Truist Financial Corp (TFC) 2004 Q2 法說會逐字稿

Good day. All sites are now online in a lecture mode and I'd like to turn the call over to your moderator, Mr. Ed Milligan. Go ahead, please.

Thank you. Good morning and thank you for joining us for the Second Quarter Earnings Call for Main Street Banks.

Our second quarter was a solid operating quarter that included several previously announced one-time events designed to enhance our long-term performance. And we look forward to reporting on the quarter with you and discussing it with you this morning.

This is our caution that the presentation contains forward-looking statements.

We'll follow our standard agenda this quarter. First, providing a quick overview of Main Street, followed by some recent developments of interest, and then a discussion of our second quarter results and the key factors impacting those results. We'll have plenty of time following that for questions, either by phone or by email at webcast@mainstreetbank.com.

I'm proud to have Sam Hay and Bob McDermott join me again this quarter to share in the presentation duties.

As promised, a brief overview of Main Street. We continue to be the market leader in community banking in Metro Atlanta, which is a market that is forecast to continue to grow well above the national average. And that growth has not only allowed us to double our size over the past four years, but to achieve consistently strong operating performance that has driven consistently strong shareholder returns over the same period.

We currently have $2.1b in assets and 23 banking centers, all in Metro Atlanta.

We've been traded on the NASDAQ national system since 1997, and have consistently outpaced the NASDAQ index and the NASDAQ bank index over that period. Our average daily trading volume, you can see, is 30,000 shares, which has increased steadily as our market cap has continued to grow to $538m.

Despite our past shareholder returns, Sam Hay will make a strong case in a few minutes that we continue to represent a valuation opportunity relative to our peers. And we are fortunate to be covered by some very prominent analysts in the community banking sector that you see here.

In recent developments, we have two new and two replacement banking centers presently under construction, and Sam will address those in detail in a moment. We enjoyed a very successful conversion to the Jack Henry Silverlake system over Memorial Day weekend, and have been able to reduce 38 jobs through that effort and other productivity initiatives that we'll be discussing as well.

Sam Hay and I presented at the Gulf South Bank Conference in New Orleans in April. Bob McDermott and John Monroe presented at the SunTrust Robinson Humphrey Annual Institution Conference in Atlanta in May. Sam and I will be presenting at the Keefe, Bruyette Woods Fifth Annual Community Bank Investor Conference in New York, actually, on July the 28th at 3:10 p.m., and we invite you to access our presentation at mainstreetbank.com for the webcast. And then we'll also be presenting at the SunTrust Robinson Humphrey Sunbelt Community Bank Conference in Atlanta in September, and that will also be webcast and we'll get out more information on that in the future.

Before I turn it over to Bob McDermott, some of the highlights of our second quarter performance that we announced earlier today were: Net income of $7.4m, up 16 percent from 2003; cash operating income of $8.2m, which was up 28 percent from 2003, and that was before one-time after tax charges of $800,000 or the equivalent of $0.04 per share, creating diluted earnings per share of $0.37, up 6 percent over 2003. Our cash operating EPS was $0.41, up 14 percent over 2003.

Asset quality remains very strong, as you will see in a moment, and we enjoyed strong loan and deposit growth, transaction deposit growth particularly, double digit, both loan and transaction deposits.

And we are reiterating our comfort today with our full year 2004 and 2005 consensus estimates. And those estimates are, on the next page for 2004, for the third quarter $0.41, with a high of $0.42 and a low of $0.40 and, for the year December '04, $1.62, with a high of $1.63 and a low of $1.59.

And now I'll ask Bob to present the details and his analysis of our quarterly operating performance. Bob?

Thank you, Ed.

The slides that I'm going to go over are pretty much the slides that we've seen in the past. The first slide is our trend of operating income. And you can see at the graph at the top of the page that, over the last five quarters, we've illustrated very consistent growth in our operating income.

On a link quarter basis between the first quarter of 2004 and the second quarter of 2004, our operating income rose from $7.7m to $8.2m. That was an increase of $527,000, or roughly 7 percent.

To reiterate some of the numbers that Ed just mentioned, the chart at the bottom of the page shows our growth in net income in the second quarter of last year at $6.4 to the second quarter of this year at $7.4, an increase of $1m or 16 percent. Operating income increased from $6.4m last year to $8.2m this year in the second quarter, or $1.8m or 28 percent.

As Ed mentioned, our diluted EPS increased $0.02 year-over-year, or 6 percent, and our operating diluted EPS increased from $0.36 to $0.41, or by $0.05, which is 14 percent year-over-year.

The next slide covers our loan outstanding. And again, you can see the graph illustrates a very healthy trend of our loan outstanding over the last five quarters. The second quarter loan outstanding of 2003 was $1.383b, as you can see from the chart at the bottom of the page. That number increased to $1.594b for the second quarter of this year.

As you'll notice, we have no mention of excluding acquisitions because the second quarter of last year number had fully absorbed the First Colony acquisition that was done in the second quarter of 2003. So, our core loan growth was $211.5m year-over-year, or 15 percent.

You can see at the chart at the top--or the graph of the chart at the top of the page, that our loan growth for this quarter was very strong. On a link quarter basis, we increased from $1.511b to $1.594b. That was roughly an $83m increase in the quarter or an annualized 22 percent increase.

The next slide covers our deposit growth. And again, a very similar story. You can see very consistent deposit growth over the last five quarters. On a link quarter basis, you can see that our deposits increased from $1.531b in the first quarter of 2004 to $1.566b in the second quarter of 2004. That was roughly a $35m increase or an annualized 9 percent increase.

To reiterate some of the information that Ed just mentioned, the chart at the bottom of the page shows that our low cost core, or our transaction accounts year-over-year increased roughly $98m, or 14 percent. Time deposits grew year-over-year $62m or 9 percent. Again, these numbers are all organic because the First Colony acquisition occurred earlier in the second quarter of 2003. So overall, our total deposits from the second quarter of 2003 to the second quarter of 2004 grew $161m or 11 percent

Net interest income on a tax equivalent basis, the graph at the top shows very consistent growth over the last five quarters. The chart at the bottom shows two numbers. One is our net interest income. And you can see for the second quarter of 2003 that number was $18.5m. And that increased by $2m or 11 percent to the second quarter of 2004 number, which is $20.5m.

As several other banks have reported in the quarter, our net interest margin was squeezed, as some of our competitors have been. If you refer to the tables that accompanied the earnings release this morning, you can see that the major components of that were related to our bond yield that was unfortunately misstated on the table. The information stated it at 3.85 percent, which was a non-tax equivalent basis. That number really should be 4.12 percent. And I apologize for that mistake.

The other major component of the decline was on our loan yields, and I think Sam's going to talk about that in a moment. You can see we're able to maintain the deposit or the borrowing side of the equation pretty consistently.

On credit quality, you can see we had a very good credit quality quarter. Our net annualized charge off as a percent of average loan, we're down to 9 basis points, by far the lowest quarter that we've had. Our nonperforming assets as a percent of total assets increased slightly to 41 basis points, but very much in line with our normal trend that you've seen for Main Street over the years.

Our reserve for possible loan loss has declined this quarter to 1.45 percent and the majority of that reason, as Ed pointed out in his release this morning, was our positive trend on credit quality. The other major factor of that was we had a specific reserve associated with our Bank Card portfolio that was sold a couple years ago. Now that our contingent liability is gone, we were able to bring that reserve back off the reserve calculation.

Non-interest income. Addressing the chart at the bottom of the page. You can see our non-interest income between the second quarter of 2003 and the second quarter of 2004 increased $1.8m or 32 percent. The majority of that increase was related to the insurance agency. And Ed gave you some of the details in the press release this morning. But, you can see our insurance agency increased roughly $1.2m or 100 percent year-over-year. About 66 percent of that increase was related to the Banks Moneyhan Hayes acquisition that we completed on January 2nd of this year.

Looking at the graph at the top of the page, you can see that there was a dip between the first and second quarter of this year. The actual decline was from $7.8m to $7.4m, or we were down $421,000. That number is somewhat exaggerated because, as we've grown our insurance agency, we will now see a seasonal fluctuation. We'll see our first quarter non-interest income spike up every quarter and then it'll decline in the second.

Our contingency income from our insurance agency was $700,000 in the first quarter of this year, and that is a one-time event every year. So, the second quarter declined because of that.

The next slide covers operating expenses. And you can see the graph at the top of the page, the second quarter number from 2003 was significantly lower than the last four quarters. The primary reason for that was the timing of the First Colony acquisition. We didn't have a full quarter's expense associated with that acquisition in the second quarter of last year.

The last four quarters on an operating basis have been very consistent. In fact, on a link quarter, our operating expenses decreased from $15.438m in the first quarter of 2004 to roughly $14.976m in the second quarter of this year, or a $463,000 operating expense reduction.

The operating expenses that we're normally reporting, and it's really more of a cash adjustment that you're used to seeing, is our backing out of our amortization expense. For the quarter, a non-tax adjusted number for the amortization was $122,000 roughly.

The other three components of our one-time expenses were, as Ed mentioned, we had a reduction in force this quarter. And the associated payments on that, or the accrual for that was $322,000. The contract buyout and the system write-offs associated with the Jack Henry conversion were $239,000 and $475,000, respectively.

Obviously, the contract and the systems that we wrote off, our core processing system, our existing loan and deposit system, were rendered obsolete by the successful conversion to the Jack Henry system. Again, the operating numbers have been backed out for this information.

The chart at the bottom of the page shows our year-over-year growth. You can see the second quarter of 2003, our operating expenses were roughly $12.7m. That increased to $15m for the second quarter of this year for an increase roughly of $2.7m or 21 percent. Personnel expenses increased $1.6m or 22 percent.

Occupancy increased rather significantly. The majority of that was associated with new branches, new branch construction, and the grow-out of our operations and service center units. So, you can see our occupancy quarter over--or year-over-year quarter comparison was up $700,000 or 47 percent.

All other expenses actually declined from the second quarter of last year to the second quarter of this year, and that's despite the Banks Moneyhan Hayes acquisition. You can see we've really focused on all other expenses. And quarter-to-quarter, or year-over-year, you can see those expenses actually declined roughly $100,000.

With that, I'm going to turn the remainder of the presentation over to Sam.

Thanks, Bob.

As is our usual custom, I'll update you on a few corporate thoughts and objectives and strategies, and then move into some highlights for the quarter.

Just to remind those of you who are familiar with Main Street Banks of the objectives that we usually set for ourselves and like to talk about anytime we have the opportunity, those are ROA of 160 and ROE of 18 percent. Cash EPS growth of 12 to 15 percent on an annual basis. Paid dividends of roughly a third of earnings.

We continue to work toward a fee-income ratio goal of 30 percent by the end of next year, and believe that we are well on our way toward that goal. Of course, maintaining superior asset quality, because that's an absolute must in our business, and we believe that that is a hallmark of our company and one that we continue to do very well on.

And then last, probably our most sacred goal, that being top quartile peer performance, which we believe earns us the privilege of having our jobs and doing the business that we do every day.

Regarding principles that continue to govern our actions every day, sort of the general themes and strategies for our business, are, one, to continue to solidify our position as the leader in community banking in Atlanta. We think that we solidly lay claim to that title now, and believe that there's not really anyone else operating in our space in the very strong Atlanta market. We will do that by continuing to focus heavily on internal growth of loans and deposits. And certainly, the second quarter, I think, is a good testament to our ability to grow loans and deposits internally.

We will continue to keep an eye open toward acquisitions. We expect about 20 percent of our growth to come from acquisitions, but assure you that we'll be disciplined and rational in implementing our acquisition strategy.

Moving on to talk a few minutes about second quarter We are extremely excited to report the balance sheet growth that we were able to achieve during the second quarter. As Bob mentioned, fee alone growth was 22 percent annualized. Low cost core deposits grew 13 percent on an annualized basis. And we are very excited about these results, especially in light of irrational competitors that we face in the Atlanta markets, some of whom don't seem to realize that there is a yield curve or a bond market or any other reasonable benchmark for pricing of loans.

Loan pricing, as Bob mentioned, has been somewhat of a challenge in the Atlanta market, but our excellent sales team has been able to employ its best salesmanship and continue to grow the bank extremely well, even with making tremendous efforts to increase our pricing as well, particularly as the yield curve has steepened some and as rates have increased.

Just an update on where we stand in terms of our footprint. We did open our new Roswell Banking facility, Banking Center, in June and are very excited about the prospects for our business in the corridor due north of the city. Our Midtown facility will be opening late this year, and the Galleria Banking Center is slated to open sometime during the middle of next year.

We will likely begin construction on the Suwannee Banking Center, which has previously been announced, later this year. And we are also scheduled to open two new replacement facilities, one in Winder and one in Conyers, later this year as well.

And then one final note. During the quarter we always update you from a hiring standpoint. We did add three new sales professionals to our fee businesses during the quarter as well.

And speaking of fee businesses, on a year-over-year basis, we are extremely pleased with our fee income growth As Bob mentioned, on a quarter-over-quarter basis, on a link quarter basis, we were down actually $400,000 or so, most of which was due to the seasonality of our insurance income. Some of which also, a point that Bob did not mention, was due to lack of funding for SBA lending in the country. As most of you know, we believe that the legislative challenge has been lifted there and are very excited about our SBA pipeline going into the third quarter and the remainder of this year.

We're also excited about our Brokerage revenue being up. If rounded, I think based on the chart Bob showed you, 100 percent, but actually looking at the actual numbers, that Brokerage revenue was up 200 percent over the second quarter of last year.

We're also pleased to tell you that, in a rising rate environment, we're pretty happy with our mortgage revenue being flat on a year-to-year basis, and very hopeful for that business continuing to contribute nicely to our bottom line.

As Bob said, Insurance revenues were up 100 percent He did mention that a large component of that was due to the Banks Moneyhan Hayes acquisition back in January. But, we're also pleased to report, most important, that our internal growth without the deal in January was 25 percent. Very excited about our ability to grow Insurance revenues.

And as an update on our Payroll business, which we have featured the last couple of quarters, we're excited to tell you that we are on plan. We have 80 clients at present and they're excited about the continued progress of that business, both in terms of top line and bottom line, too.

Moving on to talk about M&A activity. Nothing big to report here. One item to note is that we did convert the systems of Banks Moneyhan Hayes during the acquisition during the second quarter and very pleased with the results there. Pleased that we now have our entire agency on one platform. And the cultural transformation there has been minimal. We have had no turnover in the acquisition and are very pleased with the results and our new teammates from Banks Moneyhan Hayes.

We are not actively pursuing any banking deals at present. We're continuing to build on our internal growth success. We are continuing to be interested in insurance deals within our footprint as we have given you guidance in the past.

Second quarter was one of significant efficiency focus for Main Street Banks. As Ed and Bob both mentioned, we had a highly successful conversion to the Jack Henry core processing systems and to most all of their ancillary systems as well. And we're very pleased that we are now on one integrated seamless system, which has allowed us to gain some efficiency opportunities.

As Ed mentioned, we did reduce a few jobs, 38 jobs during the quarter after the conversation. Some of which was related to eliminating redundancies in our core processing functions, but also in some efficiency opportunities that we were able to identify on the line side of the organization as well, such as combining our Banking Center sales and service functions under common leadership.

We had set an internal goal earlier this year of maintaining FTEs, Full Time Equivalent Employees, flat for the year and are proud to tell you that we are significantly ahead of that goal, especially after the job reductions of 38 jobs during the quarter.

During the quarter also, we consolidated our Barrett Parkway Banking Center into our Town Park Office in Kennesaw. A previous announcement I believe we had told you in the past. And also were able to put together our existing Roswell unit and our Commercial Real Estate Lending Unit into the new Roswell Banking Center.

We also are announcing that we will be closing our Lilburn Banking Center in the [Guinett] Market in October of 2004. We find that, after having been open for many years, that our growth in Lilburn just wasn't meeting our objectives, particularly our growth in low cost core deposits. And we believe that we can redeploy that capital and our overhead investment there much more profitably. In addition, our Tucker Office is just a few miles away and can easily serve these clients in the Lilburn market.

Moving on. As an update to staffing and support functions, I mentioned our Jack Henry Silverlake conversion, a highly successful conversion. We also now have, particularly as a result of having Jack Henry put to bed, have put in place productivity and staffing models for all line functions in the company. And are currently working on productivity and staffing models for all support function in the company under the leadership of our Profit Improvement area.

We believe that we have now completed, and believe that the Jack Henry conversion now marks, three years of a consolidation process for our organization. As most of you know, we have put together seven different banking organizations over the last three years. We are extremely pleased with our progress there and believe that we now have the foundation laid for our future. We think that we've got the right structure, the right systems and, most important, the right team to carry us well into the future.

A few other items about our support functions. We continue to make progress on our service standards and our coaching and training. We are continuing to monitor our client service standards and we'll be--have already scheduled mystery shopping and client surveys again for the third quarter.

As Ed and Bob both mentioned, we are very pleased with our asset quality results in the second quarter. We actually were able to reduce 90-day delinquencies by 34 percent in the second quarter, below already very normal, very healthy levels. I don't believe you'll find 9 basis points to be able to be beaten anywhere in terms of charge-offs, net charge-offs. We're very pleased with that as well.

AS Bob mentioned, we did have a modest increase in nonperforming assets, up to 41 basis points at quarter end, but certainly no major trends to report to you there.

Our outlook is very positive for the remainder of the year in non-performings. Our delinquency trends are stable to improving, as we mentioned, particularly in the 90-day category. And as Bob said, we also did lower our loan offs reserve to 1.45 percent due to these good trends, as well as the expiration of recourse terms on the Credit Card portfolio that we sold several years ago.

A few other items about our portfolio, which you are probably already familiar with, are at the bottom of this slide as well.

And then moving on to the future, our business pipeline, we continue to see double digits in our growth and loans, and particularly low cost core deposits for the rest of this year. We are focusing heavily on the stable commercial and residential real estate sectors, and particularly the owner occupied sector, maintaining our mix of unoccupied risk within the portfolio, too.

We are focusing also heavily on checking balances. In fact, have a checking promotion that will be beginning in the next 30 days or so. And are excited out our fee income prospects, particularly since we were somewhat flat in the last quarter or two on a link quarter basis. Particularly exited about the growth in our insurance agency, our prospects for the legislative resolution in our pipeline and the SBA area, and also the growth in our Payroll service as well.

And then last but not least, we will close with our traditional summary of why we believe that Main Street Banks is a unique investment opportunity.

We believe that Main Street uniquely combines all of the facets, all of the factors that anyone would look for in a banking company investment. We are a top quartile performer. We have posted double digit earnings growth consistently for many years. We're located in, we think, one of the best markets in the country and in some of the best market segments of that market as well.

We're focused heavily on internal growth and have a very entrepreneurial and service-oriented culture to support that growth. We believe that we've got the right team with the right experience and expertise to carry us far into the future. And last, we also think that we are a compelling valuation opportunity.

On our last prepared slide here, you will see a group of similarly situated high performing banking organizations of similar size around the country. And I point out to you that Main Street ranks seventh in terms of valuation on a PE basis. Seventh also in terms of peg ratio for the group. However, our performance stacks up right at the top of this chart.

And if you believe these assumptions and these numbers, you would see that there is roughly a 15 percent opportunity in Main Street Banks' stock relative to the average for the group, but we think it's much more reasonable to compare us to the top few of this group And this, you would see, that there's about a 20 percent opportunity in our stock as well.

Now, I'd like to turn it back over to Ed Milligan for questions and answers and conclusions.

Thanks, Sam and Bob for your comments. And hope that all of you can see that, in addition to our one-time events, a lot of good things happened at Main Street during the quarter, and that we're a much stronger company at the end of the second quarter than we were going into the quarter.

We'd like to now turn it back to our moderator to take questions. And if you'd like to email questions, please feel free to do so at webcast@mainstreetbank.com. And I'll turn it back to the moderator now.

At this time, if you'd like to ask a question, please press the * and 1 on your touchtone phone. If you'd like to withdraw your question, you can press the #. Once again, if you'd like to ask a question, please press the * and 1 on your touchtone phone.

We'll take our first question from Chris Marinac from FIG Partners. Go ahead, please.

Hi, Ed and Sam and Bob. Good morning.

Good morning.

Wanted to ask you for some more color on the reduction in force. Out of the 38 jobs you mentioned, how many of those would have been lending or related functions?

Chris, as I remember it, 10 to 12 of those jobs were on the sales side of the organization.

Okay. Were there specific redundancies with those, or were there any other, I mean, I just wasn't sure that the redundancies on sales. That's what was puzzling.

Can you repeat that, Chris? I'm sorry.

The redundancies in sales I guess was something I didn't expect. Is there any reason that there were sales folks as part of those layoffs?

Well, we had the opportunity, particularly with the reductions from the elimination of redundancies on the support side of the organization. We're of course always looking for opportunities to gain efficiency and to maintain efficiency. And we saw on the line side an opportunity, really, to go back to a previous model of having the sales and service functions consolidated under common leadership.

A couple of years ago, we had taken a tack of separating those functions, because we believed that our salespeople would be able to spend more time selling and more time generating business if the branch operations function, so to speak, was not vested under them. I think we have found in conducting that experiment that often the separation of those functions can be confusing, not only for our people internally, but also for our clients externally, as well. And so, there was a pretty significant opportunity through the reconsolidation of those functions to save some jobs on the line side of the organization as well.

That's awful, Sam. Thanks. I guess just as a follow up, or separate follow up, on the sort of turnover, if you will, of your loan portfolio, is that, you know, different at all from your last quarter or two, or will that still be relatively pretty quick on how things will re-price?

Yeah, Chris. This is Bob. It's been pretty consistent. The only real change that we've seen, Sam alluded to some of the irrational pricing. We've seen a pretty significant mix change between fixed and variable the last three months. I mean, we're putting on a lot more variable rate loans. And in a rising rate environment, we feel that's a good trend. But, our duration of our loan portfolio remains very short, somewhere between, you know, 12 and 18 months on average.

And Chris, this is Sam. I might point out, too, just as a follow up to Bob's answer, that we have never traditionally done much in the way of fixed rate lending. What he is really speaking to is the difference between truly floating rate loan versus a one, two or three year balloon that still has a very short average life. And due to the growth in the market and the kind of client base that we deal with, we continue to have rapid turnover in the loan portfolio, even for say a fixed rate three year balloon or mini-perm or something like that.

So, that's not to say that in the past we have necessarily taken any kind of rate risk. Our model still shows us to be--even though our variable rate mixture has increased in the last few moths, our models previous to that showed us to be very short as well on the asset side.

Okay. Great. Thanks, guys.

Thanks, Chris.

Thank you.

We'll take our next question from John Pandtle from Raymond James and Associates. Go ahead, please.

Good morning, gentlemen.

Good morning.

Good morning.

I had a couple of questions First, the loan growth in this quarter. It accelerated for the second consecutive quarter. Should we view that as a sign that you feel like you're past some of the lending turnover issues you dealt with back in the fourth quarter?

John, this is Sam. Absolutely. We feel great about having stabilized our First Colony acquisition. We've got great leadership in that market now. A fellow who had been with us and actually--John [Bramwith], who actually came to us through the acquisition of the First National Bank of Johns Creek. But, John is doing a tremendous job stabilizing that market. He has filled all the positions, all the sales positions in that and we are growing again in that market and feel very good about it.

So, good question. I would probably--I'll say, you know, should say that 22 percent annualized growth quarter-to-quarter we don't think is necessarily something you should count on every quarter from us. But nonetheless, we still believe that our ability to grow strong double digits is still there. Even as we push to increase loan pricing and, frankly, push to introduce more rationality to this vibrant market that we deal with.

Okay. And then a separate question regarding the margin, Bob. In the quarter, obviously, we saw the down tick in the securities yields. How much of that was accelerated premium amortization? And then, with rates having stabilized, moved higher, how would you expect that to affect the margin, particularly with the fed rate increase?

John, let me handle both of those separately. What we saw--and again, the 3.85 that was on the slide is really 4.12, but we did see a pretty significant rate decline. Twenty-one basis points of that drop was because our prepays on the mortgage portfolio had accelerated. Quarter-to-quarter, we saw a lot of prepays in that.

The other part of the equation was we did do a bond sale during the quarter and then we had $10m of principal reduction. So, we saw our book yield from those two things drop pretty significantly.

On the--what was the second part of the question? I'm sorry.

And then, with rates having stabilized, I guess, on the long end of the curve, in terms of the securities portfolio and then the fed rate increase, how does that affect your margin outlook?

We are asset sensitive, but we have put in place loan floors. So, on the variable side, I think about 50 percent of our variable rate loans had floors on them, so we're not picking up the full impact of that. And then, as you're aware, we've put--we have about four derivative positions that will mute the impact of that going forward. And you'll see in our queue we do a pretty good job laying out in the next week or so the impact of that. We expect rates to go up. Unfortunately, we won't see a full increase of the 25 basis points, but we're still asset sensitive and expect that to go up pretty significantly.

In the second quarter, it was virtually no impact because the rate came so late in the quarter. But we're expecting, you know, six digit increases in the third quarter due to that rate increase. And if, you know, we get another increase in August, we expect the margin to go up even further.

Now, when you say six digit increase, are you talking about basis points?

No, more like $200,000 to $300,000.

Oh, okay. I see.

Yeah.

Okay. Thank you.

And John, this is Sam. You know, I would say, too, that we will continue to use any margin up tick for growth We would not want you to expect anything over about a 450 margin out of us, even though we continue internally to do as much as we can on the margin side.

Okay. Thanks again.

Thanks.

We'll take our next question from the site of Jefferson Harralson with KBW. Go ahead, please.

Thanks. I wanted to follow up on some of the irrational competitor comments you guys are making. What types of products are being aggressively priced in the Atlanta area? Are you seeing this from kind of the major players here in Atlanta, or from the community banks?

Jeff, and this is Sam. We are seeing--I think the thing that is probably the most challenging at this point is fixed rates that just don't meet the yield curve in any form or fashion. Some of that's out of larger institutions. Some of it, it's out of smaller folks as well.

Generally speaking, in a rising rate environment, I think you'd find that our smaller competitors don't necessarily follow shifts in the yield curve or changing bond pricing very quickly at all. And certainly, we try to provide leadership to that. I think that the larger banks, of course, are much more rational in doing so, but sometimes get aggressive in going out.

We have seen some 15 year fixed rates, outrights, no balloons, that have been somewhat challenging for us. Even some things, say, below 7 percent. I think the things that are the most challenging for us now would be balloons in the three to five year range that, based on the swap curve should be priced at, say, 7, 7.5 percent. But, we're seeing some things at 6 or 6.5. And of course, we are loath to put anything on the books that is not rational in terms of the benchmark, an objective benchmark, but that also could increase--or excuse me, decrease our asset sensitivity. So, we're trying to be very objective in the way we are meeting that competition.

And I think this is not anything that's unusual for the Atlanta market. It's been so good for so long and we are so used to this kind of competition that we think we are resourceful enough to withstand these kinds of pressures But, we share them with you because we believe that they're very relevant in terms of looking at our results on a going forward basis.

All right. And lastly, is there any fee income opportunity to come out of switching to the Jack Henry system?

No, not really, Jefferson. We have a petty aggressive matrix on our NSFOD and we basically just copied that over. So no, there's not really a fee opportunity there. It was for staff efficiency, and then to give us the capacity for future growth more than anything else.

All right. Thanks a lot.

Thanks.

Once again, if you'd like to ask a question, please press the * and 1 on your touchtone phone.

We'll take our next question from Jennifer Demba from SunTrust Robertson and Humphrey. Go ahead, please.

Good morning.

Good morning.

Just wondering if you're seeing any hiring opportunities from the most recent mergers that have been announced during the second quarter, specifically South Trust and National Commerce?

Jennifer, this is Sam. We have not identified any specific opportunities yet. We certainly anticipate that we will have some. We, as you know, have never been a big acquirer of empty real estate, so we wouldn't expect to take on any empty facilities from the deal. But certainly, it's our hope that we would be able to pick up some folks in the process.

We will both do our research, our investigation and kind of manage that process on a one-on-one basis. And if someone very strong is identified, then we would likely have significant interest But, at this point, no, we have not identified any specific opportunities.

Thank you.

Thanks.

We'll take our last question from the site of Arielle Whitman with Sandler O'Neill. Go ahead, please.

Hi, guys. I just wanted to ask if you could comment on brokerage insurance and SBA lending in terms of the fee income component on a link quarter basis, and then sort of trends going out thereafter?

Yeah, Arielle, this is Sam. I'll take them one at a time. On brokerage on a link quarter basis, you see that we were down. We did have several larger fees that came in during the first quarter, and that was the reason for that. But, if you look at the long-term trend, excluding a couple of those larger items, we still feel very good about the potential to build revenue there.

You mentioned insurance, I believe, as well. The trend there is totally due to the seasonality component that Bob mentioned. Contingency income, as you know, in the insurance business always comes in in the first quarter and we are, of course, always glad to see it. But, it is a contingency amount and not something that we can necessary count on in terms of accruals or looking forward, or forecasting.

But, we feel very good about our growth there. As I mentioned, our internal growth without the Banks Moneyhan Hayes deal was 25 percent. So, we feel like we are growing internally very well there, and there's nothing standing in our way from continuing to grow our franchise there. We are hiring salespeople in that group and continuing to develop our internal growth abilities there, so we feel very good about it.

And you also mentioned SBA. The fact that the legislative logjam was resolved in the last couple of months gives us great hopes. Our pipeline is very strong there and we are anticipating a very good quarter for SBA, and really don't see anything negative in the future there as well.

It's a very good niche for us. It's not something that's ever going to be 25 percent of our revenue or our income because it's, as you know, it's a little bit of a different animal from the typical bank loan. But, we think properly managed and with the right controls and leadership, and we are very confident in Danny Preston, who runs that unit for us, we think that we can continue to pick a lot of low hanging fruit within our footprint, particularly in the SBA business.

Okay. Thank you.

Thank you.

That appears to be our last question.

Well, thank you.

Well, this will complete our second quarter earnings call. Thank you for joining us today. We look forward to talking with you again next quarter, and have a great day.