058           $ 118     $ 2,078  
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
  $ 340     $ 2,118     $ 5     $ 360     $ 1,877     $ 283     $ 1,336     $ 6,319  
 
                                               
 
Figure 16 shows loans that are either administered or serviced by Key, but not recorded on its balance sheet. Included are loans that have been both securitized and sold, or simply sold outright. Excluded from amounts shown in the figure are approximately $1.4 billion of automobile loans serviced as of June 30, 2005. These loans represent a portion of the indirect automobile loan portfolio sold in March and April of this year that is being serviced temporarily as an accommodation to the purchasers. We anticipate that this servicing arrangement will come to an end during the third quarter. In the event of default, Key is subject to recourse with respect to approximately $618 million of the $43.7 billion of loans administered or serviced at June 30, 2005. Additional information about this recourse arrangement is included in Note 12 (“Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with Federal National Mortgage Association” on page 27.

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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 16. Loans Administered or Serviced
                                         
    June 30,     March 31,     December 31,     September 30,     June 30,  
in millions   2005     2005     2004     2004     2004  
 
Commercial real estate loans
  $ 38,630     $ 35,534     $ 33,252     $ 29,098     $ 27,861  
Education loans
    4,708       4,861       4,916       4,978       4,327  
Home equity loans
    96       116       130       147       168  
Commercial loans
    222       216       210       192       180  
Commercial lease financing
    35       40       45              
 
Total
  $ 43,691     $ 40,767     $ 38,553     $ 34,415     $ 32,536  
 
                             
 
Securities
At June 30, 2005, the securities portfolio totaled $8.7 billion and included $7.3 billion of securities available for sale, $59 million of investment securities and $1.4 billion of other investments (primarily principal investments). In comparison, the total portfolio at December 31, 2004, was $8.9 billion, including $7.5 billion of securities available for sale, $71 million of investment securities and $1.4 billion of other investments. The weighted-average maturity of the portfolio was 2.2 years at June 30, 2005, compared with 2.3 years at December 31, 2004.
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 majority of Key’s securities available-for-sale portfolio consists 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 or mortgage-backed securities. At June 30, 2005, Key had $6.7 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared with $6.7 billion at December 31, 2004, and $6.6 billion at June 30, 2004. Substantially all of Key’s mortgage-backed securities are issued or backed by federal agencies. The CMO securities held by Key are shorter-duration class bonds that are structured to have more predictable cash flows than longer-term class bonds.
Figure 17 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.

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Figure 17. 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  
 
JUNE 30, 2005
                                                               
Remaining maturity:
                                                               
One year or less
  $ 250     $ 1     $ 303     $ 4     $ 19     $ 21     $ 598       4.97 %
After one through five years
    16       2       6,073       214       100       99       6,504       4.19  
After five through ten years
    2       7       20       52       58       2       141       9.45  
After ten years
    2       10       2       9             5       28       7.18  
 
Fair value
  $ 270     $ 20     $ 6,398     $ 279     $ 177     $ 127     $ 7,271        
Amortized cost
    270       19       6,498       274       97       117       7,275       4.36 %
Weighted-average yield
    3.06 %     7.11 %     3.79 %     5.58 %     42.86 %     4.07% b     4.36 %      
Weighted-average maturity
  .3 years   10.8 years   2.2 years   3.9 years   4.6 years   4.1 years   2.2 years      
 
DECEMBER 31, 2004
                                                               
Fair value
  $ 227     $ 22     $ 6,370     $ 330     $ 193     $ 309     $ 7,451        
Amortized cost
    227       21       6,460       322       103       298       7,431       4.26 %
 
JUNE 30, 2004
                                                               
Fair value
  $ 62     $ 21     $ 6,256     $ 372     $ 173     $ 139     $ 7,023        
Amortized cost
    62       21       6,395       364       101       135       7,078       4.34 %
 
(a)   Maturity is based upon expected average lives rather than contractual terms.
 
(b)   Weighted-average yields are calculated based on amortized cost and exclude securities of $96 million at June 30, 2005, 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 primarily marketable equity securities.
Investment securities. Securities issued by states and political subdivisions constitute most of Key’s investment securities. Figure 18 shows the composition, yields and remaining maturities of these securities.
Figure 18. Investment Securities
                                 
    States and                     Weighted  
    Political     Other             Average  
dollars in millions   Subdivisions     Securities     Total     Yield a  
 
JUNE 30, 2005
                               
Remaining maturity:
                               
One year or less
  $ 13           $ 13       9.57 %
After one through five years
    29     $ 13       42       6.82  
After five through ten years
    4             4       8.93  
After ten years
                      9.23  
 
Amortized cost
  $ 46     $ 13     $ 59       7.60 %
Fair value
    48       13       61        
Weighted-average maturity
  2.2 years   2.8 years   2.3 years      
 
DECEMBER 31, 2004
                               
Amortized cost
  $ 58     $ 13     $ 71       8.01 %
Fair value
    61       13       74        
 
JUNE 30, 2004
                               
Amortized cost
  $ 68     $ 13     $ 81       8.19 %
Fair value
    72       13       85        
 
(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%.

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Other investments. Principal investments — investments in equity and mezzanine instruments made by Key’s Principal Investing unit ___are carried at fair value, which aggregated $814 million at June 30, 2005, $816 million at December 31, 2004, and $788 million at June 30, 2004. They represent approximately 58% of other investments at June 30, 2005, and include direct and indirect investments predominantly 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 equity and mezzanine instruments 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 second quarter of 2005, core deposits averaged $46.8 billion and represented 60% of the funds Key used to support earning assets, compared with $43.4 billion and 59%, respectively, during the same quarter in 2004. The composition of Key’s deposits is shown in Figure 5, which spans pages 41 and 42.
The increase in the level of Key’s average core deposits during the past twelve months was due primarily to higher levels of NOW accounts, money market deposit accounts and noninterest-bearing deposits. This growth was slightly offset by a 2% decrease in savings deposits. 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 because of continued cross-selling efforts, focused sales and marketing efforts on our free checking products, and the collection of 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 $15.9 billion in the second quarter of 2005, compared with $14.4 billion during the year-ago quarter. The increase was attributable primarily to a higher level of foreign branch deposits. These purchased funds 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 June 30, 2005, was $7.4 billion, up $235 million from December 31, 2004. Factors contributing to the change in shareholders’ equity during the first half of 2005 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 shown in Figure 19 below.
Figure 19. Changes in Common Shares Outstanding
                                         
in thousands   2Q05     1Q05     4Q04     3Q04     2Q04  
 
Shares outstanding at beginning of period
    407,297       407,570       405,723       407,243       412,153  
Issuance of shares under employee benefit and dividend reinvestment plans
    934       2,227       1,847       980       1,128  
Repurchase of common shares
          (2,500 )           (2,500 )     (6,038 )
 
                             
Shares outstanding at end of period
    408,231       407,297       407,570       405,723       407,243  
 
                             
 

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Key repurchases its common shares periodically under a repurchase program authorized by Key’s Board of Directors. These shares may be repurchased in the open market or through negotiated transactions. The program does not have an expiration date. Key did not repurchase any shares during the three months ended June 30, 2005, leaving 26,961,248 shares that may be repurchased under the authorization as of June 30, 2005.
At June 30, 2005, Key had 83,657,893 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 half of 2005, Key reissued 3,161,218 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 8.08% at June 30, 2005, and 7.92% at June 30, 2004. Key’s ratio of tangible equity to tangible assets was 6.60% at June 30, 2005, and is within our targeted range of 6.25% to 6.75%. Management believes that Key’s 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 74 of Key’s 2004 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 June 30, 2005, Key’s Tier 1 capital ratio was 7.68%, and its total capital ratio was 11.72%.
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 June 30, 2005, Key had a leverage ratio of 8.49%.
Federal bank regulators group Federal Deposit Insurance Corporation (“FDIC”)-insured depository institutions into five categories, ranging from “critically undercapitalized” to “well capitalized.” Key’s affiliate bank, KBNA, qualified as “well capitalized” at June 30, 2005, since it 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 June 30, 2005. 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 bank.
Figure 20 presents the details of Key’s regulatory capital position at June 30, 2005, December 31, 2004, and June 30, 2004.

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Figure 20. Capital Components and Risk-Weighted Assets
                         
    June 30,     December 31,     June 30,  
dollars in millions   2005     2004     2004  
 
TIER 1 CAPITAL
                       
Common shareholders’ equitya
  $ 7,406     $ 7,143     $ 6,897  
Qualifying capital securities
    1,542       1,292       1,292  
Less: Goodwill
    1,342       1,359       1,150  
Other assetsb
    151       132       65  
 
Total Tier 1 capital
    7,455       6,944       6,974  
 
TIER 2 CAPITAL
                       
Allowance for losses on loans and lending-related commitments
    1,157       1,205       1,112  
Net unrealized gains on equity securities available for sale
    3       3       2  
Qualifying long-term debt
    2,764       2,880       2,525  
 
Total Tier 2 capital
    3,924       4,088       3,639  
 
Total risk-based capital
  $ 11,379     $ 11,032     $ 10,613  
 
                 
RISK-WEIGHTED ASSETS
                       
Risk-weighted assets on balance sheet
  $ 74,153     $ 73,911     $ 69,173  
Risk-weighted off-balance sheet exposure
    24,280       23,519       20,324  
Less: Goodwill
    1,342       1,359       1,150  
Other assetsb
    714       649       464  
Plus: Market risk-equivalent assets
    675       733       254  
 
Gross risk-weighted assets
    97,052       96,155       88,137  
Less: Excess allowance for losses on loans and lending-related commitments
                227  
 
Net risk-weighted assets
  $ 97,052     $ 96,155     $ 87,910  
 
                 
AVERAGE QUARTERLY TOTAL ASSETS
  $ 89,915     $ 89,248     $ 85,323  
 
                 
CAPITAL RATIOS
                       
Tier 1 risk-based capital ratio
    7.68 %     7.22 %     7.93 %
Total risk-based capital ratio
    11.72       11.47       12.07  
Leverage ratioc
    8.49       7.96       8.34  
 

(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 and 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.

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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 safety and soundness and to maximizing profitability. Management believes that the most significant risks to which Key is exposed are market risk, credit risk, liquidity risk and operational risk. Each type 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, mandates adherence to Key’s code of ethics and administers an annual self-assessment process. The Board has established Audit and Finance committees whose appointed members play an integral role in helping the Board meet its risk oversight responsibilities. Those committees meet jointly, as appropriate, to discuss matters that relate to each committee’s responsibilities. The responsibilities of these two committees are summarized on page 35 of Key’s 2004 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 (“A/LM”) policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing Key’s sensitivity to changes in interest rates.
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 gap risk, option risk and basis risk. Each of these types of risk is defined in the discussion of market risk management, which begins on page 35 of Key’s 2004 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. Primary among these for Key are those related 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.

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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. However, since mid-2004, Key has been operating with a slight asset-sensitive position. This change resulted from management’s decision in the fourth quarter of 2003 to move Key to an asset-sensitive position by gradually lowering its liability-sensitivity over a nine to twelve-month period. Management actively monitors the risk of changes in 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 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. The yield curve depicts the relationship between the yield on a particular type of security and its term to maturity.
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 36 of Key’s 2004 Annual Report to Shareholders.
As discussed above, over the past year, Key has been operating with a slight asset-sensitive position. Deposit growth, sales of fixed-rate consumer loans, and the maturity of received fixed A/LM interest rate swaps have contributed to Key’s efforts in managing net interest income in light of the rise in short-term interest rates that has occurred during this period. Additionally, simulation model assumptions have been refined to address anticipated changes in deposit pricing on select products in a very competitive marketplace. Considering Key’s current asset-sensitive position, its net interest income should have a tendency to benefit from rising interest rates, but could be adversely affected if interest rates were to decline to near year-ago levels. Key manages interest rate risk with a long-term perspective in mind. Accordingly, our rate risk guidelines currently call for a relatively neutral position with a bias to be modestly liability-sensitive longer-term.
As of June 30, 2005, 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 .82% if short-term interest rates gradually increase by 200 basis points

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over the next twelve months. Conversely, if short-term interest rates gradually decrease by 200 basis points over the next twelve months, net interest income would be expected to decrease by approximately 1.03%.
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 over the next year. Key’s asset-sensitive position to a decrease in interest rates stems from the fact that short-term rates were relatively low at June 30, 2005. Consequently, the results of the simulation model reflect management’s assumption that yields on earning assets will decline faster than rates paid on deposits and borrowings. This is particularly true for CMOs held in the securities available for sale portfolio. When interest rates decrease, prepayments on CMOs are generally more rapid, resulting in lower reinvestment yields and a higher level of premium amortization. To mitigate the risk of a potentially adverse effect on earnings, management uses interest rate swaps 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 26 (“Net Interest Income Volatility”) on page 37 of Key’s 2004 Annual Report to Shareholders illustrates the variability of the simulation results that can arise from changing certain major assumptions.
As of June 30, 2005, based on the results of our model in which we simulate the effect 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 .23% if short-term interest rates gradually increase by 200 basis points during that year but remain unchanged during the first year. Conversely, if short-term interest rates gradually decrease by 200 basis points in the second year but remain unchanged in the first year, net interest income would be expected to decrease by approximately .41% during the second year.
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.
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 securities, debt issuance and derivatives. Key’s two major business groups conduct activities that generally result in an asset-sensitive position. To compensate, we typically issue floating-rate debt, or fixed-rate debt swapped to floating, so that the rate paid on deposits and borrowings in the aggregate will respond more quickly to market forces. 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. Since September 30, 2003, management has moved toward, then maintained, an “asset-sensitive” interest rate risk profile. During 2004, the shift to asset sensitivity reflected maturities, early terminations and a lower volume of new interest rate swaps related to conventional asset/liability management. During the fourth quarter of 2004, we terminated receive fixed interest rate swaps with a notional amount of $3.2 billion in advance of their maturity dates to achieve our desired interest rate sensitivity position. These

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terminations were completed because the growth of our fixed-rate loans and leases, which was bolstered by the acquisition of AEBF, exceeded the growth in fixed-rate liabilities.
The decision to use interest rate swaps 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 21 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 13 (“Derivatives and Hedging Activities”), which begins on page 28.
Figure 21. Portfolio Swaps By Interest Rate Risk Management Strategy
                                                         
    June 30, 2005     June 30, 2004  
                            Weighted-Average Rate              
    Notional     Fair     Maturity                     Notional     Fair  
dollars in millions   Amount     Value     (Years)     Receive     Pay     Amount     Value  
 
Receive fixed/pay variable—conventional A/LM a
  $ 3,400     $ 1       .5       3.0 %     3.2 %   $ 10,925     $ (5 )
Receive fixed/pay variable—conventional debt
    5,663       282       8.2       5.3       3.3       5,724       165  
Pay fixed/receive variable—conventional debt
    967       (42 )     4.9       2.9       4.4       1,219       (24 )
Pay fixed/receive variable—forward starting
                                  29        
Foreign currency—conventional debt
    2,497       (86 )     3.9       3.0       3.5       1,503       264  
Basis swapsb
    9,800       (1 )     .7       3.2       3.1       11,300       (3 )
 
 
                                         
Total portfolio swaps
  $ 22,327     $ 154       3.1       3.7 %     3.3 %   $ 30,700     $ 397  
 
                                               
 

(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.”

Key’s securities and term debt portfolios are also used to manage interest rate risk. Details regarding the securities portfolio can be found in the discussion of securities, beginning on page 51, and in Note 5 (“Securities”), which begins on page 16. CMOs, the majority of which have relatively short average lives, have been used in conjunction with swaps to manage our interest rate risk position.
Trading portfolio risk management
Key’s trading portfolio is described in Note 13.
Management uses a value at risk (“VAR”) simulation model to measure the potential adverse effect of changes in interest rates, foreign exchange rates, equity prices and credit spreads on the fair value of Key’s trading portfolio. Using two years of historical information, the model estimates the maximum potential one-day loss with a 95% confidence level. Key’s Financial Markets Committee has established VAR limits for its trading units. At June 30, 2005, the aggregate one-day trading limit set by the committee was $4.4 million. In addition to comparing VAR exposure against limits on a daily basis, management monitors loss limits, uses sensitivity measures and conducts stress tests.
Key is operating within the above constraints. During the first six months of 2005, Key’s aggregate daily average, minimum and maximum VAR amounts were $2.7 million, $1.0 million and $5.3 million, respectively. During the same period last year, Key’s aggregate daily average, minimum and maximum VAR amounts were $1.2 million, $.8 million and $2.0 million, respectively.
As noted in the discussion of investment banking and capital markets income on page 45, Key used interest rate swaps to manage the economic risk associated with its sale of the indirect automobile loan portfolio. Even though these derivatives were not subject to VAR trading limits, Key measured their exposure on a daily basis and the results are included in the VAR amounts indicated above for the first six months of 2005. The daily average, minimum and maximum VAR exposures for these derivatives were $1.4 million, $.09 million and $3.6 million, respectively.

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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,” which begins on page 39 of Key’s 2004 Annual Report to Shareholders.
Allowance for loan losses. The allowance for loan losses at June 30, 2005, was $1.100 billion, or 1.62% of loans. This compares with $1.276 billion, or 2.01% of loans, at June 30, 2004. The allowance includes $8 million that was specifically allocated for impaired loans of $30 million at June 30, 2005, compared with $16 million that was allocated for impaired loans of $52 million a year ago. For more information about impaired loans, see Note 8 (“Impaired Loans and Other Nonperforming Assets”) on page 20. At June 30, 2005, the allowance for loan losses was 375.43% of nonperforming loans, compared with 281.06% at June 30, 2004.
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. Earnings for the first quarter of 2004 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 and totaled $57 million at June 30, 2005, compared with $63 million at June 30, 2004. Key establishes the amount of this allowance by analyzing its lending-related commitments quarterly, or more often if deemed necessary.
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 56 of Key’s 2004 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 June 30, 2005, 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 over the past twelve months were institutional, middle market and healthcare. 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.

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As shown in Figure 22, the decrease in Key’s allowance for loan losses since June 30, 2004, was attributable to developments in both the commercial and consumer loan portfolios.
¨   Credit quality trends in certain commercial loan portfolios have been improving.
 
¨   During the fourth quarter of 2004, we sold Key’s broker-originated home equity loan portfolio and reclassified the indirect automobile loan portfolio to held-for-sale status in anticipation of its sale. The prime segment of this portfolio was sold during the first quarter of 2005, and the nonprime segment was sold during the second quarter.
 
¨   During the second quarter of 2004, we sold the indirect recreational vehicle loan portfolio.
During the first quarter of 2005, the allowance for loan losses as of December 31, 2004, and June 30, 2004, was reallocated among the various segments of Key’s loan portfolio. This reallocation resulted from a change in the methodology for allocating the allowance established for nonimpaired loans. The process used by management to establish this portion of the allowance is described in Note 1 of Key’s 2004 Annual Report to Shareholders.
Figure 22. Allocation of the Allowance for Loan Losses
                                                                         
    June 30, 2005     December 31, 2004     June 30, 2004  
            Percent of     Percent of             Percent of     Percent of             Percent of     Percent of  
            Allowance     Loan Type             Allowance     Loan Type             Allowance     Loan Type  
            to Total     to Total             to Total     to Total             to Total     to Total  
dollars in millions   Amount     Allowance     Loans     Amount     Allowance     Loans     Amount     Allowance     Loans  
 
Commercial, financial and agricultural
  $ 550       50.0 %     29.2 %   $ 560       49.2 %     28.6 %   $ 684       53.6 %     27.9 %
Real estate — commercial mortgage
    36       3.3       11.7       38       3.3       11.1       39       3.1       10.0  
Real estate — construction
    143       13.0       9.2       147       12.9       8.1       138       10.8       7.7  
Commercial lease financing
    212       19.2       14.9       224       19.7       15.0       147       11.5       12.9  
 
Total commercial loans
    941       85.5       65.0       969       85.1       62.8       1,008       79.0       58.5  
Real estate — residential mortgage
    10       .9       2.1       9       .8       2.2       1       .1       2.4  
Home equity
    68       6.2       20.5       65       5.7       20.8       48       3.8       23.3  
Consumer — direct
    44       4.0       2.7       45       4.0       2.9       68       5.3       3.3  
Consumer — indirect lease financing
    3       .3       .1       4       .4       .1       8       .6       .3  
Consumer — indirect other
    34       3.1       4.8       46       4.0       4.8       143       11.2       8.1  
 
Total consumer loans
    159       14.5       30.2       169       14.9       30.8       268       21.0       37.4  
Loans held for sale
                4.8                   6.4                   4.1  
 
Total
  $ 1,100       100.0 %     100.0 %   $ 1,138       100.0 %     100.0 %   $ 1,276       100.0 %     100.0 %
 
                                                     
 

Net loan charge-offs. Net loan charge-offs for the second quarter of 2005 totaled $48 million, or .29% of average loans. As a percentage of average loans, they remained at their lowest level since the fourth quarter of 1995. These results compare with net charge-offs of $104 million, or .67% 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 23. The decrease in net charge-offs from the year-ago quarter occurred primarily in the middle market segment of the commercial, financial and agricultural loan portfolio, and in the indirect consumer loan portfolio, due largely to the reclassification of the indirect automobile loan portfolio to held-for-sale status in the fourth quarter of 2004, and the sale of the indirect recreational vehicle loan portfolio one year ago.

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Figure 23. Summary of Loan Loss Experience
                                 
    Three months ended June 30,     Six months ended June 30,  
dollars in millions   2005     2004     2005     2004  
 
Average loans outstanding during the period
  $ 67,660     $ 62,484     $ 67,858     $ 62,347  
 
Allowance for loan losses at beginning of period
  $ 1,128     $ 1,306     $ 1,138     $ 1,406  
Loans charged off:
                               
Commercial, financial and agricultural
    20       43       45       95  
Real estate ___ commercial mortgage
    9       10       12       18  
Real estate ___ construction
    ___       5       5       5  
 
Total commercial real estate loansa
    9       15       17       23  
Commercial lease financing
    13       15       25       25  
 
Total commercial loans
    42       73       87       143  
Real estate ___ residential mortgage
    1       4       3       6  
Home equity
    7       11       13       28  
Consumer ___ direct
    10       11       18       23  
Consumer ___ indirect lease financing
    1       2       2       5  
Consumer ___ indirect other
    14       47       30       92  
 
Total consumer loans
    33       75       66       154  
 
 
    75       148       153       297  
Recoveries:
                               
Commercial, financial and agricultural
    5       13       10       26  
Real estate ___ commercial mortgage
    ___       1       1       2  
Real estate ___ construction
    2       4       2       4  
 
Total commercial real estate loansa
    2       5       3       6  
Commercial lease financing
    10       4       20       7  
 
Total commercial loans
    17       22       33       39  
Real estate ___ residential mortgage
    1       1       1       1  
Home equity
    2       1       3       2  
Consumer ___ direct
    2       2       4       4  
Consumer ___ indirect lease financing
    ___       1       1       2  
Consumer ___ indirect other
    5       17       9       34  
 
Total consumer loans
    10       22       18       43  
 
    27       44       51       82  
 
Net loans charged off
    (48 )     (104 )     (102 )     (215 )
Provision for loan losses
    20       74       64       155  
Reclassification of allowance for credit losses on lending-related commitments b
                      (70 )
 
Allowance for loan losses at end of period
  $ 1,100     $ 1,276     $ 1,100     $ 1,276  
 
Net loan charge-offs to average loans
    .29 %     .67 %     .31 %     .69 %
Allowance for loan losses to period-end loans
    1.62       2.01       1.62       2.01  
Allowance for loan losses to nonperforming loans
    375.43       281.06       375.43       281.06  
 
 
(a)   See Figure 13 on page 49 and the accompanying discussion on page 48 for more information related to Key’s commercial real estate portfolio.
 
(b)   Included in “accrued expense and other liabilities” on the consolidated balance sheet.

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Nonperforming assets. Figure 24 shows the composition of Key’s nonperforming assets, which have declined for eleven consecutive quarters and are at their lowest level in more than a decade. These assets totaled $338 million at June 30, 2005, and represented .50% of loans, other real estate owned (known as “OREO”) and other nonperforming assets, compared with $540 million, or .85%, at June 30, 2004. As shown in Figure 24, reductions in nonperforming loans in the commercial, financial and agricultural; commercial mortgage, and home equity portfolios, along with a substantial decrease in OREO, drove the improvement.
At June 30, 2005, our 20 largest nonperforming loans totaled $104 million, representing 35% of total loans on nonperforming status.
The level of Key’s delinquent loans has also experienced a downward trend, due in part to changes in the composition of Key’s consumer loan portfolio that resulted from the fourth quarter 2004 sale of the broker-originated home equity loan portfolio and the sales of the prime and nonprime segments of the indirect automobile loan portfolio during the first and second quarters of 2005, respectively. The improvement also reflects a greater emphasis placed on lending secured by real estate.
Figure 24. Summary of Nonperforming Assets and Past Due Loans
                                         
    June 30,     March 31,     December 31,     September 30,     June 30,  
dollars in millions   2005     2005     2004     2004     2004  
 
Commercial, financial and agricultural
  $ 61     $ 51     $ 43     $ 61     $ 114  
 
Real estate — commercial mortgage
    33       36       31       49       61  
Real estate — construction
    3       5       20       1       1  
 
Total commercial real estate loans(a)
    36       41       51       50       62  
Commercial lease financing
    73       75       84       74       59  
 
Total commercial loans
    170       167       178       185       235  
Real estate — residential mortgage
    38       43       39       36       38  
Home equity
    74       76       80       149       151  
Consumer — direct
    4       3       3       4       13  
Consumer — indirect lease financing
    1       5       1       1       2  
Consumer — indirect other
    6       11       15       15       15  
 
Total consumer loans
    123       138       138       205       219  
 
Total nonperforming loans
    293       305       316       390       454  
 
OREO
    33       58       53       60       71  
Allowance for OREO losses
    (2 )     (4 )     (4 )     (5 )     (8 )
 
OREO, net of allowance
    31       54       49       55       63  
Other nonperforming assets
    14       12       14       15       23  
 
Total nonperforming assets
  $ 338     $ 371     $ 379     $ 460     $ 540  
                                 
Accruing loans past due 90 days or more
  $ 74     $ 79     $ 122     $ 139     $ 114  
Accruing loans past due 30 through 89 days
    475       495       491       602       622  
 
Nonperforming loans to period-end loans
    .43 %     .45 %     .47 %     .61 %     .72 %
Nonperforming assets to period-end loans plus OREO and other nonperforming assets
    .50       .55       .56       .71       .85  
 

(a)   See Figure 13 on page 49 and the accompanying discussion on page 48 for more information related to Key’s commercial real estate portfolio.

Credit exposure by industry classification inherent in the largest sector of Key’s loan portfolio, “commercial, financial and agricultural loans,” is presented in Figure 25. The types of activity that caused the change in Key’s nonperforming loans during each of the last five quarters are summarized in Figure 26.

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Figure 25. Commercial, Financial and Agricultural Loans
                                 
                    Nonperforming Loans  
June 30, 2005   Total     Loans             % of Loans  
dollars in millions   Commitmentsa     Outstanding     Amount     Outstanding  
 
Industry classification:
                               
Manufacturing
  $ 9,986     $ 3,306     $ 6       .2 %
Services
    8,933       2,720       6       .2  
Retail trade
    5,880       3,606       5       .1  
Financial services
    4,947       1,708              
Property management
    3,742       1,353       4       .3  
Public utilities
    3,506       330              
Wholesale trade
    3,268       1,378       15       1.1  
Insurance
    2,072       100              
Building contractors
    1,842       859       3       .3  
Public administration
    1,068       272              
Transportation
    1,047       456       5       1.1  
Communications
    911       352              
Agriculture/forestry/fishing
    873       535       9       1.7  
Mining
    646       209              
Individuals
    97       68              
Other
    3,318       2,597       8       .3  
 
Total
  $ 52,136     $ 19,849     $ 61       .3 %
 
                       
 
 
(a)   Total commitments include unfunded loan commitments, unfunded letters of credit (net of amounts conveyed to others) and loans outstanding.
Figure 26. Summary of Changes in Nonperforming Loans
                                         
    2005     2004  
in millions   Second     First     Fourth     Third     Second  
 
Balance at beginning of period
  $ 305     $ 316     $ 390     $ 454     $ 587  
Loans placed on nonaccrual status
    53       69       95       94       68  
Charge-offs
    (48 )     (54 )     (91 )     (76 )     (104 )
Loans sold
          (5 )     (66 )     (35 )     (33 )
Payments
    (13 )     (9 )     (11 )     (32 )     (62 )
Transfers to OREO
    (4 )     (12 )                  
Loans returned to accrual status
                (1 )     (15 )     (2 )
 
Balance at end of period
  $ 293     $ 305     $ 316     $ 390     $ 454  
 
                             
 
 
Liquidity risk management
Key’s ALCO has also developed a program to measure and manage liquidity and associated risk.
Key defines “liquidity” as the ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner and without adverse consequences. Liquidity management involves maintaining sufficient and diverse sources of funding to accommodate planned as well as unanticipated changes in assets and liabilities under both normal and adverse conditions.
Key manages liquidity for all of its affiliates on an integrated basis. This approach considers the unique funding sources available to each entity and the differences in their capabilities to manage through adverse conditions. It also recognizes that the access of all affiliates to money market funding would be similarly affected by adverse market conditions or other events that could negatively affect the level or cost of liquidity. As part of the management process, we have established guidelines or target ranges that relate to the maturities of various types of wholesale borrowings, such as money market funding and term debt. In addition, we assess our needs for future reliance on wholesale borrowings, and then develop strategies to address those needs.

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Key’s liquidity could be adversely affected by both direct and indirect circumstances. An example of a direct (but hypothetical) event would be a downgrade in Key’s public credit rating by a rating agency due to deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures, 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.
In accordance with A/LM policy, Key performs stress tests to consider the effect that a potential downgrade in its debt ratings could have on its liquidity over various time periods. These debt ratings, which are presented in Figure 27 on page 67, have a direct impact on our cost of funds and our ability to raise funds under normal and adverse conditions. The stress test scenarios also include major disruptions to our funding markets and consider the potential adverse effect of core client activity on cash flows. To compensate for the effect of these activities, alternative sources of liquidity are incorporated into the analysis over different time periods to project how we would manage fluctuations on the balance sheet. Several alternatives for enhancing Key’s liquidity are actively managed on a regular basis. These include emphasizing client deposit generation, securitization market alternatives, loan sales, extending the maturity of wholesale borrowings, purchasing deposits from other banks, and developing relationships with fixed income investors. Key also measures its capacity to borrow using various debt instruments and funding markets. On occasion, Key will guarantee a subsidiary’s obligations in transactions with third parties. Management closely monitors the extension of such guarantees to ensure that Key will retain ample liquidity in the event it must step in to provide financial support. The results of our stress tests indicate that, following the occurrence of an adverse event, Key can continue to meet its financial obligations and to fund its operations for at least the one-year period addressed in the tests.
Key also maintains a liquidity contingency plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also addresses the assignment of specific roles and responsibilities for effectively managing liquidity through a problem period. Key has access to various sources of money market funding (such as federal funds purchased, securities sold under repurchase agreements, eurodollars and commercial paper) and also can borrow from the Federal Reserve Bank’s discount window to meet short-term liquidity requirements. Key did not have any borrowings from the Federal Reserve Bank outstanding at June 30, 2005.
Key monitors its funding sources and measures its capacity to obtain funds in a variety of wholesale funding markets. This is done with the objective of maintaining an appropriate mix of funds considering both cost and availability. We use several tools as described on page 45 of Key’s 2004 Annual Report to Shareholders to actively manage and maintain sufficient liquidity on an ongoing basis.
Key’s largest cash flows relate to both investing and financing activities. During 2004 and the first six months of 2005, the primary sources of cash from investing activities have been loan sales, and the sales, prepayments and maturities of securities available for sale. Investing activities that have required the greatest use of cash include lending, purchases of new securities, and acquisitions completed in 2004.
During 2004 and the first six months of 2005, the primary sources of cash from financing activities have been the growth in deposits (including growth in eurodollar deposits during 2004), the issuance of long-term debt and the use of short-term borrowings during 2005. During the same period, significant outlays of cash have been made to repay debt issued in prior periods. Cash outlays were also made during 2004 to reduce the level of short-term borrowings.
The Consolidated Statements of Cash Flow on page 6 summarize Key’s sources and uses of cash by type of activity for the six-month periods ended June 30, 2005 and 2004.

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Liquidity for KeyCorp (the “parent company”)
The parent company 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.
A primary tool used by management to assess our parent company liquidity is its net short-term cash position, which measures our ability to fund debt maturing in twelve months or less with existing liquid assets. Another key measure of parent company liquidity is the “liquidity gap,” which represents the difference between projected liquid assets and anticipated financial obligations over specified time horizons. We generally rely upon the issuance of term debt to manage the liquidity gap within targeted ranges assigned to various time periods.
The parent has met its liquidity requirements principally through regular dividends from KBNA. Federal banking law limits the amount of capital distributions that a bank can make to its holding company without prior regulatory approval. A national bank’s dividend paying capacity is affected by several factors, including net profits (as defined by statute) for the two previous calendar years and for the current year up to the date of dividend declaration.
During the first six months of 2005, KBNA paid the parent a total of $425 million in dividends, and nonbank subsidiaries paid a total of $93 million in dividends. As of the close of business on June 30, 2005, KBNA had an additional $731 million available to pay dividends to the parent company without prior regulatory approval and without affecting its status as “well-capitalized” under the FDIC-defined capital categories. The parent company generally maintains excess funds in short-term investments in an amount sufficient to meet projected debt maturities over the next twelve months. At June 30, 2005, the parent company held $1.2 billion in cash and short-term investments, which management projected to be sufficient to meet the parent’s debt repayment obligations over a period of approximately sixteen months.
Additional sources of liquidity
Management has implemented several programs that enable the parent company and KBNA to raise money in the public and private markets when necessary. The proceeds from most of these programs can be used for general corporate purposes, including acquisitions. Each of the programs is replaced or renewed as needed. There are no restrictive financial covenants in any of these programs.
Bank note program. KBNA’s bank note program provides for the issuance of both long- and short-term debt of up to $20.0 billion. During the first six months of 2005, there were $550 million of notes issued under this program. These notes have original maturities in excess of one year and are included in “long-term debt.” At June 30, 2005, $15.3 billion was available for future issuance.
Euro note program. Under Key’s euro note program, the parent company and KBNA may issue both long- and short-term debt of up to $10.0 billion in the aggregate ($9.0 billion by KBNA and $1.0 billion by the parent company). The notes are offered exclusively to non-U.S. investors and can be denominated in U.S. dollars or foreign currencies. There were $666 million of notes issued under this program during the first six months of 2005. At June 30, 2005, $6.4 billion was available for future issuance.
KeyCorp medium-term note program. In January 2005, the parent company registered $2.9 billion of securities under a shelf registration statement filed with the Securities and Exchange Commission. Of this amount, $1.9 billion has been allocated for issuance of medium-term notes. At June 30, 2005, unused capacity under the parent’s shelf registration statement totaled $2.7 billion.
Commercial paper and revolving credit. The parent company has a commercial paper program that provides funding availability of up to $500 million. As of June 30, 2005, there were no borrowings outstanding under the commercial paper program.

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Key has a separate commercial paper program that provides funding availability of up to $1.0 billion in Canadian currency. The borrowings under this program can be denominated in Canadian or U.S. dollars. As of June 30, 2005, borrowings outstanding under this commercial paper program totaled C$768 million in Canadian currency and $56 million in U.S. currency (equivalent to C$70 million in Canadian currency).
Key’s debt ratings are shown in Figure 27. Management believes that these debt ratings, under normal conditions in the capital markets, allow for future offerings of securities by the parent company or KBNA that would be marketable to investors at a competitive cost.
Figure 27. Debt Ratings
                                 
            Senior     Subordinated  
    Short-term     Long-Term     Long-Term     Capital  
June 30, 2005   Borrowings     Debt     Debt     Securities  
 
KeyCorp (the parent company)
                               
                                 
Standard & Poor’s
    A-2       A-       BBB+       BBB  
Moody’s
    P-1       A2       A3       A3  
Fitch
    F1       A       A-       A-  
 
                               
KBNA
                               
                                 
Standard & Poor’s
    A-1       A       A-       N/A  
Moody’s
    P-1       A1       A2       N/A  
Fitch
    F1       A       A-       N/A  
 
                               
Key Nova Scotia Funding Company (“KNSF”)
                               
                                 
Dominion Bond Rating Service(a)
  R-1 (middle)     N/A       N/A       N/A  
 
(a)   Reflects the guarantee by KBNA of KNSF’s issuance of Canadian commercial paper.
N/A=Not Applicable
On June 16, 2005, Moody’s Investors Service confirmed the long-term and short-term ratings of KeyCorp, and the long-term ratings of KBNA and KeyCorp’s other subsidiaries, and raised the outlook for these entities to stable.
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 46 of Key’s 2004 Annual Report to Shareholders.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk
The information presented in the Market Risk Management section, which begins on page 56 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 of the end of the period covered by this report, KeyCorp carried out an evaluation, under the supervision and with the participation of KeyCorp’s 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. No changes were made to KeyCorp’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, KeyCorp’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information presented in Note 12 (“Contingent Liabilities and Guarantees”), which begins on page 24 of the Notes to Consolidated Financial Statements, is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The information presented in the Capital section under the heading “Changes in common shares outstanding” on page 53 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

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Item 4. Submission of Matters to a Vote of Security Holders
At the 2005 Annual Meeting of Shareholders of KeyCorp held on May 5, 2005, the shareholders elected five directors to serve for three-year terms expiring in 2008 and ratified the appointment by the Audit Committee of the Board of Directors of Ernst & Young LLP as independent auditors of KeyCorp for the year ending December 31, 2005. Director nominees for terms expiring in 2008 were: Edward P. Campbell, H. James Dallas, Charles R. Hogan, Lauralee E. Martin and Bill R. Sanford. Directors whose terms in office as directors continued after the Annual Meeting of Shareholders were: William G. Bares, Dr. Carol A. Cartwright, Alexander M. Cutler, Henry S. Hemingway, Douglas J. McGregor, Eduardo R. Menascé, Henry L. Meyer III, Steven A. Minter, Thomas C. Stevens and Peter G. Ten Eyck, II.
The vote on each issue was as follows:
                         
    For   Against   Abstain
     
Election of Directors
                       
Edward P. Campbell
    340,281,667       *       10,118,927  
H. James Dallas
    339,698,089       *       10,702,505  
Charles R. Hogan
    335,883,570       *       14,517,024  
Lauralee E. Martin
    339,621,274       *       10,779,320  
Bill R. Sanford
    339,373,868       *       11,026,726  
 
                       
Ratification of Ernst & Young as independent auditors of KeyCorp
    336,292,332       11,015,288       3,092,974  
 
   
 
*   Proxies provide that shareholders may either cast a vote for, or abstain from voting for, directors.
Item 6. 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.
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.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
                                           KEYCORP                                       
                                         (Registrant)
 
 
         
     
Date: August 3, 2005  /s/ Lee Irving    
  By:    Lee Irving   
            Executive Vice President
          and Chief Accounting Officer 
 

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