That's the problem with throwing people a crumb of good news in this economy — everyone is starving for more.

Almost as soon as James Rohr said PNC Financial Services Group Inc. was squeezing efficiency improvements out of its National City Corp. acquisition at a faster clip than anticipated, he had to beat back analysts' questions as to whether he would raise the company's cost savings forecast.

His answer: not anytime soon.

Economic headwinds are not the only reason for PNC to play it safe. The Pittsburgh company still needs to convert its National City branches to the PNC brand name, a process slated to begin in November and continue into 2010.

"If that goes well, we may be back to you," Rohr, PNC's chairman and chief executive, told analysts Thursday on its earnings conference call. "You walk before you run."

At the end of the second quarter, cost savings from the transaction already were on pace for an annual gain of $500 million. The progress came ahead of plan and kept the company firmly on track to meet its goal of $1.2 billion in cost savings over the first two years of the combination, which was made official Dec. 31 when PNC completed its takeover of National City for more than $5.5 billion.

How to explain the better-than-expected pace of savings? It was not that PNC found efficiencies in places it had not considered. Rather, the company was able to implement the various facets of its integration plan faster than it had hoped.

For that, Rohr credits the lessons of "One PNC," a sweeping cost-cutting effort the company undertook several years ago as it sought greater efficiency from its own branches. With that experience already under their belts, PNC's staffers were able to get into National City's branches and move swiftly and effectively to wring out cost savings, he said.

Much of the savings have come in the form of head-count reductions and enhanced purchasing power with suppliers. The company also instituted a standard loan-approval process, centralized its pricing policies for loans and deposits and moved toward common compensation practices.

PNC has more than 2,600 branches, including 1,500 currently operating under the National City brand name. As part of the conditions of the merger, it will divest 61 branches this quarter.

Though the combination with National City has helped earnings for PNC, it has not been painless.

Loans in the Cleveland company's portfolio accounted for about 60% of the chargeoffs at PNC in the second quarter and a similar proportion of the increase in nonperforming loans as a percentage of total loans.

Higher credit costs cut deep into second-quarter earnings, dragging down the net income attributable to common shareholders to $65 million, from $460 million in the first quarter and $505 million in the second quarter of 2008.

PNC took nearly $800 million of net chargeoffs in the quarter, representing 1.9% of loans. That was up from the previous quarter's 1% ratio of chargeoffs to loans.

The company had established a $2.8 billion allowance for credit losses tied to National City when it completed the acquisition.

"As such, we should anticipate chargeoffs on this portfolio to continue until we approach this level of reserves," Chief Financial Officer Richard Johnson said on the conference call.

But investors looking for evidence of an economic recovery might find encouragement in the slowing rate of the buildup in PNC's nonperforming assets. The $1 billion increase, which brought total nonperforming assets to $4.5 billion, was smaller than the $1.3 billion increase reported in the first quarter.

"We believe the rate of growth for nonperformers may have peaked in the first quarter," Johnson said.

Revenue for the quarter was $3.99 billion, up from $3.87 billion in the first quarter and $2.04 billion in the year-earlier period. But the increase was no match for the effect of the increasing credit costs, along with $125 million of integration expenses tied to National City and a $133 million special assessment from the Federal Deposit Insurance Corp.

"While the quarter was very noisy, our initial sense is that the underlying trends seem solid, with good revenue growth doing its best to offset the challenging credit environment," Sandler O'Neill & Partners LP analyst Scott Siefers wrote in a note to clients. "Still, credit costs came in much higher than we had forecast."

Another area of concern for analysts was the net interest margin, which improved from 3.47% reported for last year's second quarter but contracted from 3.81% in the first quarter.

"NIM trends were weak, contracting 21 basis points to 3.6% versus our 3.75% expectation as PNC continues to de-lever its balance sheet, shedding higher-risk, higher-yielding loans," FBR Capital Markets analyst Paul J. Miller Jr. wrote in a report assessing the company's quarterly results.

A lower rate environment, in addition to a decline in commercial loan balances, were to blame, Johnson said.

"You've got absolute rates coming down a bit, so therefore the rates we would put on securities … would be at a lower rate than the loans that ran off" as they matured, Johnson explained. "We're starting to see some of our customers reducing utilization rates and so that's why you're seeing the loan balances coming down overall. So it's a little bit of de-risking, [and] a little bit of just simply lower rates."

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