MANAGEMENTGLYPH<213>S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES • Key has access to various sources of money market funding (such as federal funds purchased, securities sold under repurchase agreements and bank notes) and also can borrow from the Federal Reserve Bank to meet short-term liquidity requirements. Key did not have any borrowings from the Federal Reserve Bank outstanding at December 31, 2003. The Consolidated Statements of Cash Flow on page 49 summarize Key’s sources and uses of cash by type of activity for the years ended December 31, 2003, 2002 and 2001. As shown in these statements, Key’s largest cash flows relate to both investing and financing activities. Over the past three years, the primary sources of cash from investing activities have been loan securitizations and sales and the sales, prepayments and maturities of securities available for sale. Investing activities that have required the greatest use of cash include lending and the purchases of new securities. Over the past three years, the primary source of cash from financing activities has been the issuance of long-term debt. However, in 2003 and 2002, deposits were also a significant source of cash. In each of the past three years, major outlays of cash have been made to repay debt issued in prior periods and to reduce the level of short-term borrowings. KeyCorp meets its liquidity requirements principally through regular dividends from affiliate banks. Federal banking law limits the amount of capital distributions that banks can make to their holding companies without obtaining prior regulatory approval. A national bank’s dividend paying capacity is affected by several factors, including the amount of its net profits (as defined by statute) for the two previous calendar years, and net profits for the current year up to the date of dividend declaration. Liquidity for KeyCorp During 2003, affiliate banks paid KeyCorp a total of $245 million in dividends and nonbank subsidiaries paid a total of $73 million in dividends. KeyCorp also received a $365 million distribution of surplus in the form of cash from KeyBank National Association (“KBNA”). As of January 1, 2004, the affiliate banks had an additional $512 million available to pay dividends to KeyCorp without prior regulatory approval and remain well-capitalized under the FDIC-defined capital categories. KeyCorp generally maintains excess funds in short-term investments in an amount sufficient to meet projected debt maturities over the next twelve months. Additional sources of liquidity Management has implemented several programs that enable Key and KeyCorp to raise money in the public and private markets when necessary. The proceeds from all of these programs can be used for general corporate purposes, including acquisitions. Each of the programs is replaced or extended from time to time as needed. Bank note program. During 2003, Key’s affiliate banks raised $1.5 billion under Key’s bank note program. Of the notes issued during the year, $1.1billion have original maturities in excess of one year and are included in long-term debt. The remaining notes have original maturities of one year or less and are included in short-term borrowings. Key’s current bank note program provides for the issuance of both long- and short-term debt of up to $20.0 billion ($19.0 billion by KBNA and $1.0 billion by Key Bank USA, National Association (“Key Bank USA”)). At December 31, 2003, $16.6 billion was available for future issuance under this program. Euro note program. Under Key’s euro note program, KeyCorp, KBNA and Key Bank USA may issue both long- and short-term debt of up to $10.0 billion in the aggregate. The notes are offered exclusively to non-U.S. investors and can be denominated in U.S. dollars and many foreign currencies. There were $197 million of borrowings issued under this program during 2003. At December 31, 2003, $4.0 billion was available for future issuance. KeyCorp medium-term note program. In November 2001, KeyCorp registered, under a universal shelf registration statement filed with the Securities and Exchange Commission, $2.2 billion of securities. At December 31, 2003, the entire amount registered had been allocated for the issuance of medium-term notes and the unused capacity totaled $1.4 billion. Commercial paper and revolving credit. KeyCorp has a commercial paper program that provides funding availability of up to $500 million. As of December 31, 2003, there were no borrowings outstanding under the commercial paper program. A revolving credit agreement that provided funding availability of up to $400 million expired on October 2, 2003, and was not renewed. Key has a separate commercial paper program that provides funding availability of up to $1.0 billion in Canadian currency or the equivalent in U.S. currency. As of December 31, 2003, borrowings outstanding under this commercial paper program totaled $787 million in Canadian currency and $27 million in U.S. currency (equivalent to $35 million in Canadian currency). Key’s debt ratings are shown in Figure 34 below. Management believes that these debt ratings, under normal conditions in the capital markets, allow for future offerings of securities by KeyCorp or its affiliate banks that would be marketable to investors at a competitive cost. a ReGLYPH<223>ects the guarantee by KBNA of KNSFGLYPH<213>s issuance of Canadian commercial paper. N/A = Not Applicable Figure 24 on page 32 summarizes Key’s significant contractual cash obligations at December 31, 2003, by specific time periods in which related payments are due or commitments expire. FIGURE 34. DEBT RATINGS Senior Subordinated Short-term Long-Term Long-Term Capital December 31, 2003 Borrowings Debt Debt Securities KEYCORP Standard & PoorGLYPH<213>s A-2 A— BBB+ BBB MoodyGLYPH<213>s P-1 A2 A3 A3 Fitch F1 A A— A KBNA Standard & PoorGLYPH<213>s A-1 A A— N/A MoodyGLYPH<213>s P-1 A1 A2 N/A Fitch F1 A A— N/A KEY NOVA SCOTIA  FUNDING COMPANY  (GLYPH<210>KNSFGLYPH<211>) Dominion Bond  Rating Service a R-1 (middle) N/A N/A N/A 42 PREVIOUS PAGE SEARCH BACK TO CONTENTS NEXT PAGE