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The Bank of New York 2004 Annual Report on Form 10-K of The Bank of New York Company, Inc.

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THE BANK OF NEW YORK COMPANY, INC.

FINANCIAL REVIEW

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SELECTED FINANCIAL DATA

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE COMPANY’S FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

Introduction

The Bank of New York Company, Inc.’s (the “Company”) actual results of future operations may differ from those estimated or anticipated in certain forward-looking statements contained herein for reasons which are discussed below and under the heading “Forward Looking Statements and Factors That Could Affect Future Results.” When used in this report, the words “estimate,” “forecast,” “project,” “anticipate,” “expect,” “intend,” “believe,” “plan,” “goal,” “should,” “may,” “strategy,” “target,” and words of similar meaning are intended to identify forward looking statements in addition to statements specifically identified as forward looking statements.

Overview

The Company’s Businesses

The Bank of New York Company, Inc. (NYSE: BK) is a global leader in providing a comprehensive array of services that enable institutions and individuals to move and manage their financial assets in more than 100 markets worldwide. The Company has a long tradition of collaborating with clients to deliver innovative solutions through its core competencies: securities servicing, treasury management, investment management, and individual & regional banking services. The Company’s extensive global client base includes a broad range of leading financial institutions, corporations, government entities, endowments and foundations. Its principal subsidiary, The Bank of New York, founded in 1784, is the oldest bank in the United States and has consistently played a prominent role in the evolution of financial markets worldwide.

The Company has executed a consistent strategy over the past decade by focusing on highly scalable, fee-based securities servicing and fiduciary businesses, with top three market share in most of its major product lines. The Company distinguishes itself competitively by offering the broadest array of products and services around the investment lifecycle. These include: advisory and asset management services to support the investment decision; extensive trade execution, clearance and settlement capabilities; custody, securities lending, accounting and administrative services for investment portfolios; and sophisticated risk and performance measurement tools for analyzing portfolios. The Company also provides services for issuers of both equity and debt securities. By providing integrated solutions for clients’ needs, the Company strives to be the preferred partner in helping its clients succeed in the world’s rapidly evolving financial markets.

The Company has grown both through internal reinvestment as well as execution of strategic acquisitions to expand product offerings and increase market share in its scale businesses. Internal reinvestment occurs through increased technology spending, staffing levels, marketing/branding initiatives, quality programs, and product development. The Company consistently invests in technology to improve the breadth and quality of its product offerings, and to increase economies of scale. With respect to acquisitions, the Company has acquired 92 businesses since 1995, almost exclusively in its securities servicing and fiduciary segment. The acquisition of Pershing in 2003 for $2 billion was the largest of these acquisitions.

As part of the transformation to a leading securities servicing provider, the Company has also de-emphasized or exited its slower growth traditional banking businesses over the past decade. The Company’s more significant actions include selling its credit card business in 1997 and its factoring business in 1999, and most recently, significantly reducing non-financial corporate credit exposures by 47% from December 31, 2000 to December 31, 2004. Capital generated by these actions has been reallocated to the Company’s higher growth businesses.

The Company’s business model is well positioned to benefit from a number of long-term secular trends. These include the growth of worldwide financial assets, globalization of investment activity, structural market

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changes, and increased outsourcing. These trends benefit the Company by driving higher levels of financial asset trading volume and other transactional activity, as well as higher asset price levels and growth in client assets, all factors by which the Company prices its services. In addition, international markets offer excellent growth opportunities.

Current Business Trends

In 2004 the market environment was uneven. In the equity markets, a strong first quarter was followed by two lackluster quarters, with the environment improving in the fourth quarter following the U.S. presidential election. Accordingly, the Company’s execution and clearing businesses performed below expectations for the year. Given the Company’s diversified product mix, however, securities servicing revenues overall still showed good growth, as fixed income markets remained strong and cross-border activity increased, positively impacting businesses like investor services, broker-dealer services and ADRs.

The Company continues to experience a lack of pricing power in several of its key business lines, given pressure on asset manager clients to lower costs and strong competition among service providers. In response, the Company has undertaken aggressive measures to lower its cost base, such as the development of greater straight-through-processing of transactions, labor reengineering, and moving jobs to lower cost locations.

The Company’s business model responded favorably in 2004 to the rising rate environment. The Company’s business lines generate a significant level of low cost deposits. As rates rose in 2004, the Company benefited as it was able to begin reinvesting these balances in higher yielding assets. The Company also benefited from a modest expansion in the size of its balance sheet. The Company expects to continue to benefit from a rise in rates, based on its balance sheet positioning.

For 2005, the Company based its budget planning process on expectations of gradual improvement in the equity market. Asset price levels are projected to increase in line with long term expectations while the growth rate for trading volumes is expected to be below the average rate for a full business cycle. The Company projects fixed income activity to be stable to slightly lower, given the expectation of a continued rise in interest rates.

This environmental back drop should allow the Company’s operating business lines to perform reasonably well. Several corporate level items will have a negative impact on overall results, however. These include: 1) higher pension expense given relatively poor investment returns over the past four years and further changes in prospective assumptions; 2) higher stock option expense, as the Company will complete its phase-in of option expensing; 3) higher technology infrastructure costs, as the Company will begin incurring costs on an out-of-region data center, as required by Federal regulators, prior to decommissioning existing in-region data centers; 4) an anticipated reduction in securities gains, and 5) potentially higher credit loss provisioning given the unusually low credit costs in 2004.

Financial Highlights

2004

Securities servicing fees and private client services and asset management fees grew strongly in 2004 in spite of an uneven operating environment. A full year of results from the Pershing acquisition, new business wins and revenues from new products drove the growth. The Company continued to improve its credit risk portfolio, and it funded further long-term investment spending for technology, business continuity, quality, and branding programs.

In 2004, the Company reported net income of $1,440 million and diluted earnings per share of $1.85 compared with net income of $1,157 million and diluted earnings per share of $1.52 in 2003, and net income of $902 million and diluted earnings per share of $1.24 in 2002. In 2004, the Company recorded several gains and

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charges that in aggregate reduced reported earnings by 3 cents per share. These items are detailed in the “Other 2004 Developments”. Merger and integration costs associated with the Pershing acquisition of 8 cents per share and the settlement with General Motors Acceptance Corporation (“GMAC”) of 7 cents per share impacted earnings in 2003.

In 2004, the growth in earnings was paced by securities servicing growth of 19% (9% adjusted for full year impact of Pershing) to $2,858 million, core net interest income growth of 6%, strong credit performance, and higher than expected securities gains. Performance was strong across nearly all the Company’s securities servicing businesses. Both investor and issuer services increased by 11%. The growth in investor services was driven largely by new business wins and improvements year-over-year in asset values and volumes. Issuer services benefited from increased cross-border activity in depositary receipts and improving market share in global products within corporate trust. Broker-dealer services were up 19% primarily due to strong growth in collateral management.

The Company’s asset management business continues to perform well, responding to growing institutional investor interest in alternative investments. Private client services and asset management fees increased $64 million, or 17%, primarily due to exceptional growth at the Company’s fund of funds manager, Ivy Asset Management (“Ivy”). In addition, foreign exchange results continued to benefit from currency volatility and increased cross-border investing. Foreign exchange and other trading revenues remained at historically high levels, up 11% versus a year ago. The provision for credit losses declined to $15 million from $155 million in 2003.

This strength in revenue was partially offset by upward pressure on the Company’s expense base. Higher employee stock option and pension expenses, business continuity spending, costs associated with legal and regulatory matters, and costs associated with converting new business opportunities in investor services all contributed to higher expense levels.

At December 31, 2004, assets under custody rose to a record $9.7 trillion from $8.3 trillion at December 31, 2003. Cross-border custody assets were $2.7 trillion at December 31, 2004, compared with $2.3 trillion at December 31, 2003. Equity securities composed 35% of the assets under custody at December 31, 2004, while fixed income securities were 65%.

In 2004, the Company continued to invest in enhancing its service offerings, critical to sustaining top line growth through all types of markets, while maintaining its commitment to expense discipline to ensure a competitive cost base. Service offerings enhancements were the result of both internal development and acquisitions. In investor services, the Company rolled out major enhancements to BNY INFORM, the primary day-to-day electronic interface between clients and the Company. In execution and clearing, the Company acquired a leading electronic trading platform from Sonic Financial which offers clients access to sophisticated trading tools and smart routing capabilities. At Pershing, the Company introduced enhancements to Net Exchange, its platform for introducing broker-dealers, enabling them to more effectively manage and sell to their clients. In broker-dealer services, the Company continued to roll out its collateral management products. The results of these investments were demonstrated by consistent new business wins, which were key drivers for growth in revenues and assets under custody in 2004.

New business momentum remains strong as the Company is gaining traction with growth initiatives such as hedge fund servicing, Pershing’s registered investment advisor (“RIA”) offering and independent research. The outlook for Ivy continues to be very positive, given increased allocations by institutions to alternative investments, including hedge funds, as an asset class.

2003

In 2003, securities servicing fees were $2,412 million, a 27% increase compared with $1,896 million in 2002, reflecting the Pershing acquisition and growth in investor and broker-dealer services. Global payment

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services fees increased 6% for the full year, which is attributable to improved multi-currency funds transfer product capabilities and new business wins. For the year 2003, private client services and asset management fees were up 12% from the previous year, reflecting higher equity price levels as well as strong growth at Ivy. In addition, the year-over-year comparison also benefited from the full year impact of several 2002 acquisitions. Foreign exchange and other trading revenues were up 40% over 2002, resulting from increased client-driven foreign exchange, interest rate hedging activity, and the Pershing acquisition. Year-end assets under custody were $8.3 trillion, including $2.3 trillion of cross-border custody assets. Gains and losses on securities investments were a gain of $35 million in 2003, compared with a loss of $118 million in 2002 primarily reflecting a $210 million equity write-down in 2002. The provision for credit losses was $155 million down from $685 million in 2002, when the Company provided for problem exposures in the airline and telecom industries. Although expenses increased significantly due to the Pershing acquisition, stock option expensing, a lower pension credit, technology investment, and business continuity, the Company was able to attain positive leverage in the second half of the year.

2002

In 2002, securities servicing fees were $1,896 million, compared with $1,775 million in 2001. Global payment services fees were $296 million for the full year, reflecting higher funds transfer volumes and increased multi-currency activity from existing clients, as well as the addition of new clients, which offset continued weakness in global trade services. For the year 2002, private client services and asset management fees were $344 million reflecting several acquisitions and core growth in alternative investments and retail investment products. Ivy’s assets under management increased 30% on a year-over-year basis. Foreign exchange and other trading revenues were $234 million in 2002 reflecting a significant decrease in volatility in the currency markets and reduced client activity in the second half of 2002. Other trading was negatively impacted by a fall off in client interest rate hedging activities. Year-end assets under custody were $6.8 trillion, including $1.9 trillion of cross-border custody assets. Gains and losses on securities were a loss of $118 million in 2002, primarily reflecting impairment of equity securities.

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Other 2004 Developments

In 2004, the Company recorded several gains and charges that in the aggregate reduced reported earnings by 3 cents per share. Management believes that it is useful to provide a detailed analysis of these items in tabular form in order to better assess the trends in the income statement line items identified. These items are described in the following table:

The first item relates to an after-tax charge of $32 million resulting from a cumulative adjustment to the leasing portfolio, which was triggered under Statement of Financial Accounting Standards No. 13 “Accounting for Leases” (“SFAS 13”) by the combination of a reduction in state and local taxes and a restructuring of the lease portfolio completed in the first quarter. The SFAS 13 adjustment impacts the timing of lease income reported by the Company, and resulted in a reduction in net interest income of $145 million, offset by tax benefits of $113 million.

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The Company also recorded an after-tax gain of $52 million resulting from a SFAS 13 cumulative adjustment to the leasing portfolio for customers exercising their early buy-out (“EBO”) options. The Company’s leasing portfolio contains a number of large cross-border leveraged leases where the lessee has an early buy-out option to purchase the leased assets, generally railcars and related assets. Given a confluence of economic factors, the value of the leased equipment currently exceeds the exercise price of the early buy-out option. The Company offered financial incentives to these lessees to accelerate the exercise of their early buy-out options. As a result, several lessees agreed to this proposal, triggering the after-tax $52 million gain. The gain results from the recognition of lease income over a shorter time frame, since the term of the lease has been shortened to the early buy-out date.

In addition, the Company’s net investment in aircraft leases was impacted by a $6 million after-tax adjustment related to aircraft leased to two airlines. The Company recorded a $7 million reduction in the provision for credit losses which largely reflects release of reserves on the aircraft leases. The Company also had an after-tax gain of $2 million on the sale of a leased aircraft.

The Company recorded several other gains in noninterest income. These include a $27 million after-tax gain on the sale of a portion of the Company’s interest in Wing Hang Bank Limited (“Wing Hang”), a Hong Kong based bank, which was recorded in other income, and $19 million ($12 million after-tax) of higher than anticipated securities gains in the first quarter resulting from realized gains on sponsor fund investments in Kinkos, Inc., Bristol West Holdings, Inc., Willis Group Holdings, Ltd., and True Temper Sports, Inc.

The Company also took several actions associated with its long-term cost reduction initiatives. These actions included an after-tax severance charge of $6 million related to staff reductions tied to job relocations and a $5 million after-tax charge for terminating high cost leases associated with the staff redeployments.

Although there can be no assurance that a settlement will be reached, in 2004, the Company recorded an after-tax expense of $22 million in connection with the anticipated settlement of the RW Professional Leasing Services Corp. matter (“RW Matter”). This expense is only partially tax deductible.

In December of 2004 and January 2005, the Company had several appellate conferences with the IRS related to the Company’s cross-border leveraged lease transactions. Based on these conferences, the Company believes it may be possible to settle the proposed IRS tax adjustments related to the portfolio. However, negotiations are continuing and the matter may still be litigated. Based on a revision to the probabilities and costs assigned to litigation and settlement outcomes, the Company recorded a $50 million expense associated with increasing the tax reserve on these transactions.

Consolidated Income Statement Review

Noninterest Income

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Noninterest income is provided by a wide range of securities servicing, global payment services, private client services and asset management, trading activities and other fee-based services. Revenues from these activities were $4,691 million in 2004, compared with $4,006 million in 2003 and $3,143 million in 2002. As a percentage of revenues, total noninterest income was 74% in 2004, compared with 71% in 2003 and 65% in 2002. The increase in 2004 primarily reflects strong performance across nearly all the Company’s securities servicing businesses and the full year impact of the Pershing acquisition, as well as higher foreign exchange and other trading revenue, private client services and asset management fees, and securities gains. The 2004 increase also includes the $48 million pre-tax gain on the sale of a portion of the Company’s investment in Wing Hang Bank Limited and the $19 million gain on four sponsor fund investments recorded in 2004.

Securities servicing fees were $2,858 million, $2,412 million, and $1,896 million, in 2004, 2003, and 2002. The 19% increase in securities servicing fees from 2003 primarily reflects the full year impact of the Pershing acquisition and good organic growth in investor and issuer services which were each up 11%. In 2003, the 27% increase in securities servicing fees from 2002 reflects the Pershing acquisition and improved performance in the Company’s other securities servicing business, particularly investor services and broker-dealer services.

Global payment services fees, principally funds transfer, cash management, and trade services, were $317 million in 2004, $314 million in 2003, and $296 million in 2002. Global payment services fees were impacted by customers’ decision to leave higher compensatory balances to cover the cost of services rather than pay fees as a result of the rising rate environment. The 2003 increase in global payment services fees from 2002 is attributable to improved multi-currency funds transfer product capabilities and new business wins.

Private client services and asset management fees were $448 million in 2004, $384 million in 2003, and $344 million in 2002. The 17% increase from 2003 reflects strong growth in Ivy, higher fees from fixed income asset management, and higher equity price levels. Ivy, a fund of funds hedge fund manager, continues to attract new assets at a rapid pace. Ivy ended 2004 with $14.8 billion of assets under management, up 63% for the year. The 12% increase in fees in 2003 from 2002 reflects higher equity price levels, strong growth at Ivy, and the full year impact of several 2002 acquisitions.

Service charges and fees were $385 million in 2004, compared with $375 million in 2003 and $357 million in 2002. The increase in 2004 from 2003 reflects higher syndication and advisory fees. The increase in 2003 from 2002 was driven by higher loan syndication fees and bond underwriting fees reflecting active fixed income markets.

Foreign exchange and other trading revenues were a record $364 million in 2004, $327 million in 2003, and $234 million in 2002. The 11% increase in 2004 from the prior year resulted from new business wins and an increased level of client activity, tied to cross-border investing and hedging against currency volatility. Pershing contributed $51 million to foreign exchange and other trading revenue in 2004 up from $35 million in 2003. Fixed income trading declined as rates increased in 2004. The 40% increase in 2003 from 2002 resulted from increased client-driven foreign exchange, interest rate hedging activity, and the Pershing acquisition. Excluding Pershing, foreign exchange and other trading revenues were up 25% in 2003 reflecting more volatile currency markets and more active cross-border investors. Interest rate hedging was driven by record levels of fixed income issuance as well as higher mortgage originations.

Securities gains were $78 million in 2004, compared with a $35 million gain in 2003 and a $118 million loss in 2002. The securities gains in 2004 were primarily attributable to the Company’s private equity portfolio including $19 million of realized gains on four sponsor investments. Half of the 2003 gains arose from repositioning actions in the Company’s fixed income securities portfolio. In 2002, the loss included a $210 million equity writedown that precipitated the liquidation of the Company’s bank stock portfolio.

Other noninterest income was $241 million in 2004, $159 million in 2003, and $134 million in 2002. In 2004, other income included a pre-tax gain of $48 million from the sale of a portion of the Company’s investment

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in Wing Hang Bank Limited. In 2002, other income includes a $32 million Empire State Development Corporation (“ESDC”) grant. The ESDC grant covered relocation and other costs associated with the Company’s decision to return to downtown Manhattan and to move 1,500 employees to a new facility in Brooklyn.

Net Interest Income

For 2004, net interest income on a taxable equivalent basis amounted to $1,675 million compared with $1,644 million in 2003. Net interest income in 2004 was affected by three cumulative adjustments to the leasing portfolio, which were triggered under SFAS 13. The first was a $145 million pre-tax charge attributable to a combination of a reduction in state and local tax rates and a restructuring of the lease portfolio. The second was an $89 million pre-tax benefit resulting from customers committing to exercise their early EBO options. The third was a $10 million pre-tax adjustment related to aircraft leased to two airlines.

Excluding the impact of the SFAS 13 leasing adjustments on the leveraged lease portfolio, net interest income on a taxable equivalent basis was $1,741 million in 2004, up 6% from $1,644 million in 2003. This increase was attributable to the full year impact of Pershing and the benefit of rising interest rates. Rising rates reduced compression on deposit product spreads, increased the value of free funds and caused the Company’s global payment services customers to leave additional compensatory balances rather than pay for services with fees. Average earning assets were $81.1 billion compared with $74.1 billion in 2003. Average loans were $37.8 billion in 2004 compared with $35.6 billion in 2003. Average securities were $25.0 billion in 2004, up from $24.5 billion in 2003. The increase in average earning assets and average loans primarily reflects the Pershing acquisition. The net interest rate spread was 1.78% in 2004 compared with 1.97% in 2003, while the net yield on interest-earning assets was 2.07% in 2004 and 2.22% in 2003. Excluding the leasing adjustments of $66 million in 2004, the net interest rate spread was 1.86% and the net yield was 2.15%. The Company estimates that if Pershing had been owned for the full year of 2003, the spread and yield in 2003 would have been reduced to 1.89% and 2.13%.

In 2003, net interest income on a taxable equivalent basis amounted to $1,644 million compared with $1,714 million in 2002. The decrease reflected planned reduction in corporate loan balances, particularly focused on higher yielding loans, lower reinvestment yields on the investment securities portfolio, and the impact of Federal Reserve interest rate reductions. Partially offsetting these factors were the positive impact of the Pershing acquisition and increases in investment securities. Average earning assets were $74.1 billion compared with $65.3 billion in 2002 primarily due to the Pershing acquisition. Average loans were $35.6 billion in 2003 compared with $34.3 billion in 2002. Average securities were $24.5 billion in 2003, up from $23.0 billion in 2002. The Company added approximately $5.6 billion of highly-rated mortgage-backed securities to its portfolio in 2003. The net interest rate spread was 1.97% in 2003 compared with 2.31% in 2002, while the net yield on interest-earning assets was 2.22% in 2003 and 2.62% in 2002.

In 2002, net interest income on a taxable equivalent basis amounted to $1,714 million. Average earning assets were $65.3 billion down from prior year level of $67.7 billion. Average loans were $34.3 billion in 2002 compared with $38.8 billion in 2001. Average securities were $23.0 billion in 2002, up from $18.6 billion in 2001. The Company added approximately $6.2 billion of highly-rated mortgage-backed securities to its portfolio

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in 2002. The net interest rate spread was 2.31%, compared with 1.89% in 2001 while the net yield on interest earning assets was 2.62% versus 2.57% in 2001. The increase in the spread is attributable to increased holdings of investment securities. The increase in the yield is attributable to increased holdings of investment securities partially offset by the decreased value of demand deposits in a lower interest rate environment.

In this report a number of amounts related to net interest income are presented on a “taxable equivalent basis.” The Company believes that this presentation provides comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

Provision for Credit Losses

The provision for credit losses was $15 million in 2004, compared with $155 million in 2003 and $685 million in 2002. The 2004 provision includes a credit of $7 million for the reduction in exposure associated with the restructuring of aircraft leases. The lower provision in 2004 reflects the Company’s improved asset quality and a stronger credit environment. The provision is expected to increase in 2005 as the Company believes that from a credit perspective the favorable trend in the economy is unlikely to continue. Improved asset quality and reduced corporate credit exposure contributed to the lower provision in 2003. The larger provision in 2002 was attributable to the deterioration in the loan portfolio particularly in aircraft leasing and in a limited number of borrowers in the telecommunications portfolio.

Noninterest Expense

Total noninterest expense was $4,122 million in 2004, $3,698 million in 2003, and $2,751 million in 2002. The 2004 increase in expenses primarily reflects the full year impact of the Pershing acquisition, higher stock option expense, a lower pension credit, the upfront expenses associated with the implementation of cost reduction initiatives, higher volume related sub-custodian and clearing expenses and higher technology and business continuity spending. Noninterest expense in 2004 included lease termination and severance costs of $18 million recognized in the first quarter and expenses associated with the RW Matter of $30 million recognized in the fourth quarter. In 2003, noninterest expenses included merger and acquisition costs relating to Pershing of $96 million and the settlement with GMAC of $78 million.

Salaries and employee benefits were $2,324 million in 2004, compared with $2,002 million in 2003 and $1,581 million in 2002. The increase in salary and employee benefits primarily reflects higher performance related incentives and benefits, higher stock option and defined contribution plan expense, a lower pension credit as well as higher variable expenses associated with revenue growth. The increase in 2003 reflects the Pershing acquisition as well as stock option expensing and a lower pension credit. The number of employees at December 31, 2004 was 23,363, up from 22,901 and 19,437 in 2003 and 2002. In 2003, the Pershing acquisition added approximately 3,700 employees. Severance expense was $16 million in 2004, $10 million in 2003 and $19 million in 2002.

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Net occupancy and furniture and fixture expenses were $509 million in 2004, compared with $446 million in 2003 and $368 million in 2002. Net occupancy increased by $44 million primarily reflecting the Pershing acquisition, lease terminations, and the expansion of regional facilities, including the opening of the new Brooklyn facility and the new back-up data center. In 2002, the Company recorded $22 million in one-time occupancy expenses to reflect the estimated lease termination cost of a rented facility in Manhattan. In 2002, higher business continuity-related expenses resulted in increased occupancy and depreciation expense.

Clearing expenses were $176 million in 2004, compared with $154 million in 2003 and $124 million in 2002. The increase in 2004 reflects a higher level of business activity and the full year impact of the Pershing acquisition in the Company’s execution and clearing business. Sub-custodian expenses increased 18% in 2004 to $87 million, reflecting higher international volumes and the Company’s continued expansion of its global sub-custodian network to over 100 markets.

Software expenses increased by $23 million to $193 million in 2004, reflecting the Company’s continued investment in technology capabilities supporting its servicing activities.

Amortization of goodwill and intangibles increased to $34 million in 2004 from $25 million in 2003. In 2004 and 2003, the Pershing acquisition added $20 million and $12 million in intangibles amortization, respectively.

Other expenses in 2004 were $706 million compared with $639 million in 2003 and $420 million in 2002. The increase mainly reflects $30 million of expenses associated with the RW Matter and higher costs for legal, consulting, and employment agencies tied to hiring as well as an increase in travel expenses.

Technology expenditures were $888 million or 22% of total expense in 2004, compared with $844 million in 2003 and $644 million in 2002. Software development has been an increasing component of technology expense in 2004 and 2003. The Company has invested in client-facing portals and in developing applications to increase the efficiency of the Company’s businesses. As businesses have grown the cost of voice, data and messaging services have increased. The Pershing acquisition on May 1, 2003 had a significant impact on technology expense in both 2004 and 2003. Upgrades to business continuity plans have also been costly. Offsetting these cost pressures have been declining unit cost for hardware, third-party software and telecommunications.

In 2003, the Company and GMAC settled claims relating to the Company’s 1999 sale to GMAC of BNY Financial Corporation, the Company’s factoring and asset-based finance business. The settlement resolved all claims between the parties with a payment of $110 million by the Company to GMAC. After accounting for a previously established reserve for this matter, the net impact of the settlement was approximately $78 million, or 7 cents per fully diluted share. The Company sold BNY Financial Corporation to GMAC for $1.8 billion in cash in 1999.

The Company has a number of programs to control expense growth. These programs include day-to-day profitability programs, reengineering processes, and moving jobs to lower cost environs. Day-to-day profitability programs focus on stringent control of headcount and discretionary expenses, as well as enhanced vendor management.

Reengineering focuses on business process reviews throughout the Company. In 2004, the Company reviewed 15 areas and developed action steps to lower expenses by $90 million, with a $40 million impact in 2004 and a $50 million incremental impact projected for 2005. These savings lower the Company’s growth rate of expenses by approximately 1% each year.

In January 2004, the Company began a three-year effort to move 1,500 jobs to lower cost areas. In 2004, the Company moved 419 positions primarily to upstate New York and Florida. Employees in these two locations

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grew to 1,771 in 2004 from 1,431 at year-end 2003. Internationally, the Company moved positions from London to Liverpool. Employment in India grew to 996 in 2004 from 716 at year-end 2003, further leveraging Pershing’s technology operation in that country. In 2005, the Company plans to move 550 positions, primarily in Europe. The Company plans to open a growth center in Manchester, England in late 2005.

The Company adopted fair value accounting for stock compensation on January 1, 2003 using the prospective method. The Company’s grants of stock options typically vest over two to four years. The impact on pre-tax income was $39 million, resulting in an approximately 3.5 cents earnings per share reduction in 2004. The impact of expensing options in 2005 is expected to be an additional 1 cent per share.

Income Taxes

The Company’s consolidated effective tax rates for 2004, 2003, and 2002 were 34.5%, 34.3%, and 34.3%. The increase in the effective tax rate in 2004 is primarily due to the net of the increase in the tax reserve related to LILO exposures and the SFAS 13 leasing adjustments. The effective tax rate in 2003 also reflects the tax benefit on the GMAC settlement and lower state and local taxes.

The Company invests in synthetic fuel (Section 29) and low income housing (Section 42) investments generating tax credits, which have the effect of permanently reducing the Company’s tax expense. The Company also invests in leveraged leases which through accelerated depreciation postpone the payment of taxes to future years. For financial statement purposes, deferred taxes are recorded as a liability for future payment.

Business Segments Review

Segment Data

The Company has an internal information system that produces performance data for its four business segments along product and service lines.

Business Segments Accounting Principles

The Company’s segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the segments will track their economic performance. Segment results are subject to restatement whenever improvements are made in the measurement principles or organizational changes are made. In 2004, the Company made several methodology changes. These include a modification to the method for allocating its pension expense to the segments; changes to the method used to allocate earnings on capital, which caused a slight reallocation from reconciling items to the individual segments; and greater allocations of corporate expenses previously included in reconciling items to the individual segments. See “Reconciling Items.” Prior periods have been restated.

The measure of revenues and profit or loss by an operating segment has been adjusted to present segment data on a taxable equivalent basis. The provision for credit losses allocated to each reportable segment is based on management’s judgment as to average credit losses that will be incurred in the operations of the segment over a credit cycle of a period of years. Management’s judgment includes the following factors among others: historical charge-off experience and the volume, composition, and size of the credit portfolio. This method is different from that required under generally accepted accounting principles as it anticipates future losses which are not yet probable and therefore not recognizable under generally accepted accounting principles. Balance sheet assets and liabilities and their related income or expense are specifically assigned to each segment. Funds transfer-pricing methods are used to allocate a cost of funds used or credit for funds provided to all segment assets or liabilities using a matched funding concept. Support and other indirect expenses are allocated to segments based on general internal guidelines.

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Description of Business Segments

The results of individual business segments exclude the other 2004 developments items discussed above such as the SFAS 13 lease adjustments and the RW Matter, and in 2003 the GMAC settlement and the Pershing related merger and integration costs, which are included with reconciling amounts.

The Company reports data for the four business segments: Servicing and Fiduciary; Corporate Banking; Retail Banking; and Financial Markets.

The Servicing and Fiduciary businesses segment comprises the Company’s core services, including securities servicing, global payment services, and private client services and asset management. These businesses all share certain favorable attributes: they are well diversified and fee-based; the Company serves the role of an intermediary rather than principal, thereby limiting risk and generating more stable earnings streams; and the businesses are scalable, which result in higher margins as revenues grow. Long-term trends that favor these businesses include the growth of financial assets worldwide, the globalization of investment activity, heightened demand for financial servicing outsourcing, and continuing structural changes in financial markets.

Securities servicing provides financial institutions, corporations and financial intermediaries with a broad array of products and customized services for every step of the investment lifecycle. The Company facilitates the movement, settlement, recordkeeping and accounting of financial assets around the world by delivering timely and accurate information to issuers, investors and broker-dealers. The Company groups its securities servicing businesses into four categories, each comprised of separate, but related businesses. Issuer services includes corporate trust, depositary receipts and stock transfer. Investor services includes global fund services, global custody, securities lending, global liquidity services and outsourcing. Broker-dealer services includes government securities clearance and collateral management. Execution and clearing services includes in the execution area institutional agency brokerage, electronic trading, transition management services, and independent research. Through Pershing, the clearing part of the business provides clearing, execution, financing, and custody for introducing brokers-dealers. The Servicing and Fiduciary segment also includes customer-related foreign exchange.

In issuer services, the Company’s ADR business has over 1,180 programs representing 60 countries. As a trustee, the Company provides diverse services for corporate, municipal, mortgage-backed, asset-backed, derivative and international debt securities. Over 90,000 appointments for more than 30,000 worldwide clients have resulted in the Company being trustee for more than $2.75 trillion in outstanding debt securities. The Company is the third largest stock transfer agent representing over 1,950 publicly traded companies with over 19 million shareholder accounts.

In investor services, the Company is the world’s largest custodian with $9.7 trillion of assets at December 31, 2004. The Company is the second largest mutual fund custodian with $1.3 trillion in total assets. The Company is the largest U.K. custodian. The Company services over 20% of total exchange traded fund industry assets. The Company acts as trustee/depositary to more than 350 client trusts and open ended investment companies in the UK and over 700 across Europe. In securities lending, the Company is the largest lender of U.S. Treasury securities and depositary receipts.

The Company’s broker-dealer services business clears approximately 50% of U.S. Government securities. With over $925 billion in tri-party balances worldwide, the Company is the world’s largest collateral management agent.

The Company’s execution and clearing services business is the largest global institutional agency brokerage organization. In addition, it is the world’s largest institutional elective broker for global execution. The Company provides execution, clearing and financial services outsourcing solutions in over 80 global markets, executing trades for 580 million shares, and clearing 600,000 trades daily. The Company utilizes 21 seats on the New York Stock Exchange. Pershing services over 1,100 introducing broker firms and registered investment advisors who collectively represent nearly 6 million individual investors.

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Global payment services facilitates the flow of funds between the Company’s customers and their clients through such business lines as funds transfer, cash management and trade services. Private client services and asset management includes traditional banking and trust services to affluent clients and investment management services for institutional and high net worth clients.

The Company’s strategy is to be a market leader in these businesses and continue to build out its product and service capabilities and add new clients. The Company has completed 92 acquisitions since 1995 primarily in this segment, has made significant investments in technology to maintain its industry-leading position, and has continued the development of new products and services to meet its clients’ needs.

The Corporate Banking segment provides lending and credit-related services to large public and private financial institutions and corporations nationwide, as well as to public and private mid-size businesses in the New York metropolitan area. Special industry groups focus on industry segments such as banks, broker-dealers, insurance, media and telecommunications, energy, real estate, retailing, and government banking institutions. Through BNY Capital Markets, Inc., the Company provides syndicated loans, bond underwriting, private placements of corporate debt and equity securities, and merger, acquisition, and advisory services.

Corporate Banking coordinates delivery of all of the Company’s services to customers through its global relationship managers. The two main client bases served are financial institution clients and corporate clients. The Company’s strategy is to focus on those clients and industries that are major users of securities servicing and global payment services.

The Company believes that credit is an important product for many of its customers to execute their business strategies. However, the Company has continued to reduce its credit exposures in recent years by culling its loan portfolio of non-strategic exposures, focusing on increasing total relationship returns through cross-selling and limiting the size of its individual credit exposures and industry concentrations to reduce earnings volatility.

The Retail Banking segment includes branch banking and consumer and residential mortgage lending. The Company’s retail franchise includes 600,000 customer relationships and 100,000 business relationships. The Company operates 341 branches in 23 counties in the Tri-State region. The Company has 242 branches in New York, 91 in New Jersey and 8 in Connecticut. The New York branches are primarily suburban based with 118 in upstate New York, 86 on Long Island and 38 in New York City. The retail network is a growing source of low cost funding and provides a platform to cross-sell core services from the Servicing and Fiduciary businesses to both individuals and small businesses in the New York metropolitan area. The branches are a meaningful source of private client referrals. Small business and investment centers are set up in the largest 100 branches.

The Financial Markets segment includes non-client related trading of foreign exchange, trading of interest rate risk management products, investing and leasing activities, and treasury services to other business segments. The segment offers a comprehensive array of multi-currency hedging and yield enhancement strategies, and complements the other business segments. The Financial Markets segment centralizes interest rate risk management for the Company.

There were no major customers from whom revenues were individually material to the Company’s performance.

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Business Review

Servicing and Fiduciary Businesses

The S&P 500^® Index was up 9% for the year, with average daily price levels up 17% from 2003. Performance for the NASDAQ^® Index was also strong, increasing 9% for the year, with average daily prices up by 21%. Globally, the MSCI^® EAFE index was up 18%. Combined NYSE and NASDAQ^® non-program trading volumes were down an estimated 1.2% during the year. As the Company’s business model is more volume than price sensitive, this created a drag on the Company’s equity-linked businesses. The Lehman Brothers Aggregate Bond^sm index was up 14%. Average fixed-income trading volume was up 9% offsetting some of the weakness in equities.

The Company continued to expand its servicing and fiduciary businesses in 2004 principally through internal product development and acquisitions. In execution and clearing, the acquisition of Sonic brought the Company a leading desk top trading platform that enhances the technology and product offering. In investor services, the Company was able to achieve further scale in the UIT business through a consolidation.

Results in 2004 showed continued strength in the Company’s primary businesses, including securities servicing and private client services and asset management. In 2004, pre-tax income was $1,326 million, compared with $1,151 million in 2003 and $1,186 million in 2002.

Noninterest income was $3,947 million in 2004, compared with $3,383 million in 2003 and $2,728 million in 2002. The financial performance of the Servicing and Fiduciary businesses segment in 2004 reflects increased revenue in the Company’s core businesses, including securities servicing and related foreign exchange, and private client services and asset management. In 2004, securities servicing fees were $2,858 million, an increase

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of $446 million, or 19% (9% adjusted for full year impact of Pershing), over 2003, principally due to the full year impact of the Pershing acquisition and good organic growth in the remaining business categories.

Securities Servicing Fees

Execution and clearing services fees were $1,146 million, compared with $885 million in 2003. These businesses benefited from the full year impact of Pershing, increased client activity as well as strong growth in transition management. BNY Brokerage and B-Trade volumes were down, reflecting the overall decline in non-program trading volumes. The Company has received a favorable response to Sonic, the electronic trading portal it acquired in 2004. Since the acquisition, the Company has installed over 50 money managers on the platform that are responsible for $700 billion in assets under management. Pershing’s correspondent clearing business experienced higher retail activity which increased billable trades. The majority of Pershing’s revenues are generated from non-transactional activities, such as asset gathering, administration and other services. Pershing’s assets under administration were $706 billion at year-end 2004, compared with $633 billion at December 31, 2003. At year-end 2004, margin loans increased to $6.1 billion which indicates that retail investor sentiment remains positive. In addition, as a result of new business wins and organic growth, other key metrics like total active accounts, retirement accounts, and client assets were all up in 2004. In 2003, execution and clearing services fees include the impact of the Pershing acquisition. On a core basis in 2003, execution and clearing services declined from 2002 reflecting the decrease in overall equity transaction volumes as well as pricing pressures.

Investor services fees were $921 million, up 11% compared with $830 million in 2003. The increase over 2003 reflects strength in global fund services, as well as the continued addition of new clients to the Company’s hedge fund servicing platform. At December 31, 2004, hedge fund assets under administration totaled $48 billion, up from $30 billion at year-end 2003. Securities lending fees showed good growth in 2004 benefiting from increased loan assets due to new business wins. The increase in investor service fees relative to 2003 was a result of good organic growth in most areas.

As of December 31, 2004, assets under custody rose to $9.7 trillion, from $8.3 trillion at December 31, 2003. The increase in assets under custody primarily reflects rising equity prices and new business wins. Cross-border custody assets were $2.7 trillion at December 31, 2004, up from $2.3 trillion in 2003. Equity securities composed 35% of the assets under custody at December 31, 2004 compared with 34% at December 31, 2003, while fixed income securities were 65% compared with 66% last year. Assets under custody in 2004 consisted of assets related to the custody business of $5.7 trillion, mutual funds of $1.3 trillion, broker-dealer services assets of $2.1 trillion, and all other assets of $0.6 trillion.

Issuer services fees were $582 million, up 11% from $522 million in 2003. In 2004, the increase reflects strong growth in depositary receipts and corporate trust. In 2003, the improvement in corporate trust reflects the strong fixed income issuance.

Depositary receipts (“DR”) trading volume reached an all time high led by the energy and pharmaceutical industries. In addition, in 2004, the Company experienced positive net DR issuance. Both these trends demonstrate investors’ continued commitment to cross-border investing. DR revenues increased due to higher issue/cancel and dividend activity. Other corporate actions such as initial public offerings, mergers and acquisitions, secondary offerings and rights issues declined. During the year, companies established 121 new DR programs, a 48% jump from last year’s 82 programs, but still lower than the high of 199 new programs established in 2000. However,

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non-U.S. companies and governments raised just $8.4 billion in ADR offerings which is 18.5% lower than 2003 and 72% off the high of $30.1 billion raised in 2000.

Corporate trust continued to generate strong performance, reflecting increases in overall issuance levels as well as demand for corporate specialty products. Corporate trust also benefited from increased activity in the European debt markets and in the securitization market. The size of the European debt market increased by 14% to $2.4 trillion and the Company was able to attract significant amounts of new business.

Broker-dealer services fees were $209 million, compared with $175 million in 2003. The increase in 2004 reflects higher volumes due to new business wins in the collateral management business and higher levels of mortgage-backed and government trading activity. The Company now handles approximately $950 billion of financing for the Company’s broker-dealer clients daily through tri-party collateralized financing agreements, up 26% from a year ago. In 2003, broker-dealer services fees reflect strong performance in global clearance and collateral management services, which benefited from new business wins and higher fixed income transaction volumes.

Global payment services fees in 2004 were $317 million, compared with $314 million in 2003. The 2004 results were impacted by the rising rate environment which drove customers to use compensating balances rather than fees to pay for services. In addition, year-over-year growth is attributable to higher volumes and conversion of new business. The 2003 results reflected the build-out of multi-currency product capabilities and further penetration of the financial institutions market segment. In 2003, clients paid for more services with fees rather than leaving compensating balances in a low rate environment.

Private client services and asset management revenues grew to $448 million in 2004 compared with $384 million in 2003. The increase reflects strong growth at Ivy, higher fees in private client services, and higher equity price. In 2003, the increase reflects higher equity price levels as well as the continued demand for alternative investments from Ivy. Ivy continued its international expansion in 2004, opening an office in Tokyo to serve the expanding market for hedge fund products in Asia. Ivy successfully launched its London office in 2003.

Assets under management (“AUM”) were $102 billion at December 31, 2004, compared with $89 billion at December 31, 2003, while assets under administration were $33 billion compared with $32 billion at December 31, 2003. The increase in assets under management reflects growth in Ivy, institutional equity products, and short-term fixed income management, as well as a rise in equity market values. Institutional clients represent 69% of AUM while individual clients equal 31%. AUM at December 31, 2004, are 36% invested in equities, 21% in fixed income, 15% in alternative investments, with the remaining amount in liquid assets.

In 2004, noninterest income attributable to foreign exchange and other trading activities was $207 million, up from $163 million in 2003. The increase primarily reflects more robust client-related foreign exchange revenues due to increased activity from international custody.

Net interest income in the Servicing and Fiduciary businesses segment was $570 million for 2004, compared with $472 million in 2003 and $469 million in 2002. The increase in net interest income in 2004 from 2003 is primarily attributable to the Pershing acquisition, the benefit of rising rates, and customers’ increased use of compensating balances to pay for services. The slight increase in 2003 from 2002 is primarily attributable to the Pershing acquisition, partially offset by the impact of the decline in interest rates. Average assets for 2004 were $22.5 billion, compared with $16.9 billion in 2003 and $8.3 billion in 2002. The increase in assets in 2004 and 2003 from 2002 is attributable to the Pershing acquisition. Average deposits in the Servicing and Fiduciary segment were $35.1 billion versus $33.3 billion in 2003 and $31.3 billion in 2002.

Net charge-offs in the Servicing and Fiduciary businesses segment were $15 million in 2004, $7 million in 2003, and zero in 2002. The increase in charge-offs in 2004 is attributable to a credit loss in Pershing’s UK clearing business as a result of an alleged deceptive scheme perpetrated on Pershing. Nonperforming assets were $1 million, compared with $9 million in 2003 and $16 million in 2002.

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Noninterest expense increased by 18% in 2004 to $3,188 million, compared with $2,704 million in 2003 and $2,011 million in 2002. The rise in noninterest expense in 2004 and 2003 is attributable to Pershing and other acquisitions, the Company’s continued investment in technology and business continuity, increased pension expense, the expensing of stock options, higher volume-related sub-custodian and clearing expenses, and higher variable compensation related to revenue growth.

Corporate Banking

The Corporate Banking segment coordinates all banking and credit-related services to customers through its global relationship managers. The two main client bases served are financial institution clients and corporate clients. The Company’s strategy is to focus on those clients and industries that are major users of securities servicing and global payment services.

Over the past several years, the Company has been seeking to improve its overall risk profile by reducing its credit exposures through elimination of non-strategic exposures, cutting back large individual exposures and avoiding outsized industry concentrations. Since 2000, the Company has reduced credit exposure to its corporate client base by $20.7 billion, or 47%. In 2002, the Company set a goal of reducing corporate credit exposure to $24 billion by December 31, 2004. This goal was accomplished in early 2004 and exposures have since declined to $23 billion.

In 2004 pre-tax income was $370 million, compared with $343 million in 2003 and $359 million in 2002. The improvement in 2004 is primarily attributable to the reduction in credit risk as well as favorable conditions in credit markets, which resulted in a lower provision for credit losses. Now that the Company has achieved its principal risk management objectives, assets should be flat to slightly growing going forward.

The Corporate Banking segment’s net interest income was $350 million in 2004, compared with $376 million in 2003 and $421 million in 2002. The decrease in 2004 reflects a continued reduction in lending to corporate borrowers as well as a decline in deposits. Credit spreads were also lower reflecting the higher asset quality of the portfolio. Average assets for 2004 were $17.5 billion, compared with $19.6 billion in 2003 and $22.8 billion in 2002. Average deposits in the Corporate Banking segment were $6.2 billion versus $6.6 billion in 2003 and $6.9 billion in 2002.

The provision for credit losses, which is assessed on a long-term credit cycle basis (see “Business Segment Accounting Principles”), was $70 million in 2004, compared with $113 million in 2003 and $139 million in 2002. The decrease in 2004 principally reflects the benefits of the Company’s corporate credit risk reduction program.

Net charge-offs in the Corporate Banking segment were $32 million, $148 million, and $324 million in 2004, 2003, and 2002. The charge-offs in 2004 primarily relate to loans to media, corporate, and foreign borrowers. The charge-offs in 2003 primarily relate to loans to corporate borrowers. Nonperforming assets were $198 million, $327 million, and $414 million in 2004, 2003 and 2002. The decrease in nonperforming assets in 2004 primarily reflects the sale of $43 million of loans to the operating subsidiaries of a major cable company as

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well as paydowns and charge-offs of domestic and foreign commercial loans. The decrease in nonperforming assets in 2003 primarily reflects reductions in the levels of nonperforming cable and telecom credits.

The increase in noninterest income to $320 million in the current year from $297 million in 2003 was due to higher capital markets fees particularly syndication and advisory fees. In 2004, the Company was involved in 134 capital markets transactions, down from 181 in 2003 and 143 in 2002. In 2004, fixed income trading of corporate issues decreased reflecting a lower level of activity in the secondary fixed income markets. Loan commitment fees were approximately flat in 2004 versus 2003.

In 2003, the increase in noninterest income of $14 million from $283 million in 2002 was principally due to higher capital markets fees, as syndication and underwriting fees increased reflecting robust loan and debt markets.

Noninterest expense in 2004 was $230 million, compared to $217 million in 2003 and $206 million in 2002. The increase in noninterest expense in 2004 and 2003 was due in part to a higher pension expense, commencement of stock option expensing, and an increase in incentive compensation tied to revenues.

Retail Banking

The Retail Banking segment provides the Company with a growing source of core deposits. The segment represents an attractive distribution channel, and the Company has continued to expand the products offered through the retail branch system. The branch system is focused on the suburban Tri-State New York metropolitan area.

The Retail Banking segment continues to demonstrate stable results in spite of increased competition in the New York metropolitan area. In 2004 pre-tax income was $201 million, compared with $206 million in 2003 and $251 million in 2002. The Company has been able to steadily grow its deposit balances, with average deposits reaching $15.1 billion for 2004.

The Company continues to enhance the services offered through the branch system. This includes leveraging its retail client base to distribute BNY Asset Management and third party investment products. Currently, investment products are cross sold to over 10% of the client base. The Company is also seeking selective expansion opportunities within its current branch footprint.

Net interest income in the Retail Banking segment was $491 million in 2004, compared with $476 million in 2003 and $473 million in 2002. Net interest income growth in 2004 reflects growth in assets and deposits. The segment also benefited from the increasing number of small business customers’ use of compensating balances to pay for services. Net interest income in 2003 increased slightly as spread compression on deposits in a lower rate environment was offset by growth in the loan portfolio. Average deposits generated by the Retail Banking

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segment were $15.1 billion in 2004, compared with $14.4 billion in 2003 and $13.0 billion in 2002. Average noninterest-bearing deposits were $5.3 billion in 2004, compared with $4.8 billion in 2003 and $3.9 billion in 2002. Average assets in the Retail Banking segment were $5.6 billion, compared with $5.4 billion in 2003 and $5.1 billion in 2002.

Noninterest income was $114 million in 2004, compared with $120 million in 2003 and $118 million in 2002. The decline in noninterest income in 2004 is attributable to small business customers using compensating balances rather than fees to pay for services, and a gain on the sale of consumer loans in 2003.

Noninterest expense was $384 million in 2004, compared with $371 million in 2003 and $328 million in 2002. The rise in noninterest expense in 2004 was attributable to higher marketing, occupancy, technology and staff costs. The increase in noninterest expense in 2003 was due to a higher pension expense, the commencement of stock option expensing, and increased occupancy, legal, and advertising expenses.

Net charge-offs were $22 million, $21 million, and $20 million in 2004, 2003, and 2002. Nonperforming assets were $15 million in 2004, compared with $13 million in 2003 and $10 million in 2002. The increase in charge-offs and nonperforming loans reflects the growth in the Company’s small business loan portfolio over the last few years.

Financial Markets

Income before taxes declined to $367 million in 2004 from $375 million and $412 million in 2003 and 2002. Net interest income was $308 million in 2004, compared with $320 million in 2003 and $327 million in 2002. The decrease in 2004 reflects the impact of an increase in interest rates on the segments’ funding costs, partially offset by an increase in assets. The decrease in 2003 reflects lower reinvestment yields on the investment securities portfolio partially offset by an increase in assets, primarily highly-rated mortgage-backed securities. Average assets in the Financial Markets segment were $49.6 billion in 2004, up from $46.1 billion in 2003 and $41.2 billion in 2002. The increase in assets reflects the Company’s continuing strategy to reduce its investment in higher risk corporate loans and to increase holdings of highly-rated, more liquid investment securities. The Company continues to invest in hybrid adjustable or short life classes of structured mortgage-backed securities, both of which have short durations.

The provision for credit losses, which is assessed on a long-term credit cycle basis (see “Business Segment Accounting Principles”), was $20 million in 2004, compared with $21 million in 2003 and $20 million in 2002. Net charge-offs were $14 million, $5 million, and $127 million in 2004, 2003, and 2002, respectively. Charge-offs in 2004 and 2003 were primarily related to airline exposure. The decrease in charge-offs in 2003 versus 2002 primarily reflects the Company’s charge-off of $125 million of its $130 million leasing exposure to United Airlines in 2002.

Noninterest income was $195 million in 2004, compared with $177 million in 2003 and $194 million in 2002. The increase in noninterest income in 2004 from 2003 reflects higher equity securities gains and foreign

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exchange trading partially offset by a decline in income from trading interest rate derivatives. The decrease in noninterest income in 2003 from 2002 reflects declines in equity securities gains partially offset by higher foreign exchange and interest rate derivative trading.

Noninterest expense increased in 2004 and 2003 due to higher incentive compensation, higher pension expense, and the commencement of stock option expensing.

The consolidating schedule below shows the contribution of the Company’s segments to its overall profitability.