Edgar Filing: BANK OF NEW YORK CO INC

Annual Report for for Period Ending 12/31/2005

LOGO

THE BANK OF NEW YORK COMPANY, INC.

FINANCIAL REVIEW

TABLE OF CONTENTS


Selected Financial Data		1

Management’s Discussion and Analysis of the Company’s Financial Condition and Results of Operations

—Introduction		2
—Overview		2
—Financial Highlights		4
—Consolidated Income Statement Review		6
—Business Segment Review		12
—Critical Accounting Policies		27
—Consolidated Balance Sheet Review		31
—Liquidity		45
—Commitments and Obligations		48
—Off-Balance Sheet Arrangements		48
—Capital Resources		49
—Capital Framework		52
—Risk Management		54
—Statistical Information		61
—Unaudited Quarterly Data		64
—Other 2004 Developments		66
—Glossary		68

Consolidated Financial Statements

—Consolidated Balance Sheets December 31, 2005 and 2004		71
—Consolidated Statements of Income For The Years Ended December 31, 2005, 2004 and 2003		72
—Consolidated Statement of Changes In Shareholders’ Equity For The Years Ended December 31, 2005, 2004 and 2003		73
—Consolidated Statements of Cash Flows For the Years Ended December 31, 2005, 2004 and 2003		74
—Notes to Consolidated Financial Statements		75

Form 10-K

—Cover		115
—Cross Reference Index		116
—Certain Regulatory Considerations		117
—Submission of Matters to a Vote of Security Holders		121
—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		121
—Properties		121
—Legal and Regulatory Proceedings		121
—Executive Officers		123
—Forward Looking Statements and Risk Factors That Could Affect Future Results		124
—Website Information		136
—Code of Ethics		136
—Controls and Procedures		137
—Auditor’s Attestation Report		138
—Signatures		139
—Exhibits and Financial Statement Schedules		141

S ELECTED FINANCIAL DATA


(Dollars in millions, except per share amounts)	2005			2004			2003*			2002			2001**
Revenue (tax equivalent basis)	$	8,341		$	7,133		$	6,361		$	5,789		$	7,241
Net Interest Income		1,909			1,645			1,609			1,665			1,681
Noninterest Income		4,956			4,650			3,996			3,133			3,561
Provision for Credit Losses		15			15			155			685			375
Noninterest Expense		4,483			4,122			3,698			2,751			2,819
Net Income		1,571			1,440			1,157			902			1,343
Net Income Available to Common Shareholders		1,571			1,440			1,157			902			1,343
Return on Average Assets		1.55	%		1.45	%		1.27	%		1.13	%		1.64	%
Return on Average Common Shareholders’ Equity		16.59			16.37			15.12			13.96			21.58
Common Dividend Payout Ratio		41.00			42.22			48.83			60.78			39.21
Efficiency Ratio		65.7			66.0			66.0			55.4			55.2

Per Common Share
Basic Earnings	$	2.05		$	1.87		$	1.54		$	1.25		$	1.84
Diluted Earnings		2.03			1.85			1.52			1.24			1.81
Cash Dividends Paid		0.82			0.79			0.76			0.76			0.72
Market Value at Year-End		31.85			33.42			33.12			23.96			40.80

Averages
Securities	$	28,751		$	25,046		$	24,455		$	22,970		$	18,559
Loans		39,682			37,778			35,623			34,305			38,770
Total Assets		101,435			99,340			91,467			79,830			81,700
Deposits		62,215			61,056			58,615			53,795			56,278
Long-Term Debt		7,312			6,152			6,103			5,338			4,609
Common Shareholders’ Equity		9,473			8,797			7,654			6,465			6,224

At Year-End
Allowance for Loan Losses as a Percent of Total Loans		1.01	%		1.65	%		1.89	%		2.09	%		1.16	%
Allowance for Loan Losses as a Percent of Non-Margin Loans		1.19			1.99			2.26			2.12			1.18
Allowance for Credit Losses as a Percent of Total Loans		1.39			2.06			2.28			2.65			1.72
Allowance for Credit Losses as a Percent of Non-Margin Loans		1.63			2.48			2.72			2.68			1.75
Tier 1 Capital Ratio		8.38			8.31			7.44			7.58			8.11
Total Capital Ratio		12.48			12.21			11.49			11.96			11.57
Leverage Ratio		6.60			6.41			5.82			6.48			6.70
Common Equity to Assets Ratio		9.67			9.83			9.12			8.60			7.80
Total Equity to Assets Ratio		9.67			9.83			9.12			8.60			7.80
Common Shares Outstanding (In millions)		771.129			778.121			775.192			725.971			729.500
Employees		23,451			23,363			22,901			19,437			19,181

Assets Under Custody (In trillions)—Estimated
Total Assets Under Custody	$	10.9		$	9.7		$	8.3		$	6.8		$	6.9
Equity Securities		32	%		35	%		34	%		26	%		36	%
Fixed Income Securities		68			65			66			74			64
Cross-border Assets Under Custody	$	3.4		$	2.7		$	2.3		$	1.9		$	1.9

Assets Under Management (In billions)—Estimated
Total Assets Under Management	$	155		$	137		$	112		$	80		$	72
Asset Management Sector		69	%		75	%		79	%		95	%		93	%
Equity Securities		24%			27%			27%			27%			33%
Fixed Income Securities		14			16			17			24			18
Alternative Investments		10			11			8			8			7
Liquid Assets		21			21			27			36			35
Foreign Exchange Overlay		6			6			5			5			7
Securities Lending Short-term Investment Funds		25			19			16			—			—

*	The 2003 results reflect $96 million of merger and integration costs associated with the Pershing acquisition as well as a $78 million expense related to the settlement of a claim by General Motors Acceptance Corporation (“GMAC”) related to the 1999 sale of BNY Financial Corporation (“BNYFC”).

**	The 2001 results reflect the estimated $242 million impact of the World Trade Center disaster, the related $175 million initial insurance recovery, and the $190 million special provision on the accelerated disposition of emerging telecommunications loans.

All amounts in the above notes are pre-tax.

M ANAGEMENT’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 Risk 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’s strategy over the past decade has been to focus on highly scalable, fee-based securities servicing and fiduciary businesses, and it has achieved 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;

•

sophisticated risk and performance measurement tools for analyzing portfolios; and

•

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’s key objectives include:

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achieving positive operating leverage on an annual basis and

•

sustaining top-line growth by expanding client relationships and winning new ones

To achieve its key objectives, 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. The Company has acquired over 90 businesses over the past ten years, almost exclusively in its securities servicing and asset management areas. 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 several of 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 41% from December 31, 2001 to December 31, 2005. 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:

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growth of worldwide financial assets,

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globalization of investment activity,

•

structural market 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 2005 the operating environment was somewhat mixed relative to the Company’s assumptions at the beginning of the year. The equity markets showed lower price appreciation and volumes than assumed. The fixed income markets remained strong and cross-border investment and trading activity increased. Volatility in foreign exchange markets was in line with expectations. The Federal Reserve raised rates more than the Company anticipated at the start of 2005. Given the Company’s diversified business model, the Company achieved double-digit growth in many of its key business lines.

With respect to fee income growth, execution and clearing was lower than expected given the weaker equity markets, but the Company achieved solid growth in ADRs, corporate trust, and investor and broker-dealer services, which resulted in servicing fee growth of 10%.

Private client services and asset management, as well as foreign exchange and other trading, also had solid results. This offset weaker performance in the global payments business, corporate lending activities, and retail banking. Overall, core noninterest income growth for the year was 8%.

The Company has been positioned to benefit from rising interest rates, and with the Federal Reserve raising the federal funds rate from 2.25% at the start of the year to 4.25% at the end, core net interest income was up 11%. Strong liquidity generated from its core businesses, widening spreads on deposits, and sound asset positioning all contributed to this strong performance.

Expense control was effective as the Company’s staff count increased over 2005 by just 1% to 23,451, well below the pace of revenue growth. This reflects the Company’s continued progress on reengineering for labor efficiencies. The Company is also relocating staff to lower cost locations. Expense growth overall was up 9%, reflecting higher costs for pensions and options, construction of an out-of-region data center, and legal and regulatory costs. These factors should have a lesser impact on expense growth prospectively.

For 2006, the Company based its budget planning process on expectations of moderate economic growth and continued growth in the capital markets. The Company expects equity markets to strengthen slightly versus 2005 and rise 5-7%. U.S. non-program equity volumes are forecast to be up 4-6% with equity capital raising holding steady. Moderate growth in M&A volumes is expected. The Company assumes the federal funds rate

will rise to 4.5% with only a slight steepening of the yield curve. GDP growth is expected to be slightly over 3%. The Company projects fixed income activity to be moderate, given the expectation of a leveling-off in short interest rates.

This presents an overall backdrop which is comparable to 2005, although with a somewhat different composition and a slightly less favorable environment for net interest income. In the aggregate, the Company expects to grow revenues faster than the markets by focusing on faster-growing market segments, gaining market share, and providing a high level of service to its existing clients.

Several other factors will have an impact on 2006 results, including:

•

higher pension expense given relatively poor investment returns over the past four years and further changes in prospective assumptions partly offset by changes to the Company’s primary domestic plan;

•

higher costs related to completing relocation projects;

•

an anticipated lower level of securities gains; and

•

potentially higher credit loss provisioning given the very favorable credit costs in 2005.

After considering the above, the Company is targeting positive operating leverage of 100+ basis points in 2006. The Company will seek to control overall expense growth through continued cost discipline and reengineering efforts, without sacrificing the investments necessary both to innovate and to enhance service quality. The Company continues to focus on key programs to attain greater straight-through processing of transactions, to reengineer labor costs, and to move activity to lower cost locations.

In January 2006, a significant customer ended its clearing relationship with Pershing following its acquisition by a major broker-dealer. Pershing currently is in discussions seeking compensation for the termination of the relationship.

FINANCIAL HIGHLIGHTS

2005

In 2005, the Company reported net income of $1,571 million and diluted earnings per share of $2.03 compared with net income of $1,440 million and diluted earnings per share of $1.85 in 2004, and net income of $1,157 million and diluted earnings per share of $1.52 in 2003. Reported EPS reflects a reduction of 3 cents in 2004 due to items detailed in “Other 2004 Developments”.

Additional 2005 highlights include:

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Positive operating leverage on a core basis for the third and fourth quarters versus 2004;

•

Securities servicing fees up 10% from 2004;

•

Net interest income up 16% versus 2004;

•

Private client services and asset management fees up 9%;

•

Foreign exchange and other trading revenues up 7% from 2004; and

•

Active capital management, as the Company repurchased 5 million net shares.

The Company’s 2005 earnings reflect significant progress toward its key objectives. New business wins and revenues from new and innovative products drove double-digit revenue growth in many of the Company’s key business lines. In 2005, the Company focused on generating positive operating leverage and began to deliver on that objective as well. A number of outstanding regulatory issues were resolved. The Company launched its branding initiative in January 2005 and continued to expand it throughout the year. Finally, the Company’s earnings per share of $2.03 was in the midpoint of the guidance range the Company provided early in 2005.

During 2005, the Company formed strategic alliances to penetrate faster-growing markets in France, Germany, the Nordic and Baltic region, Japan, Australia, and India. The Company also continued to expand its market presence in high-growth areas such as hedge fund servicing and collateral management, while extending its capabilities in the rapidly growing area of alternative investments.

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 2005, 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.

The Company announced three strategic transactions:

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Lynch, Jones & Ryan, Inc.– a market leader in commission recapture, the acquisition complements the Company’s execution business. The acquisition brings in 1,400 pension fund clients, which offer cross-sell opportunities for the Company’s transition management services.

•

Alcentra – an international asset management group focused on funds that invest in non-investment grade debt. The acquisition adds structured credit to the Company’s asset management offering and $6 billion to assets under management.

•

Urdang Capital Management – a real estate investment firm that manages approximately $3.0 billion in direct investments and portfolios of REIT securities. Expected to close in the first quarter of 2006, the acquisition expands the Company’s alternative investment platform by adding real estate investment management.

The acquisitions of Alcentra and Urdang bring asset classes that are in demand by core customer segments such as pension funds, endowments and foundations, international investors, and private clients. Going forward, the Company plans to continue building out its asset management capabilities and to capitalize on the Company’s inherent distribution strengths, as well as favorable secular trends for growth in investable assets.

2004

In 2004, the Company reported net income of $1,440 million and diluted earnings per share of $1.85. In 2004, the Company recorded several gains and charges that in the aggregate reduced reported earnings by 3 cents per share. These items are detailed in “Other 2004 Developments”.

In 2004, the growth in earnings was paced by securities servicing growth of 18% (9% adjusted for full-year impact of Pershing) to $2,857 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. Investor and issuer services increased by 11% and 12%, respectively. 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 17% primarily due to strong growth in collateral management.

The Company’s asset management business continued 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.

2003

In 2003, the Company reported net income was $1,157 million and diluted earnings per share of $1.52. 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 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 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. The provision for credit losses was $155 million. 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.

CONSOLIDATED INCOME STATEMENT REVIEW

Noninterest Income


							Percent Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004		2004 vs. 2003
Noninterest Income
Servicing Fees
Securities	$	3,148	$	2,857	$	2,412	10	%	18	%
Global Payment Services		294		319		314	(8	)	2

		3,442		3,176		2,726	8		17
Private Client Services and Asset Management Fees		490		448		384	9		17
Service Charges and Fees		382		384		375	(1	)	2
Foreign Exchange and Other Trading Activities		391		364		327	7		11
Securities Gains/(Losses)		68		78		35	(13	)	123
Other		183		200		149	(9	)	34

Total Noninterest Income	$	4,956	$	4,650	$	3,996	7		16

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 $4,956 million in 2005, compared with $4,650 million in 2004 and $3,996 million in 2003. As a percentage of revenues, total noninterest income was 72% in 2005, compared with 74% in 2004 and 71% in 2003. The growth in revenue in 2005 primarily reflects broadly stronger performance in securities servicing, private client services and asset management fees, and foreign exchange and other trading revenue.

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.

The following table provides the breakdown of securities servicing fees for 2005, 2004, and 2003.

Securities Servicing Fees


							Percent Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004		2004 vs. 2003
Execution and Clearing Services	$	1,222	$	1,145	$	885	7	%	29	%
Investor Services		1,060		924		830	15		11
Issuer Services		639		583		522	10		12
Broker-Dealer Services		227		205		175	11		17

Securities Servicing Fees	$	3,148	$	2,857	$	2,412	10		18

Securities servicing fees were $3,148 million, $2,857 million, and $2,412 million, in 2005, 2004, and 2003, respectively. The 10% increase in securities servicing fees from 2004 primarily reflects solid growth across all businesses. In 2004, the 18% increase in securities servicing fees from 2003 reflects the full-year impact of the Pershing acquisition and good organic growth in investor and issuer services, which were up 11% and 12%. For additional details on Securities Servicing Fees, refer to the “Business Segment Review” section.

Global payment services fees, principally funds transfer, cash management, and trade services, were $294 million in 2005, $319 million in 2004, and $314 million in 2003. The decline in global payment services fees in 2005 reflects customers choosing to pay with higher compensatory balances, which benefits net interest income. On an invoiced services basis total revenue was up 5% over 2004. The small 2004 increase in global payment services fees from 2003 is attributable to customers starting to leave higher compensatory balances to cover the cost of services rather than pay fees as a result of the rising rate environment.

Private client services and asset management fees were $490 million in 2005, $448 million in 2004, and $384 million in 2003. The 9% increase over 2004 reflects strong growth in asset management fees as well as higher fees in private banking. Asset management was driven by another strong performance at Ivy and double-digit growth in fixed income asset management and separate account services. The 17% increase in fees in 2004 from 2003 reflects strong growth in Ivy, higher fees from fixed income asset management, and higher equity price levels.

Service charges and fees were $382 million in 2005, compared with $384 million in 2004 and $375 million in 2003. The decrease in 2005 from 2004 reflects lower retail checking account fees. The increase in 2004 from 2003 reflects higher syndication and advisory fees.

Foreign exchange and other trading revenues were a record $391 million in 2005, $364 million in 2004, and $327 million in 2003. Foreign exchange trading grew strongly in 2005 reflecting increased volume due to new business wins and greater business from existing clients. Other trading grew in 2005 reflecting higher interest rate and equity derivatives trading partially offset by a decline in trading revenue at Pershing. The 11% increase in 2004 from 2003 resulted from new business wins and an increased level of client activity, tied to cross-border investing and hedging against currency volatility. Pershing contributed $44 million to foreign exchange and other trading revenue in 2005, compared with $51 million in 2004 and $35 million in 2003.

Securities gains were $68 million in 2005, compared with a $78 million in 2004 and a $35 million in 2003. The securities gains in 2005 and 2004 were primarily attributable to the Company’s private equity portfolio. In 2004, the Company’s private equity portfolio generated $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.

Other noninterest income is attributable to asset-related gains, equity investments, and other transactions. Asset-related gains include gains on lease residuals, as well as loan and real estate dispositions. Equity investment income primarily reflects the Company’s proportionate share of the income from its investment in

Wing Hang Bank Limited, AIB/BNY Securities Services (Ireland) Limited, and RBSI Securities Services (Holdings) Limited. Other income primarily includes income or loss from insurance contracts, low income housing and other investments as well as various miscellaneous revenues. The breakdown among these three categories is shown below:

Other Noninterest Income


(In millions)	2005		2004		2003
Asset-Related Gains	$	97	$	82	$	36
Equity Investment Income		44		43		34
Other		42		75		79

Total Other Noninterest Income	$	183	$	200	$	149

Other noninterest income was $183 million in 2005, $200 million in 2004, and $149 million in 2003. In 2005, asset-related gains included a $17 million gain on the sale of the Company’s interest in Financial Models Companies, Inc. (“FMC”), a $12 million gain on the sale of certain Community Reinvestment Act (“CRA”) investments, a $12 million gain on sale of eight New York Stock Exchange seats, and a $10 million gain on the sale of a building. The increase in asset-related gains in 2004 from 2003 reflected a pre-tax gain of $48 million from the sale of a portion of the Company’s investment in Wing Hang Bank Limited. The higher level of asset-related gains in 2005 and 2004 has helped to offset higher legal and regulatory costs and the impact of the 2004 SFAS 13 lease income adjustment. The 2005 decline in other in the above table reflects fewer government grants and lower insurance-related income.

Net Interest Income


													Percent Inc/(Dec)
	2005			2004						2003			2005 vs. 2004		2004 vs. 2003
(Dollars in millions)	Reported			Reported			Core*			Reported			Reported		Reported
Net Interest Income	$	1,909		$	1,645		$	1,711		$	1,609		16	%	2	%
Tax Equivalent Adjustment		29			30			30			35

Net Interest Income on a Tax Equivalent Basis	$	1,938		$	1,675		$	1,741		$	1,644		16	%	2	%

Net Interest Rate Spread		1.83	%		1.78	%		1.86	%		1.97	%
Net Yield on Interest Earning Assets		2.36			2.07			2.15			2.22

*	Excludes SFAS 13 adjustments

For 2005, net interest income on a tax equivalent basis amounted to $1,938 million compared with $1,675 million in 2004. In 2005, the increase in net interest income reflects the Company’s sound interest rate positioning for a rising rate environment, continued expansion of deposit spreads, and increased liquidity generated by servicing activities. The Company also benefited from customers greater use of compensating balances in a rising rate environment. On a reported basis, net interest income on a tax equivalent basis was up 16% while on a core basis it was up 11%.

Net interest income in 2004 was affected by three cumulative adjustments to the leasing portfolio, which were triggered under SFAS 13. See “Other 2004 Developments”.

Excluding the impact of the SFAS 13 leasing adjustments on the leveraged lease portfolio, net interest income on a tax 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.

The increase in net interest income in 2005 and 2004 also reflects an increase in average earning assets. Average earning assets were $82.1 billion in 2005 compared with $81.1 billion in 2004 and $74.1 billion in 2003. The increase in 2004 from 2003 reflects the inclusion of Pershing for the full year 2004. Average loans were $39.7 billion in 2005 compared with $37.8 billion in 2004 and $35.6 billion in 2003. Average securities were $28.8 billion in 2005, up from $25.0 billion in 2004 and $24.5 billion in 2003.

The net interest rate spread was 1.83% in 2005 compared with 1.78% in 2004, while the net yield on interest-earning assets was 2.36% in 2005 and 2.07% in 2004. 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%, respectively.

In this report a number of amounts related to net interest income are presented on a “tax 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 2005, compared with $15 million in 2004 and $155 million in 2003. Asset quality remained high in 2005. 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 from 2003 reflects the Company’s improved asset quality and a stronger credit environment.

Noninterest Expense


							Percent Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004		2004 vs. 2003
Salaries and Employee Benefits	$	2,549	$	2,324	$	2,002	10	%	16	%
Net Occupancy		323		305		261	6		17
Furniture and Equipment		208		204		185	2		10
Clearing		187		176		154	6		14
Sub-custodian Expenses		96		87		74	10		18
Software		215		193		170	11		14
Communications		95		93		92	2		1
Amortization of Intangibles		40		34		25	18		36
Pershing Merger and Acquisition Costs		—		—		96	—		—
Other		770		706		639	9		10

Total Noninterest Expense	$	4,483	$	4,122	$	3,698	9	%	11	%

Total noninterest expense was $4,483 million in 2005, $4,122 million in 2004, and $3,698 million in 2003. The 2005 increase in expenses primarily reflects increased staffing and clearing costs associated with new business and acquisitions, higher stock option and pension expense, expanded occupancy costs associated with business continuity, as well as higher technology and legal costs. 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. In 2003, noninterest expense included merger and acquisition costs relating to Pershing of $96 million and the settlement with GMAC of $78 million.

Salaries and employee benefits were $2,549 million in 2005, compared with $2,324 million in 2004 and $2,002 million in 2003. In 2005, salaries rose 7% as tight headcount control and reengineering and relocation

projects partially offset the impact of business wins, acquisitions and additional legal and compliance personnel. Benefit expense rose significantly in 2005 reflecting higher expenses for pensions, stock options, medical benefits, and incentive payments. In 2004, the increase in salaries and employee benefits reflects higher performance related incentives and benefits, higher stock option and defined contribution plan expense, a higher pension expense as well as higher variable expenses associated with revenue growth. The number of employees at December 31, 2005, was 23,451, up from 23,363 and 22,901 in 2004 and 2003, respectively. Severance expense was $17 million in 2005, $16 million in 2004 and $10 million in 2003.

Net occupancy and furniture and fixture expenses were $531 million in 2005, compared with $509 million in 2004 and $446 million in 2003. Net occupancy increased by $18 million, primarily reflecting the costs associated with the Company’s new out-of-region data center in the mid-south region of the U.S. and the growth center in Manchester, England, as well as higher energy costs.

Clearing expenses were $187 million in 2005, compared with $176 million in 2004 and $154 million in 2003. The increase in 2005 reflects higher expenses associated with acquisitions within the execution business. Sub-custodian expenses increased 10% in 2005 to $96 million, reflecting higher level of business activity.

Software expenses increased in 2005 and 2004, reflecting the Company’s continued investment in technology capabilities supporting its servicing activities as well as spending and development to support business growth.

Amortization of intangibles increased to $40 million in 2005 from $34 million in 2004 and $25 million in 2003. In 2005 and 2004, the Pershing acquisition added $20 million in intangibles amortization.

Other noninterest expense is attributable to vendor services, business development, legal expenses, settlements and claims, other, and the GMAC settlement. Vendor services include professional fees, computer services, market data, courier, and other services. Business development includes advertising, charitable contributions, travel, and entertainment expenses. The breakdown among these five categories is shown below:

Other Noninterest Expense


(In millions)	2005		2004		2003
Vendor Services	$	336	$	307	$	259
Business Development		124		108		84
Legal Fees, Settlements and Claims		125		96		43
Other		185		195		175
GMAC Settlement		—		—		78

Total Other Noninterest Expense	$	770	$	706	$	639

Other expenses in 2005 were $770 million, compared with $706 million in 2004 and $639 million in 2003. Since the Company owned Pershing for 8 months in 2003, $67 million of the 2004 increase relates to the full- year impact of owning Pershing. The increase in vendor services in 2005 primarily reflects higher consulting and pricing services expenses. Growth in business development expenses over the period reflects higher travel and entertainment and advertising related to the Company’s branding initiatives. Legal fees, settlement and claims in 2005 included $24 million associated with the Russian Funds transfer matter and other regulatory matters, as well as an increase in legal fees. In 2004, noninterest expense included expenses associated with the RW Matter of $30 million.

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 continues to increase its investment in technology focusing on key items such as delivering positive operating leverage, driving product innovation and enhancing the client experience. Software development has been an increasing component of technology expense in 2005, 2004, and 2003. The rate of infrastructure investment is slowing. Approximately 80% of the data center capacity is two years old or less. In the fourth quarter of 2005, the Company’s new data center in the mid-south region of the U.S. became operational. The new data center will improve the geographic diversification and resilience of the Company’s operations and will support the processing needs of the Company’s institutional and retail customers. In 2006, the Company expects to benefit from the new data center as redundant locations are beginning to be shut down. Print center consolidation was completed in 2005. Core investor services applications were recently developed and engineered with technologies that should be durable over time.

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. Projects commenced in 2005 are expected to have a $40 million impact in 2006. 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 for 2005. These savings have lowered the Company’s growth rate of expenses by approximately 1% over the past two years. The savings are partly offset by consulting costs.

In January 2004, the Company began a three-year effort to move 1,500 jobs to lower cost areas. In 2005, the Company moved 516 positions out of higher-cost locations, up from 419 moves in 2004. In 2006, the Company anticipates further expansion of the job relocation program to 1,800 jobs given the success of the program to date. As a result, the Company will incur higher expense in 2006 for severance and lease termination, but will achieve net benefits in 2007 and 2008.

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 year 2005 was the third and final year the adoption of expensing stock options impacted year-over-year expense comparisons. The Company expects stock options expense to be somewhat less expensive in 2006 since the Company is issuing fewer options than it has in the past.

Income Taxes

The Company’s consolidated effective tax rates for 2005, 2004, and 2003 were 33.6%, 33.3%, and 34.0%, respectively. The increase in the effective tax rate in 2005 primarily reflects higher state and local taxes. The decline in the effective tax rate in 2004 from 2003 primarily reflects the increase in the tax reserve related to LILO exposures which was offset by the SFAS 13 leasing adjustments. The Company anticipates the tax rate for the year 2006 to increase slightly to 33.7%.

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 effective tax rates in all periods reflect a reclassification related to Section 42 tax credits. See “Accounting Changes and New Accounting Pronouncements” in the Notes to Consolidated Financial Statements. 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 SEGMENT 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 when organizational changes are made.

In 2005, the Company has determined that it is appropriate to modify its segment presentation in order to provide more transparency into its results of operations and to better reflect modifications in the management structure that the Company implemented during the fourth quarter of 2005. As such, the Company has identified four major business segments for assessing its overall performance, with the Institutional Services segment being further subdivided into four business groupings. These segments are shown below:

•

Institutional Services Segment

•

Investor & Broker-Dealer Services Business

•

Execution & Clearing Services Business

•

Issuer Services Business

•

Treasury Services Business

•

Private Bank & BNY Asset Management Segment

•

Retail & Middle Market Banking Segment

•

Corporate and Other Segment

All prior periods have been restated to reflect this realignment. Other specific accounting principles employed include:

•

The measure of revenues and profit or loss by a segment has been adjusted to present segment data on a tax equivalent basis.

•

The provision for credit losses allocated to each 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.

•

Net interest income is allocated to segments based on the yields on the assets and liabilities generated by each segment. Assets and liabilities generated by credit-related activities are allocated to businesses based on borrower usage of that businesses’ products or services. Credit-only relationships and borrowers using both credit and payment services remain in Treasury Services. Segments with a net liability position are allocated assets primarily from the securities portfolio.

•

Noninterest income associated with Treasury-related services is similarly allocated back to those businesses.

•

Revenues and expenses associated with specific client bases are included in those segments. For example, foreign exchange activity associated with clients using custody products is allocated to Investor & Broker-Dealer Services.

•

Support and other indirect expenses are allocated to segments based on internally-developed methodologies.

Description of Business Segments

The activities within each business segment are described below.

Institutional Services Segment

Investor & Broker-Dealer Services Business

Investor & Broker-Dealer Services includes global custody, global fund services, securities lending, global liquidity services, outsourcing, government securities clearance, collateral management, credit-related services, and other linked revenues, principally foreign exchange and execution and clearing revenues.

In Investor Services, the Company is one of the leading custodians with $10.9 trillion of assets under custody at December 31, 2005. The Company is one of the largest mutual fund custodians for U.S. funds and one of the largest providers of fund services in the world with over $1.6 trillion in total assets. The Company, also services more than 17% of the total industry assets for exchange-traded funds, and is a leading U.K. custodian. In securities lending, the Company is the largest lender of U.S. Treasury securities and depositary receipts with a lending pool of approximately $1.5 trillion in 27 markets around the world.

The Company’s Broker-Dealer Services business clears approximately 50% of U.S. Government securities. The Company is the leader in global clearance, clearing equity and fixed income transactions in 101 markets. With over $1.1 trillion in tri-party balances worldwide, the Company is the world’s largest collateral management agent.

Execution & Clearing Services Business

The Company provides execution, clearing and financial services outsourcing solutions in over 80 global markets, executing trades for 575 million shares and clearing 930,000 trades daily. In Execution Services, the Company conducts institutional agency brokerage, electronic trading, transition management services, and independent research. The Company’s Execution Services business is one of the largest global institutional agency brokerage organizations. In addition, it is one of the leading institutional electronic brokers for non-U.S. dollar equity execution.

Pershing’s clearing business provides clearing, execution, financing, and custody for introducing broker-dealers and registered investment advisors. Pershing services more than 1,100 institutional and retail financial organizations and independent investment advisors who collectively represent nearly 6 million individual investors.

Issuer Services Business

Issuer Services includes corporate trust, depositary receipts, employee investment plan services, stock transfer, and credit-related services.

In Issuer Services, the Company is depositary for more than 1,200 American and global depositary receipt programs, a 64% market share, acting in partnership with leading companies from 60 countries. As a trustee, the

Company provides diverse services for corporate, municipal, structured, 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 $3 trillion in outstanding debt securities. The Company is the third largest stock transfer agent, servicing more than 16 million shareowners. Employee Investment Plan Services has more than 124 clients with 650,000 employees in over 54 countries.

Treasury Services Business

Treasury Services includes global payment services for corporate customers as well as lending and credit-related services.

Corporate global payment services offers leading-edge technology, innovative products, and industry expertise to help its clients optimize cash flow, manage liquidity, and make payments around the world in more than 90 different countries. The Company maintains a global network of branches, representative offices and correspondent banks to provide comprehensive payment services including funds transfer, cash management, trade services and liquidity management. The Company is one of the largest funds transfer banks in the U.S. transferring over $1.18 trillion daily via more than 135,500 wire transfers.

The Company provides lending and credit-related services to large public and private corporations nationwide. Special industry groups focus on industry segments such as media, telecommunications, cable, energy, real estate, retailing, and healthcare. Credit-related revenues are allocated to businesses other than Treasury Services to the extent the borrower uses that businesses’ products or services. Credit-only relationships and borrowers using both credit and payment services remain in Treasury Services. Through BNY Capital Markets, Inc., the Company provides a broad range of capital markets and investment banking services including syndicated loans, bond underwriting, private placements of corporate debt and equity securities, and merger, acquisition, and advisory services. The Company is a leading arranger of syndicated financings for clients with 151 transactions totaling in excess of $59 billion in 2005.

For its credit services business overall, the Company’s corporate lending strategy is to focus on those clients and industries that are major users of securities servicing and global payment services.

Private Bank and BNY Asset Management

The Private Bank & BNY Asset Management segment includes traditional banking and trust services to wealthy clients and investment management services for institutional and high-net-worth clients. In private banking, the Company offers a full array of wealth management services to help individuals plan, invest and transition and includes financial and estate planning, trust and fiduciary services, customized banking services, brokerage and investment solutions.

BNY Asset Management provides investment solutions for some of the wealthiest individuals, largest corporate and most prestigious organizations around the world applying a broad spectrum of investment strategies and wealth management solutions. BNY Asset Management’s alternative strategies have expanded to include hedge fund of funds, private equity, alternative fixed income and real estate.

The Company’s asset management subsidiaries include:

•

Ivy Asset Management Corporation, one of the country’s leading hedge fund of fund firms, offers a comprehensive range of multi-manager hedge fund products and customized portfolio solutions.

•

Alcentra Group, acquired in January 2006, offers sophisticated alternative credit investments, including leveraged loans and subordinated and distressed debt.

•

Urdang Capital, a real estate investment firm, which the Company has agreed to acquire, offers the opportunity to invest in real estate through separate accounts, a closed-end commingled fund that invests directly in properties, and a separate account that invests in publicly-traded REITs.

•

Estabrook Capital Management LLC offers value-oriented investment management strategies, including socially responsible investing.

•

Gannett Welsh & Kotler specializes in tax-exempt management and equity portfolio strategies.

The Company also provides investment management services directly to institutions and manages the “Hamilton” family of mutual funds.

Retail & Middle Market Banking Segment

The Retail Bank includes branch banking, consumer, small business, residential mortgage and asset management activities conducted through the Company’s investment centers. The Company’s retail franchise includes more than 600,000 consumer relationships and 100,000 business relationships. The Company operates 342 branches in 23 counties in the New York tri-state region. The Company has 241 branches in New York, 93 in New Jersey and 8 in Connecticut. The New York branches are primarily suburban-based with 118 in upstate New York, 85 on Long Island and 38 in New York City. The retail network is a significant source of low-cost funding and provides a platform to cross-sell core services 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.

Investment centers provide personalized professional investment counseling to individuals. Products include mutual funds, annuities, and discount brokerage services.

In middle market lending, the Company’s regional commercial banking and regional commercial real estate divisions provide financing for a variety of businesses based in the New York metropolitan area. The types of financing include lines of credit, term loans, global trade services, and commercial mortgages.

Corporate and Other Segment

The Corporate and Other segment primarily includes the Company’s leasing operations and corporate overhead. Net interest income in this segment primarily reflects the funding cost of goodwill and intangibles. The tax equivalent adjustment on net interest income is eliminated in this segment. Provision for credit losses reflects the difference between the aggregate of the credit provision over a credit cycle for the other three reportable segments and the Company’s recorded provision. The Company’s approach to acquisitions is highly centralized and controlled by senior management. Accordingly, the resulting goodwill and other intangible assets are included in this segment for average assets. Noninterest expense includes the related amortization. Noninterest income primarily reflects leasing, securities gains, and income from the sale of other corporate assets. Noninterest expenses include direct expenses supporting the leasing activities as well as certain corporate overhead not directly attributable to the operations of the other segments.

Business Review

Institutional Services Segment


							Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004		2004 vs. 2003
Net Interest Income	$	1,186	$	1,064	$	971	$	122	$	93
Noninterest Income		4,182		3,830		3,337		352		493
Total Revenue		5,368		4,894		4,308		474		586
Provision for Credit Losses		59		59		101		—		(42	)
Noninterest Expense		3,444		3,140		2,691		304		449
Income Before Taxes		1,865		1,695		1,516		170		179

Average Assets		75,682		72,286		63,952		3,396		8,334
Average Deposits		44,833		42,533		40,683		2,300		1,850

The Company’s Institutional Services business is conducted in four business groupings: Investor & Broker-Dealer Services, Execution & Clearing Services, Issuer Services, and Treasury Services. Income before taxes was up 10% to $1,865 million in 2005 from $1,695 million in 2004, which was up 12% versus $1,516 million in 2003.

Market Data


				Percent Inc/(Dec)
	2005	2004	2003	2005 vs. 2004		2004 vs. 2003
S&P 500^® Index	1,248	1,212	1,112	3	%	9	%
NASDAQ^® Index	2,205	2,175	2,003	1		9
Lehman Brothers
Aggregate Bond^sm Index	206.2	220.6	193.4	(7	)	14
MSCI^® EAFE	1,680.1	1,515.5	1,288.8	11		18
NYSE Volume (In billions)	403.8	367.1	352.4	10		4
NASDAQ^® Volume (In billions)	449.2	453.9	424.6	(1	)	7

The S&P 500^® Index was up 3% for the year, with average daily price levels up 7% from 2004. Performance for the NASDAQ^® Index was up 1% for the year, with average daily prices up by 6%. Globally, the MSCI^® EAFE index was up 11%. Combined NYSE and NASDAQ^® non-program trading volumes were down an estimated 1% 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 down 7%. Average fixed-income trading volume was up 14% offsetting some of the weakness in equities.

As of December 31, 2005, assets under custody rose to $10.9 trillion, from $9.7 trillion at December 31, 2004. The increase in assets under custody primarily reflects rising equity prices and new business wins. Equity securities composed 32% of the assets under custody at December 31, 2005 compared with 35% at December 31, 2004, while fixed income securities were 68% compared with 65% last year. Assets under custody in 2005 consisted of assets related to the custody and mutual funds businesses of $7.3 trillion, broker-dealer services assets of $2.2 trillion, and all other assets of $1.4 trillion.

The results for the businesses in the Institutional Service segment are discussed below.

Investor & Broker-Dealer Services Business


							Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004			2004 vs. 2003
Net Interest Income	$	564	$	518	$	501	$	46		$	17
Noninterest Income		1,826		1,627		1,474		199			153
Total Revenue		2,390		2,145		1,975		245			170
Provision for Credit Losses		7		7		13		—			(6	)
Noninterest Expense		1,636		1,441		1,316		195			125
Income Before Taxes		747		697		646		50			51

Average Assets		36,233		35,225		33,123		1,008			2,102
Average Deposits		28,316		26,231		24,671		2,085			1,560
Nonperforming Assets		5		28		55		(23	)		(27	)
Net Charge-offs		—		4		24		(4	)		(20	)

In 2005, income before taxes in the Investor & Broker-Dealer Services business increased to $747 million from $697 million in 2004 and $646 million in 2003. The increase in 2005 reflects improvements in net interest income and noninterest income.

Noninterest income was $1,826 million in 2005, compared with $1,627 million in 2004 and $1,474 million in 2003. The increase in noninterest income in 2005 is attributable to an increase in both investor and broker-dealer service fees as well as foreign exchange and other trading revenue generated by clients in this segment.

Investor services fees were up in both 2005 and 2004. The increase over 2004 reflects strength in global and domestic fund services and custody, as well as new business wins and strong organic growth. Securities lending fees showed good growth in 2005 benefiting from higher loan volumes, driven by new business wins as well as a favorable spread environment. In 2004, investor services fee growth resulted from good organic growth in most areas.

Broker-dealer services fees were up compared with 2004 and 2003. The increase in 2005 reflects higher volumes due to new business wins in the collateral management business and greater volumes in government securities clearance. The Company now handles approximately $1.1 trillion of financing for the Company’s broker-dealer clients daily through tri-party collateralized financing agreements, up 18% from a year ago. In 2004, increased broker-dealer services fees reflected higher volumes due to new business wins in the collateral management business and higher levels of mortgage-backed and government trading activity.

Net interest income in the Investor & Broker-Dealer Services business was $564 million in 2005, compared with $518 million in 2004 and $501 million in 2003. Net interest income growth in 2005 reflects increased deposit flows from customers in both businesses. The increase in net interest income in 2004 also reflected growth in deposits, primarily in investor services. Average deposits generated by the Investor & Broker-Dealer Services business were $28.3 billion in 2005, compared with $26.2 billion in 2004 and $24.7 billion in 2003. Average assets in the business were $36.2 billion in 2005, compared with $35.2 billion in 2004 and $33.1 billion in 2003.

Noninterest expense was $1,636 million in 2005, compared with $1,441 million in 2004 and $1,316 million in 2003. The rise in noninterest expense in 2005 was attributable primarily to higher salaries, benefits and sub-custody expenses tied to business growth, increased costs related to business continuity, and higher stock option and pension expenses. The increase in noninterest expense in 2004 was due to higher costs tied to increased activity levels, as well as the upfront expenses associated with the implementation of cost reduction initiatives and higher pension and option expense.

Net charge-offs were zero in 2005, compared with $4 million in 2004 and $24 million in 2003. Nonperforming assets were $5 million in 2005, compared with $28 million in 2004 and $55 million in 2003.

Execution & Clearing Services Business


							Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004			2004 vs. 2003
Net Interest Income	$	211	$	170	$	108	$	41		$	62
Noninterest Income		1,327		1,242		959		85			283
Total Revenue		1,538		1,412		1,067		126			345
Provision for Credit Losses		1		1		1		—			—
Noninterest Expense		1,151		1,087		809		64			278
Income Before Taxes		386		324		257		62			67

Average Assets		15,478		15,122		11,022		356			4,100
Average Payables to Customers and Broker-Dealers		6,014		6,361		3,945		(347	)		2,416
Nonperforming Assets		—		2		3		(2	)		(1	)
Net Charge-offs		8		10		1		(2	)		9

In 2005, income before taxes in the Execution & Clearing Services Business increased to $386 million from $324 million and $257 million in 2004 and 2003. The increase in 2005 reflects strong growth in net interest income and higher value added fees at Pershing as well as incremental revenues and earnings contribution from the LJR acquisition in the execution business.

Noninterest income was $1,327 million in 2005, compared with $1,242 million in 2004 and $959 million in 2003. The execution business benefited in 2005 from increased client activity, strong growth in transition management and incremental revenues from the LJR acquisition. These factors offset the relatively weak market environment, in which non-program trading volumes were down 1%.

Pershing’s 2005 noninterest income was up reflecting organic growth from value added fees, partially offset by business lost through client consolidation. 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 $749 billion at year-end 2005, compared with $706 billion at December 31, 2004. At year-end 2005, margin loans remained flat at $6.1 billion. In 2004, clearing services fees benefited from the full-year impact of Pershing and increased client activity.

Execution and clearing service fees were $1,145 million in 2004, compared with $885 million in 2003. These businesses benefited from the full-year impact of Pershing, as well as increased client activity and strong growth in transition management.

Net interest income in the Execution and Clearing Services business was $211 million in 2005, compared with $170 million in 2004, and $108 million in 2003. Net interest income growth in 2005 and 2004 reflects the benefit of rising interest rates on spreads at Pershing. The year 2004 also benefited from the full-year impact of the Pershing acquisition. Average assets in the business were $15.5 billion in 2005, compared with $15.1 billion in 2004 and $11.0 billion in 2003.

Noninterest expense was $1,151 million in 2005, compared with $1,087 million in 2004 and $809 million in 2003. The rise in noninterest expense in 2005 was attributable to higher salaries, benefits and clearing expenses tied to both higher business activity overall as well as the LJR acquisition. The increase in noninterest expense in 2004 was due to stronger business activity and the full-year impact of the Pershing acquisition.

Net charge-offs were $8 million, $10 million, and $1 million in 2005, 2004, and 2003, respectively. 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 zero in 2005, compared with $2 million in 2004 and $3 million in 2003.

Issuer Services Business


							Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004			2004 vs. 2003
Net Interest Income	$	238	$	214	$	208	$	24		$	6
Noninterest Income		757		696		636		61			60
Total Revenue		995		910		844		85			66
Provision for Credit Losses		11		11		18		—			(7	)
Noninterest Expense		458		426		393		32			33
Income Before Taxes		526		473		433		53			40

Average Assets		13,349		11,776		11,310		1,573			466
Average Deposits		8,357		7,396		7,124		961			272
Nonperforming Assets		5		30		56		(25	)		(26	)
Net Charge-offs		—		4		25		(4	)		(21	)

In 2005, income before taxes in the Issuer Services Business increased to $526 million from $473 million in 2004 and $433 million in 2003. The increase in 2005 reflects growth in net interest income tied primarily to corporate trust, and higher fees in both depositary receipts and corporate trust.

Noninterest income was $757 million in 2005, compared with $696 million in 2004 and $636 million in 2003. In 2005, the increase reflects higher levels of trading activity and greater corporate actions in depositary receipts, as well as continued strength in international issuance and structured products in corporate trust. The European corporate trust market is growing rapidly and the Company was able to attract significant amounts of new business. In 2004, the increase reflects strong growth in depositary receipts and solid results in corporate trust.

The overall environment for depositary receipts has improved steadily from 2003 to 2005, with trading volumes increasing at a compound rate of 9%. The trend in net issuance has been strong, fueled by increased cross-border activity. The value of foreign equities held by U.S. investors has increased from 13% in 2003 to 16% in 2005. In addition, the increase in cross-border merger and acquisitions and capital raisings has been strong, particularly in 2005.

The growth in corporate trust fees has been solid over the period. The principal growth drivers have been the structured and international product areas, where the markets are growing more rapidly and the Company is gaining market share.

Net interest income in the Issuer Services business was $238 million in 2005, compared with $214 million in 2004 and $208 million in 2003. Net interest income growth in 2005 reflects the positive impact of rising rates on spreads and increased deposit levels generated by the corporate trust business. The increase in net interest income in 2004 was also driven by the increase in interest rates during the period. Average deposits generated by the Issuer Services business were $8.4 billion in 2005, compared with $7.4 billion in 2004 and $7.1 billion in 2003. Average assets in the business were $13.3 billion in 2005, compared with $11.8 billion in 2004 and $11.3 billion in 2003.

Noninterest expense was $458 million in 2005, compared with $426 million in 2004 and $393 million in 2003. The rise in noninterest expense in 2005 and 2004 was attributable to increased client activity as well as higher technology, stock option and pension expenses.

Net charge-offs were zero in 2005, compared with $4 million in 2004 and $25 million in 2003. Nonperforming assets were $5 million in 2005, compared with $30 million in 2004 and $56 million in 2003.

Treasury Services Business


							Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004			2004 vs. 2003
Net Interest Income	$	173	$	162	$	154	$	11		$	8
Noninterest Income		272		265		268		7			(3	)
Total Revenue		445		427		422		18			5
Provision for Credit Losses		40		40		69		—			(29	)
Noninterest Expense		199		186		173		13			13
Income Before Taxes		206		201		180		5			21

Average Assets		10,622		10,163		8,497		459			1,666
Average Deposits		7,914		8,793		8,810		(879	)		(17	)
Nonperforming Assets		16		95		177		(79	)		(82	)
Net Charge-offs		2		14		79		(12	)		(65	)

In 2005, income before taxes in the Treasury Services Business was $206 million, compared with $201 million in 2004 and $180 million in 2003. The moderate growth rate of this segment reflects both the Company’s overall strategy to reduce corporate credit exposures as part of its risk reduction efforts, as well as specific initiatives to reduce the number and size of credit relationships with clients that do not use other securities servicing products. The results in 2005 reflect the continued strong credit environment. The improvement in 2004 over 2003 is primarily attributable to lower credit costs resulting from the reduction in credit risk as well as favorable conditions in credit markets.

The increase in noninterest income to $272 million in the current year from $265 million in 2004 was due to higher capital market fees associated with clients in this segment, partially offset by lower fees from global payments as more clients used compensating balances to pay for services.

The Treasury Services business’s net interest income was $173 million in 2005, compared with $162 million in 2004 and $154 million in 2003. The increase in 2005 reflects customers’ increased use of compensating balances to pay for global payment services, partially offset by the impact of the credit reduction program. Credit spreads were lower, reflecting the higher asset quality of the portfolio. Average assets for 2005 were $10.6 billion, compared with $10.2 billion in 2004 and $8.5 billion in 2003. Average deposits were $7.9 billion versus $8.8 billion in 2004 and $8.8 billion in 2003.

The provision for credit losses, which is assessed on a long-term credit cycle basis (see “Business Segment Accounting Principles”), was $40 million in 2005 compared with $40 million in 2004 and $69 million in 2003. The decrease in 2004 compared to 2003 principally reflects the benefits of the Company’s corporate credit risk reduction program. 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 2001, the Company has reduced credit exposure to its corporate client base by 41%. 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 $23.3 billion.

Net charge-offs in the Treasury Services business were $2 million, $14 million, and $79 million in 2005, 2004, and 2003. The charge-offs in 2004 primarily relate to loans to media, corporate, and foreign borrowers. The charge-offs in 2003 primarily relate to corporate borrowers. Nonperforming assets were $16 million in 2005, compared with $95 million in 2004 and $177 million in 2003. The decrease in nonperforming assets in 2005 primarily reflects loan sales, paydowns and charge-offs of commercial loans. 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 well as paydowns and charge-offs of domestic and foreign commercial loans.

Noninterest expense in 2005 was $199 million, compared to $186 million in 2004 and $173 million in 2003. The increase in noninterest expense in 2005 and 2004 was due in part to a higher pension expense, stock option expensing, and an increase in incentive compensation tied to revenues.

Private Bank and BNY Asset Management Segment


							Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004			2004 vs. 2003
Net Interest Income	$	65	$	61	$	60	$	4		$	1
Noninterest Income		454		416		348		38			68
Total Revenue		519		477		408		42			69
Provision for Credit Losses		3		3		—		—			3
Noninterest Expense		317		288		233		29			55
Income Before Taxes		199		186		175		13			11

Average Assets		2,205		2,144		2,027		61			117
Average Deposits		1,673		1,616		1,765		57			(149	)
Nonperforming Assets		1		1		8		—			(7	)
Net Charge-offs		—		5		7		(5	)		(2	)

In 2005, income before taxes in the Private Bank and BNY Asset Management Segment was $199 million, compared with $186 million in 2004 and $175 million in 2003. The improvement over the period is primarily attributable to strong revenue growth at Ivy Asset Management.

Noninterest income was $454 million in 2005, compared with $416 million in 2004 and $348 million in 2003. Private Bank and BNY Asset Management revenues in 2005 were up compared with 2004 and 2003. The increase in 2005 reflects strong growth at Ivy, higher fees in private client services, and higher equity price levels. The S&P 500^® Index was up 3% for the year, with average daily price levels up 7% from 2004. Performance for the NASDAQ^® Index was up 1% for the year, with average daily prices up by 6%. In 2004, the increase reflects strong growth at Ivy, higher fees in private client services, and higher equity price. In 2004, Ivy opened 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—Asset Management Sector


(In billions)—Estimated	2005		2004		2003
Total Assets Under Management	105		102		89
Equity Securities	35	%	36	%	34	%
Fixed Income Securities	20		21		22
Alternative Investments	14		15		10
Liquid Assets	31		28		34

Assets under management (“AUM”) were $105 billion at December 31, 2005, compared with $102 billion at December 31, 2004 and $89 million at December 31, 2003. The increase in assets under management for 2005 reflects growth in Ivy, institutional equity products, and liquid assets as well as a rise in equity market values. Institutional clients represent 68% of AUM while individual clients equal 32%. AUM at December 31, 2005, are 35% invested in equities, 20% in fixed income, and 14% in alternative investments, with the remaining amount in liquid assets.

Net interest income in the Private Bank and BNY Asset Management segment was $65 million in 2005, compared with $61 million in 2004 and $60 million in 2003. Net interest income growth in 2005 and 2004 reflects wider spreads given higher interest rates. Average deposits generated by the Private Bank and BNY Asset Management segment were $1.7 billion in 2005, compared with $1.6 billion in 2004 and $1.8 billion in 2003. Average assets in the segment were $2.2 billion in 2005, compared with $2.1 billion in 2004 and $2.0 billion in 2003.

Noninterest expense was $317 million in 2005, compared with $288 million in 2004 and $233 million in 2003. The rise in noninterest expense in 2005 and 2004 was attributable to higher salaries, employee benefits, and technology costs.

Net charge-offs were zero, $5 million, and $7 million in 2005, 2004, and 2003. Nonperforming assets were $1 million in 2005, compared with $1 million and $8 million in 2004 and 2003.

Retail & Middle Market Banking Segment


							Inc/(Dec)
(In millions)	2005		2004		2003		2005 vs. 2004			2004 vs. 2003
Net Interest Income	$	650	$	616	$	597	$	34		$	19
Noninterest Income		245		255		261		(10	)		(6	)
Total Revenue		895		871		858		24			13
Provision for Credit Losses		29		31		31		(2	)		—
Noninterest Expense		511		484		474		27			10
Income Before Taxes		355		356		353		(1	)		3

Average Assets		13,778		15,166		15,996		(1,388	)		(830	)
Average Noninterest-Bearing Deposits		5,626		5,572		5,477		54			95
Average Deposits		15,709		16,907		16,167		(1,198	)		740
Nonperforming Assets		34		52		42		(18	)		10
Net Charge-offs		36		31		41		5			(10	)

Number of Branches		342		341		341		1			—
Number of ATMs		401		378		378		23			—

In 2005, income before taxes was $355 million, compared with $356 million in 2004 and $353 million in 2003.

Net interest income in the Retail & Middle Market Banking Segment was $650 million in 2005, compared with $616 million in 2004 and $597 million in 2003. Net interest income growth in both 2005 and 2004 reflects the benefit of higher rates on interest spreads, growth in consumer loans, and the increasing number of small business customers’ use of compensating balances to pay for services.

Average deposits generated by the Retail & Middle Market Banking Segment were $15.7 billion in 2005, compared with $16.9 billion in 2004 and $16.2 billion in 2003. Average noninterest-bearing deposits were $5.6 billion in 2005, compared with $5.6 billion in 2004 and $5.5 billion in 2003. Average assets in the Retail & Middle Market Banking segment were $13.8 billion, compared with $15.2 billion in 2004 and $16.0 billion in 2003.

Noninterest income was $245 million in 2005, compared with $255 million in 2004 and $261 million in 2003. The decline in noninterest income in 2005 is attributable to lower monthly checking fees, lower gains from the sale of consumer loans given the Company’s decision to retain more consumer loans, and small business customers using compensating balances rather than fees to pay for services.

Noninterest expense was $511 million in 2005, compared with $484 million in 2004 and $474 million in 2003. The rise in noninterest expense in 2005 and 2004 was primarily attributable to higher pension, option, marketing, occupancy, and consultant expenses.

Net charge-offs were $36 million, $31 million, and $41 million in 2005, 2004, and 2003. Nonperforming assets were $34 million in 2005, compared with $52 million in 2004 and $42 million in 2003.

Corporate and Other


										Inc/(Dec)
(In millions)	2005			2004			2003			2005 vs. 2004			2004 vs. 2003
Net Interest Income	$	8		$	(96	)	$	(19	)	$	104		$	(77	)
Noninterest Income		75			149			50			(74	)		99
Total Revenue		83			53			31			30			22
Provision for Credit Losses		(76	)		(78	)		23			2			(101	)
Noninterest Expense		211			210			300			1			(90	)
Income Before Taxes		(52	)		(79	)		(292	)		27			213

Average Assets		9,770			9,744			9,492			26			252
Nonperforming Assets		18			6			8			12			(2	)
Net Charge-offs		140			15			5			125			10

In 2005, income before taxes in the Corporate and Other Segment was a loss of $52 million, compared with a loss of $79 million and $292 million in 2004 and 2003.

Net interest income in the Corporate and Other Segment was $8 million in 2005, compared with a loss of $96 million in 2004 and a loss of $19 million in 2003. Net interest income in 2004 included the SFAS 13 cumulative adjustments to the leasing portfolio, which reduced net interest income by $66 million. Excluding the impact of this adjustment, the increase in net interest income in 2005 reflects lower earnings from the leasing portfolio, given the rising rate environment.

Noninterest income was $75 million in 2005, compared with $149 million in 2004 and $50 million in 2003. The decline in noninterest income in 2005 is attributable to both lower securities gains and lower gains from corporate asset sales in 2005 compared with 2004, given the $48 million gain on the sale of 5% of the Company’s stake in Wing Hang Bank in 2004. Securities gains were $68 million in 2005, compared to $78 million in 2004 and $35 million in 2003. In 2004, securities gains included $19 million of higher than anticipated gains from four large sponsor funds.

Provision for credit losses was a credit of $76 million in 2005, compared with a $78 million credit in 2004 and a $23 million expense in 2003. The provision for credit losses reflects the difference between the aggregate of the credit provision over a credit cycle assigned to the other segments and the Company’s recorded provision. The SFAS 13 aircraft adjustments lowered the provision by $7 million in 2004.

Noninterest expense, largely reflecting unallocated corporate overhead, amortization of goodwill, and nonrecurring items, was $211 million in 2005, compared with $210 million in 2004 and $300 million in 2003. The decrease in noninterest expense in 2004 versus 2003 was due to the $96 million of merger and integration costs associated with Pershing and the $78 million GMAC settlement in 2003, partially offset by growth in corporate overhead and goodwill amortization in 2004.

Net charge-offs were $140 million for 2005, compared to $15 million for 2004 and $5 million for 2003. The charge-offs in 2005 are attributable to the Company’s airline leasing portfolio.

Significant other items related to the Corporate and Other segment for the past three years are presented in the following table.


(In millions)	2005		2004		2003
Items impacting net interest income:
Cost to Carry Goodwill	(99	)	(105	)	(95	)
Tax Equivalent Basis	(29	)	(30	)	(35	)
SFAS 13 Lease Adjustment	—		(66	)	—

Items impacting noninterest income:
Gain on Sale of FMC	17		—		—
Gain on Sale of Wing Hang	—		48		—
Other Gains	—		—		16

Items impacting noninterest expense:
Severance Costs	5		12		6
Goodwill and Intangibles Amortization	40		34		25
Pershing Integration Expenses	—		—		96
RW and Other Regulatory Matters	24		30		—
GMAC Settlement	—		—		78
Lease Termination	—		8		—

Other items—Acquisitions are the responsibility of corporate management. Accordingly, goodwill and the funding cost of goodwill are assigned to the Corporate and Other segment. If the funding cost of goodwill was allocated to the other three segments, it would be assigned based on the goodwill attributable to each segment.

The tax equivalent adjustment is eliminated in the Corporate and Other Segment. Certain revenue and expense items have been driven by corporate decisions and have been included in the Corporate and Other Segment. In 2005, these include the $17 million gain on the sale of FMC and the $24 million charge for the Russian Funds transfer matter and other regulatory matters. Alternatively these items could be allocated to the Institutional Services Segment. In 2004, the $48 million gain on the sale of Wing Hang would be attributable to the Institutional Services Segment. The 2004 charge for the RW Matter would be attributable to the Retail & Middle Market Banking Segment.

Severance and lease termination costs in 2004 primarily relate to the Institutional Services Segment and to staff areas that cut across all business lines. Intangible amortization primarily relates to the Institutional Services Segment. In 2003, the GMAC settlement and the Pershing integration expenses are attributable to the Institutional Services Segment.

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


(Dollars in millions) For the Year Ended December 31, 2005	Investor & Broker-Dealer Services			Execution & Clearing Services			Issuer Services			Treasury Services			Sub-total Institutional Services			Private Bank & BNY Asset Management			Retail & Middle Market			Corporate and Other			Total
Net Interest Income	$	564		$	211		$	238		$	173		$	1,186		$	65		$	650		$	8		$	1,909
Noninterest Income		1,826			1,327			757			272			4,182			454			245			75			4,956
Total Revenue		2,390			1,538			995			445			5,368			519			895			83			6,865
Provision for Credit Losses		7			1			11			40			59			3			29			(76	)		15
Noninterest Expense		1,636			1,151			458			199			3,444			317			511			211			4,483

Income Before Taxes	$	747		$	386		$	526		$	206		$	1,865		$	199		$	355		$	(52	)	$	2,367

Contribution Percentage*		31	%		16	%		22	%		8	%		77	%		8	%		15	%

Average Assets	$	36,233		$	15,478		$	13,349		$	10,622		$	75,682		$	2,205		$	13,778		$	9,770		$	101,435

(Dollars in millions) For the Year Ended December 31, 2004	Investor & Broker-Dealer Services			Execution & Clearing Services			Issuer Services			Treasury Services			Sub-total Institutional Services			Private Bank & BNY Asset Management			Retail & Middle Market			Corporate and Other			Total
Net Interest Income	$	518		$	170		$	214		$	162		$	1,064		$	61		$	616		$	(96	)	$	1,645
Noninterest Income		1,627			1,242			696			265			3,830			416			255			149			4,650
Total Revenue		2,145			1,412			910			427			4,894			477			871			53			6,295
Provision for Credit Losses		7			1			11			40			59			3			31			(78	)		15
Noninterest Expense		1,441			1,087			426			186			3,140			288			484			210			4,122

Income Before Taxes	$	697		$	324		$	473		$	201		$	1,695		$	186		$	356		$	(79	)	$	2,158

Contribution Percentage*		31	%		15	%		21	%		9	%		76	%		8	%		16	%

Average Assets	$	35,225		$	15,122		$	11,776		$	10,163		$	72,286		$	2,144		$	15,166		$	9,744		$	99,340

(Dollars in millions) For the Year Ended December 31, 2003	Investor & Broker-Dealer Services			Execution & Clearing Services			Issuer Services			Treasury Services			Sub-total Institutional Services			Private Bank & BNY Asset Management			Retail & Middle Market			Corporate and Other			Total
Net Interest Income	$	501		$	108		$	208		$	154		$	971		$	60		$	597		$	(19	)	$	1,609
Noninterest Income		1,474			959			636			268			3,337			348			261			50			3,996
Total Revenue		1,975			1,067			844			422			4,308			408			858			31			5,605
Provision for Credit Losses		13			1			18			69			101			—			31			23			155
Noninterest Expense		1,316			809			393			173			2,691			233			474			300			3,698

Income Before Taxes	$	646		$	257		$	433		$	180		$	1,516		$	175		$	353		$	(292	)	$	1,752

Contribution Percentage*		31	%		13	%		21	%		9	%		74	%		9	%		17	%

Average Assets	$	33,123		$	11,022		$	11,310		$	8,497		$	63,952		$	2,027		$	15,996		$	9,492		$	91,467

*As a percent of total income before tax excluding Corporate and Other.

Foreign Operations

The Company’s primary foreign activities consist of securities servicing and global payment services. Target customers include financial service companies, pension funds and securities issuers worldwide. The Company’s international clearing business delivers clearing and financial services outsourcing solutions in 65 countries. In Execution, the Company provides institutional trade execution services in over 80 global markets, including 50 emerging markets.

In Investor Services, the Company is a leading global custodian. In the United Kingdom the Company provides a full global and local product set. In Continental Europe a full global product set is provided with access to local markets through strategic partnerships. Off-shore mutual fund servicing capabilities for funds registered in Dublin, the Channel Islands, Luxembourg and Singapore are provided through operations in Luxembourg and Dublin.

In Issuer Services, the Company has been a leader in the ADR market, currently acting as the depositary receipts agent for 64% of all publicly sponsored listings by foreign companies. For debt issuance, the Company is one of the leading corporate trust providers for global debt issuance.

In the Asia-Pacific region, the Company has over 50 years experience providing trade and cash services to financial institutions and central banks. In addition, the Company offers a broad range of servicing and fiduciary products to financial institutions, corporations and central banks depending on the state of market development. In emerging markets, the Company leads with global payments and issuer services, introducing other products as the markets mature. For more established markets, the Company focus is on global, not local, investor services products and alternative investments.

The Company is also a leading provider and major market maker in the area of foreign exchange and interest-rate risk management services, dealing in over 100 currencies, and provides traditional trust and banking services to customers domiciled outside of the United States, principally in Europe and Asia. Ivy UK provides clients in Europe and the Middle East with hedge fund of funds investment advisory services.

Major operation centers are based in London, England; Brussels, Belgium; and Singapore with additional subsidiaries, branches, and representative offices in 33 countries.

International clients accounted for 25% of revenue and 18% of net income in 2005. The Company has approximately 3,699 employees in Europe and 1,693 in Asia. Foreign revenue, income before income taxes, net income and assets from foreign operations are shown in the table below.


	2005								2004								2003
(In millions) Geographic Data	Revenues		Income Before Income Taxes		Net Income		Total Assets		Revenues		Income Before Income Taxes		Net Income		Total Assets		Revenues		Income Before Income Taxes			Net Income			Total Assets
Domestic	$	5,177	$	1,933	$	1,283	$	75,795	$	4,703	$	1,706	$	1,139	$	74,343	$	4,367	$	1,442		$	952		$	72,830
Europe		1,209		306		203		19,414		1,140		308		205		15,062		943		286			189			13,771
Asia		298		97		64		4,828		306		135		90		3,759		184		25			17			4,348
Other		181		31		21		2,037		146		9		6		1,365		111		(1	)		(1	)		1,448

Total	$	6,865	$	2,367	$	1,571	$	102,074	$	6,295	$	2,158	$	1,440	$	94,529	$	5,605	$	1,752		$	1,157		$	92,397

In 2005, revenues from Europe were $1,209 million, compared with $1,140 million in 2004 and $943 million in 2003. Excluding the 2004 impact of a SFAS 13 leasing adjustment, revenues in Europe were up 11% in 2005. The increase in 2005 reflects strong growth in investor and issuer service revenues. The increase in 2004 reflects the positive impact of a SFAS 13 leasing adjustment, full-year impact of the Pershing acquisition, new business growth, increased revenue from depositary receipts, and Ivy. Revenues from Asia were $298 million in 2005, compared with $306 million and $184 million in 2004 and 2003, respectively. The slight decrease in Asia in 2005 was primarily due to the large gain in 2004 related to Wing Hang Bank. Excluding the impact of the 2004 Wing Hang Bank sale, revenues in Asia were up 16% in 2005 reflecting strength in investor services, execution services and Ivy. Net income from Europe was $203 million in 2005, compared with $205 million and $189 million in 2004 and 2003, respectively. Net income from Asia was $64 million in 2005, compared with $90 million and $17 million in 2004 and 2003, respectively. Net income in Europe and Asia were driven by the same factors affecting revenue. In addition, in 2005 and 2004, net income in Europe was adversely impacted by the strength of the Euro and Sterling versus the dollar.

Cross-Border Risk

Foreign assets are subject to general risks attendant to the conduct of business in each foreign country, including economic uncertainties and each foreign government’s regulations. In addition, the Company’s foreign assets may be affected by changes in demand or pricing resulting from fluctuations in currency exchange rates or other factors. Cross-border outstandings include loans, acceptances, interest-bearing deposits with other banks, other interest bearing investments, and other monetary assets which are denominated in dollars or other non-local currency. Also included are local currency outstandings not hedged or funded by local borrowings.

The tables below show the Company’s cross-border outstandings for the last three years where cross-border exposure exceeds 1.00% of total assets (denoted with “*”) or 0.75% of total assets (denoted with “**”).


(In millions) 2005	Germany*		United Kingdom*		Netherlands*		France*		Belgium**		Switzerland**
Banks and other Financial Institutions	$	2,216	$	571	$	1,010	$	740	$	634	$	744
Public Sector		185		—		—		169		49		—
Commercial, Industrial and Other		406		1,256		570		203		257		141

Total Cross-Border Outstandings	$	2,807	$	1,827	$	1,580	$	1,112	$	940	$	885


(In millions) 2004	Germany*		United Kingdom*		France*
Banks and other Financial Institutions	$	2,586	$	307	$	850
Public Sector		176		—		128
Commercial, Industrial and Other		433		776		302

Total Cross-Border Outstandings	$	3,195	$	1,083	$	1,280


(In millions) 2003	Germany*		United Kingdom*		Belgium*		Netherlands*		France**
Banks and other Financial Institutions	$	1,988	$	1,048	$	815	$	719	$	473
Public Sector		169		1		217		—		143
Commercial, Industrial and Other		377		885		108		359		299

Total Cross-Border Outstandings	$	2,534	$	1,934	$	1,140	$	1,078	$	915

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are described in the Notes to Consolidated Financial Statements under “Summary of Significant Accounting and Reporting Policies”. Four of the Company’s more critical accounting policies are those related to the allowance for credit losses, the valuation of derivatives and securities where quoted market prices are not available, goodwill and other intangibles, and pension accounting. In addition to the “Summary of Significant Accounting and Reporting Policies” footnote, further information on policies related to the allowance for credit losses can be found under “Asset Quality and Allowance for Credit Losses” in the MD&A. Further information on the valuation of derivatives and securities where quoted market prices are not available can be found under “Market Risk Management” and “Trading Activities and Risk Management” in the MD&A section and in “Fair Value of Financial Instruments” in the Notes to Consolidated Financial Statements. Further information on goodwill and intangible assets can be found in “Goodwill and Intangibles” in the Notes to Consolidated Financial Statements. Additional information on pensions can be found in “Employee Benefit Plans” in the Notes to the Consolidated Financial Statements.

Allowance for Credit Losses

The allowance for credit losses and allowance for lending-related commitments consist of four elements: (1) an allowance for impaired credits; (2) an allowance for higher risk rated loans and exposures; (3) an allowance for pass rated loans and exposures; and (4) an unallocated allowance based on general economic conditions and certain risk factors in the Company’s individual portfolio and markets. Further discussion on the four elements can be found under “Asset Quality and Allowance for Credit Losses” in the MD&A section.

The allowance for credit losses represents management’s estimate of probable losses inherent in the Company’s loan portfolio. This evaluation process is subject to numerous estimates and judgments. Probability of default ratings are assigned after analyzing the credit quality of each borrower/counterparty and the Company’s internal rating are generally consistent with external ratings agency’s default databases. Loss given default ratings are driven by the collateral, structure, and seniority of each individual asset and are consistent with external loss given default/recovery databases. The portion of the allowance related to impaired credits is based on the present value of future cash flows. Changes in the estimates of probability of default, risk ratings, loss given default/recovery rates, and cash flows could have a direct impact on the allocated allowance for loan losses.

To the extent actual results differ from forecasts or management’s judgment, the allowance for credit losses may be greater or less than future charge-offs.

The Company considers it difficult to quantify the impact of changes in forecast on its allowance for credit losses. Nevertheless, the Company believes the following discussion may enable investors to better understand the variables that drive the allowance for credit losses.

A key variable in determining the allowance is management’s judgment in determining the size of the unallocated allowance. At December 31, 2005, the unallocated allowance was 17% of the total allowance. If the unallocated allowance were five percent higher or lower, the allowance would have increased or decreased by $28 million, respectively.

The credit rating assigned to each credit is another significant variable in determining the allowance. If each credit were rated one grade better, the allowance would have decreased by $96 million, while if each credit were rated one grade worse, the allowance would have increased by $151 million.

Similarly, if the loss given default were one rating worse, the allowance would have increased by $62 million, while if the loss given default were one rating better, the allowance would have decreased by $56 million.

For impaired credits, if the fair value of the loans were 10% higher or lower, the allowance would have increased or decreased by $3 million, respectively.

Valuation of Derivatives and Securities Where Quoted Market Prices Are Not Available

When quoted market prices are not available for derivatives and securities values, such values are determined at estimated fair value, which is defined as the value at which positions could be closed out or sold in a transaction with a willing counterparty over a period of time consistent with the Company’s trading or investment strategy. Fair value for these instruments is determined based on discounted cash flow analysis, comparison to similar instruments, and the use of financial models. Financial models use as their basis independently-sourced market parameters including, for example, interest rate yield curves, option volatilities, and currency rates. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Model-based pricing uses inputs of observable prices for interest rates, foreign exchange rates, option volatilities and other factors. Models are benchmarked and validated by independent parties. The Company’s valuation process takes into consideration factors such as counterparty credit quality, liquidity and

concentration concerns. The Company applies judgment in the application of these factors. In addition, the Company must apply judgment when no external parameters exist. Finally, other factors can affect the Company’s estimate of fair value, including market dislocations, incorrect model assumptions, and unexpected correlations.

These valuation methods could expose the Company to materially different results should the models used or underlying assumptions be inaccurate. See “Use of Estimates” in the Notes to Consolidated Financial Statements “Summary of Significant Accounting and Reporting Policies”.

To assist in assessing the impact of a change in valuation, at December 31, 2005, approximately $2.2 billion of the Company’s portfolio of securities and derivatives is not priced based on quoted market prices. A change of 2.5% in the valuation of these securities and derivatives would result in a change in pre-tax income of $56 million.

Goodwill and Other Intangibles

The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair value as required by SFAS 141. Goodwill ($3,619 million at December 31, 2005) and indefinite-lived intangible assets ($370 million at December 31, 2005) are not amortized but are subject to annual tests for impairment or more often if events or circumstances indicate they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial recording of goodwill and other intangibles requires subjective judgments concerning estimates of the fair value of the acquired assets. The goodwill impairment test is performed in two phases. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Indefinite-lived intangible assets are evaluated for impairment at least annually by comparing their fair value to their carrying value.

Other identifiable intangible assets ($441 million at December 31, 2005) are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow projections. Fair value may be determined using: market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other determinants. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions. Other key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles which require amortization. See “Goodwill and Intangibles” in the Notes to Consolidated Financial Statements for additional information regarding intangible assets.

To assist in assessing the impact of a goodwill or intangible asset impairment charge, at December 31, 2005, the Company has $4.4 billion of goodwill and intangible assets. The impact of a 5% impairment charge would result in a reduction in pre-tax income of approximately $222 million.

Pension Accounting

The Company has defined benefit plans covering approximately 13,900 U.S. employees and approximately 3,175 non-US employees.

The Company has three defined benefit pension plans in the U.S. and six overseas. The U.S. plans account for 82% of the projected benefit obligation. Pension expense was $26 million in 2005 while there were pension credits in 2004 and 2003 of $24 million and $39 million. In addition to its pension plans, the Company also has an Employee Stock Ownership Plan (“ESOP”) which may provide additional benefits to certain employees. Upon retirement, covered employees are entitled to the higher of their benefit under the ESOP or the defined benefit plan. If the benefit is higher under the defined benefit plan, the employees’ ESOP account is contributed to the pension plan.

A number of key assumption and measurement date values determine pension expense. The key elements include the long-term rate of return on plan assets, the discount rate, the market-related value of plan assets, and for the primary U.S. plan the price used to value stock in the ESOP. Since 2003, these key elements have varied as follows:


(Dollars in millions, except per share amounts)	2006			2005			2004			2003
Domestic Plans:
Long-Term Rate of Return on Plan Assets		7.88	%		8.25	%		8.75	%		9.00	%
Discount Rate		5.88			6.00			6.25			6.50
Market-Related Value of Plan Assets⁽¹⁾	$	1,324		$	1,502		$	1,523		$	1,483
ESOP Stock Price⁽¹⁾		30.46			30.67			27.88			33.30

Net U.S Pension Credit/(Expense)				$	(17	)	$	31		$	46
All other Pension Credit/(Expense)					(9	)		(7	)		(7	)

Total Pension Credit/(Expense)				$	(26	)	$	24		$	39

(1)	Actuarially smoothed data. See “Summary of Significant Accounting and Reporting Policies” in Notes to the Consolidated Financial Statements.

The discount rate for U.S. pension plans was determined after reviewing a number of high quality long-term bond indices whose yields were adjusted to match the duration of the Company’s pension liability. The Company also reviewed the results of several models that matched bonds to the Company’s pension cash flows. The various indices and models produced discount rates ranging from 5.68% to 6.2%. After reviewing the various indices and models the Company selected a discount rate of 5.875%. The discount rates for foreign pension plans are based on high quality corporate bonds rates in countries that have an active corporate bond market. In those countries with no active corporate bond market, discount rates are based on local government bond rates plus a credit spread.

The Company’s expected long-term rate of return on plan assets is based on anticipated returns for each asset class. At September 30, 2005 and 2004, the assumptions for the long-term rates of return on plan assets were 7.88% and 8.25%, respectively. Anticipated returns are weighted for the target allocation for each asset class. Anticipated returns are based on forecasts for prospective returns in the equity and fixed income markets, which should track the long-term historical returns for these markets. The Company also considers the growth outlook for U.S. and global economies, as well as current and prospective interest rates.

The market-related value of plan assets also influences the level of pension expense. Differences between expected and actual returns are recognized over five years to compute an actuarially derived market-related value of plan assets. In 2005, the market-related value of plan assets declined as the extraordinary actual return in 2000 was replaced with a more modest return.

Unrecognized actuarial gains and losses are amortized over the future service period (11 years) of active employees if they exceed a threshold amount. The Company currently has unrecognized losses which are being amortized.

For 2005, U.S. pension expense increased by $48 million reflecting changes in assumptions, the amortization of unrecognized pension losses and a decline in the market-related value of plan assets. These same factors are expected to further increase pension expense in 2006. To reduce the impact of these factors, the Company changed certain of its domestic defined benefit pension plans during the third quarter of 2005. The primary change was to switch the computation of the benefits from final average pay to career average pay effective January 1, 2006. As a result U.S. pension expense is expected to increase by approximately $21 million.

The annual impacts on the primary U.S. plan of hypothetical changes in the key elements on the pension expense are shown in the tables below.


(Dollars in millions)	Increase in Pension Expense						2006 Base			Decrease in Pension Expense
Long-Term Rate of Return on Plan Assets		6.88	%		7.38	%		7.88	%		8.38	%		8.88	%
Change in Pension Expense	$	16.0		$	7.9			N/A		$	7.9		$	15.7

Discount Rate		5.38	%		5.63	%		5.88	%		6.13	%		6.38	%
Change in Pension Expense	$	14.9		$	7.2			N/A		$	6.9		$	13.4

Market-Related Value of Plan Assets		-20.00	%		-10.00	%	$	1,324			+10.00	%		+20.00	%
Change in Pension Expense	$	50.8		$	25.4			N/A		$	25.4		$	50.8

ESOP Stock Price	$	20.46		$	25.46		$	30.46		$	35.46		$	40.46
Change in Pension Expense	$	15.2		$	7.3			N/A		$	6.7		$	12.9

CONSOLIDATED BALANCE SHEET REVIEW

The Company’s assets were $102.1 billion at December 31, 2005, up from $94.5 billion in the prior year. The increase in 2005 from 2004 primarily reflects increased loans to financial institutions and growth in the securities portfolio. Investment securities as a percent of the Company’s year-end assets were 27% in 2005 and 25% in 2004. Loans as a percent of assets was 39% and 37% of assets in 2005 and 2004, respectively. Total shareholders’ equity was $9.9 billion at December 31, 2005 compared with $9.3 billion in 2004. The major reason for the increase in shareholders’ equity was the retention of earnings.

Investment Securities

Total investment securities were $27.3 billion in 2005 compared with $23.8 billion in 2004 and $22.8 billion in 2003. The increases in 2005 and 2004 were primarily due to growth in the Company’s portfolio of highly rated mortgage-backed securities. In 2005 and 2004, the Company added approximately $3.1 billion and $0.7 billion, respectively, of mortgage-backed securities to its investment portfolio. Average investment securities were $25.2 billion in 2005 compared with $23.0 billion in 2004 and $19.9 billion in 2003. At December 31, 2005, the fixed income portfolio composition was approximately 39% hybrid, 35% fixed rate, and 12% variable rate mortgage-backed securities while treasuries, government agencies, municipalities and short-term securities were 8% and other securities were 6%.

The Company’s portfolio of mortgage-backed securities is 89% rated AAA, 8% AA, and 3% A. Mortgage-backed securities increased to $22.5 billion in 2005 from $19.4 billion in 2004. The primary risk in these securities is interest rate sensitivity. The Company seeks to reduce interest rate risk by investing in securities that convert to floating within three to five years or by investing in traunches of mortgage-backed securities that have rapid repayment characteristics. See “Asset/Liability Management”. The Company has been adding either adjustable or short life classes of structured mortgage-backed securities, both of which have short durations. The Company has maintained an effective duration of approximately 1.9 years on its mortgage portfolio to best match its liabilities and to reduce the adverse impact from a rise in interest rates.

Corporate debt securities declined in 2005. The primary risks in corporate debt securities are credit risk and interest rate risk. Almost all of the corporate securities are investment grade. Included in these securities are $0.9 billion of investment grade securities that are guaranteed by highly rated financial institutions.

The short-term money market instruments and obligations of state and political subdivisions have a modest amount of credit risk. The U.S. Treasury and Agency securities and obligations of state and political subdivision are generally fixed rate securities so they expose the Company to interest rate risk.

The table below shows the distribution of the Company’s securities portfolio:

Investment Securities (at Fair Value)


(In millions)	December 31, 2005		December 31, 2004
Fixed Income:
Mortgage-Backed Securities	$	22,483	$	19,393
Asset-Backed Securities		305		—
Corporate Debt		1,034		1,259
Short-Term Money Market Instruments		975		982
U.S. Treasury Securities		226		403
U.S. Government Agencies		620		505
State and Political Subdivisions		224		197
Emerging Market Debt (Collateralized by US Treasury Zero Coupon Obligations)		117		107
Other Foreign Debt		363		545

Subtotal Fixed Income		26,347		23,391

Equity Securities:
Money Market Funds		922		388
Other		31		10

Subtotal Equity Securities		953		398

Total Securities	$	27,300	$	23,789

The net unrealized loss on securities available-for-sale was $108 million at December 31, 2005, compared with a gain of $75 million at December 31, 2004. The decline in unrealized gains reflects the rise in interest rates in 2005.

The following table shows the maturity distribution by carrying amount and yield (not on a tax equivalent basis) of the Company’s securities portfolio at December 31, 2005.


(Dollars in millions)	U.S. Government				U.S Government Agency				States and Political Subdivisions				Other Bonds, Notes and Debentures				Mortgage/ Asset-Backed and Equity Securities				Total
(Dollars in millions)	Amount		Yield*		Amount		Yield*		Amount		Yield*		Amount		Yield*		Amount		Yield*		Total
Securities Held-to-Maturity
One Year or Less	$	—	—	%	$	—	—	%	$	105	4.77	%	$	7	4.47	%	$	—	—	%	$	112
Over 1 through 5 Years		15	3.47			245	3.42			—	—			—	—			—	—			260
Over 5 through 10 Years		33	4.70			—	—			—	—			—	—			—	—			33
Over 10 years		—	—			—	—			—	—			121	6.25			—	—			121
Mortgage-Backed Securities		—	—			—	—			—	—			—	—			1,451	4.78			1,451

	$	48	4.32	%	$	245	3.42	%	$	105	4.77	%	$	128	6.15	%	$	1,451	4.78	%	$	1,977

Securities Available-for-Sale
One Year or Less	$	178	3.31	%	$	221	3.35	%	$	8	5.58	%	$	1,799	4.03	%	$	—	—	%	$	2,206
Over 1 through 5 Years		—	—			163	4.03			36	6.07			4	5.90			—	—			203
Over 5 through 10 Years		—	—			—	—			43	5.86			4	6.46			—	—			47
Over 10 years		—	—			—	—			28	6.40			547	3.10			—	—			575
Mortgage-Backed Securities		—	—			—	—			—	—			—	—			21,162	4.67			21,162
Asset-Backed Securities		—	—			—	—			—	—			—	—			307	5.19			307
Equity Securities		—	—			—	—			—	—			—	—			957	4.03			957

	$	178	3.31	%	$	384	3.64	%	$	115	6.04	%	$	2,354	3.96	%	$	22,426	4.65	%	$	25,457

*	Yields are based upon the amortized cost of securities.

The Company also has equity investments categorized as other assets (bracketed amounts indicate carrying values). Included in other assets are strategic investments related to securities servicing ($73 million), venture capital investments ($341 million), an investment in Wing Hang Bank Ltd. ($215 million), tax advantaged low-income housing ($176 million), Federal Reserve Bank stock ($106 million), and other equity investments ($4 million).

The largest minority interest is Wing Hang with a fair value of $427 million (book value of $215 million) at December 31, 2005. An agreement with certain other shareholders of Wing Hang prohibits the sale of this interest without their permission. The Company received dividends from Wing Hang of $16 million, $12 million, and $17 million in 2005, 2004, and 2003, respectively. In 2004, the Company reduced its investment in Wing Hang from approximately 25% of Wing Hang’s outstanding shares to 20%.

Venture capital activities consist of investments in private equity funds, mezzanine financings, and direct equity investments. The carrying and fair value of the Company’s venture capital investments was $341 million at December 31, 2005, consisting of investments in private equity funds of $246 million, direct equity of $29 million, mezzanine financings of $39 million and leveraged bond funds of $27 million. Fair values for private equity funds are generally based upon information provided by fund sponsors and the Company’s knowledge of the underlying portfolio while mezzanine financing and direct equity investments are based upon Company models.

In 2005, the Company had an average invested balance of $347 million in venture capital. Securities gains and interest income were $54 million, a pre-tax return of 16%. For 2006, the Company enters the year with a $341 million investment balance, and would expect returns to be somewhat lower.

At December 31, 2005, the Company had $35 million of principal investment commitments to private equity funds and partnerships compared with $60 million at December 31, 2004. The timing of future cash requirements to fund such commitments is generally dependent on the investment cycle. This cycle, the period over which privately-held companies are funded by private equity investors and ultimately sold, merged, or taken public through an initial offering, can vary based on overall market conditions as well as the nature and type of industry in which the companies operate. If unused, the commitments expire as follows:


(In millions)	Commitments
2006	$	25
2007		3
2008 - 2010		7

Total	$	35

Commitments to venture capital limited partnerships may extend beyond expiration period shown to cover certain follow-on investments, claims and liabilities, and organizational and partnership expenses.

Consistent with the Company’s policy to focus on its core activities, it continues to reduce its exposure to venture capital activities. At December 31, 2005, the Company had hedged approximately $39 million of its private equity fund investments. Hedge gains and losses are recorded at fair value in securities gains. Consistent with its objective to expand its asset management activities, the Company expects to start the $200 million BNY Mezzanine Fund LLP in 2006 and plans to commit up to $75 million to the fund, and it may make other commitments consistent with that strategy from time to time.

Loans


(In billions)	December 31,						Annual Average
(In billions)	Total		Non-Margin		Margin		Total		Non-Margin		Margin
2005	$	40.7	$	34.6	$	6.1	$	39.7	$	33.3	$	6.4
2004		35.8		29.7		6.1		37.8		31.5		6.3
2003		35.3		29.6		5.7		35.6		31.8		3.8

Total loans were $40.7 billion at December 31, 2005, compared with $35.8 billion in 2004. The increase in 2005 versus 2004 primarily reflects an increase in overdrafts, securities industry loans, and residential mortgages. The Company continues to focus on its strategy of reducing non-strategic and outsized corporate loan exposures to improve its credit risk profile. Average total loans were $39.7 billion in 2005, compared with $37.8 billion in 2004. The increase in average loans in 2005 primarily results from increased lending to financial institutions.

The table below shows trends in the loans outstanding at year-end over the last five years based on a product analysis.


(In millions)	2005			2004			2003			2002			2001
Domestic
Commercial and Industrial Loans	$	6,271		$	6,168		$	6,611		$	10,612		$	11,633
Real Estate Loans:
Construction and Land Development		324			284			304			480			434
Other, Principally Commercial Mortgages		1,694			2,040			2,335			2,420			2,501
Collateralized by Residential Properties		5,890			4,593			3,739			3,416			3,050
Banks and Other Financial Institutions		2,156			1,323			1,320			1,292			2,075
Loans for Purchasing or Carrying Securities		4,935			3,028			4,221			1,720			3,581
Lease Financings		3,262			3,595			3,727			3,529			3,576
Less:
Unearned Income on Lease Financings		(938	)		(1,072	)		(1,063	)		(944	)		(1,026	)
Consumer Loans		1,372			1,293			1,429			1,669			1,782
Margin loans		6,089			6,059			5,712			352			452
Other		946			548			431			238			427

Total Domestic		32,001			27,859			28,766			24,784			28,485

Foreign
Commercial and Industrial Loans		1,456			793			1,305			1,780			2,390
Banks and Other Financial Institutions		3,924			3,939			2,045			1,624			2,060
Lease Financings		5,816			5,871			6,026			6,062			5,271
Less:
Unearned Income on Lease Financings		(2,615	)		(2,731	)		(2,960	)		(3,124	)		(2,810	)
Government and Official Institutions		101			42			93			205			224
Other		43			8			8			9			127

Total Foreign		8,725			7,922			6,517			6,556			7,262

Less: Allowance for Loan Losses		(411	)		(591	)		(668	)		(656	)		(415	)

Net Loans	$	40,315		$	35,190		$	34,615		$	30,684		$	35,332

Asset Quality and Allowance for Credit Losses

Over the past several years, the Company has improved its risk profile through greater focus on clients who are active users of the Company’s non-credit services, with a de-emphasis on broad-based loan growth. The Company’s primary exposure to credit risk of a customer consists of funded loans, unfunded formal contractual commitments to lend, counterparty risk associated with derivative transactions and overdrafts associated with clearing and settlement.

The role of credit has shifted to one that complements the Company’s other services instead of as a lead product. Credit solidifies customer relationships and, through a disciplined allocation of capital, can earn acceptable rates of return as part of an overall relationship. The Company’s credit risk management objectives are: (1) to eliminate non-strategic exposures; (2) to increase granularity in the portfolio by cutting back large individual borrower exposures; (3) to restructure the portfolio to avoid outsized industry concentrations; and (4) to limit exposures to non-investment grade counterparties. The goal of these objectives is to reduce volatility in the Company’s credit provisioning and earnings. The Company regularly culls its loan portfolio of credit exposures that no longer meet risk/return criteria, including an assessment of overall relationship profitability. In addition, the Company makes use of credit derivatives and other risk mitigants to hedge portions of the credit risk in its portfolio. The effect of these transactions is to transfer credit risk to creditworthy, independent third parties.

The Company continues to make progress towards improving its credit risk profile.

•

At December 31, 2005, corporate exposure was $23.3 billion.

•

The Company brought industry concentrations in line with reduced targets in areas such as telecom, retailing, and automotive. The largest single corporate industry exposure is now media at 13%.

•

The Company continued to eliminate non-strategic exposures that do not meet yield or cross-sell criteria.

•

At December 31, 2005, the Company has used credit default swaps to reduce exposure on $1,099 million of loans and commitments.

At December 31, 2005, total exposures were $89.0 billion up from $82.5 billion in 2004 reflecting greater lending to financial institutions and increased residential mortgage lending.

The Company’s largest absolute risk is lending to financial institutions and corporates, which make up 66% of the total and remained the same as 2004. The consumer and middle market portfolio increased by 13% reflecting increased residential mortgage lending. The business unit components of the loan portfolio are detailed below.

Loan Portfolio


	12/31/05				12/31/04				12/31/03				12/31/02
(In billions)	Loans		Exposure		Loans		Exposure		Loans		Exposure		Loans		Exposure
Financial Institutions	$	13.0	$	35.5	$	9.5	$	31.1	$	9.2	$	31.0	$	6.6	$	30.7
Corporate		3.7		23.3		3.6		23.0		4.0		24.5		8.2		31.6

		16.7		58.8		13.1		54.1		13.2		55.5		14.8		62.3

Consumer & Middle Market		10.3		15.1		8.9		13.4		8.2		12.3		8.0		12.1
Lease Financings		5.5		5.5		5.6		5.6		5.8		5.8		5.6		5.7
Commercial Real Estate		2.1		3.5		2.1		3.3		2.4		3.2		2.5		3.3
Margin Loans		6.1		6.1		6.1		6.1		5.7		5.7		0.4		0.4

Total	$	40.7	$	89.0	$	35.8	$	82.5	$	35.3	$	82.5	$	31.3	$	83.8

Of the credits in the financial institutions and corporate segments with a rating equivalent to non-investment grade at December 31, 2005, 47% of these credits mature in less than one year.

Financial Institutions

The financial institutions portfolio exposure was up from $30.7 billion in 2002 to $35.5 billion at year-end 2005. The financial institutions exposure fluctuates day to day based on the financing needs of the Company’s broker-dealer customers and overdrafts relating to security settlements. These exposures are generally high quality, with 85% meeting the investment grade criteria of the Company’s rating system. The exposures are short-term with 74% expiring within one year, and are frequently secured. For example, mortgage banking, securities industry, and investment managers often borrow against marketable securities held in custody at the Company. The diversity of the portfolio is shown in the accompanying table.


	12/31/05						% Inv Grade		% due <1 Yr		12/31/04						12/31/03
(In billions) Lending Division	Loans		Unfunded Commitments		Total Exposures		% Inv Grade		% due <1 Yr		Loans		Unfunded Commitments		Total Exposures		Loans		Unfunded Commitments
Banks	$	5.1	$	3.8	$	8.9	65	%	87	%	$	4.2	$	3.5	$	7.7	$	2.6	$	3.1
Securities Industry		3.4		3.7		7.1	88		96			1.5		3.0		4.5		1.9		3.5
Insurance		0.4		4.9		5.3	96		44			0.5		4.8		5.3		0.3		5.0
Government		0.1		4.7		4.8	98		52			—		5.0		5.0		0.2		5.6
Asset Managers		3.8		3.6		7.4	89		80			3.0		3.8		6.8		3.6		3.5
Mortgage Banks		0.1		0.7		0.8	70		51			0.2		0.7		0.9		0.4		0.5
Endowments		0.1		1.1		1.2	99		55			0.1		0.8		0.9		0.2		0.6

Total	$	13.0	$	22.5	$	35.5	85	%	74	%	$	9.5	$	21.6	$	31.1	$	9.2	$	21.8

Corporate

The corporate portfolio exposure was reduced to $23.3 billion at December 31, 2005, from $31.6 billion at year-end 2002. Approximately 74% of the portfolio is investment grade based on the Company’s rating system and 16% of the portfolio matures within one year. In 2004, the Company reached its goal of reducing corporate exposure below $24.0 billion. This represents a decline of over $9 billion since the Company announced its goal to reduce corporate exposure in 2002.


	12/31/05						% Inv Grade		% due <1 Yr		12/31/04						12/31/03
(In billions) Lending Division	Loans		Unfunded Commitments		Total Exposures		% Inv Grade		% due <1 Yr		Loans		Unfunded Commitments		Total Exposures		Loans		Unfunded Commitments
Media	$	1.1	$	2.0	$	3.1	62	%	10	%	$	0.9	$	2.2	$	3.1	$	0.9	$	2.3
Cable		0.4		0.5		0.9	41		18			0.6		0.4		1.0		0.7		0.7
Telecom		0.1		0.4		0.5	79		7			0.1		0.5		0.6		0.3		0.6

Subtotal		1.6		2.9		4.5	60		11			1.6		3.1		4.7		1.9		3.6

Energy		0.4		4.9		5.3	84		10			0.4		4.4		4.8		0.4		4.2
Retailing		0.1		2.1		2.2	75		23			0.1		2.1		2.2		0.1		2.3
Automotive*		0.1		1.2		1.3	55		38			0.1		1.7		1.8		0.1		2.1
Healthcare		0.3		1.7		2.0	82		11			0.3		1.5		1.8		0.2		1.3
Other**		1.2		6.8		8.0	77		18			1.1		6.6		7.7		1.3		7.0

Total	$	3.7	$	19.6	$	23.3	74	%	16	%	$	3.6	$	19.4	$	23.0	$	4.0	$	20.5

*	In 2005, the Company reduced its automotive exposure, eliminated the Automotive division, and transferred the remaining customers to the other geographic lending divisions. The amounts in the table were reconstructed for comparison to prior years.

**	Diversified portfolio of industries and geographies

Other Corporate Risks

Included in the Company’s corporate exposures are automotive and airline exposures. The Company continues to selectively reduce automotive exposures given ongoing weakness in the domestic automotive industry. Total exposure previously reported in the Automotive Division was $1.3 billion at December 31, 2005,

down $516 million from December 31, 2004. This broadly defined industry portfolio consists of $194 million to Big Three automotive manufacturing, $199 million to finance subsidiaries, $453 million to highly rated asset- backed securitizations, $311 million to suppliers, and $144 million of other.

The Company’s exposure to the airline industry consists of a $337 million leasing portfolio, including a $16 million real estate lease exposure. The airline leasing portfolio consists of $141 million to major U.S. carriers, $133 million to foreign airlines, and $63 million to U.S. regionals. In 2005, the industry continued to face the dilemma of an increasingly uncompetitive cost structure, weak demand with further downward pressure. In addition, considerable excess capacity and higher oil prices continue to negatively impact the valuations of the industry’s aircraft in the secondary market. Because of these factors, the Company continues to maintain a sizable allowance for loan losses against these exposures and to closely monitor the portfolio. In 2005, the Company charged-off $140 million of a $153 million exposure to two bankrupt domestic airlines.

Consumer and Middle Market

The Company’s consumer loan exposure is concentrated in the New York Tri-State region and consists primarily of loans secured by real estate and small business loans, as well as unsecured closed-end and open-end loans to individual consumers. These loans are originated through the Company’s Private Client Services and Retail Banking businesses. The Company’s middle market loan portfolio is very granular, with an average loan size of less than $2.5 million. It consists of loans to midsize companies, and focuses on users of cash management, trade finance, capital markets, and private client services.

Lease Financings

The Company utilizes the leasing portfolio as part of its tax cash flow management strategy. This portfolio generates attractive after-tax risk-adjusted returns. Counterparties in the leasing transactions are generally highly rated. The leasing portfolio consists of non-airline exposures of $5.2 billion and $337 million of airline exposures.

The non-airline portion of the leasing portfolio is backed by well-diversified assets, primarily large-ticket transportation equipment. The largest component is rail, consisting of both passenger and freight trains. Assets are both domestic and foreign-based, with primary concentrations in the United States and European countries. Excluding airline leasing, counterparty rating equivalents are as follows: 43% AA or better, 34% single A, 17% BBB, and 6% non-investment grade.

Commercial Real Estate

The Company’s commercial real estate loan portfolio totaled $3.6 billion of exposure at December 31, 2005. Over 72% of the portfolio is secured by mortgages on properties predominantly located in the Tri-State region. The portfolio is diverse by project type with approximately 19% secured by office buildings, 33% secured by residential buildings, approximately 8% secured by retail buildings, while approximately 20% are unsecured loans to real estate investment trusts (REIT’s) and approximately 20% fall into other categories.

The Company avoids speculative development loans and concentrates its activities largely within its retail branch network footprint. Real estate credit facilities are focused on experienced owners and are structured with moderate leverage based on existing cash flows.

International Loans

The Company is active in the international markets, particularly in areas associated with securities servicing and trade finance. Excluding leasing, these activities result in outstanding loans to foreign institutions of $5.5 billion and $4.8 billion at December 31, 2005 and 2004, respectively.

At December 31, 2005, the Company’s emerging markets exposures consisted of $96 million in medium-term loans, $1,267 million in short-term loans, primarily trade related, and a $215 million investment in Wing

Hang. In addition, the Company has $117 million of Philippine bonds whose principal payments are collateralized by U.S. Treasury zero coupon obligations and whose interest payments are partially collateralized. Emerging market countries where the Company has exposure include Argentina, Brazil, Bulgaria, China, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, Honduras, Indonesia, Jamaica, Malaysia, Mexico, Morocco, Panama, Peru, Philippines, Russia, Thailand, Uruguay, Venezuela, and Vietnam.

Further details of the Company’s outstandings are detailed under “Loans”.

Counterparty Risk Ratings Profile

The table below summarizes the risk ratings of the Company’s foreign exchange and interest rate derivative counterparty credit exposure for the past year.


	For the Quarter Ended
Rating⁽¹⁾	12/31/05		9/30/05		6/30/05		3/31/05		12/31/04
AAA to AA-	74	%	71	%	68	%	74	%	68	%
A+ to A-	13		13		15		13		19
BBB+ to BBB-	9		13		14		10		10
Noninvestment Grade	4		3		3		3		3

Total	100	%	100	%	100	%	100	%	100	%

(1)	Represents credit rating agency equivalent of internal credit ratings.

For derivative counterparty credit exposure see “Commitments and Contingent Liabilities” in the Notes to the Company’s Consolidated Financial Statements.

Nonperforming Assets

Nonperforming assets decreased by $135 million to $79 million at December 31, 2005. The decrease in nonperforming assets during 2005 is primarily attributable to sales of the Company’s exposure to a cable operator that was categorized as nonperforming as well as paydowns and charge-offs of commercial loans. See “Loans” in the Notes to the Consolidated Financial Statements.

Activity in Nonperforming Assets


	Year ended December 31,
(In millions)	2005			2004
Balance at beginning of year	$	214		$	349
Additions		45			118
Charge-offs		(25	)		(58	)
Paydowns/Sales		(155	)		(179	)
Other		—			(16	)

Balance at end of year	$	79		$	214

The following table shows the distribution of nonperforming assets at the end of each of the last five years:


(Dollars in millions)	2005			2004			2003			2002			2001
Category of Loans:
Domestic:
Other Commercial	$	17		$	132		$	219		$	321		$	138
Regional Commercial		35			53			51			34			18
Foreign		14			28			79			84			64

Total Nonperforming Loans		66			213			349			439			220
Other Assets Owned		13			1			—			1			2

Total Nonperforming Assets	$	79		$	214		$	349		$	440		$	222

Nonperforming Asset Ratio		0.2	%		0.7	%		1.2	%		1.4	%		0.6	%
Allowance for Loan Losses/Nonperforming Loans		629.7			277.5			191.2			149.2			188.7
Allowance for Loan Losses/Nonperforming Assets		524.0			276.5			191.2			148.9			187.0
Allowance for Credit Losses/Nonperforming Loans		865.4			345.6			230.2			189.1			280.0
Allowance for Credit Losses/Nonperforming Assets		720.2			344.3			230.2			188.7			277.6

Significant nonperforming assets at December 31, 2005 include $13 million related to aircraft leasing, $9 million of emerging markets exposure, and $8 million to a grocery retailer.

The following table shows loans past due 90 days or more and still accruing interest for the last five years:


(In millions)	2005		2004		2003		2002		2001
Domestic:
Consumer	$	7	$	11	$	14	$	3	$	3
Commercial		7		4		6		18		11

		14		15		20		21		14
Foreign:
Banks		—		—		—		5		—

	$	14	$	15	$	20	$	26	$	14

Activity in Allowance for Credit Losses

The following table details changes in the Company’s allowance for credit losses for the last five years.


(Dollars in millions)	2005			2004			2003			2002			2001
Loans Outstanding, December 31,	$	40,726		$	35,781		$	35,283		$	31,340		$	35,747
Average Loans Outstanding		39,682			37,778			35,623			34,305			38,770

Allowance for Credit Losses
Balance, January 1
Domestic	$	590		$	621		$	653		$	508		$	491
Foreign		27			70			79			43			67
Unallocated		119			113			99			65			58

Total, January 1		736			804			831			616			616

Charge-Offs:
Commercial		(144	)		(24	)		(118	)		(396	)		(345	)
Foreign		(10	)		(28	)		(26	)		(23	)		(18	)
Regional Commercial		(11	)		(11	)		(22	)		(42	)		(7	)
Consumer		(30	)		(30	)		(32	)		(23	)		(18	)

Total		(195	)		(93	)		(198	)		(484	)		(388	)

Recoveries:
Commercial		1			2			9			7			4
Foreign		2			3			1			2			5
Regional Commercial		2			2			3			2			1
Consumer		4			3			3			3			3

Total		9			10			16			14			13

Net Charge-Offs		(186	)		(83	)		(182	)		(470	)		(375	)


Provision		15			15			155			685			375
Balance, December 31,
Domestic		458			590			621			653			508
Foreign		11			27			70			79			43
Unallocated		96			119			113			99			65

Total, December 31,	$	565		$	736		$	804		$	831		$	616

Allowance for Loan Losses	$	411		$	591		$	668		$	656		$	415
Allowance for Lending-Related Commitments		154			145			136			175			201

Ratios
Net Charge-Offs to Average Loans Outstanding		0.47	%		0.22	%		0.51	%		1.37	%		0.97	%

Net Charge-Offs to Total Allowance for Credit Losses		32.92			11.28			22.64			56.56			60.88

Total Allowance for Credit Losses to Year-End Loans Outstanding		1.39			2.06			2.28			2.65			1.72

Allowance for Loan Losses to Year-End Loans Outstanding		1.01			1.65			1.89			2.09			1.16

Net charge-offs were $186 million in 2005, $83 million in 2004, and $182 million in 2003. In 2005, net charge-offs increased from 2004 primarily due to the charge-off of $140 million of leases with two bankrupt domestic airline customers in the fourth quarter of 2005. Net charge-offs decreased in 2004 and 2003 primarily due to improvement in asset quality.

The provision for credit losses was $15 million in 2005, compared with $15 million in 2004 and $155 million in 2003. The decrease in the provision in 2004 primarily reflects the Company’s improved risk profile as well as improvements in the credit environment. In 2005 and 2004, asset quality improved as nonperforming loans declined and loan granularity improved.

Allowance for Credit Losses


	At December 31,
(Dollars in millions)	2005			2004
Margin Loans	$	6,089		$	6,059
Non-Margin Loans		34,637			29,722

Total Loans	$	40,726		$	35,781

Allowance for Loan Losses	$	411		$	591
Allowance for Lending-Related Commitments		154			145

Total Allowance for Credit Losses	$	565		$	736

Allowance for Loan Losses As a Percent of Total Loans		1.01	%		1.65	%
Allowance for Loan Losses As a Percent of Non-Margin Loans		1.19			1.99
Total Allowance for Credit Losses As a Percent of Total Loans		1.39			2.06
Total Allowance for Credit Losses As a Percent of Non-Margin Loans		1.63			2.48

The total allowance for credit losses was $565 million and $736 million at year-end 2005 and 2004, respectively. The ratio of the total allowance for credit losses to year-end non-margin loans was 1.63% and 2.48% at December 31, 2005 and 2004, reflecting improved credit quality in 2005. The decline in the allowance and in the ratios also reflects the charge-off of $153 million of airline credits which had $140 million of allowance for credit losses associated with them.

The Company has $6.1 billion of secured margin loans on its balance sheet at December 31, 2005. The Company has rarely suffered a loss on these types of loans and does not allocate any of its allowance for credit losses to these loans. The Company believes that the ratio of allowance for credit losses to non-margin loans is a more appropriate metric to measure the adequacy of the reserve.

Loans at December 31, 2005, were $40.7 billion compared with $35.8 billion at the prior year-end. Non-margin loans increased to $34.6 billion in 2005 from $29.7 billion in 2004, reflecting increased lending to financial institutions and higher holdings of residual mortgage loans. The decrease in the total allowance for credit losses in 2005 reflects a charge-off of $140 million related to airline exposure and continued improvement in credit quality.

The Company’s total allowance at year-end equated to approximately 3.5 times the average charge-offs and 3.8 times the average net charge-offs for the last three years. Because historical charge-offs are not necessarily indicative of future charge-off levels, the Company also gives consideration to other risk indicators when determining the appropriate allowance level.

The allowance for loan losses and the allowance for lending-related commitments consist of four elements: (1) an allowance for impaired credits (nonaccrual commercial credits over $1 million); (2) an allowance for higher risk rated credits; (3) an allowance for pass rated credits; and (4) an unallocated allowance based on general economic conditions and risk factors in the Company’s individual markets.

The first element, impaired credits, is based on individual analysis of all nonperforming commercial credits over $1 million. The allowance is measured by the difference between the recorded value of impaired loans and their fair value. Fair value is either the present value of the expected future cash flows from the borrower, the market value of the loan, or the fair value of the collateral.

The second element, higher risk rated credits, is based on the assignment of loss factors for each specific risk category of higher risk credits. The Company rates each credit in its portfolio that exceeds $1 million and assigns the credits to specific risk pools. A potential loss factor is assigned to each pool, and an amount is included in the allowance equal to the product of the amount of the loan in the pool and the risk factor. Reviews of higher risk rated loans are conducted quarterly and the loan’s rating is updated as necessary. The Company prepares a loss migration analysis and compares its actual loss experience to the loss factors on an annual basis to attempt to ensure the accuracy of the loss factors assigned to each pool. Pools of past due consumer loans are included in specific risk categories based on their length of time past due.

The third element, pass rated credits, is based on the Company’s expected loss model. Borrowers are assigned to pools based on their credit ratings. The expected loss for each loan in a pool incorporates the borrower’s credit rating, loss given default rating and maturity. The credit rating is dependent upon the borrower’s probability of default. The loss given default incorporates a recovery expectation. Borrower and loss given default ratings are reviewed semi-annually at a minimum and are periodically mapped to third party, including rating agency and default and recovery data bases to ensure ongoing consistency and validity. Commercial loans over $1 million are individually analyzed before being assigned a credit rating. In 2004, the Company began to apply this technique to its leasing and consumer portfolios. In addition, the Company adjusted the estimates for default probabilities to a long-term average and adjusted from estimated to actual maturities. At the time of these changes, the impact was to increase the reserve requirement by $56 million. All current consumer loans are included in the pass rated consumer pools.

The fourth element, the unallocated allowance, is based on management’s judgment regarding the following factors:

•

Economic conditions including duration of the current cycle;

•

Past experience including recent loss experience;

•

Credit quality trends;

•

Collateral values;

•

Volume, composition, and growth of the loan portfolio;

•

Specific credits and industry conditions;

•

Results of bank regulatory and internal credit exams;

•

Actions by the Federal Reserve Board;

•

Delay in receipt of information to evaluate loans or confirm existing credit deterioration; and

•

Geopolitical issues and their impact on the economy.

In 2005, the allowance for pass rated credits increased due to a slight increase in exposure and some downward credit migration, primarily in the automotive industry. This was more than offset by a decline in the allowance for impaired credits as several impaired credits were repaid or sold. The major portion of the overall decline in the allowance was due to a decline in reserve for higher risk credits as a result of the charge-offs taken on two bankrupt domestic airlines. The amount of allocated allowance decreased reflecting the continued relatively benign credi