摩根大通 (JPM) 2003 Q2 法說會逐字稿

Good day, everyone and welcome to the Bank One second quarter 2003 earnings results conference call.

Today's program is being recorded.

At this time for opening remarks I'd like to turn the conference over to the Chief Financial Officer, Miss Heidi Miller.

Go ahead, ma'am.

Good afternoon and thanks for joining us.

Before I begin, I'd like to refer you to our forward-looking statements in our 2002 10K.

With that, we are certainly pleased to be able to report per-share earnings of 75 cents, which compare quite favorably to last year, up over 10% with ROEs up 15% with an extremely strong capital base, one of the best in the industry.

These results are real operating results.

Net security gains are mostly offset with losses.

And reserving actions also mostly offset each other.

The strength of our balance sheet and the quality of earnings enabled us to extend our buyback program and announce a dividend increase in the quarter, which Jamie will talk about in a moment.

Before I specifically address line of business results, let me make sure that everyone noted that we have moved certain non-core retail businesses to the corporate segment.

About $12 billion of transferred loans and leases against which we put up an additional $85 million of reserves.

Since we ceased origination of wholesale mortgages and brokerage home equity and auto lease, we felt we could give greater clarity to our ongoing retail business by separating out these portfolios.

We've provided lots of detail on performance here so you can foot back to your models easily and first quarter '02 numbers will be available on our web site restated for this movement and you should be able to get that in a day or so.

In the future, we're going to analyze and decide how best to dispose of or run off the portfolios.

I expect over time that this level of disclosure, once the decisions are made, will collapse disclosures here to one line and it will be a nonevent for us.

With that, let me turn to retail.

Where I can now speak to all of the great things that are happening here with -- with great clarity.

Also, line of business comparisons will exclude restructuring reserve releases in last year's numbers, so, the comparisons will be with those reversals excluded.

Retail net was up 4% to $373 million.

Down from first quarter when results included the seasonal tax refund business.

Revenue was up 3% to $1.5 billion.

NII grossed a 3%, benefited from growth and home equity loans from 16 to $23 billion, an overall total average loans increased five and a half billion to $53 billion with credit stable.

Core deposits also grew about $5 billion to $69 billion, more than offsetting a decline in time deposits.

Non-interest income of $461 million was also up, higher fees, debit card revenue and investment sales all positive.

We continue to open new DDAs, 103,000 over first quarter, and 240,000 over last year and we continue to open new branches and refurbish old ones, upgrade ATMs and add relationship bankers of 490, all of which will enhance distribution.

This was across-the-board a great story, I think we have great momentum in retail both on the banking and lending side and we are very proud of all the hard work that our partners in retail have put forward to let us announce these results.

On the commercial banking side, net income was also up -- up 73% to $249 million.

This includes the mark-to-market loss in the credit derivative hedge portfolio and a reduction in the credit loss allowance, but even excluding these items, net income would be $280 million, an increase of $154 million.

Clearly, credit quality helped, net charge-off ratio was .72, down from 1.64 last year.

As gross commercial charge-offs were lower.

We benefited from better than normal middle market recoveries.

Even with the $94 million reduction in the allowance, the $3 billion allowance is a percentage of loans remained the same as in the first quarter, a healthy 5.18%.

In addition to credit, we had record Capital Markets revenues, up 29% to $253 million.

Fixed income continued to grow and strength in a grade asset-backed and interest rate derivative products.

This helped offset declining loan balances, which were down 13% year-over-year to $58 billion and deposit margin compression.

Turning now to cards.

The story here is still one of competitive pressures and pricing against last year.

We're happy to say that we think margins have stabilized, certainly they've stabilized over first quarter.

Net income decreased year-over-year to $279 million, but it was up 13% from first quarter.

NII was down to $1.5 billion.

The result of lower competitive yield, but mitigated by higher managed loan balances.

End of period loans increased seven and a half billion, or 11% from last year to $74 billion.

In the quarter, we saw higher charge volumes to $40.5 billion and interchange revenue.

Credit improved, as well, from 5.62% to 5.21%.

This improvement was aided by higher than normal recoveries.

We're watching the 30-day delinquency ratio which increased slightly year-over-year and we expect over the course of the year to see some deterioration in credit.

In the quarter, we also benefited from an increase in securitization activity but we continue to announce new partnerships, like the Sony and Volkswagen relationships, entering new old ones.

Finally, IMG.

Net income here was down 70% to $85 million.

While assets under management did increase $25 billion to $171 billion, there was a mix shift from equities to fixed income in money markets.

Average deposits also increased $1.5 billion, which helped offset the compression on deposit spreads.

We previously announced the acquisition, which we continue to expect to close in the third quarter, with should have zero impact for the remaining of the year, but we expect to get good returns next year.

So, overall, a good, clean quarter, truly clear and clean operating results and with that I turn it over to Jamie.

Heidi, thank you very much.

Let me highlight a few things that Heidi said and cover a couple of other areas.

Retail -- I mean, you know, growth across-the-board, okay, deposits, DDAs, branches, small business loans, cross sell ratios, home equity, debit cards, which we feel pretty good about, and also the drivers of future growth, i.e. service, better marking, more sales people, more hours, so, this is some comfort that that will continue.

Large corporate Capital Markets, I don't think we could -- we could feel better about credit getting better and capitol mortgage revenues being up.

You know, middle market, obviously we're kind of trying to get to where we want to be in credit, though, probably at the expense a little bit of loan growth and we hope to reignite that.

In credit card, a lot of good underlying drivers, i.e. loan volumes up 11% year-over-year.

Spend is up 5% year-over-year and 6% to the quarter, to the second quarter seasonally a little bit stronger.

Service levels better, attrition is better, though the negative here was the compression margin and you kind of saw it in this quarter and our expectation is it's pretty much over so that hopefully the underlying numbers will start to drive the growth with the one caveat that, you know, early signs of the credit will deteriorate next quarter from this quarter, but we don't see it as a massive trend, just a little bit.

And asset management, we had real growth, the real underlying growth has been good in terms of accounts, institutional, third party, retail, private client and assets, those, obviously, some spread compression, mostly due to the mix of business to fixed income.

So, we're getting happy with that.

Heidi mentioned kind of the transferred portfolio, we're coming up with a nice name for it, it is now in corporate.

I will tell you, we're a couple more quarters, one day it will be gone.

You will never hear about it again.

Until then, we make all the disclosures necessary to make you feel very comfortable about it.

But if you look at the consumer loss rates in the stuff that's continuing, the stuff we do directly, 85 basis points, that's kind of where it should be, I think it should be a little bit better than that, so, the loss rates in the transfer stuff is in the 2.5%, so, we're breaking out and giving you more information to look at it that way.

We increased our dividend 19%.

We look at that as a -- when we did that with the board, is that's a long-term -- when you start increasing dividends, you want to do it every year, you don't want to stop.

It is a sign of our belief or strength to increase it over the next 20 years, not any one particular quarter.

It with a modest increase relative to others, that's noted, but again, we're getting our act together here.

I think it's appropriate that we be at the slight lower to payout range until we're more comfortable going forward.

Stock buyback plan, I was watching CNBC this morning, they mentioned the $3 billion stock buyback plan and someone said, yeah, but people announce that stuff and never do it.

I want to point out we spent the first $2 billion, we're very happy we did.

We think it's a great investment for shareholders and we're not going to tell people how we spend the money, but it's there.

I look at a stock buyback as a much more powerful weapon for shareholders.

You get to decide when and how much, including zero, if you think you can use it better.

So, depending what happens to our stock price, our retention of earnings, our growth, our investment prospects, this allows to us make one of the most important decisions you make, which is the capital allocation decision, that's why we have it there.

We use it as we see appropriate and hopefully will do it appropriately.

Did you mention 1046?

I don't think you did.

Effective July 1st, we will add $40 billion to the balance sheet.

Current expectations have no impact on tier 1 capital.

And, you know, Heidi toyed with a few numbers, we did the dividend, buyback stock and then 1046, you know, our capital numbers are so strong they barely dented.

So, it kind of shows you the retention to capital though hopefully accelerated growth will start to use up more of the capital over time.

I think she did mention kind of capital gains, coming out of treasury portfolio and our merchant banking private equity portfolios, offset and derivative losses.

I want to reiterate again, the derivative losses are volatile but should basically be, you know, zero or a small negative as you head to your book.

The other side, eventually we're entitled to a real return to the investment.

So, not having any of it go through isn't giving us a return on that.

We will talk about that more forward.

And the assets on the books are very clean.

The chances of gains are higher than the chances of losses in any private equity investing you can't be totally sure.

The interest rate exposure, the one point in the 10K, the earnings at risk, if the curve goes up 100 basis points, across the curve it will be 150. 150 to 200.

Kind of same range as last quarter.

Last quarter it was 250, but there's generally the same direction.

Again, you know, we had some people write last time making an interest rate bet.

We're looking at is we want to protect ourselves against a wide variety of potentially increased rates with different slopes to the yield curve and that we are protecting ourselves for that, not completely.

You can do your own scenarios, that's what we're doing, minimizing risk, not maximizing risk.

At the one point it looks like more.

Our outlook for next quarter and then we will open it up to comments and questions.

We feel pretty good about the company, there are three things I think you might have heard us mention, probably four that will go a little bit against us.

One is -- and we've already previously announced it, debit card settlement, we have $15 million a quarter.

The credit card loss will be a little bit higher.

Remember, we have some visibility on that, but the little bit higher.

The middle market, while credit is getting great, losses were 52 basis points, very good recoveries, we really shouldn't have expectations of those kind of recoveries so we expect slightly higher losses next quarter.

And you may not expect the same kind of number or the same kind of markets.

So, a couple of negatives, hopefully we will get the positives, so, next quarter should be a lot like this one, unlikely to be better.

And -- and last but not least, we had a management change in credit card.

Phil Heesley will be leaving to pursue other opportunities and I think he's done a terrific job for us for the time he was here, creative and innovative.

We've won a lot of things and getting better.

We wish him the best in his future endeavors but we're extremely fortunate to have Bill Campbell here, he's spent a couple of years -- call him a consultant, but that's almost an unfair name, part of the management team, paid as a consultant, but part of the management team.

You know, he's a first-class individual, a first-class manager, the world-class city credit card business reported to him for years, he knows the credit card business, he knows ours, he's spent an awful lot of time down there with Phil Heesley helping.

He knows all the people there.

It should be an easy transition with no dramatic changes or anything.

Thank you, if you have a question, signal by pressing start 1 on your touch-tone phone.

If you're using a speaker phone, turn off the mute function so the signal reach reaches our equipment.

We will take our first question from John McDonald with UBS.

Hi, Jamie.

I was wondering if you had an update on the retention of your credit card customers that are being repriced on what started about a year ago?

Yes, you know, again, I just put that one point up.

That was not the pricing issue.

The teaser rate, promo rates, the extent of balance sheet, et cetera, that's not why we had the margin compression.

We had the margin compression from, I think we did too much depressing for the current customers and not proper repricing of customers, to deteriorating credit, et cetera.

To answer your question directly, it's about what we expect so far, you know, the people that we've put on that we've retained at kind of the rate, the volume and the rate that we expect, but it is a little early for that.

Okay, and the compression you saw over the past couple of quarters was not due to a greater percentage of balances?

No, very little of it.

Mostly due to what I said about depricing, good customers and not repricing bad customers and so, you know, we had put in, you know, kind of algorithms, mostly in the telephone centers, a little rough and crude and did too much before getting on top of it.

Now we're still doing it in a more proper way.

If a customer has a complaint, you give them something and on the flip side should raise the prices on customers that are bad credits, et cetera.

It's mostly stopped.

It is still a competitive business and that is another major factor.

Okay.

We are doing less marketing for the new customer stuff at very aggressive rates we still do it.

We're closely tracking what our competitors do.

Remember one thing in any business, you don't want to adverse selection.

If you don't have a good offer out there, you tend to get the lesser credits, not the better one.

You have to be very careful.

Okay, so you pursue a low rate and a high line strategy to get positive selection?

Yes, on average the answer is yes, but averages don't really matter.

The way we look at 23 different segments and look at different FICOes in the segment.

It's different for each one.

We have more probably prime and superprime than most of the people you compare us with.

And a quick follow-up on the credit loss.

The forecast for a slightly higher card loss, is that delinquency or bankruptcy driven?

First of all, we had a good recovery quarter, which we don't expect to continue.

That's a timing difference when you do things, but I think it was seen the bankruptcies more predictable and pretty steady.

The other stuff had a higher roll rate to bankruptcy, to charge-off.

Okay, thanks.

And I can't tell you, bankruptcies alone, I think the industry is up 9%, we're down 5%.

And we have more accounts.

So, it's really the other stuff, the roll rates are a little bit worse.

I don't know what everyone is seeing in that kind of category.

Do you know what percentage of losses are due to bankruptcies for you guys, 35, 40%?

On average, yeah.

Okay.

Thanks.

And moving next to Mike Mayo with Prudential.

Hi.

Hey, Mike.

NPA sales during the quarter, did you sell any?

Did we?

We -- but we also, you know, do you have that number?

Just take that -- I think we disclosed exactfully our numbers how much.

Very little.

We wrote off most.

Okay.

But Mike, the real question to you, and there's the schedule, I --

There is a schedule in the tables, Mike, the credit quality page, showing the loan sales and where it came from.

And the charge-offs from that and the sales themselves.

But I would tell you year-over-year, MPA is coming down pretty quickly.

It leveled off in middle market this quarter, but we feel pretty good about it.

And the credit is getting good shape.

I might have missed it, what page is that on?

40.

Okay.

I will look it up here again.

And then separately, the bigger question, at least for me today, Phil leaving.

Yep.

It was a little bit of a surprise.

You had an onsite conference a few months ago and talked about the competitive pressures, credit quality not being quite as good.

At least from the outside is looks as though maybe he's leaving because things aren't going as well as you'd like them to go, so, if you could just address that and say, you know, maybe where is he going, for example?

You have to ask Phil that.

He's going to pursue his own opportunities.

I think he's prepared to answer the question.

It has absolutely nothing to do with expectations of business and stuff like that, okay?

You know, we have issues in all of our businesses, it doesn't mean management leaves for any cause.

So, it's got nothing to do with that.

We expect credit card to do well.

You know, to hopefully do better next quarter, in the fourth quarter, than in the second or first quarter.

So, and I know, you know, no matter what I do or say, you're going to see the shadows on the wall and what happened, you're barking up the wrong tree.

Okay.

That's fine.

I mean...

Okay.

Moving on to David Hilder with Bear Stearns.

Good afternoon.

Hi, David.

First, Jamie or Heidi, if you could talk about the release of reserves on the commercial side, you know, one, do you think that's something we will see more of in the next couple of quarters?

And two, could you talk about any of the metrics that you use in arriving at that?

Yeah.

I have a follow-up minor question.

First of all, we do all of the analysis metrics, extras, why, just expect a loss, it looks like collateral, we do all of that.

The fact is problem loans, MPAs are down and the loan balances are down, so, expected loss and stress testing has indicated lower levels, that's where the 85 comes from.

And, you know, -- or, you know, 95.

I'm sorry.

That's where the 95 comes from.

And we -- remember, we also added 85 to the transfer portfolio for the same basic reasons.

You look at all the same kind of stuff and things like that, you know, I would love to, you know, I've always said this, but not directly analytically, but kind of to grow into the reserves, you know, as we get better and better in credit and, you know, stress testing and all the results show that we may need less reserves, we will have to -- you know, take the reserves down.

That's what we have to do.

I can't say it's not going to happen.

I prefer we grow into them.

Okay.

And -- and note, we will always tell you, we don't expect any of you to look at just broad net take downs and reserves and real operating earnings.

We know you're looking, so, nobody is trying to pull a fast one on any of this.

So, the reserves, commercial, are over 5% in -- and -- and now they're 200 times, almost 200% of MPAs, in consumer, 1.28%.

Almost 100% of MPAs and for more than 100% of annualized charge-offs.

So, we feel really good about reserves.

Okay.

And I would love to make the statement for the rest of my life.

I hope you can, certainly.

Being more than adequate to me and we appreciate the disclosure.

One other detailed question.

You mentioned the impact of the debit card repricing was $15 million per quarter, my memory is that that kicks in August 1.

Is that --

Yes.

So, that's $15 million for the August and December, then going up a little bit.

I made a mistake, it's $15 million a quarter, so, two months affect in the third quarter and then on January 1, which is supposed to happen and what is happening is that new rates, debit card rates are being negotiated with all the vendors.

I don't know what the number will be.

I think a good number to use, the same $60 as a run rate.

Okay, great, thanks very much and good quarter.

Thank you.

As a reminder, it's star 1 for any questions at this time.

We'll move on to Steven Wharton with Loomis Sayles.

Hi, Jamie, Heidi.

Hi.

I had a quick question, I was trying to get a better understanding of your capital position.

You stated on several occasion that's you feel you have ample capital.

The tangible common and tangible managed asset ratio is up 5.9.

Do you look at that?

Do you manage that?

And what would be the minimum you expect for that -- accept for that ratio?

We look at all of them and they look at all of them, each one looks at different things more than others.

Some make adjusts and some don't.

Some make adjustments for type of capital.

You have to look at all of it.

It's still a very strong number and -- some companies are considerably below that.

I think 5% is a perfectly adequate number.

With the $40 billion and the thin assets coming can on, I think that's a pro forma 5.2% ratio.

Would that then imply that you're not in position to buy back more stock?

We can buy back the stock and maintain a strong ratio for the rest of the year.

Plus, the rating agencies are all different.

You have to speak to them directly.

They don't necessarily look at, you know, that kind of -- the conduits going back in the balance sheet are belts and suspenders, we never had a loss on it.

It's like a reapo with different types of collateral.

That's not needing the same type of capital supported.

The rating agencies do make other adjustments for those kinds of things and those asset classes.

Let me add on the conduit business, we anticipate bringing them back right now to the extent that we can get approval on restructuring that would keep these off the balance sheet, we intend to do that.

So, I think when Jamie gives you the worst case, it is to assume we don't get that in the immediate future, but we certainly would move in that direction.

The rules are written, you will be able to do things to keep it off the balance sheet.

You know, the problem with the rules is that it's doing the same kind of stuff to get them off the balance sheet.

You know, the little bit of ownership, a little bit of more collateralization, more outside money, but it's the same basic concept, you know, we're just going to wait and see because it is really immaterial for most all other purposes.

Okay, thank you.

You're welcome.

It adds revenues to your company and all of a sudden you go up in the tables in the terms of the size of your company.

Laughter

And moving on to David Long with Robert Baird.

Thanks.

I read a letter you recently sent out to most of your clients regarding change in policy and ATM deposits and no longer allowing deposits to be made at non-Bank One ATMs.

What's your motivation behind that?

First of all, it's Chicago only there.

Was a thing in Chicago will certain banks had a deal they can use each other's ATMs to make bank deposits.

If you had 1,000 and the other guy had 50, what would you do?

Makes sense.

But that was just here in Chicago?

Yes.

Thank you.

I don't know why Chicago is different, but it was.

Is there anything further, Mr. Long?

That's it, thanks --

But if you were using one of our ATM to deposit in their account, it's time to move your account to us!

And moving to Denis Laplante with Keefe Bruyette woods.

Within the conduit business, can we expect some of that is not super profitable and you want to look at opportunities to keep it off balance sheet and changing the structures.

That some of it will roll off.

Can you talk about the profitability?

Depending -- this is a kind of a guess, but depending on how it turns out, they -- if there are ways to keep them off the balance sheet, I don't think the nation of business will change at all.

Okay?

If they have to go on the balance sheet, I think you will be paid more to do it.

So, in some ways you will make more gross dollars because it's on the balance sheet but it's actually a lower margin.

You know, it's a lower ROA.

It's not a hard -- it's more like a reapo book.

It's a little bit above.

But -- in any event, I wouldn't make this a material thing to Bank One at all.

You know, maybe one point we're talking about will have a small plus or minus about it, but it will be small.

Do you envision, though, that the 40 could be 20 because of profitability issues that you raised the pricing, the business goes away?

I would envision it could be 30, but probably more profitable at 30 than it would be currently at way it is done at 40.

That's fair --

And remember, a loft of -- this is receivable, banks were traditionally in the receivable financing business, that's kind of what it is, you have really sound assets, receivables and you're financing for corporations and, you know, so, a lot of it won't go away.

There will be the financing need.

But the whole purpose of having a balance sheet was basically crappie margins, right?

That's why banks didn't want to put it on balance sheet.

That's okay.

The security gains.

Yeah.

How much of that was venture capital?

Well it did I depends on the definition.

Part of it is investment portfolio stuff, but a smaller portion.

Most out of the treasury portfolio.

Very little.

Very little.

So, there's very little out of VC?

Yes.

When you say VC --

Equity.

There was almost none out of real equity.

Okay.

Okay.

Okay.

Good, and --

But one day that -- I mean we show $2.6 billion or 2.9 now, we expect to have gains in that.

What is your cost to -- in other words, how much are you losing in the venture capital private equity business right now?

Well, I guess the way to say it is right now, I'm looking just at $2.9 billion, there is other stuff we have, but basically it pays the cost of carry and is expensed against it.

It's not really returning anything.

One day, one day it should earn 10% after tax.

You can add 2 50ds million of earnings to this company.

So, you're basically --

That will never be steady.

It will always be lumpy, it's equity.

You know, good quarters and good years, but we will be very conservative, you know, keep it diversified and we hope to make some money and we're pretty optimistic you will see some gains, possibly even this year.

So, basically you're at break-even rather than a loss position in the business?

It is a net -- right now that portion is a net loss but it's not a big deal.

On an operating basis.

On an operating basis.

Great.

If you allocate interest income, you allocate expenses and you take gains.

Maybe another way to ask it, how much in gains do you have to generate a year to basically break even in the business?

Okay, if you have $2.6 billion, let's say you charge 8% increase, charge it whatever you want, right?

So, you got to cover the interest and the overhead itself is very small.

I mean I forgot the number, but it's $15 million or $10 million or something like that.

Okay?

It is star 1 for any questions at this time.

Next we go to Betsy Graseck with Morgan Stanley.

Thanks, good afternoon.

Just a couple of quick questions on the card business and first on the new person that you've got, Bill Campbell, to come in and run it.

I would expect you had lots of different opportunities with different folks to select to run the business.

It would be great to understand from your perspective what you see him bringing to the table specifically, because he's been working with you for a while, I suspect he's got interesting ideas on what he wants to implement going into the business.

Can you share that with us?

Yeah, you know, the way to look at it, I've known Bill since the city traveler's deal.

Right.

And Bill is a very respected manager.

He ran Philip Morris, USA, one of the best marking and best managing companies in the U.S. while he was there.

He ran city global's consumer business for several years and then co-ran it with Bob.

He knows the credit card business intimately and he's a great manager.

So, you don't know he's been intimately involved in the credit card business since he's been here with me.

He signed up helping me the day I got here.

He's been here over three years and for the last year and a half, full-time.

I would tell you, you know, maybe 25 or 30% of that time on card.

So, he's our -- part of the beauty of him is the management skills, he knows the card business, he knows all the people down there.

He's helped design and implement a lot of stuff we're doing, so, we don't expect any major changes at all.

I mean he just wanted to continue building it for what it is, get the metrics, the marketing, the service levels.

We have a whole bunch of new products, you know, that we're working on, you know that started -- you know, some started before Bill with Phil, but he will keep firing ahead.

You should expect any major change or announcement or change in the strategy to business or anything like that.

He will continue what's been going on there?

Yes, very much.

And get him in front of the investment community a little bit early on?

Yeah, sure.

That would be helpful.

And just the second thing, in the quarter business, as I'm sure you've seen, some of the competitors have been offering what looks like very competitive rates for some.

Prime, superprime segments out there.

I wonder if you could share with us any of your thoughts or views, "A," do you see it as a competitive threat?

And "B," you know, do you plan to counter that?

Remember, when you look at the business, okay, you have to look at -- I talk about 23 segments, but United is critical, it has nothing to do with it.

Disney is critical.

We have 200,000 Disney cards now.

We just bought the Sony portfolio.

So, most of what you do for existing card marking, reward programs, attrition, has nothing on to do with that.

Obviously it's a big part of the business to create new accounts, but we're getting better and better at creating new accounts from existing lists, existing customers.

We realize just how important it is.

The teaser rate stuff, 0% for 12 months, 15 months and all that kind of stuff, that is, when we talk about the competitive pricing, that's what we're talking about.

I think you see recently a lot of people making noises that it doesn't pay for itself, we will do less of it.

We will see.

Obviously it's a competitive thing.

If the competitors don't stop, we're not going to stop, either.

But you already see the pricing competition in that.

It's already in the numbers.

It's not a big part of our balance sheet.

And I don't think we disclose the numbers, we take our $74 billion, it's a very small portion of that percentage-wise.

Yooefd --

But I do believe the credit card business will continue to be competitive.

You have to be competitive otherwise you will get adverse selection and we now are a -- very close to a low cost provider, not the low cost and we're a low cost capital and we have our own distribution.

So, for example, our credit card sales in the retail branches were up 78% last quarter.

Albeit from a low level, but we can double or triple it from there.

So, we have a lot of reason to be in the business as we compete.

And we will do what it takes.

If it compresses margin a little bit, so be it.

Any reaction to the Sears transaction?

No.

Okay.

Thanks.

And we'll move next to Leo Harman with All state.

Hi, good afternoon.

Hi.

A few of your competitors have talked about growing the middle market in the midwest and I wondered if you could give more color on whether or not the lack of growth in middle market is more function of man or more of a funning of your willingness to give up share in the environment?

You know, I -- I think it was more a function of all the enormous changes we made, systems, names, granding, credit, policies, procedures, and that's just a lot for a system to take, okay?

That's number one.

I think a little bit of it may be demand, but I think at this point, because, you know, I look at the same days you look at, competitors are reporting numbers and several had loan demand this quarter.

They're all in the same states.

I think Michigan and Illinois, in particular, are more stressed than other states.

You have to measure that.

But it's very hard to tell, I think it's our job to get the business growing.

Okay?

And, you know, so we will see.

Okay.

Second question: Both Washington mutual and Wells Fargo is visa-branded credit cards linked to a home equity product versus unsecured lines, not that you need more pressure in the credit card business, but what kind of offering or what kind of things are you thinking about on the home equity side of the business to get the home equity if that's a thought for a new business or a new product.

Our home equity numbers are great, including production, et cetera.

But, you know, you can assume that any product like that, and I think some of those are very interesting, we're on top of.

Right, there is nothing people are going to do like that that we're not going to look at and not so proud that we won't imitate.

Thank you.

Thank you.

Moving to Brock Vandervliet with Lehman Brothers.

After this, one more question, go ahead, Brock.

Thanks very much.

Jamie, could you talk for a home on where you stand with your branch rollout?

And how much of those rollout expenses are driving the -- the increase we see in the salary line?

You know, every -- the average -- I think we're up 30 or 40 year-over-year.

So, I think we're talking about opening this year, originally 60, now it will be closer to 40 or 45 or something.

The average head count has 10 people.

So, that's obviously not driving that.

What you've seen Charlie do is add a lot of sales people, while reducing head count.

A lot of that line, a loan is up because of option accounting, remember, we added option accounting and pushed it down to the units.

A little bit of it is the compensation stuff we're doing, we are paying more people in the branches more.

We have, in fact, just so you know, we have some of the most attractive compensation plans than any other retail bank in America.

We're happy to have that.

That's what's were driving the line.

We're getting are much more aggressive and smarter at looking at every location, every street corner, in-line, in stores and opening branches.

And you will see that continue and, you know, it's not, in some places, just we haven't done it for so long, we should do it not because of the competition, just because we should be in that town and we need to move that branch and anyway, so, in the numbers you see today, in the expense lines, you do see some of the costs of new branches, ATM refurbishments, higher marketing and we will continue to do that.

That's in the expense line.

I would say we have very good expense controls, but those lines are up because of all the things we're doing for new products, new signs, new systems, new marketing.

We have to do that.

It's putting us on the growth curve.

And lastly, the step-up in service charges, is that linked to the growth in DDA accounts?

I think it's a whole bunch of different things, including the growth in DDA accounts.

Our last question is a follow-up from Mike Mayo.

Hi, just any color on your attitude about doing acquisitions, you did another deal yesterday, your name thrown about for buying about, you know, every firm out there, what's your view there?

And just one separate question of your outlook on the margin.

I thought you were being more conservative with your posturing in the past because eventually rates go higher.

Where do you see your margin going the second half of the year?

Thank you.

You know, I've been really consistent in acquisitions, you have to run your own business well first and I think we have been demonstrating more and more of that.

We got our conversions done, so, we're acquisition-capable, it doesn't mean they're going to hit the hurdle rates, that makes sense for us.

If we do, we want it make sense for shareholders.

You know, we've been also clear that the business will consolidate and that will be as long as probably for my lifetime, assuming I live for a long time!

And I think the margin, you know, the biggest changes in margin, which are really -- that could happen to the company, are at retail, you will probably see kind of consistent margins and obviously big, swinging rates can change that.

Card, the margins will be about the same.

We don't expect real compression, even though there are competitive attributes to that.

You know, you could see some margin change, but that's your guess as good as mine or something like that.

So, we're not really looking for any major margin change.

Most of what we did in interest rates will protect us, will protect the margin under certain rising rates and areas, but it would be a mistake to say rates go up 500 basis points and make us millions more.

It will be why did they go up 500 basis points, how?

And even though we're asset sensitive it would hurt our earnings.

All right, thank you.

Thank you.

And thank you all for listening.

We will talk to you all soon.

That concludes today's conference call.

Have a great day.