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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

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 29, 2005, there were 283,521,031 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 2005 First Quarter Form 10-Q

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CONSOLIDATED FINANCIAL HIGHLIGHTS

THE PNC FINANCIAL SERVICES GROUP, INC.

See page 35 for a glossary of certain terms used in this report.

Certain prior period amounts included in these Consolidated Financial Highlights have been reclassified to conform with the current period presentation.

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FINANCIAL REVIEW

THE PNC FINANCIAL SERVICES GROUP, INC.

This Financial Review should be read together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and Items 6, 7, 8 and 9A of our 2004 Annual Report on Form 10-K (“2004 Form 10-K”). We have reclassified certain prior period amounts to conform with the current year presentation. 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 our 2004 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 the forward-looking statements included in this Report or from historical performance. See Note 16 Segment Reporting in the Notes to Consolidated Financial Statements included in Part I, Item 1 of 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.

EXECUTIVE SUMMARY

THE PNC FINANCIAL SERVICES GROUP, INC.

PNC 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. We operate directly and through numerous subsidiaries, providing many of our products and services nationally and others in our primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. We also provide certain asset management and global fund processing services internationally.

KEY STRATEGIC GOALS

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

In recent years, we have managed our interest rate risk to achieve a moderate risk profile with limited exposure to earnings volatility resulting from interest rate fluctuations. Our actions have created a balance sheet characterized by strong asset quality and significant flexibility to take advantage, where appropriate, of rising interest rates. We anticipate that interest rates will continue to rise in 2005 and that the overall impact of a rise in long-term interest rates will be beneficial to us.

During the first quarter of 2005, we initiated an intensive process known as “One PNC” to improve our operating efficiency. We intend for this enterprise-wide review to be completed and for implementation to begin during the third quarter of 2005. We expect to realize significant expense savings and revenue enhancements as a result of this initiative. We also expect these improvements in efficiency to bring us closer to our customers.

As previously reported, effective January 31, 2005 our majority-owned subsidiary BlackRock acquired SSRM Holdings, Inc. (“SSRM”), the holding company for State Street Research & Management Company and SSR Realty Advisors Inc., from MetLife, Inc. At closing, MetLife, Inc. received approximately $233 million in cash and approximately 550,000 shares of BlackRock restricted class A common stock. Additional cash consideration, which could increase the purchase price by up to 25%, may be paid over five years contingent on certain measures. The addition of SSRM enhanced BlackRock’s investment management platform and added $50 billion in U.S. equity, fixed income, alternative investment and real estate equity assets under management.

On February 10, 2005, we entered into an amended and restated agreement to acquire Riggs National Corporation (“Riggs”), a Washington, D.C. based banking company, replacing the original acquisition agreement entered into July 16, 2004. The transaction will give us a substantial presence on which to build a market leading franchise in the affluent Washington metropolitan area. The total consideration under the amended and restated agreement is comprised of a fixed number of approximately 6.4 million shares of PNC common stock and $286 million in cash, subject to adjustment. The merger has received regulatory and shareholder approval, but is subject to select remaining closing conditions including, among others, receipt of regulatory waivers.

We include additional information on Riggs and SSRM in Note 2 Acquisitions in the Notes To Consolidated Financial Statements in Item 1 of this Report and in the Risk Factors section of Item 2 of this Report.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

Our financial performance is substantially affected by several external factors outside of our control, including:

In addition to changes in general economic conditions, including the direction, timing and magnitude of movement in

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interest rates and the performance of the capital markets, our success for the remainder of 2005 will depend, among other things, upon:

We seek a moderate risk profile to limit the risk of loss resulting from quickly changing market conditions. We focus on the development and management of our customer franchises to generate longer-term growth in revenue and earnings.

SUMMARY FINANCIAL RESULTS

Consolidated net income for the first three months of 2005 was $354 million, or $1.24 per diluted share, compared with net income of $328 million, or $1.15 per diluted share, for the first three months of 2004. Return on average shareholders’ equity was 19.17% for the first quarter of 2005 and 18.84% for the first quarter of 2004. Return on average assets was 1.72% for the first three months of 2005 compared with 1.81% for the first three months of 2004.

On January 18, 2005, our ownership in BlackRock was transferred from PNC Bank, National Association (“PNC Bank, N.A.”) to PNC Bancorp, Inc., our intermediate bank holding company. The transfer was effected primarily to give BlackRock more operating flexibility, particularly in connection with its acquisition of SSRM. As a result of the transfer, certain deferred tax liabilities recorded by PNC were reversed in the first quarter of 2005 in accordance with Statement of Financial Accounting Standards No. (“SFAS”) 109, Accounting for Income Taxes. The reversal of deferred tax liabilities benefited our earnings by $45 million, or approximately $.16 per diluted share, in the first quarter of 2005.

Earnings for the first quarter of 2004 included an after-tax gain of $22 million, or $.08 per diluted share, related to the sale of our modified coinsurance contracts.

Our first quarter 2005 performance included the following accomplishments:

BALANCE SHEET HIGHLIGHTS

Total average assets were $83.4 billion for the first quarter of 2005 compared with $73.0 billion for the first quarter of 2004. In addition to the $7.9 billion increase in average interest-earning assets discussed below, the increase compared with the first quarter of 2004 reflected increases in average receivables related to securities sold but not settled that are included in other noninterest-earning assets.

Average interest-earning assets were $68.0 billion for the first three months of 2005 compared with $60.1 billion for the first three months of 2004. An increase of $5.1 billion in average loans was the primary factor for the increase in average interest-earning assets. In addition, average trading securities included in other interest-earning assets increased $1.5 billion in the first quarter of 2005 compared with the prior year first quarter and average trading assets included in federal funds sold and resale agreements increased $1.1 billion over the prior year period.

Average total loans were $44.0 billion for the first three months of 2005, an increase of $5.1 billion over the first three months of 2004. This increase was driven by continued improvements in market loan demand as well as targeted sales efforts across our banking businesses. The increase in average total loans reflected growth in home equity loans of approximately $2.6 billion and commercial loans of approximately $2.1 billion, partially offset by a $1.0 billion decline in lease financing loans. During the second quarter of 2004, we sold our vehicle leasing portfolio as more fully described in our 2004 Form 10-K.

Loans represented 65% of average interest-earning assets for both the first three months of 2005 and the first three months of 2004.

Average securities totaled $16.9 billion for the first three months of 2005 and $16.3 billion for the first three months of 2004. Securities comprised 25% of average interest-earning assets for the first quarter of 2005 compared with 27% of average interest-earning assets for the first quarter of 2004.

Funding cost is affected by the volume and type of funding sources that we have as well as the rates that we pay on those sources. Average total deposits were $53.4 billion for the first three months of 2005, an increase of $6.0 billion over the first three months of 2004. The increase in average total deposits was driven primarily by higher certificates of deposit, money market account and noninterest-bearing deposit balances, and by higher Eurodollar deposits. Average total deposits represented 64% of total sources of funds for the first three months of 2005 and 65% for the first quarter of 2004. Average transaction deposits were $37.0 billion for the first three months of 2005 compared with $34.8 billion for the first three months of 2004.

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Average borrowed funds were $15.0 billion for the first three months of 2005 and $13.1 billion for the first three months of 2004. The following contributed to this increase:

These increases were partially offset by Federal Home Loan Bank maturities and senior and subordinated debt maturities during the last nine months of 2004.

Shareholders’ equity totaled $7.6 billion at March 31, 2005, compared with $7.5 billion at December 31, 2004. See the Consolidated Balance Sheet Review section of this Financial Review for additional information.

BUSINESS SEGMENT HIGHLIGHTS

Total business segment earnings for the first quarter of 2005 were $329 million compared with $326 million for the first quarter of 2004. Total business segment earnings were essentially flat in the comparison as the impact of revenue growth in several of the businesses and disciplined expense management in 2005 was mostly offset by the impact of an $18 million after-tax reduction in net gains on institutional loans held for sale. In addition, BlackRock LTIP expenses were included in the first quarter of 2005, but not in the prior year quarter.

Regional Community Banking

Earnings from Regional Community Banking totaled $121 million for the first quarter of 2005 compared with $102 million for the first quarter of 2004. The 19% increase in earnings was driven by continued customer and balance sheet growth, reduced noninterest expense and a lower provision for credit losses. Checking relationships as of March 31, 2005 grew 5% compared with March 31, 2004, while total average loans grew 16% and average demand deposits grew 4% for the first quarter of 2005 compared with the first quarter of 2004.

Wholesale Banking

Earnings from Wholesale Banking were $110 million for the first three months of 2005 and $122 million for the first three months of 2004. The lower earnings reflected a $26 million pretax decrease in net gains on institutional loans held for sale and a $9 million lower negative provision for credit losses. Excluding the impact of these factors, results for Wholesale Banking for the first quarter of 2005 reflected higher taxable-equivalent net interest income, disciplined expense management and growth in average loans and deposits compared with the prior year first quarter.

PNC Advisors

PNC Advisors earned $28 million in the first three months of 2005 and $31 million in the first three months of 2004. Earnings for the first quarter of 2004 included a $7 million after-tax gain recognized from the sale of certain investment consulting activities of the Hawthorn unit. Excluding the impact of this gain, the increase in earnings from the prior year resulted primarily from disciplined expense control and improved operating leverage.

BlackRock

BlackRock reported earnings of $47 million for the first three months of 2005 compared with $55 million for the first three months of 2004. The lower earnings in 2005 were due to nonrecurring pretax expenses of $9 million associated with the SSRM acquisition and $14 million of pretax LTIP expenses reported in the 2005 quarter, partially offset by higher advisory fees driven by a growing base of assets under management. In addition, results for the first quarter of 2004 included a $9 million net income benefit recognized during that quarter associated with the resolution of an audit performed by New York State on state income tax returns filed from 1998 through 2001. BlackRock’s assets under management grew to $391 billion at March 31, 2005 compared with $342 billion at December 31, 2004, due to the SSRM acquisition and new business.

PNC owns approximately 70% of BlackRock and we consolidate BlackRock into our financial statements. Accordingly, approximately 30% of BlackRock’s earnings are recognized as minority interest expense in the Consolidated Income Statement. BlackRock financial information included in the Financial Review section of this Report is presented on a stand-alone basis. The market value of our BlackRock shares was approximately $3.4 billion at March 31, 2005 while the book value at that date was $.6 billion.

PFPC

Earnings from PFPC totaled $23 million for the first quarter of 2005 and $16 million for the first quarter of 2004. Higher earnings in 2005 were attributable to disciplined expense control and improved operating leverage, as well as strong performance in key PFPC business units in part due to continued business expansion of our existing clients and new business wins. Earnings for the first quarter of 2005 also included a $6 million after-tax gain related to the resolution of a client contract dispute and a $5 million after-tax charge related to the prepayment of intercompany debt. PFPC’s accounting/administration net fund assets increased 11% and custody fund assets increased 12% as of March 31, 2005 compared with the balances at March 31, 2004. The increases were driven by new business, asset inflows from existing customers and equity market appreciation.

Other

Earnings attributable to “Other” for the first quarter of 2005 totaled $39 million compared with earnings of $18 million in the first quarter of 2004. The increase from the first quarter of 2004 reflected the benefit of the $45 million deferred tax liability reversal related to our investment in BlackRock, as described further under “Summary Financial Results,” and higher equity management gains in 2005, partially offset by $9 million of net securities losses in 2005 compared with $15 million of net securities gains in the prior year first quarter. In addition, “Other” for the first quarter of 2004 included the impact of the $22 million after-tax gain on the sale of our modified coinsurance contracts.

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CONSOLIDATED INCOME STATEMENT REVIEW

NET INTEREST INCOME AND NET INTEREST MARGIN

Changes in net interest income and margin result from the interaction of the volume and composition of earning assets and related yields, interest-bearing liabilities and related rates paid, and noninterest-bearing sources.

See Statistical Information-Average Consolidated Balance Sheet And Net Interest Analysis included on pages 61 and 62 of this Report for additional information.

Taxable-equivalent net interest income totaled $512 million for the first quarter of 2005 compared with $497 million for the first quarter of 2004. The increase in taxable-equivalent net interest income reflected the impact of higher average earning assets in 2005. Our Consolidated Financial Highlights section included in this Financial Review provides 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 2005 was 3.02% compared with 3.30% for the first quarter of 2004. The following factors contributed to the decline in net interest margin:

These factors more than offset the effect of higher average yields on securities and loans in 2005.

PROVISION FOR CREDIT LOSSES

The provision for credit losses decreased $4 million, to $8 million, for the first quarter of 2005 compared with the first quarter of 2004. The decline in the provision for credit losses in 2005 primarily reflected the continued strong credit quality of the loan portfolio. The improved credit quality reflected both a decline in nonperforming loans and a reduction in problems related to performing credits. The favorable impact of these factors on the provision was partially offset by the impact of total average loan growth in 2005.

See Allowance for Loan And Lease Losses And Unfunded Loan Commitments And Letters Of Credit in the Credit Risk Management portion of the Risk Management section of this Financial Review for additional information regarding factors impacting the provision for credit losses. We expect loan growth to continue to impact the provision during the remainder of 2005; however, the provision for credit losses will also be favorably impacted in the second quarter of 2005 by a significant recovery as a result of a litigation settlement.

NONINTEREST INCOME

Summary

Noninterest income totaled $973 million for the first quarter of 2005 compared with $911 million for the first quarter of 2004.

Higher noninterest income for the first quarter of 2005 reflected the following:

These increases were partially offset by net securities losses in 2005 compared with gains in the prior year and a $26 million reduction in net gains on our remaining institutional loans held for sale as the liquidation of this portfolio nears completion.

Noninterest income for the first quarter of 2004 included a $34 million pretax gain related to the sale of our modified coinsurance contracts and a $10 million pretax gain related to the sale of certain investment consulting activities of the Hawthorn unit of PNC Advisors. Our 2004 Form 10-K more fully describes these two transactions.

Additional Analysis

Combined asset management and fund servicing fees amounted to $534 million for the first quarter of 2005, an increase of $77 million over the prior year first quarter. These increases reflected the impact of the SSRM acquisition and other growth in assets managed and serviced. Assets under management at March 31, 2005 totaled $432 billion, up $71 billion compared with the level at March 31, 2004. The acquisition of SSRM added $50 billion of assets under management during the first quarter of 2005. PFPC provided fund accounting/administration services for $745 billion of net fund investment assets and provided custody services for $462 billion of fund investment assets at March 31, 2005, compared with $669 billion and $411 billion, respectively, at March 31, 2004. The increases were driven by new business, asset inflows from existing customers and equity market appreciation.

Service charges on deposits totaled $59 million for both the first quarter of 2005 and first quarter of 2004. Although growth has been limited due to our offering of free checking in both the consumer and small business channels, free checking has positively impacted customer and demand deposit growth as well as other consumer-related fees.

First quarter 2005 brokerage fees totaled $55 million, a decline of $3 million from the first quarter of 2004 primarily due to weaker retail trading.

For the first quarter of 2005, consumer services fees increased $3 million, to $66 million, compared with the first quarter of 2004. Higher fees for 2005 reflected additional fees from debit card transactions primarily due to higher volumes, partially offset by the impact of the sale of certain out-of-footprint ATMs.

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Corporate services revenue totaled $107 million for the first three months of 2005 compared with $125 million for the first three months of 2004. Net gains in excess of valuation adjustments related to our liquidation of institutional loans held for sale totaled $2 million in the first quarter of 2005 compared with $28 million for the first quarter of 2004, reflecting the fact that our liquidation of institutional loans held for sale is essentially complete. This decrease was partially offset by the impact of higher fees in 2005 related to capital markets and commercial mortgage servicing activities.

Equity management (private equity) net gains on portfolio investments totaled $32 million for the first quarter of 2005 compared with net gains of $7 million for the first quarter of 2004.

Net securities losses were $9 million for the first quarter of 2005 compared with net securities gains of $15 million in the prior year first quarter.

Other noninterest income totaled $129 million for the first three months of 2005 compared with $127 million for the first three months of 2004. Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed.

Other noninterest income for the first quarter of 2005 included the following:

Other noninterest income for the first quarter of 2004 included the $34 million gain on the sale of our modified coinsurance contracts and the $10 million gain on sale of certain investment consulting activities of the Hawthorn unit referred to above.

PRODUCT REVENUE

Wholesale Banking offers treasury management, capital markets, commercial loan servicing and equipment leasing products that are marketed by several businesses across PNC.

Treasury management revenue, which includes fees as well as revenue from customer deposit balances, totaled $97 million for the first three months of 2005 and $88 million for the first three months of 2004. The increased revenue in 2005 reflected the longer term nature of treasury management deposits, strong deposit growth and a steady increase in business-to-business processing volumes.

Consolidated revenue from capital markets was $42 million for the first quarter of 2005, an increase of $10 million compared with the first quarter of 2004. Increases in loan syndication fees and client-related trading revenue drove the increase in capital markets revenue for the first quarter of 2005 compared with the prior year first quarter.

Midland Loan Services offers servicing and technology solutions for the commercial real estate finance industry. Midland’s revenue, which includes fees as well as revenue from servicing deposit balances, totaled $30 million for the first three months of 2005 and $25 million for the first three months of 2004. The revenue growth was driven primarily by growth in the commercial mortgage servicing portfolio and related services.

Consolidated revenue from equipment leasing products was $18 million for the first quarter of 2005 and $21 million for the first three months of 2004. The decline is due to the interest cost of funding the potential tax exposure on the cross-border leasing portfolio. See Cross-Border Leases and Related Tax and Accounting Matters in the Consolidated Balance Sheet Review section of this Financial Review for further information.

As a component of our advisory services to clients, we provide a select set of insurance products to fulfill specific customer financial needs. Primary insurance offerings include:

Client segments served by these insurance solutions 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. We recognized revenue of $14 million in the first quarter of 2005 and $15 million in the first quarter of 2004.

Additionally, through our subsidiary companies, PNC Insurance Corp. and Alpine Indemnity Limited, we act as a reinsurer for credit life and accident and health insurance provided to customers of our subsidiaries. We also write, assume and cede insurance for property, workers’ compensation, commercial general liability and automobile liability of PNC and its affiliates.

In the normal course of business PNC Insurance Corp. and Alpine Indemnity Limited maintain insurance reserves for reported claims and for claims incurred but not reported based on actuarial assessments.

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NONINTEREST EXPENSE

Total noninterest expense was $999 million for the first three months of 2005, an increase of $104 million compared with the first three months of 2004. The efficiency ratio was 68% for the first three months of 2005 compared with 64% for the first three months of 2004.

Noninterest expense for the first quarter of 2005 included an increase of $72 million in BlackRock operating expenses that reflected the impact of nonrecurring and ongoing costs associated with the SSRM acquisition, along with charges related to the BlackRock LTIP awards. See the discussion under the heading “2002 BlackRock Long-Term Retention and Incentive Plan” in this Financial Review for additional information on the latter expenses.

Noninterest expense for the first three months of 2004 included the following:

Apart from the impact of the items described above, noninterest expense increased $48 million, or 5%, in the first quarter of 2005 compared with the same period in 2004. The higher expenses were driven by increased sales incentives and the increased impact of expensing stock options. See Note 1 Accounting Policies in our Notes To Consolidated Financial Statements under Item 1 of this Report for additional information on our accounting for employee and director stock options.

We expect to record charges of approximately $.11 per diluted share for conversion-related and other nonrecurring costs over the course of the Riggs acquisition integration, the majority of which will be incurred in the second quarter of 2005.

Average full-time equivalent employees totaled approximately 23,800 in the first three months of 2005 and 2004. An increase for BlackRock was offset by a decrease for Regional Community Banking.

EFFECTIVE TAX RATE

Our effective tax rate for the first quarter of 2005 was 23.7% compared with 32.7% for the first quarter of 2004. The decrease in the effective rate for the first three months of 2005 was primarily attributable to the impact of the reversal of deferred tax liabilities in connection with the transfer of our ownership in BlackRock as discussed under “Summary Financial Results” in this Report and under Note 2 Acquisitions included in the Notes To Consolidated Financial Statements in Item 1 of this Report. This transaction reduced our first quarter 2005 tax provision by $45 million. The effective tax rate for the first quarter of 2004 was favorably impacted by the $9 million tax benefit recorded in that period as a result of resolving a BlackRock New York State audit.

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CONSOLIDATED BALANCE SHEET REVIEW

BALANCE SHEET DATA

Our Consolidated Balance Sheet is presented in Part I, Item 1 on page 40 of this Report.

Higher total assets at March 31, 2005 compared with the balance at December 31, 2004 were driven by loan growth resulting from continued improvements in market loan demand and higher securities balances that reflected short-term investing opportunities.

An analysis of changes in certain balance sheet categories follows.

LOANS, NET OF UNEARNED INCOME

Loans increased $1.2 billion, to $44.7 billion at March 31, 2005, compared with the balance at December 31, 2004. Improvements in market loan demand, in addition to targeted sales efforts across our banking businesses, drove the increase in total loans.

Details Of Loans

As the table above indicates, the loans that we hold continued to be diversified among numerous industries and types of businesses. The loans that we hold are also diversified across the geographic areas where we do business.

Commercial Lending Exposure (a)(b)

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Net Unfunded Credit 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 $6.1 billion at March 31, 2005 and $6.7 billion at December 31, 2004.

The increase in consumer net unfunded commitments at March 31, 2005 compared with the balance at December 31, 2004 was primarily due to net unfunded commitments related to growth in home equity loans.

Unfunded credit commitments related to Market Street totaled $950 million March 31, 2005 and $962 million at December 31, 2004 and are included in the preceding table primarily within the “Commercial” and “Consumer” categories. See the Off-Balance Sheet Arrangements And Consolidated VIEs section of this Financial Review and Note 9 Variable Interest Entities in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Report for further information regarding Market Street.

In addition to credit commitments, our net outstanding standby letters of credit totaled $3.6 billion at March 31, 2005 and $3.7 billion at December 31, 2004. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

Cross-Border Leases and Related Tax and Accounting Matters

The equipment lease portfolio totaled $3.7 billion at March 31, 2005 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. We no longer enter into cross-border lease transactions.

Aggregate residual value at risk on the total commercial lease portfolio at March 31, 2005 was $1.1 billion. We have taken steps to mitigate $.6 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, 2005.

The American Jobs Creation Act of 2004 (“AJCA”) limits the tax deductions that may be taken in a given year related to certain lease transactions, including the types of cross-border lease transactions that we have previously entered into. However, AJCA impacts only cross-border lease transactions entered into after March 12, 2004. All of our cross-border lease transactions were entered into prior to this date and are therefore not affected by AJCA. While only transactions entered into after March 12, 2004 are specifically impacted, AJCA is clear that no inference should be drawn as to the proper tax treatment of transactions entered into on or before this date. Thus, the tax treatment of existing transactions is still subject to challenge by the IRS.

As part of the audit of our 1998-2000 consolidated federal income tax returns, the IRS has proposed adjustments to several of our cross-border lease transactions.

The proposed adjustments would reverse the tax treatment of these transactions as we reported them on our filed tax returns. We believe the method used to report these transactions is supported by appropriate tax law and intend to pursue resolution of the matter through the appropriate IRS administrative appeal remedies. While we cannot predict with certainty the result of pursuing the administrative appeal remedies, 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 these transactions. The IRS is also beginning an audit of our 2001-2003 consolidated federal income tax returns. We expect them to again propose adjustments to the cross-border lease transactions referred to above as well as to new cross-border lease transactions entered in those years.

Even though we intend to pursue resolution with the IRS through administrative appeal remedies, it is possible we will be unable to reach a settlement. If we are unable to reach settlement, we will evaluate other options, including litigation. There is, of course, no guarantee as to the outcome of litigation. We believe our reserves for these exposures were adequate at March 31, 2005.

Further, the Financial Accounting Standards Board (“FASB”) has begun to consider whether any change in the timing of tax benefits associated with these transactions should result in a recalculation under Statement of Financial Accounting Standards No. (“SFAS”) 13, “Accounting for Leases,” and whether a lessor should re-evaluate the classification of a leveraged lease when a recalculation of the lease is performed. In March 2005, the FASB directed its staff to issue a proposed Staff Position on this issue. If the FASB ultimately decides companies must recalculate and re-evaluate leveraged lease classification, a cumulative adjustment in the period of change which could be material and future adjustments to earnings could be required. However, under the leverage leasing accounting rules, any reductions in earnings would be recovered in future years over the remaining lives of the leases.

In addition to the transactions referred to above, two lease-to-service contract transactions that we were party to were structured as partnerships for tax purposes. We have been informed that the partnerships are under audit by the IRS. However, we do not believe that our exposure from these transactions is material to our consolidated results of operations or financial position.

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SECURITIES

Details Of Securities

Securities represented 22% of total assets at March 31, 2005 and 21% of total assets at December 31, 2004. The increase in total securities compared with December 31, 2004 was primarily due to an increase in mortgage-backed securities, over half of which was in floating-rate securities, partially offset by decreases in commercial mortgage-backed and asset-backed securities.

At March 31, 2005, the securities available for sale balance included a net unrealized loss of $267 million, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2004 was a net unrealized loss of $102 million. The impact of increases in interest rates during the first quarter of 2005 was reflected in the higher net unrealized loss position at March 31, 2005.

The fair value of securities available for sale decreases when interest rates increase and vice versa. Further increases in interest rates after March 31, 2005, if sustained, will adversely impact the fair value of securities available for sale going forward compared with the balance at March 31, 2005. 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.

During April 2005, the front-end of the yield curve rallied to a lesser extent than did intermediate-term interest rates. We expected that this market movement was not reflective of a potential rise in short-term interest rates given recent inflation trends and the expected Federal Open Market Committee tightening action on May 3, 2005.

As a result, in late April 2005, we performed a balance sheet review and decided to adjust our securities and other earning assets positions to address the following objectives:

To achieve these objectives, in late April and early May 2005, we sold $2.1 billion of securities available for sale and terminated $1.0 billion of resale agreements that were most sensitive to extension risk due to rising short-term interest rates. We also purchased $2.1 billion of securities with higher yields and lower extension risk. These transactions resulted in realized net securities and other losses of approximately $31 million, which will be included in our results of operations for the second quarter of 2005.

The expected weighted-average life of securities available for sale was 3 years and 3 months at March 31, 2005 and 2 years and 8 months at December 31, 2004.

We estimate the effective duration of securities available for sale is 2.3 years for an immediate 50 basis points parallel increase in interest rates and 1.9 years for an immediate 50 basis points parallel decrease in interest rates.

LOANS HELD FOR SALE

Education loans held for sale totaled $1.5 billion at March 31, 2005 and $1.1 billion at December 31, 2004 and represented the majority of our loans held for sale at each date. We classify substantially all of our education loans as loans held for sale. Generally, we sell education loans when the loans are placed into repayment status. Gains on sales of education loans are reflected in the Other noninterest income line item in our Consolidated Income Statement and in the results for the Regional Community Banking business segment.

Our liquidation of institutional loans held for sale resulted in net gains in excess of valuation adjustments of $2 million in the first quarter of 2005 and $28 million in the first quarter of 2004. These gains are reflected in the Corporate Services line item in our Consolidated Income Statement and in the results of the Wholesale Banking business segment. As the liquidation of institutional loans held for sale is essentially complete, any additional gains in the future will be minimal.

OTHER ASSETS

The increase of $.4 billion in “Assets-Other” in the preceding “Balance Sheet Data” table includes the impact of an increase in goodwill and other intangible assets. Goodwill and other intangible assets recorded in connection with the first quarter 2005 SSRM acquisition totaled $258 million. See Note 7 Goodwill And Other Intangible Assets for further information.

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CAPITAL AND FUNDING SOURCES

Details Of Funding Sources

The increase in deposits during the first quarter of 2005 reflected the impact of deposit retention and sales efforts that drove growth. Higher borrowed funds at March 31, 2005 were driven in part by PNC’s issuance of $700 million of senior debt and $350 million of senior bank notes in March 2005, BlackRock’s $250 million convertible debenture issuance in February 2005 in connection with the SSRM acquisition, and higher short-term borrowings to fund asset growth.

Capital

We manage our capital position by making adjustments to our balance sheet size and composition, issuing debt and equity instruments, making treasury stock transactions, maintaining dividend policies and retaining earnings.

The increase of $.1 billion, to $7.6 billion, in total shareholders’ equity at March 31, 2005 compared with December 31, 2004 was primarily attributable to the retention of earnings in anticipation of the pending acquisition of Riggs. Partially offsetting this increase was a decline in the fair value of securities available for sale due to the impact of rising interest rates in 2005. These fair value changes are captured in the accumulated other comprehensive income (loss) component of shareholders’ equity. See Note 14 Shareholders’ Equity And Comprehensive Income in the Notes To Consolidated Financial Statements in Item 1 of this Report for additional information.

Common shares outstanding at March 31, 2005 were 282.8 million, an increase of .2 million over December 31, 2004.

As of February 16, 2005, our prior common stock repurchase program was terminated, and a new program to purchase up to 20 million shares was authorized. This program will remain in effect until fully utilized or until modified, superseded or terminated. We purchased .5 million common shares during the first quarter of 2005 at a total cost of $26 million. The extent and timing of additional share repurchases under the 2005 program will depend on a number of factors including, among others, market and general economic conditions, economic and regulatory capital considerations, alternative uses of capital, and the potential impact on our credit rating. The pending acquisition of Riggs will continue to restrict share purchases over the remainder of 2005.

Risk-Based Capital

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. The declines in the capital ratios at March 31, 2005 compared with the ratios at December 31, 2004 were primarily caused by the addition of goodwill and other intangibles associated with the SSRM acquisition. We expect a further decline in these ratios as a result of the Riggs acquisition. At March 31, 2005, each of our banking subsidiaries was considered “well-capitalized” based on regulatory capital ratio requirements.

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OFF-BALANCE SHEET ARRANGEMENTS AND CONSOLIDATED VIES

We engage in a variety of activities that involve unconsolidated entities or that are otherwise not reflected in our Consolidated Balance Sheet that are generally referred to as “off-balance sheet arrangements.” Further information on these types of activities is included in Note 17 Commitments and Guarantees included in the Notes To Consolidated Financial Statements in Item 1 of this Report.

As discussed in our 2004 Form 10-K, we are involved with various entities in the normal course of business that may be deemed to be variable interest entities (VIEs). We consolidated certain VIEs effective in 2004 and 2003 for which we were determined to be the primary beneficiary. These consolidated VIEs and relationships with PNC are described in our 2004 Form 10-K under this same heading in Part I, Item 7 and in Note 2 Variable Interest Entities in the Notes To Consolidated Financial Statements included in Part II, Item 8 of that Report.

At March 31, 2005, the aggregate assets and debt of VIEs that we have consolidated in our financial statements are as follows:

We also hold significant variable interests in other VIEs that have not been consolidated because we are not considered the primary beneficiary. Information on these VIEs follows:

The increase in collateralized debt obligations at March 31, 2005 compared with December 31, 2004 reflected the impact of BlackRock’s acquisition of SSRM.

We also have 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 our equity management activities. The fund invests in private equity investments to generate capital appreciation and profits. As permitted by FIN 46, we have deferred applying the provisions of the interpretation for this entity pending further action by the FASB. Information on this entity follows:

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REVIEW OF BUSINESSES

We operate five major businesses engaged in providing banking, asset management and global fund processing services. Banking businesses include regional community banking (consumer/small business), wholesale banking (corporate/institutional) and wealth management.

Our 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 and loan syndications; commercial loan servicing; and equipment leasing products are offered through Wholesale Banking and marketed by several businesses across PNC.

Results of individual businesses are presented based on our management accounting practices and our 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. We refine our methodologies from time to time as our management accounting practices are enhanced and our businesses change. Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis.

Our capital measurement methodology is based on the concept of economic capital for Regional Community Banking, Wholesale Banking, PNC Advisors and PFPC. However, we have increased the capital assigned to Regional Community Banking to 6% of funds to reflect the capital required for well-capitalized banks and to approximate market comparables for this business. The capital for BlackRock reflects legal entity shareholders’ equity consistent with BlackRock’s separate public financial statement disclosures.

We have allocated the allowance for loan and lease losses and unfunded loan commitments and letters of credit based on our assessment of risk inherent in the loan portfolios. Our allocation of the costs incurred by operations and other support areas not directly aligned with the businesses is primarily based on the use of services.

Total business segment financial results differ from total consolidated results. The impact of these differences is primarily reflected in minority interest in income of BlackRock and in the “Other” category in the Results of Businesses – Summary table that follows. “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 or losses, 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 the following, which represent amounts for the periods presented: net charge-offs and the related annualized net charge-off ratio; home equity portfolio credit statistics; gains on sales of education loans; average small business deposits; consolidated revenue from Treasury management, Capital markets, Midland Loan Services and equipment leasing; and average full-time equivalent employees (FTEs). 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 generally are not restated for organizational changes.

RESULTS OF BUSINESSES - SUMMARY