KeyCorp 10-Q

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 September 30, 2005


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 1-11302

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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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		407,787,197 Shares

(Title of class)		(Outstanding at October 31, 2005)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


	September 30,			December 31,			September 30,
dollars in millions	2005			2004			2004

	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	2,660		$	2,454		$	2,984
Short-term investments		2,394			1,472			2,753
Securities available for sale		7,124			7,451			7,182
Investment securities (fair value: $99, $74 and $82)		98			71			78
Other investments		1,310			1,421			1,341
Loans, net of unearned income of $2,188, $2,225 and $1,986		65,575			63,372			61,968
Less: Allowance for loan losses		1,093			1,138			1,251

Net loans		64,482			62,234			60,717
Loans held for sale		3,595			4,353			2,338
Premises and equipment		593			603			599
Goodwill		1,344			1,359			1,179
Other intangible assets		109			87			32
Corporate-owned life insurance		2,658			2,608			2,574
Accrued income and other assets		5,956			6,634			6,686

Total assets	$	92,323		$	90,747		$	88,463


LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	23,541		$	21,748		$	21,165
Savings deposits		1,922			1,970			1,976
Certificates of deposit ($100,000 or more)		4,783			4,697			4,715
Other time deposits		10,804			10,435			10,212

Total interest-bearing		41,050			38,850			38,068
Noninterest-bearing		12,202			11,581			12,008
Deposits in foreign office — interest-bearing		4,819			7,411			5,767

Total deposits		58,071			57,842			55,843
Federal funds purchased and securities sold under repurchase agreements		3,444			2,145			3,322
Bank notes and other short-term borrowings		3,001			2,515			2,853
Accrued expense and other liabilities		6,248			6,282			6,055
Long-term debt		14,037			14,846			13,444

Total liabilities		84,801			83,630			81,517
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		1,517			1,491			1,477
Retained earnings		7,719			7,284			7,197
Treasury stock, at cost (83,346,435, 84,319,111 and 86,165,314 shares)		(2,133	)		(2,128	)		(2,172	)
Accumulated other comprehensive loss		(73	)		(22	)		(48	)

Total shareholders’ equity		7,522			7,117			6,946

Total liabilities and shareholders’ equity	$	92,323		$	90,747		$	88,463

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Income (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
dollars in millions, except per share amounts	2005		2004		2005			2004

INTEREST INCOME
Loans	$	1,006	$	810	$	2,837		$	2,393
Loans held for sale		56		30		190			81
Investment securities		1		2		3			4
Securities available for sale		84		84		244			250
Short-term investments		15		9		37			27
Other investments		12		10		44			26

Total interest income		1,174		945		3,355			2,781
INTEREST EXPENSE
Deposits		273		171		717			493
Federal funds purchased and securities sold under repurchase agreements		31		17		81			37
Bank notes and other short-term borrowings		22		8		58			29
Long-term debt		155		98		427			289

Total interest expense		481		294		1,283			848

NET INTEREST INCOME		693		651		2,072			1,933
Provision for loan losses		43		51		107			206

Net interest income after provision for loan losses		650		600		1,965			1,727
NONINTEREST INCOME
Trust and investment services income		135		135		408			421
Service charges on deposit accounts		82		84		228			254
Investment banking and capital markets income		93		59		212			178
Letter of credit and loan fees		46		38		133			108
Corporate-owned life insurance income		26		25		78			77
Electronic banking fees		24		22		70			62
Net gains from loan securitizations and sales		12		19		41			45
Net securities gains (losses)		3		—		(2	)		7
Other income		110		100		349			298

Total noninterest income		531		482		1,517			1,450
NONINTEREST EXPENSE
Personnel		414		394		1,190			1,138
Net occupancy		66		57		212			176
Computer processing		54		49		155			141
Equipment		28		28		84			89
Professional fees		29		27		87			81
Marketing		29		26		88			79
Other expense		161		148		487			439

Total noninterest expense		781		729		2,303			2,143
INCOME BEFORE INCOME TAXES		400		353		1,179			1,034
Income taxes		122		101		346			293


NET INCOME	$	278	$	252	$	833		$	741


Per common share:
Net income	$	.68	$	.62	$	2.04		$	1.80
Net income — assuming dilution		.67		.61		2.01			1.78
Weighted-average common shares outstanding (000)		410,456		407,187		409,166			411,371
Weighted-average common shares and potential common shares outstanding (000)		415,441		411,575		414,510			416,002

See Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)


															Accumulated
												Treasury			Other
	Common Shares			Common		Capital			Retained			Stock,			Comprehensive			Comprehensive
dollars in millions, except per share amounts	Outstanding (000)			Shares		Surplus			Earnings			at Cost			Income (Loss)			Income

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

Total comprehensive income																		$	701

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

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


BALANCE AT DECEMBER 31, 2004		407,570		$	492	$	1,491		$	7,284		$	(2,128	)	$	(22	)
Net income										833								$	833
Other comprehensive income (losses):
Net unrealized losses on securities available for sale, net of income taxes of ($21)^a																(36	)		(36	)
Net unrealized gains on derivative financial instruments, net of income taxes of $4																8			8
Foreign currency translation adjustments																(22	)		(22	)
Minimum pension liability adjustment, net of income taxes of ($1)																(1	)		(1	)

Total comprehensive income																		$	782

Deferred compensation							27
Cash dividends declared on common shares ($.975 per share)										(398	)
Issuance of common shares under employee benefit and dividend reinvestment plans		4,722					(1	)					119
Repurchase of common shares		(3,750	)										(124	)

BALANCE AT SEPTEMBER 30, 2005		408,542		$	492	$	1,517		$	7,719		$	(2,133	)	$	(73	)

(a) Net of reclassification adjustments.

See Notes to Consolidated Financial Statements (Unaudited)

Consolidated Statements of Cash Flow (Unaudited)


	Nine months ended September 30,
in millions		2005			2004

OPERATING ACTIVITIES
Net income		$	833		$	741
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			107			206
Depreciation expense and software amortization			265			261
Net securities (gains) losses			2			(7	)
Net gains from principal investing			(44	)		(39	)
Net gains from loan securitizations and sales			(41	)		(45	)
Deferred income taxes			137			185
Net decrease in loans held for sale			758			36
Net increase in trading account assets			(255	)		(489	)
Other operating activities, net			(302	)		(505	)

NET CASH PROVIDED BY OPERATING ACTIVITIES			1,460			344
INVESTING ACTIVITIES
Cash used in acquisitions, net of cash acquired			(32	)		(31	)
Net increase in other short-term investments			(667	)		(660	)
Purchases of securities available for sale			(2,623	)		(1,399	)
Proceeds from sales of securities available for sale			128			430
Proceeds from prepayments and maturities of securities available for sale			2,707			1,445
Proceeds from prepayments and maturities of investment securities			17			19
Purchases of other investments			(326	)		(407	)
Proceeds from sales of other investments			226			155
Proceeds from prepayments and maturities of other investments			199			104
Net increase in loans, excluding acquisitions, sales and divestitures			(2,492	)		(3,996	)
Purchases of loans			(19	)		(38	)
Proceeds from loan securitizations and sales			154			1,371
Purchases of premises and equipment			(67	)		(75	)
Proceeds from sales of premises and equipment			8			6
Proceeds from sales of other real estate owned			58			60

NET CASH USED IN INVESTING ACTIVITIES			(2,729	)		(3,016	)
FINANCING ACTIVITIES
Net increase in deposits			244			4,997
Net increase in short-term borrowings			1,785			561
Net proceeds from issuance of long-term debt			2,504			2,055
Payments on long-term debt			(2,633	)		(3,887	)
Purchases of treasury shares			(124	)		(511	)
Net proceeds from issuance of common stock			97			111
Cash dividends paid			(398	)		(382	)

NET CASH PROVIDED BY FINANCING ACTIVITIES			1,475			2,944

NET INCREASE IN CASH AND DUE FROM BANKS			206			272
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD			2,454			2,712

CASH AND DUE FROM BANKS AT END OF PERIOD		$	2,660		$	2,984

Additional disclosures relative to cash flow:
Interest paid		$	1,266		$	857
Income taxes paid			193			104
Noncash items:
Net transfer of loans to other real estate owned		$	40		$	78
Assets acquired			15			—
Liabilities assumed			7			383

See Notes to Consolidated Financial Statements (Unaudited).

Notes to Consolidated Financial Statements

1. Basis of Presentation

The unaudited condensed consolidated interim financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

As used in these Notes, KeyCorp refers solely to the parent company and Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries.

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.

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 will become effective 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 September 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 a 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). During 2005, 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.

include certain items that are not allocated to the business segments because they are not reflective of their normal operations.

The table that spans pages 13 and 14 shows selected financial data for each major business group for the three- and nine-month periods ended September 30, 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 nine 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.


							Corporate and
Three months ended September 30,	Consumer Banking						Investment Banking						Other Segments
dollars in millions	2005			2004			2005			2004			2005			2004

SUMMARY OF OPERATIONS
Net interest income (TE)	$	483		$	492		$	297		$	236		$	(29	)	$	(33	)
Noninterest income		233			230			245			220			53			31

Total revenue (TE)^a		716			722			542			456			24			(2	)
Provision for loan losses		29			52			14			(1	)		—			—
Depreciation and amortization expense		35			35			55			50			—			—
Other noninterest expense		455			435			238			209			7			7

Income (loss) before income taxes (TE)		197			200			235			198			17			(9	)
Allocated income taxes and TE adjustments		74			75			88			74			(4	)		(13	)

Net income (loss)	$	123		$	125		$	147		$	124		$	21		$	4


Percent of consolidated net income		44	%		50	%		53	%		49	%		8	%		1	%
Percent of total segments net income		42			49			51			49			7			2

AVERAGE BALANCES
Loans	$	29,139		$	31,754		$	35,064		$	28,827		$	377		$	490
Total assets^a		35,473			37,270			41,398			35,194			11,646			11,557
Deposits		42,359			40,034			10,136			7,800			4,589			4,833

OTHER FINANCIAL DATA
Net loan charge-offs	$	37		$	53		$	12		$	23			—			—
Return on average allocated equity		20.30	%		20.29	%		17.01	%		16.07	%		N/M			N/M
Average full-time equivalent employees		9,963			10,508			3,336			2,875			40			37


							Corporate and
Nine months ended September 30,	Consumer Banking						Investment Banking						Other Segments
dollars in millions	2005			2004			2005			2004			2005			2004

SUMMARY OF OPERATIONS
Net interest income (TE)	$	1,455		$	1,449		$	861		$	703		$	(85	)	$	(102	)
Noninterest income		695			680			692			648			129			119

Total revenue (TE)^a		2,150			2,129			1,553			1,351			44			17
Provision for loan losses		100			162			7			44			—			—
Depreciation and amortization expense		104			109			161			152			—			—
Other noninterest expense		1,351			1,295			660			582			24			22

Income (loss) before income taxes (TE)		595			563			725			573			20			(5	)
Allocated income taxes and TE adjustments		223			211			272			215			(23	)		(32	)

Net income (loss)	$	372		$	352		$	453		$	358		$	43		$	27


Percent of consolidated net income		45	%		47	%		54	%		48	%		5	%		4	%
Percent of total segments net income		43			48			52			48			5			4

AVERAGE BALANCES
Loans	$	29,279		$	31,786		$	34,500		$	27,881		$	407		$	543
Total assets^a		35,932			37,337			40,648			34,104			11,749			11,688
Deposits		41,668			39,425			9,541			7,716			5,200			3,968

OTHER FINANCIAL DATA
Net loan charge-offs	$	108		$	190		$	43		$	101			—			—
Return on average allocated equity		20.38	%		19.07	%		17.77	%		15.59	%		N/M			N/M
Average full-time equivalent employees		10,060			10,447			3,307			2,838			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


Total Segments						Reconciling Items						Key
2005			2004			2005			2004			2005			2004


$	751		$	695		$	(25	)	$	(22	)	$	726		$	673
	531			481			—			1			531			482

	1,282			1,176			(25	)		(21	)		1,257			1,155
	43			51			—			—			43			51
	90			85			—			—			90			85
	700			651			(9	)		(7	)		691			644

	449			389			(16	)		(14	)		433			375

	158			136			(3	)		(13	)		155			123

$	291		$	253		$	(13	)	$	(1	)	$	278		$	252


	105	%		100	%		(5	)%		—			100	%		100	%
	100			100			N/A			N/A			N/A			N/A


$	64,580		$	61,071		$	178		$	183		$	64,758		$	61,254
	88,517			84,021			2,106			2,511			90,623			86,532
	57,084			52,667			(250	)		(149	)		56,834			52,518


$	49		$	76			—			—		$	49		$	76
	18.44	%		16.90	%		N/M			N/M			14.84	%		14.62	%

	13,339			13,420			6,117			6,215			19,456			19,635



Total Segments						Reconciling Items						Key
2005			2004			2005			2004			2005			2004


$	2,231		$	2,050		$	(68	)	$	(49	)	$	2,163		$	2,001
	1,516			1,447			1			3			1,517			1,450

	3,747			3,497			(67	)		(46	)		3,680			3,451
	107			206			—			—			107			206
	265			261			—			—			265			261
	2,035			1,899			3	^b		(17	)		2,038			1,882

	1,340			1,131			(70	)		(29	)		1,270			1,102

	472			394			(35	)		(33	)		437			361

$	868		$	737		$	(35	)	$	4		$	833		$	741


	104	%		99	%		(4	)%		1	%		100	%		100	%
	100			100			N/A			N/A			N/A			N/A


$	64,186		$	60,210		$	160		$	134		$	64,346		$	60,344
	88,329			83,129			2,169			2,338			90,498			85,467
	56,409			51,109			(228	)		(145	)		56,181			50,964


$	151		$	291			—			—		$	151		$	291
	18.49	%		16.57	%		N/M			N/M			15.36	%		14.36	%

	13,406			13,322			6,102			6,255			19,508			19,577

Supplementary information (Consumer Banking lines of business)


Three months ended September 30,	Community Banking						Consumer Finance
dollars in millions	2005			2004			2005			2004

Total revenue (taxable equivalent)	$	567		$	541		$	149		$	181
Provision for loan losses		22			27			7			25
Noninterest expense		407			384			83			86
Net income		86			81			37			44
Average loans		19,781			19,665			9,358			12,089
Average deposits		41,670			39,485			689			549
Net loan charge-offs		24			28			13			25
Return on average allocated equity		22.26	%		22.66	%		16.85	%		17.01	%
Average full-time equivalent employees		8,546			8,895			1,417			1,613


Nine months ended September 30,	Community Banking						Consumer Finance
dollars in millions	2005			2004			2005			2004

Total revenue (taxable equivalent)	$	1,666		$	1,618		$	484		$	511
Provision for loan losses		60			81			40			81
Noninterest expense		1,180			1,142			275			262
Net income		266			247			106			105
Average loans		19,824			19,444			9,455			12,342
Average deposits		41,026			38,904			642			521
Net loan charge-offs		70			86			38			104
Return on average allocated equity		23.24	%		23.43	%		15.57	%		13.26	%
Average full-time equivalent employees		8,514			8,828			1,546			1,619

Supplementary information (Corporate and Investment Banking lines of business)


Three months ended September 30,	Corporate Banking						KeyBank Real Estate Capital						Key Equipment Finance
dollars in millions	2005			2004			2005			2004			2005			2004

Total revenue (taxable equivalent)	$	270		$	255		$	149		$	103		$	123		$	98
Provision for loan losses		9			(7	)		2			—			3			6
Noninterest expense		157			149			64			45			72			65
Net income		65			71			52			36			30			17
Average loans		14,666			13,705			11,265			7,874			9,133			7,248
Average deposits		8,022			6,421			2,100			1,366			14			13
Net loan charge-offs		1			13			—			3			11			7
Return on average allocated equity		15.42	%		16.36	%		20.71	%		17.23	%		15.66	%		13.21	%
Average full-time equivalent employees		1,558			1,555			812			678			966			642


Nine months ended September 30,	Corporate Banking						KeyBank Real Estate Capital						Key Equipment Finance
dollars in millions	2005			2004			2005			2004			2005			2004

Total revenue (taxable equivalent)	$	787		$	766		$	391		$	281		$	375		$	304
Provision for loan losses		(3	)		33			—			(4	)		10			15
Noninterest expense		437			430			165			126			219			178
Net income		221			189			141			99			91			70
Average loans		14,950			13,229			10,557			7,555			8,993			7,097
Average deposits		7,746			6,470			1,783			1,232			12			14
Net loan charge-offs		22			78			7			5			14			18
Return on average allocated equity		17.49	%		14.49	%		19.60	%		16.07	%		16.07	%		18.59	%
Average full-time equivalent employees		1,544			1,536			781			673			982			629

5. Securities

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

Trading account securities. These are debt and equity securities that are purchased and held by Key with the intent of selling them in the near term, and certain interests retained in loan securitizations. All of these assets are reported at fair value ($1.1 billion at September 30, 2005, $863 million at December 31, 2004, and $1.5 billion at September 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 ($800 million at September 30, 2005, $816 million at December 31, 2004, and $817 million at September 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 “investment banking and capital markets income” on the income statement.

The amortized cost, unrealized gains and losses, and approximate fair value of Key’s investment securities and securities available for sale are presented in the following tables. Gross unrealized gains and losses are represented by the difference between the amortized cost and the fair values of securities on the balance sheet as of the dates indicated. Accordingly, the amount of these gains and losses may change in the future as market conditions improve or worsen.


	September 30, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
in millions	Cost		Gains		Losses		Value

SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	283		—		—	$	283
States and political subdivisions		19		—		—		19
Collateralized mortgage obligations		6,390	$	1	$	125		6,266
Other mortgage-backed securities		255		6		3		258
Retained interests in securitizations		98		73		—		171
Other securities		120		7		—		127

Total securities available for sale	$	7,165	$	87	$	128	$	7,124



INVESTMENT SECURITIES
States and political subdivisions	$	42	$	1		—	$	43
Other securities		56		—		—		56

Total investment securities	$	98	$	1		—	$	99


	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		302		7		—		309


Total securities available for sale	$	7,435	$	113	$	97	$	7,451



INVESTMENT SECURITIES
States and political subdivisions	$	58	$	3		—	$	61
Other securities		13		—		—		13

Total investment securities	$	71	$	3		—	$	74


	September 30, 2004
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
in millions	Cost		Gains		Losses		Value

SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	38		—		—	$	38
States and political subdivisions		20	$	1		—		21
Collateralized mortgage obligations		6,422		8	$	83		6,347
Other mortgage-backed securities		329		12		2		339
Retained interests in securitizations		109		79		—		188
Other securities		245		4		—		249

Total securities available for sale	$	7,163	$	104	$	85	$	7,182




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

Total investment securities	$	78	$	4		—	$	82

6. Loans and Loans Held For Sale

Key’s loans by category are summarized as follows:


	September 30,		December 31,		September 30,
in millions	2005		2004		2004

Commercial, financial and agricultural	$	19,451	$	18,730	$	17,492
Commercial real estate:
Commercial mortgage		8,618		8,131		7,315
Construction		6,700		5,508		5,126

Total commercial real estate loans		15,318		13,639		12,441
Commercial lease financing		10,339		10,155		8,294

Total commercial loans		45,108		42,524		38,227
Real estate — residential mortgage		1,476		1,473		1,528
Home equity		13,872		14,062		14,950
Consumer — direct		1,792		1,983		2,013
Consumer — indirect:
Automobile lease financing		28		89		120
Automobile loans		—		—		1,862
Marine		2,676		2,624		2,648
Other		623		617		620

Total consumer — indirect loans		3,327		3,330		5,250

Total consumer loans		20,467		20,848		23,741

Total loans	$	65,575	$	63,372	$	61,968

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.

Key’s loans held for sale by category are summarized as follows:


	September 30,		December 31,		September 30,
in millions	2005		2004		2004

Real estate — commercial mortgage	$	416	$	283	$	314
Real estate — residential mortgage		21		26		24
Real estate — construction		5		—		—
Home equity		1		29		21
Education		3,123		2,278		1,979
Automobile		29		1,737		—

Total loans held for sale	$	3,595	$	4,353	$	2,338

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


	Three months ended September 30,						Nine months ended September 30,
in millions	2005			2004			2005			2004

Balance at beginning of period	$	1,100		$	1,276		$	1,138		$	1,406
Charge-offs		(69	)		(113	)		(222	)		(410	)
Recoveries		20			37			71			119

Net charge-offs		(49	)		(76	)		(151	)		(291	)
Provision for loan losses		43			51			107			206
Foreign currency translation adjustment		(1	)		—			(1	)		—
Reclassification of allowance for credit losses on lending-related commitments ^a		—			—			—			(70	)

Balance at end of period	$	1,093		$	1,251		$	1,093		$	1,251

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

Changes in the allowance for credit losses on lending-related commitments are summarized as follows:


	Three months ended September 30,				Nine months ended September 30,
in millions	2005		2004		2005			2004

Balance at beginning of period	$	57	$	63	$	66			—
Reclassification of allowance for credit losses		—		—		—		$	70
Provision for losses on lending-related commitments		2		2		(7	)		(5	)

Balance at end of period ^a	$	59	$	65	$	59		$	65

(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

September 30, 2005
Commercial paper conduit	$	483		N/A		N/A
Low-income housing tax credit (“LIHTC”) funds		370	$	273		—
Business trusts issuing mandatorily redeemable preferred capital securities		N/A		1,597		—
LIHTC investments		N/A		716	$	221

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 September

30, 2005, the settlement value of these noncontrolling interests, which are accounted for by Key as minority interests, was estimated to be between $461 million and $555 million, while the recorded value, including reserves, totaled $389 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.

8. Impaired Loans and Other Nonperforming Assets

Impaired loans totaled $194 million at September 30, 2005, compared with $91 million at December 31, 2004, and $101 million at September 30, 2004. Impaired loans averaged $137 million for the third quarter of 2005 and $128 million for the third quarter of 2004.

Key’s nonperforming assets were as follows:


	September 30,			December 31,			September 30,
in millions	2005			2004			2004

Impaired loans	$	194		$	91		$	101
Other nonaccrual loans		166			217			288

Total nonperforming loans		360			308			389

Nonperforming loans held for sale		2			8			1

Other real estate owned (OREO)		29			53			60
Allowance for OREO losses		(3	)		(4	)		(5	)

OREO, net of allowance		26			49			55
Other nonperforming assets		5			14			15

Total nonperforming assets	$	393		$	379		$	460

At September 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 September 30, 2005, Key had $8 million of impaired loans with a specifically allocated allowance for loan losses of $4 million, and $186 million of impaired loans that were carried at their estimated fair value without a specifically allocated allowance. The uncertainty surrounding this portfolio precludes any additional specific allocation at this time, although Key believes it has sufficient reserves on this portfolio to cover potential losses. 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.

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 nine 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.

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

Principal

Interest Rate

Maturity

Capital

Amount of

of Capital

Securities,

Common

Debentures,

Securities and

dollars in millions

Net of Discount^a

Stock

Net of Discount^b

Debentures^c

Debentures

September 30, 2005

KeyCorp Institutional Capital A

376

361

7.826

2026

KeyCorp Institutional Capital B

161

154

8.250

2026

KeyCorp Capital I

197

205

4.244

2028

KeyCorp Capital II

184

165

6.875

2029

KeyCorp Capital III

234

197

7.750

2029

KeyCorp Capital V

171

180

5.875

2033

KeyCorp Capital VI

6.125

2033

KeyCorp Capital VII

235

258

5.700

2035

Total

1,633

1,597

6.729

—

December 31, 2004

1,399

1,339

6.704

—

September 30, 2004

1,419

1,339

6.654

—

(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 September 30, 2005, December 31, 2004, and September 30, 2004, are basis adjustments of $90 million, $106 million and $126 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 September 30, 2005, December 31, 2004, and September 30, 2004, are weighted-average rates.

10. Pension and Other Postretirement Benefit Plans

Pension Plans

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


	Three months ended						Nine months ended
	September 30,						September 30,
in millions	2005			2004			2005			2004

Service cost of benefits earned	$	20		$	12		$	37		$	36
Interest cost on projected benefit obligation		22			14			43			42
Expected return on plan assets		(39	)		(23	)		(70	)		(69	)
Amortization of prior service benefit		—			—			(1	)		—
Amortization of losses		9			11			17			17

Net pension cost	$	12		$	14		$	26		$	26

Other Postretirement Benefit Plans

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


	Three months ended						Nine months ended
	September 30,						September 30,
in millions	2005			2004			2005			2004

Service cost of benefits earned	$	1		$	1		$	3		$	3
Interest cost on accumulated postretirement benefit obligation		2			2			6			6
Expected return on plan assets		(1	)		(1	)		(3	)		(3	)
Amortization of unrecognized transition obligation		1			1			3			3
Amortization of cumulative net loss		—			—			2			—

Net postretirement benefit cost	$	3		$	3		$	11		$	9

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 “actuarially equivalent” 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 benefit 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 has completed a review of Key’s foreign operations and concluded that significant benefits will not be realized from this special one-time deduction.

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 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 (“Leasing 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 (“Tax Proposal”) 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 issued as drafted, the guidance in these two proposals could result in initial one-time charges 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 leases impacted by the guidance by an amount that represents a substantial portion of the one-time charge resulting from adoption of the Leasing Proposal. It is anticipated that the Leasing Proposal will be effective for years ending after December 15, 2005 (year ending December 31, 2005, for Key) and the Tax Proposal will become effective in 2006.

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.

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. On August 26, 2005, the Court entered an order modifying certain deadlines in the expert discovery phase of the case and extending the December 9, 2005, deadline to February 9, 2006.

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 September 30, 2005, totaled approximately $383 million, and management currently estimates that approximately $2 million of additional claims may be filed through year-end 2006, bringing the total aggregate amount of actual and potential claims to $385 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 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 September 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	$	11,692	$	43
Credit enhancement for asset-backed commercial paper conduit		28		—
Recourse agreement with FNMA		631		8
Return guarantee agreement with LIHTC investors		555		40
Default guarantees		32		1
Written interest rate caps^a		51		6

Total	$	12,989	$	98


(a)		As of September 30, 2005, the weighted-average interest rate of written interest rate caps was 3.8%, and the weighted-average strike rate was 5.1%. 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 September 30, 2005, Key’s standby letters of credit had a remaining weighted-average life of approximately three 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 22, 2006, and specifies that in the event of default by certain borrowers whose loans are held by the conduit, Key will provide financial relief to the conduit in an amount that is based on defined criteria that consider the level of credit risk involved and other factors.

At September 30, 2005, Key’s maximum potential funding requirement under the credit enhancement facility totaled $28 million. However, there were no drawdowns under the facility during the nine-month period ended September 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.

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 September 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 $1.9 billion. The maximum potential amount of undiscounted future payments that may be required under this program is equal to one-third of the principal balance of loans outstanding at September 30, 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 $40 million at September 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 September 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.

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 $1.4 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 $596 million at September 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 September 30, 2005, Key had $204 million of derivative assets and $191 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 totaled $928 million and $884 million, respectively. Derivative assets and liabilities are recorded at fair value in “accrued income and other assets” and “accrued expense and other liabilities,” respectively, on the balance sheet.

Counterparty credit risk

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

Key uses two additional means to manage exposure to credit risk on swap contracts. First, Key generally enters into bilateral collateral and master netting arrangements. These agreements provide for the net settlement of all contracts with a single counterparty in the event of default. Second, Key’s Credit Administration department monitors credit risk exposure to the counterparty on each interest rate swap to determine appropriate limits on Key’s total credit exposure and decide whether to demand collateral. If Key determines that collateral is required, it is generally collected at the time this determination is made. Key generally holds collateral in the form of cash and highly rated treasury and agency-issued securities.

At September 30, 2005, Key was party to interest rate swaps and caps with 53 different counterparties. Among these were swaps and caps entered into to offset the risk of client exposure. Key had aggregate exposure of $186 million on these instruments to 26 of the counterparties. However, at September 30, Key held approximately $134 million in collateral to mitigate its credit exposure, resulting in net exposure of $52 million. The largest exposure to an individual counterparty was approximately $97 million, of which Key secured approximately $92 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		September 30,
in millions	2004			Hedging Activity			Net Income		2005

Accumulated other comprehensive income (loss) resulting from cash flow hedges	$	(40	)	$	(6	)	$	14	$	(32	)

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 $5 million of net gains 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 $12 million at September 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.

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
KeyCorp

We have reviewed the condensed consolidated balance sheets of KeyCorp and subsidiaries (“Key”) as of September 30, 2005 and 2004, and the related condensed consolidated statements of income for the three-month and nine-month periods then ended, and the condensed consolidated statements of changes in shareholders’ equity and cash flow for the nine-month periods ended September 30, 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
November 2, 2005

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

Introduction

This section generally reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly and year-to-date periods ended September 30, 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 financial 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.

Key’s earnings per common share for the first nine months of 2005 grew by 13% relative to the same period last year. This improvement was accomplished by growing revenue faster than expenses and by a lower provision for loan losses. In addition, capital that exceeds internal guidelines and minimum requirements prescribed by the regulators can be used to repurchase common shares in the open market. Key’s weighted-average fully-diluted common shares decreased to 414,510,144 shares for the first nine months of 2005 from 416,002,200 shares for the first nine months of 2004. A lower share count can also contribute to both earnings per share growth and improved returns on average equity. The change in the

share count between the two time periods had an immaterial effect on Key’s earnings per share growth and return on equity.

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.

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 continue to become subject to heightened regulatory practices, requirements or expectations.

¨		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 or tax 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 nine 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.

Highlights of Key’s Performance

Financial performance

The primary measures of Key’s financial performance for the third quarter and first nine months of 2005 and 2004 are summarized below.


¨		Net income for the third quarter of 2005 was $278 million, or $.67 per common share, compared with $291 million, or $.70 per share, for the previous quarter and $252 million, or $.61 per share, for the third quarter of 2004. For the first nine months of 2005, net income was $833 million, or $2.01 per common share, compared with $741 million, or $1.78 per share, for the first nine months of 2004.

¨		Key’s return on average equity was 14.84% for the third quarter of 2005, compared with a return of 16.15% for the prior quarter and 14.62% for the year-ago quarter. For the first nine months of 2005, Key’s return on average equity was 15.36%, compared with 14.36% for the same period last year.

¨		Key’s third quarter 2005 return on average total assets was 1.22%, compared with a return of 1.30% for the previous quarter and 1.16% for the third quarter of 2004. For the first nine months of 2005, Key’s return on average total assets was 1.23%, compared with 1.16% for the first nine months of 2004.

Key’s top four priorities for 2005 are to profitably grow revenue, institutionalize a culture of compliance and accountability, maintain asset quality and maintain a disciplined approach to managing expenses. Our performance for the third quarter of 2005 reflects Key’s ability to produce solid financial results in a more challenging interest rate environment, as well as the positive effects of our longer-term strategic activities. During the third quarter:


¨		Total revenue grew by $91 million from the third quarter of 2004 as a result of growth in net interest income and a stronger performance from our fee-based businesses. The increase in net interest income was driven by a 7 basis point improvement in the net interest margin to 3.67%, higher earning assets resulting from solid commercial loan growth, and an increase in core deposits. The improvement in fee income was due primarily to increases in loan fees, and income from principal investing and capital markets activities.

¨		Asset quality remained solid. Both net loan charge-offs and nonperforming loans were down from the year-ago quarter; however, nonperforming loans increased relative to the second quarter of 2005. The increase was attributable to Key’s commercial passenger airline lease portfolio. Of this $213 million portfolio, $103 million was on nonaccrual status at September 30, 2005.

Further, we continue to effectively manage our capital through dividends paid to shareholders, share repurchases, and investing in our higher-growth businesses. During the third quarter, Key repurchased 1,250,000 of its common shares. At September 30, 2005, Key’s tangible equity to tangible assets ratio was 6.68% and within our targeted range of 6.25% to 6.75%.

Considering recent trends, we expect Key’s earnings to be in the range of $.65 to $.69 per share for the fourth quarter of 2005. This range does not include any potential one-time changes in earnings that could

result from the FASB’s proposed change in the accounting for leveraged leases as described in Note 11 (“Income Taxes”), which begins on page 23.

The primary reasons that Key’s revenue and expense components changed from those reported for the three- and nine-month periods ended September 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 during 2004 and the first nine months of 2005 that have strengthened our market share positions and support our strategy of focusing on businesses that enable us to build relationships with our clients.


¨		Effective July 1, 2005, we expanded our Federal Housing Administration (“FHA”) financing and servicing capabilities by acquiring Malone Mortgage Company, based in Dallas, Texas. This is the fifth 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.

¨		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 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.

¨		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 expanded our commercial mortgage finance and servicing capabilities by acquiring certain net assets of American Capital Resource, Inc., based in Atlanta, Georgia.

¨		Effective July 22, 2004, we acquired ten branch offices and approximately $380 million of deposits of Sterling Bank & Trust FSB in suburban Detroit, Michigan.

Figure 1 summarizes Key’s financial performance for each of the past five quarters.

Figure 1. Selected Financial Data


	2005									2004						Nine months ended September 30,
dollars in millions, except per share amounts	Third			Second			First			Fourth			Third			2005			2004

FOR THE PERIOD
Interest income	$	1,174		$	1,116		$	1,065		$	1,005		$	945		$	3,355		$	2,781
Interest expense		481			423			379			333			294			1,283			848
Net interest income		693			693			686			672			651			2,072			1,933
Provision for loan losses		43			20			44			(21	)		51			107			206
Noninterest income		531			486			500			479			482			1,517			1,450
Noninterest expense		781			753			769			818			729			2,303			2,143
Income before income taxes		400			406			373			354			353			1,179			1,034
Net income		278			291			264			213			252			833			741

PER COMMON SHARE
Net income	$	.68		$	.71		$	.65		$	.52		$	.62		$	2.04		$	1.80
Net income — assuming dilution		.67			.70			.64			.51			.61			2.01			1.78
Cash dividends paid		.325			.325			.325			.31			.31			.975			.93
Book value at period end		18.41			18.01			17.58			17.46			17.12			18.41			17.12
Market price:
High		35.00			33.80			34.07			34.50			32.02			35.00			33.23
Low		31.65			31.52			31.00			31.35			29.00			31.00			28.23
Close		32.25			33.15			32.45			33.90			31.60			32.25			31.60
Weighted-average common shares (000)		410,456			408,754			408,264			408,243			407,187			409,166			411,371
Weighted-average common shares and potential common shares (000)		415,441			414,309			413,762			413,727			411,575			414,510			416,002

AT PERIOD END
Loans	$	65,575		$	64,690		$	64,018		$	63,372		$	61,968		$	65,575		$	61,968
Earning assets		80,096			78,548			77,937			78,140			75,660			80,096			75,660
Total assets		92,323			91,015			90,276			90,747			88,463			92,323			88,463
Deposits		58,071			58,063			57,127			57,842			55,843			58,071			55,843
Long-term debt		14,037			13,588			14,100			14,846			13,444			14,037			13,444
Shareholders’ equity		7,522			7,352			7,162			7,117			6,946			7,522			6,946

PERFORMANCE RATIOS
Return on average total assets		1.22	%		1.30	%		1.18	%		.95	%		1.16	%		1.23	%		1.16	%
Return on average equity		14.84			16.15			15.09			11.99			14.62			15.36			14.36
Net interest margin (taxable equivalent)		3.67			3.71			3.66			3.63			3.60			3.68			3.63

CAPITAL RATIOS AT PERIOD END
Equity to assets		8.15	%		8.08	%		7.93	%		7.84	%		7.85	%		8.15	%		7.85	%
Tangible equity to tangible assets		6.68			6.60			6.43			6.35			6.57			6.68			6.57
Tier 1 risk-based capital		7.72			7.68			7.34			7.22			7.72			7.72			7.72
Total risk-based capital		11.83			11.72			11.58			11.47			11.67			11.83			11.67
Leverage		8.60			8.49			7.91			7.96			8.27			8.60			8.27

OTHER DATA
Average full-time equivalent employees		19,456			19,429			19,571			19,575			19,635			19,508			19,577
KeyCenters		946			945			940			935			921			946			921

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 nine-month periods ended September 30, 2005 and 2004.

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


	Three months ended												Nine months ended
	September 30,						Change						September 30,						Change
dollars in millions	2005			2004			Amount			Percent			2005			2004			Amount			Percent

Revenue (taxable equivalent)
Consumer Banking	$	716		$	722		$	(6	)		(.8	)%	$	2,150		$	2,129		$	21			1.0	%
Corporate and Investment Banking		542			456			86			18.9			1,553			1,351			202			15.0
Other Segments		24			(2	)		26			N/M			44			17			27			158.8

Total segments		1,282			1,176			106			9.0			3,747			3,497			250			7.1
Reconciling items		(25	)		(21	)		(4	)		(19.0	)		(67	)		(46	)		(21	)		(45.7	)

Total	$	1,257		$	1,155		$	102			8.8	%	$	3,680		$	3,451		$	229			6.6	%

Net income (loss)
Consumer Banking	$	123		$	125		$	(2	)		(1.6	)%	$	372		$	352		$	20			5.7	%
Corporate and Investment Banking		147			124			23			18.5			453			358			95			26.5
Other Segments		21			4			17			425.0			43			27			16			59.3

Total segments		291			253			38			15.0			868			737			131			17.8
Reconciling items		(13	)^a		(1	)		(12	)		N/M			(35	)^a		4			(39	)		N/M

Total	$	278		$	252		$	26			10.3	%	$	833		$	741		$	92			12.4	%

(a)

The net loss for the third quarter of 2005 includes an $8 million write-off of certain foreign deferred taxes associated with Key’s leasing business. The net loss for the first nine months of 2005 includes this valuation adjustment and a $30 million ($19 million after tax) charge recorded during the first quarter 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 $123 million for the third quarter of 2005, compared with $125 million for the year-ago quarter. A decrease in net interest income and an increase in noninterest expense caused the decline and more than offset growth in noninterest income and a significant reduction in the provision for loan losses, which resulted from improved asset quality.

Taxable-equivalent net interest income decreased by $9 million, or 2%, from the third quarter of 2004, due to a less favorable interest rate spread on average earning assets and a reduction in loans which resulted from the sale of the higher-yielding broker-originated home equity and indirect automobile loan portfolios within the Consumer Finance line of business. The adverse effects of these factors were moderated by growth in average deposits.

Noninterest expense increased by $20 million, or 4%, due primarily to higher costs associated with marketing, loan servicing, recording and filing fees, and various indirect charges. The rise in these costs was partially offset by a decrease in fees for professional services.

Noninterest income rose by $3 million, or 1%, due largely to increases in securitization servicing, insurance and electronic banking fees. These increases were offset in part by a decrease in net gains from loan securitizations and sales, and a decline in service charges on deposit accounts.

The provision for loan losses decreased by $23 million, or 44%, as a result of improved asset quality resulting from the sale of the loan portfolios described on page 36. Net loan charge-offs declined to $37 million for the third quarter of 2005 from $53 million in the year-ago quarter.

Figure 3. Consumer Banking


	Three months ended September 30,						Change						Nine months ended September 30,						Change
dollars in millions	2005			2004			Amount			Percent			2005			2004			Amount			Percent

Summary of operations
Net interest income (TE)	$	483		$	492		$	(9	)		(1.8	)%	$	1,455		$	1,449		$	6			.4	%
Noninterest income		233			230			3			1.3			695			680			15			2.2

Total revenue (TE)		716			722			(6	)		(.8	)		2,150			2,129			21			1.0
Provision for loan losses		29			52			(23	)		(44.2	)		100			162			(62	)		(38.3	)
Noninterest expense		490			470			20			4.3			1,455			1,404			51			3.6

Income before income taxes (TE)		197			200			(3	)		(1.5	)		595			563			32			5.7
Allocated income taxes and TE adjustments		74			75			(1	)		(1.3	)		223			211			12			5.7

Net income	$	123		$	125		$	(2	)		(1.6	)%	$	372		$	352		$	20			5.7	%


Percent of consolidated net income		44	%		50	%		N/A			N/A			45	%		47	%		N/A			N/A

Net loan charge-offs	$	37		$	53		$	(16	)		(30.2	)%	$	108		$	190		$	(82	)		(43.2	)%

Average balances
Loans	$	29,139		$	31,754		$	(2,615	)		(8.2	)%	$	29,279		$	31,786		$	(2,507	)		(7.9	)%
Total assets		35,473			37,270			(1,797	)		(4.8	)		35,932			37,337			(1,405	)		(3.8	)
Deposits		42,359			40,034			2,325			5.8			41,668			39,425			2,243			5.7


TE = Taxable Equivalent, N/A = Not Applicable

Additional Consumer Banking Data

	Three months ended September 30,						Change						Nine months ended September 30,						Change
dollars in millions	2005			2004			Amount			Percent			2005			2004			Amount			Percent

Average deposits outstanding
Noninterest-bearing	$	7,122		$	6,544		$	578			8.8	%	$	6,850		$	6,395		$	455			7.1	%
Money market and other savings		20,785			19,766			1,019			5.2			20,468			18,976			1,492			7.9
Time		14,452			13,724			728			5.3			14,350			14,054			296			2.1

Total deposits	$	42,359		$	40,034		$	2,325			5.8	%	$	41,668		$	39,425		$	2,243			5.7	%



Home equity loans
Community Banking
Average balance	$	10,365		$	10,326
Average loan-to-value ratio		71	%		72	%
Percent first lien positions		61			60
National Home Equity
Average balance	$	3,515		$	4,502
Average loan-to-value ratio		65	%		71	%
Percent first lien positions		66			76

Other data
On-line households/household penetration		607,127/49	%		550,968/44	%
KeyCenters		946			921
Automated teller machines		2,185			2,187

Corporate and Investment Banking

As shown in Figure 4, net income for Corporate and Investment Banking was $147 million for the third quarter of 2005, up from $124 million for the same period last year. Increases in both net interest income and noninterest income drove the improvement. These positive changes were offset, in part, by an increase in noninterest expense. In addition, Corporate and Investment Banking’s provision for loan losses was an expense in the third quarter of 2005, compared with a credit in the year-ago quarter.

Taxable-equivalent net interest income increased by $61 million, or 26%, from the third quarter of 2004, due primarily to strong growth in average loans and leases, as well as deposits. Average loans and leases rose by $6.2 billion, or 22%, reflecting improvements in each of the primary lines of business. The increase in lease financing receivables in the Key Equipment Finance line was bolstered by the acquisition of AEBF during the fourth quarter of 2004.

Noninterest income rose by $25 million, or 11%, due largely to increases in non-yield-related loan fees and income from capital markets activities.

Noninterest expense rose by $34 million, or 13%, as business expansion, including the acquisition of AEBF, and improved profitability led to increases in personnel and various other expense categories.

The provision for loan losses was an expense of $14 million for the third quarter of 2005, compared with a credit of $1 million for the year-ago quarter. Net loan charge-offs declined to $12 million for the third quarter of 2005 from $23 million in the year-ago quarter.

On July 1, 2005, we expanded 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 made over the past several years to build upon our success in commercial mortgage origination and servicing.

Figure 4. Corporate and Investment Banking


	Three months ended September 30,						Change						Nine months ended September 30,						Change
dollars in millions	2005			2004			Amount			Percent			2005			2004			Amount			Percent

Summary of operations
Net interest income (TE)	$	297		$	236		$	61			25.8	%	$	861		$	703		$	158			22.5	%
Noninterest income		245			220			25			11.4			692			648			44			6.8

Total revenue (TE)		542			456			86			18.9			1,553			1,351			202			15.0
Provision for loan losses		14			(1	)		15			N/M			7			44			(37	)		(84.1	)
Noninterest expense		293			259			34			13.1			821			734			87			11.9

Income before income taxes (TE)		235			198			37			18.7			725			573			152			26.5
Allocated income taxes and TE adjustments		88			74			14			18.9			272			215			57			26.5

Net income	$	147		$	124		$	23			18.5	%	$	453		$	358		$	95			26.5	%


Percent of consolidated net income		53	%		49	%		N/A			N/A			54	%		48	%		N/A			N/A

Net loan charge-offs	$	12		$	23		$	(11	)		(47.8	)%	$	43		$	101		$	(58	)		(57.4	)%

Average balances
Loans	$	35,064		$	28,827		$	6,237			21.6	%	$	34,500		$	27,881		$	6,619			23.7	%
Total assets		41,398			35,194			6,204			17.6			40,648			34,104			6,544			19.2
Deposits		10,136			7,800			2,336			29.9			9,541			7,716			1,825			23.7

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


Additional Corporate and Investment Banking Data	Three months ended September 30,				Change					Nine months ended September 30,				Change
dollars in millions	2005		2004		Amount		Percent			2005		2004		Amount		Percent

Average lease financing receivables managed by Key Equipment Finance^a
Receivables held in Key Equipment Finance portfolio	$	8,150	$	6,301	$	1,849		29.3	%	$	8,043	$	6,191	$	1,852		29.9	%
Receivables assigned to other lines of business		2,011		1,881		130		6.9			2,024		1,891		133		7.0

Total lease financing receivables managed	$	10,161	$	8,182	$	1,979		24.2	%	$	10,067	$	8,082	$	1,985		24.6	%

(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 $21 million for the third quarter of 2005, compared with $4 million for the same period last year. Increases in net gains from principal investing and net interest income drove the improvement.

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 third quarter of 2005 was $726 million, representing a $53 million, or 8%, 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 7 basis points to 3.67%. A basis point is equal to one one-hundredth of a percentage point, meaning 7 basis points equals .07%. 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.

The improvement in the net interest margin from the year-ago quarter reflected 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. 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 third quarter of 2005 totaled $78.8 billion, which was $4.2 billion, or 6%, higher than the third quarter 2004 level. The growth in commercial lending more than offset the decline in consumer loans resulting from loan sales.

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 $1.4 billion during the first nine 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 $384 million ($123 million through securitizations) during the first nine months 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 $2.1 billion during the first nine 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.

Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates

Third Quarter 2005

Second Quarter 2005

Average

Yield/

Average

Yield/

dollars in millions

Balance

Interest

Rate

Balance

Interest

Rate

ASSETS

Loans^a,b,c

Commercial, financial and agricultural

19,249

280

5.78

19,477

258

5.31

Real estate — commercial mortgage

8,467

136

6.42

8,373

129

6.13

Real estate — construction

6,388

110

6.81

6,117

6.45

Commercial lease financing

10,161

158

6.19

9,984

158

6.33

Total commercial loans

44,265

684

6.15

43,951

643

5.86

Real estate — residential

1,472

6.13

1,477

6.04

Home equity

13,888

236

6.72

13,904

225

6.49

Consumer — direct

1,794

8.96

1,831

7.93

Consumer — indirect lease financing

11.05

10.76

Consumer — indirect other

3,303

6.62

3,275

6.07

Total consumer loans

20,493

355

6.86

20,540

333

6.53

Total loans

64,758

1,039

6.37

64,491

976

6.07

Loans held for sale

3,521

6.43

3,169

6.61

Investment securities^a

7.00

8.42

Securities available for sale^d

7,131

4.65

7,081

4.54

Short-term investments

1,972

3.15

1,799

2.58

Other investments^d

1,342

3.25

1,455

6.42

Total earning assets

78,800

1,207

6.08

78,060

1,146

5.88

Allowance for loan losses

(1,095

)

(1,124

)

Accrued income and other assets

12,918

12,979

90,623

89,915

LIABILITIES AND SHAREHOLDERS’ EQUITY

NOW and money market deposit accounts

22,886

101

1.75

22,301

1.39

Savings deposits

1,952

.29

1,999

.26

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

4,928

3.85

4,999

3.70

Other time deposits

10,805

3.21

10,806

3.05

Deposits in foreign office

4,048

3.46

4,314

2.96

Total interest-bearing deposits

44,619

273

2.43

44,419

238

2.16

Federal funds purchased and securities sold under repurchase agreements

3,674

3.28

3,830

2.67

Bank notes and other short-term borrowings

2,841

3.04

2,792

2.72

Long-term debt^e

13,814

155

4.50

13,929

141

4.11

Total interest-bearing liabilities

64,948

481

2.94

64,970

423

2.62

Noninterest-bearing deposits

12,215

11,717

Accrued expense and other liabilities

6,027

6,000

Shareholders’ equity

7,433

7,228

90,623

89,915

Interest rate spread (TE)

3.14

3.26

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

726

3.67

723

3.71

TE adjustment^a

Net interest income, GAAP basis

693

(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 the average loan balances.

(c)		For all periods prior to the third quarter of 2005, certain loans have been reclassified among various components of the loan portfolio to conform to the current reporting practice.

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

(e)		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

Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates (Continued)


First Quarter 2005						Fourth Quarter 2004								Third Quarter 2004
Average			Yield/			Average					Yield/			Average					Yield/
Balance	Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate




$19,195	$	230		4.86	%	$	17,899		$	206		4.59	%	$	17,453		$	191		4.34	%

8,189		115		5.71			7,967			107		5.35			7,061			88		4.94
5,636		81		5.81			5,295			74		5.52			4,831			62		5.14
10,055		158		6.31			8,829			129		5.89			8,182			119		5.77

43,075		584		5.49			39,990			516		5.15			37,527			460		4.87
1,464		23		6.00			1,512			23		5.94			1,531			21		5.80
13,986		213		6.19			14,696			219		5.94			14,844			212		5.67
1,928		38		7.89			2,003			38		7.63			2,055			38		7.35

77		2		10.26			104			3		10.02			144			4		10.07
3,248		52		6.42			5,076			96		7.55			5,153			97		7.56

20,703		328		6.39			23,391			379		6.45			23,727			372		6.26

63,778		912		5.78			63,381			895		5.63			61,254			832		5.41
4,281		81		7.64			2,635			33		5.07			2,476			30		4.74
70		2		8.66			75			2		8.53			79			2		8.65
7,226		80		4.43			7,233			81		4.48			6,982			84		4.88
1,679		10		2.43			2,100			11		2.00			2,527			9		1.50
1,423		8		2.25			1,417			9		2.56			1,328			10		2.98

78,457		1,093		5.62			76,841			1,031		5.35			74,646			967		5.16
(1,133)							(1,251	)							(1,270	)
13,634							13,658								13,156


$90,958						$	89,248							$	86,532





$21,619		55		1.03		$	21,591			46		.84		$	20,454			39		.77
1,957		1		.24			1,951			1		.23			1,986			2		.22

4,895		44		3.65			4,871			44		3.66			4,852			44		3.60
10,589		76		2.90			10,366			75		2.89			10,348			73		2.81
4,963		30		2.45			3,506			18		1.96			3,593			13		1.47

44,023		206		1.90			42,285			184		1.73			41,233			171		1.65

4,475		25		2.24			5,085			23		1.81			5,032			17		1.35

2,947		17		2.38			2,793			13		1.79			2,614			8		1.33
14,785		131		3.77			14,119			113		3.36			13,415			98		3.01

66,230		379		2.34			64,282			333		2.08			62,294			294		1.90
11,534							11,804								11,285
6,100							6,095								6,098
7,094							7,067								6,855


$90,958						$	89,248							$	86,532


				3.28	%							3.27	%							3.26	%


		714		3.66	%					698		3.63	%					673		3.60	%

		28								26								22

	$	686							$	672							$	651

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 September 30, 2004									From nine months ended September 30, 2004
	to three months ended September 30, 2005									to nine months ended September 30, 2005
	Average			Yield/			Net			Average			Yield/			Net
in millions	Volume			Rate			Change			Volume			Rate			Change

INTEREST INCOME
Loans	$	49		$	158		$	207		$	170		$	298		$	468
Loans held for sale		15			11			26			49			60			109
Investment securities		—			(1	)		(1	)		(1	)		(1	)		(2	)
Securities available for sale		2			(2	)		—			(2	)		(4	)		(6	)
Short-term investments		(2	)		8			6			(6	)		16			10
Other investments		—			2			2			5			13			18

Total interest income (taxable equivalent)		64			176			240			215			382			597

INTEREST EXPENSE
NOW and money market deposit accounts		5			57			62			15			117			132
Certificates of deposit ($100,000 or more)		1			3			4			3			1			4
Other time deposits		3			11			14			2			14			16
Deposits in foreign office		2			20			22			21			51			72

Total interest-bearing deposits		11			91			102			41			183			224
Federal funds purchased and securities sold under repurchase agreements		(6	)		20			14			(5	)		49			44
Bank notes and other short-term borrowings		1			13			14			4			25			29
Long-term debt		3			54			57			(4	)		142			138

Total interest expense		9			178			187			36			399			435

Net interest income (taxable equivalent)	$	55		$	(2	)	$	53		$	179		$	(17	)	$	162

The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.

Noninterest income

Noninterest income for the third quarter of 2005 was $531 million, compared with $482 million for the same period last year. For the first nine months of the year, noninterest income was $1.5 billion, representing an increase of $67 million, or 5%, from the first nine months of 2004.

As shown in Figure 7, increases of $34 million in income from principal investing and capital markets activities, and $8 million from letter of credit and loan fees drove the improvement from the year-ago quarter. These increases were offset in part by a $7 million reduction in net gains from loan securitizations and sales.

For the year-to-date period, the growth in noninterest income from the same period last year was due largely to increases of $34 million in income from principal investing and capital markets activities, $25 million from letter of credit and loan fees, $11 million in loan securitization servicing fees, and $14 million in net gains on the residual values of leased vehicles and equipment (included in “miscellaneous income”). These positive results were moderated by decreases in a number of other revenue components, including a $26 million reduction in service charges on deposit accounts and a $13 million decrease in income from trust and investment services.

Figure 7. Noninterest Income



	Three months ended September 30,				Change						Nine months ended September 30,					Change
dollars in millions	2005		2004		Amount			Percent			2005			2004		Amount			Percent

Trust and investment services income	$	135	$	135		—			—		$	408		$	421	$	(13	)		(3.1	)%
Service charges on deposit accounts		82		84	$	(2	)		(2.4	)%		228			254		(26	)		(10.2	)
Investment banking and capital markets income		93		59		34			57.6			212			178		34			19.1
Letter of credit and loan fees		46		38		8			21.1			133			108		25			23.1
Corporate-owned life insurance income		26		25		1			4.0			78			77		1			1.3
Electronic banking fees		24		22		2			9.1			70			62		8			12.9
Net gains from loan securitizations and sales		12		19		(7	)		(36.8	)		41			45		(4	)		(8.9	)
Net securities gains (losses)		3		—		3			N/M			(2	)		7		(9	)		N/M
Other income:
Operating lease income		47		46		1			2.2			141			137		4			2.9
Insurance income		16		11		5			45.5			37			36		1			2.8
Loan securitization servicing fees		5		2		3			150.0			15			4		11			275.0
Credit card fees		4		3		1			33.3			12			9		3			33.3
Miscellaneous income		38		38		—			—			144			112		32			28.6

Total other income		110		100		10			10.0			349			298		51			17.1

Total noninterest income	$	531	$	482	$	49			10.2	%	$	1,517		$	1,450	$	67			4.6	%

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										Nine months ended
	September 30,				Change						September 30,				Change
dollars in millions	2005		2004		Amount			Percent			2005		2004		Amount			Percent

Brokerage commissions and fee income	$	61	$	61		—			—		$	186	$	197	$	(11	)		(5.6	)%
Personal asset management and custody fees		39		38	$	1			2.6	%		115		117		(2	)		(1.7	)
Institutional asset management and custody fees		35		36		(1	)		(2.8	)		107		107		—			—

Total trust and investment services income	$	135	$	135		—			—		$	408	$	421	$	(13	)		(3.1	)%

For the year-to-date period, the decrease in trust and investment services income from the first nine months of 2004 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 September 30, 2005, Key’s bank, trust and registered investment advisory subsidiaries had assets under management of $76.3 billion, representing a 7% increase from $71.2 billion at September 30, 2004. As shown in Figure 9, most 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.

Figure 9. Assets Under Management


	2005						2004
in millions	Third		Second		First		Fourth		Third

Assets under management by investment type:
Equity	$	34,912	$	34,959	$	34,374	$	34,788	$	32,431
Fixed income		11,492		11,957		12,754		12,885		12,514
Money market		9,235		9,355		9,857		10,802		10,748
Securities lending		20,702		20,536		19,349		16,082		15,540

Total	$	76,341	$	76,807	$	76,334	$	74,557	$	71,233


Proprietary mutual funds included in assets under management:
Equity	$	4,331	$	3,911	$	3,770	$	3,651	$	3,408
Fixed income		738		767		767		827		860
Money market		7,549		7,758		8,174		9,103		9,050

Total	$	12,618	$	12,436	$	12,711	$	13,581	$	13,318

Service charges on deposit accounts. The decrease in service charges on deposit accounts from the first nine months of 2004 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, the growth in investment banking and capital markets income compared with the third quarter of 2004 was due primarily to higher net gains from principal investing and an increase in income from dealer trading and derivatives, $14 million of which resulted from derivative transactions with clients. For the year to-date period, the increase from the first nine months of 2004 reflected improved results from dealer trading and derivatives, and higher income from other investments. Of the $45 million improvement in income from dealer trading and derivatives, $22 million came from derivative transactions with clients, while $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. For both the quarterly and year-to-date periods, the increase in total investment banking and capital markets income was moderated by a decrease in income from investment banking activities.

Figure 10. Investment Banking and Capital Markets Income


	Three months ended September 30,					Change						Nine months ended September 30,				Change
dollars in millions	2005		2004			Amount			Percent			2005		2004		Amount			Percent

Investment banking income	$	21	$	32		$	(11	)		(34.4	)%	$	57	$	83	$	(26	)		(31.3	)%
Net gains from principal investing		31		10			21			210.0			44		39		5			12.8
Foreign exchange income		11		7			4			57.1			29		31		(2	)		(6.5	)
Dealer trading and derivatives income (loss)		16		(2	)		18			N/M			45		—		45			N/M
Income from other investments		14		12			2			16.7			37		25		12			48.0

Total investment banking and capital markets income	$	93	$	59		$	34			57.6	%	$	212	$	178	$	34			19.1	%

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 ($800 million at September 30, 2005, and $817 million at September 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. 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 for the first nine months of 2005 would have been significantly higher than the level reported for the same period last year, and net interest income would have been correspondingly lower.

Letter of credit and loan fees. The increase in non-yield-related loan fees from the third quarter of 2004 was due primarily to higher syndication and origination fees generated by the KeyBank Real Estate Capital line of business. The increase from the first nine months of last year reflected growth in these fees in both the KeyBank Real Estate Capital and Corporate Banking lines. These improved results reflect 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. During the third quarter of 2004, Key completed its annual securitization and sale of education loans, resulting in a gain of $13 million. In 2005, Key expects to complete a securitization and sale of education loans during the fourth quarter. The types of loans sold during 2004 and the first nine months of 2005 are presented in Figure 15 on page 50.

Noninterest expense

Noninterest expense for the third quarter of 2005 was $781 million, compared with $729 million for the third quarter of 2004. For the first nine months of the year, noninterest expense was $2.3 billion, compared with $2.1 billion for the first nine months of last year.

As shown in Figure 11, higher costs associated with personnel, net occupancy, computer processing and a variety of other expense components contributed to the increase from the year-ago quarter.

For the year-to-date period, the increase in noninterest expense was due largely to increases in the personnel (see further discussion below), net occupancy, computer processing and “miscellaneous expense” components. Most of 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 attributable largely to a $20 million contribution to the Key Foundation recorded during the first quarter that will be used to fund future contributions, an $11 million increase in costs incurred for loan servicing, and an $11 million reserve established during the second quarter of 2005 in connection with Key’s education lending business. This reserve was established to absorb noncredit-related losses that are expected to result from Key’s election to discontinue the funding of new student loans for certain schools. The amount of the reserve was based on Key’s evaluation of the likelihood that the schools will close and the dollar amount of unfunded student loan commitments through the end of 2005. At September 30, 2005, the balance remaining in the reserve was $10 million.

Figure 11. Noninterest Expense


	Three months ended										Nine months ended
	September 30,				Change						September 30,						Change
dollars in millions	2005		2004		Amount			Percent			2005			2004			Amount			Percent

Personnel	$	414	$	394	$	20			5.1	%	$	1,190		$	1,138		$	52			4.6	%
Net occupancy		66		57		9			15.8			212			176			36			20.5
Computer processing		54		49		5			10.2			155			141			14			9.9
Equipment		28		28		—			—			84			89			(5	)		(5.6	)
Professional fees		29		27		2			7.4			87			81			6			7.4
Marketing		29		26		3			11.5			88			79			9			11.4
Other expense:
Operating lease expense		40		39		1			2.6			118			115			3			2.6
Postage and delivery		12		13		(1	)		(7.7	)		37			39			(2	)		(5.1	)
Telecommunications		8		8		—			—			23			22			1			4.5
Franchise and business taxes		8		9		(1	)		(11.1	)		25			17			8			47.1
OREO expense, net		2		3		(1	)		(33.3	)		6			14			(8	)		(57.1	)
Provision for losses on lending-related commitments		2		2		—			—			(7	)		(5	)		(2	)		(40.0	)
Miscellaneous expense		89		74		15			20.3			285			237			48			20.3

Total other expense		161		148		13			8.8			487			439			48			10.9

Total noninterest expense	$	781	$	729	$	52			7.1	%	$	2,303		$	2,143		$	160			7.5	%


Average full-time equivalent employees		19,456		19,635		(179	)		(.9	)%		19,508			19,577			(69	)		(.4	)%

Personnel. As shown in Figure 12, personnel expense, the largest category of Key’s noninterest expense, rose by $52 million, or 5%, from the first nine months of 2004, reflecting increases in all personnel expense components with the exception of incentive compensation.

Figure 12. Personnel Expense


	Three months ended September 30,				Change					Nine months ended September 30,				Change
dollars in millions	2005		2004		Amount		Percent			2005		2004		Amount			Percent

Salaries	$	222	$	213	$	9		4.2	%	$	658	$	632	$	26			4.1	%
Incentive compensation		104		103		1		1.0			276		280		(4	)		(1.4	)
Employee benefits		67		63		4		6.3			207		193		14			7.3
Stock-based compensation		17		12		5		41.7			37		27		10			37.0
Severance		4		3		1		33.3			12		6		6			100.0

Total personnel expense	$	414	$	394	$	20		5.1	%	$	1,190	$	1,138	$	52			4.6	%

For the third quarter of 2005, the average number of full-time equivalent employees was 19,456, compared with 19,429 for the second quarter of 2005 and 19,635 for the year-ago quarter.

Franchise and business taxes. The increase in franchise and business taxes from the first nine months 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 $122 million for the third quarter of 2005, compared with $101 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 30.5% for the third quarter of 2005, compared with 28.6% for the year-ago quarter. For the first nine months of 2005, the provision for income taxes was $346 million, compared with $293 million for the same period last year. The effective tax rates for these periods were 29.3% and 28.3%, 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, credits associated with investments in low-income housing projects and tax deductions associated with dividends paid to Key’s 401(k) savings plan. 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, income from corporate-owned life insurance and tax deductions associated with dividends paid to Key’s 401(k) savings plan 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. Also contributing to the higher effective tax rates is a third quarter 2005 write-off of certain foreign deferred taxes associated with Key’s leasing business. Increases in the effective rates from those reported one year ago were moderated by higher tax credits.

Financial Condition

Loans

At September 30, 2005, total loans outstanding were $65.6 billion, compared with $63.4 billion at December 31, 2004, and $62.0 billion at September 30, 2004. The composition of Key’s loan portfolio at each of these dates is presented in Note 6 (“Loans and Loans Held for Sale”), which begins 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 $6.9 billion, or 18%, 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 September 30, 2005, Key’s commercial real estate portfolio included mortgage loans of $8.6 billion and construction loans of $6.7 billion. The average size of a mortgage loan was $.6 million and the largest mortgage loan had a balance of $88 million. The average size of a construction loan commitment was $5 million. The largest construction loan commitment was $124 million, of which $7 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 59% of Key’s total average commercial real estate loans during the third 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.

On July 1, 2005, we expanded our FHA financing and mortgage servicing capabilities by acquiring Malone Mortgage Company, based in Dallas, Texas with a servicing portfolio of approximately $1.3 billion at the date of acquisition. 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 13. Commercial Real Estate Loans


September 30, 2005	Geographic Region										Percent of
dollars in millions	East		Midwest		Central		West		Total		Total

Nonowner-occupied:
Multi-family properties	$	666	$	583	$	455	$	643	$	2,347		15.3	%
Residential properties		712		161		244		696		1,813		11.8
Retail properties		166		586		189		168		1,109		7.2
Warehouses		194		195		78		94		561		3.7
Land and development		301		61		75		125		562		3.7
Office buildings		148		65		70		96		379		2.5
Manufacturing facilities		8		23		6		17		54		.4
Hotels/Motels		69		42		5		3		119		.8
Health facilities		45		—		—		21		66		.4
Other		266		377		32		136		811		5.3

		2,575		2,093		1,154		1,999		7,821		51.1
Owner-occupied		1,921		2,506		804		2,266		7,497		48.9

Total	$	4,496	$	4,599	$	1,958	$	4,265	$	15,318		100.0	%


Nonowner-occupied:
Nonperforming loans	$	3	$	3		—		—	$	6		N/M
Accruing loans past due 90 days or more		1		5		—		—		6		N/M
Accruing loans past due 30 through 89 days		29		5	$	22	$	5		61		N/M

N/M = Not Meaningful

Consumer loan portfolio. As shown in Note 6, consumer loans outstanding decreased by $3.3 billion, or 14%, 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 September 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 of 2004 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. 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 from our Community Banking line of business (75% of the home equity portfolio at September 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. 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.

Figure 14. Home Equity Loans


	2005									2004
dollars in millions	Third			Second			First			Fourth			Third

SOURCES OF LOANS OUTSTANDING AT PERIOD END
Community Banking	$	10,345		$	10,404		$	10,416		$	10,554		$	10,472

Champion Mortgage Company		2,765			2,817			2,869			2,866			2,882
Key Home Equity Services division		762			700			651			642			1,596

National Home Equity unit		3,527			3,517			3,520			3,508			4,478

Total	$	13,872		$	13,921		$	13,936		$	14,062		$	14,950


Nonperforming loans at period end	$	75		$	74		$	76		$	80		$	149
Net charge-offs for the period		6			5			5			24			7
Yield for the period		6.72	%		6.49	%		6.19	%		5.94	%		5.67	%

Sales and securitizations. During the past twelve months, Key sold $2.2 billion of commercial real estate loans, $1.7 billion of indirect consumer loans, $1.1 billion of home equity loans, $502 million of education loans ($222 million through securitizations), $395 million of residential real estate loans, and $122 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 nine months of 2005 and all of 2004.

Figure 15. Loans Sold (Including Loans Held for Sale)


			Commercial		Commercial		Residential		Home		Consumer
in millions	Commercial		Real Estate		Lease Financing		Real Estate		Equity		—Indirect		Education		Total

2005
Third quarter	$	40	$	710		—	$	99	$	3	$	111	$	48	$	1,011
Second quarter		21		336		—		99		—		635		128		1,219
First quarter		18		389		—		98		31		992		208		1,736

Total	$	79	$	1,435		—	$	296	$	34	$	1,738	$	384	$	3,966

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. In the event of default, Key is subject to recourse with respect to approximately $631 million of the $48.4 billion of loans administered or serviced at September 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.

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


	September 30,		June 30,		March 31,		December 31,		September 30,
in millions	2005		2005		2005		2004		2004

Commercial real estate loans	$	43,555	$	38,630	$	35,534	$	33,252	$	29,098
Education loans		4,518		4,708		4,861		4,916		4,978
Commercial loans		233		222		216		210		192
Home equity loans		85		96		116		130		147
Commercial lease financing		29		35		40		45		—

Total	$	48,420	$	43,691	$	40,767	$	38,553	$	34,415

Securities

At September 30, 2005, the securities portfolio totaled $8.5 billion and included $7.1 billion of securities available for sale, $98 million of investment securities and $1.3 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.

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 September 30, 2005, Key had $6.5 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 September 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.

The weighted-average maturity of the securities available-for-sale portfolio was 2.2 years at September 30, 2005, compared with 2.3 years at December 31, 2004.

The size and composition of Key’s securities available-for-sale 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.

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.

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 ^b			Total			Yield ^c

SEPTEMBER 30, 2005
Remaining maturity:
One year or less	$	264		$	1		$	557		$	5		$	19		$	28		$	874			4.70	%
After one through five years		12			2			5,692			200			120			92			6,118			4.24
After five through ten years		3			6			15			40			32			2			98			8.83
After ten years		4			10			2			13			—			5			34			7.15

Fair value	$	283		$	19		$	6,266		$	258		$	171		$	127		$	7,124			—
Amortized cost		283			19			6,390			255			98			120			7,165			4.39	%
Weighted-average yield		3.69	%		7.23	%		3.84	%		5.56	%		38.96	%		4.11%	^d		4.39%	^c,d		—
Weighted-average maturity	.5 years			10.9 years			2.2 years			4.2 years			4.4 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			302			7,435			4.26	%

SEPTEMBER 30, 2004
Fair value	$	38		$	21		$	6,347		$	339		$	188		$	249		$	7,182			—
Amortized cost		38			20			6,422			329			109			245			7,163			4.25	%

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

(b)		Includes primarily marketable equity securities.

(c)		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%.

(d)		Excludes securities of $95 million at September 30, 2005, that have no stated yield.

Investment securities. Commercial paper and 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

SEPTEMBER 30, 2005
Remaining maturity:
One year or less	$	12	$	45	$	57		4.31	%
After one through five years		27		11		38		6.79
After five through ten years		3		—		3		8.69

Amortized cost	$	42	$	56	$	98		5.39	%
Fair value		43		56		99		—
Weighted-average maturity	2.0 years		.8 years		1.3 years			—

DECEMBER 31, 2004
Amortized cost	$	58	$	13	$	71		8.01	%
Fair value		61		13		74		—

SEPTEMBER 30, 2004
Amortized cost	$	65	$	13	$	78		8.15	%
Fair value		69		13		82		—

(a)

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

Other investments. Principal investments — investments in equity and mezzanine instruments made by Key’s Principal Investing unit ^___are carried at fair value, which aggregated $800 million at September 30, 2005, $816 million at December 31, 2004, and $817 million at September 30, 2004. They represent approximately 61% of other investments at September 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.

Deposits and other sources of funds

“Core deposits” ^___ domestic deposits other than certificates of deposit of $100,000 or more ^___ are Key’s primary source of funding. During the third quarter of 2005, core deposits averaged $47.9 billion and represented 61% of the funds Key used to support earning assets, compared with $44.1 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 and 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 $15.5 billion in the third quarter of 2005, compared with $16.1 billion during the year-ago quarter. The decrease was attributable to a lower level of federal funds purchased and securities sold under repurchase agreements. The need for this funding source has diminished as a result of strong deposit growth, a higher level of capital and other interest-free funds, and loan sales.

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

Capital

Shareholders’ equity. Total shareholders’ equity at September 30, 2005, was $7.5 billion, up $405 million from December 31, 2004. Factors contributing to the change in shareholders’ equity during the first nine months 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.

Figure 19. Changes in Common Shares Outstanding

in thousands

3Q05

2Q05

1Q05

4Q04

3Q04

Shares outstanding at beginning of period

408,231

407,297

407,570

405,723

407,243

Issuance of shares under employee benefit and dividend reinvestment plans

1,561

934

2,227

1,847

980

Repurchase of common shares

(1,250

)

—

(2,500

)

—

(2,500

)

Shares outstanding at end of period

408,542

408,231

407,297

407,570

405,723

Key repurchases its common shares periodically under a repurchase program authorized by Key’s Board of Directors. Key’s repurchase activity for each of the three months ended September 30, 2005, is summarized in Figure 20.

Figure 20. Share Repurchases


					Number of		Remaining Number
					Shares Purchased		of Shares that may
	Number of		Average		under a Publicly		be Purchased Under
	Shares		Price Paid		Announced		the Program as
in thousands, except per share data	Purchased		per Share		Program ^a		of each Month-End

July 1-31, 2005		—		—		—		26,961
August 1-31, 2005		—		—		—		26,961
September 1-30, 2005		1,250	$	32.03		1,250		25,711

Total		1,250	$	32.03		1,250

(a)

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

At September 30, 2005, Key had 83,346,435 treasury shares. Management expects to reissue those shares from time-to-time to support the employee stock purchase, stock option and dividend reinvestment plans, and for other corporate purposes. During the first nine months of 2005, Key reissued 4,722,676 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 8.15% at September 30, 2005, and 7.85% at September 30, 2004. Key’s ratio of tangible equity to tangible assets was 6.68% at September 30, 2005, and 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 September 30, 2005, Key’s Tier 1 capital ratio was 7.72%, and its total capital ratio was 11.83%.

Another indicator of capital adequacy, the leverage ratio, is defined as Tier 1 capital as a percentage of average quarterly tangible assets. Leverage ratio requirements vary with the condition of the financial institution. Bank holding companies that either have the highest supervisory rating or have implemented the Federal Reserve’s risk-adjusted measure for market risk—as KeyCorp has—must maintain a minimum leverage ratio of 3.00%. All other bank holding companies must maintain a minimum ratio of 4.00%. As of September 30, 2005, Key had a leverage ratio of 8.60%.

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 September 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 September 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 21 presents the details of Key’s regulatory capital position at September 30, 2005, December 31, 2004, and September 30, 2004.

Figure 21. Capital Components and Risk-Weighted Assets


	September 30,			December 31,			September 30,
dollars in millions	2005			2004			2004

TIER 1 CAPITAL
Common shareholders’ equity^a	$	7,578		$	7,143		$	6,972
Qualifying capital securities		1,542			1,292			1,292
Less: Goodwill		1,344			1,359			1,179
Other assets^b		162			132			75

Total Tier 1 capital		7,614			6,944			7,010

TIER 2 CAPITAL
Allowance for losses on loans and lending-related commitments		1,152			1,205			1,147
Net unrealized gains on equity securities available for sale		3			3			2
Qualifying long-term debt		2,899			2,880			2,439

Total Tier 2 capital		4,054			4,088			3,588

Total risk-based capital	$	11,668		$	11,032		$	10,598

RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet	$	75,594		$	73,911		$	70,161
Risk-weighted off-balance sheet exposure		24,212			23,519			21,974
Less: Goodwill		1,344			1,359			1,179
Other assets^b		769			649			568
Plus: Market risk-equivalent assets		945			733			609

Gross risk-weighted assets		98,638			96,155			90,997
Less: Excess allowance for losses on loans and lending-related commitments		—			—			169

Net risk-weighted assets	$	98,638		$	96,155		$	90,828

AVERAGE QUARTERLY TOTAL ASSETS	$	90,623		$	89,248		$	86,532

CAPITAL RATIOS
Tier 1 risk-based capital ratio		7.72	%		7.22	%		7.72	%
Total risk-based capital ratio		11.83			11.47			11.67
Leverage ratio^c		8.60			7.96			8.27

(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.

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.

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. Although our rate risk guidelines currently call for a slightly asset-sensitive position, our bias is to be modestly liability-sensitive in the long run.

As of September 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 .93% if short-term interest rates gradually increase by 200

basis points 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 .22%.

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 reflects 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 September 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 .37% 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 increase by approximately .46% 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

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 22 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 22. Portfolio Swaps By Interest Rate Risk Management Strategy


	September 30, 2005													September 30, 2004
	Notional		Fair			Maturity		Weighted-Average Rate						Notional		Fair
dollars in millions	Amount		Value			(Years)		Receive			Pay			Amount		Value

Receive fixed/pay variable—conventional A/LM ^a	$	2,200	$	(5	)		1.0		4.0	%		3.8	%	$	8,725	$	14
Receive fixed/pay variable—conventional debt		5,962		139			8.0		5.3			3.8			5,669		305
Pay fixed/receive variable—conventional debt		955		(27	)		5.4		3.1			4.1			1,087		(34	)
Pay fixed/receive variable—forward starting		—		—			—		—			—			12		—
Foreign currency—conventional debt		2,441		(101	)		3.7		3.0			4.0			1,872		269
Basis swaps^b		9,500		(1	)		.4		3.6			3.8			9,700		(7	)

Total portfolio swaps	$	21,058	$	5			3.2		4.0	%		3.8	%	$	27,065	$	547


(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 September 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 nine months of 2005, Key’s aggregate daily average, minimum and maximum VAR amounts were $2.3 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 $1.3 million, $.8 million and $2.7 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 nine months of 2005. The daily average, minimum and maximum VAR exposures for these derivatives were $1.0 million, zero and $3.6 million, respectively.

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 September 30, 2005, was $1.093 billion, or 1.67% of loans. This compares with $1.251 billion, or 2.02% of loans, at September 30, 2004. For more information about impaired loans, see Note 8 (“Impaired Loans and Other Nonperforming Assets”), which begins on page 20. At September 30, 2005, the allowance for loan losses was 303.61% of nonperforming loans, compared with 321.59% at September 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 $59 million at September 30, 2005, compared with $65 million at September 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 September 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, healthcare and commercial real estate. These changes reflect the fluctuations that occur in loan portfolios from time to time, underscoring the benefits of Key’s strategy to limit the concentration of credit risk in any single portfolio.

As shown in Figure 23, the decrease in Key’s allowance for loan losses since September 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 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 23. Allocation of the Allowance for Loan Losses


	September 30, 2005								December 31, 2004								September 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	$	545		49.8	%		29.7	%	$	560		49.2	%		29.6	%	$	572		45.7	%		28.2	%
Real estate — commercial mortgage		37		3.4			13.1			38		3.3			12.8			35		2.8			11.8
Real estate — construction		142		13.0			10.2			147		12.9			8.7			142		11.4			8.3
Commercial lease financing		213		19.5			15.8			224		19.7			16.0			179		14.3			13.4

Total commercial loans		937		85.7			68.8			969		85.1			67.1			928		74.2			61.7
Real estate — residential mortgage		9		.8			2.3			9		.8			2.3			4		.3			2.5
Home equity		65		6.0			21.1			65		5.7			22.2			92		7.4			24.1
Consumer — direct		45		4.1			2.7			45		4.0			3.1			58		4.6			3.2
Consumer — indirect lease financing		2		.2			.1			4		.4			.2			5		.4			.2
Consumer — indirect other		35		3.2			5.0			46		4.0			5.1			164		13.1			8.3

Total consumer loans		156		14.3			31.2			169		14.9			32.9			323		25.8			38.3

Total	$	1,093		100.0	%		100.0	%	$	1,138		100.0	%		100.0	%	$	1,251		100.0	%		100.0	%

Net loan charge-offs. Net loan charge-offs for the third quarter of 2005 totaled $49 million, or .30% 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 $76 million, or .49% 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 24. 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.

Figure 24. Summary of Loan Loss Experience


	Three months ended						Nine months ended
	September 30,						September 30,
dollars in millions	2005			2004			2005			2004

Average loans outstanding during the period	$	64,758		$	61,254		$	64,346		$	60,344

Allowance for loan losses at beginning of period	$	1,100		$	1,276		$	1,138		$	1,406
Loans charged off:
Commercial, financial and agricultural		14			33			58			125
Real estate — commercial mortgage		4			8			16			26
Real estate — construction		—			—			5			5

Total commercial real estate loans^a		4			8			21			31
Commercial lease financing		18			9			43			34

Total commercial loans		36			50			122			190
Real estate — residential mortgage		1			6			5			15
Home equity		7			9			20			37
Consumer — direct		10			9			28			32
Consumer — indirect lease financing		1			1			3			6
Consumer — indirect other		14			38			44			130

Total consumer loans		33			63			100			220

		69			113			222			410
Recoveries:
Commercial, financial and agricultural		4			10			14			35
Real estate — commercial mortgage		1			1			2			4
Real estate — construction		—			—			2			4

Total commercial real estate loans^a		1			1			4			8
Commercial lease financing		7			3			27			10

Total commercial loans		12			14			45			53
Real estate — residential mortgage		—			—			1			1
Home equity		1			2			4			4
Consumer — direct		2			3			6			7
Consumer — indirect lease financing		1			1			2			3
Consumer — indirect other		4			17			13			51

Total consumer loans		8			23			26			66

		20			37			71			119

Net loans charged off		(49	)		(76	)		(151	)		(291	)
Provision for loan losses		43			51			107			206
Foreign currency translation adjustment		(1	)		—			(1	)		—
Reclassification of allowance for credit losses on lending-related commitments ^b		—			—			—			(70	)

Allowance for loan losses at end of period	$	1,093		$	1,251		$	1,093		$	1,251


Net loan charge-offs to average loans		.30	%		.49	%		.32	%		.64	%
Allowance for loan losses to period-end loans		1.67			2.02			1.67			2.02
Allowance for loan losses to nonperforming loans		303.61			321.59			303.61			321.59

(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.

Nonperforming assets. Figure 25 shows the composition of Key’s nonperforming assets. These assets totaled $393 million at September 30, 2005, and represented .60% of loans, other real estate owned (known as “OREO”) and other nonperforming assets, compared with $460 million, or .74%, at September 30, 2004. As shown in Figure 25, reductions in nonperforming loans in the commercial mortgage and home equity portfolios, along with a substantial decrease in OREO, drove the improvement. These reductions were offset in part by an increase in commercial lease financing receivables on nonaccrual status. This increase occurred during the third quarter of 2005 and was attributable to Key’s commercial airline lease portfolio. Key’s total exposure to commercial passenger airline leases at September 30, 2005, was $213 million, of which $103 million is on nonaccrual status. Management believes that adequate reserves have been established to absorb any losses inherent in the commercial airline lease portfolio at September 30, 2005.

At September 30, 2005, our 20 largest nonperforming loans totaled $174 million, representing 48% of total loans on nonperforming status.

The level of Key’s delinquent loans increased during the third quarter of 2005. Prior to this quarter, the level of Key’s delinquent loans had been trending downward. Over the course of a normal business cycle, fluctuations in the level of Key’s delinquent loans will be experienced.

Fig 25. Summary of Nonperforming Assets and Past Due Loans


	September 30,			June 30,			March 31,			December 31,			September 30,
dollars in millions	2005			2005			2005			2004			2004

Commercial, financial and agricultural	$	50		$	58		$	46		$	37		$	55

Real estate — commercial mortgage		33			36			41			37			55
Real estate — construction		3			3			5			20			1

Total commercial real estate loans^a		36			39			46			57			56
Commercial lease financing		151			73			75			84			74

Total commercial loans		237			170			167			178			185
Real estate — residential mortgage		40			38			43			39			36
Home equity		75			74			76			80			149
Consumer — direct		3			4			3			3			4
Consumer — indirect lease financing		1			1			5			1			1
Consumer — indirect other		4			5			5			7			14

Total consumer loans		123			122			132			130			204

Total nonperforming loans		360			292			299			308			389

Nonperforming loans held for sale		2			1			6			8			1

OREO		29			33			58			53			60
Allowance for OREO losses		(3	)		(2	)		(4	)		(4	)		(5	)

OREO, net of allowance		26			31			54			49			55
Other nonperforming assets		5			14			12			14			15

Total nonperforming assets	$	393		$	338		$	371		$	379		$	460


Accruing loans past due 90 days or more	$	94		$	74		$	79		$	122		$	139
Accruing loans past due 30 through 89 days		550			475			495			491			602

Nonperforming loans to period-end loans		.55	%		.45	%		.47	%		.49	%		.63	%
Nonperforming assets to period-end loans plus OREO and other nonperforming assets		.60			.52			.58			.60			.74

(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 26. The types of activity that caused the change in Key’s nonperforming loans during each of the last five quarters are summarized in Figure 27.

Figure 26. Commercial, Financial and Agricultural Loans


					Nonperforming Loans
September 30, 2005	Total		Loans				% of Loans
dollars in millions	Commitments^a		Outstanding		Amount		Outstanding

Industry classification:
Manufacturing	$	9,749	$	2,989	$	4		.1	%
Services		8,980		2,690		4		.1
Retail trade		5,961		3,373		6		.2
Financial services		5,326		1,994		—		—
Property management		3,740		1,412		3		.2
Public utilities		3,383		370		—		—
Wholesale trade		3,282		1,364		16		1.2
Insurance		2,166		71		—		—
Building contractors		1,831		839		3		.4
Public administration		1,194		396		—		—
Transportation		1,079		455		4		.9
Communications		1,028		370		—		—
Agriculture/forestry/fishing		856		530		3		.6
Mining		647		207		—		—
Individuals		79		52		—		—
Other		2,875		2,339		7		.3

Total	$	52,176	$	19,451	$	50		.3	%


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

Figure 27. Summary of Changes in Nonperforming Loans


	2005									2004
in millions	Third			Second			First			Fourth			Third

Balance at beginning of period	$	292		$	299		$	308		$	389		$	428
Loans placed on nonaccrual status		126			58			71			88			119
Charge-offs		(49	)		(48	)		(54	)		(91	)		(76	)
Loans sold		(3	)		—			(5	)		(66	)		(35	)
Payments		(5	)		(13	)		(9	)		(11	)		(32	)
Transfers to OREO		—			(4	)		(12	)		—			—
Loans returned to accrual status		(1	)		—			—			(1	)		(15	)

Balance at end of period	$	360		$	292		$	299		$	308		$	389

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.

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 28 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 September 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. Since December 31, 2003, 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 acquisitions completed during the fourth quarter of 2004, lending and purchases of new securities.

Since December 31, 2003, the primary sources of cash from financing activities have been the growth in deposits (including growth in eurodollar deposits during 2004), the use of short-term borrowings during 2005 and the issuance of long-term debt. During the same period, significant outlays of cash have been made to repay debt issued in prior periods. Cash outlays were also made during the fourth quarter of 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 nine-month periods ended September 30, 2005 and 2004. Sources and uses of cash for the full year ended December 31, 2004, are presented on page 6 of Key’s 2004 Annual Report to Shareholders.

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 nine months of 2005, KBNA paid the parent a total of $650 million in dividends, and nonbank subsidiaries paid a total of $111 million in dividends. As of the close of business on September 30, 2005, KBNA had an additional $688 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 September 30, 2005, the parent company held $1.4 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 fourteen 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 nine months of 2005, there were $1.4 billion of notes issued under this program. These notes have original maturities in excess of one year and are included in “long-term debt.” At September 30, 2005, $14.5 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 nine months of 2005. At September 30, 2005, $6.5 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 September 30, 2005, unused capacity under the parent’s shelf registration statement totaled $2.7 billion.

Commercial paper. The parent company has a commercial paper program that provides funding availability of up to $500 million. As of September 30, 2005, there were no borrowings outstanding under the commercial paper program.

Key has a separate commercial paper program at a Canadian subsidiary 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 September 30, 2005, borrowings outstanding under this commercial paper program totaled C$767 million in Canadian currency and $78 million in U.S. currency (equivalent to C$90 million in Canadian currency).

Key’s debt ratings are shown in Figure 28. 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 28. Debt Ratings

Senior

Subordinated

Short-term

Long-Term

Capital

September 30, 2005

Borrowings

Debt

Securities

KeyCorp (the parent company)

Standard & Poor’s

A-2

A-

BBB+

BBB

Moody’s

P-1

Fitch

A-

Dominion

N/A

KBNA

Standard & Poor’s

A-1

A-

N/A

Moody’s

P-1

N/A

Fitch

A-

N/A

Dominion

R-1 (middle)

A (high)

N/A

Key Nova Scotia Funding Company (“KNSF”)

Dominion^(a)

R-1 (middle)

N/A

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

N/A=Not Applicable

The rating agencies’ outlook for all of the ratings for the entities shown in the above table was stable at September 30, 2005.

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.

Regulatory agreements. On October 17, 2005, KeyCorp entered into a memorandum of understanding with the Federal Reserve Bank of Cleveland (“FRB”), and KBNA entered into a consent order with the Comptroller of the Currency (“OCC”) concerning compliance-related matters, particularly the Bank Secrecy Act. Management does not expect these actions to have a material effect on Key’s operating results; neither the OCC nor the FRB imposed a fine or civil money penalty in the matter. As part of the consent order and memorandum of understanding, Key has agreed to continue to strengthen its anti-money laundering and other compliance controls.

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.

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.


	Three months ended						Nine months ended
	September 30,						September 30,
	2005			2004			2005			2004

Average option life	5.0 years			5.0 years			5.0 years			5.1 years
Future dividend yield		3.78	%		4.24	%		3.79	%		4.23	%
Share price volatility		.274			.278			.274			.279
Weighted-average risk-free interest rate		4.0	%		3.8	%		4.0	%		3.8	%


		Page Number
Item 1.	Financial Statements

	Consolidated Balance Sheets ¾ September 30, 2005, December 31, 2004 and September 30, 2004		3

	Consolidated Statements of Income ¾ Three and nine months ended September 30, 2005 and 2004		4

	Consolidated Statements of Changes in Shareholders’ Equity ¾ Nine months ended September 30, 2005 and 2004		5

	Consolidated Statements of Cash Flow ¾ Nine months ended September 30, 2005 and 2004		6

	Notes to Consolidated Financial Statements		7

	Report of Independent Registered Public Accounting Firm		30

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31

Item 3.	Quantitative and Qualitative Disclosure about Market Risk		68

Item 4.	Controls and Procedures		68


Item 1.	Legal Proceedings	68

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 6.	Exhibits	68

	Signature	69

	Exhibits	70
EX-15 Acknowledgement of Independent Account Firm
EX-31.1 302 Certification of CEO
EX-31.2 302 Certification of CFO
EX-32.1 906 Certification for CEO
EX-32.2 906 Certification for CFO


(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.


	KEYCORP (Registrant)
Date: November 2, 2005	/s/ Lee Irving
	By:	Lee Irving Executive Vice President and Chief Accounting Officer