NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 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. Authoritative guidance on the accounting for the federal subsidy is currently pending, and that guidance, when issued, could require plan sponsors, such as Key, to change previously reported information. Management is currently evaluating the impact of the Act on Key’s postretirement healthcare plan. The APBO and net periodic postretirement benefit cost disclosed in this note do not reflect the impact of the Act.  A substantial majority of Key’s employees are covered under a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. Key’s plan permits employees to contribute from 1% to 16% (1% to 10% prior to January 1, 2002) of eligible compensation, with up to 6% being eligible for matching contributions in the form of Key common shares. The plan also permits Key to distribute a discretionary profit-sharing component. Total expense associated with the plan was $54 million in 2003, $54 million in 2002 and $42 million in 2001. EMPLOYEE 401(K) SAVINGS PLAN 17. INCOME TAXES Income taxes included in the consolidated statements of income are summarized below. Key files a consolidated federal income tax return. Significant components of Key’s deferred tax assets and liabilities, included in “accrued income and other assets” and “accrued expense and other liabilities,” respectively, on the balance sheet, are as follows: Year ended December 31, in millions 2003 2002 2001 Currently payable: Federal $239 $150 $ 222 State 28 31 19 267 181 241 Deferred: Federal 71 150 (133) State 1 5 (6) 72 155 (139) Total income tax expense a $339 $336 $ 102 December 31, in millions 2003 2002 Provision for loan losses $ 436 $ 477 Restructuring charges 7 10 Write-down of OREO 4 4 Other 190 268 Total deferred tax assets 637 759 Leasing income reported using the  operating method for tax purposes 2,331 2,104 Net unrealized securities gains 2 57 Depreciation 13 12 Other 152 388 Total deferred tax liabilities 2,498 2,561 Net deferred tax liabilities $1,861 $1,802 a Income tax expense on securities transactions totaled $3 million in 2003, $2 million in 2002 and $14 million in 2001. Income tax expense in the above table excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which Key operates. These taxes are recorded in noninterest expense on the income statement and totaled $20 million in 2003, $26 million in 2002 and $29 million in 2001. The following table shows how Key arrived at total income tax expense and the resulting effective tax rate. Year ended December 31, 2003 2002 2001 dollars in millions Amount Rate Amount Rate Amount Rate Income before income taxes times  35% statutory federal tax rate $435 35.0% $459 35.0% $ 90 35.0% State income tax, net of federal tax beneGLYPH<222>t 18 1.5 23 1.8 9 3.4 Amortization of nondeductible intangibles GLYPH<209> GLYPH<209> GLYPH<209> GLYPH<209> 78 30.1 Tax-exempt interest income (12) (1.0) (13) (1.0) (15) (5.9) Corporate-owned life insurance income (42) (3.4) (39) (3.0) (42) (16.3) Tax credits (43) (3.4) (37) (2.8) (42) (16.1) Reduced tax rate on lease income (23) (1.9) (61) (4.7) (13) (5.1) Other 6 .5 4 .3 37 14.3 Total income tax expense $339 27.3% $336 25.6% $102 39.4% 76 PREVIOUS PAGE SEARCH BACK TO CONTENTS NEXT PAGE