SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 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 October 29, 2004, there were 282,638,497 shares of the registrant’s common stock ($5 par value) outstanding.

The PNC Financial Services Group, Inc.

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

CONSOLIDATED FINANCIAL HIGHLIGHTS

THE PNC FINANCIAL SERVICES GROUP, INC.

See page 39 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 and securities that represent interests in pools of loans. For information regarding certain business and regulatory risks, see the Risk Factors and Risk Management sections in this Financial Review and Items 1 and 7 of 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. 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. See Note 17 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 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 market share growth 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 by expanding to new geographical markets.

In recent years, we have managed our balance sheet toward 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 through 2005, 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.

On August 26, 2004, our majority-owned subsidiary BlackRock entered into a definitive agreement to acquire SSRM Holdings Inc. (“SSRM”), the holding company for State Street Research & Management Company and SSR Realty Advisors Inc., from MetLife for total consideration at closing of $375 million in cash and stock. Additional cash consideration, which could increase the purchase price by up to 25%, may be paid over 5 years contingent on certain measures. The addition of SSRM, which is expected to close in the first quarter of 2005, is expected to enhance BlackRock’s investment management platform with additional U.S. equity, alternative investment and real estate equity management capabilities, expanding the universe of products offered to institutional and individual investors worldwide. Closing is subject to required regulatory and fund shareholder approvals and satisfaction of other customary closing conditions. See BlackRock’s Current Report on Form 8-K dated August 30, 2004 for additional information on this pending acquisition.

On July 16, 2004, we entered into a definitive agreement to acquire Riggs National Corporation, (“Riggs”) a Washington, D.C. based banking company. The transaction 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. The merger is subject to closing conditions including, among others, receipt of regulatory approvals and the approval of Riggs shareholders. See Current Reports on Form 8-K dated July 16, 2004 and July 22, 2004 for additional information on this pending acquisition. The Agreement and Plan of Merger for this transaction is included as Exhibit 99.13 to this Report.

Additional information on the proposed acquisitions of Riggs and SSRM is included in Note 3 Acquisitions in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Report and in the Cautionary Statement Regarding Forward-Looking Information section of this Financial Review.

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 economic and market conditions. We focus on the

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development and management of our customer franchises to generate growth in revenue and earnings.

During the third quarter of 2004, we maintained our performance with a sound balance sheet and strong customer franchise.

Net interest income grew slightly in the third quarter of 2004 compared with the third quarter of 2003 primarily due to increased revenues attributable to growth in the loan portfolio and our core deposit funding base. Noninterest income increased $13 million compared with the third quarter of 2003 as the impact of growth in our customer base in a number of key areas, along with higher equity management gains, more than offset lower gains on asset sales and lower trading revenue.

Given the increase in loans outstanding and anticipated increases in interest rates, we believe net interest income will increase in the fourth quarter of 2004 compared with the third quarter of 2004 and will be higher in 2005 compared with 2004.

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 and into 2005 will depend upon, among other things:

SUMMARY FINANCIAL RESULTS

Consolidated net income for the first nine months of 2004 was $890 million, or $3.13 per diluted share, compared with net income of $727 million, or $2.57 per diluted share, for the first nine months of 2003. Return on average shareholders’ equity was 16.86% for the first nine months of 2004 compared with 14.53% for the first nine months of 2003. Return on average assets was 1.60% for the first nine months of 2004 compared with 1.46% for the first nine months of 2003.

Consolidated net income for the third quarter of 2004 was $258 million or $.91 per diluted share compared with $281 million or $1.00 per diluted share for the third quarter of 2003. Return on average common shareholders’ equity was 14.42% for the third quarter of 2004 compared with 17.06% for the third quarter of 2003, while return on average assets was 1.36% for the third quarter of 2004 and 1.63% for the third quarter of 2003.

Results for the third quarter and first nine months of 2004 reflected the impact of a charge totaling $42 million after taxes, or $.15 per diluted share, related to the 2002 BlackRock Long-Term Retention and Incentive Plan (“LTIP”) that was recognized during the third quarter of 2004. See “2002 BlackRock Long-Term Incentive Plan” under the Critical Accounting Policies and Judgments section of this Financial Review and Note 13 Certain Employee Benefit and Stock-Based Compensation Plans in the Notes To Consolidated Financial Statements for further information. BlackRock and PNC each filed Current Reports on Form 8-K dated October 6, 2004 that contain additional information on the LTIP charge. Results for 2004 also reflect the impact of our acquisition of United National Bancorp, Inc. (“United National”) that we closed effective January 1, 2004.

Results for the first nine months of 2003 included expenses totaling $87 million after taxes, or $.31 per diluted share, in connection with the 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 third quarter 2004 performance included the following accomplishments:

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BALANCE SHEET HIGHLIGHTS

Total assets were $77.3 billion at September 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 September 30, 2004.

Average interest-earning assets were $60.9 billion for the first nine months of 2004 compared with $54.5 billion for the first nine months of 2003. An increase in average loans and securities, due in part to the acquisition of United National, and the comparative impact of our adoption of Financial Accounting Standards Board 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.

During the third quarter of 2004, we reclassified on our Consolidated Balance Sheet certain assets related to the Market Street Funding Corporation (“Market Street”) conduit from purchased customer receivables to loans. These amounts totaled $1.8 billion at September 30, 2004, $2.2 billion at December 31, 2003 and $2.5 billion at September 30, 2003. The impact on our average total loans resulting from this change was an increase of $1.7 billion for the third quarter of 2004, $1.8 billion for the second quarter of 2004 and $2.5 billion for the third quarter of 2003. For the nine months ended September 30, 2004 and 2003, our average total loans increased $1.9 billion and $.8 billion, respectively, as a result of this reclassification. These amounts are included in our Wholesale Banking segment. The asset quality ratios included in this Report reflect this reclassification for all periods presented.

Average total loans were $40.2 billion for the first nine months of 2004, an increase of $4.6 billion over the first nine months of 2003. Apart from the comparative impact of the Market Street reclassification described above, 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 of approximately $2.2 billion and commercial loans of approximately $.3 billion, partially offset by a $.5 billion 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 Financial Review.

Average total deposits were $48.9 billion for the first nine months of 2004, an increase of $4.6 billion over the first nine months of 2003. The increase in deposits was attributable to the acquisition of United National that added approximately $2.2 billion of average deposits and increased customer volumes. Average total deposits represented 66% of total sources of funds for the first nine months of 2004 and 2003. Average transaction deposits were $35.5 billion for the first nine months of 2004 compared with $ 32.7 billion for the first nine months of 2003.

Average borrowed funds were $12.5 billion for the first nine months of 2004 and $9.8 billion for the first nine months of 2003. The following contributed to this increase:

These increases were partially offset by Federal Home Loan Bank maturities of $1.3 billion and senior and subordinated debt maturities totaling $.5 billion during the first nine months of 2004.

Shareholders’ equity totaled $7.3 billion at September 30, 2004, an increase of $.7 billion from December 31, 2003. See the Consolidated Balance Sheet Review section of this Financial Review for additional information.

BUSINESS SEGMENT HIGHLIGHTS

Total business segment earnings were $921 million for the first nine months of 2004 and $853 million for the first nine months of 2003. Total business segment earnings for the third quarter of 2004 were $265 million, compared with $301 million for the third quarter of 2003.

Regional Community Banking

Regional Community Banking’s earnings were $361 million for the first nine months of 2004 and $350 million for the first nine months of 2003. Earnings from Regional Community Banking totaled $134 million for the third quarter of 2004 compared with $122 million for the third quarter of 2003. Checking relationships as of September 30, 2004 grew 8% compared with September 30, 2003, while Regional Community Banking average loans grew 32% and average demand deposits grew 12% for the third quarter of 2004 compared with the third 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 nine months of 2004 was partially 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 and growth in the small business commercial loan portfolio.

Wholesale Banking

Earnings from Wholesale Banking were $335 million for the first nine months of 2004 and $274 million for the first nine months of 2003. Wholesale Banking reported third quarter 2004 earnings of $100 million, an increase of $3 million over the third quarter of 2003. The benefit of a lower provision for credit losses, reflecting overall improved asset quality, more than offset higher noninterest expense to support future growth.

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PNC Advisors

PNC Advisors earned $82 million in the first nine months of 2004 and $69 million in the first nine months of 2003. Earnings for the first nine months of 2004 included a $10 million pretax gain recognized in the first quarter from the sale of certain investment consulting activities of the Hawthorn unit. Earnings from PNC Advisors totaled $24 million for the third quarter of 2004 and $25 million for the third quarter of 2003. The decrease in earnings compared with the third quarter of 2003 was primarily due to lower client trading revenues partially offset by lower related expenses.

BlackRock

BlackRock reported earnings of $93 million for the first nine months of 2004 compared with $114 million for the first nine months of 2003. BlackRock reported a net loss of $10 million for the third quarter of 2004 compared with earnings of $40 million for the third quarter of 2003. Results for both the third quarter and first nine months of 2004 reflected the $57 million after-tax impact of the LTIP charge recorded in the third quarter. Apart from the impact of the LTIP charge, results for both 2004 periods reflected higher revenue resulting from a growing base of assets under management. In addition, nine-month 2004 results included a $9 million net income benefit recognized 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 totaled $323 billion at September 30, 2004, an increase of 10% compared with the level at September 30, 2003. The increase was 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 the Financial Review section of this Report is presented on a stand-alone basis. The market value of our BlackRock shares was approximately $3.3 billion at September 30, 2004.

PFPC

PFPC earned $50 million for the first nine months of 2004 and $46 million for the first nine months of 2003. Earnings from PFPC totaled $17 million for both the third quarter of 2004 and the third quarter of 2003. The higher year-to-date 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. Improved results for 2004 also reflected new and expanded business, expense savings initiatives and debt management. PFPC’s accounting/administration net fund assets increased 7% and custody fund assets increased 9% as of September 30, 2004 compared with the balances at September 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 this Financial Review and the Statistical Information-Average Consolidated Balance Sheet And Net Interest Analysis included in Part I, Item 1 of this Report for additional information.

Taxable-equivalent net interest income was $1.480 billion for the first nine months of 2004 compared with $1.518 billion for the first nine months of 2003. Taxable-equivalent net interest income totaled $498 million for the third quarter of 2004 compared with $489 million for the third 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 nine months of 2004 was 3.22%, a decrease of 48 basis points compared with the first nine months of 2003. The net interest margin for the third quarter of 2004 was 3.19% compared with 3.44% for the third quarter of 2003. The following factors contributed to the decline in net interest margin for both the nine-month and third 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 $93 million of net interest income and five basis points to the net interest margin during the first nine months of 2004 and approximately $30 million of net interest income and five basis points to the net interest margin in the third quarter of 2004 compared with the year-earlier periods.

PROVISION FOR CREDIT LOSSES

The provision for credit losses was $33 million for the first nine months of 2004, a decline of $110 million compared with the first nine months of 2003. The provision for credit losses decreased $37 million, to $13 million, for the third quarter of 2004 compared with the third 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. The favorable impact of these factors on the provision was partially offset by the impact of overall loan growth in 2004.

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.

NONINTEREST INCOME

Summary

Noninterest income increased $263 million, to $2.659 billion, for the first nine months of 2004 compared with $2.396 billion for the first nine months of 2003. Noninterest income totaled

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$838 million for the third quarter of 2004 compared with $825 million for the third quarter of 2003.

Higher noninterest income for both 2004 periods reflected the following:

Pretax gains amounting to $57 million arising from three transactions in the first half of 2004 as further described below also contributed to the increase in noninterest income for the first nine months of 2004.

Lower gains from asset sales and lower net securities gains in 2004 partially offset these increases for both the third quarter and nine-month comparisons to 2003.

Additional Analysis

Combined asset management and fund servicing fees totaled $1.348 billion for the first nine months of 2004, up $147 million compared with $1.201 billion for the first nine months of 2003. Combined asset management and fund servicing fees amounted to $442 million for the third quarter of 2004, an increase of $38 million over the prior year third quarter. These increases reflected growth in assets managed and serviced, partially due to improved equity market conditions that began in 2003 and continued into 2004. Assets under management at September 30, 2004 totaled $362 billion, up $26 billion compared with the level at September 30, 2003 primarily due to growth in assets managed by BlackRock. PFPC provided fund accounting/administration services for $667 billion of net fund investment assets and provided custody services for $418 billion of fund investment assets at September 30, 2004, compared with $622 billion and $384 billion, respectively, at September 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 grew $10 million, to $187 million, for the first nine months of 2004 compared with the prior year period. For the third quarter of 2004, service charges on deposits totaled $65 million compared with $60 million in the third quarter of 2003. Additional checking relationships, which increased 8% as of September 30, 2004 compared with September 30, 2003, drove the improvement in this category.

Brokerage fees totaled $166 million for the first nine months of 2004, up $33 million compared with the first nine months of 2003. Third quarter 2004 brokerage fees amounted to $52 million, an increase of $6 million compared with the prior year quarter. The impact of overall higher trading volumes resulting from comparatively improved market conditions contributed to the increases in both comparisons.

Consumer services fees were $196 million for the first nine months of 2004 compared with $188 million for the prior year-to-date period. For the third quarter of 2004, consumer services fees totaled $66 million, up slightly compared with the third quarter of 2003. Higher fees for 2004 were partially 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 nine months of 2004 was approximately $7 million. For the third 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 $353 million for the first nine months of 2004, a decline of $9 million compared with the first nine months of 2003. For the third quarter of 2004, corporate services revenue totaled $100 million compared with $132 million for the third quarter of 2003. Net gains in excess of valuation adjustments related to our liquidation of institutional loans held for sale totaled $50 million in the first nine months of 2004 compared with $53 million for the first nine months of 2003. For the third quarter of 2004, these gains amounted to $5 million compared with $23 million for the prior year third quarter. We expect these gains to continue to decline as the liquidation of institutional loans held for sale nears completion. In addition to these declines, corporate services revenue decreased in both 2004 comparisons primarily due to lower gains on sales of commercial mortgages partially offset by higher servicing fees related to an increase in the commercial mortgage servicing portfolio and higher letters of credit fees.

Equity management (private equity) net gains on portfolio investments totaled $58 million for the first nine months of 2004 compared with net losses of $25 million for the first nine months of 2003. For the third quarter of 2004, net gains on portfolio investments totaled $16 million compared with net losses of $4 million in the third quarter of 2003.

Net securities gains totaled $45 million for the first nine months of 2004 compared with $101 million for the first nine months of 2003. Net securities gains for the first nine months of 2003 included $25 million related to the liquidation of the three entities formed in 2001 in the PAGIC transactions. Net securities gains were $16 million for the third quarter of 2004, down from $19 million in the prior year quarter.

Other noninterest income totaled $306 million for the first nine months of 2004 compared with $259 million for the first nine months of 2003. Other noninterest income typically fluctuates from period to period depending on the nature and magnitude of transactions completed. Other noninterest income for the first nine months of 2004 included the following items:

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Review section of Part I, Item 2 of our first quarter 2004 Quarterly Report on Form 10-Q,

Partially offsetting the impact of these items was a $30 million decline in the component of trading revenue included in other noninterest income for the first nine months of 2004. See Trading Risk within the Risk Management section of this Financial Review and Note 7 Trading Activities in the Notes to Consolidated Financial Statements included under Part I, Item 1 of this Report for additional information.

Other noninterest income was $81 million for the third quarter of 2004, a decline of $22 million compared with the third quarter of 2003. The impact of an $11 million increase in gains on sales of education loans was more than offset by lower trading revenue in the third quarter of 2004 compared with the prior year quarter.

PRODUCT REVENUE

Wholesale Banking offers treasury management, capital markets, commercial loan servicing 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 $274 million for the first nine months of 2004 compared with $270 million for the first nine months of 2003. Treasury management revenue for the third quarter of 2004 totaled $95 million compared with $90 million for the third quarter of 2003. In September 2004, we changed our deposit earnings methodology to reflect the longer term nature of treasury management deposits. The impact in the third quarter of 2004 was an increase in revenue of approximately $3 million. Excluding this methodology change, treasury management revenue has increased slightly 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 revenue declines by increasing other treasury management product sales.

Consolidated revenue from capital markets totaled $96 million for the first nine months of 2004 and $87 million for the first nine months of 2003. The revenue growth was driven primarily by increased derivative and syndication activity and increased trading revenue. For the third quarter of 2004, consolidated revenue from capital markets decreased $5 million, to $27 million, compared with the prior year third quarter. The decrease in revenue was driven primarily by lower results in trading and decreased customer volumes.

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 $81 million for the first nine months of 2004 compared with $73 million for the first nine months of 2003. Midland’s revenue for the third quarter of 2004 totaled $29 million compared with $26 million for the third quarter of 2003. The revenue growth was driven primarily by growth in the servicing portfolio and related services.

Consolidated revenue from equipment leasing products totaled $63 million for the first nine months of 2004 and $62 million for the first nine months of 2003. Consolidated revenue from equipment leasing products totaled $21 million for the third quarter of 2004 compared with $23 million for the third quarter of 2003. The decline in third quarter 2004 equipment leasing revenue reflected a change in product mix as we no longer engage in higher spread, cross-border leases but have shifted to more traditional lower-spread leasing products.

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 $50 million in the first nine months of 2004 and $41 million in the first nine months of 2003. Revenue from our insurance sales activities totaled $17 million for the third quarter of 2004 and $10 million for the third quarter of 2003. We expect revenue from these activities to level off in 2005 compared with 2004.

NONINTEREST EXPENSE

Year-to-date September 30, 2004 and 2003

Total noninterest expense was $2.786 billion for the first nine months of 2004, an increase of $168 million compared with $2.618 billion for the first nine months of 2003. The efficiency ratio was 68% for the first nine months of 2004 compared with 67% for the first nine months of 2003.

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

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

Apart from the impact of the items described above, noninterest expense increased $164 million during the first nine months of 2004 compared with the same period in 2003. The higher expenses were primarily attributable to 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 $74 million incremental benefit in the first nine months of 2004 from efficiency initiatives.

Third quarter 2004 and 2003

Total noninterest expense was $981 million for the third quarter of 2004, up $154 million compared with the third quarter of 2003. The efficiency ratio was 74% for the third quarter of 2004 compared with 63% for the third quarter of 2003.

Noninterest expense for the third quarter of 2004 reflected the BlackRock LTIP charge described above and included $14 million of ongoing costs related to United National. Apart from the impact of these items, noninterest expense increased $44 million in the third quarter of 2004 compared with the third quarter of 2003 primarily due to higher incentive compensation. These charges more than offset the benefit of a $21 million incremental benefit in the third quarter of 2004 from efficiency initiatives.

Average full-time equivalent employees totaled approximately 23,700 in the first nine months of 2004 and 23,400 for the first nine months of 2003. The increase was primarily in Regional Community Banking, reflecting the United National acquisition, partially offset by decreases at PNC Advisors and PFPC.

EFFECTIVE TAX RATE

Our effective tax rate for the first nine months of 2004 was 31.5% compared with 34.3% for the first nine months of 2003. For the third quarter of 2004, the effective tax rate was 26.9% compared with 34.9% for the third quarter of 2003. The decrease in the effective rate for the first nine months of 2004 was primarily attributable to the impact of the $8 million tax effect of the non-deductible component of the second quarter 2003 DOJ agreement, the $9 million first quarter 2004 tax benefit recorded as a result of resolving a BlackRock New York State audit and a $14 million third quarter 2004 reduction in income tax expense following our determination that we no longer required an income tax reserve related to bank-owned life insurance. This determination was also the principal reason for the reduction in the effective tax rate from the third quarter of 2003 to the third quarter of 2004. We made this determination based on:

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CONSOLIDATED BALANCE SHEET REVIEW

BALANCE SHEET DATA

Our Consolidated Balance Sheet is presented in Part I, Item 1 on page 43 of this Report.

Total assets were $77.3 billion at September 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. Total funding sources at September 30, 2004 increased $7.4 billion from the balance at December 31, 2003 primarily due to higher deposits resulting from the United National acquisition, increased checking relationships and an increase in short-term borrowings.

An analysis of changes in certain balance sheet categories follows.

LOANS, NET OF UNEARNED INCOME

Loans increased $6.2 billion, to $42.5 billion at September 30, 2004, compared with the balance at December 31, 2003. The increase in total loans was driven by 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. These were partially offset by the impact of the sale of the vehicle leasing portfolio and the comparative impact of the Market Street reclassification described under Balance Sheet Highlights in the Executive Summary section of this Financial Review.

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.

As shown in the table below, the types of Wholesale Banking 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 $3.9 billion at September 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 September 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 September 30, 2004.

As discussed in our prior filings, differing versions of legislation had been passed in the United States Senate and House of Representatives that affected cross-border lease transactions. The differing legislation was reconciled in the American Jobs Creation Act of 2004 (the “Act”) which was signed into law on October 22, 2004. The Act 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. While only transactions entered into after March 12, 2004 are specifically impacted, the Act 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 the following cross-border lease 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 method used to report 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.

On September 1, 2004, we acquired the business of the Aviation Finance Group, LLC (“AFG”), an Idaho-based company that specializes in loans to finance private aircraft. By combining the business of AFG with our existing business, we expect to increase our ability to offer a variety of loans and leasing products to corporate aircraft customers. See Note 3 Acquisitions in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Report for additional information regarding our acquisition of the business of AFG.

Net Unfunded Credit 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 $5.4 billion at September 30, 2004 and $6.4 billion at December 31, 2003.

The increase in consumer net unfunded commitments at September 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.

Unfunded credit commitments related to Market Street totaled $930 million at September 30, 2004 and $911 million at December 31, 2003 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 2 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 $3.5 billion at September 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 22% of total assets at September 30, 2004 and 23% of total assets at December 31, 2003. The increase in total securities compared with December 31, 2003 was primarily due to increases in U.S. Treasury and government agencies and mortgage-backed securities, partially offset by declines in commercial mortgage-backed and asset-backed securities.

At September 30, 2004, the securities available for sale balance included a net unrealized loss of $62 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 and third quarters of 2004 was reflected in the net unrealized loss position at September 30, 2004.

The fair value of securities available for sale decreases when interest rates increase and vice versa. Further increases in interest rates after September 30, 2004, if sustained, will adversely impact the fair value of securities available for sale going forward compared with the balance at September 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 9 months at September 30, 2004 and 2 years and 11 months at December 31, 2003.

We estimate the effective duration of securities available for sale is 2.6 years for an immediate 50 basis points parallel increase in interest rates and 2.3 years for an immediate 50 basis points parallel decrease in interest rates.

Mortgage-backed securities comprise 43% of available for sale securities or $7.2 billion. These securities are predominantly collateralized mortgage obligations and securitized pools of hybrid adjustable rate mortgages. At September 30, 2004, we held approximately $716 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 September 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 10 months at September 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 are placed into repayment status. Gains on sales of education loans totaled $15 million for the third quarter of 2004 and $17 million for the first nine months of 2004. The corresponding amounts for 2003 totaled $4 million and $12 million. These gains are reflected in the results of the Regional Community Banking segment.

Our liquidation of institutional loans held for sale resulted in net gains in excess of valuation adjustments of $5 million for the third quarter of 2004 and $50 million for the first nine months of 2004. The corresponding amounts for 2003 were $23 million and $53 million. These gains are reflected in the results of the Wholesale Banking business segment. We expect these gains to continue to decline as the liquidation of institutional loans held for sale nears completion.

OTHER ASSETS

The increase of $1.6 billion in “Assets-Other” in the preceding “Balance Sheet Data” table includes the impact of an increase in receivables related to trade-date accounting for securities sold but not settled as of September 30, 2004 and an increase in goodwill. Goodwill recorded in connection with the 2004 United National acquisition totaled $564 million and $35 million of goodwill recorded during the third quarter of 2004 related to the AFG acquisition.

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CAPITAL AND FUNDING SOURCES

Details Of Funding Sources

Total deposits increased $5.9 billion from December 31, 2003. This increase was primarily attributable to our first quarter 2004 acquisition of United National. Total borrowed funds increased $1.5 billion from December 31, 2003 due to an increase in short-term borrowings.

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.

Total shareholders’ equity was $7.3 billion at September 30, 2004, an increase of $.7 billion from December 31, 2003. The increase in total shareholders’ equity at September 30, 2004 compared with December 31, 2003 was primarily attributable to higher retention of shareholders’ equity in anticipation of the pending acquisitions of Riggs and SSRM. Partially offsetting the increase in shareholders’ equity was 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 and third quarters of 2004. These fair value changes are captured in the accumulated other comprehensive (loss) income component of shareholders’ equity. See Note 15 Shareholders’ Equity And Comprehensive Income in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Report for additional information.

Common shares outstanding at September 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 in early 2004.

As previously reported, in February 2004 the PNC board of directors authorized the repurchase of up to 20 million shares of common stock. During the third quarter of 2004, we repurchased .3 million common shares under this program at a total cost of $12 million. During the first nine months of 2004, we purchased 3.5 million common shares at a total cost of $193 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. The pending acquisition of Riggs and BlackRock’s pending acquisition of SSRM will cause us to constrain share repurchases over the next several quarters as we seek to maintain our capital position.

Risk-Based Capital

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 September 30, 2004 compared with the ratios at December 31, 2003 reflected the addition of goodwill associated with the United National acquisition. At September 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 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 September 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