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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, 2003

Commission file number 1-9718

THE PNC FINANCIAL SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)

One PNC Plaza

249 Fifth Avenue

Pittsburgh, Pennsylvania 15222-2707

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code - (412) 762-2000

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

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

$1.80 Cumulative Convertible Preferred Stock – Series A, par value $1.00

$1.80 Cumulative Convertible Preferred Stock – Series B, par value $1.00

8.25% Convertible Subordinated Debentures Due 2008

Indicate by check mark whether the registrant: (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. Yes x No ¨

Indicate by check mark if the 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 ¨

The aggregate market value of the registrant’s outstanding voting common stock held by nonaffiliates on June 30, 2003, determined using the per share closing price on that date on the New York Stock Exchange of $48.81, was approximately $13.6 billion. There is no non-voting common equity of the registrant outstanding.

Number of shares of registrant’s common stock outstanding at February 27, 2004: 282,862,121

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement of The PNC Financial Services Group, Inc. to be filed pursuant to Regulation 14A for the annual meeting of shareholders to be held on April 27, 2004 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K. The incorporation by reference herein of portions of the Proxy Statement shall not be deemed to specifically incorporate by reference the information referred to in Items 306(c), 306(d) and 402(a)(8) and (9) of Regulation S-K.

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PART I

Forward-Looking Statements: From time to time The PNC Financial Services Group, Inc. (“PNC” or “Corporation”) has made and may continue to make written or oral forward-looking statements with respect to the Corporation’s outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on the Corporation’s business operations or performance. This Annual Report on Form 10-K (“Report” or “Form 10-K”) also includes forward-looking statements. With respect to all such forward-looking statements, see Cautionary Statement Regarding Forward-Looking Information in Item 7 of this Report.

ITEM 1 – BUSINESS

BUSINESS OVERVIEW The Corporation is one of the largest diversified financial services companies in the United States, operating businesses engaged in regional community banking; wholesale banking, including corporate banking, real estate finance and asset-based lending; wealth management; asset management; and global fund processing services. The Corporation operates directly and through numerous subsidiaries, providing certain products and services nationally and others in PNC’s primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The Corporation also provides certain banking, asset management and global fund processing services internationally. At December 31, 2003, the Corporation’s consolidated total assets, deposits and shareholders’ equity were $68.2 billion, $45.2 billion and $6.6 billion, respectively.

PNC was incorporated under the laws of the Commonwealth of Pennsylvania in 1983 with the consolidation of Pittsburgh National Corporation and Provident National Corporation. Since 1983, PNC has diversified its geographical presence, business mix and product capabilities through internal growth and strategic bank and non-bank acquisitions and the formation of various non-banking subsidiaries.

Information on certain acquisitions is included in Note 3 Acquisitions and information on divestitures is included in Note 6 Discontinued Operations of the Notes to Consolidated Financial Statements included in Item 8 of this Report and is incorporated herein by reference.

REVIEW OF LINES OF BUSINESS In addition to the following information relating to the Corporation’s lines of business, information is set forth under the captions Line of Business Highlights and Review of Businesses included in Item 7 of this Report and is incorporated herein by reference. Also, financial and other information by line of business is included in Note 27 Segment Reporting of the Notes To Consolidated Financial Statements included in Item 8 of this Report and is incorporated herein by reference.

REGIONAL COMMUNITY BANKING

Regional Community Banking provides deposit, lending, cash management and investment services to two million consumer and small business customers within PNC’s primary geographic footprint.

The goal of Regional Community Banking is to generate sustainable revenue growth by consistently increasing its base of satisfied and loyal customers. The Corporation’s strategy is to drive revenue growth by building a base of checking account relationships which provide fee revenue and a low-cost funding source for loans and investments. PNC seeks to generate additional revenue growth by expanding relationships with these customers through cross-selling of other products and services.

Consistent with this strategy, on January 1, 2004 the Corporation acquired United National Bancorp (“United National”). United National was a bank holding company with over $3 billion in assets. A subsidiary of United National, UnitedTrust Bank, provides a full range of commercial and retail banking services through 45 branches in New Jersey and seven branches in Pennsylvania. With this acquisition, PNC increased its customer base by more than 100,000 households and businesses. The acquisition was completed through the merger of United National with and into PNC Bancorp, Inc., a wholly owned subsidiary of the Corporation. United National shareholders received an aggregate of approximately $321 million in cash and

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6.6 million shares of PNC common stock valued at $360 million, for an aggregate of $681 million. The transaction resulted in the addition of approximately $3 billion of assets and $2.3 billion of deposits and the recognition of goodwill estimated to exceed $550 million in the first quarter of 2004. See Cautionary Statement Regarding Forward-Looking Information in Item 7 of this Report and Note 3 Acquisitions in the Notes to Consolidated Financial Statements under Item 8 of this Report for further information.

Also, in August 2003, PNC Bank, National Association (“PNC Bank, N.A.”) announced an alliance with The Stop & Shop Supermarket Company to become the exclusive bank in all new Stop & Shop stores located in New Jersey and expects to place 40 branches in Stop & Shop’s new and existing New Jersey stores over the next four years.

WHOLESALE BANKING-OVERVIEW

Wholesale Banking (which includes Corporate Banking, PNC Real Estate Finance and PNC Business Credit) provides lending, treasury management and capital markets-related products and services to mid-sized corporations, government entities and selectively to large corporations. Lending products include secured and unsecured loans, letters of credit and equipment leases. Treasury management services include cash and investment management, receivables management, disbursement services and global trade services. Capital markets products include foreign exchange, derivatives, loan syndications and securities underwriting and distribution.

Wholesale Banking is focused on becoming a trusted business advisor for its customers and on acquiring, retaining and growing its customer base. Wholesale Banking’s goals include growth in market share, higher levels of customer and employee satisfaction and increased shareholder returns. Now that the institutional lending repositioning that began in 2001 is essentially complete, management seeks to drive quality loan growth in 2004 and 2005 as economic conditions improve, reversing prior trends.

WHOLESALE BANKING – CORPORATE BANKING

Corporate Banking provides credit, equipment leasing, treasury management and capital markets products and services to mid-sized corporations, government entities and selectively to large corporations primarily within PNC’s geographic region. Treasury management activities, capital markets products and equipment leasing products offered through Corporate Banking are marketed by several businesses across the Corporation.

The goal of Corporate Banking is to acquire, grow and retain customer relationships through adapting its institutional expertise to the middle market with an emphasis on higher-margin noncredit products and services, especially treasury management and capital markets, and to improve the risk/return characteristics of the lending business. Corporate Banking intends to build customer relationships, continue its efforts to manage credit risk and liquidate loans held for sale.

PNC, through the Corporate Banking line of business, administers Market Street Funding Corporation (“Market Street”), a multi-seller asset-backed commercial paper conduit. Effective July 1, 2003, PNC consolidated Market Street into its financial statements in connection with the Corporation’s adoption of FASB Interpretation No. 46 (Revised 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”). The consolidation of Market Street had no impact on 2003 earnings for Corporate Banking. See the Off-Balance Sheet Arrangements section of Item 7 of this Report and Note 2 Variable Interest Entities of the Notes to Consolidated Financial Statements in Item 8 of this Report for further information.

Corporate Banking operates primarily within PNC’s principal geographical markets.

WHOLESALE BANKING – PNC REAL ESTATE FINANCE

PNC Real Estate Finance specializes in financial solutions for the acquisition, development, permanent financing and operation of commercial real estate nationally. In addition to the primary Wholesale Bank products and services, PNC Real Estate Finance originates and sells commercial mortgage loans and provides commercial mortgage loan servicing and other industry specific products and services to clients that develop, own, manage or invest in commercial real estate. PNC’s commercial real estate financial services platform provides processing services through Midland Loan Services, Inc. (“Midland”). Midland is a leading third-party provider of loan servicing and technology to the commercial real estate finance industry. PNC Real Estate Finance, which operates nationwide, also includes PNC MultiFamily Capital, a national provider of financial services for the multi-family housing industry, particularly affordable and senior housing as well as healthcare facilities.

PNC Real Estate Finance seeks to maximize its distribution and lending capabilities in accordance with current economic conditions and acquire new clients. The continued origination and sale of commercial mortgage loans, which is part of the ongoing business, was profitable in 2003. In addition, the low income housing tax credit distribution continues to grow. However, the current phase of the economic cycle has limited the opportunities to replace the run-off of loans with new loans having acceptable risks and returns.

WHOLESALE BANKING – PNC BUSINESS CREDIT

PNC Business Credit provides lending services to middle market customers nationally, including loans secured by accounts receivable, inventory, machinery and equipment, and other collateral. Its customers include manufacturing, wholesale, distribution, retailing and service industry companies.

PNC Business Credit’s focus is to continue to achieve scale and market leadership in national markets targeting middle market clientele. PNC Business Credit plans to build upon sales momentum achieved over the past two years and capitalize on scale advantages over regional competitors, while striving to maintain hold levels under $35 million per client.

In January 2002, PNC Business Credit acquired a portion of National Bank of Canada’s (“NBOC”) U.S. asset-based lending business in a purchase business combination. NBOC exercised its put option effective July 15, 2003 related to the loan portfolio it had retained as part of the 2002 transaction. See Note 3 Acquisitions of the Notes to the Consolidated Financial

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Statements included under Item 8 of this Report for additional information.

PNC ADVISORS

PNC Advisors provides a broad range of tailored investment, trust and private banking products and services to affluent individuals and families, including full-service brokerage through J.J.B. Hilliard, W.L. Lyons, Inc. (“Hilliard Lyons”) and investment consulting and trust services to the ultra-affluent through its Hawthorn division. PNC Advisors also serves as investment manager and trustee for employee benefit plans and charitable and endowment assets and provides defined contribution plan services and investment options through its Vested Interest^® product. PNC Advisors provides services to individuals and corporations primarily within PNC’s primary geographic markets.

To provide long-term financial planning, PNC Advisors’ wealth planners work closely with a team of investment, trust and banking professionals to develop comprehensive solutions for their clients. The momentum that PNC Advisors has built over the past year, combined with an experienced team, the introduction of managed accounts and an extensive delivery system, positions PNC Advisors as a trusted advisor for its customers.

BLACKROCK

BlackRock, Inc. (“BlackRock”) is one of the largest publicly traded investment management firms in the United States with approximately $309 billion of assets under management at December 31, 2003. BlackRock manages assets on behalf of institutions and individuals worldwide through a variety of fixed income, liquidity and equity mutual funds, separate accounts and alternative investment products. Mutual funds include the flagship fund families, BlackRock Funds and BlackRock Liquidity Funds (formerly BlackRock Provident Institutional Funds). In addition, BlackRock provides risk management and investment system services to institutional investors under the BlackRock Solutions^® brand name.

The ability of BlackRock to grow assets under management is the key driver of increases in revenue, earnings and ultimately shareholder value. BlackRock’s strategy for growth in assets under management includes a focus on achieving superior relative client investment performance objectives and providing best in class client service. The business attracts and retains talented professionals and enhances its technology and operating capabilities to deliver on its strategy. BlackRock also continues to expand the firm’s expertise and breadth of distribution.

BlackRock is approximately 70% owned by PNC and is consolidated into PNC’s financial statements. Accordingly, approximately 30% of BlackRock’s earnings are recognized as a minority interest expense in the Consolidated Statement Of Income included in Item 8 of this Report.

PFPC

PFPC is among the largest providers of mutual fund transfer agency and accounting and administration services in the United States, offering a wide range of fund processing services to the investment management industry and providing processing solutions to the international marketplace through its Ireland and Luxembourg operations.

Strategically, PFPC is focusing technological resources on targeted web-based initiatives, streamlining operations and developing flexible systems architecture and client-focused servicing solutions. To meet the growing needs of the international marketplace, PFPC is also continuing its global expansion.

SUBSIDIARIES The corporate legal structure currently consists of two subsidiary banks, including their subsidiaries, and over 60 active non-bank subsidiaries. PNC Bank, N.A., headquartered in Pittsburgh, Pennsylvania, is the Corporation’s principal bank subsidiary. At December 31, 2003, PNC Bank, N.A. had total consolidated assets representing approximately 91% of the Corporation’s consolidated assets. For additional information on subsidiaries, see Exhibit 21 to this Form 10-K, which is incorporated herein by reference.

STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The following statistical information is included on the indicated pages of this Report and is incorporated herein by reference:

SUPERVISION AND REGULATION

OVERVIEW

The Corporation is a bank holding company registered under the Bank Holding Company Act of 1956 as amended (“BHC Act”) and a financial holding company under the Gramm-Leach-Bliley Act (“GLB Act”).

The Corporation and its subsidiaries are subject to numerous governmental regulations, some of which are highlighted below and in Note 4 Regulatory Matters of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which is incorporated herein by reference. Applicable laws and regulations restrict permissible activities and investments and require compliance with protections for loan, deposit, brokerage, fiduciary, mutual fund and other customers, among other things. They also restrict the Corporation’s ability to repurchase stock or to receive dividends from its bank subsidiaries and impose capital adequacy requirements. The consequences of noncompliance can include substantial monetary and nonmonetary sanctions.

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In addition, the Corporation and its subsidiaries are subject to comprehensive examination and supervision by, among other regulatory bodies, the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) and the Office of the Comptroller of the Currency (“OCC”). These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of the Corporation’s operations.

The Corporation and certain of its subsidiaries are also subject to regulation by the Securities and Exchange Commission (“SEC”) by virtue of the Corporation’s status as a public company and due to the nature of certain of its businesses.

There are numerous rules governing the regulation of financial services institutions and their holding companies. Accordingly, the following discussion is general in nature and does not purport to be complete or to describe all of the laws and regulations that apply to the Corporation and its subsidiaries.

The discussion below begins by presenting a general description of the principal regulations affecting the Corporation. It then summarizes key regulatory developments that took place in 2003.

GENERAL

As a bank holding company and, as discussed below, a financial holding company, the Corporation is subject to supervision and regular inspection by the Federal Reserve Board. The Federal Reserve Board’s prior approval is required whenever the Corporation proposes to acquire all or substantially all of the assets of any bank or thrift, to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank or thrift, or to merge or consolidate with any other bank holding company or thrift holding company. When reviewing bank acquisition applications for approval, the Federal Reserve Board considers, among other things, each subsidiary bank’s record in meeting the credit needs of the communities it serves in accordance with the Community Reinvestment Act of 1977, as amended (“CRA”). At December 31, 2003, both of the Corporation’s bank subsidiaries, PNC Bank, N.A. and PNC Bank, Delaware, were rated “outstanding” with respect to CRA.

The GLB Act permits a qualifying bank holding company to become a “financial holding company” and thereby to affiliate with financial companies engaging in a broader range of activities than had previously been permitted for a bank holding company. Permitted affiliates include securities underwriters and dealers, insurance companies and companies engaged in other activities that are determined by the Federal Reserve Board, in consultation with the Secretary of the Treasury, to be “financial in nature or incidental thereto” or are determined by the Federal Reserve Board unilaterally to be “complementary” to financial activities. A bank holding company may elect to become a financial holding company if each of its subsidiary banks is “well capitalized,” is “well managed,” and has at least a “satisfactory” CRA rating. The Corporation became a financial holding company as of March 13, 2000.

The Federal Reserve Board is the “umbrella” regulator of a financial holding company. In addition, the financial holding company’s operating entities, such as its subsidiary broker-dealers, investment managers, investment companies, insurance companies and banks, are also subject to the jurisdiction of various federal and state “functional” regulators.

The Corporation’s subsidiary banks and their subsidiaries are subject to supervision and examination by applicable federal and state banking agencies, including the OCC with respect to PNC Bank, N.A. and the Federal Deposit Insurance Corporation (“FDIC”) and the Delaware Office of the State Bank Commissioner with respect to PNC Bank, Delaware. One aspect of this regulation is that the Corporation’s subsidiary banks are subject to various federal and state restrictions on their ability to pay dividends to PNC Bancorp, Inc., the parent of the subsidiary banks, which in turn may affect the ability of PNC Bancorp, Inc. to pay dividends to PNC at the parent company level. These dividends constitute the principal source of the Corporation’s revenue and cash flow at the parent company level. Without regulatory approval, the amount available for the payment of dividends by PNC Bank, N.A. and PNC Bank, Delaware was approximately $324 million at December 31, 2003. The Corporation’s subsidiary banks are also subject to federal laws limiting extensions of credit to their parent holding company and non-bank affiliates as discussed in Note 4 Regulatory Matters of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which is incorporated herein by reference.

In 2003, PNC Bank, N.A. received regulatory approval to transfer $500 million in cash capital surplus to PNC. The first installment occurred in December 2003 and the second installment occurred in January 2004.

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each such bank. Consistent with the “source of strength” policy for subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the corporation’s capital needs, asset quality and overall financial condition.

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In addition to dividends from PNC Bank, N.A., other sources of parent company liquidity for the Corporation include cash and short-term investments, as well as dividends and loan repayments from other subsidiaries. As of December 31, 2003, the Corporation had approximately $1.7 billion in funds available from its cash and short-term investments or other funds available from unrestricted subsidiaries for the repayment of contractual obligations with maturities of less than one year of $1.1 billion. The Corporation regularly assesses its ability to meet both the obligatory and discretionary funding needs of the parent company. Based on the amount of funds currently available at the parent company and the projected amount of dividends from PNC Bank, N.A., and taking into account the cash portion of the United National acquisition, management expects the parent company to have sufficient liquidity to meet current obligations to its debt holders, vendors, and others, and to pay dividends at current rates through the next twelve months.

Subsidiary banks are also limited by law and regulation in the scope of permitted activities and investments. Subsidiary banks and their operating subsidiaries may engage in any activities that are determined by the OCC to be part of or incidental to the business of banking. The GLB Act, however, permits a national bank, such as PNC Bank, N.A. to engage in expanded activities through the formation of a “financial subsidiary.” PNC Bank, N.A. has filed a financial subsidiary certification with the OCC and may thus engage through a financial subsidiary in any activity that is financial in nature or incidental to a financial activity with certain exceptions, including insurance underwriting, insurance investments, real estate investment or development, and merchant banking.

In order to qualify to establish or acquire a financial subsidiary, PNC Bank, N.A. and each of its depository institution affiliates must be “well capitalized” and “well managed” and may not have a less than “satisfactory” CRA rating. In addition, the total assets of all financial subsidiaries of a national bank may not exceed the lesser of $50 billion or 45% of the parent bank’s total assets. A national bank that is one of the largest 50 insured banks in the United States, such as PNC Bank, N.A. must also have issued debt with certain minimum ratings. In addition to calculating its risk-based capital information from its consolidated financial statements, a national bank with one or more financial subsidiaries must also be “well capitalized” after excluding from its assets and equity all equity investments, including retained earnings, in a financial subsidiary, and the assets of the financial subsidiary from the bank’s consolidated assets. Any published financial statement for a national bank with a financial subsidiary must provide risk-based capital information under both methods described above. PNC Bank, N.A. provides this information under both methods in its quarterly Consolidated Reports of Condition and Income to the OCC. The national bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.

As a regulated financial services firm, the Corporation’s relationships and good standing with its regulators are of fundamental importance to the continuation and growth of the Corporation’s businesses. The Federal Reserve Board, OCC, SEC, and other domestic and foreign regulators have broad enforcement powers, and powers to approve, deny, or refuse to act upon applications or notices of the Corporation or its subsidiaries to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations. In addition, the Corporation and its bank subsidiaries are subject to examination by various regulators, which results in examination reports and ratings (which are not publicly available) that can impact the conduct and growth of the Corporation’s businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. An examination downgrade by any of the Corporation’s federal bank regulators potentially can result in the imposition of significant limitations on the activities and growth of the Corporation and its subsidiaries.

For example, as subsidiaries of a financial holding company under the GLB Act, the non-bank subsidiaries of the Corporation are allowed to conduct new financial activities or acquire non-bank financial companies with after-the-fact notice to the Federal Reserve Board. In addition, the Corporation’s non-bank subsidiaries (and financial subsidiaries of the Corporation’s subsidiary banks) are now permitted to engage in certain activities that were not permitted for banks and bank holding companies prior to enactment of the GLB Act, and to engage on less restrictive terms in certain activities that were previously permitted. Among other activities, the Corporation currently relies on its status as a financial holding company to conduct mutual fund distribution activities, merchant banking activities, and underwriting and dealing activities.

To continue to qualify for financial holding company status, the Corporation’s subsidiary banks must maintain “well capitalized” capital ratios, examination ratings of “1” or “2” (on a scale of 1 to 5), and certain other criteria that are incorporated into the definition of “well managed” under the BHC Act and Federal Reserve Board rules. If the Corporation were no longer to qualify for this status, it could not continue to enjoy the after-the-fact notice process for new non-banking activities and non-banking acquisitions, and would be required promptly to enter into an agreement with the Federal Reserve Board providing a plan for the Corporation’s subsidiary bank(s) to meet the “well capitalized” and “well managed” criteria. The Federal Reserve Board would have broad authority to limit the activities of the Corporation. Failure to satisfy the criteria within a six-month period could result in a requirement that the Corporation conform its existing non-banking activities to activities that were permissible prior to the enactment of the GLB Act. If a subsidiary bank of the Corporation failed to maintain a “satisfactory” or better rating under the CRA, the Corporation could not commence new activities or make new investments in reliance on the GLB Act.

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In addition, if the Corporation’s subsidiary banks were no longer “well capitalized” and “well managed” within the meaning of the BHC Act and Federal Reserve Board rules (which take into consideration capital ratios, examination ratings and other factors), the expedited processing of certain types of Federal Reserve Board applications would not be available to the Corporation. Moreover, examination ratings of “3” or lower, lower capital ratios than peer group institutions, regulatory concerns regarding management, controls, assets, operations or other factors, can all potentially result in practical limitations on the ability of a bank or bank holding company to engage in new activities, grow, acquire new businesses, repurchase its stock or pay dividends, or to continue to conduct existing activities.

Certain subsidiaries of the Corporation’s BlackRock subsidiary have qualified as “financial subsidiaries,” as described above, of PNC Bank, N.A. If a subsidiary bank of the Corporation were to fail to meet the “well capitalized” or “well managed” and related criteria, PNC Bank, N.A. would be required to enter into an agreement with the OCC to correct the condition. The OCC would have the authority to limit the activities of the bank. If the condition were not corrected within six months or within any additional time granted by the OCC, PNC Bank, N.A. could be required to conform the activities of its financial subsidiaries to activities in which a national bank could engage directly. In addition, if the bank or any insured depository institution affiliate receives a less than satisfactory CRA examination rating, PNC Bank, N.A. would not be permitted to engage in any new activities or to make new investments in reliance on the financial subsidiary authority.

The federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company. The extent of these powers depends upon whether the institution in question is considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Generally, the smaller an institution’s capital base in relation to its total assets, the greater the scope and severity of the agencies’ powers, ultimately permitting the agencies to appoint a receiver for the institution. Business activities may also be influenced by an institution’s capital classification. For instance, only a “well capitalized” depository institution may accept brokered deposits without prior regulatory approval and an “adequately capitalized” depository institution may accept brokered deposits only with prior regulatory approval. At December 31, 2003, both of the Corporation’s subsidiary banks exceeded the required ratios for classification as “well capitalized.” Additional discussion of capital adequacy requirements is set forth under the caption “Capital And Funding Sources” in the Consolidated Balance Sheet Review section of Item 7 of this Report and in Note 4 Regulatory Matters of the Notes to Consolidated Financial Statements in Item 8 of this Report, which sections are incorporated herein by reference.

Regulatory matters could also increase the cost of FDIC deposit insurance premiums to an insured bank. Both of the Corporation’s subsidiary banks are insured by the FDIC and subject to premium assessments. Since 1996, the FDIC has not assessed banks in the most favorable capital and assessment risk classification categories for insurance premiums for most deposits, due to the favorable ratio of the assets in the FDIC’s deposit insurance funds to the aggregate level of insured deposits outstanding. This has resulted in significant cost savings to all insured banks. Recent costs to the FDIC in resolving several large bank and savings institution receiverships, however, have caused this ratio to decline to the point that the FDIC may be required in the near future to once again begin to assess deposit insurance premiums against insured banks in the most favorable capital and assessment risk classification categories. Deposit insurance premiums are assessed as a percentage of the deposits of the insured institution. If the FDIC assesses premiums for all deposits, it would impose a significant cost to all insured banks, including the Corporation’s subsidiary banks, reducing the net spread between deposit and other bank funding costs and the earnings from assets and services of the bank, and thus the net income of the bank. FDIC deposit insurance premiums are “risk based”; therefore, higher fee percentages would be charged to banks that have lower capital ratios or higher risk profiles. These risk profiles may take into account weaknesses that are found by the primary banking regulator through its examination and supervision of the bank. A negative evaluation by the FDIC or a bank’s primary federal banking regulator could increase the costs to a bank and result in an aggregate cost of deposit funds higher than that of competing banks in a lower risk category.

The Corporation’s subsidiary banks are subject to “cross-guarantee” provisions under federal law which provide that if one of these banks fails or requires FDIC assistance, the FDIC may assess a “commonly-controlled” bank for the estimated losses suffered by the FDIC. Such liability could have a material adverse effect on the financial condition of any assessed bank and the Corporation. While the FDIC’s claim is junior to the claims of depositors, holders of secured liabilities, general creditors and subordinated creditors, it is superior to the claims of shareholders and affiliates, such as the Corporation.

The Corporation’s subsidiaries are subject to regulatory requirements imposed by the Federal Reserve Board and other federal and state agencies. The Corporation’s registered broker-dealer subsidiaries, including one of BlackRock’s subsidiaries, are regulated by the SEC and either by the OCC or the Federal Reserve Board. They are also subject to rules and regulations promulgated by the National Association of Securities Dealers, Inc. (“NASD”), among others. Hilliard Lyons is also a member of the New York Stock Exchange and subject to its regulations and supervision. Three subsidiaries, including one of BlackRock’s subsidiaries, are registered as commodity pool operators with the Commodity Futures Trading Commission and the National Futures Association, and are subject to regulation by them.

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Several of the Corporation’s subsidiaries, including certain BlackRock subsidiaries, are registered with the SEC as investment advisers and, therefore, are subject to the requirements of the Investment Advisers Act of 1940 and the SEC’s regulations thereunder. The principal purpose of the regulations applicable to investment advisers is the protection of clients and the securities markets, rather than the protection of creditors and shareholders of investment advisers. The regulations applicable to investment advisers cover all aspects of the investment advisory business, including limitations on the ability of investment advisers to charge performance-based or non-refundable fees to clients; record-keeping; operational, marketing and reporting requirements; disclosure requirements; limitations on principal transactions between an adviser or its affiliates and advisory clients; as well as general anti-fraud prohibitions. The Corporation’s investment advisory subsidiaries also may be subject to certain state securities laws and regulations. In addition, the Corporation’s investment adviser subsidiaries, such as certain BlackRock subsidiaries, that are investment advisors to registered investment companies and other managed accounts are subject to the requirements of the Investment Company Act of 1940 and the SEC’s regulations thereunder.

Additional legislation, changes in rules promulgated by the SEC, other federal and state regulatory authorities and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the method of operation and profitability of investment advisers. The profitability of investment advisers could also be affected by rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation and electronic commerce.

Recently, the SEC and other governmental agencies have been investigating the mutual fund industry. The SEC has adopted and proposed various rules, and legislation has been introduced in Congress, intended to reform the regulation of this industry. The likely effect of regulatory reform would be to increase the extent of regulation of the mutual fund industry and impose additional compliance obligations and costs on PNC’s subsidiaries involved with the mutual fund industry.

Under various provisions of the federal securities laws (including in particular those applicable to broker-dealers, investment advisers and registered investment companies and their service providers), a determination by a court or regulatory agency that certain violations have occurred at a company or its affiliates can result in a limitation of permitted activities, disqualification to continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infractions and violations can also affect a public company in its timing and ability to expeditiously issue new securities into the capital markets. In addition, expansion of activities of a broker-dealer generally requires approval of the New York Stock Exchange and/or NASD, and regulators may take into account a variety of considerations in acting upon such applications, including internal controls, capital, management experience and quality, and supervisory concerns.

For additional information about the regulation of BlackRock, see the discussion under the “Regulation” section of Item 1 Business in BlackRock’s most recent Annual Report on Form 10-K, which may be obtained electronically at the SEC’s website at www.sec.gov.

2003 REGULATORY DEVELOPMENTS

On July 18, 2002, the Corporation announced that it had entered into a written agreement with the Federal Reserve Bank of Cleveland (“Federal Reserve”) and that its principal subsidiary, PNC Bank, N.A., had entered into a written agreement with the OCC. These agreements addressed such issues as risk, management and financial controls. On September 15, 2003 and September 29, 2003, respectively, the Federal Reserve lifted its formal written agreement with the Corporation and the OCC lifted its formal written agreement with PNC Bank, N.A. These actions brought the agreements to a conclusion.

The Board and senior management team remain committed to the goal of establishing the Corporation as an industry leader in the areas of governance, corporate conduct, risk management and regulatory relations.

On June 2, 2003, PNC ICLC Corp. (“PNCICLC”), an indirect non-bank subsidiary of the Corporation, entered into a Deferred Prosecution Agreement (the “Deferred Prosecution Agreement”) with the United States Department of Justice, Criminal Division, Fraud Section (the “Department of Justice”) relating to PNCICLC’s actions in connection with the three PAGIC transactions that were entered into in 2001. The Agreement is further described under Item 3 of this Report.

COMPETITION The Corporation is subject to intense competition from various financial institutions and from non-bank entities that engage in similar activities without being subject to bank regulatory supervision and restrictions.

In making loans, the subsidiary banks compete with traditional banking institutions as well as consumer finance companies, leasing companies and other non-bank lenders. Loan pricing and credit standards are under competitive pressure as lenders seek to deploy capital and a broader range of borrowers have access to capital markets. Traditional deposit activities are subject to pricing pressures and customer migration as a result of intense competition for consumer investment dollars. The Corporation’s subsidiary banks compete for deposits with not only other commercial banks, savings banks, savings and loan associations and credit unions, but also insurance companies and issuers of commercial paper and other securities, including mutual funds. Various non-bank subsidiaries engaged in investment banking and private equity activities compete with commercial banks, investment banking firms, merchant banks, insurance companies, private equity firms and other investment vehicles. In

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providing asset management services, the Corporation’s subsidiaries compete with many investment management firms, large banks and other financial institutions, brokerage firms, mutual fund complexes, and insurance companies.

The fund servicing business is also highly competitive, with a relatively small number of providers. Merger, acquisition and consolidation activity in the financial services industry has also impacted the number of existing or potential fund servicing clients.

The ability to access and use technology is an increasingly important competitive factor in the financial services industry. Technology is not only important with respect to delivery of financial services, but in processing information. Each of the Corporation’s businesses consistently must make technological investments to remain competitive.

See also “Competition,” “Disintermediation,” “Asset Management Performance” and “Fund Servicing” within the Risk Factors section of Item 7 of this Report, which is incorporated herein by reference, for additional information.

EMPLOYEES Average full-time equivalent employees totaled approximately 23,200 for full year 2003, and were approximately 22,900 for the month of December 2003.

SEC REPORTS AND CORPORATE GOVERNANCE INFORMATION The Corporation is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and in accordance with the Exchange Act, PNC files annual, quarterly and current reports, proxy statements, and other information with the SEC. PNC’s SEC File Number is 1-9718. You may read and copy any document PNC files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street NW, Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including PNC’s filings. The address of the SEC’s website is www.sec.gov. Copies of such materials can also be obtained at prescribed rates from the public reference section of the SEC at 450 Fifth Street NW, Washington, D.C. 20549.

The Corporation makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge on or through the Corporation’s internet site as soon as reasonably practicable after it files such material with, or furnishes it to, the SEC. The Corporation’s internet address is www.pnc.com. Copies may also be obtained by contacting Shareholder Services at (800) 982-7652 or via e-mail at web.queries@computershare.com.

Information about PNC’s Board and its committees and corporate governance at PNC is available in the corporate governance section of the “For Investors” page of PNC’s website at www.pnc.com. Shareholders who would like to request printed copies of the PNC Code of Business Conduct and Ethics or the charter of the Board’s Audit, Nominating and Governance, or Personnel and Compensation Committees (all of which are posted on the PNC website) may do so by sending their requests to Thomas R. Moore, Corporate Secretary, at corporate headquarters at One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707. The material requested will be provided without cost to the shareholder.

ITEM 2 – PROPERTIES

The executive and administrative offices of the Corporation and PNC Bank, N.A. are located at One PNC Plaza, Pittsburgh, Pennsylvania. The thirty-story structure is owned by PNC Bank. The Corporation and PNC Bank, N.A. occupy the entire building. In addition, PNC Bank, N.A. owns a thirty-four story structure adjacent to One PNC Plaza, known as Two PNC Plaza, that houses additional office space.

The Corporation and its subsidiaries own or lease numerous other premises for use in conducting business activities. The facilities owned or occupied under lease by the Corporation’s subsidiaries are considered by management to be adequate. Additional information pertaining to the Corporation’s properties is set forth in Note 16 Premises, Equipment and Leasehold Improvements of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which is incorporated herein by reference.

ITEM 3 – LEGAL PROCEEDINGS

On June 2, 2003, PNC ICLC Corp. (“PNCICLC”), an indirect non-bank subsidiary of the Corporation, entered into a Deferred Prosecution Agreement with the Department of Justice. A copy of the Deferred Prosecution Agreement is attached as Exhibit 99.1 to the Current Report on Form 8-K filed by the Corporation on June 2, 2003 (the “Form 8-K”). Pursuant to the terms of the Deferred Prosecution Agreement, the United States filed a criminal complaint in the United States District Court for the Western District of Pennsylvania charging PNCICLC with conspiracy to commit securities fraud, in violation of Title 18, United States Code, Section 371. The Deferred Prosecution Agreement relates to the three 2001 transactions (the “PAGIC transactions”) that gave rise to a financial statement restatement announced by the Corporation on January 29, 2002 and that were the subject of a July 2002 consent order between the Corporation and the United States Securities and Exchange Commission.

The Department of Justice has recommended to the District Court that the prosecution of PNCICLC be deferred for a period of twelve months in light of PNCICLC’s exceptional remedial actions to date and its willingness to acknowledge responsibility for its behavior, continue its cooperation with the Department of Justice and other governmental regulatory agencies, demonstrate its future good faith conduct and full compliance with the securities laws and generally accepted

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accounting principles and consent to the establishment of a $90 million restitution fund and the assessment of a $25 million monetary penalty. The Department of Justice has further agreed that if PNCICLC is in full compliance with all of its obligations under the Deferred Prosecution Agreement, the Department of Justice will seek dismissal with prejudice of the complaint within 30 days of the twelve month anniversary of the Deferred Prosecution Agreement and at such time the Deferred Prosecution Agreement will be terminated. PNCICLC has timely paid the monetary penalty and established the restitution fund. The $90 million restitution fund will be available to satisfy claims, including for the settlement of the pending securities litigation referred to below. The restitution fund will be administered by Louis W. Fryman, chairman of Fox Rothschild LLP in Philadelphia, Pennsylvania.

The Form 8-K, together with its exhibits, contains a more complete description of the Deferred Prosecution Agreement and its impact on PNCICLC and the Corporation.

There are several pending judicial or administrative proceedings or other matters arising out of the PAGIC transactions. The impact of the final disposition of these matters cannot be assessed at this time. The Corporation intends to defend vigorously each of the pending lawsuits described below.

The several putative class action complaints filed during 2002 in the United States District Court for the Western District of Pennsylvania have been consolidated in a consolidated class action complaint brought on behalf of purchasers of the Corporation’s common stock between July 19, 2001 and July 18, 2002 (the “Class Period”). The consolidated class action complaint names the Corporation, the Chairman and Chief Executive Officer, the former Chief Financial Officer, the Controller, and the Corporation’s independent auditors for 2001 as defendants and seeks unquantified damages, interest, attorneys’ fees and other expenses. The consolidated class action complaint alleges violations of federal securities laws related to disclosures regarding the PAGIC transactions and related matters. The Corporation and all other defendants have filed a motion to dismiss this lawsuit.

In August 2002, the United States Department of Labor began a formal investigation of the Administrative Committee of the Corporation’s Incentive Savings Plan (“Plan”) in connection with the Committee’s conduct relating to the Corporation’s common stock held by the Plan and the Corporation’s restatement of earnings for 2001. Both the Administrative Committee and the Corporation are cooperating fully with the investigation. In June 2003, the Administrative Committee retained Independent Fiduciary Services, Inc. (“IFS”) to serve as an independent fiduciary charged with the exclusive authority and responsibility to act on behalf of the Plan in connection with the pending securities litigation referred to above and to evaluate any legal rights the Plan might have against any parties relating to the PAGIC transactions. This authority includes representing the Plan’s interests in connection with the $90 million restitution fund set up under the Deferred Prosecution Agreement. The Department of Labor has been advised of the appointment of IFS.

In July 2003, a former employee brought a putative class action lawsuit under ERISA in the United States District Court for the Western District of Pennsylvania against the Corporation, its Chairman and Chief Executive Officer, its former Chief Financial Officer, the Plan administrator and certain past and present members of the Administrative Committee of the Plan. The complaint, brought on behalf of the Plan and all Plan participants for whose individual accounts the Plan purchased and/or held shares of the Corporation during the Class Period, alleged that the defendants breached their fiduciary duties related to disclosures regarding the PAGIC transactions and related matters and also breached their fiduciary duties by permitting the Plan to purchase and hold stock of the Corporation. The complaint sought, among other things, unquantified damages, declaratory and injunctive relief, and attorneys’ fees and costs. In November 2003, the court dismissed the complaint without prejudice upon the joint stipulation of the parties.

The Corporation received a letter in June 2003 on behalf of an alleged shareholder of the Corporation demanding that the Corporation take appropriate legal action against the Chairman and Chief Executive Officer, the former Chief Financial Officer, and the Controller, as well as any other individuals or entities allegedly responsible for causing damage to the Corporation as a result of the PAGIC transactions. The Board referred this matter to a special committee of the Board for evaluation, which has completed its evaluation and reported its findings to the Board of Directors and counsel for the alleged shareholder. The special committee recommended against bringing any claims against the current or former executive officers but made certain recommendations with respect to resolution of potential claims PNC has with respect to certain other third parties.

In July 2003, the lead underwriter on the Corporation’s Executive Blended Risk insurance coverage filed a lawsuit for a declaratory judgment against the Corporation and PNCICLC in the United States District Court for the Western District of Pennsylvania. The complaint seeks a determination that the defendants breached the terms and conditions of the policy and, as a result, the policy does not provide coverage for any loss relating to or arising out of the Department of Justice investigation or the PAGIC transactions. Alternatively, the complaint seeks a determination that the policy does not provide coverage for the payments made pursuant to the Deferred Prosecution Agreement. The complaint also seeks attorneys’ fees and costs. In September 2003, the Corporation moved to stay the action until resolution of the claims against the Corporation in the pending securities litigation described above.

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Subsidiaries of PNC are defendants (or have potential contribution obligations to defendants) in several pending lawsuits brought during late 2002 and 2003 arising out of the bankruptcy of Adelphia Communications Corporation. One of the lawsuits is pending in the United States Bankruptcy Court for the Southern District of New York and has been brought as an adversary proceeding by the unsecured creditors’ committee in Adelphia’s bankruptcy proceeding. A motion to intervene on behalf of the equity committee is also pending in this case. The other lawsuits (one of which is a putative class action) have been brought by holders of debt and equity securities of Adelphia and have been consolidated for pretrial purposes in the United States District Court for the Southern District of New York. These lawsuits arise out of lending and securities underwriting activities engaged in by these PNC subsidiaries together with other financial services companies. In the aggregate, more than 400 other financial services companies and numerous other companies and individuals have been named as defendants in one or more of the lawsuits. Collectively, with respect to some or all of the defendants, the lawsuits allege violations of federal securities laws, violations of common law duties, aiding and abetting such violations, voidable preference payments, and fraudulent transfers, among other matters. The lawsuits seek unquantified monetary damages, interest, attorneys’ fees and other expenses, and a return of the alleged voidable preference and fraudulent transfer payments, among other remedies. PNC believes it has substantial defenses to the claims against it in these lawsuits and intends to defend them vigorously. These lawsuits are currently in initial stages and present complex issues of law and fact. As a result, PNC is not currently capable of evaluating its exposure, if any, resulting from these lawsuits.

In addition to the proceedings or other matters described above, the Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. Management does not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material adverse effect on the Corporation’s financial position. However, management is not now in a position to determine whether any of such other pending or threatened legal proceedings will have a material adverse effect on the Corporation’s results of operations in any future reporting period.

In connection with industry-wide investigations of practices in the mutual fund industry including market timing, late day trading, employee trading in mutual funds and other matters, several of PNC’s subsidiaries have received requests for information and other inquiries from state and federal regulatory authorities. These subsidiaries are fully cooperating in all of these matters.

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None during the fourth quarter of 2003.

EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding each executive officer of the Corporation as of February 27, 2004 is set forth below. Each executive officer has held the position or positions indicated or another executive position with the same entity or one of its affiliates for the past five years unless otherwise indicated below.

William S. Demchak joined the Corporation as Vice Chairman and Chief Financial Officer in September 2002. From 1997 to May 2002, he served as Global Head of Structured Finance and Credit Portfolio for J.P. Morgan Chase & Co.

William C. Mutterperl joined the Corporation as Vice Chairman in October 2002. From August 2002 to October 2002, he was a partner in the business law division of the international law firm of Brown Rudnick Berlack Israels LLP. From February 2002 to May 2002, he served as Executive Director of the Independent Oversight Board for Arthur Andersen LLP, headed by former Federal Reserve Chairman Paul Volcker. From April 1985 to December 2001, he served as Executive Vice President, or another executive position, General Counsel and Secretary to FleetBoston Financial Corp.

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Joseph J. Whiteside joined the Corporation as Vice Chairman in October 2002. From 2001 to 2002 he served as Chairman and Chief Executive Officer for Homeside Lending, Inc. From 1996 to 2001 he served as Executive Vice President for National Australia Bank.

John J. Wixted, Jr. joined the Corporation as Senior Vice President and Chief Regulatory Officer in August 2002. From 1996 to 2002 he served as Senior Vice President for Banking Supervision and Regulation for the Federal Reserve Bank of Chicago.

Richard J. Johnson joined the Corporation as Senior Vice President and Director of Finance in December 2002. From 1999 to 2002 he served as President and Chief Executive Officer for J.P. Morgan Services.

DIRECTORS OF THE REGISTRANT The names and principal occupations of each director of the Corporation as of February 27, 2004 is set forth below:

Paul W. Chellgren, Retired Chairman and Chief Executive Officer of Ashland Inc. (energy company), Adjunct Professor, Northern Kentucky University; Robert N. Clay, President and Chief Executive Officer of Clay Holding Company (investments); J. Gary Cooper, Chairman and Chief Executive Officer of Commonwealth National Bank (community banking); George A. Davidson, Jr., Retired Chairman of Dominion Resources, Inc. (public utility holding company); Richard B. Kelson, Executive Vice President and Chief Financial Officer of Alcoa Inc. (producer of primary aluminum, fabricated aluminum, and alumina); Bruce C. Lindsay, Chairman and Managing Director of Brind-Lindsay & Co., Inc. (advisory company); Anthony A. Massaro, Chairman, President and Chief Executive Officer of Lincoln Electric Holdings, Inc. (full-line manufacturer of welding and cutting products); Thomas H. O’Brien, Retired Chairman of the Corporation; Jane G. Pepper, President of Pennsylvania Horticultural Society (nonprofit membership organization); James E. Rohr, Chairman and Chief Executive Officer of the Corporation; Lorene K. Steffes, Independent Business Advisor and Consultant (Vice President of International Business Machines 1998-2003); Dennis F. Strigl, President and Chief Executive Officer of Verizon Wireless, Inc. (wireless telecommunications); Stephen G. Thieke, Retired Chairman, Risk Management Committee of JP Morgan Incorporated (financial and investment banking services); Thomas J. Usher, Chairman and Chief Executive Officer of United States Steel Corporation (integrated steelmaker); Milton A. Washington, President and Chief Executive Officer of Allegheny Housing Rehabilitation Corporation (housing rehabilitation and construction); and Helge H. Wehmeier, Vice Chairman of Bayer Corporation (healthcare, crop sciences, polymers, and chemicals).

PART II

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Corporation’s common stock is listed on the New York Stock Exchange and is traded under the symbol “PNC.” At the close of business on February 27, 2004, there were 50,034 common shareholders of record.

Holders of common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available therefor. The Board of Directors may not pay or set apart dividends on the common stock until dividends for all past dividend periods on any series of outstanding preferred stock have been paid or declared and set apart for payment. The Board presently intends to continue the policy of paying quarterly cash dividends. However, the amount of any future dividends will depend on earnings, the financial condition of the Corporation and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of bank and non-bank subsidiaries to pay dividends to the parent company). Management expects that the parent company will have sufficient liquidity available to pay dividends at current rates through 2004.

The Federal Reserve Board has the power to prohibit the Corporation from paying dividends without its approval. Further discussion concerning dividend restrictions and restrictions on loans or advances from bank subsidiaries to the parent company is set forth under the caption “Supervision and Regulation” in Part I, Item 1 of this Report, under the caption “Liquidity Risk Management” in the Risk Management section of Item 7 of this Report, and in Note 4 Regulatory Matters of the Notes to Consolidated Financial Statements section of Item 8 of this Report, each of which is incorporated herein by reference.

Additional information relating to the common stock is set forth under the caption “Common Stock Prices/Dividends Declared” in Item 8 of this Report, which is incorporated herein by reference.

Information regarding the Corporation’s compensation plans under which equity securities of the registrant are authorized for issuance as of December 31, 2003 is included in the table under Item 12 of this Report.

The Corporation’s registrar and transfer agent is:

Computershare Investor Services, LLC

2 North LaSalle Street

Chicago, Illinois 60602

(800) 982-7652

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Item 6.

SELECTED FINANCIAL DATA

Certain prior-period amounts have been reclassified to conform with the current year presentation.

For information regarding certain business risks, see the Risk Factors and Risk Management sections of Item 7 of this Report. Also, see the Cautionary Statement Regarding Forward-Looking Information section of Item 7 of this Report for certain factors that could cause actual results to differ materially from those anticipated in forward-looking statements or from historical performance.

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

THE PNC FINANCIAL SERVICES GROUP, INC.

The Corporation is one of the largest diversified financial services companies in the United States, operating businesses engaged in regional community banking, wholesale banking, wealth management, asset management and global fund processing services. The Corporation provides certain products and services nationally and others in PNC’s primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The Corporation also provides certain banking, asset management and global fund processing services internationally.

PNC’s strategies to enhance shareholder value include expanding its deposit-driven banking franchise through internal growth and, as opportunities arise, through targeted acquisitions. In addition, the Corporation plans to leverage its customer base and leading technology to grow the asset management and processing businesses in an efficient and effective manner. Efforts in recent years to reduce risk, grow deposits and diversify the Corporation’s revenue mix have enabled PNC to improve liquidity and build a strong capital position.

OVERVIEW OF KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

The financial performance of financial services companies such as PNC is affected by a variety of key factors. Given the nature of its business, PNC’s performance is substantially dependent on general economic factors such as overall economic activity, loan demand, interest rates and the shape of the yield curve, and the performance of the equity and debt markets. PNC, like other financial services companies, does not have the ability to exercise control over these economic factors, although it can manage its business to take advantage of the opportunities offered and to mitigate the risks presented by changes in these factors. On the other hand, PNC’s performance also relies on its ability to develop and execute effective business plans and to maintain an effective risk management program.

During 2003, PNC was able to achieve success in a number of critical areas, impacting PNC’s results in 2003 and contributing to PNC’s ability to continue to grow its businesses and to respond to the challenges it expects to face in 2004 and thereafter.

One significant example of these successes was the improvement in client acquisition and retention across most of PNC’s businesses. Further, the success of PNC’s efforts to enhance cross selling to its client base is evidenced by the year over year increase in fee based income. On the expense side, PNC’s efficiency initiative identified and realized almost $150 million in savings on a run rate basis into 2004, and the Corporation is building on this initiative as it moves into 2004. Managing and deploying capital in a disciplined fashion was another critical factor that affected PNC’s financial performance in 2003 and should help build its foundation for the future. PNC deployed excess economic capital to strengthen its banking businesses by acquiring United National; it returned additional excess capital to its shareholders by increasing the quarterly dividend by four percent and repurchasing approximately 11.9 million of its shares.

Economic factors, however, had a negative impact on PNC’s overall growth, with a continuation of historically low interest rates and weak loan demand both having a major effect on performance in 2003. These economic factors are the areas that PNC’s management sees as presenting the greatest challenges for 2004. Indeed, the key factor affecting PNC’s results of operations for 2004 that is neither readily predictable nor responsive to actions substantially within PNC’s control is likely to be the timing and extent of changes in market interest rates. Also, loan demand should respond positively to improving economic conditions, but the timing and extent of increased loan demand is not now predictable, depending in substantial part on the nature of the continuing economic recovery. PNC is thus not assuming that its 2004 results will reflect significant improvement in this area. As part of its enhanced risk management framework, PNC has avoided the temptation to respond to the pressures presented by these economic factors by increasing the Corporation’s risk profile in an effort to bolster short term earnings.

In addition to the need to manage its business effectively to deal with these and other critical economic factors, PNC’s success in 2004 will depend on its success in a number of other key areas, including:

SUMMARY FINANCIAL RESULTS

Consolidated net income for 2003 was $1.001 billion or $3.55 per diluted share compared with $1.184 billion or $4.15 per diluted share for 2002. Results for 2003 reflected the impact of expenses totaling $87 million after taxes, or $.31 per diluted share, in connection with PNC’s previously announced agreement with the United States Department of Justice (“DOJ”) and related legal and consulting costs. Net income for 2003 also included the cumulative effect of a change in accounting principle that negatively impacted earnings by $28 million, or $.10 per diluted share. Results for 2002 included a loss from discontinued operations of $16 million, or $.05 per diluted share.

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Return on average common shareholders’ equity was 15.06% for 2003 and 18.83% for 2002. Return on average assets was 1.49% for 2003 and 1.78% for 2002.

The Corporation’s performance in 2003 reflected significant progress in a number of key areas:

BALANCE SHEET HIGHLIGHTS

Total assets were $68.2 billion at December 31, 2003 compared with $66.4 billion at December 31, 2002. Total assets at December 31, 2003 included $2.6 billion due to PNC’s adoption of FIN 46R.

Average interest-earning assets were $55.2 billion in 2003, down $.2 billion from 2002 primarily due to decreases in average loans, average loans held for sale and average federal funds sold that were partially offset by increases in average securities, and purchased customer receivables recorded in connection with PNC’s adoption of FIN 46R.

Average loans for 2003 were $34.7 billion compared with $37.1 billion in 2002, a decline of $2.4 billion or 6%. Loans represented 63% of average interest-earning assets for 2003 compared with 67% for 2002. The decreases were primarily due to prepayments of residential mortgages, continued weak commercial loan demand coupled with strategic commercial loan downsizing and the run-off of vehicle leases, partially offset by an increase in home equity loans. The term “loans” in this Report excludes loans held for sale and securities that represent interests in pools of loans.

Average securities totaled $14.7 billion for 2003, an increase of $2.7 billion from 2002. Securities comprised 27% of average interest-earning assets for 2003 compared with 22% for 2002. The increase was primarily due to the purchase of U.S. government agencies securities resulting from the redeployment of liquidity and other interest rate risk management activities.

Funding cost is affected by the volume and composition of funding sources as well as related rates paid thereon. Average total deposits were $44.5 billion for 2003 compared with $44.1 billion for 2002. Average deposits comprised 66% of total sources of funds for both 2003 and 2002.

Average interest-bearing demand and money market deposits totaled $22.4 billion for 2003 compared with $21.5 billion in 2002. The increase reflected focused marketing efforts to grow and maintain more valuable transaction accounts while higher cost, less valuable retail certificates of deposit were not emphasized. Average borrowed funds for 2003 decreased $.2 billion, to $10.5 billion, compared with 2002 commensurate with the decline in average interest-earning assets. Average borrowed funds for 2003 included $1.3 billion and $.4 billion related to the impact of the adoption of FIN 46R and Statement of Financial Accounting Standards No. (“SFAS”) 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” respectively. See the Consolidated Average Balance Sheet and Net Interest Analysis under Item 8 of this Report for additional information.

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LINE OF BUSINESS HIGHLIGHTS

PNC operates seven major businesses engaged in regional community banking; wholesale banking, including corporate banking, real estate finance and asset-based lending; wealth management; asset management and global fund processing services. Treasury management activities, which include cash and investment management, receivables management, disbursement services and global trade services; capital markets products, which include foreign exchange, derivatives trading and loan syndications; and equipment leasing products are offered through Corporate Banking and sold by several businesses across the Corporation. Highlights of 2003 results for each of the lines of business follows.

Regional Community Banking

Regional Community Banking earnings were $608 million in 2003 compared with $697 million in 2002. The decline in total revenue in 2003 compared with the prior year reflected the negative impact of lower interest rates, residential mortgage loan prepayments and the managed run-off of the vehicle leasing portfolio. These factors, and an increase in employee benefit costs, contributed to the decline in earnings.

Wholesale Banking – Total

Wholesale Banking earnings were $306 million in 2003 compared with $280 million in 2002. The higher earnings for 2003 reflected improved overall asset quality and higher noninterest income.

Wholesale Banking – Corporate Banking

Corporate Banking earnings were $173 million for 2003 compared with $150 million for 2002. The earnings improvement reflected a lower provision for credit losses that more than offset decreased total revenue and higher noninterest expense compared with the prior year.

Wholesale Banking – PNC Real Estate Finance

PNC Real Estate Finance earned $102 million for 2003 and $90 million for 2002. The increase was primarily due to higher gains on commercial mortgage loan sales in 2003 that more than offset the impact of lower taxable-equivalent net interest income and a lower benefit from the provision for credit losses.

Wholesale Banking – PNC Business Credit

PNC Business Credit earned $31 million for 2003 compared with $40 million for 2002. The decline in earnings for 2003 compared with the prior year was primarily due to a $17 million increase in the provision for credit losses in 2003.

PNC Advisors

PNC Advisors earned $72 million for 2003 compared with $97 million in 2002. The earnings decline reflected lower fee income due to net asset outflows, reduced brokerage revenue and lower taxable-equivalent net interest income resulting from the residential mortgage portfolio runoff and the level of interest rates in 2003.

BlackRock

BlackRock earned $155 million for 2003 compared with $133 million for 2002. Earnings increased for 2003 compared with the prior year as higher revenue, driven by an increase in assets under management and BlackRock Solutions^™ assignments, and higher investment income more than offset increases in general and administration and other operating expenses. BlackRock financial information included in Item 7 of this Report is presented on a stand-alone basis.

PFPC

PFPC earned $61 million for 2003 compared with $65 million for 2002. Lower fund servicing revenue, largely attributable to the sale of the retirement services unit, client attrition and the impact of competitive market conditions on pricing, were substantially offset by a decline in operating expenses, primarily due to benefits from efficiency initiatives that exceeded $50 million. PFPC’s 2002 results included the benefits of a $19 million reduction in reserves that were originally established in 2001 and $13 million of fees related to the renegotiation of a client contract.

Other

Aggregate results of the lines of businesses differ from consolidated results from continuing operations of PNC due to intercompany eliminations and due to various items captured in “Other” discussed within the Review of Businesses section of Item 7 of this Report. See Note 27 Segment Reporting included in Item 8 of this Report for a reconciliation of line of business results to PNC Consolidated Results from Continuing Operations. “Other” includes differences between management accounting practices and GAAP such as: capital assignments rather than legal entity shareholders’ equity, unit cost allocations rather than actual expense assignments, and policies that do not fully allocate holding company expenses; minority interest in income of BlackRock; and other corporate items. “Other” also includes equity management activities, residual asset and liability management activities and certain insurance-related activities which do not meet the criteria for disclosure as a separate reportable business. “Other” reflected a net loss of $167 million for 2003 compared with a net loss of $63 million for 2002. “Other” for 2003 included pretax expenses of $120 million, or $87 million after taxes, in connection with the DOJ agreement, including related legal and consulting costs, and a pretax charge of $25 million, or $16 million after taxes, related to leased facilities.

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CONSOLIDATED STATEMENT OF INCOME REVIEW

NET INTEREST INCOME

Changes in net interest income and margin result from the interaction of the volume and composition of earning assets, related yields and associated funding costs. Accordingly, portfolio size, composition and yields earned and funding costs can have a significant impact on net interest income and margin. See Statistical Information - Average Consolidated Balance Sheet and Net Interest Analysis under Item 8 of this Report for additional information.

Net interest income was $1.996 billion for 2003 compared with $2.197 billion for 2002. Net interest income on a taxable-equivalent basis was $2.006 billion and the net interest margin was 3.64 % for 2003, a decline of $204 million and 35 basis points compared with 2002. The low interest rate environment, decreases in commercial loans, prepayments in the residential mortgage loan portfolio, and sales and maturities of securities that were replaced at lower yields resulted in a decline in taxable-equivalent net interest income compared with 2002. See below for a reconciliation of net interest income as reported under GAAP to net interest income presented on a taxable-equivalent basis.

In addition, PNC’s adoption effective July 1, 2003, of SFAS 150 negatively impacted 2003 taxable-equivalent net interest income by $29 million and the net interest margin by 5 basis points. As required by SFAS 150, the Corporation’s mandatorily redeemable capital securities of subsidiary trusts (trust preferred securities) totaling $848 million were reclassified in the third quarter of 2003 from between the liabilities and shareholders’ equity sections of the Consolidated Balance Sheet to borrowed funds. The dividends paid on these financial instruments, previously classified as noninterest expense, were recharacterized as interest expense. Reclassification of prior period amounts was not permitted under SFAS 150. Effective December 31, 2003, the trusts that issued trust preferred securities were deconsolidated based on guidance provided by FIN 46R – see Off-Balance Sheet Arrangements And Consolidated VIEs in Item 7 of this Report for additional information.

Also, the consolidation of variable interest entities due to the adoption of FIN 46R increased 2003 taxable-equivalent net interest income by $3 million and average interest-earning assets by $1.2 billion. These changes negatively impacted the 2003 net interest margin by 7 basis points. See Market Risk Management—Interest Rate Risk in the Risk Management section of Item 7 of this Report for additional information.

RECONCILIATION OF NET INTEREST INCOME

The interest income earned on certain assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than a taxable investment In order to provide accurate comparisons of yields and margins for all earning assets, the interest income earned on tax-exempt assets has been increased to make them fully equivalent to other taxable interest income investments. A reconciliation of net interest income as reported in the Consolidated Statement of Income to net interest income on a taxable-equivalent basis follows (in millions):

See Consolidated Income Statement Review under the 2002 Versus 2001 section of Item 7 of this Report for further information regarding 2001 taxable-equivalent net interest income.

PROVISION FOR CREDIT LOSSES

The provision for credit losses was $177 million for 2003 compared with $309 million for 2002. The decline in the provision for credit losses compared with the prior year was primarily due to the overall improvement in the credit quality of the loan portfolio during 2003. The provision for 2002 reflected additions to reserves for PNC Business Credit and Corporate Banking and losses in Corporate Banking related to Market Street Funding Corporation (“Market Street”) liquidity facilities.

See Allowances for Credit Losses And Unfunded Loan Commitments And Letters of Credit in the Credit Risk Management portion of the Risk Management section of Item 7 of this Report for additional information regarding factors impacting the provision for credit losses.

NONINTEREST INCOME

Noninterest income totaled $3.257 billion for 2003 compared with $3.197 billion for 2002, an increase of $60 million, or 2%.

Asset management fees totaled $861 million for 2003, an increase of $8 million compared with $853 million for 2002. The level of asset management fees is driven in large part by the Corporation’s assets under management. Consolidated assets under management were $354 billion at December 31, 2003, an increase of $41 billion, or 13%, compared with $313 billion at December 31, 2002. Growth in fixed income assets managed by BlackRock, attributable to net subscriptions and net market appreciation, was the primary factor in the increase in assets under management during 2003.

Fund servicing fees were $762 million for 2003, a decrease of $54 million or 7% compared with the prior year. Fund servicing fees are largely attributable to PFPC. Fund servicing fees for 2002 included the favorable impact of $13 million of fees related to the renegotiation of a client contract at PFPC and an additional $15 million related to PFPC’s retirement services business, which was sold effective June 30, 2003. Apart from these items, the positive impact of new sales of accounting/administration services and offshore growth in 2003 was more than offset by revenue declines resulting from client attrition and the impact of competitive market conditions on pricing.

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Service charges on deposits totaled $239 million for 2003, an increase of $12 million or 5% compared with 2002. The increase for 2003 reflected higher volumes partially offset by lower monthly service charges due to higher sales and continued implementation of free checking. Consumer noninterest-bearing demand deposits grew 10% on average during 2003 compared with the prior year and total checking relationships of 1.611 million at December 31, 2003 represented a 4% increase compared with the number at December 31, 2002.

Brokerage fees totaled $184 million for 2003, down $11 million or 6% compared with the prior year. The decrease compared with 2002 reflected the impact of lower trading volumes and lower annuity fees in 2003. While brokerage activity improved in the latter part of 2003, this did not compensate for the lower trading volumes earlier in the year.

Consumer services revenue of $251 million for 2003 represented an increase of $12 million or 5% compared with 2002. Higher revenue in 2003 was primarily due to the impact of additional fees from debit card transactions related to higher transaction volumes and additional fees from ATM transactions.

Visa settled litigation in 2003 with major retailers regarding pricing and usage of customer debit cards. The settlement effectively lowered prices paid by merchants to Visa and its member banks. Although PNC was not a defendant in the litigation, the settlement lowered future revenue from certain debit card transactions. The rate changes went into effect August 1, 2003. The lost revenue impact to PNC in 2003 was $6 million. Comparing current rates to those in effect prior to August 1, 2003, the lost revenue impact on 2004 is estimated to be $18 million.

Corporate services revenue was $485 million for 2003, a decline of $41 million or 8% compared with 2002. Net gains in excess of valuation adjustments related to the liquidation of institutional loans held for sale are reflected in this line item and totaled $69 million for 2003 compared with $147 million for 2002. Partially offsetting this decline were net gains on sales of commercial mortgages that totaled $52 million for 2003, an increase of $21 million compared with 2002. Cash management and letters of credit fees totaled $250 million, a $14 million increase compared with 2002. This increase also partially offset the decline in net gains in excess of valuation adjustments.

Equity management (private equity activities) net losses on portfolio investments were $25 million for 2003 compared with net losses of $51 million for 2002. See Equity Management Asset Valuation in the Critical Accounting Policies And Judgments section and Market Risk Management—Equity And Other Investment Risk in the Risk Management section of Item 7 of this Report for further information.

Net securities gains were $116 million in 2003 compared with $89 million in 2002. Net securities gains for 2003 included $25 million related to the liquidation in the first quarter of 2003 of the three entities formed in 2001 in the PAGIC transactions.

Other noninterest income totaled $384 million for 2003, an increase of $81 million or 27% compared with $303 million for 2002. Other noninterest income from investments held by certain variable interest entities (“VIEs”) totaled $19 million for 2003 due solely to PNC’s adoption of FIN 46R. Net trading income included in other noninterest income increased $40 million, to $131 million, in 2003 compared with the prior year. See Note 9 Trading Activities in the Notes to Consolidated Financial Statements under Item 8 of this Report for further information. Other noninterest income for 2002 included the impact of an additional $20 million benefit resulting from a reduction in the put option liability related to the NBOC acquisition and a $14 million gain on the sale of a real estate investment.

PRODUCT REVENUE

Treasury management, capital markets and equipment leasing products offered through Corporate Banking are marketed by several businesses across the Corporation. A portion of the revenue and expense related to these products is reflected in Corporate Banking and the remainder is reflected in the results of other businesses. Treasury Management revenue, which includes fees as well as revenue from customer deposit balances, grew to $350 million in 2003, up $13 million compared with the prior year.

Consolidated revenue from capital markets products was $119 million for 2003, an increase of $15 million compared with 2002 primarily due to an increase in derivatives trading activity and underwriting profits partially offset by a decrease in corporate services fees. Consolidated revenue from equipment leasing products was $84 million for 2003 compared with $79 million for 2002, an increase of $5 million or 6%.

As a component of its advisory services to clients, PNC provides a select set of insurance solutions to fulfill specific customer financial needs. Primary insurance offerings include annuities, life, health, disability and commercial lines coverage. Client segments served by these insurance solutions include those in PNC Advisors, Regional Community Banking and Wholesale Banking. Insurance products are sold by PNC-

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licensed insurance agents and through licensed third-party arrangements. PNC recognized revenue from its insurance sales activities of $54 million in 2003, $59 million in 2002 and $63 million in 2001.

Additionally, PNC, through its subsidiary companies, Alpine Indemnity Limited and PNC Insurance Corp., makes available credit life and disability insurance to consumers and participates in the underwriting of annuities under modified coinsurance agreements with select insurance carriers. See Impact of the Adoption of DIG B36 for further information.

NONINTEREST EXPENSE

Total noninterest expense was $3.476 billion for 2003, an increase of $249 million or 8% compared with $3.227 billion in 2002. The efficiency ratio was 66% for 2003 and 60% for 2002 on a continuing operations basis. A number of significant expense items impacted each year that drove the increase in total noninterest expense from approximately 3% to 8% in the year-over-year comparison.

Noninterest expense for 2003 included the impact of the following items:

The effect of these items in 2003 was partially offset by the impact of a $25 million benefit from the vehicle leasing settlement during the fourth quarter of 2003, as described in the Consolidated Balance Sheet Review section of this Report.

Noninterest expense for 2002 included the impact of the following items:

Partially offsetting these items in 2002 was the benefit of a $19 million reduction in reserves at PFPC that were originally established in 2001 largely related to a previously reported plan to consolidate selected facilities.

Apart from the items described above, noninterest expense for 2003 increased from 2002 as costs related to reinvestment in new business initiatives and higher pension, stock option, incentive compensation and marketing expenses more than offset a $100 million benefit from efficiency initiatives in 2003.

The cost of executive risk insurance, including financial institution bond, directors and officers liability, professional and fiduciary liability, and employment practices liability coverage, will increase significantly in 2004 relative to the current level. The Corporation expensed approximately $10 million related to this insurance in 2003 and expects 2004 expense to total approximately $28 million.

IMPACT OF THE ADOPTION OF DIG B36

Regional Community Banking’s business includes the sale of various annuity products on which it realizes commission income. In connection with certain of these transactions, a separate PNC insurance subsidiary has entered into modified coinsurance agreements with select insurance carriers to reinsure 50% of these annuity transactions. These reinsurance agreements currently cover approximately 50,000 annuity contracts, with PNC’s share of policyholder account value aggregating approximately $1.2 billion. As part of these agreements, PNC receives a return on a portfolio of assets held and managed by the insurance carriers. Management has discontinued reinsuring new annuity contracts effective January 1, 2004, and is currently evaluating strategic alternatives with respect to the existing book of business.

Effective October 1, 2003, as required by the FASB, the Corporation adopted the provisions of Derivatives Implementation Group Statement 133 Implementation Issue No. B36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments” (“DIG B36”), which affects the accounting for these coinsurance agreements. DIG B36 clarifies SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” by requiring separate accounting for the impact of certain risks embedded in modified coinsurance agreements as derivatives under SFAS 133.

The initial adoption of the provisions of DIG B36 to existing coinsurance agreements as of October 1, 2003 was reported in PNC’s Consolidated Statement of Income as the cumulative effect of an accounting change and reduced both fourth quarter and full year 2003 net income by $28 million, or $.10 per diluted share. Subsequent to its initial adoption, the application of DIG B36 increased other noninterest income by $8 million for fourth quarter and full year 2003.

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CONSOLIDATED BALANCE SHEET REVIEW

BALANCE SHEET DATA

The Corporation’s Consolidated Balance Sheet is included under Item 8 of this Report.

Total assets were $68.2 billion at December 31, 2003 compared with $66.4 billion at December 31, 2002. PNC’s adoption of FIN 46R resulted in increases in total assets of $2.6 billion, increases in total liabilities of $2.4 billion and increases in minority and noncontrolling interests in consolidated entities of $216 million at December 31, 2003. See “Impact of FIN 46R Consolidating Balance Sheet” within the Off-Balance Sheet Arrangements And Consolidated VIEs section of Item 7 of this Report for a line-by-line analysis of the impact of FIN 46R.

Apart from FIN 46R, the decrease in total assets at December 31, 2003 compared with December 31, 2002 reflected changes in the mix of total assets as a $1.8 billion decrease in federal funds sold and a smaller loan portfolio more than offset the impact of purchases of U.S. government agencies securities in 2003.

An analysis of changes in selected balance sheet categories follows.

LOANS

Loans were $34.1 billion at December 31, 2003 compared with $35.5 billion at December 31, 2002. The decline of $1.4 billion from the prior year was primarily due to run-off in the residential mortgage and vehicle lease portfolios, and a decline in commercial loans, partially offset by an increase in home equity loans.

Details Of Loans

Loan portfolio composition continued to be diversified across PNC’s footprint among numerous industries and types of businesses.

As shown in the table below, wholesale commercial loan portfolio composition based on the total of loans and unfunded commitments remained concentrated in investment grade equivalent exposure and secured lending.

Wholesale Lending Statistics ^(a)

The equipment lease portfolio totaled $3.7 billion at December 31, 2003 and included approximately $1.7 billion of cross-border leases. Cross-border leases are primarily leveraged leases of equipment located in foreign countries, primarily in western Europe and Australia. Aggregate residual value at risk on the total commercial lease portfolio at December 31, 2003 was $1.2 billion. Steps have been taken to mitigate $.7 billion of this residual risk, including residual value insurance coverage with third parties, third party guarantees, and other actions. Approximately $.5 billion of this risk was unmitigated.

At December 31, 2003, PNC’s total loans included $698 million of vehicle leases, net of unearned income. PNC’s vehicle leasing business, which has been designated for exit, is

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comprised of vehicle leases with an aggregate residual value of $557 million and $187 million of estimated future customer lease payments. As of December 31, 2003, the active vehicle leases scheduled to mature are as follows.

Vehicle Lease Maturity Schedule

The Corporation recognized a charge of $135 million in late 2001 in connection with the vehicle leasing business that included exit costs and additions to reserves related to insured residual value exposures. The remaining reserve at December 31, 2002 was $119 million. During the fourth quarter of 2003 PNC recognized the benefit of a $25 million settlement related to the vehicle leasing business. This settlement was reached with insurance carriers regarding certain residual value claims for which a reserve had been provided in 2001. Also primarily as a result of this settlement, claims receivable and related reserves were reduced by $61 million during 2003. At December 31, 2003, the remaining liability was $33 million.

Until the remaining leases mature, the Corporation will continue to be subject to risks inherent in the vehicle leasing business, including credit risk and the risk that vehicles returned during or at the conclusion of the lease term cannot be disposed of at a price at least equal to the Corporation’s remaining investment in the vehicles after application of any available residual value insurance or related reserves. The assumptions that were used to establish these reserves in 2001 are monitored, evaluated and updated on an ongoing basis. Accordingly, the remaining liability was considered adequate at December 31, 2003.

Net Unfunded Loan Commitments

Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Commercial commitments are reported net of participations, assignments and syndications, primarily to financial institutions, totaling $6.4 billion at December 31, 2003 and $6.2 billion at December 31, 2002.

Net outstanding standby letters of credit totaled $4.0 billion at December 31, 2003 and $3.7 billion at December 31, 2002. Standby letters of credit commit the Corporation to make payments on behalf of customers if specified future events occur.

At December 31, 2003, purchased customer receivables totaled $2.2 billion. These receivables related to Market Street and resulted from PNC’s adoption of FIN 46R. Unfunded commitments related to purchased customer receivables totaled $911 million at December 31, 2003. See the Off-Balance Sheet Arrangements And Consolidated VIEs section under Item 7 of this Report and Note 2 Variable Interest Entities in the Notes to Consolidated Financial Statements under Item 8 of this Report for further information. At December 31, 2002, prior to the adoption of FIN 46R, PNC’s unfunded commitments related to Market Street were reflected in the Commercial category in the Net Unfunded Loan Commitments table and totaled $3.2 billion.

SECURITIES

Details Of Securities