## MANAGEMENTGLYPH<213>S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES 

•A verage core deposits have grown for six consecutive quarters and increased by 10% during 2003. 

•W e have maintained a strong capital position, which provides the flexibility to pay dividends, take advantage of investment opportunities and repurchase shares when appropriate. In addition, in January 2004, Key’s Board of Directors increased the dividend on Key’s common shares for the thirty-ninth consecutive year. 

•W e have continued to manage our expenses effectively. Expenses grew by 3% during 2003, compared with a peer group average of approximately 8%. 

Despite these favorable trends and signs of an improving economy, most of 2003 presented a difficult environment for growing revenue. The combination of weak demand for commercial loans and the Federal Reserve’s further reduction in interest rates in June 2003 contributed to a $24 million decline in Key’s net interest income. During the same period, Key’s noninterest income was essentially unchanged, reflecting the effects of a soft economy on our market-sensitive businesses. In the coming year, profitably growing revenue will remain a top priority, along with managing expenses and continuing to improve asset quality. 

Based on our current business mix and the actions we have taken to control costs and sharpen our business focus, we believe Key is well positioned to reap benefits as economic activity improves. We expect that smaller and medium-size businesses, a segment in which Key holds a position of strength in the marketplace, will be among the first to seek additional funding as the economy strengthens. 

Results for 2001 were significantly affected by a series of strategic initiatives announced during 2001 that were designed to sharpen our business focus and strengthen Key’s financial performance. These included: 

• Accelerating Key’s revenue growth by delivering products and services to customers through a seamless, integrated sales process called 1Key. 

• Achieving 100% of the savings from a competitiveness initiative, which was designed to improve Key’s profitability by reducing the costs of doing business, focusing on the most profitable growth businesses and enhancing revenues. 

• Re-emphasizing our commitment to relationship-based activities and committing to re-establish a conservative credit culture by de-emphasizing high-risk, low-return businesses. 

Specific actions related to these initiatives included exiting the automobile leasing business, de-emphasizing indirect prime automobile lending, discontinuing many credit-only relationships in the leveraged financing and nationally syndicated lending businesses, and increasing the allowance for loan losses. 

As a result of these actions, Key recorded 2001 charges aggregating $1.1 billion ($774 million after tax) that hinder a direct comparison of financial results over the past three years. Specifically, in the second quarter of 2001, we recorded a $150 million write-down of goodwill associated with Key’s 1995 acquisition of AutoFinance Group, Inc. This charge reflected our intention to significantly downsize Key’s automobile finance business. We also increased the provision for loan losses by $300 million ($189 million after tax) to facilitate the exiting of credits in the leveraged financing and nationally syndicated lending businesses. Finally, in the same quarter, we recorded a $40 million ($25 million after tax) charge to establish a reserve for losses incurred on the residual values of leased vehicles. 

In the fourth quarter of 2001, we recorded an additional provision for loan losses of $590 million ($372 million after tax) as a result of both the rapid downturn in the economy and further erosion in credit quality experienced after the events of September 11. In the same quarter, we recorded a $45 million ($28 million after tax) write-down of Key’s principal investing portfolio and a $15 million ($9 million after tax) charge to increase Key’s reserve for customer derivative losses. 

Results for 2001 also were adversely affected by a $39 million ($24 million after tax) charge resulting from a prescribed change in accounting principles generally accepted in the United States applicable to retained interests in securitized assets and a $20 million ($13 million after tax) increase in litigation reserves. 

The primary reasons that Key’s revenue and expense components changed over the past three years are reviewed in greater detail throughout the remainder of the Management’s Discussion & Analysis section. 

## LINE OF BUSINESS RESULTS 

This section summarizes the financial performance and related strategic developments of each of Key’s three major business groups: Consumer Banking, Corporate and Investment Banking, and Investment Management Services. To better understand this discussion, see Note 4 (“Line of Business Results”), which begins on page 58. Note 4 includes a brief description of the products and services offered by each of the three major business groups, more detailed financial information pertaining to the groups and their respective lines of business, and explanations of “Other Segments” and “Reconciling Items” presented in Figure 2. 

Figure 2 summarizes the contribution made by each major business group to Key’s taxable-equivalent revenue and net income for each of the past three years. 

