The Federal Home Loan Bank Board has turned down KeyCorp's application to acquire eight branches of Old Stone Bank in Seattle. KeyCorp is the parent company of Key Bank of Utah.

"We are deeply concerned and fail to understand this action by the three-member FHLBB," said KeyCorp President Victor J. Riley Jr. following the denial. KeyCorp is based in Albany, N.Y.He said the branches are financially healthy offices that Old Stone wanted to sell. KeyCorp wanted the branches in order to expand the Key Bank market in the Puget Sound area.

Riley said the Federal Deposit Insurance Corp. (FDIC) had already approved the application.

As a result of the board's disapproval, Riley said KeyCorp's possible 2-cent dilution to shareholders next year has been eliminated.

"More importantly, however, we have been denied the opportunity to consummate an agreement which would have been of real value to shareholders in the longer run, and strengthened the service-delivery capability by Key Bank in the greater Puget Sound area," he said.