PITTSBURGH, July 17 /PRNewswire-FirstCall/ -- The PNC Financial Services Group, Inc. today reported net income of $505 million, or $1.45 per diluted share, for the second quarter of 2008 compared with net income of $423 million, or $1.22 per diluted share, for the second quarter of 2007 and net income of $377 million, or $1.09 per diluted share, for the first quarter of 2008.

For the first six months of 2008, the company earned net income of $882 million, or $2.54 per diluted share, compared with net income of $882 million, or $2.67 per diluted share, for the first six months of 2007.

"PNC reported strong second quarter results, growing revenue faster than expenses while continuing to manage credit risk effectively," said James E. Rohr, chairman and chief executive officer. "We remained focused on our customer growth strategies in this challenging environment. As these economic conditions continue, we believe our solid balance sheet, strong capital and liquidity, and diverse revenue mix position us well for the future and allow us to invest in our businesses and grow customer relationships."

HIGHLIGHTS

-- Net interest income grew 32 percent in the second quarter of 2008 compared with the second quarter of 2007 and 14 percent compared with the linked quarter reflecting a significant decline in funding costs. The net interest margin expanded to 3.47 percent compared with 3.03 percent in the second quarter of 2007 and 3.09 percent in the first quarter of 2008.

-- Noninterest income increased 9 percent compared with the second quarter of 2007 and 10 percent compared with the prior quarter. Diversity of noninterest revenue continued to differentiate PNC.

-- PNC created positive operating leverage by growing revenue while controlling noninterest expense. Revenue growth of 16 percent exceeded noninterest expense growth of 9 percent in the first half of 2008 compared with the same period in 2007.

-- Net income for the second quarter of 2008 included an after-tax gain of $52 million on the mark to market of our BlackRock long-term incentive plan (LTIP) shares obligation and $24 million of after-tax integration costs. Apart from these items, net income for the second quarter was $477 million, or $1.37 per diluted share.

-- Average loans for the second quarter increased 15 percent over second quarter 2007 and 5 percent compared with the first quarter of 2008. Average deposits for the second quarter increased 7 percent compared with the second quarter of 2007 and 3 percent compared with the linked quarter.

-- PNC lowered certain market risk positions during the second quarter by reducing its commercial mortgage loans held for sale position by approximately 23 percent and trading assets by approximately 22 percent, resulting in increased hedge coverage in connection with these activities.

-- Overall asset quality continued to be manageable in a challenging credit environment. Coverage ratio of the allowance for loan and lease losses to total loans improved to 1.35 percent at June 30, 2008 from 1.09 percent at June 30, 2007 and 1.22 percent at March 31, 2008.

-- PNC continued to maintain a strong capital position. The estimated Tier 1 risk-based capital ratio increased to 8.1 percent at June 30, 2008 compared with 7.7 percent at March 31, 2008.

CONSOLIDATED REVENUE REVIEW

Net interest income totaled $977 million for the quarter, an increase of 32 percent compared with $738 million for second quarter 2007 and an increase of 14 percent compared with $854 million for the linked quarter. The net interest margin in the second quarter of 2008 increased to 3.47 percent compared with 3.03 percent in the second quarter of 2007 and 3.09 percent in the first quarter of 2008. The increase in net interest income and the margin for both periods of comparison was primarily due to the benefit of declining interest rates on PNC's liability sensitive balance sheet that resulted in lower funding costs. Acquisitions also contributed to the growth in net interest income in both comparisons.

Noninterest income totaled $1.062 billion for the second quarter of 2008 compared with $975 million for the same quarter of 2007 and $967 million for the first quarter of 2008. Noninterest income increased $95 million, or 10 percent, compared with the linked quarter due to higher corporate service fees, service charges on deposits and fund servicing fees as well as consumer service fees apart from the impact of the sale of J.J.B. Hilliard, W. L. Lyons, LLC on March 31, 2008. Noninterest income for the second quarter of 2008 also included a net gain of $21 million on valuations of commercial mortgage loans and commitments held for sale, net of hedges, compared with a net loss of $177 million in the first quarter, trading income of $53 million primarily driven by customer trading activity compared with a loss of $76 million in the linked quarter mainly due to proprietary trading activity, and a gain of $80 million related to PNC's BlackRock LTIP shares obligation compared with a $40 million gain in the linked quarter. First quarter 2008 noninterest income included a gain of $114 million on the sale of Hilliard Lyons, a gain of $95 million on the partial share redemption of PNC's Visa ownership, and net gains on securities transactions of $41 million.

Noninterest income increased $87 million, or 9 percent, compared with the prior year second quarter. Fund servicing, asset management and corporate service fees as well as consumer service fees apart from the impact of the sale of Hilliard Lyons grew in the year over year comparison. The comparison was also impacted by the second quarter 2008 gain related to PNC's BlackRock LTIP shares obligation and higher trading results.

CONSOLIDATED EXPENSE REVIEW

Noninterest expense for the second quarter of 2008 was $1.115 billion compared with $1.040 billion in the prior year second quarter and $1.042 billion for the first quarter of 2008. The 7 percent increase in the linked quarter comparison was primarily due to the comparative impact of the first quarter 2008 reversal of $43 million of an indemnification obligation related to certain Visa litigation recorded in the fourth quarter of 2007 and the acquisition of Sterling Financial Corporation on April 4, 2008, partially offset by the impact of the sale of Hilliard Lyons. The 7 percent increase in noninterest expense compared with the second quarter of 2007 primarily resulted from investments in growth initiatives, including acquisitions, partially offset by the sale of Hilliard Lyons.

CONSOLIDATED BALANCE SHEET REVIEW

Total assets were $142.8 billion at June 30, 2008 compared with $125.7 billion at June 30, 2007 and $140.0 billion at March 31, 2008. The increase compared with June 30, 2007 was primarily due to growth in loans and securities along with the impact of acquisitions. The increase compared with the linked quarter end was attributable to acquisitions and higher securities partially offset by lower trading assets.

Average loans were $72.8 billion for the quarter and increased $9.3 billion, or 15 percent, compared with the year-earlier second quarter and $3.5 billion, or 5 percent, compared with the first quarter of 2008. The increase in average loans compared with the second quarter of 2007 was primarily a result of acquisitions and higher commercial loans. The increase compared with the linked quarter was mainly due to acquisitions, growth in commercial loans and the impact of the transfer of education loans previously held for sale to the loan portfolio during the first quarter of 2008.

Average securities available for sale for the second quarter of 2008 were $31.4 billion, an increase of $5.0 billion, or 19 percent, compared with the second quarter of 2007 and an increase of $1.5 billion, or 5 percent, compared with the first quarter of 2008. The increase in securities over the prior year second quarter was primarily due to the addition of commercial mortgage-backed and residential mortgage-backed securities as part of the company's balance sheet management activities. Securities available for sale increased by $2.5 billion at June 30, 2008 compared with March 31, 2008 primarily due to net securities purchases.

Average loans held for sale were $2.4 billion for the second quarter of 2008, a decrease of $.3 billion compared with the second quarter of 2007 and a decrease of $1.3 billion compared with the first quarter of 2008. The linked quarter decline was primarily due to the transfer of approximately $1.8 billion of education loans previously held for sale to the loan portfolio during the first quarter of 2008 and the securitization and sale of $.5 billion of commercial mortgage loans held for sale. The portfolio of commercial mortgage loans held for sale intended for securitization was $1.6 billion at June 30, 2008 compared with $2.1 billion at March 31, 2008.

Average deposits of $84.0 billion grew $5.8 billion, or 7 percent, compared with the second quarter of 2007 and $2.4 billion, or 3 percent, compared with the linked quarter. Average deposits increased from the prior year second quarter as a result of acquisitions and growth in money market and time deposits. In the linked quarter comparison, average deposits increased due to the Sterling acquisition and growth in retail money market deposits somewhat offset by a decrease in time deposits in foreign offices and a decline in legacy retail certificates of deposit.

Average borrowed funds for the second quarter of 2008 were $31.1 billion, an increase of $9.8 billion compared with the second quarter of 2007 and a decrease of $1.0 billion compared with the first quarter of 2008. The increase over second quarter 2007 was due to new borrowings to fund acquisitions and earning asset growth.

PNC's Tier 1 risk-based capital ratio was an estimated 8.1 percent at June 30, 2008 compared with 8.3 percent at June 30, 2007 and 7.7 percent at March 31, 2008. The decline in the ratio from June 30, 2007 was primarily due to the impact of acquisitions, which increased risk-weighted assets and goodwill, and organic balance sheet growth. The increase in the ratio from March 31, 2008 resulted mainly from retained earnings and the second quarter issuance of noncumulative preferred securities that qualified as Tier 1 capital, partially offset by the Sterling acquisition. PNC issued approximately 4.6 million shares of common stock and paid approximately $224 million in cash to Sterling shareholders at closing of the acquisition in April 2008. The company has not actively engaged in share repurchase activity during 2008. In April 2008, the second quarter dividend was increased by five percent, or three cents, to 66 cents a share. In July 2008, the PNC board of directors declared a third quarter common stock cash dividend of 66 cents a share.

ASSET QUALITY REVIEW

Overall asset quality at PNC performed as expected in the challenging credit environment and remained at a manageable level. The company continued to focus on maintaining a moderate risk profile. The provision for credit losses for the second quarter of 2008 was $186 million compared with $54 million in the second quarter of 2007 and $151 million in the first quarter of 2008. The increase in the provision compared with the linked quarter was primarily attributable to general credit quality migration, including residential real estate development exposure in the commercial real estate portfolio and related sectors, and growth in total credit exposure.

Net charge-offs for the second quarter of 2008 were $112 million, or .62 percent of average loans, compared with net charge-offs of $32 million, or .20 percent, for the second quarter of 2007 and net charge-offs of $98 million, or .57 percent, for the first quarter of 2008. The increases in net charge-offs were primarily due to commercial loans in the prior year second quarter comparison and commercial real estate and consumer loans in both periods of comparison.

The allowance for loan and lease losses to total loans improved to 1.35 percent at June 30, 2008 from 1.09 percent at June 30, 2007 and 1.22 percent at March 31, 2008.

Nonperforming assets at June 30, 2008 were $733 million, or 1.00 percent of total loans and foreclosed assets, compared with ratios of .40 percent at June 30, 2007 and .87 percent at March 31, 2008. Nonperforming assets increased $473 million compared with the balance a year ago and $118 million compared with March 31, 2008. The increases were primarily due to higher nonaccrual residential real estate development loans. Nonperforming assets to total assets were .51 percent at June 30, 2008 compared with .21 percent at June 30, 2007 and .44 percent at March 31, 2008. The allowance for loan and lease losses to nonperforming loans was 142 percent at June 30, 2008, 303 percent at June 30, 2007 and 151 percent at March 31, 2008.

Retail Banking earned $140 million for the quarter compared with $222 million for the year-ago quarter and $195 million for the first quarter of 2008. The decline from the prior year second quarter was driven by an increase in the provision for credit losses and lower net interest income. The decline from the linked quarter was primarily attributable to the first quarter after- tax gain of $62 million related to the Visa initial public offering. The declines in both period comparisons were partially offset by the net benefits from the Yardville and Sterling acquisitions.

Retail Banking overview:

-- Customer growth continued. Reported checking relationships increased by a net 23,000 since March 31, 2008.