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 on each commercial mortgage loan sold to FNMA. Accordingly, KBNA established and maintains a reserve for such potential losses in an amount management estimates will approximate the fair value of the liability undertaken by KBNA. At December 31, 2003, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 9 years and the unpaid principal balance outstanding of loans sold by KBNA as a participant in this program was approximately $1.7 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. 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 Low-Income Housing Tax Credit (“LIHTC”) investors. KAHC, a subsidiary of KBNA, offered limited partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential rental properties that qualify for federal LIHTCs under Section 42 of the Internal Revenue Code. In certain partnerships, investors pay a fee to KAHC for a guaranteed return that is dependent on the financial performance of the property and the property’s ability to maintain its LIHTC status throughout a fifteen-year compliance period. If these two conditions are not met, Key is obligated to make any necessary payments to investors to provide the guaranteed return. Key consolidated these partnerships upon adoption of Interpretation No. 46 on July 1, 2003. In October 2003, management elected to discontinue new projects under this program. Additional information regarding Interpretation No. 46 and these partnerships is included in Note 1 and Note 8 (“Loan Securitizations and Variable Interest Entities”), which begins on page 63. 

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

As shown in the preceding table, KAHC maintained a reserve in the amount of $34 million at December 31, 2003, which management believes will be sufficient to cover estimated future obligations under the guarantees. The maximum exposure to loss reflected in the preceding table represents undiscounted future payments due to investors for the return on and of their investments. In accordance with Interpretation No. 45, the amount of all fees received in consideration for any return guarantee agreements entered into or modified with LIHTC investors on or after January 1, 2003, has been recognized in the stand ready obligation. 

Various types of default guarantees. Some lines of business provide or participate in guarantees that obligate Key to perform if the debtor fails to pay all or a portion of the subject indebtedness and/or related interest. 

These guarantees are generally undertaken when Key is supporting or protecting its underlying investment or where the risk profile of the debtor is stable. The terms of these default guarantees range from less than 1 year to as many as 19 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 December 31, 2003, these caps had a weighted average life of approximately 5 years. 

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

## OTHER OFF-BALANCE SHEET RISK 

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

Liquidity facility that supports asset-backed commercial paper conduit. Key provides liquidity to an asset-backed commercial paper conduit that is owned by a third party and administered by an unaffiliated financial institution. See further discussion of the conduit in Note 8. This liquidity facility obligates Key through November 4, 2006, to provide funding of up to $1.3 billion if required as a result of a disruption in credit markets or other factors. The amount available to be drawn, which is based on the amount of current commitments to borrowers in the conduit, was $607 million at December 31, 2003. 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, but also in connection with purchases and sales of businesses. Management’s past experience with these indemnifications has been that the amounts paid, if any, have not had a significant effect on Key’s financial condition or results of operations. 

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

Relationship with MasterCard International Inc. and Visa U.S.A. Inc. KBNA and Key Bank USA are members of MasterCard International Incorporated (“MasterCard”) and Visa U.S.A. Inc. (“Visa”). MasterCard’s charter documents and bylaws state that MasterCard may assess its members for certain liabilities that it incurs, including litigation liabilities. 

