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United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2002

Commission file number 1-6152

THE BANK OF NEW YORK COMPANY, INC.

New York

(State or other jurisdiction of incorporation or organization)

I.R.S. Employer Identification No. 13-2614959

Address: One Wall Street

New York, New York 10286

Telephone: (212) 495-1784

Securities registered pursuant to Section 12(b) of the Act: Common Stock, $7.50 par value*

Preferred Stock Purchase Rights*

7.05% Preferred Trust Securities, Series D*

6.88% Preferred Trust Securities, Series E*

Securities registered pursuant to Section 12(g) of the Act:

Class A, 7.75% Cumulative Convertible Preferred Stock 7.97% Capital Securities, Series B

As of February 28, 2003, The Bank of New York Company, Inc. had 726,314,129 shares of common stock outstanding. The aggregate market value of voting stock held by non-affiliates on February 28, 2003 was $16,545,435,860.

The Bank of New York Company, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes x  No ¨

This Annual Report and Form 10-K incorporates into a single document the requirements of the accounting profession and the Securities and Exchange Commission. Only those sections of the Annual Report referenced in the following cross-reference index and the information under the caption “Forward-Looking Statements” are incorporated in the Form 10-K.

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The Bank of New York Company, Inc.

2002 Annual Report on Form 10-K

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THE BANK OF NEW YORK COMPANY, INC.

FINANCIAL REVIEW

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SELECTED FINANCIAL DATA

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

Introduction

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

Overview

The Bank of New York Company, Inc., is a financial holding company and together with its consolidated subsidiaries (the “Company”) (NYSE: BK), has total assets of over $77 billion as of December 31, 2002. The Company provides a complete range of banking and other financial services to corporations and individuals worldwide through its basic businesses, namely, Securities Servicing, Global Payment Services, BNY Asset Management and Private Client Services, Corporate Banking, Global Market Services, and Retail Banking.

The Company has focused its strategy on high-growth, fee-based businesses that have transformed the Company from a traditional commercial bank into a premier global securities servicing provider. The Company’s breadth of products and services allow it to build client relationships with investors, issuers and financial intermediaries through many different avenues in major markets and regions throughout the world. The Company’s well-diversified franchise has become an integral part of the infrastructure of the global capital markets.

Summary of Results

For the year 2002, the Company reported net income of $902 million or $1.24 per diluted share, compared with $1,343 million or $1.81 per diluted share in 2001 and $1,429 million or $1.92 per diluted share in 2000. The 2002 decline largely reflects an increase in the provision for credit losses, which increased to $685 million in 2002 from $375 million in 2001. The Company has experienced higher than historical credit losses over 200l and 2002, primarily due to the telecommunications and aircraft leasing segments of its loan portfolio.

Securities servicing fees in 2002 were $1,896 million, a 7% increase, compared with $1,775 million in 2001 reflecting acquisitions and the benefit of well-diversified businesses. Global payment services fees increased 2% for the full year, because of higher funds transfer volumes and increased multi-currency activity from existing clients, as well as the addition of new clients, which offset continued weakness in global trade services. For the year 2002, private client services and asset management fees were up 9% from the previous year, reflecting several acquisitions and core growth in alternative investments and retail investment products. Ivy Asset Management’s assets under management increased 30% on a year-over-year basis. Foreign exchange and other trading revenues decreased 31% in 2002 due to a significant decrease in volatility in the currency markets and reduced client activity in the second half of 2002. Other trading was negatively impacted by a fall off in client interest rate hedging activities. Year-end assets under custody were $6.8 trillion, including $1.9 trillion of cross-border custody assets. Gains and losses on securities were a loss of $118 million in 2002, compared with a gain of $154 million in 2001 primarily reflecting impairment of equity securities.

In 2002, return on average common equity was 13.96% compared with 21.58% in 2001 and 26.08% in 2000, while return on average assets was 1.13% in 2002 compared with 1.64% in 2001 and 1.85% in 2000.

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In 2001, the World Trade Center disaster (“WTC disaster”) resulted in a disruption of the markets, including payment and securities processing, which affected both the Company and other market participants. The Company estimates the WTC disaster reduced net interest income by $45 million and noninterest revenue by $29 million in 2001. Noninterest income also included an insurance recovery of $175 million in 2001. In addition, the Company recorded noninterest expenses of $168 million in 2001. These expenses primarily related to the repair of damaged facilities, overtime and other staff costs, replacement equipment, replacement furniture and fixtures, and costs associated with interim space.

In 2001, securities servicing fees were $1,775 million, a 6% increase, compared with $1,681 million in 2000. Areas leading the increase for the year included execution services, corporate trust, broker-dealer services, and global liquidity services. New business growth in cash management drove global payment services fees to $287 million, up 10% from 2000, reflecting continued success of CA$H-Register Plus^R, the Company’s internet-based electronic banking service. Foreign exchange and other trading revenues were $338 million, up 30% from 2000, reflecting a strong demand for interest rate risk management products driven by declining interest rates and higher volatility in 2001. Private client services and asset management fees were $314 million, up 5% compared with $300 million in 2000, because strength in alternate investments and short-term money market product lines offset lower asset price levels.

In 2000, securities servicing fee revenues were up 33% to $1,681 million reflecting particular strength in global custody, depositary receipts (“DRs”), unit investment trust (“UIT”), and mutual funds as well as global execution and clearing services. In addition, fee revenue benefited from the acquisition of the Royal Bank of Scotland Trust Bank (“RBSTB”) on October 31, 1999. Private client services and asset management fees were up 23% to $300 million, led by strong business flows in the BNY Hamilton Funds, as well as by the acquisitions of Ivy Asset Management Corp. and Estabrook Capital Management, Inc. Increased cross-selling within the securities servicing client franchise and rapid growth in the Company’s foreign exchange e-commerce initiative drove foreign exchange and other trading revenues up 38% to $261 million. Net interest income on a taxable equivalent basis was $1,811 million in 2000, benefiting from the acquisition of RBSTB, which brought approximately $10 billion in highly liquid, short-term assets and liabilities. The provision for credit losses was $105 million.

Recent Developments

In January 2003, the Company signed a definitive purchase agreement with Credit Suisse First Boston to acquire its Pershing unit. Headquartered in Jersey City, New Jersey, Pershing is a leading global provider of correspondent clearing services and outsourcing solutions for broker dealers, asset managers and other financial intermediaries. Pershing has approximately 4,000 employees worldwide at 13 locations in the U.S., Europe and Asia. Under the terms of the agreement, the Company will pay a purchase price of $2 billion in cash subject to an upward adjustment of up to $50 million depending on the achievement of certain revenue goals. The Company expects the acquisition to be dilutive to its earnings by approximately $0.02 to $0.03 per share in 2003 (not including dilution of approximately $0.06 per share from an expected one-time integration charge of $65 million of pre-tax restructuring costs associated with the acquisition), and accretive by approximately $0.02 to $0.03 per share in 2004. This transaction is expected to close during the second quarter of 2003.

The Company expects that the acquisition of Pershing will strengthen its position as a global securities servicing provider and accelerate the continuing transformation of its business model. The Company estimates that fee-based revenues will increase to approximately 74% of total revenues after closing the Pershing acquisition. In addition, the Company expects the acquisition to allow it to take advantage of significant economies of scale. After the acquisition, the Company will become the largest provider of agency execution and clearing services through BNY Securities Group. On a combined basis, it will have over 3,000 institutional clients, over 1,200 correspondent brokerage firms and will have 29 seats on the New York Stock Exchange. It will execute transactions totaling 325 million shares daily and will continue to be the largest electronic broker for global execution services, serving 65 global markets, and the largest provider of commission management services for asset managers and plan sponsors.

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The Company has sold forward $1 billion of common stock and has issued $400 million of subordinated debt as part of the financing of the acquisition. The Company expects to issue an additional $600 million of debt prior to the closing. See “Capital Resources” section.

After a promising start in early January, the business environment in the first quarter of 2003 has become increasingly challenging. Concerns about geopolitical considerations have overshadowed the modest pace of economic growth, suppressing capital markets activity. As a result, equity trading volumes and price levels, capital raising and corporate actions are all weaker than expected, making revenue growth more challenging. These conditions may make it difficult to perform at targeted levels until the environment improves. Nonetheless, the Company continues to prudently invest in its businesses to enhance its strategic positioning, and remains committed to its long-term financial goals (See “Long-Term Financial Goals and Factors That May Affect Them”).

Consolidated Income Statement Review

Noninterest Income

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 $3,143 million in 2002, compared with $3,571 million in 2001, and $3,145 million in 2000. The Company estimates the WTC disaster reduced noninterest income in 2001 by $29 million⁽¹⁾.

Securities servicing fees were $1,896 million, $1,775 million, and $1,681 million, in 2002, 2001, and 2000. The 7% increase in securities servicing fees from 2001 reflects acquisitions and the benefit of well-diversified businesses across markets, products, client segments, and geography. In 2001, the 6% increase in securities servicing fees reflects growth in execution services, corporate trust, broker-dealer services, and global liquidity services.

Global payment services fees, principally funds transfer, cash management, and trade services, were $292 million in 2002, $287 million in 2001, and $261 million in 2000. The increase in global payment services fees from 2001 reflects higher funds transfer volumes and increased multi-currency activity from existing clients, as well as the addition of new clients. This offset continued weakness in global trade services.

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Private client services and asset management fees were $344 million in 2002, $314 million in 2001, and $300 million in 2000. The 9% increase from 2001 reflects several acquisitions and core growth in alternative investments and retail investment products. The increase in 2001 from 2000 reflects strong growth in alternative investment products.

Service charges and fees were $361 million in 2002, compared with $356 million in 2001, and $364 million in 2000. The increase in 2002 from 2001 relates to increased fees charged to customers in lieu of customer deposits. The decline in 2001 from 2000 primarily reflects the impact of the WTC disaster.

Foreign exchange and other trading revenues were $234 million in 2002, $338 million in 2001, and $261 million in 2000. The 31% decrease in 2002 from the prior year reflects a significant decrease in volatility in the currency markets and reduced client activity in the second half of 2002. Other trading was negatively impacted by a fall off in client interest rate hedging activities and a reduction in seasonal arbitrage opportunities arising from the securities lending area. The 30% increase in revenue in 2001 compared with 2000 reflected strong demand for interest rate risk management products driven by declining interest rates and higher volatility. Strong foreign exchange transaction flows from the Company’s securities servicing clients also contributed to the increase.

Securities losses were $118 million in 2002, compared with a $154 million gain in 2001, and a $150 million gain in 2000. In 2002, the loss included a $210 million equity writedown that precipitated the substantial liquidation of the Company’s bank stock portfolio.

Other noninterest income was $134 million in 2002, $347 million in 2001, and $128 million in 2000. In 2002, other income includes a $32 million Empire State Development Corporation (“ESDC”) grant. The ESDC grant covers relocation and other costs associated with the Company’s previously announced decision to return to downtown Manhattan and to move 1,500 employees to a new facility in Brooklyn. In 2001, other income includes a $175 million insurance recovery related to the WTC disaster and a $43 million gain on the sale of the Company’s interest in New York Cash Exchange (“NYCE”). In 2000, other income includes a $26 million payment associated with the termination of a securities clearing contract.

Net Interest Income

For 2002, net interest income on a taxable equivalent basis amounted to $1,714 million compared with $1,741 million in 2001. Average earning assets were $65.4 billion compared with $67.7 billion in 2001. Average loans were $34.3 billion in 2002 compared with $38.8 billion in 2001. The impact of the WTC disaster in 2001 increased average earning assets and loans by $3.9 billion. Average securities were $23.0 billion in 2002, up from $18.6 billion in 2001. The Company added approximately $6.2 billion of highly-rated mortgage-backed securities to its portfolio in 2002. The decline in net interest income reflects the decline in average earning assets. The net interest rate spread was 2.29% in 2002 compared with 1.89% in 2001, while the net yield on interest earning assets was 2.62% in 2002 and 2.57% in 2001. The increase in the spread is attributable to increased holdings of investment securities. The increase in the yield is attributable to increased holdings of investment securities partially offset by the decreased value of demand deposits in a lower interest rate environment.

For 2001, net interest income on a taxable equivalent basis amounted to $1,741 million compared with $1,811 million in 2000. The decline in net interest income in 2001 reflects several factors. First, the WTC disaster resulted in a disruption of markets, including payment and securities processing, which affected both the

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Company and other market participants. In addition, significant levels of liquidity were injected into the markets immediately following the disaster. These factors resulted in excess liquidity which could not be invested and unsettled trades at the Company, causing an estimated $45 million drop in net interest income and a temporary expansion of the Company’s balance sheet. Second, the decline reflects the Company’s ongoing strategy to shift the mix of its assets away from loans to highly-rated investment securities and short-term liquid assets. Lastly, the decline also results from the lower value of free funds in a declining interest rate environment. Average earning assets were $67.7 billion, up from $64.9 billion in 2000. Average loans were $38.8 billion in 2001 compared with $39.3 billion in 2000. Average securities were $18.6 billion in 2001, up from $15.8 billion in 2000. The Company added approximately $6 billion of highly-rated mortgage and asset backed securities to its securities portfolio in 2001. Substantially all of these securities were rated AAA. The net interest rate spread was 1.89% in 2001 compared with 1.85% in 2000, while the net yield on interest earning assets was 2.57% in 2001 and 2.79% in 2000.

For 2000, net interest income on a taxable equivalent basis amounted to $1,811 million. Average earning assets were $64.9 billion, up from the prior year level of $56.2 billion, reflecting growth in highly liquid, lower yielding assets generated by the Company’s securities servicing businesses and the acquisition of RBSTB. Average loans increased by $0.4 billion to $39.3 billion in 2000. The net interest rate spread was 1.85% in 2000, while the net yield on interest earning assets was 2.79%. The expansion of the Company’s securities servicing, global payment services, and asset management businesses continued to generate increased levels of deposits. These additional deposits were invested in high quality liquid assets which increased net interest income, although lowering the net interest rate spread and net yield.

Provision for Credit Losses

The provision for credit losses was $685 million in 2002 compared with $375 million in 2001 and $105 million in 2000. The increase in 2002 primarily reflects deterioration in the loan portfolio particularly for borrowers in the telecommunications and retail portfolios and additional provisioning related to aircraft leasing exposure to United Airlines, as well as the potential losses on leases to other domestic carriers. The increase in the provision in 2001 compared with 2000 primarily reflects the accelerated disposition program related to emerging telecommunications companies credits, the loss on an energy trading credit, and the general deterioration in credit quality in 2001.

Noninterest Expense

Total noninterest expense was $2,751 million in 2002, $2,819 million in 2001, and $2,546 million in 2000. Adjusting for higher expenses in 2001 due to the impact of the WTC disaster of $168 million and higher goodwill and intangibles amortization of $104 million compared to 2002, core noninterest expenses increased by $204 million, or 8%, in 2002 primarily related to acquisitions and higher spending for technology, and business continuity planning.

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Salaries and employee benefits were $1,581 million in 2002 compared with $1,593 million in 2001; however, 2001 included $34 million related to the WTC disaster. The number of employees at December 31, 2002 was 19,435, up slightly from 19,181 at the start of the year. This increase reflects the addition of approximately 500 employees through acquisitions partially offset by a 400 person staff reduction program in the second quarter of 2002. Severance expense was $19 million in 2002. Employee benefit expense decreased to $350 million in 2002 compared with $410 million in 2001, reflecting primarily lower incentive compensation.

Net occupancy and furniture and fixture expenses were $368 million in 2002 compared with $411 million the previous year. In 2002, the Company recorded $22 million in one-time occupancy expenses to reflect the estimated lease termination cost of a rented facility in Manhattan. In 2001, WTC disaster related expenses increased net occupancy expense by $38 million and furniture and equipment expense by $55 million. In 2002, higher business continuity-related expenses resulted in increased occupancy and depreciation expense.

Clearing expenses increase significantly in 2002 to $124 million from $61 million in 2001 and $36 million in 2000. The increase stems from the build out of the Company’s clearing and execution business. Sub-custodian expenses increased 13% in 2002 to $70 million as the Company continued to expand its global sub-custodian network to over 100 markets.

Software expenses increased by $25 million to $115 million in 2002, reflecting the companies continued investment in technology capabilities supporting its servicing activities.

In 2002, the Company adopted a new accounting pronouncement which no longer requires the amortization of goodwill. As a result, amortization of goodwill and intangibles declined to $8 million in 2002 from $112 million in 2001 and $115 million in 2000.

Other expenses in 2002 were $485 million compared with $490 million in 2001 and $478 million in 2000. The year 2001 included $41 million related to the WTC disaster. The adjusted 2002 increase of $36 million, or 8%, is largely tied to acquisitions.

Technology spending, including software, was $644 million in 2002, compared with $588 million in 2001 and $493 million in 2000. The Company made sizable investments in expanded business continuity configurations in 2002. While the rate of growth in technology spending slowed somewhat in 2002, the Company’s key technology initiatives were protected as the Company continues to believe that its technology investments are important for its long-term competitive positioning.

Total noninterest expense increased 11% in 2001 compared with 2000. Salaries and employee benefits increased 7% to $1,593 million in 2001. Net occupancy and furniture and fixture expenses increased by a combined $119 million to $411 million. Other expenses increased by 3% in 2001 to $490 million. Excluding the $168 million of expenses associated with the WTC disaster in 2001, expenses grew by 4% in 2001, reflecting both higher technology and acquisition-related expenses, partially offset by disciplined expense control.

A measure of the Company’s operating profitability is the efficiency ratio. This ratio is derived by dividing total noninterest expenses less other real estate expenses by total net interest income on a tax equivalent basis and noninterest income after subtracting securities gains. The efficiency ratio was 55.3% in 2002, compared with 54.8% in 2001, and 52.5% in 2000. The increase reflects both a changing business mix due to relatively lower margin, fiduciary business acquisitions, as well as the revenue softness given the poor capital markets environment.

The Company adopted fair value accounting for stock compensation in 2003 using the prospective method. Commencing January 1, 2003, all stock options grants will be fair valued and expensed over the vesting period. The Company’s grants of stock options typically vest over two to four years. Between January 1, 2003 and February 28, 2003, the Company granted approximately 18 million options to employees. These options have a fair value of $96 million which will be expensed over the next three years. The options were fair valued using a

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Black-Scholes model with the following assumptions:  dividend yield of 3%; expected volatility of 33%; risk free interest rate of 2.66%; and expected option lives of 5 years. The expected pre-tax impact of the options granted in 2003 is $29 million for 2003, $35 million for 2004, $28 million for 2005, and $4 million for 2006. The Company does not expect to make significant additional grants of options in 2003. All of the options granted so far in 2003 are nonqualifying options. The Company is able to record a tax benefit as nonqualifying options are expensed.

The Company has defined benefit pension plans in the U.S. and overseas. The U.S. plan accounts for 89% of the projected benefit obligation. Pension credits were $95 million, $98 million, and $62 million in 2002, 2001 and 2000. 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. For the Company’s U.S. plans, the key elements are the long-term rate of return on plan assets, the discount rate, the market-related value of plan assets, and the price used to value stock in the ESOP. Since 2000, these key elements have varied as follows:

As a result of the decline in the key elements for 2003, the pre-tax U.S. pension credit is expected to decline by $54 million.

The annual impact of changes in the key elements on the pension credit are shown in the tables below.

Income Taxes

The Company’s consolidated effective tax rates for 2002, 2001, and 2000 were 34.3%, 34.7%, and 36.5%. The decline in the effective rate in 2002 and 2001 reflects increased levels of tax credits from synthetic fuel and low-income housing investments partially offset in 2002 by higher state and local taxes.

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In addition to the tax credit investments discussed above, which have the effect of permanently reducing the Company’s tax expense, the Company also invests in leveraged leases which through accelerated depreciation postpone the payment of taxes to future years. For financial statement purposes, deferred taxes are recorded as a liability for future payment.

Business Segments Review

Segment Data

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

Business Segments Accounting Principles

The Company’s segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the segments will track their economic performance. Segment results are subject to restatement whenever improvements are made in the measurement principles or organizational changes are made.

The measure of revenues and profit or loss by operating segment has been adjusted to present segment data on a taxable equivalent basis. The provision for credit losses allocated to each reportable segment is based on management’s judgment as to average credit losses that will be incurred in the operations of the segment over a credit cycle of a period of years. Management’s judgment includes the following factors among others: historical charge-off experience and the volume, composition, and size of the loan 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. Assets and liabilities are match funded. Support and other indirect expenses are allocated to segments based on general internal guidelines.

The results of individual business segments exclude unusual items such as the impact of the WTC disaster in 2001, which is included with reconciling amounts.

Description of Business Segments

The Company reports data for the following four business segments:

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

Securities servicing provides financial institutions, corporations and financial intermediaries with a broad array of products and customized services for every step of the investment lifecycle. The Company facilitates the movement, settlement, recordkeeping and accounting of financial assets around the world by delivering timely and accurate information to issuers, investors and broker-dealers. The Company groups its securities servicing businesses into four categories, each comprised of separate, but related businesses. These are: issuer services, which include corporate trust, depositary receipts and stock transfer; investor services, which include global custody, securities lending and separate account services; broker-dealer services, which include mutual funds, government securities clearance, hedge fund servicing, exchange traded funds and UITs; and execution and clearing services, which include all of the activities in BNY Securities Group. This segment also includes customer-related foreign exchange trading.

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

The Company is a market leader in many of these businesses and has aggressively expanded to both enhance and expand its product and service offerings and to add new clients. The Company has completed 46 acquisitions since 1998 in these core services, has made significant investments in technology to maintain its industry-leading position, and has continued the development of new products and services that meet its clients’ needs.

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

The Company believes that credit is an important product for many of its customers to execute their business strategies. Since provision of the credit product by the Company offers lower returns on capital and potentially higher volatility of earnings, the Company has continued to reduce its credit exposures in recent years by culling its loan portfolio of non-strategic exposures, focusing on total relationship return measures and limiting the size of its individual credit exposures and industry concentrations.

Retail Banking includes retail deposit services, branch banking, consumer and residential mortgage lending. The Company operates 341 branches in 23 counties in the Tri-State region. The retail network is a stable source of low cost funding and provides a platform to cross-sell core services from the Servicing and Fiduciary businesses to both individuals and companies in the New York metropolitan area.

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

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

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Business Review

Servicing and Fiduciary Businesses

The financial performance of the Servicing and Fiduciary businesses segment in 2002 reflects the depressed activity levels in the capital markets.

The S&P 500 Index was down 23% for the year, with average daily price levels off 17% from 2001. Performance for the NASDAQ Index was even weaker, declining 32% for the year, with average daily prices down by 24%.

Although daily average trading volumes for the New York Stock Exchange increased by 17% in 2002, average NASDAQ volumes declined by 8%, resulting in a combined increase of only 2% for the year.

Global merger and acquisition activity was particularly weak, with completed transactions down 40% from 2001. Equity issuance proceeds were off by 10%.

Nevertheless, the Company continued to expand its servicing and fiduciary businesses in 2002 through both acquisitions and internal product development. In 2002 the Company agreed to acquire six businesses in execution services, three in asset management, and three in investor and issuer services. The transactions in 2002 were more tilted towards new products than in prior years as the Company sought to expand distribution synergies with its extensive client base.

The Company’s execution services acquisitions have attempted to build out the most complete array of agency equity trading capabilities, offering the Company’s investor services customers highly flexible means of completing their trade executions in a cost and market-impact efficient manner. The asset management acquisitions have added both expanded product capability for high net worth individuals, as well as new distribution channels.

The Company expanded its U.S. hedge fund service offering through the acquisition of International Funds Administration, a leading provider of administration services to U.S. hedge funds.

The Company is continuing to expand overseas by bringing its proven U.S. securities servicing business model to the UK, continental Europe and Asia. In 2002, the Company expanded its mid-office outsourcing platform and international clearing services through the acquisition of Tilney Investment Management and

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entered into a significant global equities clearance outsourcing agreement with ING. A separate marketing alliance with ING for investor services will help the Company expand in markets where ING has a strong local presence, such as the Benelux countries and Germany.

New products introduced in 2002 included sophisticated collateral management systems that enable clients to more easily and more cost effectively manage and finance their securities inventories. Another new product was the launching of the NASDAQ-sponsored BLDRS exchange-traded funds products which allow investors to participate in international investments by purchasing baskets of depositary receipts, which the Company services.

The securities servicing businesses benefit from the Company’s industry-leading technology, which is characterized by a common open architecture, straight-through processing, and scalability. Open architecture enables common technology platforms to service many business lines, driving efficiency, quality of information, and functionality. For example, in 2002, the Company was able to introduce its securities master data base across the majority of its processing platforms. In addition, the Company continued to deploy Inform, the Company’s browser based information delivery system across its customer base. By the end of 2002, the Company had 38,000 Inform users, representing 4,000 customers in over 60 countries. The Company also continued to make progress in straight through processing where 84% of transactions are now processed this way, an increase of 38% in two years. In the highly automated U.S. market, the rate is over 94%.

The Pershing acquisition will continue the expansion of the Servicing and Fiduciary business. See “Pershing Acquisition”.

With respect to the financial results, noninterest income was $2,728 million in 2002 compared with $2,651 million in 2001 and $2,479 million in 2000. Securities servicing fees increased to $1,896 million in 2002 as compared with $1,775 million in 2001 and $1,681 million in 2000. The 7% securities servicing revenue increase in 2002 reflects acquisitions and the benefit of well-diversified businesses which held their own in spite of a difficult market environment. The Company’s fixed income and cash-linked businesses, namely corporate trust, broker-dealer services, and global liquidity services all performed well, as did execution services given market share gains. The Company’s equity-linked businesses, in particular ADRs, were weaker as a result of the environment. Excluding acquisitions, core securities servicing revenues contracted 3% in 2002.

At December 31, 2002, assets under custody were $6.8 trillion, including $1.9 trillion of cross-border assets, compared with $6.9 trillion in 2001 reflecting weaker markets. Equity securities composed 26% of the assets under custody at December 31, 2002 while fixed income securities were 74%. Assets under custody in 2002 consisted of assets related to the custody business of $3.2 trillion, mutual funds of $1.2 trillion, broker-dealer services assets of $1.8 trillion, and all other assets of $0.6 trillion. In 2001, market share gains from new business wins were partially offset by weak markets that resulted in assets under custody declining slightly to $6.9 trillion in 2001 from $7.0 trillion in 2000.

Fees from global payment services in 2002 were $292 million compared with $287 million in 2001 and $261 million in 2000. The increased revenues reflect higher funds transfer volumes and increased multi-currency activity from existing clients, as well as the addition of new clients. This offset continued weakness in global trade services. In 2001, fees increased primarily as a result of customers electing to pay for services in fees rather than maintaining higher compensating balances in a declining interest rate environment, as well as new business growth in cash management, reflecting the continued success of CA$H-Register Plus^R, the Company’s internet-based electronic banking service.

Fees from private client services and asset management grew to $344 million in 2002, up from $314 million in 2001 and $300 million in 2000. In 2002, the increase reflects acquisitions, as well as continued strong flows into alternate investment funds offered by the Company’s Ivy Asset Management subsidiary partially offset by

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lower asset price levels. Excluding acquisitions, core growth was approximately 2% in 2002. In 2001, strength in alternate investment and short-term money market product lines offset lower asset price levels.

Asset under management (“AUM”) were $76 billion at December 31, 2002 compared with $67 billion at December 31, 2001, while assets under administration were $28 billion compared with $33 billion at December 31, 2001. The increase in assets under management reflects acquisitions and growth in the Company’s alternative investments business partially offset by decline in asset values. Institutional clients represent 64% of AUM while individual clients equal 36%. AUM at December 31, 2002, are 29% invested in equities, 25% in fixed income, 8% in alternative investments, and the remaining in liquid assets.

In 2002, noninterest income was also impacted by weaker client-related foreign exchange revenues due to decreased volatility in the currency markets and a significant reduction in client activity in the second half of 2002.

Net interest income in the Servicing and Fiduciary businesses segment was $471 million for 2002 compared with $588 million in 2001 and $672 million in 2000. The decrease in net interest income in 2002 and 2001 is primarily attributable to the decline in interest rates which caused compression on the spread made from securities servicing deposits. Average assets for 2002 were $8.3 billion compared with $9.0 billion in 2001 and $8.6 billion in 2000. Average deposits in the Servicing and Fiduciary segment were $31.2 billion versus $33.0 billion in 2001 and $35.3 billion in 2000, reflecting lower levels of activity in the securities processing business.

Net charge-offs in the Servicing and Fiduciary businesses segment were zero in 2002, 2001, and 2000. Nonperforming assets were $16 million compared with zero in 2001 and 2000.

Noninterest expense increased by 10% in 2002 to $1,933 million compared with $1,765 million in 2001 and $1,665 million in 2000. The rise in noninterest expense in both 2002 and 2001 is attributable to acquisitions, as well as the Company’s continued investment in technology and business continuity planning. Clearing expenses were up in 2002 reflecting the build out of the Company’s execution and clearing business. Sub-custodian expenses also increased in 2002.

Corporate Banking

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

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Over the past several years, however, the Company has been seeking to improve its overall risk profile by reducing its credit exposures by eliminating non-strategic exposures, cutting back large individual exposures and avoiding outsized industry concentrations. Since 1999, the Company has reduced credit exposure to its corporate client base by $14.6 billion, or 31%. In 2002, the Company achieved its targeted goal of reducing corporate credit exposures by $7 billion and set a new target of further reducing its corporate credit exposures by $9 billion by the end of 2004.

The Corporate Banking segment’s net interest income was $400 million in 2002 compared with $491 million in 2001 and $543 million in 2000. The decrease in 2002 and 2001 reflects a decline in assets particularly from non-financial companies, as well as a decline in both the volume and value of low cost short-term deposits. Average assets for 2002 were $22.7 billion compared with $26.9 billion in 2001 and $29.8 billion in 2000. Average deposits in the corporate bank were $7.0 billion versus $7.7 billion in 2001 and $6.7 billion in 2000.

The provision for credit losses, which is assessed on a long-term credit cycle basis (see “Business Segment Accounting Principles”), was $139 million in 2002 compared with $124 million and $127 million in 2001 and 2000. The increase in 2002 principally reflects a higher expected loss rate for the portfolio, partially offset by the reduction in exposures.

Net charge-offs in the Corporate Banking segment were $324 million, $356 million, and $78 million in 2002, 2001, and 2000. The charge-offs in 2002 primarily relates to an internet backbone company, a large retailer, and several telecom credits. The charge-offs in 2001 reflect the disposition of emerging telecom credits and a loan to an energy trading company. Nonperforming assets were $414 million, $214 million, and $187 million in 2002, 2001 and 2000. The increase in nonperforming assets in 2002 primarily reflects exposures to the operating subsidiaries of a large cable operator, as well as to a large insurance company.

The decrease in noninterest income to $283 million in the current year was due to lower capital markets fees, as loan syndication volumes were down. The increase in 2001 compared with 2000 reflected increased capital markets fees. In 2002, the Company was the co-manager on 143 underwritings, up from 132 in 2001. In 2000, the Company was the co-manager on 60 underwritings. The decrease in noninterest expense in 2002 was due to lower compensation costs. The increase in noninterest expense in 2001 compared with 2000 reflects higher compensation related to a higher level of capital markets activity.

Retail Banking

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The Retail Banking segment provides the Company with a stable source of core deposits. Continued investment has expanded the products offered through the retail branch system. The branch banking system is focused on the suburban Tri-State metropolitan area. Many of the segment’s 700,000 customers keep their main household account with the Company.

Net interest income in the Retail Banking sector was $472 million in 2002, compared with $493 million in 2001 and $510 million in 2000. Net interest income in the branch banking network in 2002 and 2001 was adversely impacted by the decrease in the value of noninterest-bearing sources of funds in a lower interest rate environment. Average deposits generated by the Retail Banking segment were $13.0 billion in 2002 compared with $12.7 billion in 2001 and $12.7 billion in 2000. Average noninterest-bearing deposits were $3.9 billion in 2002, compared with $3.9 billion in 2001, and $3.7 billion in 2000. Average assets in the retail banking sector were $5.1 billion, compared with $4.5 billion in 2001, and $4.4 billion in 2000.

Noninterest income was $118 million in 2002 compared with $115 million in 2001 and $99 million in 2000. In 2002, noninterest income increased slightly as a result of higher account servicing fees. The increase in 2001 from 2000 reflects better penetration of the customer base and improved pricing. Noninterest expense was $319 million in 2002, compared with $312 million in 2001, and $305 million in 2000.

Net charge-offs were $20 million, $15 million and $7 million in 2002, 2001, and 2000, reflecting modestly higher loss rates on consumer assets. Nonperforming assets were $10 million in 2002 compared with $8 million in 2001 and $6 million in 2000.

Financial Markets

The Financial Markets Segment centralizes interest rate risk management for the Company. The increase in income before taxes reflects increased holdings of mortgage-backed securities, offset by lower income from proprietary investing and trading activities. The increase in mortgage-backed securities reflects the Company’s continuing strategy to reduce investment in higher risk corporate loans and increase holdings of highly-rated, more liquid investment securities.

Net interest income was $361 million in 2002, compared with $232 million in 2001, and $122 million in 2000. The increase in 2002 and 2001 reflects lower funding costs and an increase in assets, primarily highly-rated mortgage-backed securities. Average assets in the Financial Markets segment were $41.2 billion, up from $35.3 billion in 2001 and $32.7 billion in 2000.

The provision for credit losses, which is assessed on a long-term credit cycle basis (see “Business Segment Accounting Principles”), was $20 million in 2002 compared with $4 million in 2001. The increase in 2002 principally reflects a higher expected loss rate for the portfolio, in light of deterioration in the value of aircraft collateral. Net charge-offs were $127 million and $4 million in 2002 and 2001, respectively, and a recovery of

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$1 million in 2000. The increase in charge-offs in 2002 primarily reflects the Company’s charge-off of $125 million of its $130 million leasing exposure to United Airlines.

Noninterest income was $194 million in 2002, compared with $297 million in 2001, and $249 million in 2000. The decrease in noninterest income in 2002 from 2001 reflects lower equity securities gains, less client-related interest rate hedging, and a decline in gains from the Company’s equity arbitrage business. The increase in noninterest income in 2001 from 2000 reflects strong trading performance, particularly in interest rate derivatives and gains from the Company’s equity arbitrage business.

Noninterest expense increased in 2002 due to increased technology expenditures associated primarily with higher interest rate derivatives revenue. The increase in noninterest expenses in 2001 reflects higher compensation related to the 2001 increased revenues.

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