MANAGEMENTGLYPH<213>S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Figure 18 shows loans that are either administered or serviced by Key, but not recorded on the balance sheet. Included are loans that have been both securitized and sold, or simply sold outright. In the event of default, Key is subject to recourse with respect to approximately $581 million of the $30.4 billion of loans administered or serviced at December 31, 2003. Key derives income from two sources when we sell or securitize loans but retain the right to administer or service them. We earn noninterest income (recorded as “other income”) from servicing or administering the loans, and we earn interest income from any securitized assets retained. Conning Asset Management and National Realty Funding L.C. service the commercial real estate loans shown in Figure 18; other financial institutions originated most of these loans. Figure 19 shows the maturities of certain commercial and real estate loans, and the sensitivity of those loans to changes in interest rates. At December 31, 2003, approximately 51% of these outstanding loans were scheduled to mature within one year. Loans with maturities greater than one year include $11.9 billion with floating or adjustable rates and $2.5 billion with predetermined rates. FIGURE 18. LOANS ADMINISTERED OR SERVICED a Includes $4.1 billion of serviced loans purchased in the June 28, 2002, acquisition  of Conning Asset Management. December 31, in millions 2003 2002 2001 Education loans $ 4,610 $ 4,605 $ 4,433 Automobile loans GLYPH<209> 54 131 Home equity loans 215 456 768 Commercial real  estate loans 25,376 19,508 a 10,471 Commercial loans 167 123 983 Total $30,368 $24,746 $16,786 FIGURE 19. MATURITIES AND SENSITIVITY OF CERTAIN LOANS TO CHANGES IN INTEREST RATES a GLYPH<210>FloatingGLYPH<211> and GLYPH<210>adjustableGLYPH<211> rates vary in relation to other interest rates (such as the base lending rate) or a variable index that may change during the term of the loan. b GLYPH<210>PredeterminedGLYPH<211> interest rates either are GLYPH<222>xed or will change during the term of the loan according to a speciGLYPH<222>c formula or schedule. December 31, 2003 Within 1-5 Over in millions 1 Year Years 5 Years Total Commercial, GLYPH<222>nancial and agricultural $10,289 $4,571 $2,152 $17,012 Real estate GLYPH<209> construction 2,740 2,097 141 4,978 Real estate GLYPH<209> residential and commercial mortgage 1,813 2,193 3,284 7,290 $14,842 $8,861 $5,577 $29,280 Loans with GLYPH<223>oating or adjustable interest rates a $7,808 $4,057 Loans with predetermined interest rates b 1,053 1,520 $8,861 $5,577 Securities At December 31, 2003, the securities portfolio totaled $8.8 billion and included $7.6 billion of securities available for sale, $98 million of investment securities and $1.1 billion of other investments (primarily principal investments). In comparison, the total portfolio at December 31, 2002, was $9.5 billion, including $8.5 billion of securities available for sale, $120 million of investment securities and $919 million of other investments. The weighted-average maturity of the portfolio was 3.1 years at December 31, 2003, compared with 3.0 years at December 31, 2002. The size and composition of Key’s securities portfolio are dependent largely on our needs for liquidity and the extent to which we are required or elect to hold these assets as collateral to secure public and trust deposits. Although debt securities are generally used for this purpose, other assets, such as securities purchased under resale agreements, may be used temporarily when they provide more favorable yields. Securities available for sale. The majority of Key’s securities available-for- sale portfolio consist of collateralized mortgage obligations that provide a source of interest income and serve as collateral in connection with pledging requirements. A collateralized mortgage obligation (“CMO”) is a debt security that is secured by a pool of mortgages, mortgage-backed securities, U.S. government securities, corporate debt obligations or other Investment securities. Securities issued by states and political subdivisions constitute most of Key’s investment securities. Figure 21 shows the composition, yields and remaining maturities of these securities. Figure 20 shows the composition, yields and remaining maturities of Key’s securities available for sale. For more information about retained interests in securitizations, gross unrealized gains and losses by type of security and securities pledged, see Note 6 (“Securities”), which begins on page 61. bonds. At December 31, 2003, Key had $7.1 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared with $8.1 billion at December 31, 2002. Key invested more heavily in these securities during 2002 as opportunities to originate loans (Key’s preferred earning asset) declined in the soft economy. However, during the second quarter of 2003, Key reduced the level of its CMOs by approximately $750 million, primarily through sales undertaken to manage prepayment risk. The securities sold were backed by higher coupon mortgages and had very short expected average lives. Substantially all Key’s mortgage-backed securities are issued or backed by federal agencies. The CMO securities Key holds are shorter-maturity class bonds that are structured to have more predictable cash flows than other longer- term class bonds during periods of rising interest rates. PREVIOUS PAGE SEARCH BACK TO CONTENTS NEXT PAGE 28