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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

or

For the transition period from              to             

Commission file number 001-09718

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)

(Zip Code)

(412) 762-2000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

As of April 30, 2004, there were 282,033,350 shares of the registrant’s common stock ($5 par value) outstanding.

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The PNC Financial Services Group, Inc.

Cross-Reference Index to 2004 First Quarter Form 10-Q

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CONSOLIDATED FINANCIAL HIGHLIGHTS

THE PNC FINANCIAL SERVICES GROUP, INC.

See page 37 for a glossary of certain terms used in this report.

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FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review should be read in conjunction with The PNC Financial Services Group, Inc. (“Corporation” or “PNC”) unaudited Consolidated Financial Statements and unaudited Statistical Information included herein and Items 6, 7 and 8 of the Corporation’s 2003 Annual Report on Form 10-K, (“2003 Form 10-K”). Certain prior period amounts have been reclassified to conform with the current year presentation. The term “loans” in this report excludes loans held for sale and securities that represent interests in pools of loans. For information regarding certain business and regulatory risks, see the Risk Factors and Risk Management sections in this Financial Review and Items 1 and 7 of the 2003 Form 10-K. Also, see the Cautionary Statement Regarding Forward-Looking Information and Critical Accounting Policies And Judgments sections in this Financial Review for certain other factors that could cause actual results or future events to differ materially from those anticipated in forward-looking statements or from historical performance.

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 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.

KEY STRATEGIC GOALS

PNC’s strategy to enhance shareholder value centers on achieving growth in the Corporation’s lines of business underpinned by prudent risk and capital management. In each of the Corporation’s business segments, the primary drivers of growth are the acquisition, expansion and retention of customer relationships. PNC strives to achieve such growth in its customer base by providing convenient banking options, leading technological systems, and a broad range of asset management products and services. The Corporation also intends to grow through appropriate and targeted acquisitions and, in certain businesses, by expanding to new geographical markets.

PNC has in recent years managed its interest rate risk to achieve a moderate risk profile with limited exposure to earnings volatility resulting from interest rate fluctuations. PNC’s actions have created a balance sheet characterized by superior asset quality and significant flexibility to take advantage, where appropriate, of rising interest rates. The Corporation anticipates rising interest rates later in 2004, and expects the overall impact of such an environment to be beneficial.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

PNC’s financial performance is substantially affected by several external factors outside the Corporation’s control, including general economic conditions, loan demand, interest rates, the shape of the interest rate yield curve and the performance of the capital markets. In its response to these factors, PNC seeks a moderate risk profile in the management of its businesses in order to limit the risk of loss resulting from quickly changing market conditions. Instead, PNC focuses on the development and management of customer franchises in order to generate growth in revenue and earnings.

During the first quarter of 2004, PNC achieved success in growing its business segments, with customer growth and retention improving in a number of key areas. Management believes such growth enhances the overall value of the Corporation by increasing revenues that are less susceptible to changes in economic and market conditions. Noninterest income increased by 15% in the first quarter of 2004 compared with the first quarter of 2003, and noninterest income as a percentage of total revenue increased to 65% from 61% a year ago. These measures reflect, among other things, growth in fee-based customer revenues.

Economic factors, particularly low interest rates, continued to pressure net interest income. Loan demand increased slightly during the quarter, but remains sluggish. While the Corporation expects interest rates to rise and loan demand to increase in response to improving general economic conditions, the timing and magnitude of these increases cannot be predicted with certainty, and to some extent the benefits of rising interest rates and increases in loan demand will trail the improvements themselves. Therefore, PNC is not assuming significant benefits to its 2004 results from any improvements in these areas.

In addition to changes in general economic conditions, including the direction, timing and magnitude of movement in interest rates and the performance of the capital markets, PNC’s success for the remainder of 2004 will depend, among other things, upon:

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SUMMARY FINANCIAL RESULTS

Consolidated net income for the first three months of 2004 was $328 million or $1.15 per diluted share compared with $262 million or $.92 per diluted share for the first three months of 2003. Return on average common shareholders’ equity rose to 18.84% for the first quarter of 2004 compared with 15.76% for the first quarter of 2003, while return on average assets was 1.81% for the first three months of 2004 and 1.61% for the first three months of 2003.

PNC’s performance in the first quarter of 2004 reflected the following accomplishments:

BALANCE SHEET HIGHLIGHTS

Total assets were $74.1 billion at March 31, 2004 compared with $68.2 billion at December 31, 2003. The increase in assets was primarily attributable to the acquisition of United National, an increase in securities held and the purchase of a portfolio of home equity loans.

Average interest-earning assets were $60.1 billion for the first quarter of 2004 compared with $54.0 billion for the first quarter of 2003. The increase in interest-earning assets was primarily attributable to the acquisition of United National and the impact of PNC’s adoption of FASB Interpretation No. (“FIN”) 46 (Revised 2003), Consolidation of Variable Interest Entities, in 2003.

Average total loans of $36.7 billion increased by $1.6 billion over the first quarter of 2003. The increase in average total loans was primarily attributable to the addition of $1.9 billion of loans from the acquisition of United National and growth in home equity loans, partially offset by declines in lease financing and commercial loans.

Average total deposits were $47.3 billion for the first quarter of 2004, an increase of $2.9 billion over the first quarter of 2003. The increase in deposits was primarily attributable to the acquisition of United National. Average total deposits represented 65% of total sources of funds for the first quarter of 2004 and 67% for the first quarter of 2003. Aggregate average interest-bearing demand and money market and average demand and other noninterest- bearing deposits were $34.8 billion for the first quarter of 2004 compared with $32.2 billion for the first quarter of 2003.

Average borrowed funds were $13.1 billion for the first quarter of 2004 and $8.7 billion for the first quarter of 2003. The addition of $1.2 billion of junior subordinated debentures at December 31, 2003 related to the deconsolidation of trust preferred securities under FIN 46R, the impact of United National, and the issuance of $600 million of subordinated notes in November 2003 contributed to this increase. The addition of commercial paper related to Market Street Funding Corporation (“Market Street”) resulting from the adoption of FIN 46 in 2003 also contributed to the increase in average borrowed funds compared with the first quarter of 2003. Market Street is a consolidated special purpose entity in which PNC holds no equity interest.

Shareholders’ equity totaled $7.2 billion at March 31, 2004, and $6.6 billion at December 31, 2003. The increase in total shareholders’ equity reflected the impact of first quarter earnings, the issuance of common stock in connection with the completion of the United National acquisition and higher other comprehensive income due to an increase in net unrealized securities gains, partially offset by stock repurchases.

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BUSINESS SEGMENT HIGHLIGHTS

Total business segment earnings for the first quarter of 2004 were $326 million compared with $268 million for the first quarter of 2003. PNC’s business segments as reported in this Report reflect changes in the Corporation’s methodology for reporting business segment results as further described in the Corporation’s Current Report on Form 8-K dated April 5, 2004. See Note 16 Segment Reporting in the Notes To Consolidated Financial Statements included in this Report for a reconciliation of total business segment earnings to total PNC consolidated earnings as reported on a generally accepted accounting principles (“GAAP”) basis.

Regional Community Banking

Regional Community Banking earnings totaled $102 million for the first quarter of 2004 compared with $106 million for the first quarter of 2003. First quarter 2004 earnings reflected an increased provision for credit losses due to management’s decision to change the charge-off policy related to smaller nonperforming commercial loans. Checking relationships as of March 31, 2004 increased 8% compared with the year-ago level, while home equity loans increased by 23% and demand deposit account balances grew by 16%. This increase was attributable to the acquisition of United National and focused efforts to grow and retain the customer base.

Wholesale Banking

Wholesale Banking reported first quarter 2004 earnings of $122 million, an increase of $28 million over the first quarter of 2003. The increase compared with the year-earlier quarter reflected lower provision for credit losses and higher net gains on loans held for sale related to the continued liquidation of the institutional lending repositioning portfolio that was established in 2001.

PNC Advisors

Earnings from PNC Advisors totaled $31 million for the first quarter of 2004 compared with $20 million for the first quarter of 2003. Increased earnings in the first quarter of 2004 reflected the impact of a $10 million pre-tax gain from the sale of certain investment consulting activities of Hawthorn, as well as higher revenues resulting from the impact of stronger equity markets and increased personal brokerage activity.

BlackRock

BlackRock’s earnings totaled $55 million for the first quarter of 2004 compared with $35 million for the first quarter of 2003. Stronger earnings were attributable to increased revenue resulting from a growing base of assets under management and to a $9 million after tax gain related to resolving a State of New York tax audit. BlackRock’s assets under management rose to $321 billion at March 31, 2004, an increase of 17% compared with the level at March 31, 2003. The increase was attributable to strong net new subscriptions and market appreciation.

BlackRock is approximately 71% owned by PNC and is consolidated into PNC’s financial statements. Accordingly, approximately 29% of BlackRock’s earnings are recognized as minority interest expense in the Consolidated Statement of Income. BlackRock financial information included in Item 2 of this Report is presented on a stand-alone basis. The market value of the BlackRock shares owned by PNC was approximately $2.7 billion at March 31, 2004.

PFPC

Earnings from PFPC totaled $16 million for the first quarter of 2004 compared with $13 million for the first quarter of 2003. The higher earnings compared with the prior year quarter were primarily attributable to growth in assets serviced and lower borrowing costs related to both retirement of debt outstanding and the refinancing of certain remaining debt obligations. PFPC’s accounting/administration and custody servicing assets increased 19% and 18%, respectively, as of March 31, 2004 compared with the balances at March 31, 2003. The increases were driven by improved equity market conditions, net new business and asset inflows from existing business.

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CONSOLIDATED INCOME STATEMENT REVIEW

NET INTEREST INCOME

Changes in net interest income and net interest margin result from the interaction among 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 Balance Sheet Highlights in the Executive Summary section of Part I, Item 2 of this Report and Statistical Information-Average Consolidated Balance Sheet and Net Interest Analysis under Part I, Item 1 of this Report for additional information.

Taxable-equivalent net interest income totaled $497 million for the first quarter of 2004 compared with $506 million for the first quarter of 2003. See Consolidated Financial Highlights in this Financial Review for a reconciliation of net interest income as reported under GAAP to net interest income presented on a taxable-equivalent basis.

The net interest margin for the first quarter of 2004 was 3.30%, a decline of 46 basis points compared with 3.76% for the first quarter of 2003. The following factors contributed to the decline in net interest margin:

The acquisition of United National added $30 million of net interest income and 3 basis points to the net interest margin during the first quarter of 2004.

PROVISION FOR CREDIT LOSSES

The provision for credit losses was $12 million for the first quarter of 2004 and $36 million for the first quarter of 2003. The decrease in the provision for credit losses was due to the overall improvement in credit quality of the loan portfolio, which reflected a decline in nonperforming loans and a reduction in problems related to performing credits. See Allowance for Credit Losses And Unfunded Loan Commitments And Letters of Credit in the Credit Risk Management portion of the Risk Management section of Item 2 of this Report for additional information regarding factors impacting the provision for credit losses.

NONINTEREST INCOME

Noninterest income totaled $911 million for the first three months of 2004 and $795 million for the first three months of 2003. With the exception of net securities gains, all major categories of noninterest income increased during the first quarter of 2004 compared with the first quarter of 2003 primarily due to a pre-tax gain related to the sale of PNC’s modified coinsurance contracts, improved equity market conditions and growth in checking relationships. The United National acquisition contributed $7 million to noninterest income for the first quarter of 2004.

Asset management and fund servicing fees aggregated $456 million for the first quarter of 2004, an increase of $56 million compared with combined asset management and fund servicing fees for the year-ago quarter. These increases reflected growth in assets managed and serviced as well as improved equity market conditions during the first quarter of 2004. Assets under management at March 31, 2004 totaled $361 billion, up $48 billion compared with the level at March 31, 2003 primarily due to growth in fixed income assets managed by BlackRock. PFPC provided accounting/administration services for $683 billion of net fund investment assets and provided custody services for $411 billion of fund investment assets at March 31, 2004, compared with $573 billion and $347 billion, respectively, at March 31, 2003. Net new business, improved equity market conditions and asset inflows from existing business all contributed to the increases in the PFPC statistics.

Service charges on deposits increased $2 million, to $59 million, during the first quarter of 2004 compared with the first quarter of 2003. The increase in service charges on deposits reflected growth in checking relationships, which increased 8% as of March 31, 2004 compared with March 31, 2003.

Brokerage fees of $58 million for the first three months of 2004 represented a $17 million increase compared with the first three months of 2003. The increase in brokerage fees reflected higher trading volumes that resulted from improved equity market conditions.

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Consumer services fees totaled $63 million for the first quarter of 2004, an increase of $4 million compared with the prior year quarter. The increase was partially due to additional fees from debit card transactions that reflected higher transaction volumes in the current year quarter, partially offset by a decline in on-line banking fees as that product is now offered free of charge.

As previously reported, 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 lost revenue impact to PNC for the first quarter of 2004 was approximately $3 million. As a result of subsequent changes in the pricing structure with Visa during 2004, the estimated lost revenue impact of the settlement for full year 2004 has been reduced to $9 million from $18 million.

Corporate services revenue increased $9 million, to $125 million, in the first three months of 2004 compared with the first three months of 2003. Net gains in excess of valuation adjustments related to the liquidation of institutional loans held for sale totaled $28 million in the 2004 quarter compared with $15 million in the prior year period. Decreases in various other corporate fees partially offset this increase in the comparison.

Equity management (private equity) net gains on portfolio investments were $7 million for the first quarter of 2004 compared with net losses of $4 million for the first quarter of 2003.

Net securities gains totaled $15 million for the first three months of 2004 compared with $56 million for the first three months of 2003. Net securities gains in the 2003 period included $25 million related to the liquidation of the three entities formed in 2001 in the PAGIC transactions.

Other noninterest income totaled $128 million for the first quarter of 2004 compared with $70 million for the first quarter of 2003. Other noninterest income for the 2004 quarter included a $34 million pre-tax gain related to the sale of the Corporation’s modified coinsurance contracts as discussed below, $15 million of private equity dividends and a $10 million pre-tax gain related to the sale of certain investment consulting activities of the Hawthorn unit of PNC Advisors.

As previously reported and as required by the Financial Accounting Standards Board (“FASB”), effective October 1, 2003 PNC 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”), for its annuity coinsurance agreements. 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 $42 million before taxes. In addition to the impact of its initial adoption, the application of DIG B36 increased other noninterest income by $8 million in the fourth quarter of 2003. The 2003 Form 10-K provides further details on PNC’s use of modified coinsurance contracts. During the first quarter of 2004, the Corporation recognized a $34 million pre-tax gain on the sale of its modified coinsurance contracts. PNC continues to sell various annuity products from which it earns commission income.

PRODUCT REVENUE

Treasury management, capital markets and equipment leasing products offered through Wholesale Banking are marketed by several businesses across the Corporation. Treasury management revenue, which includes fees as well as revenue from customer deposit balances, totaled $88 million for the first quarter of 2004 compared with $91 million for the first quarter of 2003. The impact of a lower funds transfer pricing credit rate on corporate customer deposits more than offset the benefit of growth in customers and activity volumes. Consolidated revenue from capital markets totaled $32 million for the first three months of 2004, an increase of $5 million compared with the first three months of 2003. The increase was primarily the result of increased revenue from derivatives, loan syndications and foreign exchange. Consolidated revenue from equipment leasing products was $21 million for the first quarter of 2004 and $20 million for the first quarter of 2003.

As a component of its advisory services to clients, PNC provides a select set of insurance products to fulfill specific customer financial needs. Primary insurance offerings include annuities, life, health, disability and commercial lines coverage. Client segments served by these insurance products include those in PNC Advisors, Regional Community Banking and Wholesale Banking. Insurance products are sold by PNC-licensed insurance agents and through licensed third-party arrangements. PNC recognized revenue from its insurance sales activities of $15 million in the first three months of 2004 and $13 million in the first three months of 2003. The revenue increase was primarily due to an increase in annuity revenue.

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NONINTEREST EXPENSE

Total noninterest expense was $895 million in the first three months of 2004 compared with $856 million in the first three months of 2003. The efficiency ratio was 64% for the first quarter of 2004 and 66% for the first quarter of 2003.

Noninterest expense for the first quarter of 2004 included the following:

Noninterest expense for the first quarter of 2003 included the following:

Apart from the effects of the items described above, noninterest expense for the first quarter of 2004 increased $67 million compared with the first quarter of 2003. This increase was driven by higher sales-based and stock-based incentive compensation, and higher expense accruals in 2004. These changes more than offset the benefit of lower pension expense in the comparison and a $31 million incremental benefit in the first three months of 2004 from efficiency initiatives.

Average full-time equivalent employees totaled approximately 23,800 in the first quarter of 2004 and 23,600 for the first quarter of 2003. The increase was primarily in Regional Community Banking, reflecting the United National acquisition, partially offset by a decrease at PFPC.

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CONSOLIDATED BALANCE SHEET REVIEW

BALANCE SHEET DATA

The Corporation’s Consolidated Balance Sheet is presented in Part I, Item 1 on page 41 of this Form 10-Q.

Total assets were $74.1 billion at March 31, 2004 compared with $68.2 billion at December 31, 2003. The increase in total assets was primarily attributable to the acquisition of United National and the purchase of approximately $660 million of home equity loans in the first quarter of 2004. Total funding sources at March 31, 2004 increased $5.1 billion from the balance at December 31, 2003 primarily due to higher deposits that reflected the impact of the United National acquisition and an increase in federal funds purchased.

An analysis of changes in certain balance sheet categories follows.

LOANS, NET OF UNEARNED INCOME

Loans were $37.5 billion at March 31, 2004, a $3.4 billion increase from December 31, 2003 primarily due to the addition of $2.0 billion of loans from the acquisition of United National and the purchase of approximately $660 million of home equity loans in the first quarter of 2004.

Details Of Loans

As the table above indicates, loan portfolio composition continued to be diversified among numerous industries and types of businesses. Loan portfolio composition is also diversified across PNC’s footprint.

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)

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The equipment lease portfolio totaled $3.8 billion at March 31, 2004 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 March 31, 2004 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 March 31, 2004. PNC no longer enters into new cross-border lease transactions.

Proposals are currently pending before the United States Congress designed to change the tax treatment of cross-border lease transactions, possibly without grandfathering existing transactions such as those included in PNC’s portfolio. If such legislation were enacted, particularly if it did not grandfather the tax treatment of existing transactions, it could impact significantly the economics of PNC’s cross-border lease portfolio.

In addition, as part of the 1998-2000 audit of the Corporation’s consolidated federal income tax returns, the Internal Revenue Service (“IRS”) has proposed adjustments to the two lease-in, lease-out transactions into which PNC had entered. The proposed adjustments reverse the tax treatment of these transactions as reported on the tax returns as filed. The IRS has also verbally indicated that it intends to issue similar proposed adjustments to qualified technological equipment leases and lease-to-service contract transactions into which the Corporation had entered. PNC believes its reported treatment on the filed tax returns is supported by appropriate tax law and intends to pursue resolution of the matter through IRS administrative appeal remedies which are available. The result of pursuing the administrative appeal remedies cannot currently be predicted with certainty, although any resolution would most likely involve a change in the timing of tax deductions which, in turn, depending on the exact resolution, could significantly impact the economics of the subject transactions.

At March 31, 2004, PNC’s total loans included $550 million of vehicle leases, net of unearned income. PNC’s vehicle leasing business, which PNC is exiting, is comprised of vehicle leases with an aggregate residual value of $446 million and $137 million of estimated future customer lease payments. As of March 31 2004, the active vehicle leases scheduled to mature are as follows.

Vehicle Lease Maturity Schedule

PNC 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. At March 31, 2004, the remaining reserve was $30 million, a decline of $3 million from the balance at December 31, 2003. Until the remaining leases mature or are otherwise liquidated, 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 and evaluated on an ongoing basis and were considered adequate at March 31, 2004.

Net Unfunded Commitments

The increase in consumer net unfunded commitments at March 31, 2004 compared with the balance at December 31, 2003 was primarily due to net unfunded commitments related to the first quarter 2004 purchase of a portfolio of home equity loans and the acquisition of United National.

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 $6.1 billion at March 31, 2004 and $6.4 billion at December 31, 2003.

Net outstanding standby letters of credit totaled $3.9 billion at March 31, 2004 and $4.0 billion at December 31, 2003. Standby letters of credit commit the Corporation to make payments on behalf of customers if specified future events occur.

At March 31, 2004, purchased customer receivables totaled $1.9 billion. Unfunded commitments related to purchased customer receivables totaled $890 million at March 31, 2004 and are included in the preceding table. This activity is conducted entirely through Market Street. See the Off-Balance Sheet Arrangements And Consolidated VIEs section of this Financial Review and Note 2 Variable Interest Entities in the Notes to Consolidated Financial Statements for further information regarding Market Street.

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SECURITIES

Details Of Securities

Securities represented 23% of total assets at both March 31, 2004 and December 31, 2003. The increase in total securities compared with December 31, 2003 was primarily due to increases in United States Treasury and government agencies, commercial mortgage-backed and asset-backed securities.

At March 31, 2004, the securities available for sale balance included a net unrealized gain of $183 million, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2003 was a net unrealized gain of $4 million. The change in the fair value attributable to interest rates of securities available for sale reflects an inverse relationship with changes in interest rates. If interest rates rise after March 31, 2004, such movement, if sustained, will adversely impact the fair value of securities available for sale from the levels at March 31, 2004. Net unrealized gains and losses in the securities available for sale portfolio are included in shareholders’ equity as accumulated other comprehensive income or loss, net of tax. The expected weighted-average life of securities available for sale was 2 years and 5 months at March 31, 2004 and 2 years and 11 months at December 31, 2003.

Management estimates the effective duration (change in fair value given a change in interest rates) of securities available for sale is 2.5% for an immediate 50 basis points parallel increase in interest rates and 2.2% for an immediate 50 basis points parallel decrease in interest rates.

Mortgage-backed securities (“MBS”) comprise 34% of available for sale securities or $5.7 billion. These securities are predominantly CMOs (“collateralized mortgage obligations”) and securitized pools of hybrid adjustable rate mortgages. At March 31, 2004, the Corporation held less than $50 million of 30- and 15- year fixed-rate pass-through securities.

Securities classified as held to maturity relate to Market Street and are carried at amortized cost. The expected weighted-average life of securities held to maturity was 2 years and 4 months at March 31, 2004 and 2 years and 7 months at December 31, 2003.

LOANS HELD FOR SALE

Details Of Loans Held For Sale

Substantially all education loans are classified as loans held for sale. Generally, education loans are sold when the loans go into repayment status.

During the first quarter of 2004 and 2003, the liquidation of institutional loans held for sale resulted in net gains in excess of valuation adjustments of $28 million and $15 million, respectively. These gains are reflected in the results of the Wholesale Banking business segment.

OTHER ASSETS

The increase of $1.1 billion in “Assets—Other” in the preceding “Balance Sheet Data” table includes $567 million of goodwill recorded in the first quarter of 2004 in connection with the United National acquisition.

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CAPITAL AND FUNDING SOURCES

Details Of Funding Sources

Total deposits increased $2.9 billion from December 31, 2003. This increase was primarily attributable to the acquisition of United National. Total borrowed funds increased $2.3 billion from December 31, 2003 primarily due to an increase in federal funds purchased.

Total shareholders’ equity was $7.2 billion at March 31, 2004 compared with $6.6 billion at December 31, 2003. The increase in total shareholders’ equity reflected the impact of first quarter earnings, the issuance of common stock in connection with the completion of the United National acquisition as noted below and higher other comprehensive income due to net unrealized securities gains, partially offset by stock repurchases. See Note 15 Shareholders’ Equity And Comprehensive Income in the Notes to Consolidated Financial Statements of Item 1 of this Report for additional information.

Common shares outstanding at March 31, 2004 were 282 million, an increase of five million over December 31, 2003, principally due to the issuance of common shares for the acquisition of United National.

As previously reported, in February 2004 the PNC board of directors authorized the Corporation to repurchase up to 20 million shares of common stock. The new repurchase program is a replacement and continuation of the prior repurchase program. During the first quarter of 2004, the Corporation purchased 2.2 million common shares at a total cost of $125 million. The extent and timing of share repurchases during the remainder of the program will depend on a number of factors, including, among others, market and general economic conditions, regulatory and economic capital considerations, alternative uses of capital and the potential impact on PNC’s credit rating.

Risk-Based Capital

The capital position is managed through balance sheet size and composition, issuance of debt and equity instruments, treasury stock activities, dividend policies and retention of earnings.

The access to, and cost of, funding new business initiatives, including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs, and the level and nature of regulatory oversight depend, in part, on a financial institution’s capital strength. At March 31, 2004, each banking subsidiary of the Corporation was considered “well capitalized” based on regulatory capital ratio requirements.

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OFF-BALANCE SHEET ARRANGEMENTS AND CONSOLIDATED VIES

As is the case with most larger financial services companies, PNC conducts a portion of its business activities through limited purpose entities known as “special purpose entities.” Most of these activities involve financial products distributed to customers, trust and custody services, and processing and funds transfer services. The amounts involved in these activities can be quite large in relation to the Corporation’s assets, equity and earnings. While some of these special purpose entities are not included on PNC’s Consolidated Balance Sheet, under FIN 46 those special purpose entities defined as “variable interest entities” (“VIEs”) and for which the Corporation is considered the primary beneficiary must be consolidated by PNC for financial reporting purposes.

PNC is considered the primary beneficiary and consolidates the following VIEs under the provisions of FIN 46:

PNC Bank, N.A. provides credit enhancement, liquidity facilities and certain administrative services to Market Street. Credit enhancement is provided in part by PNC Bank, N.A. in the form of a cash collateral account that is funded by a credit loan facility with a five-year term expiring on March 25, 2009. At March 31, 2004, approximately $86 million was outstanding on this facility. This amount was eliminated in PNC’s Consolidated Balance Sheet as of March 31, 2004. An additional $257 million was provided by a major insurer.

Also at March 31, 2004, Market Street had committed liquidity facilities available supporting individual pools of receivables totaling $2.9 billion, of which $2.5 billion was provided by PNC Bank, N.A. Program administrator and commitment fees associated with Market Street of $2.0 million and $.6 million, respectively, for the three months ended March 31, 2004 were eliminated in PNC’s Consolidated Statement of Income for the three months ended March 31, 2004. All of Market Street’s assets at March 31, 2004 collateralize its commercial paper obligations. Neither creditors nor equity investors in Market Street have any recourse to the general credit of PNC.

The consolidation of Market Street was reflected in the Wholesale Banking business segment.

Also consolidated were certain entities in which PNC, as a national syndicator of affordable housing equity, serves as the general partner (together with the aforementioned low income housing tax credit limited partnership investments, the “LIHTC investments”) and no other entity owns a majority of the limited partnership interests. Neither creditors nor equity investors in the LIHTC investments have any recourse to the general credit of PNC.

The consolidation of the LIHTC investments was reflected in the Wholesale Banking business segment and increased PNC’s total assets by $.4 billion and total liabilities by $.2 billion at both March 31, 2004 and December 31, 2003. The most significant increases to the Consolidated Balance Sheet were reflected in “Other assets” of $.4 billion, “Borrowed funds” of $.1 billion, “Other liabilities” of $.1 billion and “Minority and noncontrolling interests in consolidated entities” of $.2 billion at both March 31, 2004 and December 31, 2003.

The following represent significant off-balance sheet arrangements that have not been consolidated at either March 31, 2004 or December 31, 2003, as PNC is not considered the primary beneficiary:

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The Corporation has subsidiaries that invest in and act as the investment manager for a private equity fund that is organized as a limited partnership as part of its equity management activities. The fund invests in private equity investments to generate capital appreciation and profits. At March 31, 2004, both aggregate assets and equity in the fund were approximately $60 million. The comparable amounts at December 31, 2003 were $53 million and $52 million, respectively. PNC’s ownership interest in the fund was approximately $15 million at March 31, 2004, which represents its maximum exposure to loss from its investment in this fund. Under the transition guidance in FIN 46, application of the provisions of the interpretation has been deferred for companies that follow specialized accounting for investment companies pending further action by the FASB.

Also, as previously reported in the 2003 10-K, a number of private investment funds, organized as limited partnerships, were managed by the Hawthorn division of PNC Advisors (“Private Funds”) and represented off-balance sheet arrangements as of December 31, 2003. The management of these Private Funds was transferred as part of the sale of certain investment consulting activities of the Hawthorn unit of PNC Advisors during the first quarter of 2004, and PNC no longer had an ownership interest in the Private Funds at March 31, 2004.

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REVIEW OF BUSINESSES

PNC operates five major businesses engaged in banking, asset management and global fund processing services. Banking businesses include regional community banking, wholesale banking and wealth management. 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 Wholesale Banking and sold by several businesses across the Corporation.

Results of individual businesses are presented based on PNC’s management accounting practices and the Corporation’s management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of individual businesses are not necessarily comparable with similar information for any other company. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis.

As more fully described in the Corporation’s Current Report on Form 8-K dated April 5, 2004, PNC changed its financial reporting for its business segments for first quarter 2004 reporting and restated all prior period amounts to conform with the new methodology. The principal changes to PNC’s segment reporting are as follows:

The allowance for credit losses is allocated based on management’s assessment of risk inherent in the loan portfolios. The costs incurred by support areas not directly aligned with the businesses are allocated primarily based on the utilization of services.

Total business segment financial results differ from total consolidated results. The impact of these differences is primarily reflected in the “Other” category in the table below. “Other” includes residual activities that do not meet the criteria for disclosure as a separate reportable business, such as asset and liability management activities, related net securities gains, equity management activities, differences between business segment performance reporting and financial statement reporting (GAAP), corporate overhead and intercompany eliminations. Business segment results, including inter-segment revenues, are included in Note 16 Segment Reporting included in the Notes To Consolidated Financial Statements under Part I, Item 1 of this Report.

“Other Information” included in the tables that follow is presented as of period end, except for net charge-offs, net gains (losses) on loans held for sale and average full-time equivalent employees (FTEs), which represent amounts for the periods presented. FTE statistics as reported by business reflect staff directly employed by the respective businesses and exclude corporate and shared services employees. Prior period FTE amounts are not restated for organizational changes.

RESULTS OF BUSINESSES