MANAGEMENTGLYPH<213>S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Corporate and Investment Banking As shown in Figure 4, net income for Corporate and Investment Banking was $394 million for 2003, compared with $396 million for 2002 and $452 million for 2001. The slight decrease from 2002 resulted from an increase in noninterest expense and a lower level of taxable-equivalent net interest income. These adverse results were nearly offset by a significant reduction in the provision for loan losses and moderate growth in noninterest income. TE = Taxable Equivalent, N/A = Not Applicable During 2003, taxable-equivalent net interest income decreased by $22 million, or 2%. The decrease was due primarily to a less favorable interest rate spread on deposits and other funding sources, as well as decreases in both yield-related loan fees and average loans outstanding. The adverse effects of these factors were offset in part by significant growth in average deposits and a more favorable interest rate spread on earning assets. Although the overall demand for commercial loans continues to be soft, commercial lease financing receivables have increased for ten consecutive quarters. During the same period, noninterest income rose by $17 million, or 3%, due largely to a $23 million increase in non-yield-related loan fees in the KeyBank Real Estate Capital line of business. In addition, the Key Equipment Finance line recorded net gains from the residual values of leased equipment sold in 2003, compared with net losses a year ago. These positive results were offset partially by a $29 million decrease in investment banking and capital markets income. Noninterest expense increased by $32 million, or 5%, reflecting a $13 million increase in personnel expense, a $7 million rise in franchise and business taxes, and increases in professional fees and various indirect charges. The provision for loan losses decreased by $34 million, or 14%, as a result of improved asset quality in both the Key Equipment Finance and Corporate Banking lines. In 2002, the decrease in net income was due largely to a $99 million, or 71%, increase in the provision for loan losses stemming from an increase in net charge-offs in the Corporate Banking line. In addition, noninterest income declined by $35 million, or 7%, mostly due to lower income from investment banking and capital markets activities. These adverse results were offset in part by a $28 million, or 4%, reduction in noninterest expense, reflecting a significant reduction in goodwill amortization following the adoption of new accounting guidance in 2002. As shown in Figure 5, Investment Management Services’ net income was $97 million for 2003, compared with $111 million for 2002 and $98 million for 2001. The decrease in 2003 was attributable to a substantial reduction in noninterest income offset in part by growth in taxable- equivalent net interest income and a decrease in noninterest expense. Taxable-equivalent net interest income rose by $23 million, or 10%, from 2002, due primarily to strong growth in average core deposits. The positive effect of this growth was moderated, however, by a less favorable interest rate spread on deposits and other funding sources. Noninterest income decreased by $67 million, or 11%. In particular, income from trust and investment services declined by $57 million, due primarily to lower brokerage commissions and the June 2002 sale of Key’s 401(k) plan recordkeeping business. The divestiture of this business accounted for approximately $36 million, or 63%, of the total decrease in income from trust and investment services. The negative effects of these factors were offset in part by a rise in the market value of assets under management and the implementation of various pricing initiatives. In addition, results for 2003 received a modest boost from the July 2003 acquisition of NewBridge Partners. For information relating to this acquisition, see Note 3 (“Acquisitions and Divestiture”) on page 57. 16 NEXT PAGE PREVIOUS PAGE SEARCH BACK TO CONTENTS Investment Management Services FIGURE 4. CORPORATE AND INVESTMENT BANKING Year ended December 31, Change 2003 vs 2002 dollars in millions 2003 2002 2001 Amount Percent SUMMARY OF OPERATIONS Net interest income (TE) $1,048 $1,070 $1,066 $(22) (2.1)% Noninterest income 506 489 524 17 3.5 Total revenue (TE) 1,554 1,559 1,590 (5) (.3) Provision for loan losses 204 238 139 (34) (14.3) Noninterest expense 719 687 715 32 4.7 Income before income taxes (TE) 631 634 736 (3) (.5) Allocated income taxes and TE adjustments 237 238 284 (1) (.4) Net income $ 394 $ 396 $ 452 $ (2) (.5)% Percent of consolidated net income 43% 41% 342% N/A N/A AVERAGE BALANCES Loans $27,871 $29,279 $31,109 $(1,408) (4.8)% Total assets 32,255 32,798 35,034 (543) (1.7) Deposits 4,414 3,395 3,116 1,019 30.0