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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 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 July 30, 2004, there were 282,360,287 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 Second Quarter Form 10-Q

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CONSOLIDATED FINANCIAL HIGHLIGHTS

THE PNC FINANCIAL SERVICES GROUP, INC.

See page 36 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 together with our unaudited Consolidated Financial Statements and unaudited Statistical Information included elsewhere in this Report and Items 6, 7 and 8 of our 2003 Annual Report on Form 10-K, (“2003 Form 10-K”). We have reclassified certain prior period amounts to conform with the current year presentation. The term “loans” in this report excludes loans held for sale, securities that represent interests in pools of loans, and purchased customer receivables. 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 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.

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 certain products and services nationally and others in our primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. We also provide certain banking, 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 risk and capital management. 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 to new geographical markets.

On July 16, 2004, we entered into a definitive agreement to acquire Riggs National Corporation, a Washington, D.C. based banking company. The transaction, which we expect to close in the first quarter of 2005, will give us a substantial presence on which to build a market leading franchise in the affluent Washington metropolitan area. The aggregate consideration is comprised of a fixed number of approximately 7.5 million shares of PNC common stock and $319 million in cash, subject to adjustment. See Note 18 Subsequent Events in the Notes to Consolidated Financial Statements under Item 1 of this Report and our Current Reports on Form 8-K dated July 16, 2004 and July 22, 2004 for additional information on this pending acquisition.

In recent years, we have managed 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 significant flexibility to take advantage, where appropriate, of rising interest rates. We anticipate rising interest rates in the second half of 2004, and we expect that the overall impact of such an environment will be beneficial to our results in the latter part of 2004 and in 2005.

KEY FACTORS AFFECTING FINANCIAL PERFORMANCE

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

We seek a moderate risk profile in the management of our businesses 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 growth in revenue and earnings.

During the second quarter of 2004, we achieved success in growing our business segments, with customer growth and retention improving in a number of key areas. We believe such growth enhances our overall value by increasing revenues that are less susceptible to changes in economic and market conditions.

Noninterest income increased by 17% in the second quarter of 2004 compared with the second quarter of 2003, and noninterest income as a percentage of total revenue increased to 65% from 60% 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 during the quarter. We expect interest rates to rise and loan demand to increase in response to improving general economic conditions. To some extent, the benefits of rising interest rates and increases in loan demand will trail the improvements themselves. Given these factors, we believe net interest income for the third quarter of 2004 will be relatively flat compared with the second quarter of 2004 and will increase in the fourth quarter of 2004 and continue to increase through 2005.

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, our 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 six months of 2004 was $632 million, or $2.22 per diluted share, compared with net income of $446 million, or $1.57 per diluted share, for the first six months of 2003. Return on average shareholders’ equity was 18.13% for the first half of 2004 compared with 13.32% for the first half of 2003. Return on average assets was 1.73% for the first six months of 2004 compared with 1.37% for the first six months of 2003.

Consolidated net income for the second quarter of 2004 was $304 million or $1.07 per diluted share compared with $184 million or $.65 per diluted share for the second quarter of 2003. Return on average common shareholders’ equity was 17.41% for the second quarter of 2004 compared with 10.91% for the second quarter of 2003, while return on average assets was 1.66% for the second quarter of 2004 and 1.13% for the second quarter of 2003.

Results for both the first six months and second quarter of 2003 included expenses totaling $87 million after taxes, or $.31 per diluted share, in connection with our agreement with the United States Department of Justice (“DOJ”), including related legal and consulting costs. See “Agreement with Department of Justice” in the Financial Review section of our Quarterly Report on Form 10-Q for the second quarter of 2003 and our Current Report on Form 8-K dated June 23, 2004 for further information.

Our second quarter 2004 performance included the following accomplishments:

BALANCE SHEET HIGHLIGHTS

Total assets were $73.1 billion at June 30, 2004 compared with $68.2 billion at December 31, 2003. The impact of our January 2004 acquisition of United National and an increase in total loans, including the first quarter 2004 purchase of a portfolio of home equity loans, contributed to the increase in total assets at June 30, 2004.

Average interest-earning assets were $60.5 billion for the first half of 2004 compared with $53.6 billion for the first half of 2003. The acquisition of United National, an increase in average securities and the impact of our adoption of FASB Interpretation No. (“FIN”) 46 (Revised 2003), “Consolidation of Variable Interest Entities,” in the second half of 2003 were the primary drivers of the increase in average interest-earning assets.

Average total loans were $37.5 billion for the first six months of 2004, an increase of $2.5 billion over the first six months of 2003. The increase in average total loans was primarily attributable to the addition of approximately $1.9 billion of loans from the acquisition of United National and growth in home equity loans, partially offset by a decline in lease financing loans. During the second quarter of 2004, we sold our vehicle leasing portfolio as more fully described in the Consolidated Balance Sheet Review section of this Report.

Average total deposits were $48.2 billion for the first half of 2004, an increase of $4.0 billion over the first half of 2003. The increase in deposits was attributable to the acquisition of United National, higher time deposits in foreign offices and increased customer volumes. Average total deposits represented 66% of total sources of funds for the first half of 2004 and 67% for the first half of 2003. Aggregate average interest-bearing demand and money market and average demand and other noninterest-bearing deposits were $35.2 billion for the first six months of 2004 compared with $32.3 billion for the first six months of 2003.

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Average borrowed funds were $12.9 billion for the first six months of 2004 and $8.7 billion for the first six months of 2003. The following contributed to this increase:

Shareholders’ equity totaled $7.1 billion at June 30, 2004, an increase of $.4 billion from December 31, 2003. See Consolidated Balance Sheet Review for additional information.

BUSINESS SEGMENT HIGHLIGHTS

Total business segment earnings were $656 million for the first half of 2004 and $552 million for the first half of 2003. Total business segment earnings for the second quarter of 2004 were $330 million, compared with $284 million for the second quarter of 2003. 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. PNC’s business segments as reported in this Report reflect changes in our methodology for reporting business segment results as further described in our Current Report on Form 8-K dated April 5, 2004.

Regional Community Banking

Regional Community Banking’s earnings were $227 million for the first six months of 2004 and $228 million for the first six months of 2003. Earnings from Regional Community Banking totaled $125 million for the second quarter of 2004 compared with $122 million for the second quarter of 2003. Checking relationships as of June 30, 2004 grew 8% compared with June 30, 2003, while Regional Community Banking average loans grew 31% and average demand deposits grew 15% for the second quarter of 2004 compared with the second quarter of 2003. Earnings for 2004 reflected the acquisition of United National that was effective January 1, 2004, increased loan demand and focused efforts to increase and retain the customer base. The impact of these factors on results for the first half of 2004 was offset by higher noninterest expense – primarily attributable to United National – and a higher provision for credit losses driven by a change in charge-off policy.

Wholesale Banking

Earnings from Wholesale Banking totaled $235 million for the first half of 2004 and $177 million for the first half of 2003. Wholesale Banking reported second quarter 2004 earnings of $113 million, an increase of 36% over the second quarter of 2003. Improved results in 2004 reflected a lower provision for credit losses as asset quality improved.

PNC Advisors

PNC Advisors earned $58 million in the first six months of 2004 and $44 million in the first six months of 2003. Earnings for the first half of 2004 included a $10 million pretax gain recognized in the first quarter from the sale of certain investment consulting activities of Hawthorn. Earnings from PNC Advisors totaled $27 million for the second quarter of 2004, an increase of $3 million or 13%, compared with the second quarter of 2003. Increased second quarter 2004 earnings reflected a reduction in the provision for credit losses and lower noninterest expense.

BlackRock

BlackRock reported first half 2004 earnings of $103 million compared with $74 million for the first half of 2003. BlackRock’s earnings totaled $48 million for the second quarter of 2004 compared with $39 million for the second quarter of 2003. Stronger earnings were attributable to increased revenue resulting from a growing base of assets under management. In addition, BlackRock recognized a $9 million net income benefit during the first quarter of 2004 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 rose to $310 billion at June 30, 2004, an increase of 8% compared with the level at June 30, 2003. The increase was primarily attributable to net new subscriptions and market appreciation.

PNC owns approximately 71% of BlackRock and we consolidate BlackRock into our 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 our BlackRock shares was approximately $2.9 billion at June 30, 2004.

PFPC

PFPC earned $33 million for the first six months of 2004 and $29 million for the first six months of 2003. Earnings from PFPC totaled $17 million for the second quarter of 2004 compared with $16 million for the second quarter of 2003. The higher earnings were primarily attributable to the divestiture of the retirement services business and the acquisition of ADVISORport, Inc., both executed in 2003, as well as the benefit derived from comparatively favorable market conditions. PFPC’s accounting/administration net fund assets increased 9% and custody fund assets increased 12% as of June 30, 2004 compared with the balances at June 30, 2003. The increases were driven by improved equity market conditions, net new business and asset inflows from existing clients.

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CONSOLIDATED INCOME STATEMENT REVIEW

NET INTEREST INCOME AND NET INTEREST MARGIN

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 was $982 million for the first half of 2004 compared with $1.029 billion for the first half of 2003. Taxable-equivalent net interest income totaled $485 million for the second quarter of 2004 compared with $523 million for the second quarter of 2003. 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 six months of 2004 was 3.24% compared with 3.83% for the first six months of 2003. The net interest margin for the second quarter of 2004 was 3.18%, a decline of 73 basis points compared with 3.91% for the second quarter of 2003. The following factors contributed to the decline in net interest margin for both the six-month and second quarter comparisons:

The impact of the United National acquisition on 2004 taxable-equivalent net interest income and net interest margin mitigated the factors described above. United National added approximately $63 million of net interest income and 5 basis points to the net interest margin during the first half of 2004 and approximately $33 million of net interest income and 7 basis points to the net interest margin in the second quarter of 2004 compared with the year-earlier periods.

PROVISION FOR CREDIT LOSSES

The provision for credit losses was $20 million for the first six months of 2004, a decline of $73 million compared with the first six months of 2003. The provision for credit losses was $8 million for the second quarter of 2004 compared with $57 million for the second quarter of 2003. The significant decline in the provision for credit losses in both 2004 periods primarily reflected an overall improvement in the credit quality of the loan portfolio in 2004 compared with the prior year periods. The improved credit quality reflected both a decline in nonperforming loans and a reduction in problems related to performing credits. In addition, the provision for credit losses for the second quarter and first half of 2004 declined $5 million due to a reserve reduction recognized in connection with the sale of our vehicle leasing business.

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 Item 2 of this Report for additional information regarding factors impacting the provision for credit losses.

NONINTEREST INCOME

Summary

Noninterest income was $1.821 billion for the first six months of 2004 compared with $1.571 billion for the first six months of 2003. Noninterest income totaled $910 million for the second quarter of 2004 compared with $776 million for the second quarter of 2003. Other than net securities gains, all major categories of noninterest income increased during the first half and second quarter of 2004 compared with the like prior year periods.

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Higher noninterest income for both 2004 periods reflected the following:

The first quarter 2004 pretax gain related to the sale of our modified coinsurance contracts also favorably impacted noninterest income for the first half of 2004.

In addition, the United National acquisition contributed approximately $13 million to noninterest income in the first six months of 2004, including approximately $6 million in the second quarter.

Additional Analysis

Combined asset management and fund servicing fees totaled $906 million for the first half of 2004 compared with $797 million for the first half of 2003. Combined asset management and fund servicing fees amounted to $450 million for the second quarter of 2004, an increase of $53 million over the prior year second quarter. These increases reflected growth in assets managed and serviced, partially due to improved equity market conditions in 2004. Assets under management at June 30, 2004 totaled $350 billion, up $22 billion compared with the level at June 30, 2003 primarily due to growth in fixed income assets managed by BlackRock. PFPC provided fund accounting/administration services for $665 billion of net fund investment assets and provided custody services for $416 billion of fund investment assets at June 30, 2004, compared with $608 billion and $371 billion, respectively, at June 30, 2003. Net new business, comparatively improved equity market conditions and asset inflows from existing clients all contributed to the increases in the PFPC statistics.

Service charges on deposits were $122 million for the first six months of 2004, up $5 million over the first six months of 2003. Service charges on deposits totaled $63 million for the second quarter of 2004 compared with $60 million for the second quarter of 2003. The increases in both comparisons were primarily due to growth in checking relationships, which increased 8% as of June 30, 2004 compared with June 30, 2003.

Brokerage fees increased $27 million, to $114 million, for the first half of 2004 compared with the first half of 2003. Second quarter 2004 brokerage revenues totaled $56 million, an increase of $10 million from the second quarter of 2003. The impact of higher trading volumes resulting from comparatively improved equity market conditions drove the increases in both comparisons.

Consumer service fees totaled $130 million for the first six months of 2004 compared with $123 million for the first six months of 2003. Consumer service fees increased $3 million, to $67 million, in the second quarter of 2004 compared with the year ago quarter. Increases in 2004 were in part due to additional fees from debit card transactions that reflected higher volumes, including the impact of United National customers, partially offset by the impact of the sale of certain out-of-footprint ATMs.

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 beginning August 1, 2003. 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 half of 2004 was approximately $5 million. For the second quarter of 2004, the lost revenue impact was approximately $2 million. As a result of subsequent changes in the pricing structure with Visa during 2004, the lost revenue impact of the settlement for full year 2004 is estimated to be $10 million.

Corporate services revenue totaled $253 million for the first half of 2004, an increase of $23 million compared with the prior year first half. For the second quarter of 2004, corporate services revenue totaled $128 million compared with $114 million for the second quarter of 2003. Net gains in excess of valuation adjustments related to our liquidation of institutional loans held for sale totaled $45 million in the first six months of 2004 compared with $30 million for the first six months of 2003. For the second quarter of 2004, these gains amounted to $17 million compared with $15 million for the prior year second quarter. The increases in corporate services revenue for both 2004 periods also reflected higher servicing fees related to an increase in the commercial mortgage servicing portfolio.

Equity management (private equity) net gains on portfolio investments totaled $42 million for the first six months of 2004 compared with net losses of $21 million for the first six months of 2003. For the second quarter of 2004, net gains on portfolio investments totaled $35 million compared with net losses of $17 million in the second quarter of 2003.

Net securities gains totaled $29 million for the first half of 2004 compared with $82 million for the first half of 2003. Net securities gains in the 2003 first half included $25 million related to the liquidation of the three entities formed in 2001 in the PAGIC transactions. Net securities gains were $14 million for the second quarter of 2004, down from $26 million in the prior year quarter.

Other noninterest income totaled $225 million for the first six months of 2004 compared with $156 million for the first six months of 2003. Other noninterest income for the first half of 2004 included the following items:

Other noninterest income was $97 million for the second quarter of 2004, an increase of $11 million compared with the second quarter of 2003.

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PRODUCT REVENUE

Wholesale Banking offers treasury management, capital markets and equipment leasing products that are marketed by several businesses across our Corporation. Treasury management revenue, which includes fees as well as revenue from customer deposit balances, totaled $179 million for the first half of 2004 compared with $180 million for the first half of 2003. Treasury management revenue for the second quarter of 2004 totaled $91 million compared with $89 million for the second quarter of 2003. Treasury management revenue has remained relatively flat despite a declining value of deposits and the industry shift to a more electronic-based platform, which has lower revenue per item than a paper-based platform. We have been able to offset these declines by increasing other treasury management sales.

Consolidated revenue from capital markets totaled $69 million for the first six months of 2004 and $55 million for the first six months of 2003. For the second quarter of 2004, consolidated revenue from capital markets increased $9 million, to $37 million, compared with the prior year second quarter. The higher revenue in both comparisons reflected increased revenue from derivatives trading and loan syndications.

Consolidated revenue from equipment leasing products increased $3 million, to $42 million, for the first half of 2004 compared with the first half of 2003. Consolidated revenue from equipment leasing products totaled $21 million for the second quarter of 2004 compared with $19 million for the second quarter of 2003. Growth in the equipment leasing portfolio drove the increases in both comparisons.

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 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. We recognized revenue from our insurance sales activities of $33 million in the first half of 2004 and $31 million in the first half of 2003. Revenue from our insurance sales activities totaled $18 million for both the second quarter of 2004 and the second quarter of 2003.

NONINTEREST EXPENSE

Year-to-date June 30, 2004 and 2003

Total noninterest expense was $1.805 billion for the first half of 2004 compared with $1.791 billion for the first half of 2003. The efficiency ratio was 65% for the first six months of 2004 compared with 69% for the first six months of 2003.

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

Noninterest expense for the first six months of 2003 included the following:

Apart from the impact of the items described above, noninterest expense increased $118 million during the first half of 2004 compared with the same period in 2003. The higher expenses were primarily attributable to United National expenses and higher sales-based compensation, stock-based incentive compensation and marketing costs in 2004. These charges more than offset the benefit of lower pension expense in the comparison and a $53 million incremental benefit in the first half of 2004 from efficiency initiatives.

Second quarter 2004 and 2003

Total noninterest expense was $910 million for the second quarter of 2004 compared with $935 million for the second quarter of 2003. The efficiency ratio was 65% for the second quarter of 2004 compared with 72% for the second quarter of 2003.

Noninterest expense for the second quarter of 2004 included $18 million of FIN 46-related costs and expenses totaling $8 million in connection with the sale of our vehicle leasing business. Noninterest expense for the second quarter of 2003 included the $120 million of DOJ expenses outlined above and $14 million of distributions on capital securities. Apart from the impact of these items, noninterest expense increased in the second quarter of 2004 compared with the second quarter of 2003 primarily due to higher incentive compensation and marketing costs. These charges more than offset the benefit of lower pension expense in the comparison and a $24 million incremental benefit in the second quarter of 2004 from efficiency initiatives.

Average full-time equivalent employees totaled approximately 23,700 in the first half of 2004 and 23,500 for the first half 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

Our Consolidated Balance Sheet is presented in Part I, Item 1 on page 40 of this Form 10-Q.

Total assets were $73.1 billion at June 30, 2004 compared with $68.2 billion at December 31, 2003. Our acquisition of United National that was effective January 1, 2004, organic growth in loan demand and the first quarter 2004 purchase of approximately $660 million of home equity loans drove the increase in total assets, partially offset by a reduction in the size of the securities portfolio. Total funding sources at June 30, 2004 increased $4.2 billion from the balance at December 31, 2003 primarily due to higher deposits resulting from the United National acquisition and increased checking and savings relationships, partially offset by a decline in total borrowed funds.

An analysis of changes in certain balance sheet categories follows.

LOANS, NET OF UNEARNED INCOME

Loans increased $5.0 billion, to $39.1 billion at June 30, 2004, compared with the balance at December 31, 2003. The addition of $1.9 billion of loans related to our United National acquisition, growth in demand for commercial loans and the purchase of approximately $660 million of home equity loans in the first quarter of 2004, partially offset by the impact of the sale of the vehicle leasing portfolio, drove the increase in total loans.

Details Of Loans

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

As shown in the table below, the types of wholesale commercial loans and unfunded commitments that we have remained concentrated in investment grade equivalent exposure and secured lending.

Wholesale Lending Statistics ^(a)

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Leasing Activities

The equipment lease portfolio totaled $3.7 billion at June 30, 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. We no longer enter into new cross-border lease transactions.

Aggregate residual value at risk on the total commercial lease portfolio at June 30, 2004 was $1.2 billion. We have taken steps 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 June 30, 2004.

Legislation passed in the United States Senate would, if enacted into law, change the tax treatment of existing cross-border lease transactions including those that we have previously entered into. The House of Representatives-passed version of the bill would only impact the tax treatment of cross-border lease transactions entered into starting from a point in time after we discontinued doing these transactions. A conference committee will be required to resolve these and other differences between the Senate and House versions of this legislation. If legislation is ultimately enacted that changes the tax treatment of transactions that had already occurred prior to our discontinuation of these transactions, as is the case with the current Senate version, it could impact significantly the economics of our existing cross-border lease portfolio.

In addition, as part of the 1998-2000 audit of our consolidated federal income tax returns, the Internal Revenue Service (“IRS”) has proposed adjustments to the following transactions that we have previously entered into:

The proposed adjustments would reverse the tax treatment of these transactions as we reported them on our filed tax returns. We believe the way we reported these transactions in our filed tax returns 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 types of transactions.

Two other 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.

During the second quarter of 2004, we completed the sale of our subsidiary, PNC Vehicle Leasing LLC, and the related vehicle lease portfolio and other assets. In connection with this transaction, we also terminated our related residual insurance policies with our residual insurance carrier. As a result of these actions, we have completed the exit of the consumer vehicle leasing business, including our related exposures to the used vehicle market and the payment of future residual insurance claims. We recognized a pretax net loss of $3 million related to the sale during the second quarter of 2004.

See Note 18 Subsequent Events in the Notes to Consolidated Financial Statements regarding our planned acquisition of certain fixed assets and new loan production from Aviation Finance Group.

Net Unfunded Commitments

Commitments to extend credit represent arrangements that we have 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 $6.2 billion at June 30, 2004 and $6.4 billion at December 31, 2003.

The increase in consumer net unfunded commitments at June 30, 2004 compared with the balance at December 31, 2003 was primarily due to net unfunded commitments related to our first quarter 2004 purchase of a portfolio of home equity loans and the acquisition of United National.

At June 30, 2004, purchased customer receivables totaled $1.7 billion. Unfunded commitments related to purchased customer receivables totaled $818 million at June 30, 2004 and are included in the preceding table. This activity is conducted entirely through Market Street Funding Corporation (“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.

Net outstanding standby letters of credit totaled $3.7 billion at June 30, 2004 and $4.0 billion at December 31, 2003. Standby letters of credit commit us to make payments on behalf of our customers if specified future events occur.

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SECURITIES

Details Of Securities

Securities represented 20% of total assets at June 30, 2004 and 23% of total assets at December 31, 2003. Decreases in commercial mortgage-backed and asset-backed securities partially offset by increases in United States Treasury and government agencies and state and municipal securities drove the decrease in total securities compared with December 31, 2003.

At June 30, 2004, the securities available for sale balance included a net unrealized loss of $227 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 impact of an increase in interest rates during the second quarter of 2004 was reflected in the net unrealized loss position at June 30, 2004.

The fair value of securities available for sale decreases when interest rates increase and vice versa. Further increases in interest rates after June 30, 2004, if sustained, will adversely impact the fair value of securities available for sale going forward compared with the balance at June 30, 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 10 months at June 30, 2004 and 2 years and 11 months at December 31, 2003.

We estimate the effective duration of securities available for sale is 2.8 years for an immediate 50 basis points parallel increase in interest rates and 2.6 years for an immediate 50 basis points parallel decrease in interest rates.

Mortgage-backed securities (“MBS”) comprise 38% 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 June 30, 2004, we held approximately $130 million of 30- and 15- year fixed-rate pass-through securities.

We carry securities classified as held to maturity at amortized cost. Securities classified as held to maturity at June 30, 2004 and December 31, 2003 were related to Market Street and were consolidated due to our adoption of FIN 46 effective July 1, 2003. These securities represent a static pool of lottery payments purchased as a private placement. The expected weighted-average life of securities held to maturity was 9 months at June 30, 2004 and 2 years and 7 months at December 31, 2003.

LOANS HELD FOR SALE

Details Of Loans Held For Sale

We classify substantially all of our education loans as loans held for sale. Generally, we sell education loans when the loans go into repayment status.

Our liquidation of institutional loans held for sale resulted in net gains in excess of valuation adjustments of $17 million for the second quarter of 2004 and $45 million for the first six months of 2004. The corresponding amounts for 2003 were $15 million and $30 million. These gains are reflected in the results of the Wholesale Banking business segment.

OTHER ASSETS

The increase of $615 million 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 $4.8 billion from December 31, 2003. This increase was primarily attributable to our first quarter 2004 acquisition of United National. Total borrowed funds decreased $.5 billion, or 5%, from December 31, 2003.

Total shareholders’ equity was $7.1 billion at June 30, 2004, an increase of $.4 billion from December 31, 2003. In addition to the impact of earnings, dividends and the issuance of stock, shareholders’ equity at June 30, 2004 compared with December 31, 2003 reflected a decline in the fair value of securities available for sale and cash flow hedge derivatives due to the impact of rising interest rates during the second quarter of 2004. These fair value changes are captured in the accumulated other comprehensive income (loss) component of shareholders’ equity. 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 June 30, 2004 were 282 million, an increase of 5 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 us to repurchase up to 20 million shares of common stock. During the second quarter of 2004, we repurchased 1 million common shares under this program at a total cost of $56 million. During the first half of 2004, we purchased 3.2 million common shares at a total cost of $181 million under the 2004 repurchase program and under the prior program. 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. Capital to be utilized for the pending acquisition of Riggs National Corporation, which is expected to add approximately $650 to $700 million of intangible assets, will cause us to constrain share repurchases over the next several quarters as we seek to maintain our capital position.

Risk-Based 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 access to, and cost of, funding for 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 June 30, 2004 compared with the ratios at December 31, 2003 reflected the addition of goodwill associated with the United National acquisition. At June 30, 2004, 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

As is the case with most larger financial services companies, we conduct a portion of our 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 our assets, equity and earnings. While some of these special purpose entities are not included on our Consolidated Balance Sheet, under FIN 46 those special purpose entities defined as “variable interest entities” (“VIEs”) and for which we are considered the primary beneficiary must be consolidated by us for financial reporting purposes.

As discussed in our 2003 Form 10-K and our first quarter 2004 Form 10-Q, we consolidated certain VIEs effective in 2003 for which we were determined to be the primary beneficiary. These consolidated VIEs and relationships with PNC are described in our 2003 Form 10-K and first quarter 2004 Form 10-Q.

At June 30, 2004, and December 31, 2003, the aggregate assets and debt of VIEs that we have consolidated in our financial statements are as follows:

Consolidated VIEs – PNC Is Primary Beneficiary

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:

Non-Consolidated VIEs – Significant Variable Interests