PNC Financial Services Group Inc (PNC) 2002 Q2 法說會逐字稿

Good morning and welcome to the PNC Financial

Services Group conference call. All lines have been placed on

mute to prevent any background noise. After the speakers' remarks

there will be a question and answer session period. If you would

like to ask a question during this time, simply press star and the

No. 1 on your telephone key pad.

If you would like to withdraw your question, press star then the

number two on your telephone key pad. As a reminder this call is

being recorded.

Now I would like to turn the call over to the director of investor

relations Bill Callihan. Please go ahead, sir.

Good morning and welcome to our call.

Participating in the call today will be PNC's chairman, president

and chief executive officer, Jim Rohr, Bob (Honschild), chief

financial officer and Tom Woodford, PNC's chief risk officer.

Jim will begin today's call with some prepared remarks regarding

the regulatory agreements. Then Bob will review second quarter

results. And after that Jim and others will take questions.

The following comments contain forward-looking statements. Actual

results could differ due to a variety of factors, including those

described in these statements in today's releases and form 8-K and

our 2001 form 10-Q and other SEC reports.

These statements speak only as of July 18th, 2002. And PNC

undertakes no obligation to update them. Let me introduce Jim

Rohr.

Thank you, Bill and good morning. Thank you for

joining us. Today we'll address two distinct issues. It's a very

difficult day for us in the market, I see, so far. But hopefully

we can bring some clarity to the releases we have this morning on

this call. We will review the SEC and the bank regulatory

announcements and then we'll discuss our second quarter results.

Before I get into detail on these actions I want to put them in

context for you. As you recall, last year we were down sizing our

institutional loan portfolio and we did that by approximately 13

billion dollars.

And during the course of that, PNC transferred some of the loans

of venture capital investments to companies (inaudible) less than

four percent of the total portfolio that was sold. We intended

that the assets and liabilities of these companies would not be

reflected on the balance sheet, and we accounted for the

transactions in that way, in conjunction with our external auditor

with whom we were working with the entire time.

The FCC's order requires among other things that our accounting

treatment was incorrect and the assets should have remained on our

balance sheet. I'm disappointed by these events. This falls on

my watch, and I regret the impact it's had on our employees and

our investors. This is an issue that I sincerely do apologize

for. We're going to make sure this doesn't happen again.

But today's announcement really is about moving forward. We've

got these disclosures and number one I would like to tell you they

do not affect our ability to in any material way to perform for

our customer or to do business.

And that is clearly important. And secondly that none of these

arrangements we're announcing today require us to take any

material financial action. They're not financially oriented, as

you can tell, from the ratings. Let me take them one at a time.

As I mentioned, we reached closure in the SEC investigation that's

been ongoing since the restatement. And referring to the review

of the transfer of assets to companies formerly (IG.)

On the 29th of January of this year, we reflect the consolidation

of those entities in our financial statements, and the SEC found

accounting record keeping and disclosure violations in connection

with those transactions.

We neither admitted nor denied the SEC findings and the finding

and the remedy is that they have ordered us to refrain from future

violations of these securities laws. I think it's important to

note that there are no fines or monetary penalties that have been

levied and there's no need for any further financial restatements

related to this matter. With regards to the company, we've now

put the SEC matter behind us.

In addition, the federal reserve, as you're probably aware, was

working with the SEC on this investigation. They actually, the

SEC actually referred and complemented the federal reserve in

their press release today, and as a result of these things we

reached agreements with both the Federal Reserve of the Bank of

Cleveland and the office of the controller of the currency that

were announced today.

And we worked closely with the regulators throughout the process

to develop a board approved action plan which was designed to

address the issues identified by regulators. And the build of the

model (phonetic) financial control. An outlined number of these

items in the news release, the management changes that have taken

place and the actions we've already undertaken. And we will

continue to work diligently to implement those steps. I believe

Bill that they have those items listed. A lot of these items have

been, we've made some significant change over the first six

months of the year starting with the MacKenzie study going through

reorganizing risk management, (inaudible) risk officer, having

Deloitte work on internal controls, all of those things have been

basically accomplished. We've got more to do and we have a plan

to execute. Not the least of which is a new member of the

management team that we announced today, regulatory relations

obviously have not been particularly our strength and we named

Jack Wixted, formerly senior vice president of the federal reserve

bank of Chicago, the newly created position of chief regulatory

officer pending regulatory approval.

He's got a wealth of experience in this area and will coordinate

all of our regulatory compliance activities and I'm very, very

pleased and our bank regulators are pleased seeing Jack come on

board.

Clearly this whole thing is an opportunity to continue to further

enhance our approach to risk management and we're confident that

we're in a position to implement these measures.

I think when we look at that competence it's really illustrated by

our second quarter results. We have a very difficult environment.

The market has been difficult. The economy certainly has been

soft. But we're pleased with the solid results that we've

announced today. And it's building clearly on the success we

achieved in the first quarter.

Bob will provide you with more details on the quarter. I'd like

to share with you some highlights. WE reported second quarter

earnings of 320 million dollars with a dollar twelve per diluted

share. I'll be pleased to sign the certification of that,

probably well in advance of the required date in August. I want

to point out we didn't get there exactly how we thought we might

get there. We did benefit from net gains on the excess evaluation

adjustments related to the liquidation of the (held for sale)

portfolio which is being liquidated well in advance of what we had

anticipated before.

We also had higher credit costs and noninterest expense. We built

the reserve in the quarter. And we delivered very strong returns.

Return on equity of 21 percent, compared with 18 percent the same

time last year.

In addition, we've strengthened our overall balance sheet.

(Inaudible) of the ratio of 81 to 85 percent and frankly we have

one of the strongest liquidity positions I've seen in my years

here at the bank. I mentioned our (held for sale) portfolio.

Those who might recall we had anticipated that we would liquidate

that portfolio between 18 and 24 months. We reduced credit

exposure in this portfolio by approximately 60 percent in the

first six months of this year, well ahead of plan to two billion

dollars.

As I said, I'm pleased with these results. I'm not particularly

pleased with where we are given the circumstances surrounding the

reporting issue that I mentioned. I'm sure there will be many

questions about that. We'll be happy to entertain any and all of

those questions.

But I'm pleased with the quarterly results in light of the current

environment and I'd like to turn it over to Bob for more detail on

the financial.

Thank you, Jim. Overall results as Jim

mentioned were in line with our expectations and what continues to

be a challenging business and market environment.

The company continues to make good progress on efforts to

strengthen the risk profile of the balance sheet both in terms of

balance sheet compensation and the net gains from the liquidation

of health for sale loans as Jim just mentioned. The regional

community bank continued to grow. Core transaction deposits

(inaudible) turned in another strong performance for the quarter

with a 33 percent increase versus last year and PFTC had sales

successes for the quarter.

Net income for the quarter was 320 million dollars and diluted

earnings per share was a dollar and 12 cents.

The quarter benefited from stronger than anticipated gains on the

liquidation of (inaudible) for sale that was higher than

anticipated credit card and expenses. Return continued to be

strong at 21 percent on equity. And 1.93 percent on assets.

Looking at revenues, consistent with our expectations in the

current environment compared with the second quarter of last year,

spread revenues declined with the reduction in earning assets

while noninterest revenue for the quarter grew reflecting growth

and asset management revenue, the benefit of net gains from

resulting from the liquidation of loans held for sale and lower

venture capital losses in the current quarter versus the

comparable quarter last year.

Spread revenues or net interest income declined in PNC continued

to aggressively reduce lending exposure and down size the balance

sheet. Earning assets declined to 4.4 billion on average in the

comparison with the prior year quarter. And loans declined by 7.1

billion.

The impact of these declines was mitigated by a stronger margin in

our lower interest rate environment.

Net interest income is expected to be flat (inaudible) for the

remainder of the year as we continue to liquidate the held for

sale portfolio and reduce the level of lending assets on our

balance sheet combined with a somewhat narrower margin.

Noninterest income growth from the businesses was modest during

the quarter reflecting the sluggish economy and difficult capital

market conditions. Asset management revenues grew based on strong

performance in Blackrock that offset declines due to market

valuations and PNC advisors. Assets under management were 294

billion at quarter end and we're up 13 percent from 260 billion a

year ago.

On servicing revenues were up modestly during the quarter.

Although new business generation and retention efforts were strong

in the quarter, equity market conditions and the impact of

intensified competition will continue to be a challenge for this

business.

Consumer related reference were up modestly in the comparison with

the prior year quarter reflecting the benefit of continued growth

in core transaction deposits.

Ultimately the revenues continue to be effected by weak business

environment and capital markets. These revenues benefited by

strong performance and liquidating the held for sale portfolio and

higher treasury management fees that would have been down modestly

otherwise.

Equity management reflected loss of 13 million during the quarter,

which was an improvement from 30 million in losses in the second

quarter last year.

In the current environment, (inaudible) revenues expected to

decline somewhat in categories affected by market valuation and

corporate business activity while consumer categories are expected

to remain relatively stable.

The provision for credit losses was 89 million compared with 45

million in the second quarter of last year.

Charge offs for the quarter were 74 million and included 45

million related to a metals trading firm that was fully reserved

at the end of the first quarter.

The higher provision resulted in an increase in the allowance

primarily related to business credit and corporate banking

activities.

Nonperforming assets were 500 million in quarter end, up from 438

million at the end of the first quarter.

The increase was related to one large secured credit supported by

a vocational student loans that are privately ensured.

The insurer has instituted litigation in an attempt to rescind the

coverage. We intend to contest that action and believe that PNC

is entitled to payment in full.

While loan losses for the second half of the year currently are

expected to decline from this level, the economy and business

conditions are unpredictable and could cause credit costs to go

higher than the anticipated level.

Expenses for the quarter were 824 million reflecting higher

expenses to support growth at Blackrock PFPC and business credit

and some higher other expenses.

Expense levels for the remainder of the year will be impacted by

costs to support the initiatives that Jim mentioned to enhance the

infrastructure as well as higher deposit assessments and other

costs. We will continue to strive to aggressively manage our

revenue and expense relationship.

As I mentioned, the significant focus this year has been the

liquidation of (loan sale for sale.) Those efforts continue to go

well. The held for sale portfolio of institutional loans was

reduced to 1.1 billion at quarter end, a 60 percent reduction

since december 31st, well ahead of our expectation. As a result

of the efforts and attractive opportunities to invest on the

balance sheet, average earning assets for the quarter were

significantly below our expectations and are expected to decline

for the remainder of the year in the absence of a change in

business condition.

We will continue to aggressively evaluate our businesses with a

focus on developing value-added relationships and achieving our

desired risk profile. Transaction deposits. The focus of our

consumer business continue to grow during the quarter up five

percent on average compared with the prior year quarter reflecting

the continued success of our consumer marketing efforts.

As a result, loans to deposit ratio declined again this quarter to

85 percent and deposits of a source of funding increased to 67

percent of our total sources of funds. Capital ratios also

improved during the quarter reflecting a decline in the balance

sheet and the retention of earnings.

Those shares were repurchased under the share repurchase program

and we currently do not expect to repurchase shares through the

remainder of the year as we continue to strengthen our balance

sheet in this difficult environment.

The first half performance is satisfactory and the business has

made progress on a number of fronts, strong performance at

Blackrock and continued success in the regional community banks

deposit initiatives, for example. And we are optimistic that the

success in the first half on our balance sheet initiatives will

position us for improvements in credit costs and expenses in the

second half.

However, we believe that the economic and market environment will

continue to present challenges for at least the remainder of the

year and limited opportunities for revenue growth. Actual results

will be impacted by many factors, including the disposition of

loans held for sale and continued balance sheet management, market

conditions, the status of asset quality and the need to provide

for potential credit losses. The ability to generate revenue

growth and managing expenses while making investments to support

organizational business growth and risk management objectives.

For additional risks and other factors that may affect our future

results, see the risk factors, risk management and forward-looking

statements portion of our SEC filings.

Back to you Jim.

Thank you, Bob. Before taking your questions I'd

like to briefly provide you with an outlook for the remainder of

the year.

Bob just reviewed a whole series of things that obviously could be

impacted by a number of factors. Many of which you're very

familiar with. But as I mentioned the first half of the year we

clearly benefited from gains related to liquidation of our loans

held for sale and offset by the higher credit costs and expenses.

At this point I don't think we're going to be doing the - we

won't have those level of gains in the second half of the year.

But I also don't anticipate we will have the same credit costs and

expenses in the second half of the year. So we're looking forward

to a good second half of the year. We're not particularly

optimistic about the market or the economy quite frankly. And I

think there will be some challenges in that half.

We think that the balance sheet and the business mix that we have

clearly has the ability to give us the, deliver earnings in the

$2.10 $2.2 range for the second half of the year. We will have

some expenses, although I don't think that they'll be material

related to our formal agreements. And we're not going to have the

ability to be buying back stock in the second half of the year

because - although we have the ability to request that from the

regulators under the agreement I think we will probably not be

doing it for the rest of the year, which will have some impact on

our EPS.

But relatively speaking we believe that we will be able to have a

good second half of the year.

Now I'd like to open it up for questions. I'm sure there are

many.

This is Bill Callihan. Will you please give

our callers instructions for asking their questions

Yes, sir. At this time I would like to remind

everyone in order to ask a question please press star and then the

number one on your telephone key pad.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from (Mar Mortari) of Ohio Futures.

(Mar Mortari) from Ohio Futures. In your press

release you have comments about agreements with the regulators to

enhance the risk management process and financial controls. Is

that the transaction in question, did it occur without adequate

approval or did it occur while violating some pre-existing

internal controls that were already in place?

That's a fairly technical question, obviously. I

will tell you that the transactions that we entered into were

visible. We obviously renewed them with our outside - reviewed

them with our external auditor, with our external law firms and

there was an awareness in the company of the transactions. Really

it was what we found out that the regulators disagreed with the

reporting that gave rise to the tissue that we're bringing to

conclusion today, I believe, with the SEC, with the SEC document

that is in place now we're really drawing closure to this

transaction and moving forward, really.

I think the good news is that there's no fines or penalties that

are involved in the SEC conclusion with regards to the company.

I guess it sounds as if perhaps it went higher enough

up the food chain internally at PNC but perhaps the regulators

weren't made aware of it as it was in process or as it happened?

I really can't comment on the regulatory examination

process or the SEC findings because we didn't agree or deny with

the SEC findings. We just were in a position to accept the

consent decree to draw conclusion to this issue.

I guess I was really trying to - what are your

strengthening and what's the benefit of strengthening those risk

management processes and financial controls? I guess is really

what I was getting at.

That's a very good point. And I appreciate it. The

whole risk management process and the internal controls have been

changed significantly in the last five months.

In the press release - let me just put some color on it at least.

We brought MacKenzie in January. Obviously we had some regulatory

communication flaws. But we brought MacKenzie in to look at the

entire risk management program we had in the company. And in the

second quarter we implemented those organizational changes

(inaudible) chief regulatory officer, all of the credit policy

people and they'll report directly to Mike Hannan and we set up an

organizational structure under Tom in the risk management area

that really centralizes the function across the company.

We also added another committee to the board that had nothing to

do with the SEC filing but we added an operations risk and

technology committee at the board level so that the board is now

exactly lined up with the various risks that we have under Todd

Woodford. So we've implemented a number of those changes already.

Then at the same time we had the Deloitte and Touche internal

control review that I mentioned before. And now we're adding,

today we'll be adding Jack Wixted to enhance our regulatory

communication.

So I think the areas we're dealing with here really were

enhancements to where we were before. And I think frankly they

will benefit for the company in the long run. And the other item

is that when you look at the bank, when you look at the bank

regulatory agreements, those really relate to reviewing management

and how we coordinate the risk management operation within the

company. Which is exactly the same track we've been on for a

number of months now and I think really regulatory agreements are

right in line with where we want to take the company to become

best in class in risk management as well. So I think they're very

much in concert with where we're taking PNC.

The next question, please

Your next question comes from Mike (Holton) with

(inaudible).

Actually two quick questions. The first one would be

if you have the ability to request buy back, your stock is at 40

bucks, why wouldn't you make that request? And the second one

would be in the earnings press release, there's mention of a lot

of unusual gains, in fact I can't keep up with them all. Could

you all maybe ago great that and talk about how much you consider

unusual gains added to the earnings in the quarter?

First thing on the stock buy back, right now the anticipation

is that we wouldn't request that for the next six months.

However, the capital actually gets quite high over the course of

the next six months in our projections.

So we could actually in fact request that.

But our primary objective over the next six months is to really

kind of execute on the plans that were in place which I think will

satisfy, we're certainly committed to satisfying the regulators in

their formal agreements. And I think the issue there is related

to - the number one priority will be to be in total compliance

with those agreements and get those agreements lifted as soon as

possible.

With respect to the gains, the two items that are really

somewhat unique this quarter, the held for sale (inaudible) we

mentioned a number of times it's about 55 million result. So a

commercial - the interest we had in the commercial real estate

property which we sold during the quarter, which added about 14

million. Other than that, the items in there are, while we have

pointed them out for you, items that occur, the kinds of items

that occur typically on a recurring basis, from various operations

of the company.

We've been trying to sell that building for about

five years, our interest in the building.

Next question, please.

Your next question comes from Roger (inaudible) with

Morgan Stanley.

I understand it's difficult for the readers of the

federal reserve board memorandum to understand whether or not

these issues are broader than just the ratification of these

transactions or whether they're in fact largely limited to the

results of the transaction. So I don't know, when you look all

the things involved, capital and other rules, seems to be much

bigger than the transaction, but is this just the fact that the

transaction ramifications were fairly broad? When you go through

the board order it deals with a lot of topics in terms of risk

management that seem to go in a lot of different directions. But

when you think about that in transaction, of what is involved in

terms of subsidiaries, nonbank subsidiaries and things like that.

Is this all related to the transactions that were reversed?

There's a couple of things with regards to - I

think when you combine the items in the 8 K, there's a lot of

things that really aren't material to PNC that have to be

described there.

I think that probably the best way to perhaps the best way to

answer your question is that the document, the review of

management and the risk management policies and procedures that

the Fed document relates to are quite directly that. And I think

the document speaks well for itself.

I think they looked at - I think they looked at the two

restatements that we had in the first quarter. One created by

simply an accounting error. The other created by the issue that

the SEC document relates to. And I think the agreements, quite

frankly, point us to make sure that we're looking at all of our

risk management programs seriously, so that they are the

regulator, frankly, and they're looking for the safety and

soundness for the company. And I think that's exactly what they

mean to say and that's exactly what they mean for us to to do and

that's what we're going to do.

I think it is broader than the transaction, clearly. But I think

it speaks for itself and we've got on the board and ourselves are

very actively pursuing being in compliance with those agreements.

Next question, please

Your next question comes from (inaudible) Dixon with

Lehman Brothers.

Two things I'd like you to touch on. Talk about your

remaining telecom exposure, what the composition of the health for

sale piece is. And also talk about, if you would, this one

nonperformer that went bad and the outlook, the student loan thing

and the outlook for that, how long it's probably going to take to

settle that. And then any comments you can make on the shared

national credit exam.

Okay first one is our telecom portfolio (inaudible)

telecom portfolio. Tom Woodford.

In terms of the held for sale and the concentrations, we made

tremendous focus on the larger holdings, many of those were in the

telecom that we've eliminated. We still have right under 300

million dollars in the telecom. But I think more importantly when

you look at the entire remaining exposure in the asset held for

sale portfolio, 83 percent of it is in the pass grade. 40 percent

of it in total is investment grade, credit. So again it is a

portfolio that is not low quality credit. It's very diverse in

terms of the quality of the portfolio. We've been making

significant progress that Jim and Bob have mentioned. We

eliminated it and we've been eliminating both investment grade as well as noninvestment grade credit.

I don't think we have any large telecom exposure for

bankrupt companies at this point; is that right? .

I think that's right.

With respect to the question about the one credit we

described in the, responsible for the nonperforming increase, as

we indicated in our disclosures there's litigation involved in

that one and as always litigation can take some time to point out.

We obviously will aggressively pursue our claims there. As we

indicated we believe we're entitled to be paid in full and we are

going to aggressively pursue that.

Next question, please

Your next question comes from Mark (Mccoviak) with

John Levin.

Two questions. One is related to what you talked

about in the press release a little bit on the call on the changes

in some of the custodial relationships. And I was curious, given

the fact you kind of walked through the second half and given us

comfort on the two dollars, roughly, of earnings power, just

taking that forward a little bit, can you talk about further drill

down in the relationships that you talk about and where might be

the strength in some of the other businesses to offset perhaps the

weakness in what the competitive environment on the custodial

side. That's question one, just talking about earnings power.

Number two, I'm sure there's going to be speculation in the

marketplace given that some of the language in the 8-K related to

safety and soundness, with the regulators. Could you just touch

on the ability of the PNC bank to still dividend up to the holding

company and pay the dividends out to the shareholders. Some folks

look at it perhaps as support to the valuation in the stock.

First of all, the guidance we gave in the second of

the year was 210 to 220. Bob, do you want to make a comment?

With respect to the item you mentioned with regard to PFPC C

and the level of business, actually the declined in the custody

business you see there was due to the change in the product mix

with the customer. We actually picked up some additional revenues

from other products for that customer.

In terms of its overall impact on that business, that's not where

we make most of our money in that business. As you can tell from

the size of those custody numbers, we're not a large custody bank.

Most of our money in that bank would be transfer east and fund

accounting businesses so that would not have a, be expected to

have a significant impact on it.

And your last question with respect to the dividend capacity from

the bank to the holding company at the end of the quarter, that

would approximately 350 million dollars.

Just to clarify, the regulators are, there's no

reason the regulators are asking you to stop the dividend for

safety and soundness reasons?

No.

And then just going forward on the more of the

earnings power issue. Can we kind of look at that 220ish number

as kind of a even going past 2002, that you'd have comfort with?

I think it's too early to give guidance on that

right now.

Thanks.

Next question, please.

Your next question comes from (inaudible) Cassidy

with RBC capital markets.

Good morning. The question I have you touched upon

the gains which I think totaled about 69 million dollars pretax

that may be looked at as one time in nature. We have a tax effect

(inaudible) divide it by shares outstanding looks like it comes

out to about 16 cents per share, which if we back that a way from

the dollar 12 we come in with under a dollar for the quarter.

Were there expenses in this quarter that you view as one time in

nature or are we just going to see a dramatic decline in possibly

the loan loss provision in the second half of the year to get that

210, 220 number that you guys are referring to?

I think that's probably a good analysis of what the

second half of the year will look like what we anticipate. The

(inaudible) will not repeat I guess in the second of the year.

We're anticipating more credit quality and lower credit costs of

all our expenses.

Then one follow-up. Getting back to this agreement,

it's pretty broad as everybody has been referring to. Is there

any issues regarding the way the credit has been monitored or

credit quality is reviewed as part of this agreement?

I think there's no mention of asset quality in the

third agreement. There is mention of the review of asset quality

in the OCC agreement. The OCC does monitor, does regulate the

bank. And I think this is an item that we've been changing and

monitoring over time.

(Inaudible) the situation is one we don't find particularly

attractive and we get through that and dealt with that.

The asset quality pieces ever since we've been revamping and

changed Mike Hannah's role has centralized all the credit quality

we've been tempted to get out in front of credit and deal with it

more aggressively than we had in the past. If you look at what we

did with Hampton lane in the first quarter, we disclosed that. We

were very transparent about (inaudible) more so than - more so

than the industry at large we dealt with it and still had a very

good first quarter. This withstood the funding situation, stood

(inaudible) loan company. I think we're being as transparent as

we can be. We're dealing with it.

In the second quarter. We want to be in position so we have a

very aggressive asset quality group that's very transparent to the

marketplace. I think we're working very much in concert with the

regulators on that issue.

Thank you.

Next question, please

Your next question comes from (Vegas Hilda) with

Bear Sterns.

Thank you, good morning. Two topics. First is the

review you mention in your press release being conducted by the

board of directors of senior management. Could you tell us which

director or directors is leading that effort? Could you talk

about the timing of it? Could you talk about the scope of what

that group will look at and give us some sense of what kind of

consultant will be engaged? Is it MacKenzie, for example? And

then on PSPC, looks like if you adjust out the gain in this

quarter and the amortization a year ago, it looks like earnings at

PSPC went from 25 million down to eight million in the most recent

quarter on a two percent increase, two million increase in

revenue. Could you talk about whether that's a fair analysis and

what's going on in the business to produce that?

With regards to management review, I believe it's

fairly well documented in the documents, the Board has formed a

special economy. I don't know that we've disclosed that special

committee of the Board. But they will be hiring an outside

consultant. I think that will probably be disclosed next week if

it has been finalized. But they're all external directors. As

you know we only have two (inaudible) directors anyway. But

they're all external directors. They're on a special committee

and they'll be announcing I believe next week the hiring of a

consultant to pursue the review of management.

The (inaudible) agreement asks for the outside consultant, the OCC

does not, obviously the board will be using the consultant, there

a the OCC uses as well, reflection. Their intent is to get that

behind them in relatively short order. So I think you'll see an

aggressive approach to that management review.

Bob you had some answers to some other questions?

Sure you had a number of the factors that impacted PFPC in

this quarter as it related to the fee recognition item you saw

that was somewhat offset by some expense items during the quarter

of relocation of the facility, for example. And some other items.

But you as you do indicate, the earnings when you take into

account the change in goodwill because in that business we do have

the impact of goodwill amortization in the prior year from the ISG

acquisition, the earnings on that comparative basis would be down

which would reflect the challenges we see in that business, the

impact of the markets, principally on MABs and the intense

competition. We do point out we have a number of customer

successes in the quarter. Some of those are large customers where

we maintained our business. The biggest piece, however, over half

of those wins relates to new business. And will be some

technology and investment in staffing up front which will continue

to impact those numbers because as you know as you transfer that

business it takes, there's a lag between the time you make the

investments to support the business and when it does come on

board.

So we will see a bit of a variation there. But overall the

business had a pretty good quarter with the biggest impact being

the market impact in the down draft of the market.

Could you just indicate how much in on one time

expenses we should offset against that 13 million dollar gain?

My recollection, David, it's about two-thirds of it.

Next question, please

Your next question comes from (inaudible) with

Sonoma Capital.

Your line is open.

I think my question was answered. Thank you.

Next question.

Your next question comes from Mike (Maya) with

Prudential.

I just wanted some more clarification on the

expenses. In your opening comments you said expenses should be

higher for the rest of the year for Blackrock PFPC (inaudible)

initiatives and later on you said you thought expenses might

decline. Then separately I think you had a gain on a put option

of ten million. Are there any one time expenses that offset that?

Relative to your first question, what you're

referring to is the second quarter impact, what impact is of the

second quarter. That's the growth in Blackrock and PFCP and

business credit including the national bank of Canada transaction

coming on board that drove that.

With respect to business credit in particular and the benefit of

that put option, when we do have in there are the costs for

servicing the service portfolio which we are managing down as

we've indicated. In fact, we had a good quarter and that was

reflective in the put option valuation as well as some continued

integration costs related to that acquisition.

Next question.

Do you expect that put option gain to continue then

or does something else offset that?

To the extent we have continued success in bringing those

service to assets down the way we have, we would expect that

liability as you may recall was 112 million when it was initially

established. And with the passage of time, if we are successful

in continuing to bring that book down, there will be further

recognition of portions of that liability.

And lastly on expenses, higher deposit insurance is

it assumed in the 210 to 220 guidance in the second half.

Yes.

Next question

Robert (Smally) with HSBC.

Couple of questions. And I think that there's a bit

of confusion going through the 8-K and maybe you can help a number

of us out.

There are a number of dates in the 8-K that have requirements.

Could you give us a time line, a little bit of how and when things

are going to happen, what's been done already to comply with the

agreement, what's left and how you're going to report on that

going forward.

The regulatory agreements I don't believe we will be

having report, external reporting on our progress in terms of the

are meeting the goals and the deadlines of the regulatory

agreement.

Just as I would like to mention. We have a number of things we

have to do. Someone asked about asset quality and working with

the OCC. I mean we have a series of things, credit quality,

procedures and processes that we still have to complete that are

underway. We've got things we need to do.

We're committed to making those deadlines at this point in time.

I don't see any reason why we wouldn't.

What's the best way for those of us outside the

company to track that progress so we can report to respective

investors that in fact you're achieving the deadlines?

I think the issue really is probably (inaudible) we

continue to proceed and deliver strong investor results, deliver

investor returns, is the best way for you to be able to tell that

we're doing the right stuff. I think you will have an

announcement over the completion of the announcement of the

management board I think that will be a public statement because I

think there will be a public statement of the hiring of the

consultants. I think that will a public issue.

The rest of the items I believe will be relatively straightforward

between ourselves and the regulators. And those relationships are

typically confidential.

Next question, please.

Hello. And also somewhere in the document it says

that there are a number of things that you may have to ask, number

of activities that you'll have to ask approval to engage in on

merchant banking securities underwriting and insurance. Is this

really the big issue in terms of crimping earnings with respect to

this going forward or is there other things that -

That's a very good question. And Bob has some

clarification on really what that means to PNC or could mean to

PNC.

You put your finger on the three issues. All of those

activities were activities that we engaged in prior to the

evolution of the top financial holding company structure under

(inaudible) for us to continue to conduct those activities we may

have to revise the way we do this. For example, in our insurance

agency activities, we previously engaged those in a different form

and a subsidiary where we had an authority to do that under grant

which was simplified. We may simply have to go back and conduct

those activities in a manner similar to what we did previously.

Similar paradigm applies to the merchant banking activities and

the underwriting and dealing activities as well.

So some effort to reconfigure it but in terms of its materiality

of its impact there shouldn't be any.

Can you give us an idea.

Can you repeat that last comment.

I said the terms of the impact on the performance or

financial results of the company should not be a material impact.

Can you give us an idea what as a percentage of

revenues, for example, what those activities were? Just in a

rough range.

It's going to be five percent or less.

So it's - I think this has caused a lot of

consternation in the market, even away from the idea that the

agreement was announced.

I think that clarification there is important. Thanks.

Thank you.

Next question

Your next question comes from John McDonald with UBS

Warburg.

Good morning. I apologize if I don't understand this

correctly. Could you clarify where those restrictions show up. I

don't see it in the fed agreement. Is that in the OCC agreement?

I think John those are specified, the potential impacts are

specified at more length in the 8-K document that we filed

announcing the agreements.

I think what happens is that there are some legal

ramifications to the formal agreement that come along with the

(inaudible) agreement and those are reflected in the 8-K.

Because you have an agreement with the fed and the

OCC you have to change your practices and it's not stated in the

agreement with the regulators.

We may have to change our practices in time.

Thank you. Also, could Bob just give a little color

on, a little more precisely where you see credit losses for the

second half of the year.

Maybe what I'll do is put it again in the context John of

what I mentioned. In the first half we saw higher levels, over 80

million dollars in each of the first two quarters in what we had

anticipated. I think in this environment it's difficult to

predict. And based on what we currently see right now, we don't

see that kind of level for the second half. If that's not as

precise as you know ,I apologize.

Earlier in the year you talked about 45 to 55 basis

points. Is that still in the range that normalized losses should

be in terms for the second half.

I think those are possible outcomes, yes.

Next question

Comes from Jim (AGa) with Millennium Partners.

The question has been answered, thank you.

Next question, please

Your next question comes from Ronald (Tibell) with

Lassard Asset Management.

Simple question, do you have approval to pay

dividends from the bank up to the holding company? Or do you

anticipate that you might have to have approval?

The payment of dividends from the bank to the holding company

is subject to statutory limitation. As I indicated earlier, under

the calculation that is, that you do to determine the capacity to

pay dividends from the bank to the holding company without prior

regulatory approval is one you do every quarter. At the end of

the first quarter that capacity for PNC's bank NA was about 350

million dollars.

Secondly, who -

At the end of second quarter.

Who at senior management is being held accountable

for the disasters this year?

I think we made a number of changes in the

management structure. So far in terms of risk management. We

changed a number of the responsibilities. And I think the whole

idea I think is to be able to build a management team that really

develops the best in class in a number of areas. I think we've

added a good group of people and restructured it with the company

some. I think you'll continue to see changes where we can add

value.

Should we expect to see changes in the board or

management going forward.

We have a management review that will be going on

externally. But I think whatever whenever we have the opportunity

to improve the management team for the best interests of the

shareholder that's exactly what we're going to do.

Look forward to seeing it.

Next question, please

Your next question comes from mark Lynch with

Wellington management.

Two questions. One financial one, the other

regulatory.

The financial question is, is my math correct that long losses in

the second quarter without the metal trading company were only 29

million? The regulatory question: Is the reason not to ask for

permission to buy back stock that you think you won't get it

because they don't feel they owe you any favors at the moment?

Your calculation on the first one is exactly correct.

Secondly, I think I think the regulatory program

really isn't about failure. Failures. I think the regulators and

their agreements really have asked us for some qualitative things,

reviews to take place, which I don't disagree with, and quite

frankly embrace. And I think at the end of the day we'll be a

better company. Doesn't mean I'm happy to have them. I would

rather not. I would rather not have had this whole circumstance

take place, but we have and I think the issue is we have to make

the best of it. We have to be a better company as a result of it.

And to the extent we comply with those agreements that they, that

the regulators have put in place I think it will be a better

company for us. With regards to the dividend, I think their

objective really right now is to be totally in compliance with

those agreements and then do whatever we can to achieve that and

then come back and continually be looking at the capital levels,

make sure they're not inappropriate. But to then come back to the

capital level after we've done what we need to do for the

agreements.

To clarify the cease and desist is only the SEC and

it's an agreement with the bank regulators, which (inaudible)

which is (inaudible) cease and desist.

The cease and desist order is an SEC finding.

That's different than - if I understand it I'm not an attorney,

but I believe that's what they do. I think that's the form it

takes. We have not agreed nor denied their findings. We have

simply accepted their order in order to put this behind the

company. From PNC's point of view we've been able to put the SEC

investigation behind us.

The two agreements with the fed and the OCC are formal agreements

and not cease and desist orders

Next question comes from (inaudible) (ocline) with

(inaudible) O'Neal.

One question has been answered. But in the second

half of your guidance, are there any gains that you're going to

rely on for the 210 to 220? And also the size of the student loan

I just missed that when you went over it before.

I think that Jim indicated in his comments that in our

outlook for the second half we don't see the same kind of - we're

not anticipating the same kinds of gains that we saw obviously in

the first half and likewise we're optimistic here that we.Won't

see the same kind of - likewise we're optimistic here that we

won't see the same kind of impact on credit costs and expenses

that we saw as we try and aggressively manage those.

I'm just referring maybe to securities gains or

things like that to try to get to the numbers. So it should be

clean results.

Yeah, you always have some of those kinds of

things. But in terms relative to the size again that we're

talking about this quarter where we had 55 million held in sale

for gains we're not counting that level of activity.

Student loan exposure.

Student loan exposure is guaranteed by quality

insurance company. We don't expect at this time to have any loss

from that credit.

How big is the credit?

62 million.

Next question, please

Next question from Ted (Paluzak) with Deutsche Asset

Management. Just a different variant on the dividend question.

Your comments on capacity and the capital levels and the

(inaudible), could you comment on the board's willingness to

maintain the dividend at the 38 cent level.

At this point I can't comment on behalf of the board

but to my knowledge the board hasn't had any questions about

maintaining the dividend. We just declared the dividend.

(Inaudible) based on the results we see and what we're expecting

we don't see any reason that we wouldn't plan to recommend that to

the board.

Thank you very much.

Next question, please

Your next question comes from Sally (Poet) Davis

with Goldman Sachs asset management.

Two questions. One, wow, this is an unpleasant 00:59:08 message to deliver. It's probably going to be more unpleasant to 00:59:12 read it tomorrow in the newspapers. 00:59:14 What are you doing internally when you get off this call to talk 00:59:18 to your employees about what to say to your customers, what 00:59:21 message are you empowering them to tell the customers because both 00:59:58 your commerce both corporate to a lesser extent retail won't be

thrilled to read this. Second, can you give us an update to the

extent you can on your discussion with (Wamoo) and have you

provided any two-year litigation reserve in that respect?

Those are very good questions, Sally. We've had all

of our employees received an e-mail this morning. All of our

employees received a voice mail this morning. All of our managers

and customer contact people now have in their hands talking points

around this issue. We have a concentration point for feedback

from customers and employees. I had a meeting this morning with

all the senior managers. We will be doing a debriefing this

afternoon and this evening at two different levels to find out

what levels of communication, what items are coming back that are

particularly of interest.

Then we have - I think we'll have the press issue tomorrow that

we have to deal with and then we've scheduled a satellite

broadcast early Monday morning so that we can collect the data

from the media over the weekend and then rebroadcast to about

4,000 employees on Monday morning, along with there will be

another voice mail and e-mail going to the employees. With

enhanced messaging depending on what kind of feedback we get

today, tomorrow and over the weekend. So we have a very

aggressive communication program. All of us have assignments to

pro actively call customers on the phone and we're very active in

doing that. As well, we have senior managers in the company

visiting all of our significant employee concentration, so there's

openness in conversation about this issue.

I think, quite frankly, the conversation we had this morning, I

think we'll see what happens with the media. We're not expecting

anything but the worst. That having been said, the company is a

very well capitalized company, more liquid than we ever have been

before just reported a solid quarter. There's no restrictions in

these agreements to keep us from doing business with the

customers, quite frankly. I think that was never the intent of

the regulators anyway and the positive thing is we put the SEC

investigation behind us in regards to the company. So I think

those are the messages that we've got to get out to the employees

and quite frankly our customer satisfaction numbers are at an all

time high. Our employee satisfaction numbers prior to today were

at an all time high. And our sales across the various businesses

were very consistently up from where we were a year ago. So

there's a lot of positive things that have been going on which

allowed us to deliver this quarter in not such a hot economic

growth environment so we need to make sure that this thing turns

into a bump in the road and not a ditch. We've got to make sure

we've got to work hard to make sure that our employees, who are -

that is our business. There are 24,000 employees, people who make

it happen. And we've got to get over this.

Good news they haven't been involved in this for the last six

months. They've been taking care of the customer.

With respect to the (inaudible) situation that's in

litigation. The litigation involves both the items of underclaim

and the next step in that process will be a determination of the

venue that the issues there will be decided in, the contract that

we had with (Wamwoo) called for that resolution to be in

arbitration. Wall into has taken it to court. In August I

believe is the next step in that process to determine which venue

that issue will be resolved in. And as we have indicated in our

disclosures, the amount that we have, (inaudible) that we think

we're entitled to, we think we have a portion of that reserved.

Next question, please.

Clarence (inaudible) with Montgomery Scott.

Would you comment on what's going on trend wise for

asset quality in market street funding? I do want to get clear on

this draw down, if this is anything new.

And what's going on with credit quality in the corporate loan book

and in business credit? Thanks.

In terms of market share we've done a strategic review of the

relationship and we're in the process of actually shifting how we

do business in the market street arena in terms of which customers

will be in the process of exiting many of the nonstrategic

relationships over the next several months,.

Just in the last quarter we reduced our liquidity by over 10

percent, and we've reduced our (inaudible) or (inaudible) by

almost 20 percent.

We will continue to review each of the underlying credits and work

them very closely with that given on the exposure that's there.

In terms of the overall credit quality, we continue to make

progress. I think you've heard a lot of the statistics. Given

that we do have a difficult economic environment, we have seen a

very positive thing. Jim and Bob have both mentioned some of the

progress on the held for sale access. We've made significant

progress in reducing our watch list by over 15 percent. The other

thing that's important in our watch list, if you look at the top

20, it is no large exposures. The largest one is 100 million

dollars in fact just slightly over 75. When you get to number 20

you're already down to 25 million dollars.

We have reduced significant exposures in our portfolio and

continue to make strides in that direction. And we continue to

see positive trends in terms of improving the credit quality based

on the new business we're bringing in and continuing to reduce

exposures on the business we already have.

We'll take one last question

Your next question comes from Dennis (Laplant) with

Fox-Pitt (Kelson).

On the national bank of Canada, I just want to make

sure I understand the size of the amount of the assets you're down

to in terms of what you're servicing right now. I have a

follow-up from there.

As you know, Dennis, that started out at around 650 million

dollars. Over half of that approximately half of that has now

been liquidated.

In terms of the reserves that you have set aside, is

that basically the put option you have?

The put option liability was designed, we tried to articulate

in the disclosures, which are somewhat complex about that

transaction, that that is what would be necessary to bring those

assets on a forward basis since it is a put option. Those assets

to market, if they come on to our balance sheet at the end of

term.

That liability includes, as you know, a lot of factors including

time value of money and those kind of things over the term of the

option. And so as we saw in the first two quarters, is those

assets come down and with the passage of time a portion of that

put option liability has been reversed.

Why would you try to reverse any of that until you

are closer to the end? Because you have until, as I recall,

middle of 2003 to get those off and cleaned up before they come

back on balance sheet, correct?

Yes that's essentially market value determination that we're

required to mark once a quarter. It's an valuation that's done by

an independent consultant. So we are bound to mark that to market

in accordance with our procedure.

Good.

Let me wrap up.

Thank you for joining us today. As you heard we've announced a

number of important regulatory matters here and also I think a

solid second quarter and a good first half. If I could just

quickly point out from our point of view, we're putting the SEC

investigation behind us in regards to PNC. We consider that to be

a positive development in this announcement.

The two regulatory plans that we have with our bank regulators we

believe really will further enhance our internal controls and our

risk management processes. As I mentioned a number of times we've

begun to implement a whole series of things. We've got more to

do. I feel confident we'll be able to do that. In the meantime

the company remains strong as you see in the second quarter

results. We're very well capitalized excellent liquidity we

deliver excellent returns in the quarter. The first half of our

number of business, particularly on the consumer side, Blackrock,

posted strong sales in customer satisfaction is the highest it's

been in five years. So there's a number of very positive things

happening. We've also got a challenging environment going forward

in the second half of the year. But we're fairly confident that

we can deliver good solid second half of the year as well.

So thank you very much. We're going to go back to paying

attention to the customers now. But bill and myself and Bob will

be around all afternoon by the telephones. As Sally said the most

important thing today we'll be talking to yourselves and customers

and employees all day long. If you would like, if you have

further questions, please call us

This conclude's today's call. Thank you

This conclude's today's PNC Financial Services Group

conference call. You may now disconnect.