MANAGEMENTGLYPH<213>S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES International operations. Key meets the equipment leasing needs of companies worldwide. Economic and political uncertainties resulting from terrorist attacks, related military actions or other events that affect the countries in which we operate may have an adverse effect on Key’s results of operations. Business mix and development. The extent to which existing clients use Key’s new products and services and our level of success in attracting new clients may have a significant effect on Key’s future revenue. In addition, Key’s results of operations could be affected by changes (including those resulting from acquisitions and divestitures) in the composition of its business and in the geographic locations in which we operate. Pricing and competition. The prices we charge for Key’s products and services and, hence, their profitability could change depending on demand, actions taken by our competitors (including mergers that enhance their pricing flexibility) and the introduction of new products and services. Liquidity. Key’s liquidity could be adversely affected by both direct and indirect circumstances. An example of a direct (but hypothetical) event would be a significant downgrade in Key’s public credit rating by a rating agency. Examples of indirect (but hypothetical) events unrelated to Key that could have market-wide consequences would be terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, speculation about Key or the banking industry in general may cause normal funding sources to tighten or withdraw for a period of time. Regulatory capital. KeyCorp and its banking subsidiaries must meet specific capital requirements imposed by federal banking regulators. Sanctions for failure to meet applicable capital requirements may include regulatory enforcement actions that restrict dividend payments, require the adoption of remedial measures to increase capital, terminate Federal Deposit Insurance Corporation (“FDIC”) deposit insurance, and mandate the appointment of a conservator or receiver in severe cases. In addition, failure to maintain a well-capitalized status affects the evaluation of regulatory applications for specific transactions and activities, including acquisitions, continuation and expansion of existing activities, and commencement of new activities, and could affect the confidence of our clients and potential investors. Business continuity. Although Key has disaster recovery plans in place, events such as terrorist activities or military actions could damage our facilities or otherwise disrupt our operations. Such events could have an adverse affect on Key’s results of operations. Technological change. Key’s financial performance depends in part on its ability to develop, market and deliver new and innovative products and services. This is often accomplished through technological change. Developing and implementing such changes may require significant financial investments and staff time, and there is no guarantee that the end result will be attractive to our clients. In addition, technological advances may quickly become obsolete. Accounting principles. Changes in accounting principles generally accepted in the United States could have a significant adverse affect on Key’s reported financial results. Although these changes may not have an economic impact on our business, they could affect our ability to attain targeted levels for certain performance measures. Legal obligations. We may become subject to new legal obligations, or the resolution of pending litigation may have an adverse effect on our financial results. Our strategy for achieving Key’s long-term goals is comprised of the following five primary elements: Corporate strategy • Focus on our core businesses. We focus on businesses that enable us to build relationships with our clients. We focus on our “footprint” operations (i.e., those businesses conducted primarily within the 12 states in which we have KeyCenters) that serve individuals, small businesses and middle market companies. In addition, we focus nationwide on businesses such as commercial real estate lending, investment management, home equity lending and equipment leasing, in which we believe we possess resources of the scale necessary to compete nationally. • Put our clients first. We work to deepen our relationships with existing clients, and to build relationships with new clients, particularly those that have the potential to purchase multiple products and services or to generate repeat business. One way that we pursue this goal is by emphasizing deposit growth across all our lines of business. To ensure that our clients receive a distinctive level of service, we are putting considerable effort into enhancing our service quality. • Enhance our business. We strive for continuous improvement in our businesses. We continue to focus on increasing revenues, controlling expenses, improving the credit quality of our loan portfolios and better serving our clients. We will continue to leverage technology to reduce costs and to achieve these objectives. • Cultivate a workforce that demonstrates Key’s values and works together for a common purpose. Key intends to achieve this by: —paying for performance if achieved in ways that are consistent with Key’s values; —attracting, developing and retaining a quality, high-performing and inclusive workforce; —developing leadership at all levels in Key; and —creating a positive, stimulating and entrepreneurial work environment. • Enhance performance measurement. We will continue to refine and to rely upon performance measurement mechanisms that help us ensure that we are maximizing returns for our shareholders, that those returns are appropriate considering the inherent levels of risk involved and that our incentive compensation plans are commensurate with the contributions employees make to profitability. Key’s business is dynamic and complex. Consequently, management must exercise judgment in choosing and applying accounting policies and methodologies in many areas. These choices are important: not only are they necessary to comply with accounting principles generally accepted in the United States, they also reflect management’s view of the most SigniGLYPH<222>cant accounting policies and estimates NEXT PAGE PREVIOUS PAGE SEARCH BACK TO CONTENTS 9