UPDATE 3-PNC profit down 87 pct, misses view on bad loans

* CEO blames weak economy for credit losses

* Shares fall (Adds CEO and analyst comments, byline)

By Jonathan Stempel

NEW YORK, July 23 (Reuters) - PNC Financial Services Group Inc (PNC.N) said on Thursday that quarterly profit declined by a larger-than-expected 87 percent because of rising credit losses, a lower lending margin, and the cost of integrating National City Corp.

The Pittsburgh-based lender, the nation's seventh-largest bank, joined major rivals in reporting increases in troubled commercial, real estate and consumer loans and said it plans to build reserves for the rest of 2009.

"The economy is going to be tough" all year, Chief Executive James Rohr said on a conference call.

In afternoon trading, PNC shares were down $1.56, or 4.2 percent, at $35.85 on the New York Stock Exchange.

Second-quarter net income applicable to PNC shareholders fell to $65 million, or 14 cents per share, from $505 million, or $1.45 per share, a year earlier.

Excluding merger costs, profit was 34 cents per share. On that basis, analysts had expected 44 cents, according to Reuters Estimates.

Revenue nearly doubled to $3.99 billion; analysts had expected $3.68 billion. Net interest margin fell to 3.60 percent from the first quarter's 3.81 percent as PNC shed some higher-yielding but higher-risk loans.

Results included payments of $133 million to bolster a federal deposit insurance program, and $95 million of preferred stock dividends paid under the federal bank bailout program.

PNC set aside $1.09 billion for bad loans, up from $186 million a year earlier and $880 million in the first quarter.

Net charge-offs were $795 million, up 84 percent from the first quarter. About three-fifths of these were tied to National City, a Cleveland lender that struggled with mortgage losses before PNC bought it at year-end.

In light of PNC's loan mix, "we expect net charge-off pressures to continue gaining momentum as commercial credit comes under greater pressure," wrote Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

Rohr said he was "comfortable" with the range of analyst forecasts for second-half profitability.

Analysts on average have projected per-share profit of 60 cents in the third quarter and 48 cents in the fourth quarter.

PNC took $7.6 billion from the federal Troubled Asset Relief Program, and built a further $600 million buffer demanded by regulators.

Unlike many rivals, PNC has been in no hurry to repay its federal bailout money, saying it plans to use future earnings to help fund repayments. Not repaying the government also gives PNC more of a cushion in case credit deteriorates.

Quarterly profit fell 26 percent in consumer banking, 30 percent in corporate and investment banking, 64 percent in investment servicing and 76 percent in asset management.

Profit was $88 million in residential mortgages, a new segment. The bank also has a 31 percent stake in the money manager BlackRock Inc (BLK.N), which on Tuesday posted a $218 million quarterly profit.

PNC ended June with $279.8 billion of assets and has 2,606 branches, though it plans to divest 61 of these.

Through Wednesday, PNC shares were down 24 percent this year, versus an 18 percent drop in the KBW Bank Index .BKX. (Reporting by Jonathan Stempel; Editing by Derek Caney and Gerald E. McCormick)