KeyCorp (KeyBank) - 10-Q quarterly report FY

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q


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

For the Quarterly Period Ended June 30, 2005

or


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ______ To ______

Commission File Number 0-850

KeyCorp

(Exact name of registrant as specified in its charter)


Ohio		34-6542451

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

127 Public Square, Cleveland, Ohio		44114-1306

(Address of principal executive offices)		(Zip Code)

	(216) 689-6300

	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Shares with a par value of $1 each		409,307,404 Shares

(Title of class)		(Outstanding at July 29, 2005)

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


		Page Number
Item 1.	Financial Statements

	Consolidated Balance Sheets — June 30, 2005, December 31, 2004 and June 30, 2004		3

	Consolidated Statements of Income — Three and six months ended June 30, 2005 and 2004		4

	Consolidated Statements of Changes in Shareholders’ Equity — Six months ended June 30, 2005 and 2004		5

	Consolidated Statements of Cash Flow — Six months ended June 30, 2005 and 2004		6

	Notes to Consolidated Financial Statements		7

	Report of Independent Registered Public Accounting Firm		30

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

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		68

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

Item 4.	Submission of Matters to a Vote of Security Holders		69

Item 6.	Exhibits		69

	Signature		70

	Exhibits		71
Exhibit 15 List
Exhibit 31.1 Certification 302-CEO
Exhibit 31.2 Certification 302-CFO
Exhibit 32.1 Certification 906-CEO
Exhibit 32.2 Certification 906-CFO

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets


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

	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	2,968		$	2,454		$	2,313
Short-term investments		1,845			1,472			2,639
Securities available for sale		7,271			7,451			7,023
Investment securities (fair value: $61, $74 and $85)		59			71			81
Other investments		1,409			1,421			1,231
Loans, net of unearned income of $2,157, $2,227 and $2,009		67,964			67,725			63,390
Less: Allowance for loan losses		1,100			1,138			1,276

Net loans		66,864			66,587			62,114
Premises and equipment		576			603			600
Goodwill		1,342			1,359			1,150
Other intangible assets		101			87			31
Corporate-owned life insurance		2,639			2,608			2,550
Accrued income and other assets		5,941			6,634			6,499

Total assets	$	91,015		$	90,747		$	86,231


LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts	$	22,071		$	21,748		$	19,956
Savings deposits		2,022			1,970			2,014
Certificates of deposit ($100,000 or more)		5,094			4,697			4,630
Other time deposits		10,794			10,435			10,342

Total interest-bearing		39,981			38,850			36,942
Noninterest-bearing		12,158			11,581			10,940
Deposits in foreign office — interest-bearing		5,924			7,411			4,541

Total deposits		58,063			57,842			52,423
Federal funds purchased and securities sold under repurchase agreements		2,824			2,145			3,794
Bank notes and other short-term borrowings		3,315			2,515			2,598
Accrued expense and other liabilities		5,873			6,282			5,979
Long-term debt		13,588			14,846			14,608

Total liabilities		83,663			83,630			79,402
SHAREHOLDERS’ EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares, none issued		—			—			—
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 491,888,780 shares		492			492			492
Capital surplus		1,504			1,491			1,469
Retained earnings		7,574			7,284			7,072
Treasury stock, at cost (83,657,893, 84,319,111 and 84,646,118 shares)		(2,132	)		(2,128	)		(2,121	)
Accumulated other comprehensive loss		(86	)		(22	)		(83	)

Total shareholders’ equity		7,352			7,117			6,829

Total liabilities and shareholders’ equity	$	91,015		$	90,747		$	86,231

See Notes to Consolidated Financial Statements (Unaudited).

3

Consolidated Statements of Income (Unaudited)


	Three months ended June 30,				Six months ended June 30,
dollars in millions, except per share amounts	2005		2004		2005			2004

INTEREST INCOME
Loans	$	999	$	809	$	1,965		$	1,634
Investment securities		1		1		2			2
Securities available for sale		80		78		160			166
Short-term investments		12		9		22			18
Other investments		24		8		32			16

Total interest income		1,116		905		2,181			1,836

INTEREST EXPENSE
Deposits		238		161		444			322
Federal funds purchased and securities sold under repurchase agreements		25		10		50			20
Bank notes and other short-term borrowings		19		9		36			21
Long-term debt		141		96		272			191

Total interest expense		423		276		802			554


NET INTEREST INCOME		693		629		1,379			1,282
Provision for loan losses		20		74		64			155

Net interest income after provision for loan losses		673		555		1,315			1,127

NONINTEREST INCOME
Trust and investment services income		135		141		273			286
Service charges on deposit accounts		76		86		146			170
Investment banking and capital markets income		52		73		119			119
Letter of credit and loan fees		47		37		87			70
Corporate-owned life insurance income		24		25		52			52
Electronic banking fees		24		22		46			40
Net gains from loan securitizations and sales		10		1		29			26
Net securities gains (losses)		1		7		(5	)		7
Other income		117		99		239			198

Total noninterest income		486		491		986			968

NONINTEREST EXPENSE
Personnel		386		371		776			744
Net occupancy		55		61		146			119
Computer processing		50		48		101			92
Equipment		28		30		56			61
Professional fees		30		29		58			54
Marketing		34		30		59			53
Other expense		170		148		326			291

Total noninterest expense		753		717		1,522			1,414

INCOME BEFORE INCOME TAXES		406		329		779			681
Income taxes		115		90		224			192


NET INCOME	$	291	$	239	$	555		$	489


Per common share:
Net income	$	.71	$	.58	$	1.36		$	1.18
Net income — assuming dilution		.70		.58		1.34			1.17
Weighted-average common shares outstanding (000)		408,754		410,292		408,510			413,486
Weighted-average common shares and potential common shares outstanding (000)		414,309		414,908		414,037			418,240

See Notes to Consolidated Financial Statements (Unaudited).

4

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)


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

BALANCE AT DECEMBER 31, 2003		416,494		$	492	$	1,448		$	6,838		$	(1,801	)	$	(8	)
Net income										489								$	489
Other comprehensive income (losses):
Net unrealized losses on securities available for sale, net of income taxes of ($24)^a																(41	)		(41	)
Net unrealized losses on derivative financial instruments, net of income taxes of ($20)																(35	)		(35	)
Foreign currency translation adjustments																1			1

Total comprehensive income																		$	414

Deferred compensation							10
Cash dividends declared on common shares ($.62 per share)										(255	)
Issuance of common shares under employee benefit and dividend reinvestment plans		4,787					11						116
Repurchase of common shares		(14,038	)										(436	)

BALANCE AT JUNE 30, 2004		407,243		$	492	$	1,469		$	7,072		$	(2,121	)	$	(83	)


BALANCE AT DECEMBER 31, 2004		407,570		$	492	$	1,491		$	7,284		$	(2,128	)	$	(22	)
Net income										555								$	555
Other comprehensive losses:
Net unrealized losses on securities available for sale, net of income taxes of ($8)^a																(16	)		(16	)
Net unrealized losses on derivative financial instruments, net of income taxes of ($8)																(14	)		(14	)
Foreign currency translation adjustments																(33	)		(33	)
Minimum pension liability adjustment, net of income taxes of ($1)																(1	)		(1	)

Total comprehensive income																		$	491

Deferred compensation							26
Cash dividends declared on common shares ($.65 per share)										(265	)
Issuance of common shares under employee benefit and dividend reinvestment plans		3,161					(13	)					80
Repurchase of common shares		(2,500	)										(84	)

BALANCE AT JUNE 30, 2005		408,231		$	492	$	1,504		$	7,574		$	(2,132	)	$	(86	)

(a) Net of reclassification adjustments.

See Notes to Consolidated Financial Statements (Unaudited)

5

Consolidated Statements of Cash Flow (Unaudited)


	Six months ended June 30,
in millions	2005			2004

OPERATING ACTIVITIES
Net income	$	555		$	489
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		64			155
Depreciation expense and software amortization		174			176
Net securities (gains) losses		5			(7	)
Net gains from principal investing		(13	)		(29	)
Net gains from loan securitizations and sales		(29	)		(26	)
Deferred income taxes		48			82
Net increase in mortgage loans held for sale		(233	)		(219	)
Net (increase) decrease in trading account assets		114			(453	)
Other operating activities, net		(411	)		(320	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		274			(152	)
INVESTING ACTIVITIES
Cash used in acquisitions, net of cash acquired		(7	)		—
Net increase in other short-term investments		(487	)		(582	)
Purchases of securities available for sale		(1,466	)		(911	)
Proceeds from sales of securities available for sale		57			33
Proceeds from prepayments and maturities of securities available for sale		1,547			1,425
Proceeds from prepayments and maturities of investment securities		12			16
Purchases of other investments		(209	)		(252	)
Proceeds from sales of other investments		168			78
Proceeds from prepayments and maturities of other investments		43			58
Net increase in loans, excluding acquisitions, sales and divestitures		(2,166	)		(3,807	)
Purchases of loans		(11	)		(33	)
Proceeds from loan securitizations and sales		2,061			2,501
Purchases of premises and equipment		(27	)		(50	)
Proceeds from sales of premises and equipment		7			4
Proceeds from sales of other real estate owned		47			35

NET CASH USED IN INVESTING ACTIVITIES		(431	)		(1,485	)
FINANCING ACTIVITIES
Net increase in deposits		227			1,588
Net increase in short-term borrowings		1,479			778
Net proceeds from issuance of long-term debt		1,752			1,349
Payments on long-term debt		(2,495	)		(1,875	)
Purchases of treasury shares		(84	)		(436	)
Net proceeds from issuance of common stock		57			89
Cash dividends paid		(265	)		(255	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		671			1,238

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS		514			(399	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		2,454			2,712

CASH AND DUE FROM BANKS AT END OF PERIOD	$	2,968		$	2,313

Additional disclosures relative to cash flow:
Interest paid	$	765		$	556
Income taxes paid		193			132
Noncash items:
Net transfer of loans to other real estate owned	$	32		$	50

See Notes to Consolidated Financial Statements (Unaudited).

6

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.

7

SFAS No. 123 requires companies like Key that have used the intrinsic value method to account for employee stock options to provide pro forma disclosures of the net income and earnings per share effect of accounting for stock options using the fair value method. Management estimates the fair value of options granted using the Black-Scholes option-pricing model. This model was originally developed to estimate the fair value of exchange-traded equity options, which (unlike employee stock options) have no vesting period or transferability restrictions. As a result, the Black-Scholes model is not a perfect indicator of the value of an employee stock option, but it is commonly used for this purpose. The estimated weighted-average fair value of options granted by Key during the six-month periods ended June 30, 2005 and 2004, was $7.12 and $6.50, respectively.

The Black-Scholes model requires several assumptions, which management developed and updates based on historical trends and current market observations. The accuracy of these assumptions is critical to management’s ability to accurately estimate the fair value of options. The assumptions pertaining to options issued during the three- and six-month periods ended June 30, 2005 and 2004, are shown in the following table.


	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004

Average option life	6.0 years			6.0 years			6.0 years			6.0 years
Future dividend yield		3.91	%		4.16	%		3.96	%		4.05	%
Share price volatility		.286			.292			.286			.292
Weighted-average risk-free interest rate		3.9	%		4.3	%		4.0	%		3.7	%

The model assumes that the estimated fair value of an option is amortized as compensation expense over the option’s vesting period. The pro forma effect of applying the fair value method of accounting to all forms of stock-based compensation (primarily stock options, restricted stock, performance shares, discounted stock purchase plans and certain deferred compensation-related awards) for the three- and six-month periods ended June 30, 2005 and 2004, is shown in the following table and would, if recorded, have been included in “personnel expense” on the income statement.


		Three months ended June 30,				Six months ended June 30,
in millions, except per share amounts		2005		2004		2005		2004

Net income, as reported		$	291	$	239	$	555	$	489
Add:	Stock-based employee compensation expense included in reported net income, net of related tax effects:
	Stock options expense		3		2		6		4
	All other stock-based employee compensation expense		3		3		7		6

			6		5		13		10

Deduct:	Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects:
	Stock options expense		3		4		6		7
	All other stock-based employee compensation expense		3		3		7		6

			6		7		13		13

Net income — pro forma		$	291	$	237	$	555	$	486

Per common share:
Net income		$	.71	$	.58	$	1.36	$	1.18
Net income — pro forma			.71		.58		1.36		1.18
Net income assuming dilution			.70		.58		1.34		1.17
Net income assuming dilution — pro forma			.70		.57		1.34		1.16

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

8

Accounting Pronouncements Adopted in 2005

SEC guidance on lease accounting. In February 2005, the Securities and Exchange Commission (“SEC”) issued interpretive guidance related to the accounting for operating leases that focused on three areas: (i) the amortization of leasehold improvements by a lessee where the lease term includes renewal options; (ii) rent recognition when the lease term contains a period where there are free or reduced rents (commonly referred to as “rent holidays”); and (iii) incentives related to leasehold improvements provided by a lessor to a lessee. As a result of this interpretive guidance, Key recorded a $30 million net occupancy charge during the first quarter of 2005 to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis.

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

Accounting Pronouncements Pending Adoption

Consolidation of Limited Partnerships. In June 2005, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners of a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” which provides guidance in determining whether a general partner controls a limited partnership. Issue No. 04-5 is effective for all limited partnerships created or modified after June 29, 2005, and for all other limited partnerships at the beginning of the first interim period in fiscal years beginning after December 15, 2005 (January 1, 2006 for Key). As of June 30, 2005, this guidance had no material effect on Key’s financial condition or results of operations. Management is currently evaluating the potential impact of Issue No. 04-5 for Key’s limited partnership interests for which this guidance is not yet effective. Adoption of this guidance is not expected to have any material effect on Key’s financial condition or results of operations.

Accounting Changes and Error Corrections. In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which addresses the accounting for and reporting of accounting changes and error corrections. This guidance requires retrospective application for the reporting of voluntary changes in accounting principles and changes required by an accounting pronouncement when transition provisions are not specified. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (January 1, 2006 for Key). Adoption of this guidance is not expected to have any material effect on Key’s financial condition or results of operations.

Share-based payments. In December 2004, the FASB issued SFAS No. 123R, which requires companies to recognize in the income statement the fair value of stock options and other equity-based compensation issued to employees. As discussed under the heading “Stock-Based Compensation” on page 7, Key adopted the fair value method of accounting as outlined in SFAS No. 123 effective January 1, 2003, using the prospective method. SFAS No. 123R replaces SFAS No. 123 and changes certain aspects of this accounting guidance for recognizing the fair value of stock compensation. SFAS No. 123R was to be effective for public companies for interim or annual periods beginning after June 15, 2005. However, in April 2005, the SEC delayed the effective date to the first interim period of the first fiscal year beginning after June 15, 2005 (January 1, 2006 for Key). Recently, both the SEC and the FASB issued interpretative guidance related to SFAS No. 123R. Management is currently evaluating the potential impact of this collective guidance, which is not expected to be material to Key’s financial condition or results of operations.

Medicare prescription law. In May 2004, the FASB issued Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act

9

of 2003.” The Medicare Modernization Act, which was enacted in December 2003 and takes effect in 2006, introduces a prescription drug benefit under Medicare. It also provides a federal subsidy to sponsors of retiree healthcare benefit plans that offer prescription drug coverage to retirees that is at least actuarially equivalent to the Medicare benefit. In accordance with Staff Position No. 106-2, sponsoring companies must recognize the subsidy in the measurement of their plan’s accumulated postretirement benefit obligation (“APBO”) and net postretirement benefit cost.

In January 2005, the Centers for Medicare and Medicaid Services issued the final regulations necessary to fully implement the Act, including the manner in which actuarial equivalence must be determined. Management expects that the prescription drug coverage related to Key’s retiree healthcare benefit plan will be actuarially equivalent, and that the subsidy will not have any material effect on Key’s APBO and net postretirement cost.

2. Earnings Per Common Share

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


	Three months ended June 30,				Six months ended June 30,
dollars in millions, except per share amounts	2005		2004		2005		2004

NET INCOME	$	291	$	239	$	555	$	489


WEIGHTED-AVERAGE COMMON SHARES
Weighted-average common shares outstanding (000)		408,754		410,292		408,510		413,486
Effect of dilutive common stock options and other stock awards (000)		5,555		4,616		5,527		4,754

Weighted-average common shares and potential common shares outstanding (000)		414,309		414,908		414,037		418,240


EARNINGS PER COMMON SHARE
Net income per common share	$	.71	$	.58	$	1.36	$	1.18
Net income per common share — assuming dilution		.70		.58		1.34		1.17

3. Acquisitions

American Express Business Finance Corporation

On December 1, 2004, Key acquired American Express Business Finance Corporation (“AEBF”), the equipment leasing unit of American Express’ small business division. AEBF had lease financing receivables of approximately $1.5 billion at the date of acquisition. The terms of the transaction are not material.

EverTrust Financial Group, Inc.

On October 15, 2004, Key acquired EverTrust Financial Group, Inc. (“EverTrust”), the holding company for EverTrust Bank, a state-chartered bank headquartered in Everett, Washington. EverTrust had assets of approximately $780 million and deposits of approximately $570 million at the date of acquisition. On November 12, 2004, EverTrust Bank was merged into KeyBank National Association (“KBNA”). The terms of the transaction are not material.

Sterling Bank & Trust FSB

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

Acquisition Pending as of June 30, 2005

Malone Mortgage Company

On July 1, 2005, Key acquired Malone Mortgage Company, a mortgage company headquartered in Dallas, Texas that serviced approximately $1.2 billion in loans at the date of acquisition. The terms of the transaction are not material.

10

4. Line of Business Results

Consumer Banking

Community Banking includes Retail Banking, Small Business and McDonald Financial Group.

Retail Banking provides individuals with branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans.

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

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

Consumer Finance includes Indirect Lending and National Home Equity.

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

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

Corporate and Investment Banking

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

Through its Victory Capital Management unit, Corporate Banking also manages or gives advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals. These portfolios may be managed in separate accounts, common funds or the Victory family of mutual funds.

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

Key Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients. Lease financing receivables and related revenues are assigned to other lines of business (primarily Corporate Banking) if those businesses are principally responsible for maintaining the relationship with the client.

Other Segments

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

Reconciling Items

Total assets included under “Reconciling Items” represent primarily the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling Items also

11

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

The table that spans pages 13 and 14 shows selected financial data for each major business group for the three- and six-month periods ended June 30, 2005 and 2004. This table is accompanied by supplementary information for each of the lines of business that comprise these groups. The information was derived from the internal financial reporting system that management uses to monitor and manage Key’s financial performance. U.S. generally accepted accounting principles guide financial accounting, but there is no authoritative guidance for “management accounting”—the way management uses its judgment and experience to make reporting decisions. Consequently, the line of business results Key reports may not be comparable with line of business results presented by other companies.

The selected financial data are based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. According to our policies:


¨		Net interest income is determined by assigning a standard cost for funds used to assets or a standard credit for funds provided to liabilities based on their assumed maturity, prepayment and/or repricing characteristics. The net effect of this funds transfer pricing is charged to the lines of business based on the total loan and deposit balances of each line.

¨		Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent to which each line actually uses the services.

¨		Key’s consolidated provision for loan losses is allocated among the lines of business based primarily on their actual net charge-offs, adjusted periodically for loan growth and changes in risk profile. The level of the consolidated provision is based on the methodology that management uses to estimate Key’s consolidated allowance for loan losses. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan Losses” on page 56 of Key’s 2004 Annual Report to Shareholders.

¨		Income taxes are allocated based on the statutory federal income tax rate of 35% (adjusted for tax-exempt interest income, income from corporate-owned life insurance and tax credits associated with investments in low-income housing projects) and a blended state income tax rate (net of the federal income tax benefit) of 2.5%.

¨		Capital is assigned based on management’s assessment of economic risk factors (primarily credit, operating and market risk) directly attributable to each line.

Developing and applying the methodologies that management uses to allocate items among Key’s lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect accounting enhancements, changes in the risk profile of a particular business or changes in Key’s organizational structure. The financial data reported for all periods presented in the tables reflect a number of changes that occurred during the first six months of 2005:


¨		Key reorganized and renamed some of its business groups and lines of business. The Investment Management Services group, which included McDonald Financial Group and Victory Capital Management, was disbanded. McDonald Financial Group, along with Retail Banking and Small Business, is now included as part of the Community Banking line of business within the Consumer Banking group. Victory Capital Management is included as part of the Corporate Banking line within the Corporate and Investment Banking group.

¨		Key began to charge the net consolidated effect of funds transfer pricing related to estimated deferred tax benefits associated with lease financing to the lines of business. In the past, this amount was included in “Other Segments.”

¨		Methodologies used to allocate certain overhead costs and a portion of the provision for loan losses were refined.

12


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

SUMMARY OF OPERATIONS
Net interest income (TE)	$	473		$	470		$	292		$	231		$	(19	)	$	(34	)
Noninterest income		233			220			231			222			27			49

Total revenue (TE)^a		706			690			523			453			8			15
Provision for loan losses		22			49			(2	)		25			—			—
Depreciation and amortization expense		35			37			52			50			—			—
Other noninterest expense		449			438			222			190			7			7

Income (loss) before income taxes (TE)		200			166			251			188			1			8
Allocated income taxes and TE adjustments		75			62			94			70			(9	)		(7	)

Net income (loss)	$	125		$	104		$	157		$	118		$	10		$	15


Percent of consolidated net income		43	%		44	%		54	%		49	%		3	%		6	%
Percent of total segments net income		43			44			54			50			3			6

AVERAGE BALANCES
Loans	$	32,105		$	33,813		$	34,943		$	28,012		$	407		$	544
Total assets^a		35,369			37,420			40,684			33,917			11,622			11,562
Deposits		41,567			39,305			9,691			7,867			5,121			3,823

OTHER FINANCIAL DATA
Net loan charge-offs	$	32		$	64		$	16		$	40			—			—
Return on average allocated equity		20.76	%		16.99	%		17.87	%		14.95	%		N/M			N/M
Average full-time equivalent employees		9,976			10,415			3,250			2,828			40			37


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

SUMMARY OF OPERATIONS
Net interest income (TE)	$	971		$	957		$	565		$	467		$	(57	)	$	(68	)
Noninterest income		462			450			447			429			77			87

Total revenue (TE)^a		1,433			1,407			1,012			896			20			19
Provision for loan losses		70			110			(6	)		45			—			—
Depreciation and amortization expense		70			76			104			100			—			—
Other noninterest expense		890			856			422			376			16			14

Income (loss) before income taxes (TE)		403			365			492			375			4			5
Allocated income taxes and TE adjustments		151			137			184			141			(19	)		(18	)

Net income (loss)	$	252		$	228		$	308		$	234		$	23		$	23


Percent of consolidated net income		45	%		46	%		56	%		48	%		4	%		5	%
Percent of total segments net income		43			47			53			48			4			5

AVERAGE BALANCES
Loans	$	32,726		$	33,971		$	34,559		$	27,697		$	422		$	570
Total assets^a		36,144			37,348			40,289			33,576			11,802			11,754
Deposits		41,316			39,117			9,238			7,673			5,510			3,531

OTHER FINANCIAL DATA
Net loan charge-offs	$	72		$	136		$	30		$	79			—			—
Return on average allocated equity		20.65	%		18.56	%		17.57	%		14.86	%		N/M			N/M
Average full-time equivalent employees		10,057			10,416			3,276			2,820			39			37

(a)		Substantially all revenue generated by Key’s major business groups is derived from clients resident in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software and goodwill, held by Key’s major business groups are located in the United States.

(b)		“Other noninterest expense” includes a $30 million ($19 million after tax) charge recorded during the first quarter of 2005 to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis.

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

13


Total Segments						Reconciling Items						Key
2005			2004			2005			2004			2005			2004


$	746		$	667		$	(23	)	$	(16	)	$	723		$	651
	491			491			(5	)		—			486			491

	1,237			1,158			(28	)		(16	)		1,209			1,142
	20			74			—			—			20			74
	87			87			—			—			87			87
	678			635			(12	)		(5	)		666			630

	452			362			(16	)		(11	)		436			351

	160			125			(15	)		(13	)		145			112

$	292		$	237		$	(1	)	$	2		$	291		$	239


	100	%		99	%		—			1	%		100	%		100	%
	100			100			N/A			N/A			N/A			N/A


$	67,455		$	62,369		$	205		$	115		$	67,660		$	62,484
	87,675			82,899			2,240			2,424			89,915			85,323
	56,379			50,995			(243	)		(239	)		56,136			50,756


$	48		$	104			—			—		$	48		$	104
	18.39	%		15.83	%		N/M			N/M			16.15	%		13.97	%

	13,266			13,280			6,163			6,234			19,429			19,514


Total Segments						Reconciling Items						Key
2005			2004			2005			2004			2005			2004


$	1,479		$	1,356		$	(42	)	$	(28	)	$	1,437		$	1,328
	986			966			—			2			986			968

	2,465			2,322			(42	)		(26	)		2,423			2,296
	64			155			—			—			64			155
	174			176			—			—			174			176
	1,328			1,246			20	^b		(8	)		1,348			1,238

	899			745			(62	)		(18	)		837			727

	316			260			(34	)		(22	)		282			238

$	583		$	485		$	(28	)	$	4		$	555		$	489


	105	%		99	%		(5	)%		1	%		100	%		100	%
	100			100			N/A			N/A			N/A			N/A


$	67,707		$	62,238		$	151		$	109		$	67,858		$	62,347
	88,235			82,678			2,199			2,251			90,434			84,929
	56,064			50,321			(217	)		(142	)		55,847			50,179


$	102		$	215			—			—		$	102		$	215
	18.32	%		16.14	%		N/M			N/M			15.63	%		14.22	%

	13,372			13,273			6,162			6,275			19,534			19,548

14

Supplementary information (Consumer Banking lines of business)


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

Total revenue (taxable equivalent)	$	566		$	547		$	140		$	143
Provision for loan losses		18			25			4			24
Noninterest expense		392			391			92			84
Net income		97			82			28			22
Average loans		19,791			19,487			12,314			14,326
Average deposits		41,128			38,940			439			365
Net loan charge-offs		21			27			11			37
Return on average allocated equity		25.36	%		23.51	%		12.81	%		8.29	%
Average full-time equivalent employees		8,438			8,833			1,538			1,582


Six months ended June 30,	Community Banking						Consumer Finance
dollars in millions	2005			2004			2005			2004

Total revenue (taxable equivalent)	$	1,122		$	1,097		$	311		$	310
Provision for loan losses		38			54			32			56
Noninterest expense		791			763			169			169
Net income		183			175			69			53
Average loans		19,863			19,347			12,863			14,624
Average deposits		40,896			38,750			420			367
Net loan charge-offs		47			57			25			79
Return on average allocated equity		24.06	%		25.08	%		14.99	%		10.01	%
Average full-time equivalent employees		8,479			8,813			1,578			1,603

Supplementary information (Corporate and Investment Banking lines of business)


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

Total revenue (taxable equivalent)	$	258		$	262		$	139		$	91		$	126		$	100
Provision for loan losses		(6	)		25			(7	)		(4	)		11			4
Noninterest expense		144			141			55			43			75			56
Net income		75			60			57			33			25			25
Average loans		15,089			13,150			10,962			7,752			8,892			7,110
Average deposits		7,952			6,651			1,728			1,202			11			14
Net loan charge-offs (recoveries)		11			36			3			(1	)		2			5
Return on average allocated equity		17.75	%		13.73	%		21.33	%		14.49	%		13.23	%		20.03	%
Average full-time equivalent employees		1,513			1,523			774			673			963			632


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

Total revenue (taxable equivalent)	$	516		$	511		$	243		$	179		$	253		$	206
Provision for loan losses		(12	)		39			(1	)		(3	)		7			9
Noninterest expense		278			282			100			81			148			113
Net income		157			118			90			63			61			53
Average loans		15,095			12,988			10,543			7,688			8,921			7,021
Average deposits		7,605			6,494			1,622			1,165			11			14
Net loan charge-offs		21			67			6			1			3			11
Return on average allocated equity		18.54	%		13.57	%		16.93	%		13.77	%		16.27	%		21.40	%
Average full-time equivalent employees		1,520			1,528			766			670			990			622

15

5. Securities

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

Trading account securities. These are debt and equity securities that are purchased and held by Key with the intent of selling them in the near term, and certain interests retained in loan securitizations. All of these assets are reported at fair value ($749 million at June 30, 2005, $863 million at December 31, 2004, and $1.5 billion at June 30, 2004) and are included in “short-term investments” on the balance sheet. Realized and unrealized gains and losses on trading account securities are reported in “investment banking and capital markets income” on the income statement.

Securities available for sale. These are securities that Key intends to hold for an indefinite period of time and that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. Securities available for sale are reported at fair value and include debt and marketable equity securities with readily determinable fair values. Unrealized gains and losses (net of income taxes) deemed temporary are recorded in shareholders’ equity as a component of “accumulated other comprehensive income.” Unrealized losses on specific securities deemed to be “other-than-temporary” are included in “net securities gains (losses)” on the income statement. Also included in “net securities gains (losses)” are actual gains and losses resulting from sales of specific securities.

When Key retains an interest in loans it securitizes, it bears risk that the loans will be prepaid (which would reduce expected interest income) or not paid at all. Key accounts for these retained interests as debt securities, classifying them as available for sale or as trading account assets.

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

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

Other investments. Principal investments — investments in equity and mezzanine instruments made by Key’s Principal Investing unit — represent the majority of other investments and are carried at fair value ($814 million at June 30, 2005, $816 million at December 31, 2004, and $788 million at June 30, 2004). These include direct and indirect investments — predominantly in privately held companies. Direct investments are those made in a particular company, while indirect investments are made through funds that include other investors. Changes in estimated fair values and actual gains and losses on sales of principal investments are included in “investment banking and capital markets income” on the income statement.

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

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

16


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

SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	270		—		—	$	270
States and political subdivisions		19	$	1		—		20
Collateralized mortgage obligations		6,498		3	$	103		6,398
Other mortgage-backed securities		274		7		2		279
Retained interests in securitizations		97		80		—		177
Other securities		117		10		—		127

Total securities available for sale	$	7,275	$	101	$	105	$	7,271



INVESTMENT SECURITIES
States and political subdivisions	$	46	$	2		—	$	48
Other securities		13		—		—		13

Total investment securities	$	59	$	2		—	$	61


	December 31, 2004
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
in millions	Cost		Gains		Losses		Value

SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	227		—		—	$	227
States and political subdivisions		21	$	1		—		22
Collateralized mortgage obligations		6,460		5	$	95		6,370
Other mortgage-backed securities		322		10		2		330
Retained interests in securitizations		103		90		—		193
Other securities		298		11		—		309

Total securities available for sale	$	7,431	$	117	$	97	$	7,451



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

Total investment securities	$	71	$	3		—	$	74


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

SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations	$	62		—		—	$	62
States and political subdivisions		21		—		—		21
Collateralized mortgage obligations		6,395	$	3	$	142		6,256
Other mortgage-backed securities		364		12		4		372
Retained interests in securitizations		101		72		—		173
Other securities		135		4		—		139

Total securities available for sale	$	7,078	$	91	$	146	$	7,023



INVESTMENT SECURITIES
States and political subdivisions	$	68	$	4		—	$	72
Other securities		13		—		—		13

Total investment securities	$	81	$	4		—	$	85

17

6. Loans

Key’s loans by category are summarized as follows:


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

Commercial, financial and agricultural	$	19,849	$	19,343	$	17,721
Commercial real estate:
Commercial mortgage		7,999		7,534		6,312
Construction		6,239		5,505		4,863

Total commercial real estate loans		14,238		13,039		11,175
Commercial lease financing		10,113		10,155		8,166

Total commercial loans		44,200		42,537		37,062
Real estate — residential mortgage		1,449		1,456		1,542
Home equity		13,921		14,062		14,753
Consumer — direct		1,797		1,987		2,074
Consumer — indirect:
Automobile lease financing		43		89		170
Automobile loans		—		—		1,910
Marine		2,665		2,624		2,640
Other		615		617		598

Total consumer — indirect loans		3,323		3,330		5,318

Total consumer loans		20,490		20,835		23,687
Loans held for sale:
Real estate — commercial mortgage		519		283		369
Real estate — residential mortgage		23		26		22
Home equity		1		29		13
Education		2,586		2,278		2,237
Automobile		145		1,737		—

Total loans held for sale		3,274		4,353		2,641

Total loans	$	67,964	$	67,725	$	63,390

Key uses interest rate swaps to manage interest rate risk; these swaps modify the repricing and maturity characteristics of certain loans. For more information about such swaps, see Note 19 (“Derivatives and Hedging Activities”), which begins on page 84 of Key’s 2004 Annual Report to Shareholders.

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


	Three months ended June 30,						Six months ended June 30,
in millions	2005			2004			2005			2004

Balance at beginning of period	$	1,128		$	1,306		$	1,138		$	1,406
Charge-offs		(75	)		(148	)		(153	)		(297	)
Recoveries		27			44			51			82

Net charge-offs		(48	)		(104	)		(102	)		(215	)
Provision for loan losses		20			74			64			155
Reclassification of allowance for credit losses on lending-related commitments ^a		—			—			—			(70	)

Balance at end of period	$	1,100		$	1,276		$	1,100		$	1,276

(a)

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

18

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


	Three months ended June 30,					Six months ended June 30,
in millions	2005		2004			2005			2004

Balance at beginning of period	$	55	$	70		$	66			—
Reclassification of allowance for credit losses ^a		—		—			—		$	70
Provision for losses on lending-related commitments		2		(7	)		(9	)		(7	)

Balance at end of period	$	57	$	63		$	57		$	63


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

7. Variable Interest Entities

A VIE is a partnership, limited liability company, trust or other legal entity that meets any one of certain criteria specified in Revised Interpretation No. 46. This interpretation requires VIEs to be consolidated by the party who is exposed to the majority of the VIE’s expected losses and/or residual returns (i.e., the primary beneficiary).

Key’s VIEs, including those consolidated and those in which Key holds a significant interest, are summarized below. Key defines a “significant interest” in a VIE as a subordinated interest that exposes Key to a significant portion, but not the majority, of the VIE’s expected losses or residual returns.


	Consolidated VIEs		Unconsolidated VIEs
					Maximum
in millions	Total Assets		Total Assets		Exposure to Loss

June 30, 2005
Commercial paper conduit	$	556		N/A		N/A
Low-income housing tax credit (“LIHTC”) funds		374	$	273		—
Business trusts issuing mandatorily redeemable preferred capital securities		N/A		1,597		—
LIHTC investments		N/A		694	$	217

N/A = Not Applicable

The noncontrolling interests associated with the consolidated LIHTC guaranteed funds are considered mandatorily redeemable instruments in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” The FASB has indefinitely deferred the measurement and recognition provisions of SFAS No. 150 for mandatorily redeemable noncontrolling interests associated with finite-lived subsidiaries, such as Key’s LIHTC guaranteed funds. At June 30, 2005, the settlement value of these noncontrolling interests, which are accounted for by Key as minority interests, was estimated to be between $483 million and $584 million, while the recorded value, including reserves, totaled $391 million.

Key’s Principal Investing unit and the KeyBank Real Estate Capital line of business make equity and mezzanine investments in entities, some of which are VIEs. These investments are held by nonregistered investment companies subject to the provisions of the AICPA Audit and Accounting Guide, “Audits of Investment Companies.” The FASB deferred the effective date of Revised Interpretation No. 46 for such nonregistered investment companies until the AICPA clarifies the scope of the Audit Guide. As a result, Key is not currently applying the accounting or disclosure provisions of Revised Interpretation No. 46 to its principal and real estate mezzanine and equity investments, which remain unconsolidated.

Additional information pertaining to Revised Interpretation No. 46 and the activities of the specific VIEs with which Key is involved is provided in Note 8 (“Loan Securitizations, Servicing and Variable Interest Entities”) of Key’s 2004 Annual Report to Shareholders under the heading “Variable Interest Entities” on page 69.

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8. Impaired Loans and Other Nonperforming Assets

Impaired loans totaled $88 million at June 30, 2005, compared with $91 million at December 31, 2004, and $154 million at June 30, 2004. Impaired loans averaged $99 million for the second quarter of 2005 and $208 million for the second quarter of 2004.

Key’s nonperforming assets were as follows:


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

Impaired loans	$	88		$	91		$	154
Other nonaccrual loans		205			225			300

Total nonperforming loans		293			316			454
Other real estate owned (OREO)		33			53			71
Allowance for OREO losses		(2	)		(4	)		(8	)

OREO, net of allowance		31			49			63
Other nonperforming assets		14			14			23

Total nonperforming assets	$	338		$	379		$	540

At June 30, 2005, Key did not have any significant commitments to lend additional funds to borrowers with loans on nonperforming status.

When expected cash flows or collateral values cast doubt on the carrying amount of an impaired loan, the loan is assigned a specific allowance. Management calculates the extent of the impairment, which is the carrying amount of the loan less the estimated present value of future cash flows and the fair value of any existing collateral. That amount – effectively the amount that management deems uncollectible – is charged against the allowance for loan losses. Even when collateral value or other sources of repayment appear sufficient, if management remains uncertain about whether the loan will be repaid in full, an appropriate amount is specifically allocated in the allowance for loan losses. At June 30, 2005, Key had $30 million of impaired loans with a specifically allocated allowance for loan losses of $8 million, and $58 million of impaired loans that were carried at their estimated fair value without a specifically allocated allowance. At December 31, 2004, impaired loans included $38 million of loans with a specifically allocated allowance of $12 million, and $53 million that were carried at their estimated fair value without a specifically allocated allowance.

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

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9. Capital Securities Issued by Unconsolidated Subsidiaries

KeyCorp owns the outstanding common stock of business trusts that issued corporation-obligated mandatorily redeemable preferred capital securities (“capital securities”). The trusts used the proceeds from the issuance of their capital securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts’ only assets; the interest payments from the debentures finance the distributions paid on the capital securities.

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

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

The characteristics of the business trusts and capital securities have not changed with the de-consolidation of the trusts. The capital securities provide an attractive source of funds since they constitute Tier 1 capital for regulatory reporting purposes, but have the same tax advantages as debt for federal income tax purposes. During the first quarter of 2005, the Federal Reserve Board adopted a final rule that allows bank holding companies to continue to treat capital securities as Tier 1 capital, but with stricter quantitative limits that take effect after a five-year transition period ending March 31, 2009. Management believes that the new rule will not have any material effect on Key’s financial condition.

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

•		required distributions on the capital securities;

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

•		amounts due if a trust is liquidated or terminated.

During the first six months of 2005, the business trusts did not repurchase any capital securities or related debentures.

In April 2005, KeyCorp and two affiliated business trusts, KeyCorp Capital VII and KeyCorp Capital VIII, filed a registration statement with the SEC for the issuance of up to $501 million of capital securities of KeyCorp Capital VII and KeyCorp Capital VIII. On June 13, 2005, $250 million of securities were issued by the KeyCorp Capital VII trust.

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


					Principal		Interest Rate			Maturity
	Capital				Amount of		of Capital			of Capital
	Securities,		Common		Debentures,		Securities and			Securities and
dollars in millions	Net of Discount^a		Stock		Net of Discount^b		Debentures^c			Debentures

June 30, 2005
KeyCorp Institutional Capital A	$	381	$	11	$	361		7.826	%		2026
KeyCorp Institutional Capital B		164		4		154		8.250			2026
KeyCorp Capital I		197		8		205		3.840			2028
KeyCorp Capital II		191		8		165		6.875			2029
KeyCorp Capital III		246		8		197		7.750			2029
KeyCorp Capital V		176		5		180		5.875			2033
KeyCorp Capital VI		76		2		77		6.125			2033
KeyCorp Capital VII		250		8		258		5.700			2035

Total	$	1,681	$	54	$	1,597		6.684	%		—


December 31, 2004	$	1,399	$	46	$	1,339		6.704	%		—


June 30, 2004	$	1,365	$	46	$	1,339		6.568	%		—

(a)		The capital securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of capital securities carries an interest rate identical to that of the related debenture. Prior to July 1, 2003, the capital securities constituted minority interests in the equity accounts of KeyCorp’s consolidated subsidiaries. Effective July 1, 2003, the business trusts that issued the capital securities were de-consolidated. The capital securities continue to qualify as Tier 1 capital under Federal Reserve Board guidelines. Included in certain capital securities at June 30, 2005, December 31, 2004, and June 30, 2004, are basis adjustments of $138 million, $106 million and $72 million, respectively, related to fair value hedges. See Note 19 (“Derivatives and Hedging Activities”), which begins on page 84 of Key’s 2004 Annual Report to Shareholders, for an explanation of fair value hedges.

(b)		KeyCorp has certain rights to redeem its debentures: (i) in whole or in part, on or after December 1, 2006 (for debentures owned by Capital A), December 15, 2006 (for debentures owned by Capital B), July 1, 2008 (for debentures owned by Capital I), March 18, 1999 (for debentures owned by Capital II), July 16, 1999 (for debentures owned by Capital III), July 21, 2008 (for debentures owned by Capital V) and December 15, 2008 (for debentures owned by Capital VI); and, (ii) in whole at any time within 90 days after and during the continuation of a “tax event,” “investment company event” or a “capital treatment event” (as defined in the applicable offering circular). If the debentures purchased by Capital A or Capital B are redeemed before they mature, the redemption price will be the principal amount, plus a premium, plus any accrued but unpaid interest. If the debentures purchased by Capital I, Capital V, Capital VI, or Capital VII are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by Capital II or Capital III are redeemed before they mature, the redemption price will be the greater of: (a) the principal amount, plus any accrued but unpaid interest or (b) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable offering circular), plus 20 basis points (25 basis points for Capital III), plus any accrued but unpaid interest. When debentures are redeemed in response to tax or capital treatment events, the redemption price generally is slightly more favorable to KeyCorp.

(c)		The interest rates for Capital A, Capital B, Capital II, Capital III, Capital V, Capital VI and Capital VII are fixed. Capital I has a floating interest rate equal to three-month LIBOR plus 74 basis points; it reprices quarterly. The rates shown as the total at June 30, 2005, December 31, 2004, and June 30, 2004, are weighted-average rates.

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10. Pension and Other Postretirement Benefit Plans

Pension Plans

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


	Three months ended						Six months ended
	June 30,						June 30,
in millions	2005			2004			2005			2004

Service cost of benefits earned	$	4		$	12		$	17		$	24
Interest cost on projected benefit obligation		6			14			21			28
Expected return on plan assets		(7	)		(23	)		(31	)		(46	)
Amortization of prior service benefit		—			—			(1	)		—
Amortization of losses		2			3			8			6

Net pension cost	$	5		$	6		$	14		$	12

Other Postretirement Benefit Plans

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


	Three months ended						Six months ended
	June 30,						June 30,
in millions	2005			2004			2005			2004

Service cost of benefits earned	$	1		$	1		$	2		$	2
Interest cost on accumulated postretirement benefit obligation		2			2			4			4
Expected return on plan assets		(1	)		(1	)		(2	)		(2	)
Amortization of unrecognized transition obligation		1			1			2			2
Amortization of cumulative net loss		1			—			2			—

Net postretirement benefit cost	$	4		$	3		$	8		$	6

On December 8, 2003, the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Act”) was signed into law. The Act, which becomes effective in 2006, introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree healthcare benefit plans that offer “qualified” prescription drug coverage to retirees.

In January 2005, the Centers for Medicare and Medicaid Services issued the final regulations necessary to fully implement the Act, including the manner in which actuarial equivalence must be determined. Management expects that the prescription drug coverage related to Key’s retiree healthcare benefit plan will be actuarially equivalent, and that the subsidy will not have any material effect on Key’s APBO and net postretirement cost.

11. Income Taxes

The American Jobs Creation Act of 2004 provides for a special one-time tax deduction equal to 85 percent of certain foreign earnings that are “repatriated.” Management is in the process of reviewing Key’s foreign operations to determine the potential amount of the deduction and, therefore, is currently unable to provide a reasonable estimate of the amount of unremitted earnings that may be repatriated or the related effect on Key’s income taxes. Management anticipates that the special one-time deduction will not have any material effect on Key’s financial condition or results of operations.

In the normal course of business, Key enters into various types of lease financing transactions. The Internal Revenue Service (“IRS”) has completed an audit of Key’s income tax returns for the 1995 through 1997 tax years and has proposed to disallow all deductions taken in those years that relate to certain leveraged lease financing transactions commonly referred to as Lease-In, Lease-Out (“LILO”) transactions. In addition, the

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IRS is currently examining Key’s returns for the 1998 through 2000 tax years and has similarly proposed to disallow deductions for LILO transactions. The preliminary outcome of the IRS audit of Key’s returns for the 1995 through 1997 tax years is on appeal within the IRS, and settlement discussions are ongoing. Although the ultimate resolution of this matter is unknown, Key has provided tax reserves that management currently believes are adequate based on its assessment of Key’s tax position.

Key has also entered into other types of leveraged lease financing transactions that are being examined by the IRS and has been informed that the IRS intends to disallow all deductions related to such transactions. Management believes that the deductions taken by Key are appropriate based on the relevant statutory, regulatory and judicial authority in effect at the time the lease financing transactions were entered into and the tax returns were filed. However, if the IRS were to be successful in disallowing the deductions, Key would potentially owe additional taxes, interest and penalties that could have a material effect on its results of operations in the period in which incurred.

In July 2005, the FASB issued two drafts of proposed tax-related guidance for public comment. The first proposal provides additional guidance regarding the application of SFAS No. 13, “Accounting for Leases,” that would affect the timing under which earnings from leveraged lease financing transactions would be recognized when changes or projected changes in the timing of cash flows, including those due to or expected to be due to settlements of tax matters, occur. The second provides guidance on the accounting for uncertain tax positions and would require that a tax position meet a “probable recognition threshold” for it to be recognized in the financial statements.

If finalized as drafted, the guidance in these two proposals could result in an initial one-time charge to earnings stemming from changes in the timing or projected timing of cash flows related to lease financing transactions and/or the possibility that uncertain tax positions may not meet the “probable recognition threshold.” However, future earnings would be expected to increase over the remaining term of the lease by approximately the same amount as the one-time charge. The new guidance would be effective for years ending after December 15, 2005 (year ending December 31, 2005, for Key).

12. Contingent Liabilities and Guarantees

Legal Proceedings

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

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

The 4011 Policy was canceled and replaced as of May 1, 2000, by a policy issued by North American Specialty Insurance Company (a subsidiary or affiliate of Swiss Re) (“the NAS Policy”). Tri-Arc Financial Services, Inc. (“Tri-Arc”) acted as agent for Reliance, Swiss Re and NAS. From February 2000 through September 2004, Key Bank USA filed claims, and since October 2004, KBNA (successor to Key Bank USA) has been filing claims under the Policies, but none of these claims has been paid.

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

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

On August 4, 2004, the Court ruled on Key’s and Swiss Re’s motions for summary judgment on issues related to liability. In its written decision, which is publicly available, the Court held as a matter of law that Swiss Re breached its Letter Agreement with Key by not issuing a replacement policy covering the leases insured under Key’s 4011 Policy that were booked between October 1, 1998, and April 30, 2000. With respect to Key’s claims under the 4019 Policy, the Court held that Swiss Re is not entitled to judgment as a matter of law on Key’s claim that Swiss Re authorized Tri-Arc to issue the REINS-1 Endorsement. The Court also held that Swiss Re is not entitled to judgment as a matter of law on Key’s claim that Swiss Re acted in bad faith. On March 21, 2005, the Court, in response to the parties’ joint motion and related agreement to allow more time for the completion of the damages discovery process, entered an order establishing a new damages discovery schedule, including an extension of the deadline for submitting summary judgment motions on issues related to damages to December 9, 2005.

Management believes that KBNA (successor to Key Bank USA) has valid insurance coverage or claims for damages relating to the residual value of automobiles leased through Key Bank USA during the four-year period ending January 1, 2001. With respect to each individual lease, however, it is not until the lease expires and the vehicle is sold that the existence and amount of any actual loss (i.e., the difference between the residual value provided for in the lease agreement and the vehicle’s actual market value at lease expiration) can be determined.

Accordingly, the total expected loss on the portfolio for which KBNA (and Key Bank USA) will have filed claims cannot be determined with certainty at this time. Claims filed through June 30, 2005, totaled approximately $382 million, and management currently estimates that approximately $5 million of additional claims may be filed through year-end 2006, bringing the total aggregate amount of actual and potential claims to $387 million. During the litigation, Key has carefully analyzed its claims, both internally and with the assistance of outside expert consultants. Based on the analysis completed through April 30, 2005, Key currently expects to seek recovery of insured residual value losses in the range of approximately $342 million to $357 million, in addition to interest and other damages attributable to Swiss Re’s denial of coverage.

Key is filing insurance claims for its losses and has recorded as a receivable on its balance sheet a portion of the amount of the insurance claims. Management believes the amount being recorded as a receivable due from the insurance carriers is appropriate to reflect the collectibility risk associated with the insurance

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litigation; however, litigation is inherently not without risk, and any actual recovery from the litigation may be more or less than the receivable. While management does not expect an adverse decision, if a court were to make an adverse final determination, such result would cause Key to record a material one-time expense during the period when such determination is made. An adverse determination would not have a material effect on Key’s financial condition, but could have a material adverse effect on Key’s results of operations in the quarter it occurs.

Other litigation. In the ordinary course of business, Key is subject to legal actions that involve claims for substantial monetary relief. Based on information presently known to management, management does not believe there is any legal action to which KeyCorp or any of its subsidiaries is a party, or involving any of their properties, that, individually or in the aggregate, could reasonably be expected to have a material adverse effect on Key’s financial condition.

Guarantees

Key is a guarantor in various agreements with third parties. The following table shows the types of guarantees that Key had outstanding at June 30, 2005. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Guarantees” on page 59 of Key’s 2004 Annual Report to Shareholders.


	Maximum Potential
	Undiscounted		Liability
in millions	Future Payments		Recorded

Financial Guarantees:
Standby letters of credit	$	11,896	$	41
Credit enhancement for asset-backed commercial paper conduit		73		—
Recourse agreement with FNMA		618		8
Return guarantee agreement with LIHTC investors		584		38
Default guarantees		37		1
Written interest rate caps^a		68		3

Total	$	13,276	$	91


(a)		As of June 30, 2005, the weighted-average interest rate of written interest rate caps was 3.3%, and the weighted-average strike rate was 4.8%. Maximum potential undiscounted future payments were calculated assuming a 10% interest rate.

Standby letters of credit. These instruments obligate Key to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument, or fails to perform some contractual nonfinancial obligation. Standby letters of credit are entered into by many of Key’s lines of business to address clients’ financing needs. If amounts are drawn under standby letters of credit, such amounts are treated as loans; they bear interest (generally at variable rates) and pose the same credit risk to Key as a loan. At June 30, 2005, Key’s standby letters of credit had a remaining weighted-average life of approximately two years, with remaining actual lives ranging from less than one year to as many as thirteen years.

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

At June 30, 2005, Key’s maximum potential funding requirement under the credit enhancement facility totaled $73 million. However, there were no drawdowns under the facility during the six-month period ended June 30, 2005. Key has no recourse or other collateral available to offset any amounts that may be funded under this credit enhancement facility. Management periodically evaluates Key’s commitments to provide credit enhancement to the conduit.

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Recourse agreement with Federal National Mortgage Association. KBNA participates as a lender in the Federal National Mortgage Association (“FNMA”) Delegated Underwriting and Servicing (“DUS”) program. As a condition to FNMA’s delegation of responsibility for originating, underwriting and servicing mortgages, KBNA has agreed to assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan sold to FNMA. Accordingly, a reserve for such potential losses has been established and is maintained in an amount estimated by management to approximate the fair value of the liability undertaken by KBNA. At June 30, 2005, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of nine years and the unpaid principal balance outstanding of loans sold by KBNA as a participant in this program was approximately $2.0 billion. The maximum potential amount of undiscounted future payments that may be required under this program is equal to one-third of the principal balance of loans outstanding at June 30, 2005. If payment is required under this program, Key would have an interest in the collateral underlying the commercial mortgage loan on which the loss occurred.

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

No recourse or collateral is available to offset the guarantee obligation other than the underlying income stream from the properties. These guarantees have expiration dates that extend through 2018. Key meets its obligations pertaining to the guaranteed returns generally through the distribution of tax credits and deductions associated with the specific properties.

As shown in the table on page 26, KAHC maintained a reserve in the amount of $38 million at June 30, 2005, which management believes will be sufficient to cover estimated future obligations under the guarantees. The maximum exposure to loss reflected in the preceding table represents undiscounted future payments due to investors for the return on and of their investments. In accordance with Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” the amount of all fees received in consideration for any return guarantee agreements entered into or modified with LIHTC investors on or after January 1, 2003, has been recognized in the liability recorded.

Various types of default guarantees. Some lines of business provide or participate in guarantees that obligate Key to perform if the debtor fails to satisfy all of its payment obligations to third parties. These guarantees are generally undertaken when Key is supporting or protecting its underlying investment or where the risk profile of the debtor should provide an investment return. The terms of these default guarantees range from less than one year to as many as seventeen years. Although no collateral is held, Key would have recourse against the debtor for any payments made under a default guarantee.

Written interest rate caps. In the ordinary course of business, Key writes interest rate caps for commercial loan clients that have variable rate loans with Key and wish to limit their exposure to interest rate increases. At June 30, 2005, these caps had a weighted-average life of approximately two years.

Key is obligated to pay the client if the applicable benchmark interest rate exceeds a specified level (known as the “strike rate”). These instruments are accounted for as derivatives with the fair value liability recorded in “accrued expense and other liabilities” on the balance sheet. Key’s potential amount of future payments under these obligations is mitigated by offsetting positions with third parties.

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Other Off-Balance Sheet Risk

Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in Interpretation No. 45 and from other relationships.

Liquidity facility that supports asset-backed commercial paper conduit. Key provides liquidity to an asset-backed commercial paper conduit that is owned by a third party and administered by an unaffiliated financial institution. This liquidity facility obligates Key through November 5, 2007, to provide funding of up to $1.9 billion if required as a result of a disruption in credit markets or other factors that preclude the issuance of commercial paper by the conduit. The amount available to be drawn, which is based on the amount of current commitments to borrowers in the conduit, was $1.1 billion at June 30, 2005. However, there were no drawdowns under this committed facility at that time. Key’s commitment to provide liquidity is periodically evaluated by management.

Indemnifications provided in the ordinary course of business. Key provides certain indemnifications primarily through representations and warranties in contracts that are entered into in the ordinary course of business in connection with loan sales and other ongoing activities, as well as in connection with purchases and sales of businesses. Management’s past experience with these indemnifications has been that the amounts paid, if any, have not had a significant effect on Key’s financial condition or results of operations.

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

13. Derivatives and Hedging Activities

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

At June 30, 2005, Key had $323 million of derivative assets and $164 million of derivative liabilities on its balance sheet that arose from derivatives that were being used for hedging purposes. As of the same date, derivative assets and liabilities classified as trading derivatives each totaled $1.1 billion. Derivative assets and liabilities are recorded at fair value in “accrued income and other assets” and “accrued expense and other liabilities,” respectively, on the balance sheet.

Counterparty credit risk

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

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

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determine appropriate limits on Key’s total credit exposure and decide whether to demand collateral. If Key determines that collateral is required, it is generally collected at the time this determination is made. Key generally holds collateral in the form of cash and highly rated treasury and agency-issued securities.

At June 30, 2005, Key was party to interest rate swaps and caps with 58 different counterparties. Among these were swaps and caps entered into to offset the risk of client exposure. Key had aggregate exposure of $268 million on these instruments to 36 of the counterparties. However, at June 30, Key held approximately $170 million in collateral to mitigate its credit exposure, resulting in net exposure of $98 million. The largest exposure to an individual counterparty was approximately $117 million, of which Key secured approximately $102 million in collateral.

Asset and Liability Management

Key uses a fair value hedging strategy to modify its exposure to interest rate risk and a cash flow hedging strategy to reduce the potential adverse impact of interest rate increases on future interest expense. For more information about these asset and liability management strategies, see Note 19 (“Derivatives and Hedging Activities”), which begins on page 84 of Key’s 2004 Annual Report to Shareholders.

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


							Reclassification
	December 31,			2005			of Losses to		June 30,
in millions	2004			Hedging Activity			Net Income		2005

Accumulated other comprehensive income (loss) resulting from cash flow hedges	$	(40	)	$	(25	)	$	11	$	(54	)

Reclassifications of gains and losses from “accumulated other comprehensive income (loss)” to earnings coincide with the income statement impact of the hedged item through the payment of variable-rate interest on debt, the receipt of variable-rate interest on commercial loans and the sale or securitization of commercial real estate loans. Key expects to reclassify an estimated $.4 million of net losses on derivative instruments from “accumulated other comprehensive income (loss)” to earnings during the next twelve months.

Trading Portfolio

Key’s trading portfolio includes:

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

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

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

¨		proprietary trading positions in financial assets and liabilities.

The fair values of these trading portfolio items are included in “accrued income and other assets” or “accrued expense and other liabilities” on the balance sheet. Adjustments to the fair values are included in “investment banking and capital markets income” on the income statement. Key has established a reserve in the amount of $16 million at June 30, 2005, which management believes will be sufficient to cover estimated future losses on the trading portfolio in the event of client default. Additional information pertaining to Key’s trading portfolio is summarized in Note 19 of Key’s 2004 Annual Report to Shareholders.

29

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
KeyCorp

We have reviewed the condensed consolidated balance sheets of KeyCorp and subsidiaries (“Key”) as of June 30, 2005 and 2004, and the related condensed consolidated statements of income for the three-month and six-month periods then ended, and the condensed consolidated statements of changes in shareholders’ equity and cash flow for the six-month periods ended June 30, 2005 and 2004. These financial statements are the responsibility of Key’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Key as of December 31, 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flow for the year then ended not presented herein, and in our report dated February 25, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Cleveland, Ohio
August 2, 2005

30

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

Introduction

This section generally reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly and year-to-date periods ended June 30, 2005 and 2004. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes that appear on pages 3 through 29. A description of Key’s business is included under the heading “Description of Business” on page 10 of Key’s 2004 Annual Report to Shareholders.

Terminology

This report contains some shortened names and industry-specific terms. We want to explain some of these terms at the outset so you can better understand the discussion that follows.


¨		KeyCorp refers solely to the parent holding company.

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

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

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

¨		Key engages in capital markets activities. These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients’ financing needs and for proprietary trading purposes), and conduct transactions in foreign currencies (both to accommodate clients’ needs and to benefit from fluctuations in exchange rates).

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

¨		For regulatory purposes, capital is divided into two classes. Federal regulations prescribe that at least one-half of a bank or bank holding company’s total risk-based capital must qualify as Tier 1. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. You will find a more detailed explanation of total and Tier 1 capital and how they are calculated in the section entitled “Capital,” which begins on page 53.

Long-term goals

Key’s long-term goals are to achieve an annual return on average equity in the range of 16% to 18% and to grow earnings per common share at an annual rate of 8% to 10%. Our strategy for achieving these goals is described under the heading “Corporate Strategy” on page 11 of Key’s 2004 Annual Report to Shareholders.

Forward-looking statements

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

31

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


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

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

¨		Increased competitive pressure among financial services companies may adversely affect our ability to market our products and services.

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

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

¨		We may experience operational or risk management failures due to technological or other factors.

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

¨		Terrorist activities or military actions could further disrupt the economy and the general business climate, which may have an adverse effect on our financial results or condition and that of our borrowers.

¨		We may become subject to new accounting, tax, or regulatory practices or requirements.

Critical accounting policies and estimates

Key’s business is dynamic and complex. Consequently, management must exercise judgment in choosing and applying accounting policies and methodologies in many areas. These choices are important; not only are they necessary to comply with U.S. generally accepted accounting principles, but they also reflect management’s view of the most appropriate manner in which to record and report Key’s overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Significant Accounting Policies”), which begins on page 55 of Key’s 2004 Annual Report to Shareholders, should be reviewed for a greater understanding of how Key’s financial performance is recorded and reported.

In management’s opinion, some accounting policies are more likely than others to have a significant effect on Key’s financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance or require management to make assumptions and estimates that affect amounts reported in the financial statements. Because these assumptions and estimates are based on current circumstances, they may change over time or prove to be inaccurate. Key relies heavily on the use of assumptions and estimates in several areas, including accounting for the allowance for loan losses, loan securitizations, contingent liabilities and guarantees, principal investments, goodwill, and pension and other postretirement obligations. A brief discussion of each of these areas appears on pages 12 and 13 of Key’s 2004 Annual Report to Shareholders.

During the first six months of 2005, there were no significant changes in the manner in which Key’s significant accounting policies were applied or in which related assumptions and estimates were developed. Additionally, no new significant accounting policies were adopted.

32

Highlights of Key’s Performance

Financial performance

The primary measures of Key’s financial performance for the second quarter and first six months of 2005 and 2004 are summarized below. Our solid second quarter results reflect continued improvement in Key’s operating fundamentals, as well as the positive effects of our longer-term strategic activities.


¨		Net income for the second quarter of 2005 was $291 million, or $.70 per common share, compared with $264 million, or $.64 per share, for the previous quarter and $239 million, or $.58 per share, for the second quarter of 2004. For the first six months of 2005, net income was $555 million, or $1.34 per common share, compared with $489 million, or $1.17 per share, for the first half of 2004.

¨		Key’s return on average equity was 16.15% for the second quarter of 2005, compared with a return of 15.09% for the prior quarter and 13.97% for the year-ago quarter. For the first six months of 2005, Key’s return on average equity was 15.63%, compared with 14.22% for the first six months of 2004.

¨		Key’s second quarter 2005 return on average total assets was 1.30%, compared with a return of 1.18% for the previous quarter and 1.13% for the second quarter of 2004. For the first six months of 2005, Key’s return on average total assets was 1.24%, compared with 1.16% for the same period last year.

Key’s top three priorities for 2005 are to profitably grow revenue, maintain asset quality and maintain a disciplined approach to managing expenses. During the second quarter:


¨		Total revenue grew by $59 million from the second quarter of 2004 as a result of an increase in net interest income. Current year results benefited from a better net interest margin, strong commercial loan growth and an increase in core deposits. The growth in our commercial loan portfolio was broad based and spread among a number of industry sectors.

¨		Asset quality continued to improve. Nonperforming loans decreased for the eleventhconsecutive quarter and net loan charge-offs, as a percentage of average loans, remained at their lowest level since the fourth quarter of 1995. While a stronger economy contributed to these positive changes, they also reflect strategic business mix changes we’ve made to improve Key’s risk profile.

Further, we continue to effectively manage our capital through dividends paid to shareholders; share repurchases, when appropriate; and investing in our higher-growth businesses. Key’s tangible equity to tangible assets ratio was 6.60% at June 30, 2005, and is within our targeted range of 6.25% to 6.75%.

Considering recent trends, we expect Key’s earnings to be in the range of $.64 to $.68 per share for the third quarter of 2005 and $2.60 to $2.70 per share for the full year.

The primary reasons that Key’s revenue and expense components changed from those reported for the three- and six-month periods ended June 30, 2004, are reviewed in greater detail throughout the remainder of the Management’s Discussion and Analysis section.

Strategic developments

Our financial performance has improved due in part to a number of specific actions taken over the past year that have strengthened our market share positions and support our strategy of focusing on businesses that enable us to build relationships with our clients.


¨		During the fourth quarter of 2004, we sold our broker-originated home equity loan portfolio and reclassified our indirect automobile loan portfolio to held-for-sale status. These businesses were identified for exit because they did not meet our performance standards or fit with our relationship banking strategy. We completed the sale of the prime segment of the indirect automobile loan

33


		portfolio during the first quarter of 2005 and the sale of the nonprime segment in the second quarter. We will, however, continue to build our floor plan financing business with automobile dealers.


¨		Effective December 1, 2004, we acquired American Express Business Finance Corporation (“AEBF”), the equipment leasing unit of American Express’ small business division. This company provides capital for small and middle market businesses, mostly in the healthcare, information technology, office products, and commercial vehicle/construction industries, and had a leasing portfolio of approximately $1.5 billion at date of acquisition. During the second quarter of 2005, we completed the integration of AEBF into Key Equipment Finance, our leasing line of business.

¨		Effective October 15, 2004, we acquired EverTrust Financial Group, Inc. (“EverTrust”), the holding company for EverTrust Bank, a state-chartered bank headquartered in Everett, Washington with twelve branch offices. EverTrust had assets of approximately $780 million and deposits of approximately $570 million at the date of acquisition.

¨		Effective August 11, 2004, we acquired certain net assets of American Capital Resource, Inc., based in Atlanta, Georgia. This is the fourth commercial real estate acquisition we have made since January 31, 2000, as part of our ongoing strategy to expand Key’s commercial mortgage finance and servicing capabilities.

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

In addition, during the second quarter of 2005, we announced plans to further expand our Federal Housing Administration (“FHA”) financing and servicing capabilities by acquiring Malone Mortgage Company, based in Dallas, Texas.

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

34

Figure 1. Selected Financial Data


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

FOR THE PERIOD
Interest income	$	1,116		$	1,065		$	1,005		$	945		$	905		$	2,181		$	1,836
Interest expense		423			379			333			294			276			802			554
Net interest income		693			686			672			651			629			1,379			1,282
Provision for loan losses		20			44			(21	)		51			74			64			155
Noninterest income		486			500			479			482			491			986			968
Noninterest expense		753			769			818			729			717			1,522			1,414
Income before income taxes		406			373			354			353			329			779			681
Net income		291			264			213			252			239			555			489

PER COMMON SHARE
Net income	$	.71		$	.65		$	.52		$	.62		$	.58		$	1.36		$	1.18
Net income — assuming dilution		.70			.64			.51			.61			.58			1.34			1.17
Cash dividends paid		.325			.325			.31			.31			.31			.65			.62
Book value at period end		18.01			17.58			17.46			17.12			16.77			18.01			16.77
Market price:
High		33.80			34.07			34.50			32.02			32.27			34.07			33.23
Low		31.52			31.00			31.35			29.00			28.23			31.00			28.23
Close		33.15			32.45			33.90			31.60			29.89			33.15			29.89
Weighted-average common shares (000)		408,754			408,264			408,243			407,187			410,292			408,510			413,486
Weighted-average common shares and potential common shares (000)		414,309			413,762			413,727			411,575			414,908			414,037			418,240

AT PERIOD END
Loans	$	67,964		$	67,549		$	67,725		$	64,306		$	63,390		$	67,964		$	63,390
Earning assets		78,548			77,937			78,140			75,660			74,364			78,548			74,364
Total assets		91,015			90,276			90,747			88,463			86,231			91,015			86,231
Deposits		58,063			57,127			57,842			55,843			52,423			58,063			52,423
Long-term debt		13,588			14,100			14,846			13,444			14,608			13,588			14,608
Shareholders’ equity		7,352			7,162			7,117			6,946			6,829			7,352			6,829

PERFORMANCE RATIOS
Return on average total assets		1.30	%		1.18	%		.95	%		1.16	%		1.13	%		1.24	%		1.16	%
Return on average equity		16.15			15.09			11.99			14.62			13.97			15.63			14.22
Net interest margin (taxable equivalent)		3.71			3.66			3.63			3.60			3.56			3.69			3.64

CAPITAL RATIOS AT PERIOD END
Equity to assets		8.08	%		7.93	%		7.84	%		7.85	%		7.92	%		8.08	%		7.92	%
Tangible equity to tangible assets		6.60			6.43			6.35			6.57			6.64			6.60			6.64
Tier 1 risk-based capital		7.68			7.34			7.22			7.72			7.93			7.68			7.93
Total risk-based capital		11.72			11.58			11.47			11.67			12.07			11.72			12.07
Leverage		8.49			7.91			7.96			8.27			8.34			8.49			8.34

OTHER DATA
Average full-time equivalent employees		19,429			19,571			19,575			19,635			19,514			19,534			19,548
KeyCenters		945			940			935			921			902			945			902

35

Line of Business Results

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

Figure 2 summarizes the contribution made by each major business group to Key’s taxable-equivalent revenue and net income for the three- and six-month periods ended June 30, 2005 and 2004.

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


	Three months ended June 30,						Change						Six months ended June 30,						Change
dollars in millions	2005			2004			Amount			Percent			2005			2004			Amount			Percent

Revenue (taxable equivalent)
Consumer Banking	$	706		$	690		$	16			2.3	%	$	1,433		$	1,407		$	26			1.8	%
Corporate and Investment Banking		523			453			70			15.5			1,012			896			116			12.9
Other Segments		8			15			(7	)		(46.7	)		20			19			1			5.3

Total segments		1,237			1,158			79			6.8			2,465			2,322			143			6.2
Reconciling items		(28	)		(16	)		(12	)		(75.0	)		(42	)		(26	)		(16	)		(61.5	)

Total	$	1,209		$	1,142		$	67			5.9	%	$	2,423		$	2,296		$	127			5.5	%


Net income (loss)
Consumer Banking	$	125		$	104		$	21			20.2	%	$	252		$	228		$	24			10.5	%
Corporate and Investment Banking		157			118			39			33.1			308			234			74			31.6
Other Segments		10			15			(5	)		(33.3	)		23			23			—			—

Total segments		292			237			55			23.2			583			485			98			20.2
Reconciling items		(1	)		2			(3	)		N/M			(28	)^a		4			(32	)		N/M

Total	$	291		$	239		$	52			21.8	%	$	555		$	489		$	66			13.5	%

(a)

Includes a $30 million ($19 million after tax) charge recorded during the first quarter of 2005 to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis.

N/M = Not Meaningful

Consumer Banking

As shown in Figure 3, net income for Consumer Banking was $125 million for the second quarter of 2005, up from $104 million for the year-ago quarter. Increases in both net interest income and noninterest income, along with a significant reduction in the provision for loan losses drove the improvement and more than offset an increase in noninterest expense.

Taxable-equivalent net interest income increased by $3 million, or 1%, from the second quarter of 2004, due to growth in, and a more favorable interest rate spread on, average deposits. The positive effects of these factors were moderated by a less favorable interest rate spread on earning assets and a decline in average loans, due largely to the sale of the higher-yielding broker-originated home equity and indirect automobile loan portfolios within the Consumer Finance line.

Noninterest income increased by $13 million, or 6%, due primarily to net gains of $5 million from loan securitizations and sales in the current year, compared with net losses of $5 million in the year-ago quarter.

The provision for loan losses decreased by $27 million, or 55%, primarily as a result of the loan sales discussed above.

Noninterest expense increased by $9 million, or 2%, due primarily to higher costs associated with loan servicing, reserves established to absorb potential noncredit-related losses from our education lending

36

business, and various indirect charges. These adverse changes were partially offset by decreases in both personnel and net occupancy expenses.

Figure 3. Consumer Banking


	Three months ended June 30,						Change						Six months ended June 30,						Change
dollars in millions	2005			2004			Amount			Percent			2005			2004			Amount			Percent

Summary of operations
Net interest income (TE)	$	473		$	470		$	3			.6	%	$	971		$	957		$	14			1.5	%
Noninterest income		233			220			13			5.9			462			450			12			2.7

Total revenue (TE)		706			690			16			2.3			1,433			1,407			26			1.8
Provision for loan losses		22			49			(27	)		(55.1	)		70			110			(40	)		(36.4	)
Noninterest expense		484			475			9			1.9			960			932			28			3.0

Income before income taxes (TE)		200			166			34			20.5			403			365			38			10.4
Allocated income taxes and TE adjustments		75			62			13			21.0			151			137			14			10.2

Net income	$	125		$	104		$	21			20.2	%	$	252		$	228		$	24			10.5	%


Percent of consolidated net income		43	%		44	%		N/A			N/A			45	%		46	%		N/A			N/A

Average balances
Loans	$	32,105		$	33,813		$	(1,708	)		(5.1	)%	$	32,726		$	33,971		$	(1,245	)		(3.7)	%
Total assets		35,369			37,420			(2,051	)		(5.5	)		36,144			37,348			(1,204	)		(3.2	)
Deposits		41,567			39,305			2,262			5.8			41,316			39,117			2,199			5.6

TE = Taxable Equivalent, N/A = Not Applicable

Additional Consumer Banking Data


	Three months ended June 30,						Change					Six months ended June 30,				Change
dollars in millions	2005			2004			Amount		Percent			2005		2004		Amount		Percent

Average deposits outstanding
Noninterest-bearing	$	6,816		$	6,394		$	422		6.6	%	$	6,712	$	6,320	$	392		6.2	%
Money market and other savings		20,323			18,923			1,400		7.4			20,306		18,576		1,730		9.3
Time		14,428			13,988			440		3.1			14,298		14,221		77		.5

Total deposits	$	41,567		$	39,305		$	2,262		5.8	%	$	41,316	$	39,117	$	2,199		5.6	%



Home equity loans
Community Banking
Average balance	$	10,397		$	10,102
Average loan-to-value ratio		71	%		72	%
Percent first lien positions		61			60
National Home Equity
Average balance	$	3,498		$	4,504
Average loan-to-value ratio		65	%		72	%
Percent first lien positions		67			78

Other data
On-line households / household penetration		595,411/47	%		524,150/42	%
KeyCenters		945			902
Automated teller machines		2,205			2,166

Corporate and Investment Banking

As shown in Figure 4, net income for Corporate and Investment Banking was $157 million for the second quarter of 2005, up from $118 million for the same period last year. Increases in both net interest income and noninterest income, along with a significant reduction in the provision for loan losses drove the improvement. These positive changes were offset in part by an increase in noninterest expense.

Taxable-equivalent net interest income increased by $61 million, or 26%, from the second quarter of 2004, due primarily to strong growth in average loans and leases, as well as deposits. Average loans and leases rose by $6.9 billion, or 25%, reflecting improvements in each of the primary lines of business. An increase in lease financing receivables in the Key Equipment Finance line was bolstered by the acquisition of American Express Business Finance Corporation during the fourth quarter of 2004.

Noninterest income rose by $9 million, or 4%, due largely to an increase in non-yield-related loan fees. This growth was moderated by a decrease in income from investment banking and capital markets activities.

The provision for loan losses was a credit of $2 million for the second quarter of 2005, compared with expense of $25 million for the year-ago quarter. The reduction from the second quarter of 2004 reflected improved asset quality in the Corporate Banking and KeyBank Real Estate Capital lines of business.

37

Noninterest expense rose by $34 million, or 14%, as expansion of the business and improved profitability led to increases in personnel and various other expense categories. During the second quarter of 2005, we completed the integration of American Express Business Finance Corporation into Key Equipment Finance.

In June 2005, we announced plans to further expand our FHA financing and servicing capabilities by acquiring Malone Mortgage Company, based in Dallas, Texas. This is one in a series of acquisitions that we have initiated over the past several years to build upon the success we have experienced in our commercial mortgage origination and servicing area.

Figure 4. Corporate and Investment Banking


	Three months ended June 30,						Change						Six months ended June 30,						Change
dollars in millions	2005			2004			Amount			Percent			2005			2004			Amount			Percent

Summary of operations
Net interest income (TE)	$	292		$	231		$	61			26.4	%	$	565		$	467		$	98			21.0	%
Noninterest income		231			222			9			4.1			447			429			18			4.2


Total revenue (TE)		523			453			70			15.5			1,012			896			116			12.9
Provision for loan losses		(2	)		25			(27	)		N/M			(6	)		45			(51	)		N/M
Noninterest expense		274			240			34			14.2			526			476			50			10.5


Income before income taxes (TE)		251			188			63			33.5			492			375			117			31.2
Allocated income taxes and TE adjustments		94			70			24			34.3			184			141			43			30.5


Net income	$	157		$	118		$	39			33.1	%	$	308		$	234		$	74			31.6	%


Percent of consolidated net income		54	%		49	%		N/A			N/A			56	%		48	%		N/A			N/A

Average balances

Loans	$	34,943		$	28,012		$	6,931			24.7	%	$	34,559		$	27,697		$	6,862			24.8	%
Total assets		40,684			33,917			6,767			20.0			40,289			33,576			6,713			20.0
Deposits		9,691			7,867			1,824			23.2			9,238			7,673			1,565			20.4

TE = Taxable Equivalent, N/A = Not Applicable


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

Average lease financing receivables managed by Key Equipment Finance^a
Receivables held in Key Equipment Finance portfolio	$	7,950	$	6,209	$	1,741		28.0	%	$	7,988	$	6,135	$	1,853		30.2	%
Receivables assigned to other lines of business		2,034		1,901		133		7.0			2,031		1,896		135		7.1

Total lease financing receivables managed	$	9,984	$	8,110	$	1,874		23.1	%	$	10,019	$	8,031	$	1,988		24.8	%

(a)

Includes lease financing receivables held in portfolio and those assigned to other lines of business (primarily Corporate Banking) if those businesses are principally responsible for maintaining the relationship with the client.

Other Segments

Other segments consist primarily of Corporate Treasury and Key’s Principal Investing unit. These segments generated net income of $10 million for the second quarter of 2005, compared with net income of $15 million for the same period last year. Declines in net gains from principal investing and the sales of securities drove the decrease.

38

Results of Operations

Net interest income

Key’s principal source of earnings is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:

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

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

¨ market interest rate fluctuations; and

¨ asset quality.

To make it easier to compare results among several periods and the yields on various types of earning assets (some of which are taxable and others which are not), we present net interest income in this discussion on a “taxable-equivalent basis” (i.e., as if it were all taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $154, an amount that—if taxed at the statutory federal income tax rate of 35%—would yield $100.

Figure 5, which spans pages 41 and 42, shows the various components of Key’s balance sheet that affect interest income and expense, and their respective yields or rates over the past five quarters. This figure also presents a reconciliation of taxable-equivalent net interest income for each of those quarters to net interest income reported in accordance with U.S. generally accepted accounting principles (“GAAP”).

Taxable-equivalent net interest income for the second quarter of 2005 was $723 million, representing a $72 million, or 11%, increase from the year-ago quarter. This growth was attributable to an increase in average earning assets, due primarily to strong growth in all major components of the commercial loan portfolio, and a higher net interest margin, which increased 15 basis points to 3.71%. A basis point is equal to one one-hundredth of a percentage point, meaning 15 basis points equals .15%. The net interest margin, which is an indicator of the profitability of the earning assets portfolio, is calculated by dividing net interest income by average earning assets and annualizing the result.

During the second quarter of 2005, the net interest margin benefited from a principal investing distribution of $15 million received in the form of dividends and interest. This distribution added approximately 8 basis points to the net interest margin for the current quarter. Strong growth in commercial loans, deposits and noninterest-bearing funds, along with a slight asset-sensitive interest rate risk position in a rising interest rate environment, also contributed to the improvement from the year-ago quarter. The increase in the net interest margin caused by these factors was offset in part by the effects of actions taken by Key to exit certain assets that had higher yields and credit costs, which did not fit its relationship banking strategy.

Average earning assets for the second quarter of 2005 totaled $78.1 billion, which was $4.8 billion, or 7%, higher than the second quarter 2004 level. The growth in commercial lending more than offset the decline in consumer loans resulting from loan sales and management’s efforts to exit certain credit-only relationship portfolios.

39

Since December 31, 2003, the growth and composition of Key’s loan portfolio has been affected by the following actions:


¨		During the fourth quarter of 2004, Key acquired EverTrust, in Everett, Washington with a loan portfolio (primarily commercial real estate loans) of approximately $685 million at the date of acquisition. In the same quarter, Key acquired AEBF with a commercial lease financing portfolio of approximately $1.5 billion.


¨		Key sold commercial mortgage loans of $725 million during the first six months of 2005 and $2.1 billion during all of 2004. Since some of these loans have been sold with limited recourse (i.e., there is a risk that Key will be held accountable for certain events or representations made in the sales), Key established and has maintained a loss reserve of an amount estimated by management to be appropriate. More information about the related recourse agreement is provided in Note 12 (“Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with Federal National Mortgage Association” on page 27.


¨		Key sold education loans of $336 million ($112 million through securitizations) during the first half of 2005 and $1.3 billion ($1.1 billion through securitizations) during all of 2004. Key has used the securitization market for education loans as a cost effective means of diversifying its funding sources.


¨		Key sold other loans (primarily home equity and indirect consumer loans) totaling $1.9 billion during the first six months of 2005 and $2.9 billion during all of 2004. During the first quarter of 2005, Key completed the sale of $992 million of indirect automobile loans, representing the prime segment of that portfolio. In April 2005, Key completed the sale of $635 million of loans, representing the nonprime segment. During the fourth quarter of 2004, Key sold $978 million of broker-originated home equity loans. The decision to sell these loans was driven by management’s strategies for improving Key’s returns and achieving desired interest rate and credit risk profiles.

40

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


	Second Quarter 2005								First Quarter 2005
	Average					Yield/			Average					Yield/
dollars in millions	Balance			Interest		Rate			Balance			Interest		Rate

ASSETS
Loans^a,b
Commercial, financial and agricultural	$	20,019		$	266		5.32	%	$	19,796		$	238		4.88	%
Real estate — commercial mortgage		7,845			120		6.15			7,602			108		5.74
Real estate — construction		6,116			98		6.45			5,633			81		5.81
Commercial lease financing		9,984			158		6.33			10,055			158		6.31

Total commercial loans		43,964			642		5.86			43,086			585		5.49
Real estate — residential		1,460			22		6.04			1,449			22		5.99
Home equity		13,904			225		6.49			13,986			213		6.19
Consumer — direct		1,835			36		7.93			1,932			38		7.88
Consumer — indirect lease financing		53			1		10.76			77			2		10.26
Consumer — indirect other		3,275			50		6.07			3,248			52		6.42

Total consumer loans		20,527			334		6.53			20,692			327		6.39
Loans held for sale		3,169			53		6.61			4,281			81		7.64

Total loans		67,660			1,029		6.09			68,059			993		5.90
Investment securities^a		65			1		8.42			70			2		8.66
Securities available for sale^c		7,081			80		4.54			7,226			80		4.43
Short-term investments		1,799			12		2.58			1,679			10		2.43
Other investments^c		1,455			24		6.42			1,423			8		2.25

Total earning assets		78,060			1,146		5.88			78,457			1,093		5.62
Allowance for loan losses		(1,124	)							(1,133	)
Accrued income and other assets		12,979								13,634


	$	89,915							$	90,958


LIABILITIES AND SHAREHOLDERS’ EQUITY
NOW and money market deposit accounts	$	22,301			77		1.39		$	21,619			55		1.03
Savings deposits		1,999			1		.26			1,957			1		.24
Certificates of deposit ($100,000 or more)^d		4,999			46		3.70			4,895			44		3.65
Other time deposits		10,806			82		3.05			10,589			76		2.90
Deposits in foreign office		4,314			32		2.96			4,963			30		2.45

Total interest-bearing deposits		44,419			238		2.16			44,023			206		1.90
Federal funds purchased and securities sold under repurchase agreements		3,830			25		2.67			4,475			25		2.24
Bank notes and other short-term borrowings		2,792			19		2.72			2,947			17		2.38
Long-term debt^d		13,929			141		4.11			14,785			131		3.77

Total interest-bearing liabilities		64,970			423		2.62			66,230			379		2.34
Noninterest-bearing deposits		11,717								11,534
Accrued expense and other liabilities		6,000								6,100
Shareholders’ equity		7,228								7,094


	$	89,915							$	90,958


Interest rate spread (TE)							3.26	%							3.28	%

Net interest income (TE) and net
interest margin (TE)					723		3.71	%					714		3.66	%

TE adjustment^a					30								28

Net interest income, GAAP basis				$	693							$	686


(a)		Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%.

(b)		For purposes of these computations, nonaccrual loans are included in average loan balances.

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

(d)		Rate calculation excludes basis adjustments related to fair value hedges. See Note 19 (“Derivatives and Hedging Activities”), which begins on page 84 of Key’s 2004 Annual Report to Shareholders, for an explanation of fair value hedges.

TE = Taxable Equivalent

41

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


Fourth Quarter 2004							Third Quarter 2004								Second Quarter 2004
Average				Yield/			Average					Yield/			Average					Yield/
Balance		Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate




$18,524		$	214		4.60	%	$	18,088		$	198		4.34	%	$	17,392		$	189		4.36	%

7,361			99		5.38			6,448			81		4.99			6,071			74		4.94
5,291			74		5.53			4,825			62		5.15			4,716			56		4.79
8,829			129		5.89			8,182			119		5.77			8,110			120		5.90

40,005			516		5.15			37,543			460		4.87			36,289			439		4.86
1,493			23		5.93			1,511			21		5.79			1,568			24		6.09
14,696			219		5.94			14,844			212		5.67			14,631			201		5.53
2,007			38		7.62			2,059			38		7.35			2,058			38		7.41

104			3		10.02			144			4		10.07			199			5		9.74
5,076			96		7.55			5,153			97		7.56			5,137			95		7.39

23,376			379		6.45			23,711			372		6.26			23,593			363		6.17
2,635			33		5.07			2,476			30		4.74			2,602			28		4.28

66,016			928		5.61			63,730			862		5.38			62,484			830		5.33
75			2		8.53			79			2		8.65			90			2		8.72
7,233			81		4.48			6,982			84		4.88			7,130			78		4.37
2,100			11		2.00			2,527			9		1.50			2,384			9		1.44
1,417			9		2.56			1,328			10		2.98			1,167			8		2.79

76,841			1,031		5.35			74,646			967		5.16			73,255			927		5.07
(1,251	)							(1,270	)							(1,237	)
13,658								13,156								13,305


$89,248							$	86,532							$	85,323





$21,591			46		.84		$	20,454			39		.77		$	19,753			33		.67
1,951			1		.23			1,986			2		.22			2,040			1		.23

4,871			44		3.66			4,852			44		3.60			4,727			44		3.77
10,366			75		2.89			10,348			73		2.81			10,591			76		2.87
3,506			18		1.96			3,593			13		1.47			2,635			7		1.05

42,285			184		1.73			41,233			171		1.65			39,746			161		1.63

5,085			23		1.81			5,032			17		1.35			4,483			10		.93

2,793			13		1.79			2,614			8		1.33			2,512			9		1.43
14,119			113		3.36			13,415			98		3.01			14,465			96		2.74

64,282			333		2.08			62,294			294		1.90			61,206			276		1.82
11,804								11,285								11,010
6,095								6,098								6,228
7,067								6,855								6,879


$89,248							$	86,532							$	85,323


					3.27	%							3.26	%							3.25	%


			698		3.63	%					673		3.60	%					651		3.56	%

			26								22								22

		$	672							$	651							$	629

42

Figure 6 shows how the changes in yields or rates and average balances from the prior year affected net interest income. The section entitled “Financial Condition,” which begins on page 48, contains more discussion about changes in earning assets and funding sources.

Figure 6. Components of Net Interest Income Changes


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

INTEREST INCOME
Loans	$	72		$	127		$	199		$	156		$	188		$	344
Investment securities		—			(1	)		(1	)		(1	)		—			(1	)
Securities available for sale		—			2			2			(4	)		(2	)		(6	)
Short-term investments		(3	)		6			3			(4	)		8			4
Other investments		2			14			16			5			11			16

Total interest income (taxable equivalent)		71			148			219			152			205			357

INTEREST EXPENSE
NOW and money market deposit accounts		5			39			44			9			61			70
Certificates of deposit ($100,000 or more)		2			—			2			3			(3	)		—
Other time deposits		2			4			6			(1	)		3			2
Deposits in foreign office		6			19			25			18			32			50

Total interest-bearing deposits		15			62			77			29			93			122
Federal funds purchased and securities sold under repurchase agreements		(1	)		16			15			(1	)		31			30
Bank notes and other short-term borrowings		1			9			10			3			12			15
Long-term debt		(4	)		49			45			(6	)		87			81

Total interest expense		11			136			147			25			223			248

Net interest income (taxable equivalent)	$	60		$	12		$	72		$	127		$	(18	)	$	109

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

Noninterest income

Noninterest income for the second quarter of 2005 was $486 million, compared with $491 million for the same period last year. For the first six months of the year, noninterest income was $986 million, representing an increase of $18 million, or 2%, from the first six months of 2004.

As shown in Figure 7, the slight decline in noninterest income from the year-ago quarter was due largely to income from investment banking and capital markets activities, which decreased by $21 million as a result of lower net gains from principal investing and a decline in investment banking income. Also contributing to the decrease in total noninterest income was a $10 million reduction in service charges on deposit accounts. A $10 million increase in letter of credit and loan fees, as well as comparable increases in net gains from loan securitizations and sales, and various service charges (included in “miscellaneous income”) substantially offset these adverse results.

For the year-to-date period, the growth in noninterest income from the same period last year reflected a $17 million increase in letter of credit and loan fees, an $8 million increase in loan securitization servicing fees, and an $11 million increase in net gains on the residual values of leased vehicles and equipment (included in “miscellaneous income”). These positive results were partially offset by decreases in a number of other revenue components, including a $24 million reduction in service charges on deposit accounts.

43

Figure 7. Noninterest Income


	Three months ended June 30,				Change						Six months ended June 30,					Change
dollars in millions	2005		2004		Amount			Percent			2005			2004		Amount			Percent

Trust and investment services income	$	135	$	141	$	(6	)		(4.3	)%	$	273		$	286	$	(13	)		(4.5	)%
Service charges on deposit accounts		76		86		(10	)		(11.6	)		146			170		(24	)		(14.1	)
Investment banking and capital markets income		52		73		(21	)		(28.8	)		119			119		—			—
Letter of credit and loan fees		47		37		10			27.0			87			70		17			24.3
Corporate-owned life insurance income		24		25		(1	)		(4.0	)		52			52		—			—
Electronic banking fees		24		22		2			9.1			46			40		6			15.0
Net gains from loan securitizations and sales		10		1		9			900.0			29			26		3			11.5
Net securities gains (losses)		1		7		(6	)		(85.7	)		(5	)		7		(12	)		N/M
Other income:
Operating lease income		48		45		3			6.7			94			91		3			3.3
Insurance income		10		14		(4	)		(28.6	)		21			25		(4	)		(16.0	)
Loan securitization servicing fees		5		1		4			400.0			10			2		8			400.0
Credit card fees		5		3		2			66.7			8			6		2			33.3
Miscellaneous income		49		36		13			36.1			106			74		32			43.2

Total other income		117		99		18			18.2			239			198		41			20.7

Total noninterest income	$	486	$	491	$	(5	)		(1.0	)%	$	986		$	968	$	18			1.9	%

N/M = Not Meaningful

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

Trust and investment services income. Trust and investment services is Key’s largest source of noninterest income. The primary components of revenue generated by these services are shown in Figure 8.

Figure 8. Trust and Investment Services Income


	Three months ended June 30,				Change						Six months ended June 30,				Change
dollars in millions	2005		2004		Amount			Percent			2005		2004		Amount			Percent

Brokerage commissions and fee income	$	62	$	66	$	(4	)		(6.1	)%	$	125	$	136	$	(11	)		(8.1)	%
Personal asset management and custody fees		38		39		(1	)		(2.6	)		76		79		(3	)		(3.8	)
Institutional asset management and custody fees		35		36		(1	)		(2.8	)		72		71		1			1.4

Total trust and investment services income	$	135	$	141	$	(6	)		(4.3	)%	$	273	$	286	$	(13	)		(4.5	)%

The decrease in trust and investment services income for both the quarterly and year-to-date periods was attributable primarily to a slowdown in brokerage activities.

A significant portion of Key’s trust and investment services income depends on the value of assets under management. At June 30, 2005, Key’s bank, trust and registered investment advisory subsidiaries had assets under management of $76.8 billion, representing a 10% increase from $70.0 billion at June 30, 2004. As shown in Figure 9, 80% of the increase was attributable to Key’s securities lending business. When clients’ securities are lent to a borrower, the borrower must provide Key with cash collateral, which is invested during the term of the loan. The difference between the revenue generated from the investment and the cost of the collateral is then shared with the client. This business, although profitable, generates a significantly lower rate of return (commensurate with the lower level of risk inherent in the business) than other types of assets under management.

44

Figure 9. Assets Under Management


	2005				2004
in millions	Second		First		Fourth		Third		Second

Assets under management by investment type:
Equity	$	34,959	$	34,374	$	34,788	$	32,431	$	32,299
Fixed income		11,957		12,754		12,885		12,514		11,638
Money market		9,355		9,857		10,802		10,748		10,966
Securities lending		20,536		19,349		16,082		15,540		15,097

Total	$	76,807	$	76,334	$	74,557	$	71,233	$	70,000


Proprietary mutual funds included in assets under management:
Equity	$	3,911	$	3,770	$	3,651	$	3,408	$	3,426
Fixed income		767		767		827		860		866
Money market		7,758		8,174		9,103		9,050		9,275

Total	$	12,436	$	12,711	$	13,581	$	13,318	$	13,567

Service charges on deposit accounts. The decrease in service charges on deposit accounts for both the quarterly and year-to-date periods was due primarily to a reduction in the level of overdraft, maintenance and account analysis fees charged to clients. The decline in overdraft fees reflects enhanced capabilities such as “real time” posting that allow clients to better manage their accounts. Maintenance fees were lower because a higher proportion of Key’s clients have elected to use Key’s free checking products. The decrease in account analysis fees was attributable to the rising interest rate environment in which clients have elected to pay for services with compensating balances.

Investment banking and capital markets income. As shown in Figure 10, lower income from investment banking activities and a reduction in net gains from principal investing drove the decrease in investment banking and capital markets income, compared with the second quarter of 2004. For the year to-date period, total investment banking and capital markets income was unchanged from the first six months of 2004 as decreases in the revenue components discussed above were offset by improved results from dealer trading and derivatives, and higher income from other investments. Of the $27 million improvement in income from dealer trading and derivatives, $11 million represented derivative income recorded during the first quarter of 2005 in connection with the anticipated sale of the indirect automobile loan portfolios completed in March and April 2005.

Figure 10. Investment Banking and Capital Markets Income


	Three months ended June 30,				Change						Six months ended June 30,				Change
dollars in millions	2005		2004		Amount			Percent			2005		2004		Amount			Percent

Investment banking income	$	19	$	29	$	(10	)		(34.5	)%	$	36	$	51	$	(15	)		(29.4	)%
Net gains from principal investing		1		19		(18	)		(94.7	)		13		29		(16	)		(55.2	)
Foreign exchange income		9		11		(2	)		(18.2	)		18		24		(6	)		(25.0	)
Dealer trading and derivatives income		10		7		3			42.9			29		2		27			N/M
Income from other investments		13		7		6			85.7			23		13		10			76.9

Total investment banking and capital markets income	$	52	$	73	$	(21	)		(28.8	)%	$	119	$	119		—			—

N/M = Not Meaningful

Key’s principal investing income is susceptible to volatility since most of it is derived from mezzanine debt and equity investments in small to medium-sized businesses. Principal investments consist of direct and indirect investments in predominantly privately held companies and are carried on the balance sheet at fair value ($814 million at June 30, 2005, and $788 million at June 30, 2004). Thus, the net gains presented in Figure 10 stem from changes in estimated fair values as well as actual gains and losses on sales of principal investments. As discussed earlier, during the second quarter of 2005, Key received a $15 million distribution in the form of dividends and interest from principal investing activities. This revenue was recorded in net interest income. Had it been recorded in noninterest income, principal investing income would have been comparable to the level reported for the same period last year.

45

Letter of credit and loan fees. The increase in non-yield-related loan fees for both the quarterly and year-to-date periods was due primarily to higher syndication, origination and commitment fees generated by the Corporate Banking and KeyBank Real Estate Capital lines of business. These improved results reflect the stronger demand for commercial loans and a more disciplined approach to pricing, which considers overall customer relationships.

Net gains from loan securitizations and sales. Key sells or securitizes loans to achieve desired interest rate and credit risk profiles, to improve the profitability of the overall loan portfolio or to diversify funding sources. During the first quarter of 2005, Key completed the sale of the prime segment of its indirect automobile loan portfolio, resulting in a gain of $19 million. However, this gain was substantially offset by a $9 million impairment charge in the education lending business recorded during the same quarter. The types of loans sold during 2004 and the first six months of 2005 are presented in Figure 15 on page 50.

Noninterest expense

Noninterest expense for the second quarter of 2005 was $753 million, compared with $717 million for the second quarter of 2004. For the first six months of the year, noninterest expense was $1.5 billion, compared with $1.4 billion for the first half of last year.

As shown in Figure 11, higher costs associated with personnel and an increase in “miscellaneous expense” drove the increase from the year-ago quarter. The increase in miscellaneous expense was attributable in part to an $11 million reserve established in the current quarter to absorb potential noncredit-related losses from Key’s education lending business. In addition, miscellaneous expense for the second quarter of 2005 included a $2 million provision for probable losses inherent in lending-related commitments, compared with a $7 million credit for the same period last year.

For the year-to-date period, the increase in noninterest expense was due largely to increases in the personnel (see further discussion on page 47), net occupancy and “miscellaneous expense” components. The increase in net occupancy expense resulted from a $30 million charge recorded during the first quarter of 2005 to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis. The growth in miscellaneous expense was due primarily to a $20 million contribution to the Key Foundation recorded during the first quarter that will be used to fund future contributions.

Figure 11. Noninterest Expense


	Three months											Six months
	ended June 30,					Change						ended June 30,						Change
dollars in millions	2005		2004			Amount			Percent			2005			2004			Amount			Percent

Personnel	$	386	$	371		$	15			4.0	%	$	776		$	744		$	32			4.3	%
Net occupancy		55		61			(6	)		(9.8	)		146			119			27			22.7
Computer processing		50		48			2			4.2			101			92			9			9.8
Equipment		28		30			(2	)		(6.7	)		56			61			(5	)		(8.2	)
Professional fees		30		29			1			3.4			58			54			4			7.4
Marketing		34		30			4			13.3			59			53			6			11.3
Other expense:
Operating lease expense		40		38			2			5.3			78			76			2			2.6
Postage and delivery		12		13			(1	)		(7.7	)		25			26			(1	)		(3.8	)
Telecommunications		8		7			1			14.3			15			14			1			7.1
Franchise and business taxes		9		9			—			—			17			8			9			112.5
OREO expense, net		2		7			(5	)		(71.4	)		4			11			(7	)		(63.6	)
Provision for losses on lending-related commitments		2		(7	)		9			N/M			(9	)		(7	)		(2	)		(28.6	)
Miscellaneous expense		97		81			16			19.8			196			163			33			20.2

Total other expense		170		148			22			14.9			326			291			35			12.0

Total noninterest expense	$	753	$	717		$	36			5.0	%	$	1,522		$	1,414		$	108			7.6	%


Average full-time equivalent employees		19,429		19,514			(85	)		(.4	)%		19,534			19,548			(14	)		(.1	)%

N/M = Not Meaningful

Personnel. As shown in Figure 12, personnel expense, the largest category of Key’s noninterest expense, rose by $32 million, or 4%, from the first six months of 2004, reflecting increases in all personnel expense components with the exception of incentive compensation.

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Figure 12. Personnel Expense


	Three months ended June 30,				Change					Six months ended June 30,				Change
dollars in millions	2005		2004		Amount		Percent			2005		2004		Amount			Percent

Salaries	$	218	$	210	$	8		3.8	%	$	436	$	419	$	17			4.1	%
Incentive compensation		92		92		—		—			172		177		(5	)		(2.8	)
Employee benefits		65		59		6		10.2			140		130		10			7.7
Stock-based compensation		9		8		1		12.5			20		15		5			33.3
Severance		2		2		—		—			8		3		5			166.7

Total personnel expense	$	386	$	371	$	15		4.0	%	$	776	$	744	$	32			4.3	%

For the second quarter of 2005, the average number of full-time equivalent employees was 19,429, compared with 19,571 for the first quarter of 2005 and 19,514 for the year-ago quarter.

Franchise and business taxes. The increase in franchise and business taxes from the first half of 2004 shown in Figure 11 was largely the result of a $7 million adjustment recorded during the first quarter of 2004 to reverse certain business taxes that had been overaccrued.

Income taxes

The provision for income taxes was $115 million for the second quarter of 2005, compared with $90 million for the comparable period in 2004. The effective tax rate, which is the provision for income taxes as a percentage of income before income taxes, was 28.3% for the second quarter of 2005, compared with 27.4% for the year-ago quarter. For the first six months of 2005, the provision for income taxes was $224 million, compared with $192 million for the first half of 2004. The effective tax rates for these periods were 28.8% and 28.2%, respectively.

The effective tax rates for both the current and prior year are substantially below Key’s combined federal and state tax rate of 37.5%, due primarily to income from investments in tax-advantaged assets such as corporate-owned life insurance, and credits associated with investments in low-income housing projects. In addition, a lower tax rate is applied to portions of the equipment lease portfolio that are managed by a foreign subsidiary in a lower tax jurisdiction. Since Key intends to permanently reinvest the earnings of this foreign subsidiary overseas, no deferred income taxes are recorded on those earnings in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.”

The increases in the effective tax rates from those reported for the comparable quarterly and year-to-date periods last year reflected the fact that tax-exempt interest income and income from corporate-owned life insurance each represented a lower percentage of income before income taxes in the current year, while the level of state income taxes represented a higher percentage. The increase in the quarterly effective tax rate also reflected a lower tax benefit associated with the equipment lease portfolio. Increases in the effective rates from those reported one year ago were moderated by higher dividends received deductions.

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Financial Condition

Loans

At June 30, 2005, total loans outstanding were $68.0 billion, compared with $67.7 billion at December 31, 2004, and $63.4 billion at June 30, 2004. The composition of Key’s loan portfolio at each of these dates is presented in Note 6 (“Loans”) on page 18. The growth in our loans over the past twelve months was attributable largely to the stronger demand for commercial loans in an improving economy. In addition, commercial loan growth was bolstered by the acquisitions of EverTrust and AEBF during the fourth quarter of 2004.

The growth of the total loan portfolio was moderated by loan sales completed to improve the profitability or risk profile of the overall portfolio, or to accommodate our asset/liability management needs. These transactions included the sales of the prime and nonprime segments of Key’s indirect automobile loan portfolio, which were completed in the first and second quarters of 2005, respectively, and the fourth quarter 2004 sale of Key’s broker-originated home equity loan portfolio, all of which were a result of our decision to exit these businesses.

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

Commercial loan portfolio. Commercial loans outstanding increased by $7.1 billion, or 19%, from one year ago. Over the past year, all major segments of the commercial loan portfolio experienced growth, reflecting improvement in the economy. In addition, acquisitions added an aggregate $2.1 billion to outstanding balances, primarily in the lease financing and commercial mortgage portfolios. The growth in the commercial loan portfolio was broad-based and spread among a number of industry sectors.

Equipment lease financing is a specialty business in which Key believes it has both the scale and array of products to compete on a world-wide basis. This business showed strong growth during the past twelve months and benefited from the fourth quarter 2004 acquisition of AEBF, the equipment leasing unit of American Express’ small business division. This acquisition added approximately $1.5 billion of receivables to Key’s commercial lease financing portfolio.

Commercial real estate loans related to both owner and nonowner-occupied properties constitute one of the largest segments of Key’s commercial loan portfolio. At June 30, 2005, Key’s commercial real estate portfolio included mortgage loans of $8.0 billion and construction loans of $6.2 billion. The average size of a mortgage loan was $.6 million and the largest mortgage loan had a balance of $84 million. The average size of a construction loan commitment was $7 million. The largest construction loan commitment was $107 million, of which $22 million was outstanding.

Key conducts its commercial real estate lending business through two primary sources: a thirteen-state banking franchise and KeyBank Real Estate Capital, a national line of business that cultivates relationships both within and beyond the branch system. The KeyBank Real Estate Capital line of business deals exclusively with nonowner-occupied properties (generally properties in which the owner occupies less than 60% of the premises) and accounted for approximately 60% of Key’s total average commercial real estate loans during the second quarter of 2005. Our commercial real estate business as a whole focuses on larger real estate developers and, as shown in Figure 13, is diversified by both industry type and geography.

In June 2005, we announced plans to further expand our FHA financing and servicing capabilities by acquiring Malone Mortgage Company, based in Dallas, Texas. This is one in a series of acquisitions that we have initiated over the past several years to build upon the success we have experienced in our commercial mortgage origination and servicing area.

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Figure 13. Commercial Real Estate Loans


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

Nonowner-occupied:
Multi-family properties	$	612	$	597	$	539	$	687	$	2,435		17.1	%
Residential properties		438		156		224		699		1,517		10.7
Retail properties		186		561		203		129		1,079		7.7
Warehouses		160		150		83		108		501		3.5
Land and Development		180		58		89		107		434		3.0
Office buildings		123		92		96		104		415		2.9
Manufacturing facilities		8		24		5		13		50		.3
Hotels/Motels		3		36		1		3		43		.3
Health facility		14		3		—		20		37		.3
Other		327		291		12		30		660		4.6

		2,051		1,968		1,252		1,900		7,171		50.4
Owner-occupied		1,687		2,523		772		2,085		7,067		49.6

Total	$	3,738	$	4,491	$	2,024	$	3,985	$	14,238		100.0	%


Nonowner-occupied:
Nonperforming loans	$	3	$	3		—		—	$	6		N/M
Accruing loans past due 90 days or more		—		7		—		—		7		N/M
Accruing loans past due 30 through 89 days		40		20	$	1	$	13		74		N/M

N/M = Not Meaningful

Consumer loan portfolio. As shown in Note 6, consumer loans outstanding decreased by $3.2 billion, or 13%, from one year ago. The decline was due primarily to two factors. In December 2004, we reclassified $1.7 billion of indirect automobile loans to held-for-sale status in anticipation of their sale. During the first and second quarters of 2005, we completed the sales of the prime and nonprime segments of this portfolio, respectively. In addition, since June 30, 2004, we sold $1.1 billion of broker-originated home equity loans within the Key Home Equity Services division. Most of these loans were sold during the fourth quarter as a result of our decision to exit this business. The loan sales discussed above are part of our strategy for improving Key’s returns and achieving desired interest rate and credit risk profiles.

During the same period, residential real estate loans decreased because most of the new loans originated by Key over the past twelve months were originated for sale. The overall decline in consumer loans was offset in part by growth in home equity loans generated by the Community Banking line of business discussed below.

Excluding loan sales, acquisitions and the reclassification of the indirect automobile loan portfolio to held-for-sale status, consumer loans would have decreased only slightly during the past twelve months.

The home equity portfolio is by far the largest segment of Key’s consumer loan portfolio. Key’s home equity portfolio is derived primarily from our Community Banking line of business (75% of the home equity portfolio at June 30, 2005) and the National Home Equity unit within our Consumer Finance line of business.

The National Home Equity unit has two components: Champion Mortgage Company, a home equity finance company, and Key Home Equity Services, which purchases individual loans from an extensive network of correspondents and agents. As discussed above, in the fourth quarter of 2004, we sold $978 million of broker-originated loans within the Key Home Equity Services division as a result of our decision to exit this business.

Figure 14 summarizes Key’s home equity loan portfolio at the end of each of the last five quarters, as well as certain asset quality statistics and yields on the portfolio as a whole.

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Figure 14. Home Equity Loans


	2005						2004
dollars in millions	Second			First			Fourth			Third			Second

SOURCES OF LOANS OUTSTANDING AT PERIOD END
Community Banking	$	10,404		$	10,416		$	10,554		$	10,472		$	10,249

Champion Mortgage Company		2,817			2,869			2,866			2,882			2,879
Key Home Equity Services division		700			651			642			1,596			1,625

National Home Equity unit		3,517			3,520			3,508			4,478			4,504

Total	$	13,921		$	13,936		$	14,062		$	14,950		$	14,753


Nonperforming loans at period end	$	74		$	76		$	80		$	149		$	151
Net charge-offs for the period		5			5			24			7			10
Yield for the period		6.49	%		6.19	%		5.94	%		5.67	%		5.53	%

Sales and securitizations. During the past twelve months, Key sold $2.0 billion of commercial real estate loans, $1.4 billion of education loans ($1.2 billion through securitizations), $1.6 billion of indirect consumer loans, $1.2 billion of home equity loans, $375 million of residential real estate loans, and $162 million of commercial loans.

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

¨ whether particular lending businesses meet our performance standards or fit with our relationship banking strategy;

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

¨ the relative cost of funds;

¨ the level of credit risk; and

¨ capital requirements.

Figure 15 summarizes Key’s loan sales (including securitizations) for the first half of 2005 and all of 2004.

Figure 15. Loans Sold


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

2005
Second quarter	$	21	$	336		—	$	99		—	$	635	$	128	$	1,219
First quarter		18		389		—		98	$	31		992		208		1,736

Total	$	39	$	725		—	$	197	$	31	$	1,627	$	336	$	2,955

2004
Fourth quarter	$	43	$	760		—	$	99	$	1,058		—	$	118	$	2,078
Third quarter		80		508		—		79		85		—		976		1,728
Second quarter		87		652	$	5		121		70	$	283		104		1,322
First quarter		130		198		—		61		664		—		138		1,191

Total	$	340	$	2,118	$	5	$	360	$	1,877	$	283	$	1,336	$	6,319

Figure 16 shows loans that are either administered or serviced by Key, but not recorded on its balance sheet. Included are loans that have been both securitized and sold, or simply sold outright. Excluded from amounts shown in the figure are approximately $1.4 billion of automobile loans serviced as of June 30, 2005. These loans represent a portion of the indirect automobile loan portfolio sold in March and April of this year that is being serviced temporarily as an accommodation to the purchasers. We anticipate that this servicing arrangement will come to an end during the third quarter. In the event of default, Key is subject to recourse with respect to approximately $618 million of the $43.7 billion of loans administered or serviced at June 30, 2005. Additional information about this recourse arrangement is included in Note 12 (“Contingent Liabilities and Guarantees”) under the heading “Recourse agreement with Federal National Mortgage Association” on page 27.

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

Figure 16. Loans Administered or Serviced


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

Commercial real estate loans	$	38,630	$	35,534	$	33,252	$	29,098	$	27,861
Education loans		4,708		4,861		4,916		4,978		4,327
Home equity loans		96		116		130		147		168
Commercial loans		222		216		210		192		180
Commercial lease financing		35		40		45		—		—

Total	$	43,691	$	40,767	$	38,553	$	34,415	$	32,536

Securities

At June 30, 2005, the securities portfolio totaled $8.7 billion and included $7.3 billion of securities available for sale, $59 million of investment securities and $1.4 billion of other investments (primarily principal investments). In comparison, the total portfolio at December 31, 2004, was $8.9 billion, including $7.5 billion of securities available for sale, $71 million of investment securities and $1.4 billion of other investments. The weighted-average maturity of the portfolio was 2.2 years at June 30, 2005, compared with 2.3 years at December 31, 2004.

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

Securities available for sale. The majority of Key’s securities available-for-sale portfolio consists of collateralized mortgage obligations that provide a source of interest income and serve as collateral in connection with pledging requirements. A collateralized mortgage obligation (“CMO”) is a debt security that is secured by a pool of mortgages or mortgage-backed securities. At June 30, 2005, Key had $6.7 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared with $6.7 billion at December 31, 2004, and $6.6 billion at June 30, 2004. Substantially all of Key’s mortgage-backed securities are issued or backed by federal agencies. The CMO securities held by Key are shorter-duration class bonds that are structured to have more predictable cash flows than longer-term class bonds.

Figure 17 shows the composition, yields and remaining maturities of Key’s securities available for sale. For more information about securities, including gross unrealized gains and losses by type of security, see Note 5 (“Securities”), which begins on page 16.

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Figure 17. Securities Available for Sale


										Other
	U.S. Treasury,			States and			Collateralized			Mortgage-			Retained									Weighted
	Agencies and			Political			Mortgage			Backed			Interests in			Other						Average
dollars in millions	Corporations			Subdivisions			Obligations ^a			Securities ^a			Securitizations ^a			Securities ^c			Total			Yield ^b

JUNE 30, 2005
Remaining maturity:
One year or less	$	250		$	1		$	303		$	4		$	19		$	21		$	598			4.97	%
After one through five years		16			2			6,073			214			100			99			6,504			4.19
After five through ten years		2			7			20			52			58			2			141			9.45
After ten years		2			10			2			9			—			5			28			7.18

Fair value	$	270		$	20		$	6,398		$	279		$	177		$	127		$	7,271			—
Amortized cost		270			19			6,498			274			97			117			7,275			4.36	%
Weighted-average yield		3.06	%		7.11	%		3.79	%		5.58	%		42.86	%		4.07%	^b		4.36	%		—
Weighted-average maturity	.3 years			10.8 years			2.2 years			3.9 years			4.6 years			4.1 years			2.2 years				—

DECEMBER 31, 2004
Fair value	$	227		$	22		$	6,370		$	330		$	193		$	309		$	7,451			—
Amortized cost		227			21			6,460			322			103			298			7,431			4.26	%

JUNE 30, 2004
Fair value	$	62		$	21		$	6,256		$	372		$	173		$	139		$	7,023			—
Amortized cost		62			21			6,395			364			101			135			7,078			4.34	%

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

(b)		Weighted-average yields are calculated based on amortized cost and exclude securities of $96 million at June 30, 2005, that have no stated yield. Such yields have been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%.

(c)		Includes primarily marketable equity securities.

Investment securities. Securities issued by states and political subdivisions constitute most of Key’s investment securities. Figure 18 shows the composition, yields and remaining maturities of these securities.

Figure 18. Investment Securities


	States and						Weighted
	Political		Other				Average
dollars in millions	Subdivisions		Securities		Total		Yield ^a

JUNE 30, 2005
Remaining maturity:
One year or less	$	13		—	$	13		9.57	%
After one through five years		29	$	13		42		6.82
After five through ten years		4		—		4		8.93
After ten years		—		—		—		9.23

Amortized cost	$	46	$	13	$	59		7.60	%
Fair value		48		13		61		—
Weighted-average maturity	2.2 years		2.8 years		2.3 years			—

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

JUNE 30, 2004
Amortized cost	$	68	$	13	$	81		8.19	%
Fair value		72		13		85		—

(a)

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

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Other investments. Principal investments — investments in equity and mezzanine instruments made by Key’s Principal Investing unit ^___are carried at fair value, which aggregated $814 million at June 30, 2005, $816 million at December 31, 2004, and $788 million at June 30, 2004. They represent approximately 58% of other investments at June 30, 2005, and include direct and indirect investments predominantly in privately held companies. Direct investments are those made in a particular company, while indirect investments are made through funds that include other investors.

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

Deposits and other sources of funds
“Core deposits” ^___ domestic deposits other than certificates of deposit of $100,000 or more ^___ are Key’s primary source of funding. During the second quarter of 2005, core deposits averaged $46.8 billion and represented 60% of the funds Key used to support earning assets, compared with $43.4 billion and 59%, respectively, during the same quarter in 2004. The composition of Key’s deposits is shown in Figure 5, which spans pages 41 and 42.

The increase in the level of Key’s average core deposits during the past twelve months was due primarily to higher levels of NOW accounts, money market deposit accounts and noninterest-bearing deposits. This growth was slightly offset by a 2% decrease in savings deposits. These results reflect client preferences for investments that provide high levels of liquidity in a low interest rate environment. Average noninterest-bearing deposits also increased because of continued cross-selling efforts, focused sales and marketing efforts on our free checking products, and the collection of more escrow deposits associated with the servicing of commercial real estate loans.

Purchased funds, comprising large certificates of deposit, deposits in the foreign branch and short-term borrowings, averaged $15.9 billion in the second quarter of 2005, compared with $14.4 billion during the year-ago quarter. The increase was attributable primarily to a higher level of foreign branch deposits. These purchased funds have grown over the past several quarters due in part to increased funding needs stemming from stronger demand for commercial loans.

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

Capital

Shareholders’ equity. Total shareholders’ equity at June 30, 2005, was $7.4 billion, up $235 million from December 31, 2004. Factors contributing to the change in shareholders’ equity during the first half of 2005 are shown in the Consolidated Statements of Changes in Shareholders’ Equity presented on page 5.

Changes in common shares outstanding. Share repurchases and other activities that caused the change in Key’s outstanding common shares over the past five quarters are shown in Figure 19 below.

Figure 19. Changes in Common Shares Outstanding


in thousands	2Q05		1Q05			4Q04		3Q04			2Q04

Shares outstanding at beginning of period		407,297		407,570			405,723		407,243			412,153
Issuance of shares under employee benefit and dividend reinvestment plans		934		2,227			1,847		980			1,128
Repurchase of common shares		—		(2,500	)		—		(2,500	)		(6,038	)

Shares outstanding at end of period		408,231		407,297			407,570		405,723			407,243

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Key repurchases its common shares periodically under a repurchase program authorized by Key’s Board of Directors. These shares may be repurchased in the open market or through negotiated transactions. The program does not have an expiration date. Key did not repurchase any shares during the three months ended June 30, 2005, leaving 26,961,248 shares that may be repurchased under the authorization as of June 30, 2005.

At June 30, 2005, Key had 83,657,893 treasury shares. Management expects to reissue those shares from time-to-time to support the employee stock purchase, stock option and dividend reinvestment plans, and for other corporate purposes. During the first half of 2005, Key reissued 3,161,218 treasury shares.

Capital adequacy. Capital adequacy is an important indicator of financial stability and performance. Overall, Key’s capital position remains strong: the ratio of total shareholders’ equity to total assets was 8.08% at June 30, 2005, and 7.92% at June 30, 2004. Key’s ratio of tangible equity to tangible assets was 6.60% at June 30, 2005, and is within our targeted range of 6.25% to 6.75%. Management believes that Key’s capital position provides the flexibility to take advantage of investment opportunities, to repurchase shares when appropriate and to pay dividends.

Banking industry regulators prescribe minimum capital ratios for bank holding companies and their banking subsidiaries. Note 14 (“Shareholders’ Equity”), which begins on page 74 of Key’s 2004 Annual Report to Shareholders, explains the implications of failing to meet specific capital requirements imposed by the banking regulators. Risk-based capital guidelines require a minimum level of capital as a percent of “risk-weighted assets,” which is total assets plus certain off-balance sheet items, both adjusted for predefined credit risk factors. Currently, banks and bank holding companies must maintain, at a minimum, Tier 1 capital as a percent of risk-weighted assets of 4.00%, and total capital as a percent of risk-weighted assets of 8.00%. As of June 30, 2005, Key’s Tier 1 capital ratio was 7.68%, and its total capital ratio was 11.72%.

Another indicator of capital adequacy, the leverage ratio, is defined as Tier 1 capital as a percentage of average quarterly tangible assets. Leverage ratio requirements vary with the condition of the financial institution. Bank holding companies that either have the highest supervisory rating or have implemented the Federal Reserve’s risk-adjusted measure for market risk—as KeyCorp has—must maintain a minimum leverage ratio of 3.00%. All other bank holding companies must maintain a minimum ratio of 4.00%. As of June 30, 2005, Key had a leverage ratio of 8.49%.

Federal bank regulators group Federal Deposit Insurance Corporation (“FDIC”)-insured depository institutions into five categories, ranging from “critically undercapitalized” to “well capitalized.” Key’s affiliate bank, KBNA, qualified as “well capitalized” at June 30, 2005, since it exceeded the prescribed thresholds of 10.00% for total capital, 6.00% for Tier 1 capital and 5.00% for the leverage ratio. If these provisions applied to bank holding companies, Key would also qualify as “well capitalized” at June 30, 2005. The FDIC-defined capital categories serve a limited supervisory function. Investors should not treat them as a representation of the overall financial condition or prospects of KeyCorp or its affiliate bank.

Figure 20 presents the details of Key’s regulatory capital position at June 30, 2005, December 31, 2004, and June 30, 2004.

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Figure 20. Capital Components and Risk-Weighted Assets


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

TIER 1 CAPITAL
Common shareholders’ equity^a	$	7,406		$	7,143		$	6,897
Qualifying capital securities		1,542			1,292			1,292
Less: Goodwill		1,342			1,359			1,150
Other assets^b		151			132			65

Total Tier 1 capital		7,455			6,944			6,974

TIER 2 CAPITAL
Allowance for losses on loans and lending-related commitments		1,157			1,205			1,112
Net unrealized gains on equity securities available for sale		3			3			2
Qualifying long-term debt		2,764			2,880			2,525

Total Tier 2 capital		3,924			4,088			3,639

Total risk-based capital	$	11,379		$	11,032		$	10,613

RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet	$	74,153		$	73,911		$	69,173
Risk-weighted off-balance sheet exposure		24,280			23,519			20,324
Less: Goodwill		1,342			1,359			1,150
Other assets^b		714			649			464
Plus: Market risk-equivalent assets		675			733			254

Gross risk-weighted assets		97,052			96,155			88,137
Less: Excess allowance for losses on loans and lending-related commitments		—			—			227

Net risk-weighted assets	$	97,052		$	96,155		$	87,910

AVERAGE QUARTERLY TOTAL ASSETS	$	89,915		$	89,248		$	85,323

CAPITAL RATIOS
Tier 1 risk-based capital ratio		7.68	%		7.22	%		7.93	%
Total risk-based capital ratio		11.72			11.47			12.07
Leverage ratio^c		8.49			7.96			8.34


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

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

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

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Risk Management

Overview

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

Key’s Board of Directors (“Board”) has established and follows a corporate governance program that serves as the foundation for managing and mitigating risk. In accordance with this program, the Board focuses on the interests of shareholders, encourages strong internal controls, demands management accountability, mandates adherence to Key’s code of ethics and administers an annual self-assessment process. The Board has established Audit and Finance committees whose appointed members play an integral role in helping the Board meet its risk oversight responsibilities. Those committees meet jointly, as appropriate, to discuss matters that relate to each committee’s responsibilities. The responsibilities of these two committees are summarized on page 35 of Key’s 2004 Annual Report to Shareholders.

Market risk management

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

Interest rate risk management

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

Factors contributing to interest rate exposure. Key uses interest rate exposure models to quantify the potential impact that a variety of possible interest rate scenarios may have on earnings and the economic value of equity. The various scenarios estimate the level of Key’s interest rate exposure arising from gap risk, option risk and basis risk. Each of these types of risk is defined in the discussion of market risk management, which begins on page 35 of Key’s 2004 Annual Report to Shareholders.

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

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

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

When an increase in short-term interest rates is expected to generate lower net interest income, the balance sheet is said to be “liability-sensitive,” meaning that rates paid on deposits and other liabilities respond more quickly to market forces than yields on loans and other assets. Conversely, when an increase in short-term interest rates is expected to generate greater net interest income, the balance sheet is said to be “asset-sensitive,” meaning that yields on loans and other assets respond more quickly to market forces than rates paid on deposits and other liabilities. Key has historically maintained a modest liability-sensitive position to increasing interest rates under our “standard” risk assessment. However, since mid-2004, Key has been operating with a slight asset-sensitive position. This change resulted from management’s decision in the fourth quarter of 2003 to move Key to an asset-sensitive position by gradually lowering its liability-sensitivity over a nine to twelve-month period. Management actively monitors the risk of changes in interest rates and takes preventive actions, when deemed necessary, with the objective of assuring that net interest income at risk does not exceed internal guidelines. In addition, since rising rates typically reflect an improving economy, management expects that Key’s lines of business could increase their portfolios of market-rate loans and deposits, which would mitigate the effect of rising rates on Key’s interest expense.

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

In addition to modeling interest rates as described above, Key models the balance sheet in three distinct ways to forecast changes over different periods and under different conditions. Our initial simulation of net interest income assumes that the composition of the balance sheet will not change over the next year. Another simulation, using Key’s “most likely balance sheet,” assumes that the balance sheet will grow at levels consistent with consensus economic forecasts. Finally, we simulate the impact of increasing market interest rates in the second year of a two-year time horizon. The first year of this simulation is identical to the “most likely balance sheet” simulation, except that we assume market interest rates do not change. For more information on the specific assumptions used by Key in each of these simulations, see the section entitled “Measurement of short-term interest rate exposure,” which begins on page 36 of Key’s 2004 Annual Report to Shareholders.

As discussed above, over the past year, Key has been operating with a slight asset-sensitive position. Deposit growth, sales of fixed-rate consumer loans, and the maturity of received fixed A/LM interest rate swaps have contributed to Key’s efforts in managing net interest income in light of the rise in short-term interest rates that has occurred during this period. Additionally, simulation model assumptions have been refined to address anticipated changes in deposit pricing on select products in a very competitive marketplace. Considering Key’s current asset-sensitive position, its net interest income should have a tendency to benefit from rising interest rates, but could be adversely affected if interest rates were to decline to near year-ago levels. Key manages interest rate risk with a long-term perspective in mind. Accordingly, our rate risk guidelines currently call for a relatively neutral position with a bias to be modestly liability-sensitive longer-term.

As of June 30, 2005, based on the results of our simulation model using Key’s “most likely balance sheet,” and assuming that management does not take action to alter the outcome, Key would expect net interest income to increase by approximately .82% if short-term interest rates gradually increase by 200 basis points

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over the next twelve months. Conversely, if short-term interest rates gradually decrease by 200 basis points over the next twelve months, net interest income would be expected to decrease by approximately 1.03%.

The results of the above scenarios reflect the fact that Key’s balance sheet is currently asset-sensitive to changes in short-term interest rates over the next year. Key’s asset-sensitive position to a decrease in interest rates stems from the fact that short-term rates were relatively low at June 30, 2005. Consequently, the results of the simulation model reflect management’s assumption that yields on earning assets will decline faster than rates paid on deposits and borrowings. This is particularly true for CMOs held in the securities available for sale portfolio. When interest rates decrease, prepayments on CMOs are generally more rapid, resulting in lower reinvestment yields and a higher level of premium amortization. To mitigate the risk of a potentially adverse effect on earnings, management uses interest rate swaps while maintaining the flexibility to lower rates on deposits, if necessary.

The results of the “most likely balance sheet” simulation form the basis for our “standard” risk assessment that is performed monthly and reported to Key’s risk governance committees in accordance with ALCO policy. There are a variety of factors that can influence the results of the simulation. Assumptions we make about loan and deposit growth strongly influence funding, liquidity, and interest rate sensitivity. Figure 26 (“Net Interest Income Volatility”) on page 37 of Key’s 2004 Annual Report to Shareholders illustrates the variability of the simulation results that can arise from changing certain major assumptions.

As of June 30, 2005, based on the results of our model in which we simulate the effect of increasing market interest rates in the second year of a two-year time horizon using the “most likely balance sheet,” and assuming that management does not take action to alter the outcome, Key would expect net interest income in the second year to increase by approximately .23% if short-term interest rates gradually increase by 200 basis points during that year but remain unchanged during the first year. Conversely, if short-term interest rates gradually decrease by 200 basis points in the second year but remain unchanged in the first year, net interest income would be expected to decrease by approximately .41% during the second year.

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

Key’s guidelines for risk management call for preventive measures to be taken if an immediate 200 basis point increase or decrease in interest rates is estimated to reduce the economic value of equity by more than 15%. Key is operating within these guidelines.

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

We actively manage our interest rate sensitivity through securities, debt issuance and derivatives. Key’s two major business groups conduct activities that generally result in an asset-sensitive position. To compensate, we typically issue floating-rate debt, or fixed-rate debt swapped to floating, so that the rate paid on deposits and borrowings in the aggregate will respond more quickly to market forces. Interest rate swaps are the primary tool we use to modify our interest rate sensitivity and our asset and liability durations. During 2003, management focused on interest rate swap maturities of two years or less to preserve the flexibility of changing from “liability-sensitive” to “asset-sensitive” in a relatively short period of time. Since September 30, 2003, management has moved toward, then maintained, an “asset-sensitive” interest rate risk profile. During 2004, the shift to asset sensitivity reflected maturities, early terminations and a lower volume of new interest rate swaps related to conventional asset/liability management. During the fourth quarter of 2004, we terminated receive fixed interest rate swaps with a notional amount of $3.2 billion in advance of their maturity dates to achieve our desired interest rate sensitivity position. These

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terminations were completed because the growth of our fixed-rate loans and leases, which was bolstered by the acquisition of AEBF, exceeded the growth in fixed-rate liabilities.

The decision to use interest rate swaps rather than securities, debt or other on-balance sheet alternatives depends on many factors, including the mix and cost of funding sources, liquidity and capital requirements, and interest rate implications. Figure 21 shows the maturity structure for all swap positions held for asset/liability management purposes. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index. For example, fixed-rate debt is converted to floating rate through a “receive fixed, pay variable” interest rate swap. For more information about how Key uses interest rate swaps to manage its balance sheet, see Note 13 (“Derivatives and Hedging Activities”), which begins on page 28.

Figure 21. Portfolio Swaps By Interest Rate Risk Management Strategy


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

Receive fixed/pay variable—conventional A/LM ^a	$	3,400	$	1			.5		3.0	%		3.2	%	$	10,925	$	(5	)
Receive fixed/pay variable—conventional debt		5,663		282			8.2		5.3			3.3			5,724		165
Pay fixed/receive variable—conventional debt		967		(42	)		4.9		2.9			4.4			1,219		(24	)
Pay fixed/receive variable—forward starting		—		—			—		—			—			29		—
Foreign currency—conventional debt		2,497		(86	)		3.9		3.0			3.5			1,503		264
Basis swaps^b		9,800		(1	)		.7		3.2			3.1			11,300		(3	)


Total portfolio swaps	$	22,327	$	154			3.1		3.7	%		3.3	%	$	30,700	$	397


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

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

Key’s securities and term debt portfolios are also used to manage interest rate risk. Details regarding the securities portfolio can be found in the discussion of securities, beginning on page 51, and in Note 5 (“Securities”), which begins on page 16. CMOs, the majority of which have relatively short average lives, have been used in conjunction with swaps to manage our interest rate risk position.

Trading portfolio risk management

Key’s trading portfolio is described in Note 13.

Management uses a value at risk (“VAR”) simulation model to measure the potential adverse effect of changes in interest rates, foreign exchange rates, equity prices and credit spreads on the fair value of Key’s trading portfolio. Using two years of historical information, the model estimates the maximum potential one-day loss with a 95% confidence level. Key’s Financial Markets Committee has established VAR limits for its trading units. At June 30, 2005, the aggregate one-day trading limit set by the committee was $4.4 million. In addition to comparing VAR exposure against limits on a daily basis, management monitors loss limits, uses sensitivity measures and conducts stress tests.

Key is operating within the above constraints. During the first six months of 2005, Key’s aggregate daily average, minimum and maximum VAR amounts were $2.7 million, $1.0 million and $5.3 million, respectively. During the same period last year, Key’s aggregate daily average, minimum and maximum VAR amounts were $1.2 million, $.8 million and $2.0 million, respectively.

As noted in the discussion of investment banking and capital markets income on page 45, Key used interest rate swaps to manage the economic risk associated with its sale of the indirect automobile loan portfolio. Even though these derivatives were not subject to VAR trading limits, Key measured their exposure on a daily basis and the results are included in the VAR amounts indicated above for the first six months of 2005. The daily average, minimum and maximum VAR exposures for these derivatives were $1.4 million, $.09 million and $3.6 million, respectively.

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As shown in Figure 22, the decrease in Key’s allowance for loan losses since June 30, 2004, was attributable to developments in both the commercial and consumer loan portfolios.

¨		Credit quality trends in certain commercial loan portfolios have been improving.

¨		During the fourth quarter of 2004, we sold Key’s broker-originated home equity loan portfolio and reclassified the indirect automobile loan portfolio to held-for-sale status in anticipation of its sale. The prime segment of this portfolio was sold during the first quarter of 2005, and the nonprime segment was sold during the second quarter.

¨		During the second quarter of 2004, we sold the indirect recreational vehicle loan portfolio.

During the first quarter of 2005, the allowance for loan losses as of December 31, 2004, and June 30, 2004, was reallocated among the various segments of Key’s loan portfolio. This reallocation resulted from a change in the methodology for allocating the allowance established for nonimpaired loans. The process used by management to establish this portion of the allowance is described in Note 1 of Key’s 2004 Annual Report to Shareholders.

Figure 22. Allocation of the Allowance for Loan Losses


	June 30, 2005								December 31, 2004								June 30, 2004
			Percent of			Percent of					Percent of			Percent of					Percent of			Percent of
			Allowance			Loan Type					Allowance			Loan Type					Allowance			Loan Type
			to Total			to Total					to Total			to Total					to Total			to Total
dollars in millions	Amount		Allowance			Loans			Amount		Allowance			Loans			Amount		Allowance			Loans

Commercial, financial and agricultural	$	550		50.0	%		29.2	%	$	560		49.2	%		28.6	%	$	684		53.6	%		27.9	%
Real estate — commercial mortgage		36		3.3			11.7			38		3.3			11.1			39		3.1			10.0
Real estate — construction		143		13.0			9.2			147		12.9			8.1			138		10.8			7.7
Commercial lease financing		212		19.2			14.9			224		19.7			15.0			147		11.5			12.9

Total commercial loans		941		85.5			65.0			969		85.1			62.8			1,008		79.0			58.5
Real estate — residential mortgage		10		.9			2.1			9		.8			2.2			1		.1			2.4
Home equity		68		6.2			20.5			65		5.7			20.8			48		3.8			23.3
Consumer — direct		44		4.0			2.7			45		4.0			2.9			68		5.3			3.3
Consumer — indirect lease financing		3		.3			.1			4		.4			.1			8		.6			.3
Consumer — indirect other		34		3.1			4.8			46		4.0			4.8			143		11.2			8.1

Total consumer loans		159		14.5			30.2			169		14.9			30.8			268		21.0			37.4
Loans held for sale		—		—			4.8			—		—			6.4			—		—			4.1

Total	$	1,100		100.0	%		100.0	%	$	1,138		100.0	%		100.0	%	$	1,276		100.0	%		100.0	%

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

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Figure 23. Summary of Loan Loss Experience


	Three months ended June 30,						Six months ended June 30,
dollars in millions	2005			2004			2005			2004

Average loans outstanding during the period	$	67,660		$	62,484		$	67,858		$	62,347

Allowance for loan losses at beginning of period	$	1,128		$	1,306		$	1,138		$	1,406
Loans charged off:
Commercial, financial and agricultural		20			43			45			95
Real estate ^___ commercial mortgage		9			10			12			18
Real estate ^___ construction		^___			5			5			5

Total commercial real estate loans^a		9			15			17			23
Commercial lease financing		13			15			25			25

Total commercial loans		42			73			87			143
Real estate ^___ residential mortgage		1			4			3			6
Home equity		7			11			13			28
Consumer ^___ direct		10			11			18			23
Consumer ^___ indirect lease financing		1			2			2			5
Consumer ^___ indirect other		14			47			30			92

Total consumer loans		33			75			66			154

		75			148			153			297
Recoveries:
Commercial, financial and agricultural		5			13			10			26
Real estate ^___ commercial mortgage		^___			1			1			2
Real estate ^___ construction		2			4			2			4

Total commercial real estate loans^a		2			5			3			6
Commercial lease financing		10			4			20			7

Total commercial loans		17			22			33			39
Real estate ^___ residential mortgage		1			1			1			1
Home equity		2			1			3			2
Consumer ^___ direct		2			2			4			4
Consumer ^___ indirect lease financing		^___			1			1			2
Consumer ^___ indirect other		5			17			9			34

Total consumer loans		10			22			18			43
		27			44			51			82

Net loans charged off		(48	)		(104	)		(102	)		(215	)
Provision for loan losses		20			74			64			155
Reclassification of allowance for credit losses on lending-related commitments ^b		—			—			—			(70	)

Allowance for loan losses at end of period	$	1,100		$	1,276		$	1,100		$	1,276

Net loan charge-offs to average loans		.29	%		.67	%		.31	%		.69	%
Allowance for loan losses to period-end loans		1.62			2.01			1.62			2.01
Allowance for loan losses to nonperforming loans		375.43			281.06			375.43			281.06


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

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

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Nonperforming assets. Figure 24 shows the composition of Key’s nonperforming assets, which have declined for eleven consecutive quarters and are at their lowest level in more than a decade. These assets totaled $338 million at June 30, 2005, and represented .50% of loans, other real estate owned (known as “OREO”) and other nonperforming assets, compared with $540 million, or .85%, at June 30, 2004. As shown in Figure 24, reductions in nonperforming loans in the commercial, financial and agricultural; commercial mortgage, and home equity portfolios, along with a substantial decrease in OREO, drove the improvement.

At June 30, 2005, our 20 largest nonperforming loans totaled $104 million, representing 35% of total loans on nonperforming status.

The level of Key’s delinquent loans has also experienced a downward trend, due in part to changes in the composition of Key’s consumer loan portfolio that resulted from the fourth quarter 2004 sale of the broker-originated home equity loan portfolio and the sales of the prime and nonprime segments of the indirect automobile loan portfolio during the first and second quarters of 2005, respectively. The improvement also reflects a greater emphasis placed on lending secured by real estate.

Figure 24. Summary of Nonperforming Assets and Past Due Loans


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

Commercial, financial and agricultural	$	61		$	51		$	43		$	61		$	114

Real estate — commercial mortgage		33			36			31			49			61
Real estate — construction		3			5			20			1			1

Total commercial real estate loans(a)		36			41			51			50			62
Commercial lease financing		73			75			84			74			59

Total commercial loans		170			167			178			185			235
Real estate — residential mortgage		38			43			39			36			38
Home equity		74			76			80			149			151
Consumer — direct		4			3			3			4			13
Consumer — indirect lease financing		1			5			1			1			2
Consumer — indirect other		6			11			15			15			15

Total consumer loans		123			138			138			205			219

Total nonperforming loans		293			305			316			390			454

OREO		33			58			53			60			71
Allowance for OREO losses		(2	)		(4	)		(4	)		(5	)		(8	)

OREO, net of allowance		31			54			49			55			63
Other nonperforming assets		14			12			14			15			23

Total nonperforming assets	$	338		$	371		$	379		$	460		$	540

Accruing loans past due 90 days or more	$	74		$	79		$	122		$	139		$	114
Accruing loans past due 30 through 89 days		475			495			491			602			622

Nonperforming loans to period-end loans		.43	%		.45	%		.47	%		.61	%		.72	%
Nonperforming assets to period-end loans plus OREO and other nonperforming assets		.50			.55			.56			.71			.85


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

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

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

In accordance with A/LM policy, Key performs stress tests to consider the effect that a potential downgrade in its debt ratings could have on its liquidity over various time periods. These debt ratings, which are presented in Figure 27 on page 67, have a direct impact on our cost of funds and our ability to raise funds under normal and adverse conditions. The stress test scenarios also include major disruptions to our funding markets and consider the potential adverse effect of core client activity on cash flows. To compensate for the effect of these activities, alternative sources of liquidity are incorporated into the analysis over different time periods to project how we would manage fluctuations on the balance sheet. Several alternatives for enhancing Key’s liquidity are actively managed on a regular basis. These include emphasizing client deposit generation, securitization market alternatives, loan sales, extending the maturity of wholesale borrowings, purchasing deposits from other banks, and developing relationships with fixed income investors. Key also measures its capacity to borrow using various debt instruments and funding markets. On occasion, Key will guarantee a subsidiary’s obligations in transactions with third parties. Management closely monitors the extension of such guarantees to ensure that Key will retain ample liquidity in the event it must step in to provide financial support. The results of our stress tests indicate that, following the occurrence of an adverse event, Key can continue to meet its financial obligations and to fund its operations for at least the one-year period addressed in the tests.

Key also maintains a liquidity contingency plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also addresses the assignment of specific roles and responsibilities for effectively managing liquidity through a problem period. Key has access to various sources of money market funding (such as federal funds purchased, securities sold under repurchase agreements, eurodollars and commercial paper) and also can borrow from the Federal Reserve Bank’s discount window to meet short-term liquidity requirements. Key did not have any borrowings from the Federal Reserve Bank outstanding at June 30, 2005.

Key monitors its funding sources and measures its capacity to obtain funds in a variety of wholesale funding markets. This is done with the objective of maintaining an appropriate mix of funds considering both cost and availability. We use several tools as described on page 45 of Key’s 2004 Annual Report to Shareholders to actively manage and maintain sufficient liquidity on an ongoing basis.

Key’s largest cash flows relate to both investing and financing activities. During 2004 and the first six months of 2005, the primary sources of cash from investing activities have been loan sales, and the sales, prepayments and maturities of securities available for sale. Investing activities that have required the greatest use of cash include lending, purchases of new securities, and acquisitions completed in 2004.

During 2004 and the first six months of 2005, the primary sources of cash from financing activities have been the growth in deposits (including growth in eurodollar deposits during 2004), the issuance of long-term debt and the use of short-term borrowings during 2005. During the same period, significant outlays of cash have been made to repay debt issued in prior periods. Cash outlays were also made during 2004 to reduce the level of short-term borrowings.

The Consolidated Statements of Cash Flow on page 6 summarize Key’s sources and uses of cash by type of activity for the six-month periods ended June 30, 2005 and 2004.

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Liquidity for KeyCorp (the “parent company”)

The parent company has sufficient liquidity when it can pay dividends to shareholders, service its debt, and support customary corporate operations and activities (including acquisitions), at a reasonable cost, in a timely manner and without adverse consequences.

A primary tool used by management to assess our parent company liquidity is its net short-term cash position, which measures our ability to fund debt maturing in twelve months or less with existing liquid assets. Another key measure of parent company liquidity is the “liquidity gap,” which represents the difference between projected liquid assets and anticipated financial obligations over specified time horizons. We generally rely upon the issuance of term debt to manage the liquidity gap within targeted ranges assigned to various time periods.

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

During the first six months of 2005, KBNA paid the parent a total of $425 million in dividends, and nonbank subsidiaries paid a total of $93 million in dividends. As of the close of business on June 30, 2005, KBNA had an additional $731 million available to pay dividends to the parent company without prior regulatory approval and without affecting its status as “well-capitalized” under the FDIC-defined capital categories. The parent company generally maintains excess funds in short-term investments in an amount sufficient to meet projected debt maturities over the next twelve months. At June 30, 2005, the parent company held $1.2 billion in cash and short-term investments, which management projected to be sufficient to meet the parent’s debt repayment obligations over a period of approximately sixteen months.

Additional sources of liquidity

Management has implemented several programs that enable the parent company and KBNA to raise money in the public and private markets when necessary. The proceeds from most of these programs can be used for general corporate purposes, including acquisitions. Each of the programs is replaced or renewed as needed. There are no restrictive financial covenants in any of these programs.

Bank note program. KBNA’s bank note program provides for the issuance of both long- and short-term debt of up to $20.0 billion. During the first six months of 2005, there were $550 million of notes issued under this program. These notes have original maturities in excess of one year and are included in “long-term debt.” At June 30, 2005, $15.3 billion was available for future issuance.

Euro note program. Under Key’s euro note program, the parent company and KBNA may issue both long- and short-term debt of up to $10.0 billion in the aggregate ($9.0 billion by KBNA and $1.0 billion by the parent company). The notes are offered exclusively to non-U.S. investors and can be denominated in U.S. dollars or foreign currencies. There were $666 million of notes issued under this program during the first six months of 2005. At June 30, 2005, $6.4 billion was available for future issuance.

KeyCorp medium-term note program. In January 2005, the parent company registered $2.9 billion of securities under a shelf registration statement filed with the Securities and Exchange Commission. Of this amount, $1.9 billion has been allocated for issuance of medium-term notes. At June 30, 2005, unused capacity under the parent’s shelf registration statement totaled $2.7 billion.

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

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Key has a separate commercial paper program that provides funding availability of up to $1.0 billion in Canadian currency. The borrowings under this program can be denominated in Canadian or U.S. dollars. As of June 30, 2005, borrowings outstanding under this commercial paper program totaled C$768 million in Canadian currency and $56 million in U.S. currency (equivalent to C$70 million in Canadian currency).

Key’s debt ratings are shown in Figure 27. Management believes that these debt ratings, under normal conditions in the capital markets, allow for future offerings of securities by the parent company or KBNA that would be marketable to investors at a competitive cost.

Figure 27. Debt Ratings

Senior

Subordinated

Short-term

Long-Term

Capital

June 30, 2005

Borrowings

Debt

Securities

KeyCorp (the parent company)

Standard & Poor’s

A-2

A-

BBB+

BBB

Moody’s

P-1

A2

A3

Fitch

F1

A

A-

KBNA

Standard & Poor’s

A-1

A

A-

N/A

Moody’s

P-1

A1

A2

N/A

Fitch

F1

A

A-

N/A

Key Nova Scotia Funding Company (“KNSF”)

Dominion Bond Rating Service^(a)

R-1 (middle)

N/A

(a)

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

N/A=Not Applicable

On June 16, 2005, Moody’s Investors Service confirmed the long-term and short-term ratings of KeyCorp, and the long-term ratings of KBNA and KeyCorp’s other subsidiaries, and raised the outlook for these entities to stable.

Operational risk management

Key, like all businesses, is subject to operational risk, which represents the risk of loss resulting from human error, inadequate or failed internal processes and systems, and external events, including legal proceedings. Resulting losses could take the form of explicit charges, increased operational costs, harm to Key’s reputation or forgone opportunities. Key seeks to mitigate operational risk through a system of internal controls that are designed to keep operational risks at appropriate levels. For more information on Key’s efforts to monitor and manage its operational risk, see page 46 of Key’s 2004 Annual Report to Shareholders.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

The information presented in the Market Risk Management section, which begins on page 56 in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, is incorporated herein by reference.

Item 4. Controls and Procedures

As of the end of the period covered by this report, KeyCorp carried out an evaluation, under the supervision and with the participation of KeyCorp’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of KeyCorp’s disclosure controls and procedures. Based upon that evaluation, KeyCorp’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective, in all material respects, as of the end of the period covered by this report. No changes were made to KeyCorp’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, KeyCorp’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information presented in Note 12 (“Contingent Liabilities and Guarantees”), which begins on page 24 of the Notes to Consolidated Financial Statements, is incorporated herein by reference.

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

The information presented in the Capital section under the heading “Changes in common shares outstanding” on page 53 of the Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

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Item 4. Submission of Matters to a Vote of Security Holders

At the 2005 Annual Meeting of Shareholders of KeyCorp held on May 5, 2005, the shareholders elected five directors to serve for three-year terms expiring in 2008 and ratified the appointment by the Audit Committee of the Board of Directors of Ernst & Young LLP as independent auditors of KeyCorp for the year ending December 31, 2005. Director nominees for terms expiring in 2008 were: Edward P. Campbell, H. James Dallas, Charles R. Hogan, Lauralee E. Martin and Bill R. Sanford. Directors whose terms in office as directors continued after the Annual Meeting of Shareholders were: William G. Bares, Dr. Carol A. Cartwright, Alexander M. Cutler, Henry S. Hemingway, Douglas J. McGregor, Eduardo R. Menascé, Henry L. Meyer III, Steven A. Minter, Thomas C. Stevens and Peter G. Ten Eyck, II.

The vote on each issue was as follows:


	For		Against		Abstain

Election of Directors
Edward P. Campbell		340,281,667		*		10,118,927
H. James Dallas		339,698,089		*		10,702,505
Charles R. Hogan		335,883,570		*		14,517,024
Lauralee E. Martin		339,621,274		*		10,779,320
Bill R. Sanford		339,373,868		*		11,026,726

Ratification of Ernst & Young as independent auditors of KeyCorp		336,292,332		11,015,288		3,092,974

*

Proxies provide that shareholders may either cast a vote for, or abstain from voting for, directors.

Item 6. Exhibits


	15			Acknowledgment of Independent Registered Public Accounting Firm.

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

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

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

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

Information Available on Website

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

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	KEYCORP (Registrant)



Date: August 3, 2005	/s/ Lee Irving
	By: Lee Irving
	Executive Vice President and Chief Accounting Officer

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

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