At this time, I would like to welcome everyone to the PNC Financial Services Group second quarter 2009 earnings conference call. (Operator Instructions). Mr. Bill Callihan, Director of Investor Relations and Senior Vice President, you may begin your conference.

Good morning and thank you, operator. Welcome to today's conference call for the PNC Financial Services Group. Participating on this call will be PNC's Chairman and Chief Executive Officer, Jim Rohr, and Rick Johnson, Executive Vice President and Chief Financial Officer. The following statements contain forward-looking information. Actual results and future events could differ, possibly materially, from those that we anticipated in our statements and from our historical performance due to a variety of factors. Those factors include items described in today's conference call, press release and related materials and in our most recent 10-K and 10-Q and various other SEC filings available on our corporate website. These statements speak only as of July 23, 2009, and PNC undertakes no obligation to update them. We also provide details of reconciliations to GAAP and non-GAAP financial measures that we may discuss. These details may be found in today's conference call, press release, in our financial supplement, in our presentation slides, and appendix and in various SEC reports and other documents. These are all available on our corporate website, pnc.com, in the Investor Relations section. And now, I'd like to turn the call over to Jim Rohr.

Thank you, Bill. Good morning and thank you for joining us today. As you all know, the current economy is a very difficult one, as a matter of fact it's the most difficult perhaps that I've experienced in all my years of banking. But considering this environment, quite frankly, I feel good about PNC's second quarter performance. We reported net income of $207million or $0.14 per diluted share. Excluding the impact of the special FDIC assessment and integration costs net income would have been more than $375 million and earnings per diluted share would have been $0.53. Our performance is what we would expect in this environment. We've done a good job. Total revenue grew on a linked quarter basis. It was nearly $4 billion. Net interest income performed well in the second quarter and I think that reflects our efforts to transition our balance sheet. And non-interest income improved significantly from the first quarter, and actually, I like the improved quality of the non-interest income. We managed our expenses well and as you would expect of us. But in today's economy, there are clearly concerns about the asset quality if all banks and our response is being what you would expect of PNC. We successfully raised capital at market prices and we increased our capital ratios. We improved our liquidity ratios. We increased our loan loss reserves. We continued to execute our proven business model, creating pretax, pre-provision earnings that more than covered our credit costs. I would say that with regards to the credit costs, and Rick will get into this in more detail in a minute, even after the impairments we took at National City, National City comprised more than 60% of our charge-offs and our increase in NPAs. And frankly, I think what we've been doing here with our balance sheet and the reserves, positions us to handle the credit challenges of the current economy. When we look at our balance sheet, we're one of the most liquid large banks in the country. Our deposit business is going very well. During the second quarter we generated an additional average transaction deposits of $6.6 billion. We re-priced a number of our higher rate maturing securities and deposits with lower rate CDs and we maintained our customer balances. At the same time, we reduced our higher rate, a very high rate brokerage CDs by $5 billion. As a result we remain a core funded bank with loan to deposit ratio of 87% and the total funding costs fell by 26 basis points during the linked quarter. The greatest challenge we see is on the asset side. Loan demand continues to be soft across the country and it's difficult to find assets that meet our risk adjusted criteria, as a result average loans decreased by nearly $5 billion on a linked quarter basis, despite the originating more than $29 billion of loans and commitments during the second quarter. And one option would be to replace, to increase assets by extending our securities portfolio, but we have not done that at this point. Like many other banks, we saw a continuing decline in the broader economy during the quarter which resulted in a corresponding deterioration in our loan portfolio risk ratings. And as a result, we increased our loan loss reserves again this quarter. Nevertheless, we're seeing several signs of stabilizing credit. The growth rate in nonperforming assets slowed in the second quarter, and early stage delinquencies began to flatten. In addition, we've made good progress in disposing our foreclosed assets through the sale of more than 1,600 properties during the second quarter, and that's good news to see that that market is starting to open up. That said, the size of nonperforming assets reflects the challenges we see in the economy and we believe that unemployment will continue to increase through year end, and since credit cost lag the economy, we expect to see continued deterioration, but at a slower pace. Now, in response to this credit environment, we've taken aggressive steps. We have nearly 1,500 people on staff to handle the workout, loss mitigation, and loan modification areas. And we are reviewing loan files earlier and more frequently and we think that we currently have the processes and the people in place to perform well during this portion of the credit cycle. Turning to our customer side, we're very pleased. In our legacy PNC footprint every market was at or above their sales goals for the first half of the year and well above last year. In our acquired markets, 80% of our region have exceeded their sales targets through six months and exceeded last year. And we have positive trends going into the second half. We're especially pleased with our ability to increase market share in places where we want to grow and we're deepening these relationships through our fee based products and services across our (inaudible) markets. In retail banking we continue to invest in our brand and product innovation at a time when some peers haven't. Our increasing brand strength helped us grow by 14,000 net new consumer and business checking accounts in the second quarter. For example, we've seen market share gains in Greater Washington, Greater Maryland, Milwaukee, St. Louis, and this contributed more than $2 billion in increased average transaction deposits out of the enterprise total of $6.6 billion increase. Almost a year ago, we launched our highly successful Virtual Wallet, which was designed for Gen-Y consumers. We now have nearly 80,000 customers using this product with above average balances. We've leveraged our understanding of this market and combined with our extensive University Banking Program, we launched a new product this quarter for college students and their parents called Virtual Wallet Student, and we expect further growth of this product as we convert our National City branches and it becomes available across our expanded franchise. Corporate and institutional banking also had another strong quarter in key growth areas. Corporate service fees of $236 million were up more than 8% from last quarter. We saw strong results from credit remanagement and capital markets as we are beginning to successfully cross-sell our broad array of products and services to legacy National City customers. Lower average loans for this segment reflected softer demand, but average deposits increased $3 billion on a linked quarter basis, reflecting increased client liquidity. Our Asset Management Group, which includes wealth management, saw its assets under management increased to $98 billion at June 30, as a result of higher equity market values. Quarterly profits were down in the quarter due to higher provision for acquired loans in wealth management, different than historical experience. Sales remained strong in the quarter, led by growth in newly acquired markets, such as Cleveland, Columbus and Chicago, as well as legacy markets, including Greater Washington and Philadelphia. The pipeline here is solid and I'm pleased with the level of cross-selling we're seeing across all of our markets. Residential mortgage banking performed well in the second quarter, but total income was lower due to the expected declines, primarily in the hedging gains associated with servicing rights. As you know that it was extraordinarily high in the first quarter. For the second quarter total loan originations were $6.4 billion, mortgage rates did rise late in the quarter, which reduced incoming application volume for future loan closings, but still continuing at a good pace. As a step to improve the quality and efficiency of our mortgage operations, we announced this quarter that we're consolidating underwriting in some 90 existing operation sites to two locations, Chicago and Pittsburgh. The Global Investment Servicing saw increases in custody and net fund asset service from the first quarter. The business launched fund distribution support services in Asia, offering a full suite of processing and reporting services for European and US mutual fund firms with investors based in Asia. Global Investment Services continue to have a strong sales pipeline, and we're pleased with the relative performance of this business in spite of the downturn in the markets. And both our Asset Management Group and Global Investment Services reduced non interest cost in line with revenues. I think this will position them well for improved profitability, when the equity markets recover. BlackRock as you know reported a good quarter, profit of more than $200 million. It's assets under management rose link quarter as a result of improved performance of the equity in fixed income markets. And as you know, BlackRock announced a pending acquisition of Barclays Global Investors in June, which will make it perhaps the largest or certainly one of the largest asset managers in the world. We truly believe in this transaction. We believe it is a terrific transformation for BlackRock. We've supported the transaction, and it should provide us with additional capital upon closing, assuming BlackRock's current stock price. Let me turn to the distressed asset portfolio. They had a strong quarter, primarily due to a lower provision for credit losses. This segment, which manages our distressed loans, is now staffed with more than 130 employees to handle this portfolios workup. Now, let me comment briefly on the credit availability. Obviously, we're committed to meeting the credit needs of qualified customers in these difficult economic times. And the second quarter, we improved loan modifications, totaling more than half a billion dollars. And in addition to our modification programs, we began participating in the home affordable program in May for all GSE mortgages and for non-GSE in July. And we'll evaluate the second lien program, when details are announced. And when we look at the commercial side, we've enhanced our calling efforts to small business and corporations. We're offering promotions with special financing rates such as loans that green business practices and loans in the lower and moderate income areas. These efforts are paying off, as we've originated nearly $1 billion in small business loans in just the last two months. And for mid size companies, we led the nation in the second quarter loan syndication, putting together almost $1billion. And business loans and together these activities helped us to originate or renew more than $55 billion in loans and commitments year-to-date. Now, turning to the integration of National City, I am very pleased with our efforts. Our employees are working very hard on the integration, and I really appreciate their ongoing efforts and enthusiasm. We're well on our way to achieving our cost saving goal. On an annualized basis, we've already captured almost $500 million in cost savings, a great start towards our two year goal of $1.2 billion. Preparations are well underway for the initial wave of consumer conversions, which is scheduled for November with the remaining waves running through mid 2010. Our goal is for a seamless transition for customers. And, I believe we will reach that mark given the investments we're making. Additionally, we're scheduled to complete the required divestiture of 61 branches in early September. The acquisition clearly of National City has been accretive to our first half income and we expect it to be accretive for the full year. And as we're able to bring costs down and the credit costs begin to diminish, we really are pleased with the opportunity for our shareholders. Now overall, I'm pleased with how PNC's businesses performed in the second quarter and I remain very optimistic about the benefits of the National City acquisition. Our business model continues to position us for growth as the economy recovers, and we're working very hard on the asset quality side. Now, Rick will provide you with more detail about our second quarter.

Thank you Jim, and good morning, everyone. Let me add some detail to the business strategies that Jim discussed. PNC reported second quarter earnings of $207 million or $0.14 per common diluted share. This included expenses of 133 million or $0.19 per share with a FDIC assessment and $125 million or $0.20 for integration costs. Excluding those items, net income and earnings per share, clearly would have been substantially higher. Additionally, second quarter preferred dividends were 26 per diluted share compared to $0.11 per diluted share in the first quarter, as we paid a full quarter or $95 million of dividends on our TARP preferred shares. The key take away for this quarter are, first, our earnings were driven by strong and diverse revenue streams and well managed expenses. Second, we were not immune to the challenging economic environment, as reflected in further credit quality deterioration. However, credit costs remain manageable as our pretax, pre-provision earnings exceeded our credit costs, and we increased our coverage for credit losses. Third, we maintained a strong liquidity position and continue to strengthen our key capital ratios. And fourth, our business model was working, now it's all about execution. Let me start with a review of our earnings on slide five. At PNC, we continue to benefit from having a diversified revenue stream with a strong contribution from our fee based businesses. In total, we delivered almost $4 billion in revenue. Non interest income of $1.8billion was strong and diversified for the quarter, despite the expected decline in gains form hedging our mortgage servicing rights, and our residential mortgage business. For the second quarter, non interest income represented 45% of our total revenue and increased $239 million or 15% compared with the first quarter results. Our relationship based fee category such as fund servicing, asset management, consumer and corporate services, residential mortgage and deposit service charges delivered 82% of non interest income, a solid and consistent performance. In the other non interest income category, improvements in the markets drove gains on security sales, lower losses on private equity valuations, increases in customer related trading results, gains on loan sales, and hedges of our deferred compensation program. Several of these items are highlighted on page six of your financial supplement. These result underscore the benefits of having a diverse revenue stream. Net interest income of $2.2 billion, net interest margin of 3.6% were down linked quarter primarily cue to the reduction and higher yielding loan balances, partially offset by lower deposit costs. While the yield curve has gotten somewhat steeper, we have not invested in a meaningful way and our balance sheet remains very asset sensitive. We continue to be focused on expense control. As Jim mentioned, we have already captured $500 million of annualized cost savings against our two year integration goal of $1.2 billion. For the quarter, our total non interest expenses of $2.7 billion included $133 million in special FDIC assessments and a $125 million of integration costs. These and other cost details are also highlighted on page six of the supplement. Even with these additional costs, our pretax, pre provision earnings for the quarter was $1.3 billion or $242 million more than our cost of credit. On a year-to-date basis, our pretax, pre provision earnings of $2.9 billion were $900 million above our credit costs providing a solid contribution to the increase in our capital ratios. Now let's take a look at our loan portfolio on slide six. This portfolio represents only 59% of our total assets. PNC's loan portfolio is relatively well balanced with 55% from commercial lending and the remaining 45% from consumer lending. As you can see this portfolio is well diversified and granular, it is primarily in our footprint and the majority is collateralized. However, as the effects of the recession continue to spread throughout the economy, we're seeing deterioration in the loan portfolio. But, we continue to believe the pace of change is manageable. Now let's review the overall quality metrics on the bottom right-end portion of the slide. Nonperforming loans to total loans increased to 2.4% or $1.1 billion in the second quarter compared to $1.3 billion increase in the first quarter. This is a 36% increase with 60% of the growth coming from National City. We believe the rate of growth for nonperformers may have peaked in the first quarter. In total, net charge-offs were almost $800 million or 1.9% of loans compared to 1% last quarter. National City loans resulted in more than $460 million or 60% of these charge-offs. As you will recall, we established a $2.8 billion allowance for credit losses when we acquired National City. As such, we should anticipate charge-offs on this portfolio to continue until we approach this level of reserves. Our provision to average loans increased 2.6% in the second quarter, resulting in allowance for loan and lease losses to total loans of 2.8%. And we increased our reserves to $4.6 billion in the second quarter. When you add that to the $7.5 billion of valuation reserves we have in our impaired loans, we have over $12 billion of reserves or close to 7% of loans outstanding. We believe this positions us well to further manage through deterioration in economic conditions. Now let's take a looks at some of the specific areas of deterioration on slide seven. Let's start with our commercial real estate portfolio. The size of this portfolio is approximately $25 billion or 14% of our loan portfolio. Now broken down further, $8 billion of this portfolio is commercial mortgages, predominantly with recourse and this portfolio is performing well. The remaining outstandings is real estate projects. Nonperforming loans in the real estate projects book increased this quarter by $400 million to $1.4 billion. Nonperforming loans in this sector continue to be driven to a large part by residential development. In terms of geography, the largest contributors continue to be in Florida, New Jersey, and Maryland. Our total outstandings residential development was $3.6 billion. This is comprised of impaired loans of $1.8 billion, which has a fair value mark of 40% against it as impaired loans, and $1.8 billion of un-impaired loans with $600 million or 33% declared nonperforming and are well reserved. Two other areas in the commercial real estate portfolio that we're following closely are retail strip shopping centers and lodging. While these are small in relation to our balance sheet, we're being proactive in managing these risks, as they're particularly susceptible to the effects of lower consumer spending. Second, we have real estate related loans in our commercial book of $8.3 billion. The area of greatest stress in this portfolio is in the supplier segment where outstandings are less than $2 billion. The majority of these loans were acquired and we're aggressively managing them through increased due diligence and collateral reviews. Also in our commercial book is our exposure to the big three auto manufacturers, which is less than $100 million. The majority of our exposure to this industry is to auto suppliers with less than $1 billion in outstandings. However, most of this business is collateralized, which tends to result in a lower loss given default. And 70% of our auto dealer exposure is to foreign manufacturers. Clearly, the mid Western region is bearing the brunt of the downturn in the US auto industry, and we have a team studying the ripple effect on the region. We believe the additional loan modification and loss mitigation staff, we have added will help us successfully manage through this challenging period. The third area of focus, consumer residential real estate is approximately $22 billion. This portfolio contributed about $350 million of our $1.1 billion increase in nonperforming loans. Of that amount, $300 million of the linked quarter increase was related to the National City portfolio. Although, nonperforming assets increased primarily due to the subprime portfolio acquired in the National City acquisition, the overall residential mortgage portfolio is performing relatively well due to the quality of our overall residential mortgage portfolio with net charges of less than $80 million in the second quarter. The majority of the loans are in our footprint with weighted average FICO score of 706 and a weighted average loan-to-value of 75%. Now finally, our home equity portfolio and other consumer lending continue to perform reasonably well. Home equity nonperforming loans to loans in the second quarter was 29 basis points and net charge-offs were 1.2%. As of June 30th, our home equity portfolio had weighted average FICO scores of 728 and weighted average loan-to-value of 75%. More than 80% of these loans are in our retail markets. Now let's turn to our capital position. Our estimated Tier 1 common and Tier 1 risk-based capital ratios ended the quarter at 5.3% and 10.5%, each increasing by 40 to 50 basis points. Both ratio is benefited from our successful at the market common equity offering in May, lower risk weighted assets at quarter end, and retained earnings for quarter, which was somewhat offset by the increase in goodwill associated with additional impairments. Our capital plan was accepted by our regulators. Our position on TARP repayment has not changed. Our plan is to repay TARP as soon as appropriate, and end in a shareholder friendly manner. Now, slide nine is a scorecard we use to measure our progress as we integrate National City and apply PNC's business model to our new franchise. Jim and I have already highlighted many of the metrics on the slide. We continue to execute the PNC business model and work to deliver on all of these metrics. We believe our results this quarter reflect continued progress towards these goals. The key point of this slide is this. PNC acquired National City by issuing 95 million shares or about 20% of our current 460 million shares outstanding, and we doubled the size of our company. When we improve our return on average assets to historical standards, which were well in excess of 1.3%, the leverage on our performance should be substantial. We just need to execute our business model. And with that, I'll hand it back to Jim.

Thank you, Rick. And that's exactly what we told our Board at our strategic planning meeting. And when we look at the second quarter, we've made progress. We generated solid results in the quarter despite the economic difficulties that all of us are going through. Going into this business cycle, many of you viewed PNC stock as a defensive play. Coming out of this cycle, we view ourselves as an offensive play and we believe PNC will have three distinct advantages as the economy begins to recover. First, we fully expect to achieve the $1.2 billion in expense savings from the integration. Second, with the marks that we've taken on the National City loan portfolio that Rick described, I believe that our credit costs will decline as the economy begins to recover. Finally, on the revenue side, we're already seeing success with customer and market share growth and improving markets should further enhance income from our fee-based businesses. We will simply continue to execute our business strategy in support of our customers and when the economy recovers, I believe we should be able to deliver returns consistent with our historical performance. As we look ahead, we continue to be comfortable with the range of first call estimates for the second half. Clearly, we believe that the combination of National City and PNC has tremendous opportunities for growing shareholder value, as we continue to build a great company. With that, we'd be more than happy to entertain your questions.

Operator, if you could give our participants the instructions please.

Yes, sir. (Operator Instructions). And your first question comes from the line of Paul Miller of FBR Capital Market.

Thank you very much. How you're doing. Hey, on your [NIM], your net interest margin was down 20 some basis points over the quarter. Was that mainly from just the continued deleveraging or were you also de-risking the balance sheet at the same time?

It's a little bit of both. One, we got absolute rates coming down a bit. So, therefore the rates we would put on securities and we put some on, it was modest amount would be at a lower rate than the loans that ran off. So there is de-risking taking place there as we're starting to see that some of our customers reducing utilization rates. So that's why you're seeing the loan balances coming down overall, So it's a little bit of de-risking and little bit of just simply lower rates.

What we are hearing across the board a lot of the CD pricing and rates continue to fall on the low end of the curve. Should we see some bounce-back on the [NIM] going forward or is that the de-risking still going to really control the [NIM]?

The de-risking will control it for the short-term. But what you sill see is, when the CDs are repricing today for example, we marked all the CDs at National City of that an average of 2%. We'll be repricing almost all of those CD at about 1.7% to 1.8%, and probably retaining right now 70 to 80% of those balances. So I think on that piece of it, you'll start to see improvement. I think as we sell down potentially some of the more risky assets and if our customers continue to pull back on there lines, then you'll probably see further contraction on that.

Your next question comes from the line of Matt O'Connor of Deutsche Bank. Matt O'Connor: Just a follow-up on the net interest question, good disclosure on the purchased accounting adjustments on page 8 and I think that then shows about 20 basis point drag of the lower accretion. I'm just wondering how that plays out going forward in terms of the magnitude of runoff I guess?

The way I would look at it is 50% of what you're seeing today is the purchase accounting that's coming from loans and 50% is comes from CDs. The loan piece will come down, if we're not able to replace loans at those same spreads and rates. The deposit piece won't come down, because of the fact that we are able to replace those deposits at the rates at which we mark them. So therefore, I would probably split the difference on the impact of the accretion and suggest that overtime and this is a wild prediction. But, overtime time we'll probably run about 3.2% margin overtime because I think half of what you're seeing there in terms of the purchase accounting may or may not replace itself, the other half will. Matt O'Connor: So just, as we think about the next couple of quarters, again that page 8 shows $486 million of benefit. How should we think about that piece?

Well, that will come down a little bit. I think our full year projection for this is going to be around $1.6 billion. So, you should expect to see about $300 million in Q3 and $200 million in Q4. But the fact is that those numbers change every time we remark the book. So, I wouldn't lock them in, but that's our current forecast. Matt O'Connor: Then to your point that it's not the entire going from 486 to 300, that's not the entire hit of the [NIM], since the deposits are getting reinvested.

That's exactly correct and if you look up above you'll see have of the benefits if not more is coming from the deposit side. So, we'll be able to reprice and retain that difference. Matt O'Connor: Then now just separately, you took some than temporary impairment on your securities portfolio this quarter, and the unrealized losses did moderate as spread tightened. But can you just remind us, one, what triggers the OTTI? How should we think about the $3.8 billion in unrealized losses in terms of how much it might be realized overtime?

I would suggest on the 3.8 what we're seeing basically is that the markets are settling down from the historical instability that we saw last fall. I think that will continue, and I think has markets get more comfortable, spreads will come in. I think that 3.8 billion will continue to come back in over time and then we have to recapture as much of it is, as we possibly can, I think probably the majority of it, if not all. On the OTTI side, what you're seeing there is, we took in another 150 million of losses there. Keep in mind those are projected losses. So, as delinquency 70% of it came from continued delinquencies on loans that were already impaired, the other 30% came from new securities which are appearing in period. But again, we have in total I think our losses on this entire portfolio real losses is less than $5 million. So if the markets improves portfolio, real losses is less than $5 million. So if the markets improve and those delinquencies don't pan out, some of that even could come back to us as well, because those are all projected. Matt O'Connor: I think you've got the big gain from the BlackRock Barclay's scale coming later as well that gives some flexibility, right?

We should have a gained, depending on where the BlackRock share price is at the end of the year. In our fourth quarter the current expectation are between $400 to $500 million after tax.

Your next question comes from the line of Betsy Grascek of Morgan Stanley.

My question is on the expense saves and the trajectories there with regard to the merger. I think you indicated that you have 500 million now annualized run rate and the goal was only 600 for the full year or since there, but it was 600 for the full year. So it seems like you're making a lot of progress. Can you tell us is this just an acceleration of what you expected or is this new stuff? If it's new stuff, are you even raising your guidance on expenses?

I would say that right now it's the acceleration of the expected savings. I think we've talked about how one PNC helped us learn about a lot of different places where we could find space savings. So when we went in I think frankly our team was able to execute at a more rapid pace than we might have anticipated before. We're confident in the billion, $200 million, and I think we'll continue to have that run ahead of schedule. I think before we would get optimistic about some thing more than a billion two, I think we would want to get the first conversion done in November. That in fact goes well we may be back to you but, those kinds of things you walk before you run.

Any color on the revenue side?

Revenue side is coming along nicely. We're just starting, a number of the products we have like Virtual Wallet really aren't available in National City markets until we get the conversions done. But, we've actually been able to get a couple of universities start talking to us about doing a lot of things together. The big conversion of course is in November, but then a lot of the National City stuff like Cleveland gets done in the first quarter of next year, which gives us a lot of opportunity. But we have crossover products, and we call them cross over products, treasury management and healthcare and capital markets, which really weren't cross sold at all in the National City environment, which have taken off. And so, when you look at treasury management growing at 8%, here is an industry that doesn't grow at all. So, the 8% is a market share. The industry grows at maybe 2%. The market share gain that we had there, a lot of it is just starting to come out of National City, where we can bring our national product, setting our technology to their customers, before branch conversions. So, we could actually put customers on our systems from the corporate side and the healthcare side without having the branches conversion.

Okay. So on the revenue side, are you running in line with your expectations or not at this stage?

We mentioned that the majority of the National City markets are ahead of the sales plan that we put in place for them. And across the entire acquired markets, we're 109% of plan. So, I would say we're doing better than we thought.

Okay. Thank you.

Your next question comes from the line of Mike Mayo of CLSA.

Can your just elaborate more on the declining loan yields? Loan yields is down 50 basis points. Which type of loans, which geographies, I mean that’s such a big linked quarter decline that just more color on that would be great?

Sure Mike. Two things are happening. One is you have people that are just drawing down on utilizations. And as a result, you've got the balances coming down, so that's one. And those are coming down from a higher rate environment, and when those loans are put on to where today's rate environment is. So, someone has to just simply the drop in rates.

So they draw down the utilizations. They take out more money and the rates contracted are much lower.

They're borrowing less Mike. I'm saying they're borrowing less and that’s why the balances are coming down. So, you have a combination that the balance is coming down and they're coming down from a higher rate environment.

Okay.

As low as lot of our commercial loans re-price on a short-term nature. And so those rates are coming down as well. So it's really driven very much by the absolute level of rates coming down.

Okay, more on the commercial side than anything?

That's correct.

Okay. And then just generally speaking you mentioned the gap between your pretax profits and your loan losses, and you have a nice cushion there. But, I guess if loan losses have gone from 1% to almost 2%. If they went to 3% that gap might evaporate. Can you talk about you know how long you think you might have that cushion or what you could do if things don't pan out as well as you think they might? What other levers do you have if the economy doesn't improve a whole lot?

I think we're forecasting as we said that that we would be able to perform within the range. I think that’s the kind guidance that we gave, so if we're of able to perform within the range in the second half of the year, that means our pretax, pre provision income would be greater than our provision. So, we don't see an erosion of that number going forward.

And just maybe your outlook for the loan losses, 1.9%, do you think that it's a little bit higher or lot hire, how should we think about that?

That's a very tough question Mike, because there are some factors which are looking better. We think we may have peaked on nonperforming asset growth. We look at the fact that delinquencies have flattened out a bit. On the other hand we expect unemployment to continue to go up. Right, so you have got factors going in both directions. So, I don't see our reserve levels changing much from the elevated level where we are today, at the provisioning level I should say. From where we are today, I have no reason to believe we got substantially better, nor do I have a reason to believe to get substantially worse.

Your next question comes from the line of John McDonald of Sanford Bernstein.

Morning. Just on that last answer, Rick, so does that mean you expect the charge-offs to go up, but the amount of reserve bill might start to go down, because you start to use some of those reserves you brought over from that City?

Well I definitely expect that we'll use up the reserves we bought out from National City. That we'll start to see the charge-offs go up. It just remains to be seen at what pace and whether or not – whether they will start to see other areas subside in terms of charge-offs, therefore making room so that we can continue to build reserves. I'd like to say at this stage of the game, we plan to continue to build reserves through the end of the year. But, it's very difficult to predict where this is going with a lot of mix seg that was in terms of where the economy is headed.

But you're saying to Mike just now, your best guest is that the provision in dollars, the combination of the charge-offs and the reserve bill doesn't move a lot from what we saw in the second quarter.

We have a hard time predicting. We're hopeful that the increase in nonperformers, the rate of increase peaked in the first quarter. The increase on a percentage basis and on an absolute basis was less in the second quarter. You hope that when we look at our past two loans, when you look on nine and supplement, you can see that the past two loans, the past 90 days have been increasing significantly to around 3%, whereas the 30 to 89 day loans are stuck 3/4 in a row at 2%. So, you are hoping that perhaps we've seen the deterioration will to some extent subside. The charge-offs always follow the economy. I mean the charge-offs will remain at a higher level. You do your reserve bill during the deterioration period of the economy. And then the charge-offs frequently follow that and that's why you have the reserves. So, I think the reserving and the provisioning and the charge-off questions are kind of two different questions.

Yeah, I was just looking at the reserves. You have almost a 3% reserve to loans and a less than 2% charge-off. So, it seem like you might be able to start using some of that Nat City reserve. You brought over three plus percent for a nonimpaired book that you'd start using it.

Well, at some point we will use it for sure. That's for sure. But as we look forward, unemployment probably is going to continue to rise throughout the rest of the year. But, the consumer book will follow that number. And housing prices haven't stabilized. We'd like to see a couple of green shoes that we saw yesterday and today. I think the economy is going to be tough throughout the rest of the year.

Okay. And then maybe just a little bit of thought on some of the CE items that were strong in this quarter Rick, trading $90 million. Do you have a sense of what might an average trading results you guys might be over time?

That's a tough one. I think we have historically said that our customer related businesses probably give us maybe $40 to $50 million a quarter on average. And that really hasn't change add lot. The volume has stayed pretty consistent, so we just happen to have a very good quarter this quarter clearly.

Okay, and equally hard as the mortgage as well right, in terms of what might be a…

Yes, but that was pretty low. That was $50 million. So, $50, $53 million, so that was 203 in the first quarter. We didn't expect to repeat that. I don't think anyone else expected us to repeat it either.

And 50 feels more normal, given what is 50?

I think it's fair to say this is a pretty volatile area. This number moves around quite a bit. And we've actually worked very closely with our asset and liability team, when working with the BlackRock team and actually putting in some better modeling around how to actually hedge the servicing right. And these guys have done a great job so far managing that risk. But, I wouldn't suggest to you that this isn't volatile item to hedge because it can be volatile.

What kind of pace of run down might we expect over the next year or couple of years on the distress asset portfolio and then commercial commitments, is there anyway you could size for us how low lying utilization is right now?

I can tell you we'd love to run the distress asset portfolio down. And we're working on it. We have got a lot of people focused on it in every way, and I think all the banks are. The pleasing thing was that in the first quarter, we couldn't get any bids on some of these residential properties at all. And so, the idea that we've been able to move over 500 a month for the last three months is encouraging. Prices aren't any good, but they're encouraging to start moving these assets. So, I think the Northeast is the place where the prices haven't fallen yet. But, they're starting to. Unfortunately, we don't have a lot in the Northeast. So the Florida stuff and the California stuff, we've taken big marks on. And I think we just have to keep working on how to predict when that happens. Utilization rate just continues to fall. The number that we have here.

That's about 3% down. It's hard to pinpoint an actual rate, but the change is about 3%.

The other issue is when you look at some of the financing we do, it's interesting, we've had added a lot of customers in the last 12 months. But, the average borrowing per customer and the easiest place to look is in business credit, where we've really just added awful lot of good customers. But, their requirements are down by 60% simply because the value of their inventories are down. And that holds the receivables, and so even though we're adding customers, the average loan balance is down even if they're activity is the same.

The next question comes from the line of David George of Robert W. Baird.

Hey guys, couple of quick questions. First on the other income line, I assume that includes trading, was there anything else that was extraordinarily strong during the quarter, just trying to get a sense of what a run rate there maybe, and then I have got one follow up?

Not really. I think the one thing you probably need to take a look at when you look at the change from quarter-to-quarter -- by the way, we lay it out on page six of the supplement is this idea that some of our compensation line went up, simply because our stock price went up versus in the first quarter our stock price went down. And so you had almost $70 million delta related from first quarter to second quarter. That had an impact on the expense line. But, because we hedged that risk, it had a corresponding impact on the revenue line from one quarter to the other. And obviously, our private equity business didn't have as severe losses as we saw in the first quarter. That had settled down a bit, the trading we talked about. We had some lone sales as we started to take some of these impaired loans and try to move them off our balance sheet and recognize some gains on that.

On page 9 of your slide deck, you discuss what's kind of a normal or a target loss rate would be and the number looks to be 30 to 50 basis points. How do you come up with that number longer term, because both your loss rates as well as want City I think were I think considerably higher than that. I guess just walk us through that if you don't mind?

That number of 30 to 50 basis points in terms of charge-offs?

Provision average loans.

You're talking about the, what we've done historically and what we do and we actually are revisiting as we speak. We did this several years ago. We take a look at what we think our credit costs are to look like through the cycle. Then we set our whole risk profile on all our limits and all of our hold levels and everything is driven from that view. Right now we're looking at the same thing. Recognizing now it's a new environment. Recognizing now that it's the fact is capital levels and expectations of capital levels more involved with the regulators being involved with that. So we're revisiting all that. But, we don't see a sustainable change. The only thing I would overtime is the fact that we've picked up residential mortgage and we've picked up credit card and we've picked up our leasing. We need to incorporate those into the other broader portfolio and we'll be evaluating that overtime. But, 30 to 50 is what we've used historically.

And we've performed within that range for a number of years.

Your next question comes from the line of Ed Najarian of ISI Group.

Most of my questions having been asked and answered, so, I won't pick up too much time. But I did see two things additionally that jumped out at me. One, it looked like you had an abnormally low tax rate in the second quarter. If you could just describe what that was and if we should expect some thing like that going forward? Then secondarily I saw that you did had an extra $600 million of purchase accounting marks taken in the second quarter. I'm just wondering if you think you're finally through additional purchase accounting marks or if that's something that we could still see play out in the second half of the year?

Let me take the latter point. I believe we are. We feel we are, through purchase accounting marks, but you never, say never. So I won't commit to that. But I think in the last quarter we said we were 90% of the way through. I think we've made substantial progress over the course of the quarter. So we on the loan balances I think we are very much comfortable with where we're standing. There's other factors out there and I think you've seen our disclosures that there are shareholder litigation in another cases which may take a lot longer to come to fruition. So we'll have to wait to see how they play out overtime. As far as the loan book goes, I think we're done. On the tax rate, we had an effective rate in the first quarter for the full year of 22%. I would say a more appropriate rate now is 20 and that being the increase in the credit costs that we've all talked about. Clearly, our credit costs expectations are a little higher than anticipated. So I would say if you're looking at the 14, I'd say that's probably low by six percentage points. That's a small number when you do the math. It's not that big of an impact on the earnings.

So your best guess on a GAAP basis on sort of non-FTE basis for the second half of the year would be around 20%?

That's correct, Ed.

Your next question comes from the line of Nancy Bush of NAB Research LLC.

I believe you said that you have not yet begun to reinvest in the securities book and I guess my question would be at what point do you think you will? And what are you waiting for because it's not likely that rates are going to get a lot higher at this point?

If you guarantee that for us we can (inaudible).

I think Mr. Bernanke is guaranteeing it for you.

He certainly guaranteed he's going to keep the rates low and we agree with that. Then the real curve has steepened and we've remained extraordinarily liquid. I though we just did a little study this way, we've got more demand deposits per share than anybody else in the industry. So the flexibility that we ought to have going forward to move into that market I think is resident in the balance sheet. At some point, when you're spending this kind of money, the government spending this kind of money that they don't have. At some point, we will have higher loan rates. So the question is how far out the yield curve might you want to go at what time? So, those are things we're always considering, we don't have to, as you know, I've discussed, we're not won out the business of betting the balance sheet. So I would expect that we would invest a little more aggressively down the road.

I would also say we did a little bit of that in the first quarter. And I think you saw that in treasury and agencies where we invested in some securities. When rates came down, we thought they may stay down. So, we probably take advantage of taking that out that was some of the security gains we saw in the first quarter.

So this does not sound like it's a very near term events that you are talking about?

Well, we've always had the view that it's not a one time event. It's a gradual thing overtime, in terms of how we invest on the balance sheet.

Secondly, I'm just a little confused on the trends in the non-impaired portfolio in Nat City. We saw yesterday that well to look like it got some fairly unpleasant surprises from the non-impaired Wachovia portfolio. So how does the non-impaired NAT City portfolio?

Well, there is two areas where you saw an increase and there is two good reasons why that occurred. One is, to the extent that we have revolvers in the portfolio, you cannot impair revolving loans. So therefore we were unable to impair them and as we get through the portfolios and get the appraisals updated and all that. We start to get the information to the level where we want it. That's part of the lift you're seeing in non-performing loans. The other side is if you take a look at an increase in the mortgage portfolio that went up $300 million I believe in the quarter at National City. We impaired all mortgages that were more than 60 days past due at the end of the year. So the first quarter you wouldn't have expected to see much increase in non-performing, given they'd have to get past due as a portfolio. That started to happen in the second quarter and that's part of the reason for the increase. So it is behaving pretty much as we expected. That's why we set aside $2.8 billion of reserves against that portfolio overall.

So there's basically an aging process going on here that probably will continue in the near term?

That's right and that's the point we're making around $2.8 billion of reserves established and obviously, we'll have charge-offs to fill that bucket up overtime.

Your next question comes from the line of Mike Holton of Boston Company.

Jim, you said you thought that the growth rate in, NPA is peaked in the first quarter, is that right?

I said it may have.

It may have, okay So NPAs grew 61% in the first quarter and like 29% in the second quarter. So given the economy is still weak, is it reasonable to assume that NPA growth could be somewhere between that 29% level in Q2 and then the 60% level in Q1?

It's very difficult to say. I think the percentage piece is easier to pinpoint. But, the good news was that from an absolute point of view they didn't increase as much in the second quarter as they did in the first. And I think it's important to note that we're not forecasting a big turnaround in the economy in the next 90 to 180 days. I'm trying to tie it a little back to Nancy's question. One of the things we look at are delinquencies and the delinquencies as Rick mentioned, delinquencies in some of the National City stuff you can see on page I believe it's 9. The past 90 day delinquencies went from 1.8 to 2.3 to 2.99. That's the buildup of the real troubled assets. The thing we find encouraging is at the top of the page where a 30 day to 89 day past dues are holding steady at 2%. So, I think in some cases what we hope to find is that the bad stuff continues to just be bad and we've got to deal with it and earn our way through it. While the rest of the portfolio isn't deteriorating anywhere near as the pace as we saw the first half of the year.

One thing I should point out to the audience about page nine is that this delinquency information includes impaired loans and un-impaired loans. And I think if you look at the notes, you'll see that the impaired portion of that is over 90 days delinquency is approximately $2.9 billion as of the end of June. So, the un-impaired book actually is improving a lot better than this, performing a lot better.

Okay. And then just the other clarification is your comments around comfort with second half estimates. Are you comfortable with the consensus of 57 in Q3 and 53 in Q4, because it seem like that will be heroic and will require some extraordinary gains to get there or is it more the range which is has estimates a lot lower?

We use the range.

Okay. And is the BlackRock in Q4, is that something that's going to help you too? Do you include that?

No, we don't include that but that should help us in the fourth quarter quite a bit.

Your next question comes from the line of Gerard Cassidy of RBC Capital.

Good morning. Couple of questions. First, do the nonperforming assets, the review of the nonperforming assets this quarter, does that reflect the Shared National Credit exam that just was completed or will that be a third quarter event for you guys?

We're the agent, yes, but there may be further impact, where we're not the agent.

This is all the notifications, we received at this point including our entire ranges of portfolio?

Okay. The second question is on your slides on page nine, where you're talking about the return on average assets, the target rate going to examine to the feature. That one point reserve percent, is that taking into account any heavy regulations that might be coming from Washington, as they rework the regulatory environment for the banking system or the financial system?

I don't think there's any question, we're considering that. That’s ought to be very difficult to quantify at this point. But, I think we'll have more regulation and some of it quite frankly we agree with. The systemic risk issues that we as a country have fallen into, as well as the industry is certainly troublesome. And some of the consumer products that were created were truly became problematic for all of us. I think they have some really good ideas, how they go about doing it and whether they form a new agency or not, that remains to be seen, but we're in agreement with some of it.

And to Jim's point, our historical performance has usually been 1.5% plus. So we kind of hedge back on that to 1.3 because there is a lot of uncertainty about some of these items.

Sure and then finally on page 12 of the supplement where you guys give the new inflows of problem loans and your logic to just individual nonperforming assets, I noticed in comparing it to the first quarter that a large manufacturing credit appeared to fall off. Did you guys re-work that out or did you charge it off and also a mining credit came off, did you work that one time or what happened to that one?

For the big charge-off and a manufacturing side, yeah.

And then finally in the information services has company come on? That seems to be different than what you've seen in the past with a real estate and stuff, any color on that?

That's a highly levered transaction.

And your final question comes from the line of Rick Wise of [Genisat].

Good morning. I'm wondering if you could discuss whether the troubles at CIT have presented your middle market lending group with either challenges or opportunities?

In terms of CIT you say?

Yeah. Whether or not it has affected the lending opportunities in your area?

Well I think it will clearly in our business credit area. We only participate in a certain portion of the activities of CIT. Our business credit area is clearly involved in the more traditional inventory and receivable areas. So that I think that's important to note, because they do a number of things that we're not in, included in factoring and some software financing. Now from a direct point of view its very de-minimus exposure. But, the opportunity that you're mentioning I think could be as it depends on what happens with CIT obviously but clearly we have a number of credits that we share with them that we're very, very pleased to be sharing with them. And to the extent that they decide to reduce their balance sheet, I think there might be customer opportunities for us.

Thank you. This concludes our call. Jim, do you have closing remarks.

We believe that given the difficult environment, we had solid results for the quarter. And I feel particularly good about the progress that we're making in terms of growing customers' revenue and managing the expenses with the integration of National City. So, again, we believe that we'll work as hard as we can as we bring these two companies together, there'll be a significant amount of shareholder value to be gained. Thank you very much.

Thank you.

And this concludes today's conference call. You may now disconnect at this time.