MANAGEMENTGLYPH<213>S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Briefly, management assigns a specific allowance to an impaired loan when the carrying amount of the loan exceeds the estimated present value of related future cash flows and the fair value of any existing collateral. The allowance for loan losses arising from nonimpaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics and by exercising judgment to assess the impact of factors such as changes in economic conditions, credit policies or underwriting standards, and the level of credit risk associated with specific industries and markets. The aggregate balance of the allowance for loan losses at December 31, 2003, represents management’s best estimate of the losses inherent in the loan portfolio at that date. The allowance allocated for Key’s impaired loans decreased by $106 million, or 59%, over the past twelve months. This improvement reflects a significant reduction in impaired loans stemming from Key’s continued efforts to resolve problem credits, as well as stabilizing credit quality trends in certain portfolios. As shown in Figure 29, most of the 2003 decrease in Key’s allowance for loan losses was attributable to developments in the commercial loan portfolio. This decrease reflects stabilizing credit quality trends in certain portfolios, as well as weak demand for commercial loans in a soft economy. The level of watch credits in the commercial portfolio has been progressively decreasing since the end of 2002. Watch credits are loans with the potential for further deterioration in quality due to the debtor’s current financial condition and related inability to perform in accordance with the terms of the loan. The commercial loan portfolios with the most significant decreases in watch credits were commercial real estate, large corporate and media. These changes reflect the fluctuations that occur in loan portfolios from time to time, underscoring the benefits of Key’s strategy to limit the concentration of credit risk in any single portfolio. FIGURE 29. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES December 31, 2003 2002 2001 Percent of Percent of Percent of Loan Type to Loan Type to Loan Type to dollars in millions Amount Total Loans Amount Total Loans Amount Total Loans Commercial, GLYPH<222>nancial and agricultural $ 943 27.1% $1,042 27.9% $1,184 28.7% Real estate GLYPH<209> commercial mortgage 42 9.1 48 9.6 45 10.5 Real estate GLYPH<209> construction 68 7.9 95 9.1 144 9.3 Commercial lease GLYPH<222>nancing 88 13.6 74 12.0 89 11.6 Total commercial loans 1,141 57.7 1,259 58.6 1,462 60.1 Real estate GLYPH<209> residential mortgage 3 2.5 2 3.1 4 3.7 Home equity 77 24.0 65 22.1 59 17.7 Consumer GLYPH<209> direct 47 3.4 16 3.5 24 3.7 Consumer GLYPH<209> indirect lease GLYPH<222>nancing 8 .5 5 1.4 8 3.2 Consumer GLYPH<209> indirect other 118 8.1 103 7.9 117 8.4 Total consumer loans 253 38.5 191 38.0 212 36.7 Loans held for sale 12 3.8 2 3.4 3 3.2 Unallocated GLYPH<209> GLYPH<209> GLYPH<209> GLYPH<209> GLYPH<209> GLYPH<209> Total $1,406 100.0% $1,452 100.0% $1,677 100.0% 2000 1999 Percent of Percent of Loan Type to Loan Type to Amount Total Loans Amount Total Loans Commercial, GLYPH<222>nancial and agricultural $ 698 30.0% $469 28.8% Real estate GLYPH<209> commercial mortgage 35 10.3 34 10.6 Real estate GLYPH<209> construction 71 7.7 56 7.1 Commercial lease GLYPH<222>nancing 45 10.7 39 10.4 Total commercial loans 849 58.7 598 56.9 Real estate GLYPH<209> residential mortgage 2 6.3 1 6.1 Home equity 20 14.8 7 12.4 Consumer GLYPH<209> direct 15 3.8 8 4.0 Consumer GLYPH<209> indirect lease GLYPH<222>nancing 9 4.5 6 5.0 Consumer GLYPH<209> indirect other 104 8.6 55 10.0 Total consumer loans 150 38.0 77 37.5 Loans held for sale 2 3.3 18 5.6 Unallocated GLYPH<209> GLYPH<209> 237 GLYPH<209> Total $1,001 100.0% $930 100.0% 38 PREVIOUS PAGE SEARCH BACK TO CONTENTS NEXT PAGE