MANAGEMENTGLYPH<213>S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES At December 31, 2003, total loans outstanding were $62.7 billion, compared with $62.5 billion at the end of 2002 and $63.3 billion at the end of 2001. Among the factors that contributed to the decrease in our loans since 2001 are: Over the past several years, we have used alternative funding sources like loan sales and securitizations to support our loan origination capabilities. In addition, several acquisitions have improved our ability to generate and securitize new loans, especially in the area of commercial real estate. These acquisitions include the purchase of Conning Asset Management in June 2002, and both Newport Mortgage Company, L.P. and National Realty Funding L.C. in 2000. Commercial loan portfolio. Commercial loans outstanding decreased by $423 million, or 1%, from one year ago. Over the past year, growth in equipment lease financing receivables was more than offset by declines in all other commercial portfolios, reflecting softness in the economy and our decision to discontinue many credit-only relationships in the leveraged financing and nationally syndicated lending businesses. The aggregate decline in these other commercial portfolios was moderated by Key’s consolidation of an asset-backed commercial paper conduit, which resulted from an accounting change and added approximately $200 million to Key’s commercial loans outstanding. Key conducts its commercial real estate lending business through two primary sources: a 12-state banking franchise and KeyBank Real Estate Capital, a national line of business that cultivates relationships both within and beyond the branch system. The KeyBank Real Estate Capital line of business deals exclusively with nonowner-occupied properties (generally properties in which the owner occupies less than 60% of the premises) and accounted for approximately 54% of Key’s total average commercial real estate loans during 2003. Our commercial real estate business as a whole focuses on larger real estate developers and, as shown in Figure 15, is diversified by both industry type and geography. Commercial real estate loans, related to both owner and nonowner- occupied properties, constitute one of the largest segments of Key’s commercial loan portfolio. At December 31, 2003, Key’s commercial real estate portfolio included mortgage loans of $5.7 billion and construction loans of $5.0 billion. The average size of a mortgage loan was $.5 million and the largest mortgage loan had a balance of $29 million. The average size of a construction loan was $8 million. The largest construction loan commitment was $65 million, none of which was outstanding. Equipment lease financing is a specialty business in which Key believes it has both the scale and array of products to compete on a world-wide basis. Despite the soft economy, this business continued to grow during 2003 due in part to the success of our “Lead with leasing” campaign designed to improve the penetration of Key’s middle-market customer base. In addition, Key acquired a $311 million commercial lease financing portfolio and a $71 million commercial loan portfolio from a Canadian financial institution. The acquisition of these portfolios further diversified our asset base and has generated additional equipment financing opportunities. • Loan sales completed to improve the profitability of the overall portfolio, or to accommodate our asset/liability management needs; •W eak commercial loan demand due to the soft economy; and • Our decision to exit the automobile leasing business, de-emphasize indirect prime automobile lending and discontinue certain credit-only commercial relationships. home equity portfolio was substantially offset by declines of $568 million in automobile lease financing receivables and $355 million in residential real estate mortgage loans. The decline in automobile lease financing receivables reflects our decision to exit the automobile leasing business. Consumer loan portfolio. Consumer loans outstanding increased by $406 million, or 2%, from one year ago. Our home equity portfolio increased by $1.2 billion, largely as a result of our focused efforts to grow this business, facilitated by a period of lower interest rates. The growth of the N/M = Not Meaningful PREVIOUS PAGE SEARCH NEXT PAGE BACK TO CONTENTS 26 December 31, 2003 Geographic Region Total Percent of dollars in millions East Midwest Central West Amount Total Nonowner-occupied: Multi-family properties $ 576 $ 508 $ 631 $ 567 $ 2,282 21.4% Retail properties 203 488 103 242 1,036 9.7 OfGLYPH<222>ce buildings 138 88 169 190 585 5.5 Residential properties 160 49 152 490 851 8.0 Warehouses 15 104 92 108 319 3.0 Manufacturing facilities 1 16 8 10 35 .3 Hotels/Motels 6 6 1 8 21 .2 Other 126 295 53 161 635 6.0 1,225 1,554 1,209 1,776 5,764 54.1 Owner-occupied 662 2,112 604 1,513 4,891 45.9 Total $1,887 $3,666 $1,813 $3,289 $10,655 100.0% Nonowner-occupied: Nonperforming loans GLYPH<209> $4 $1 $5 $10 N/M Accruing loans past due 90 days or more GLYPH<209> 5 GLYPH<209> 4 9 N/M Accruing loans past due 30 through 89 days GLYPH<209> 7 5 3 15 N/M FIGURE 15. COMMERCIAL REAL ESTATE LOANS