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EX-32.2 - EXHIBIT 32.2 - Atlantic Capital Bancshares, Inc.a20180331-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Atlantic Capital Bancshares, Inc.a20180331-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Atlantic Capital Bancshares, Inc.a20180331-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Atlantic Capital Bancshares, Inc.a20180331-ex311.htm
EX-10.9 - EXHIBIT 10.9 - Atlantic Capital Bancshares, Inc.a20180331-ex109.htm
EX-10.8 - EXHIBIT 10.8 - Atlantic Capital Bancshares, Inc.a20180331-ex108.htm
EX-10.7 - EXHIBIT 10.7 - Atlantic Capital Bancshares, Inc.a20180331-ex107.htm
EX-10.6 - EXHIBIT 10.6 - Atlantic Capital Bancshares, Inc.a20180331-ex106.htm
EX-10.5 - EXHIBIT 10.5 - Atlantic Capital Bancshares, Inc.a20180331-ex105.htm
EX-10.4 - EXHIBIT 10.4 - Atlantic Capital Bancshares, Inc.a20180331-ex104.htm
EX-10.3 - EXHIBIT 10.3 - Atlantic Capital Bancshares, Inc.a20180331-ex103.htm
EX-10.2 - EXHIBIT 10.2 - Atlantic Capital Bancshares, Inc.a20180331-ex102.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
newacblogosa06.jpg
_______________________________________________
FORM 10-Q
_______________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from              to             
COMMISSION FILE NO. 001-37615
_________________________________________________
ATLANTIC CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
_________________________________________________
Georgia
20-5728270
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
945 East Paces Ferry Road NE, Suite 1600, Atlanta, Georgia
30326
(Address of principal executive offices)
(Zip Code)
 
(404) 995-6050
 
 
(Registrant’s telephone number, including area code)
 
 
3280 Peachtree Road NE, Suite 1600 Atlanta, Georgia 30305
 
 
(Former name, former address, and former fiscal year, if changed since last report)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
ý
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
 
 
 
Smaller reporting company
¨
 
 
 
Emerging growth company
ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, no par value: 26,037,219 shares outstanding as of May 1, 2018



Atlantic Capital Bancshares, Inc.
Form 10-Q
INDEX
 
 
 
Page
No.
PART I.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 



PART I - FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)

Atlantic Capital Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
 
 
March 31,
2018
 
December 31,
2017
(in thousands, except share data)
 
(unaudited)
 
ASSETS
 
 
 
 
Cash and due from banks
 
$
39,985

 
$
38,086

Interest-bearing deposits in banks
 
62,787

 
281,247

Other short-term investments
 
9,669

 
10,681

Cash and cash equivalents
 
112,441

 
330,014

Securities available-for-sale
 
458,730

 
449,117

Other investments
 
37,949

 
32,174

Loans held for sale
 
835

 
1,487

Loans held for investment
 
1,959,421

 
1,933,839

Less: allowance for loan losses
 
(19,885
)
 
(19,344
)
Loans held for investment, net
 
1,939,536

 
1,914,495

Premises and equipment, net
 
15,475

 
12,054

Bank owned life insurance
 
64,014

 
63,667

Goodwill and intangible assets, net
 
27,485

 
27,633

Other real estate owned
 
927

 
1,215

Other assets
 
61,273

 
59,565

Total assets
 
$
2,718,665

 
$
2,891,421

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand
 
$
599,838

 
$
732,442

Interest-bearing checking
 
302,636

 
306,331

Savings
 
29,407

 
26,573

Money market
 
911,449

 
1,117,891

Time
 
140,594

 
138,612

Brokered deposits
 
112,376

 
128,816

Total deposits
 
2,096,300

 
2,450,665

Federal funds purchased and securities sold under agreements to repurchase
 
47,855

 

Federal Home Loan Bank borrowings
 
185,000

 
45,000

Long-term debt
 
49,577

 
49,535

Other liabilities
 
32,874

 
37,796

Total liabilities
 
2,411,606

 
2,582,996

SHAREHOLDERS’ EQUITY
 
 
 
 
Preferred Stock, no par value – 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2018 and December 31, 2017
 

 

Common stock, no par value – 100,000,000 shares authorized; 25,772,208 and 25,712,909 shares issued and outstanding as of March 31, 2018, and December 31, 2017, respectively
 
300,893

 
299,474

Retained earnings
 
18,693

 
12,810

Accumulated other comprehensive (loss) income
 
(12,527
)
 
(3,859
)
Total shareholders’ equity
 
307,059

 
308,425

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
2,718,665

 
$
2,891,421


See Accompanying Notes to Consolidated Financial Statements
1


Atlantic Capital Bancshares, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
 
March 31,
(in thousands, except per share data)
2018
 
2017
INTEREST INCOME
 
 
 
Loans, including fees
$
22,675

 
$
19,994

Investment securities available-for-sale
2,592

 
2,018

Interest and dividends on other interest-earning assets
715

 
449

Total interest income
25,982

 
22,461

INTEREST EXPENSE
 
 
 
Interest on deposits
3,044

 
2,047

Interest on Federal Home Loan Bank advances
509

 
302

Interest on federal funds purchased and securities sold under agreements to repurchase
83

 
36

Interest on long-term debt
829

 
823

Total interest expense
4,465

 
3,208

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
21,517

 
19,253

Provision for loan losses
772

 
634

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
20,745

 
18,619

NONINTEREST INCOME
 
 
 
Service charges
1,192

 
1,349

Gain (loss) on sales of other assets
(46
)
 
78

Mortgage income
304

 
257

Trust income
518

 
407

Derivatives income
114

 
(51
)
Bank owned life insurance
369

 
378

SBA lending activities
1,302

 
1,227

Other noninterest income
230

 
212

Total noninterest income
3,983

 
3,857

NONINTEREST EXPENSE
 
 
 
Salaries and employee benefits
12,077

 
11,065

Occupancy
1,355

 
1,230

Equipment and software
787

 
805

Professional services
832

 
904

Postage, printing and supplies
58

 
85

Communications and data processing
1,043

 
987

Marketing and business development
190

 
270

FDIC premiums
147

 
314

Amortization of intangibles
343

 
470

Foreclosed property/problem asset expense
282

 
3

Other noninterest expense
1,278

 
1,611

Total noninterest expense
18,392

 
17,744

INCOME BEFORE PROVISION FOR INCOME TAXES
6,336

 
4,732

Provision for income taxes
1,298

 
1,502

NET INCOME
$
5,038

 
$
3,230

NET INCOME PER SHARE:
 
 
 
Net income per share – basic
$
0.20

 
$
0.13

Net income per share – diluted
$
0.19

 
$
0.13


See Accompanying Notes to Consolidated Financial Statements
2


Atlantic Capital Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended
 
March 31,
(in thousands)
2018
 
2017
Net income
$
5,038

 
$
3,230

Other comprehensive income
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
Unrealized holding gains (losses) arising during the period, net of tax of ($2,137) and $227, respectively
(6,414
)
 
364

Unrealized gains on available-for-sale securities, net of tax
(6,414
)
 
364

Cash flow hedges:
 
 
 
Net unrealized derivative gains (losses) on cash flow hedges, net of tax of ($470) and ($91), respectively
(1,410
)
 
(146
)
Changes from cash flow hedges
(1,410
)
 
(146
)
Other comprehensive income (loss), net of tax
(7,824
)
 
218

Comprehensive income (loss)
$
(2,786
)
 
$
3,448







See Accompanying Notes to Consolidated Financial Statements
3


Atlantic Capital Bancshares, Inc. and Subsidiary
Consolidated Statements of Shareholders’ Equity
(Unaudited)

 
 
Common Stock
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
(in thousands, except share data)
 
Shares
 
Amount
 
Retained Earnings
 
Total
Balance - December 31, 2016
 
25,093,135

 
$
292,747

 
$
16,536

 
$
(5,625
)
 
$
303,658

Comprehensive income:
 
 
 
 
 
 
 
 
 


Net Income
 

 

 
3,230

 

 
3,230

Change in unrealized gains on investment securities available-for-sale, net
 

 

 

 
364

 
364

Change in unrealized gains on cash flow hedges
 

 

 

 
(146
)
 
(146
)
Total comprehensive income
 
 
 
 
 


 
 
 
3,448

Issuance of common stock for option exercises
 
380,079

 
2,281

 

 

 
2,281

Issuance of common stock for long-term incentive plan
 
61,799


1,209

 

 

 
1,209

Restricted stock activity
 

 
229

 

 

 
229

Stock-based compensation
 

 
142

 

 

 
142

Balance - March 31, 2017
 
25,535,013

 
$
296,608

 
$
19,766

 
$
(5,407
)
 
$
310,967

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2017
 
25,712,909

 
$
299,474

 
$
12,810

 
$
(3,859
)
 
$
308,425

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
Net Income
 

 

 
5,038

 

 
5,038

Reclassification of tax effects from AOCI
 

 

 
844

 
(844
)
 

Change in unrealized gains on investment securities available-for-sale, net
 

 

 

 
(6,414
)
 
(6,414
)
Change in unrealized gains (losses) on cash flow hedges
 

 

 

 
(1,410
)
 
(1,410
)
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
(2,786
)
Change in accounting principle - Revenue Recognition
 

 

 
1

 

 
1

Net forfeitures of restricted stock
 
(2,023
)
 

 

 

 

Issuance of common stock for option exercises
 
22,481


325

 

 

 
325

Issuance of common stock for long-term incentive plan
 
38,841

 
687

 

 

 
687

Restricted stock activity
 

 
349

 

 

 
349

Stock-based compensation
 

 
58

 

 

 
58

Balance - March 31, 2018
 
25,772,208

 
$
300,893

 
$
18,693

 
$
(12,527
)
 
$
307,059



See Accompanying Notes to Consolidated Financial Statements
4


Atlantic Capital Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
 
March 31,
(in thousands)
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net income
$
5,038

 
$
3,230

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Provision for loan losses
772

 
634

Depreciation, amortization, and accretion
1,078

 
1,428

Amortization of restricted stock compensation
349

 
229

Stock option compensation
58

 
142

Loss on disposition of premises and equipment, net
44

 

Net write downs and losses (gains) on sales of other real estate owned
279

 
(78
)
Net increase in cash value of bank owned life insurance
(347
)
 
(356
)
Origination of servicing assets
(371
)
 
(267
)
Proceeds from sales of SBA loans
19,337

 
11,698

Net gains on sale of SBA loans
(1,113
)
 
(762
)
Changes in operating assets and liabilities -
 
 
 
Net change in loans held for sale
652

 
5,978

Net (increase) decrease in other assets
(98
)
 
3,774

Net decrease in accrued expenses and other liabilities
(4,234
)
 
(4,202
)
Net cash provided by operating activities
21,444

 
21,448

 INVESTING ACTIVITIES
 
 
 
Activity in securities available-for-sale:
 
 
 
Prepayments
11,622

 
10,804

Maturities and calls
65

 
1,000

Purchases
(30,560
)
 
(121,427
)
Net change in loans held for investment
(44,037
)
 
67,244

(Purchases) proceeds of Federal Home Loan Bank stock, net
(6,097
)
 
(4,631
)
Proceeds from sales of other real estate
9

 
216

(Purchases) of premises and equipment, net
(3,834
)
 
(703
)
Net cash (used in) investing activities
(72,832
)
 
(47,497
)
FINANCING ACTIVITIES
 
 
 
Net change in deposits
(354,365
)
 
(34,541
)
Net change in short-term borrowings
47,855

 

Proceeds from Federal Home Loan Bank advances
430,000

 
474,000

Repayments of Federal Home Loan Bank advances
(290,000
)
 
(367,000
)
Proceeds from exercise of stock options
325

 
2,281

Net cash (used in) provided by financing activities
(166,185
)
 
74,740

NET CHANGE IN CASH AND CASH EQUIVALENTS
(217,573
)
 
48,691

CASH AND CASH EQUIVALENTS – beginning of period
330,014

 
165,725

CASH AND CASH EQUIVALENTS – end of period
$
112,441

 
$
214,416

 
 
 
 
 
Three Months Ended
 
March 31,
 
2018
 
2017
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
 
 
 
Interest paid
$
3,715

 
$
4,028

Income taxes paid

 
110

 

See Accompanying Notes to Consolidated Financial Statements
5


ATLANTIC CAPITAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 – ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accounting and financial reporting policies of Atlantic Capital Bancshares, Inc. (“Atlantic Capital” or the “Company”) and its subsidiary, Atlantic Capital Bank, N.A. (the “Bank”), conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated.
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Atlantic Capital’s filing on Form 10-K. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. Certain prior period amounts have been reclassified to conform to the current year presentation.
NOTE 2 – ACCOUNTING STANDARDS UPDATES AND RECENTLY ADOPTED STANDARDS
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The guidance gives entities the option to reclassify into retained earnings tax effects related to items in accumulated other comprehensive income (“OCI”) that were stranded in accumulated OCI as a result of tax reform. It is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption in any period is permitted and Atlantic Capital adopted ASU 2018-02 as of January 1, 2018. The adoption of this update resulted in a reclassification of approximately $844,000 between accumulated OCI and retained earnings, and a net impact of zero to total shareholders’ equity.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.” The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. Atlantic Capital adopted ASU 2017-12 as of January 1, 2018. The guidance requires a modified retrospective transition method resulting in the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. Adoption did not have a material impact on Atlantic Capital’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope and Modification Accounting.” The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with Topic 718. The amendments were effective for interim and annual reporting periods beginning after December 15, 2017. This ASU did not have a material impact on Atlantic Capital’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. The amendments were effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. This ASU did not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-1, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities.” The guidance in this update requires that equity investments (except those accounted for under the equity method of accounting) be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance also simplifies the impairment assessment of equity investments without readily determinable fair values

6


by requiring a qualitative assessment to identify impairment. In addition, the guidance requires that public business entities base their fair value disclosures for financial instruments that are not measured at fair value in the financial statements on the exit price notion. For public entities, this update was effective for fiscal years beginning after December 15, 2017. The adoption of this update did not have a material impact on Atlantic Capital’s consolidated financial statements, however Atlantic Capital changed the disclosure of financial instruments not measured at fair value to reflect the exit price notion.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public companies, this guidance was effective for annual and interim periods beginning after December 15, 2017. Atlantic Capital completed its review of the impact of ASU 2014-09 on components of non-interest income and did not find any significant changes to its methodology of recognizing revenue. Revenue streams impacted by the ASU included service charges, trust income, sales of financed other real estate, and check printing revenue. The Company recorded a cumulative effect adjustment to first quarter 2018 opening retained earnings in an amount less than $2,000, and included newly applicable revenue disclosures.
In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This guidance shortens the premium amortization period for certain callable debt securities by requiring amortization to the earliest call date. The standard is effective for public companies for annual and interim periods beginning after December 15, 2020. The adoption of this update is not expected to have a material impact on Atlantic Capital’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which intends to simplify goodwill impairment testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The update instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied prospectively and is effective for the Company on January 1, 2020. Early adoption is permitted. Atlantic Capital does not expect the new guidance to have a material impact on its financial condition or results of operations.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public companies for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Atlantic Capital is in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-2, “Leases.” Under the new guidance, leases classified as operating leases under previous GAAP must be recorded on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Upon adoption, Atlantic Capital expects to report higher assets and liabilities as a result of including leases on the consolidated balance sheet. The Company does not expect the new guidance to have a material impact on the consolidated statement of income or the consolidated statement of shareholders’ equity.

7


NOTE 3 – ACQUISITIONS AND DIVESTITURES

Sale of Southeastern Trust Company (“SETCO”)

On December 14, 2017, the Bank entered into an agreement with The Banc Group, LLC to sell its trust business, a division of the Bank known as Southeastern Trust Company (“SETCO”), for approximately $1.7 million. The Banc Group, LLC is controlled by a former director and Chief Operating Officer of the Company. Subject to customary closing conditions, including the receipt of all regulatory approvals, the sale of SETCO is expected to close during the second quarter of 2018.
NOTE 4 – BALANCE SHEET OFFSETTING
Atlantic Capital enters into reverse repurchase agreements in order to invest short-term funds. Atlantic Capital enters into repurchase agreements for short-term financing needs.
The following table presents a summary of amounts outstanding under reverse repurchase agreements, repurchase agreements, and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of March 31, 2018 and December 31, 2017. While these agreements are typically over-collateralized, U.S. GAAP requires disclosures in this table to limit the amount of such collateral to the amount of the related recognized asset or liability for each counterparty.
(in thousands)
 
 
 
 
 
 
 
 Gross Amounts not Offset in the Balance Sheet
 
 
March 31, 2018
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset on the Balance Sheet
 
Net Asset Balance
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Reverse repurchase agreements
 
$
9,669

 
$

 
$
9,669

 
$
(9,669
)
 
$

 
$

Derivatives
 
2,614

 

 
2,614

 

 

 
2,614

Total
 
$
12,283

 
$

 
$
12,283

 
$
(9,669
)
 
$

 
$
2,614

 
 
 
 
 
 
 
 
 Gross Amounts not Offset in the Balance Sheet
 
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset on the Balance Sheet
 
Net Liability Balance
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Repurchase agreements
 
$
7,855

 
$

 
$
7,855

 
$
(11,532
)
 
$

 
$

Derivatives
 
5,360

 

 
5,360

 
(4,039
)
 
(1,321
)
 

Total
 
$
13,215

 
$

 
$
13,215

 
$
(15,571
)
 
$
(1,321
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Gross Amounts not Offset in the Balance Sheet
 
 
December 31, 2017
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset on the Balance Sheet
 
Net Asset Balance
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Reverse repurchase agreements
 
$
10,681

 
$

 
$
10,681

 
$
(10,681
)
 
$

 
$

Derivatives
 
3,018

 

 
3,018

 

 

 
3,018

Total
 
$
13,699

 
$

 
$
13,699

 
$
(10,681
)
 
$

 
$
3,018

 
 
 
 
 
 
 
 
 Gross Amounts not Offset in the Balance Sheet
 
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset on the Balance Sheet
 
Net Liability Balance
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Repurchase agreements
 
$

 
$

 
$

 
$

 
$

 
$

Derivatives
 
4,023

 

 
4,023

 
(2,705
)
 
(1,318
)
 

Total
 
$
4,023

 
$

 
$
4,023

 
$
(2,705
)
 
$
(1,318
)
 
$



8


NOTE 5 – SECURITIES
The following table presents the amortized cost, unrealized gains and losses, and fair value of securities available-for-sale at March 31, 2018 and December 31, 2017.
 Available-For-Sale
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
(in thousands)
March 31, 2018
 
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
37,364

 
$
2

 
$
(834
)
 
$
36,532

U.S. states and political divisions
 
92,005

 
18

 
(6,210
)
 
85,813

Trust preferred securities
 
4,761

 

 
(111
)
 
4,650

Corporate debt securities
 
12,925

 

 
(468
)
 
12,457

Residential mortgage-backed securities
 
325,809

 
2,414

 
(8,945
)
 
319,278

Total
 
$
472,864

 
$
2,434

 
$
(16,568
)
 
$
458,730

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
34,699

 
$
11

 
$
(599
)
 
$
34,111

U.S. states and political divisions
 
92,169

 
237

 
(2,405
)
 
90,001

Trust preferred securities
 
4,754

 

 
(104
)
 
4,650

Corporate debt securities
 
12,948

 
60

 
(386
)
 
12,622

Residential mortgage-backed securities
 
310,129

 
2,423

 
(4,819
)
 
307,733

Total
 
$
454,699

 
$
2,731

 
$
(8,313
)
 
$
449,117


The following table presents the amortized cost and fair value of debt securities by contractual maturity at March 31, 2018. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
Available-For-Sale
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Within 1 year
$

 
$

Over 1 year through 5 years
23,099

 
22,605

5 years to 10 years
52,910

 
51,238

Over 10 years
71,046

 
65,609

 
147,055

 
139,452

Residential mortgage-backed securities
325,809

 
319,278

Total
$
472,864

 
$
458,730



9


The following table summarizes available-for-sale securities in an unrealized loss position as of March 31, 2018 and December 31, 2017.
 
 
 
Less than 12 months
 
12 months or greater
 
Totals
Available-For-Sale
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(in thousands)
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
25,903

 
$
(499
)
 
$
8,848

 
$
(335
)
 
$
34,751

 
$
(834
)
U.S. states and political divisions
 
28,017

 
(1,017
)
 
54,396

 
(5,193
)
 
82,413

 
(6,210
)
Trust preferred securities
 

 

 
4,650

 
(111
)
 
4,650

 
(111
)
Corporate debt securities
 
9,464

 
(147
)
 
2,993

 
(321
)
 
12,457

 
(468
)
Residential mortgage-backed securities
 
183,751

 
(3,844
)
 
118,906

 
(5,101
)
 
302,657

 
(8,945
)
Totals
 
$
247,135

 
$
(5,507
)
 
$
189,793

 
$
(11,061
)
 
$
436,928

 
$
(16,568
)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
22,148

 
$
(348
)
 
$
9,145

 
$
(251
)
 
$
31,293

 
$
(599
)
U.S. states and political divisions
 
14,009

 
(183
)
 
58,744

 
(2,222
)
 
72,753

 
(2,405
)
Trust preferred securities
 

 

 
4,650

 
(104
)
 
4,650

 
(104
)
Corporate debt securities
 
2,989

 
(27
)
 
2,970

 
(359
)
 
5,959

 
(386
)
Residential mortgage-backed securities
 
155,637

 
(1,344
)
 
126,580

 
(3,475
)
 
282,217

 
(4,819
)
Totals
 
$
194,783


$
(1,902
)
 
$
202,089

 
$
(6,411
)
 
$
396,872

 
$
(8,313
)

At March 31, 2018, there were 318 available-for-sale securities that were in an unrealized loss position. Atlantic Capital does not intend to sell and does not believe it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at March 31, 2018 and December 31, 2017 were attributable to changes in interest rates.
Management evaluates securities for other-than-temporary impairment on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three months ended March 31, 2018 or 2017.
Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. No securities were sold during the three months ended March 31, 2018 and 2017.
Investment securities with a carrying value of $79.9 million and $93.9 million were pledged to secure public funds and other borrowings at March 31, 2018 and December 31, 2017, respectively.

10


NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio as of March 31, 2018 and December 31, 2017, is summarized below.
 
March 31,
2018
 
December 31,
2017
 
(in thousands)
Loans held for sale
 
 
 
Other loans held for sale
$
835

 
$
1,487

Total loans held for sale
$
835

 
$
1,487

 
 
 
 
Loans held for investment
 
 
 
Commercial loans:
 
 
 
Commercial and industrial
$
636,181

 
$
615,359

Commercial real estate
914,100

 
940,415

Construction and land
145,904

 
115,495

Mortgage warehouse participations
44,575

 
39,981

Total commercial loans
1,740,760

 
1,711,250

Residential:
 
 
 
Residential mortgages
105,255

 
104,484

Home equity
70,712

 
76,244

Total residential loans
175,967

 
180,728

Consumer
30,966

 
29,393

Other
15,181

 
16,278

Total loans
1,962,874

 
1,937,649

Less net deferred fees and other unearned income
(3,453
)
 
(3,810
)
Less allowance for loan losses
(19,885
)
 
(19,344
)
Loans held for investment, net
$
1,939,536

 
$
1,914,495

At March 31, 2018 and December 31, 2017, loans with a carrying value of $717.3 million and $667.2 million, respectively, were pledged as collateral to secure FHLB advances and the Federal Reserve discount window.
At March 31, 2018, the carrying value and outstanding balance of Purchased Credit Impaired (“PCI”) loans accounted for under ASC 310-30 was $11.8 million and $14.0 million, respectively. At December 31, 2017, the carrying value and outstanding balance of PCI loans accounted for under ASC 310-30 was $11.8 million and $14.1 million, respectively. The following table presents changes in the value of the accretable yield for acquired loans accounted for under ASC 310-30.
 
 
For the Three Months Ended
 
 
March 31, 2018
 
March 31, 2017
 
 
(in thousands)
Balance at beginning of period
 
$
2,316

 
$
3,467

Accretion
 
(298
)
 
(444
)
Reclassification of nonaccretable discount due to change in expected cash flows
 
96

 
251

Other changes, net
 
295

 
95

Balance at end of period
 
$
2,409

 
$
3,369


In addition to the accretable yield on PCI loans, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest income over the life of the loans. At March 31, 2018, the remaining accretable fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $2.5 million compared to $2.8 million at December 31, 2017.

11


The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period. It is comprised of specific reserves for impaired loans and a general allowance for pools of loans with similar characteristics not individually evaluated. The allowance is regularly evaluated for loan losses to maintain an adequate level to absorb probable current inherent losses in the loan portfolio. Factors contributing to the determination of the allowance include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. Most loan commitments rated substandard or worse are specifically reviewed for loss potential. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans.
The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2018 and 2017.
 
 
2018
 
2017
Three Months Ended March 31,
 
Commercial
 
Residential
 
Consumer
 
Total
 
Commercial
 
Residential
 
Consumer
 
Total
 
 
(in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
18,267

 
$
802

 
$
275

 
$
19,344

 
$
18,717

 
$
1,418

 
$
460

 
$
20,595

Provision for loan losses
 
637

 
154

 
(19
)
 
772

 
297

 
34

 
303

 
634

Loans charged-off
 
(126
)
 
(128
)
 
(3
)
 
(257
)
 
(913
)
 
(46
)
 
(332
)
 
(1,291
)
Recoveries
 
19

 

 
7

 
26

 

 

 
1

 
1

Total ending allowance balance
 
$
18,797

 
$
828

 
$
260

 
$
19,885

 
$
18,101

 
$
1,406

 
$
432

 
$
19,939

The general component of the allowance for loan losses is based on the incurred losses inherent in the portfolio. The loss factors are determined through the generation of probabilities of default (“PDs”) and losses given default (“LGDs”) for groups of similar loans with similar credit grades where Loss Rate = PD x LGD. The PDs and LGDs for the loan portfolio are calculated based on Atlantic Capital’s loss history as well as available market-based data. The loss factor for each pool of loans is adjusted based on qualitative and environmental factors to account for conditions in the current environment which management believes are likely to cause a difference between the calculated loss based on historical performance and the incurred loss in the existing portfolio. These factors include: changes in policies and procedures, changes in the economy, changes in nature or volume of the portfolio and in the terms of loans, changes in lending management, changes in past dues and credit migration, changes in the loan review system, changes in the value of collateral and concentration risk and changes in external factors, such as competition, legal and regulatory. Quarterly, management evaluates these factors to determine an adjustment unique to Atlantic Capital and its market.
Charge-offs are recognized when the amount of the loss is quantifiable and timing is known. Collateral based loan charge-offs are measured based on the difference between the loan’s carrying value, including deferred fees, and the estimated net realizable value of the loan. When assessing property value for the purpose of determining a charge-off, a third-party appraisal or an independently derived internal evaluation is generally employed.
A loan is considered to be impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Loans for which the terms have been modified or granted an economic concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. A specific allowance is established for individually evaluated impaired loans as needed. Reserves on impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the observable market price, or the fair value of the underlying collateral of the loan if the loan is collateral dependent.
Atlantic Capital’s policy is to place loans on nonaccrual status, when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not both well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.
PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans accounted for under ASC 310-30 were not classified as nonaccrual at March 31, 2018 or December 31, 2017, as the carrying value of the respective loan or pool of loans’ cash flows were considered estimable and collection was probable. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows (accretable yield), is being recognized on all acquired loans accounted for under ASC 310-30.

12


The balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method is presented in the following table as of March 31, 2018 and December 31, 2017.
March 31, 2018
 
Commercial
 
Residential
 
Consumer
 
Total
 
 
(in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
Ending allowance balance attributable to loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
276

 
$

 
$

 
$
276

Collectively evaluated for impairment
 
18,516

 
828

 
260

 
19,604

PCI
 
5

 

 

 
5

Total ending allowance balance
 
$
18,797

 
$
828

 
$
260

 
$
19,885

 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
6,731

 
$
183

 
$

 
$
6,914

Loans collectively evaluated for impairment
 
1,724,816

 
173,172

 
46,135

 
1,944,123

PCI
 
9,213

 
2,612

 
12

 
11,837

Total ending loans balance
 
$
1,740,760

 
$
175,967

 
$
46,147

 
$
1,962,874

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Commercial
 
Residential
 
Consumer
 
Total
 
 
(in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
Ending allowance balance attributable to loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
306

 
$

 
$

 
$
306

Collectively evaluated for impairment
 
17,918

 
800

 
275

 
18,993

PCI
 
43

 
2

 

 
45

Total ending allowance balance
 
$
18,267

 
$
802

 
$
275

 
$
19,344

 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
6,886

 
$
186

 
$

 
$
7,072

Loans collectively evaluated for impairment
 
1,694,948

 
178,204

 
45,671

 
1,918,823

PCI
 
9,416

 
2,338

 

 
11,754

Total ending loans balance
 
$
1,711,250

 
$
180,728

 
$
45,671

 
$
1,937,649




13


The following table presents information on Atlantic Capital’s impaired loans for the three months ended March 31, 2018 and 2017:
 
For the Three Months Ended March 31,
 
2018
 
2017
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average Balance of Recorded Investment While Impaired
 
Interest Income Recognized During Impairment
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average Balance of Recorded Investment While Impaired
 
Interest Income Recognized During Impairment
 
(in thousands)
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,035

 
$
972

 
$

 
$
973

 
$
13

 
$
1,132

 
$
1,069

 
$

 
$
1,550

 
$
17

Commercial real estate
1,755

 
1,592

 

 
1,592

 

 
2,388

 
2,226

 

 
2,303

 

Construction and land

 

 

 

 

 

 

 

 

 

Residential mortgages
228

 
183

 

 
184

 

 
244

 
198

 

 
225

 

Home equity

 

 

 

 

 
549

 
549

 

 
549

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Total
$
3,018

 
$
2,747

 
$

 
$
2,749

 
$
13

 
$
4,313

 
$
4,042

 
$

 
$
4,627

 
$
17

Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
3,643

 
$
3,643

 
$
168

 
$
3,691

 
$
46

 
$
8,316

 
$
8,316

 
$
2,077

 
$
8,357

 
$
108

Commercial real estate
524

 
524

 
108

 
544

 
6

 
750

 
750

 
159

 
753

 
7

Construction and land

 

 

 

 

 

 

 

 

 

Residential mortgages

 

 

 

 

 
147

 
147

 
4

 
147

 

Home equity

 

 

 

 

 

 

 

 

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Total
$
4,167

 
$
4,167

 
$
276

 
$
4,235

 
$
52

 
$
9,213

 
$
9,213

 
$
2,240

 
$
9,257

 
$
115

Total impaired loans
$
7,185

 
$
6,914

 
$
276

 
$
6,984

 
$
65

 
$
13,526

 
$
13,255

 
$
2,240

 
$
13,884

 
$
132


Atlantic Capital evaluates loans in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors. TDRs are loans in which Atlantic Capital has modified the terms or granted an economic concession to a borrower who is experiencing financial difficulties. These modifications may include interest rate reductions, term extensions and other concessions intended to minimize losses.
As of March 31, 2018 and December 31, 2017, the Company had a recorded investment in TDRs of $5.2 million and $5.3 million, respectively. The Company had commitments to lend additional funds of $28,000 and $26,000 on loans modified as TDRs, as of March 31, 2018 and December 31, 2017, respectively. The Company did not modify any new loans as a TDR during the three months ended March 31, 2018 or 2017 and there were no subsequent defaults on prior TDRs.

14


Atlantic Capital individually rates loans based on internal credit risk ratings using numerous factors, including thorough analysis of historical and expected cash flows, consumer credit risk scores (FICO scores), rating agency information, LTV ratios, collateral, collection experience, and other internal metrics. Atlantic Capital uses a dual rating system. The likelihood of default of a credit transaction is graded in the Obligor Rating. The risk of loss given default is graded in the Facility Rating. The Obligor Rating is determined through credit analysis. Facility Ratings are used to describe the value to the Company that the collateral represents. Facility Ratings are based on the collateral package or market expectations regarding the value and liquidity of the collateral. Ratings are generally reviewed at least annually or more frequently if there is a material change in creditworthiness. Exceptions to this policy may include well collateralized term loans and loans to individuals with limited exposure or complexity.
Atlantic Capital uses the following definitions for risk ratings:
Pass: Loans that are analyzed individually as part of the above described process and that do not meet the criteria of special mention, substandard or doubtful.
Special Mention: Loans classified as special mention have a potential weakness that requires management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

15


As of March 31, 2018 and December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows.

 
Pass
 
Special Mention
 
Substandard Accruing
 
Substandard Nonaccruing
 
Doubtful Nonaccruing
 
Total
 
(in thousands)
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
593,133

 
$
16,089

 
$
21,656

 
$
14

 
$

 
$
630,892

Commercial real estate
879,885

 
11,453

 
17,483

 

 
1,592

 
910,413

Construction and land
145,667

 

 

 

 

 
145,667

Residential mortgages
100,871

 
1,063

 
746

 
322

 
315

 
103,317

Home equity
68,869

 
642

 
304

 
223

 

 
70,038

Mortgage warehouse
44,575

 

 

 

 

 
44,575

Consumer/Other
45,895

 

 
240

 

 

 
46,135

Total loans, excluding PCI loans
$
1,878,895

 
$
29,247

 
$
40,429

 
$
559

 
$
1,907

 
$
1,951,037

Commercial and industrial
$

 
$

 
$
5,289

 
$

 
$

 
$
5,289

Commercial real estate
3,130

 
188

 
256

 

 
113

 
3,687

Construction and land
222

 
6

 
9

 

 

 
237

Residential mortgages
467

 
699

 
772

 

 

 
1,938

Home equity
34

 
288

 
352

 

 

 
674

Mortgage warehouse

 

 

 

 

 

Consumer/Other

 

 
12

 

 

 
12

Total PCI loans
$
3,853

 
$
1,181

 
$
6,690

 
$

 
$
113

 
$
11,837



 
Pass
 
Special Mention
 
Substandard Accruing
 
Substandard Nonaccruing
 
Doubtful
 
Total
 
(in thousands)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
572,942

 
$
15,643

 
$
21,332

 
$
16

 
$
2

 
$
609,935

Commercial real estate
919,939

 
6,227

 
8,906

 

 
1,592

 
936,664

Construction and land
115,255

 

 

 

 

 
115,255

Residential mortgages
100,342

 
1,075

 
753

 
398

 
321

 
102,889

Home equity
74,841

 
64

 
310

 
285

 

 
75,500

Mortgage warehouse
39,981

 

 

 

 

 
39,981

Consumer/Other
45,422

 
57

 
192

 

 

 
45,671

Total loans, excluding PCI loans
$
1,868,722

 
$
23,066

 
$
31,493

 
$
699

 
$
1,915

 
$
1,925,895

Commercial and industrial
$

 
$
3,881

 
$
1,543

 
$

 
$

 
$
5,424

Commercial real estate
3,151

 
212

 
276

 

 
112

 
3,751

Construction and land
222

 
7

 
11

 

 

 
240

Residential mortgages
428

 
493

 
674

 

 

 
1,595

Home equity
34

 
354

 
356

 

 

 
744

Mortgage warehouse

 

 

 

 

 

Consumer/Other

 

 

 

 

 

Total PCI loans
$
3,835

 
$
4,947

 
$
2,860

 
$

 
$
112

 
$
11,754




16


Atlantic Capital monitors loans by past due status. The following table presents the aging of the recorded investment in past due loans as of March 31, 2018 and December 31, 2017 by class of loans.
 
 
As of March 31, 2018
 
Accruing Current
 
Accruing 30-89
Days
Past Due
 
Accruing
90+ Days
Past Due
 
Nonaccruing
 
PCI Loans
 
Total
 
(in thousands)
Loans by Classification
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
627,685

 
$
3,193

 
$

 
$
14

 
$
5,289

 
$
636,181

Commercial real estate
908,300

 
521

 

 
1,592

 
3,687

 
914,100

Construction and land
145,667

 

 

 

 
237

 
145,904

Residential mortgages
102,129

 
551

 

 
637

 
1,938

 
105,255

Home equity
69,775

 
5

 
35

 
223

 
674

 
70,712

Mortgage warehouse
44,575

 

 

 

 

 
44,575

Consumer
45,900

 
235

 

 

 
12

 
46,147

Total Loans
$
1,944,031

 
$
4,505

 
$
35

 
$
2,466

 
$
11,837

 
$
1,962,874


 
As of December 31, 2017
 
Accruing Current
 
Accruing 30-89
Days
Past Due
 
Accruing
90+ Days
Past Due
 
Nonaccruing
 
PCI Loans
 
Total
 
(in thousands)
Loans by Classification
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
606,677

 
$
3,239

 
$

 
$
19

 
$
5,424

 
$
615,359

Commercial real estate
932,916

 
2,156

 

 
1,592

 
3,751

 
940,415

Construction and land
114,988

 
267

 

 

 
240

 
115,495

Residential mortgages
100,402

 
1,470

 
298

 
719

 
1,595

 
104,484

Home equity
75,081

 
135

 

 
284

 
744

 
76,244

Mortgage warehouse
39,981

 

 

 

 

 
39,981

Consumer
45,599

 
72

 

 

 

 
45,671

Total Loans
$
1,915,644

 
$
7,339

 
$
298

 
$
2,614

 
$
11,754

 
$
1,937,649



17


NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill and other intangible assets as of March 31, 2018 and December 31, 2017 is summarized below:
 
March 31,
 
December 31,
 
2018
 
2017
 
(in thousands)
Core deposit intangible
$
9,544

 
$
9,544

Less: accumulated amortization
(4,967
)
 
(4,624
)
Less: impairment related to divested branches
(2,286
)
 
(2,286
)
Core deposit intangible, net
2,291

 
2,634

Servicing assets, net
3,435

 
3,240

Total other intangibles, net
5,726

 
5,874

Goodwill
21,759

 
21,759

Total goodwill and other intangible assets, net
$
27,485

 
$
27,633


There were no goodwill impairment charges recorded in the three months ended March 31, 2018 and 2017. The following table presents activity for goodwill and other intangible assets:
 
 
For the Three Months Ended March 31,
 
 
Goodwill
 
Core Deposit Intangible
 
Total
 
 
(in thousands)
2018
 
 
 
 
 
 
Balance, beginning of period
 
$
21,759

 
$
2,634

 
$
24,393

Amortization
 

 
(343
)
 
(343
)
Balance, end of period
 
$
21,759

 
$
2,291

 
$
24,050

 
 
 
 
 
 
 
2017
 
 
 
 
 
 
Balance, beginning of period
 
$
21,759

 
$
4,624

 
$
26,383

Amortization
 

 
(470
)
 
(470
)
Balance, end of period
 
$
21,759

 
$
4,154

 
$
25,913



18


NOTE 8 – SERVICING ASSETS

SBA Servicing Assets

SBA servicing assets are initially recorded at fair value. Subsequently, Atlantic Capital accounts for SBA servicing assets using the amortization method and they are included in other assets. As of March 31, 2018 and December 31, 2017, the balance of SBA loans sold and serviced by Atlantic Capital totaled $151.0 million and $135.8 million, respectively.

Changes in the balance of servicing assets for the three months ended March 31, 2018 and 2017 are presented in the following table.
 
 
 Three months ended March 31,
SBA Loan Servicing Assets
 
2018
 
2017
 
 
(in thousands)
Beginning carrying value, net
 
$
2,635

 
$
2,359

Additions
 
371

 
267

Amortization
 
(134
)
 
(131
)
Impairment
 

 

             Ending carrying value
 
$
2,872

 
$
2,495

At March 31, 2018 and December 31, 2017, the sensitivity of the fair value of the SBA loan servicing assets to immediate changes in key economic assumptions are presented in the table below.
Sensitivity of the SBA Servicing Assets
 
March 31, 2018
 
December 31, 2017
 
 
 
(dollars in thousands)
 
Fair value of retained servicing assets
 
$
3,114

 
$
2,865

 
Weighted average life
 
5.96 years

 
6.22 years

 
Prepayment speed:
 
9.45

%
8.64

%
Decline in fair value due to a 10% adverse change
 
$
(111
)
 
$
(103
)
 
Decline in fair value due to a 20% adverse change
 
$
(199
)
 
$
(181
)
 
Weighted average discount rate
 
12.98

%
13.01

%
Decline in fair value due to a 100 bps adverse change
 
$
(103
)
 
$
(103
)
 
Decline in fair value due to a 200 bps adverse change
 
$
(185
)
 
$
(180
)
 

The above sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on valuation assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.


19


TriNet Servicing Assets

Changes in the balance of TriNet servicing assets for the three months ended March 31, 2018 and 2017 are presented in the following table.

 
 
 Three months ended March 31,
TriNet Servicing Assets
 
2018
 
2017
 
 
(in thousands)
Beginning carrying value, net
 
$
605

 
$
825

Additions
 

 

Amortization
 
(42
)
 
(47
)
Impairment
 

 

             Ending carrying value
 
$
563

 
$
778


At March 31, 2018 and December 31, 2017, the sensitivity of the fair value of the TriNet servicing assets to immediate changes in key economic assumptions are presented in the table below.
Sensitivity of the TriNet Servicing Assets
 
March 31, 2018
 
December 31, 2017
 
 
 
(dollars in thousands)
 
Fair value of retained servicing assets
 
$
652

 
$
697

 
Weighted average life
 
7.35 years

 
7.37 years

 
Prepayment speed:
 
5.00

%
5.00

%
Decline in fair value due to a 10% adverse change
 
$
(9
)
 
$
(10
)
 
Decline in fair value due to a 20% adverse change
 
$
(18
)
 
$
(20
)
 
Weighted average discount rate
 
8.00

%
8.00

%
Decline in fair value due to a 100 bps adverse change
 
$
(17
)
 
$
(19
)
 
Decline in fair value due to a 200 bps adverse change
 
$
(33
)
 
$
(37
)
 

The above sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on valuation assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.



20


NOTE 9 – OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) for Atlantic Capital consists of changes in net unrealized gains and losses on investment securities available-for-sale and derivatives.  The following tables present a summary of the changes in accumulated other comprehensive income (loss) balances for the applicable periods.
 
For the Three Months Ended
 
March 31, 2018
 
Pre-Tax Amount
 
Income Tax (Expense) Benefit
 
After-Tax Amount
 
(in thousands)
Accumulated other comprehensive income (loss) beginning of period
$
(6,274
)
 
$
2,415

 
$
(3,859
)
Reclassification of tax effects from AOCI

 
(844
)
 
(844
)
Unrealized net gains (losses) on investment securities available-for-sale
(8,551
)
 
2,137

 
(6,414
)
Unrealized net gains (losses) on derivatives
(1,880
)
 
470

 
(1,410
)
Accumulated other comprehensive income (loss) end of period
$
(16,705
)
 
$
4,178

 
$
(12,527
)
 
For the Three Months Ended
 
March 31, 2017
 
Pre-Tax Amount
 
Income Tax (Expense) Benefit
 
After-Tax Amount
 
(in thousands)
Accumulated other comprehensive income (loss) beginning of period
$
(9,144
)
 
$
3,519

 
$
(5,625
)
Unrealized net gains (losses) on investment securities available-for-sale
591

 
(227
)
 
364

Unrealized net gains (losses) on derivatives
(237
)
 
91

 
(146
)
Accumulated other comprehensive income (loss) end of period
$
(8,790
)
 
$
3,383

 
$
(5,407
)





21


NOTE 10 – EARNINGS PER COMMON SHARE
Basic earnings per share amounts are computed by dividing net income by the weighted average number of shares of common stock outstanding.
Diluted earnings per share amounts are computed by dividing net income by the weighted average number of shares of common stock outstanding and the dilutive effects of the shares awarded under the stock option plan, based on the treasury stock method using an average fair market value of the stock during the respective periods.
The following table represents the earnings per share calculations for the three months ended March 31, 2018 and 2017.
 
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
(in thousands, except share and per share amounts)
 
 
 
 
Net income available to common shareholders
 
$
5,038

 
$
3,230

Weighted average shares outstanding
 
 
 
 
Basic (1)
 
25,750,824

 
25,320,690

Effect of dilutive securities:
 
 
 
 
Stock options and warrants
 
194,949

 
351,596

Diluted
 
25,945,773

 
25,672,286

Income per common share:
 
 
 
 
Basic
 
$
0.20

 
$
0.13

Diluted
 
$
0.19

 
$
0.13

(1) Unvested restricted shares are participating securities and included in basic share calculations.
Stock options outstanding of 432 at March 31, 2018 and 747 at March 31, 2017 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. These awards were considered anti-dilutive because the exercise price of the award was higher than the market value of the shares.
The Amended and Restated Articles of Incorporation of Atlantic Capital, which were approved by the Board of Directors on March 24, 2015 and by Atlantic Capital’s shareholders on May 21, 2015, authorize Atlantic Capital to issue 110,000,000 shares of capital stock, of which 10,000,000 shares are designated as preferred stock, no par value per share, and 100,000,000 shares are designated as common stock, no par value per share.
At March 31, 2018, 25,772,208 shares of common stock were issued and outstanding. At December 31, 2017, 25,712,909 shares of common stock were issued and outstanding.
The primary source of funds available to Atlantic Capital is payments of dividends from the Bank. The Bank has not paid any dividends to Atlantic Capital in 2018 or 2017. Banking laws and other regulations limit the amount of dividends a bank subsidiary may pay without prior regulatory approval. Additionally, Atlantic Capital’s ability to pay dividends to its shareholders will depend on the ability of the Bank to pay dividends to Atlantic Capital. The Bank is subject to regulatory restrictions on the payment of cash dividends, which generally may be paid only from current earnings.

22


NOTE 11 – DERIVATIVES AND HEDGING
Risk Management
Atlantic Capital’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish these objectives, Atlantic Capital primarily uses interest rate swaps as part of its interest rate risk management strategy.
Cash Flow Hedges
At March 31, 2018, Atlantic Capital’s interest rate swaps designated as cash flow hedges involve the payment of floating-rate amounts to a counterparty in exchange for receiving fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. At March 31, 2018 and December 31, 2017, Atlantic Capital had interest rate swaps designated as cash flow hedges with aggregate notional amounts of $100.0 million, respectively.
No hedge ineffectiveness gains or losses were recognized on active cash flow hedges for the three months ended March 31, 2018 and 2017. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Atlantic Capital expects that approximately $83,000 will be reclassified as a decrease to loan interest income over the next twelve months related to these cash flow hedges.
Customer Swaps
Atlantic Capital also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of customers desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. To economically hedge the interest rate risk associated with offering this product, Atlantic Capital simultaneously enters into derivative contracts with third parties to offset the customer contracts, such that Atlantic Capital minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts reduce over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to clients.
Atlantic Capital’s derivative instruments are recorded at fair value in other assets and accrued interest receivable and other liabilities and accrued interest payable in the Consolidated Balance Sheets. The changes in the fair value of the derivative instruments are recognized in other noninterest income in the Consolidated Statements of Income. At March 31, 2018 and December 31, 2017, Atlantic Capital had interest rate swaps related to this program with an aggregate notional amount of $129.9 million and $142.3 million, respectively.
Atlantic Capital acquired a loan level hedging program, which First Security utilized to accommodate clients preferring a fixed rate loan. The loan documents include an addendum with a zero premium collar. The zero premium collar is a cap and a floor at the same interest rate, resulting in a fixed rate to the borrower. To hedge this embedded option, First Security entered into a dealer facing trade exactly mirroring the terms in the loan addendum.
Counterparty Credit Risk
As a result of its derivative contracts, Atlantic Capital is exposed to credit risk. Specifically approved counterparties and exposure limits are defined. Quarterly, the customer derivative contracts and related counterparties are evaluated for credit risk and an adjustment is made to the contract’s fair value. This adjustment is recognized in the Consolidated Statements of Income.
Most derivative contracts with clients are secured by collateral. Additionally, in accordance with the interest rate agreements with derivatives dealers, Atlantic Capital may be required to post margin to these counterparties. At March 31, 2018 and December 31, 2017, Atlantic Capital had minimum collateral posting thresholds with certain of its derivative counterparties and posted collateral of $8.3 million and $8.8 million, respectively, against its obligations under these agreements. Cash collateral related to derivative contracts is recorded in other assets in the Consolidated Balance Sheets.
Atlantic Capital has master netting agreements with the derivatives dealers with which it does business, but reflects gross assets and liabilities on the Consolidated Balance Sheets.
In conjunction with the FASB’s fair value measurement guidance, management made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting arrangements on a net basis.
To accommodate clients, Atlantic Capital occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. This allows clients to execute an interest rate swap with one bank while allowing for distribution of the credit risk among participating members. Credit risk participation agreements arise when Atlantic Capital contracts with other financial institutions, as a guarantor, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. At March 31, 2018 and December 31, 2017, Atlantic Capital had credit risk participation agreements with a notional amount of $14.1 million and $14.8 million, respectively.

23


The following table reflects the estimated fair value positions of derivative contracts and credit risk participation agreements as of March 31, 2018 and December 31, 2017:
Derivatives designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
March 31, 2018
 
December 31, 2017
Interest Rate Products
 
Balance Sheet Location
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
Cash flow hedge of LIBOR based loans
 
 Other liabilities
 
$
100,000

 
$
2,739

 
$
100,000

 
$
887

 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
March 31, 2018
 
December 31, 2017
Interest Rate Products
 
Balance Sheet Location
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
Customer swap positions
 
 Other assets
 
$
64,958

 
$
1,065

 
$
71,160

 
$
946

Zero premium collar
 
 Other assets
 
94,189

 
1,549

 
94,953

 
2,072

 
 
 
 
$
159,147

 
$
2,614

 
$
166,113

 
$
3,018

 
 
 
 
 
 
 
 
 
 
 
Dealer offsets to customer swap positions
 
 Other liabilities
 
$
64,958

 
$
1,061

 
$
71,160

 
$
975

Credit risk participation
 
 Other liabilities
 
14,058

 
2

 
14,807

 
4

Dealer offset to zero premium collar
 
 Other liabilities
 
94,189

 
1,558

 
94,953

 
2,157

 
 
 
 
$
173,205

 
$
2,621

 
$
180,920

 
$
3,136

The following table presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Consolidated Statements of Income for the three months ended March 31, 2018 and 2017.
Derivatives not designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
(in thousands)
 
Location of Gain or (Loss) Recognized in Income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivative
 
 
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
Interest rate products
 
Other income / (expense)
 
$
108

 
$
(51
)
Other contracts
 
Other income / (expense)
 
3

 

Total
 
 
 
$
111

 
$
(51
)
 
 
 
 
 
 
 
Fee income
 
Other income / (expense)
 
$
3

 
$

The following table reflects the impact to the Consolidated Statements of Income related to derivative contracts for the three months ended March 31, 2018 and 2017:
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
(in thousands)
 
 Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
 
 Gain or (Loss) Reclassified from Accumulated OCI in Income (Effective Portion)
 
 
2018
 
2017
 
Location
 
2018
 
2017
Interest rate swaps
 
$
(1,778
)
 
$
(100
)
 
Interest income
 
$
102

 
$
137



24


NOTE 12 – OTHER BORROWINGS AND LONG TERM DEBT
Federal Home Loan Bank borrowings as of March 31, 2018 and December 31, 2017 are as follows:
 
March 31, 2018
 
 
December 31, 2017
 
Balance
 
Interest Rate
 
 
Balance
 
Interest Rate
 
(in thousands)
 
 
(in thousands)
FHLB short-term borrowings:
 
 
 
 
FHLB short-term borrowings:
 
 
 
Fixed rate advance maturing April 3, 2018
40,000

 
1.61
%
 
Fixed rate advance maturing January 16, 2018
45,000

 
1.40
%
Fixed rate advance maturing April 6, 2018
40,000

 
1.70
%
 
 


 


Fixed rate advance maturing April 12, 2018
30,000

 
1.70
%
 
 
 
 
 
Fixed rate advance maturing April 16, 2018
45,000

 
1.86
%
 
 
 
 
 
Fixed rate advance maturing April 23, 2018
30,000

 
1.85
%
 
 


 


Total
$
185,000

 


 
Total
$
45,000

 
 
 
 
 
 
 
 
 
 
 
On September 28, 2015, Atlantic Capital issued subordinated notes (the “Notes”) totaling $50.0 million in aggregate principal amount. The Notes are due September 30, 2025 and bear a fixed rate of interest of 6.25% per year until September 29, 2020. From September 30, 2020 to the maturity date, the interest rate will be a floating rate equal to the three-month LIBOR plus 468 basis points. The Notes were priced at 100% of their par value. The Notes qualify as Tier 2 regulatory capital.
Subordinated debt is summarized as follows.
 
 
March 31, 2018
 
December 31, 2017
 
 
(in thousands
Floating rate 10 year capital securities, with interest paid semi-annually at an annual fixed rate of 6.25% until September 30, 2020
 
$
50,000

 
$
50,000

Principal amount of subordinated debt
 
$
50,000

 
$
50,000

Less debt issuance costs
 
 
423

 
 
465

Subordinated debt, net
 
$
49,577

 
$
49,535

All subordinated debt outstanding at March 31, 2018 matures after more than five years.
NOTE 13 – SHARE-BASED COMPENSATION
Atlantic Capital sponsors a stock incentive plan for the benefit of directors and employees. Under the 2015 Stock Incentive Plan, there were approximately 4,525,000 shares reserved for issuance to directors and employees. The Compensation Committee has the authority to grant the following: an incentive or nonqualified option; a restricted stock award (including a restricted stock award or a restricted unit award); a performance award (including a performance share award or a performance unit award); a phantom stock award; a dividend equivalent award; or any other award granted under the plan.
As of March 31, 2018, approximately 3,660,000 additional awards were available to be granted under the plan. Stock options are granted at a price which is no less than the fair market value of a share of Atlantic Capital common stock on the grant date. Stock options generally vest over three years and expire after ten years.
As of March 31, 2018 and December 31, 2017, no warrants were outstanding for the purchase of common stock.

25


The Company estimates the fair value of its options and warrants awards using the Black-Scholes option pricing model. The risk-free rate for periods within the contractual life of the option and warrant is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options or warrants granted during the three months ended March 31, 2017. The table below summarizes the assumptions used to calculate the fair value of options granted/modified during the three months ended March 31, 2018:
 
 
2018
Risk‑free interest rate
 
1.66
%
Expected term in years
 
0.25

Expected stock price volatility
 
24.2
%
Dividend yield
 
%
The following table represents stock option activity for the three months ended March 31, 2018:
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding, December 31, 2017
757,711

 
$
12.66

 
 
 
 
Granted
15,000

 
14.64

 
 
 
 
Exercised
(25,376
)
 
12.80

 
 
 
 
Forfeited
(15,000
)
 
14.64

 
 
 
 
Expired
(118
)
 
482.97

 
 
 
 
Outstanding, March 31, 2018
732,217

 
$
12.58

 
5.31
 
$
4,127

 
 
 
 
 
 
 
 
Exercisable, March 31, 2018
645,522

 
$
12.32

 
5.02
 
$
3,813

Atlantic Capital recognized compensation expense relating to stock options of $58,000 and $142,000 for the three months ended March 31, 2018 and 2017, respectively. Using the Black-Scholes pricing model, the amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period.
The following table represents restricted stock activity for the three months ended March 31, 2018:
 
Shares
 
Weighted Average Grant-Date Fair Value
Outstanding, December 31, 2017
239,468

 
$
15.69

Granted
19,882

 
12.61

Vested
(8,769
)
 
4.93

Forfeited
(21,905
)
 
15.94

Outstanding, March 31, 2018
228,676

 
$
15.81

Compensation expense for restricted stock is based on the fair value of restricted stock awards at the time of grant, which is equal to the value of Atlantic Capital’s common stock on the date of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting period. For the three months ended March 31, 2018 and 2017, compensation expense of $401,000 and $229,000, respectively, was recognized related to restricted stock awards.
As of March 31, 2018, there was $2.2 million of unrecognized compensation cost related to restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.83 years.
During the three months ended March 31, 2018, the Company modified options for 15,000 shares and 6,869 restricted stock awards to two individuals. The modifications allowed for the immediate vesting of the awards upon termination of service. The total incremental cost resulting from the modifications was $111,000 for the three months ended March 31, 2018.


26


NOTE 14 – FAIR VALUE MEASUREMENTS

Atlantic Capital follows the guidance pursuant to ASC 820-10, Fair Value Measurements and Disclosures. This guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This issuance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. Atlantic Capital measures its investment securities and interest rate derivative assets and liabilities at fair value on a recurring basis. Fair value is used on a nonrecurring basis either when assets are evaluated for impairment or for disclosure purposes. Atlantic Capital measures its servicing assets, goodwill, intangible assets, loans held for sale, impaired loans and other real estate owned at fair value on a nonrecurring basis if necessary.

The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement and defines fair value as the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, this guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Atlantic Capital applied the following fair value hierarchy:

Level 1 – Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments or futures contracts.

Level 2 – Assets or liabilities valued based on observable market data for similar instruments.

Level 3 – Assets or liabilities for which significant valuation assumptions are not readily observable in the market, instruments valued based on the best available data, some of which is internally-developed, and risk premiums that a market participant would require.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement. There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the three months ended March 31, 2018 and 2017.

Atlantic Capital records investment securities available-for-sale at fair value on a recurring basis. Investment securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, Atlantic Capital obtains fair value measurements from an independent pricing service. In estimating the fair values for investment securities, Atlantic Capital believes that independent third-party market prices are the best evidence of an exit price. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury Department yield curve, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things.

Derivative instruments are primarily transacted as over-the-counter trades and priced with observable market assumptions. Ongoing measurements include observable market assumptions with appropriate valuation adjustments for liquidity and for credit risk of counterparties and Atlantic Capital’s own credit. For these instruments, Atlantic Capital obtains fair value measurements from an independent pricing service. The fair value measurements consider factors such as the likelihood of default by Atlantic Capital and its counterparties, total exposure and remaining maturities in determining the appropriate fair value adjustments to record. Generally, the expected loss of each client counterparty is estimated using Atlantic Capital’s internal risk rating system. For financial institution counterparties that are rated by national rating agencies, those ratings are used in determining the credit risk. This approach used to estimate exposures to counterparties is also used by Atlantic Capital to estimate its own credit risk on derivative liability positions.


27


Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the assets that were measured at fair value on a recurring basis by level within the fair value hierarchy as reported in the Consolidated Balance Sheets at March 31, 2018 and December 31, 2017.

 
Fair Value Measurements at
 
March 31, 2018 Using:
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in thousands)
Securities available-for-sale—
 
 
 
 
 
 
 
U.S. government agencies
$

 
$
36,532

 
$

 
$
36,532

U.S. states and political subdivisions

 
85,813

 

 
85,813

Trust preferred securities

 
4,650

 

 
4,650

Corporate debt securities

 
12,457

 

 
12,457

Mortgage-backed securities

 
319,278

 

 
319,278

Total securities available-for-sale
$

 
$
458,730

 
$

 
$
458,730

Interest rate derivative assets
$

 
$
2,614

 
$

 
$
2,614

Interest rate derivative liabilities
$

 
$
5,360

 
$

 
$
5,360


 
Fair Value Measurements at
 
December 31, 2017 Using:
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in thousands)
Securities available-for-sale—
 
 
 
 
 
 
 
U.S. government agencies
$

 
$
34,111

 
$

 
$
34,111

U.S. states and political subdivisions

 
90,001

 

 
90,001

Trust preferred securities

 
4,650

 

 
4,650

Corporate debt securities

 
12,622

 

 
12,622

Mortgage-backed securities

 
307,733

 

 
307,733

Total securities available-for-sale
$

 
$
449,117

 
$

 
$
449,117

Interest rate derivative assets
$

 
$
3,018

 
$

 
$
3,018

Interest rate derivative liabilities
$

 
$
4,023

 
$

 
$
4,023

 

For the three months ended March 31, 2018 and 2017, there was not a change in the methods and significant assumptions used to estimate fair value.


28


Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The following table presents the assets that were measured at fair value on a nonrecurring basis by level within the fair value hierarchy as reported in the Consolidated Balance Sheets at March 31, 2018 and December 31, 2017.
March 31, 2018
 
Level 1
Fair Value
Measurement
 
Level 2
Fair Value
Measurement
 
Level 3
Fair Value
Measurement
 
Total
 
(in thousands)
Impaired Loans
 
$

 
$

 
$
2,142

 
$
2,142


December 31, 2017
 
Level 1
Fair Value
Measurement
 
Level 2
Fair Value
Measurement
 
Level 3
Fair Value
Measurement
 
Total
 
(in thousands)
Impaired Loans
 
$

 
$

 
$
2,199

 
$
2,199


Level 3 loans consist of impaired loans which have been partially charged-off or have specific valuation allowances. The fair value of Level 3 assets is estimated based on the underlying collateral value. For loans which the cash proceeds from the sale of the underlying collateral is the expected source of repayment, the fair value of these loans was derived from internal estimates of the underlying collateral incorporating market data, including third party appraisals or evaluations, when available. Appraised values may be discounted based on management’s assessment of the level of inactivity in the real estate market and other markets for the underlying collateral, changes in market conditions from the time of the valuation, and other information that in management’s judgment may affect the value. Impaired loans are evaluated on at least a quarterly basis and adjusted accordingly.

Assets and Liabilities Not Measured at Fair Value

For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates the reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For loans held for investment, fair value is measured using the exit price notion. For off-balance sheet derivative instruments, fair value is estimated as the amount that Atlantic Capital would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

The short maturity of Atlantic Capital’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and due from banks, interest-bearing deposits in other banks, other short-term investments, and FHLB stock. The fair value of securities available-for-sale equals the balance sheet value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of Atlantic Capital’s entire holdings. Because no ready market exists for a significant portion of Atlantic Capital’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Off-balance sheet financial instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.

29


The following table presents the estimated fair values of Atlantic Capital’s financial instruments at March 31, 2018 and December 31, 2017.
 
Fair Value Measurements at
 
March 31, 2018 Using:
 
Carrying
Value
 
Quoted Prices in Active markets for Identical Securities (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
Cash and due from banks
$
39,985

 
$
39,985

 
$

 
$

Interest bearing deposits in banks
62,787

 
62,787

 

 

Other short-term investments
9,669

 
9,669

 

 

Total securities available-for-sale
458,730

 

 
458,730

 

FHLB stock
10,485

 

 

 
10,485

Federal Reserve Bank stock
9,792

 

 

 
9,792

Loans held for investment, net
1,939,536

 

 

 
1,893,372

Loans held for sale
835

 

 
835

 

Derivative assets
2,614

 

 
2,614

 

Financial liabilities
 
 
 
 
 
 
 
Deposits
$
2,096,300

 
$

 
$
2,037,010

 
$

Federal funds purchased and securities sold under agreements to repurchase
47,855

 
47,855

 

 

Subordinated debt
49,577

 

 
48,823

 

FHLB advances
185,000

 

 
185,276

 

Derivative financial instruments
5,360

 

 
5,360

 

 
Fair Value Measurements at
 
December 31, 2017 Using:
 
Carrying
Value
 
Quoted Prices in Active markets for Identical Securities (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
Cash and due from banks
$
38,086

 
$
38,086

 
$

 
$

Interest-bearing deposits in other banks
281,247

 
281,247

 

 

Other short-term investments
10,681

 
10,681

 

 

Total securities available-for-sale
449,117

 

 
449,117

 

FHLB stock
4,388

 

 

 
4,388

Federal Reserve Bank stock
9,792

 

 

 
9,792

Loans held for investment, net
1,914,495

 

 

 
1,955,705

Loans held for sale
1,487

 

 
1,487

 

Derivative assets
3,018

 

 
3,018

 

Financial liabilities
 
 
 
 
 
 
 
Deposits
$
2,450,665

 
$

 
$
2,411,810

 
$

Subordinated debt
49,535

 

 
49,888

 

FHLB advances
45,000

 

 
45,057

 

Derivative financial instruments
4,023

 

 
4,023

 


30


NOTE 15 – COMMITMENTS AND CONTINGENCIES
Atlantic Capital is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, most of which are standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract amounts of these instruments reflect the extent of involvement Atlantic Capital has in particular classes of financial instruments.
Standby letters of credit are written conditional commitments issued by Atlantic Capital to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Most letters of credit expire in less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Atlantic Capital’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Atlantic Capital uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Atlantic Capital’s maximum exposure to credit risk for unfunded loan commitments and standby letters of credit at March 31, 2018 and December 31, 2017 was as follows:
 
March 31,
2018
 
December 31,
2017
 
(in thousands)
Financial Instruments whose contract amount represents credit risk:
 
Commitments to extend credit
$
688,312

 
$
689,753

Standby letters of credit
13,560

 
10,958

 
$
701,872

 
$
700,711


Atlantic Capital, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on Atlantic Capital’s financial position or results of operations.

NOTE 16 – REVENUE RECOGNITION
On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 2, Accounting Standards Updates and Recently Adopted Standards, the implementation of the new standard did not result in any significant changes to the Company’s methodology of recognizing revenue; as such, the Company recorded a cumulative effect adjustment to first quarter 2018 opening retained earnings in an amount less than $2,000. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with financial guarantees and derivatives are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts and trust and asset management income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams within the scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges represent general service fees for monthly account maintenance and activity, or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed, such as a wire transfer or ATM withdrawal. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. The following table presents service charges by type of service provided for the three months ended March 31, 2018 and 2017:


31


 
 
For the three months ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Deposit account analysis fees and charges
 
$
571

 
$
499

ATM fees
 
290

 
407

NSF fees
 
193

 
248

Wire fees
 
90

 
91

Foreign Exchange Fees
 
38

 
84

Other
 
10

 
20

 
 
$
1,192

 
$
1,349

Trust and Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. The following table presents trust income by type of service provided for the three months ended March 31, 2018 and 2017:
 
 
For the three months ended March 31,
 
 
2018
 
2017
 
 
(in thousands)
Personal trust and agency accounts
 
$
313

 
$
232

Employee benefit and retirement-related trust and agency accounts
 
60

 
52

Investment management and investment advisory agency accounts
 
107

 
88

Custody and safekeeping accounts
 
13

 
18

Other
 
25

 
17

 
 
$
518

 
$
407

Other
Other noninterest income consists of other recurring revenue streams such as check printing income, safety deposit box rental fees, and other miscellaneous revenue streams. Check printing income is recognized ratably over the contract period as the Company satisfies its performance obligation to sell a specific number of check packages. Safe deposit box rental fees are charged to the customer annually and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2018 and December 31, 2017, the Company did not have any significant contract balances.


32


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q of Atlantic Capital Bancshares, Inc. (the “Company” or “Atlantic Capital”) contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates, and projections about our industry, management’s beliefs, and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
The following risks, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
changes in our business strategy implemented following the integration with First Security Group, Inc. (“First Security”) may result in the expected benefits of the acquisition not being fully realized;
costs associated with, and fluctuations in income resulting from, strategic decisions with respect to particular markets, locations or lines of business;
loss of income from out trust business following our exit of this business;
changes in asset quality and credit risk;
the cost and availability of capital;
customer acceptance of our products and services;
customer borrowing, repayment, investment and deposit practices;
the introduction, withdrawal, success and timing of business initiatives;
the impact, extent, and timing of technological changes;
severe catastrophic events in our geographic area;
a weakening of the economies in which we conduct operations may adversely affect our operating results;
the U.S. legal and regulatory framework, including those associated with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), could adversely affect the operating results of the company;
an increasing interest rate environment may compress margins and adversely affect net interest income;
changes in trade, monetary and fiscal policies of various governmental bodies and central banks could affect the economic environment in which we operate;
our ability to determine accurate values of certain assets and liabilities;
adverse developments in securities, public debt, and capital markets, including changes in market liquidity and volatility;
our ability to anticipate or respond to interest rate changes correctly and manage interest rate risk presented through unanticipated changes in our interest rate risk position and/or short- and long-term interest rates;
unanticipated changes in our liquidity position, including but not limited to our ability to enter the financial markets to manage and respond to any changes to our liquidity position;
adequacy of our risk management program;
increased costs associated with operating as a public company;
increased competitive pressure due to consolidation in the financial services industry;

33


risks related to security breaches, cybersecurity attacks and other significant disruptions in our information technology systems, including attacks focused on the financial industry, may result in costs and liabilities related to compromised personal information of our customers;
the effect of changes in tax law, such as the effect of the Tax Cuts and Jobs Act that was enacted on December 22, 2017; or
other risks and factors identified in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 15, 2018 (the “Annual Report”) in Part I, Item 1A under the heading “Risk Factors.”
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of Atlantic Capital are in accordance with GAAP and conform to general practices within the banking industry. Atlantic Capital’s financial position and results of operations are affected by management’s application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in Atlantic Capital’s consolidated financial position and/or consolidated results of operations. The more critical accounting and reporting policies include Atlantic Capital’s accounting for the allowance for loan losses, fair value measurements, and income tax related items. Significant accounting policies are discussed in the Notes to Consolidated Financial Statements within Atlantic Capital’s Annual Report on Form 10-K.
Non-GAAP Financial Measures.
This Form 10-Q contains non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. Atlantic Capital management uses non-GAAP financial measures, including: (i) taxable equivalent interest income; (ii) taxable equivalent net interest income; (iii) taxable equivalent net interest margin; (iv) net interest income after provision for loan losses-taxable equivalent; (v) income before income taxes-taxable equivalent; and (vi) income tax expense-taxable equivalent. Management uses these non-GAAP financial measures because it believes they provide a greater understanding of ongoing performance and operations, enhance comparability with prior periods, and provide users of our financial information with a meaningful measure for assessing our financial results and credit trends. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as an alternative to any measure of performance or financial condition as determined in accordance with GAAP. In addition, non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures presented by other companies. Investors should consider Atlantic Capital’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. A reconciliation of these non-GAAP financial measures to GAAP financial measures is included in Table 1.

34


EXECUTIVE OVERVIEW AND EARNINGS SUMMARY
Atlantic Capital reported net income of $5.0 million for the first quarter of 2018 compared to net income of $3.2 million for the first quarter of 2017. Diluted income per common share was $.19 for the first quarter of 2018 compared to diluted income per common share of $.13 for the first quarter of 2017.
The increase in net income for the three months ended March 31, 2018, compared to the same period in 2017, was primarily the result of a $2.1 million, or 11%, increase in taxable equivalent net interest income after provision for loan losses, offset by a $648,000, or 4%, increase in noninterest expense.
Taxable equivalent net interest income was $21.6 million for the first quarter of 2018, compared to $19.5 million for the first quarter of 2017. Taxable equivalent net interest margin increased to 3.51% for the three months ended March 31, 2018 from 3.20% for the three months ended March 31, 2017. The margin increase for the three months ended March 31, 2018 compared to the prior year was due to increases in the Fed Funds rate.
Provision for loan losses for the quarter ended March 31, 2018 totaled $772,000, an increase of $138,000 from the quarter ended March 31, 2017. The higher provision for the three months ended March 31, 2018 was primarily related to loan growth.
Noninterest income increased $126,000, or 3%, to $4.0 million from the first quarter of 2017. The increase was primarily due to a $165,000, or 324%, increase in derivatives income which was attributable to the quarterly credit valuation adjustment.
The closing on the sale of Southeastern Trust Company is expected to occur in the second quarter of 2018 and result in a gain of approximately $1.7 million. Quarterly expense savings are expected to be approximately $450,000 to $500,000, but will be offset by an expected decrease in quarterly trust income of approximately $518,000 based on first quarter 2018 results.
For the first quarter of 2018, noninterest expense increased $648,000, or 4%, to $18.4 million compared to the first quarter of 2017. The most significant component of the increase was salaries and employee benefits due to severance expense.

35


Table 1 - Quarterly Selected Financial Data
 
(dollars in thousands, except share and per share data; taxable equivalent)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
 
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
INCOME SUMMARY
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
26,085

 
$
25,350

 
$
24,566

 
$
24,545

 
$
22,716

 
Interest expense
 
4,465

 
4,028

 
4,060

 
3,833

 
3,208

 
Net interest income
 
21,620

 
21,322

 
20,506

 
20,712

 
19,508

 
Provision for loan losses
 
772

 
282

 
322

 
1,980

 
634

 
Net interest income after provision for loan losses
 
20,848

 
21,040

 
20,184

 
18,732

 
18,874

 
Noninterest income
 
3,983

 
3,568

 
3,477

 
5,287

 
3,857

 
Noninterest expense
 
18,392

 
20,594

 
17,504

 
17,623

 
17,744

 
    Income before income taxes
 
6,439

 
4,014

 
6,157

 
6,396

 
4,987

 
Income tax expense
 
1,401

 
19,351

 
2,105

 
2,067

 
1,757

 
Net income (loss)
 
$
5,038

 
$
(15,337
)
 
$
4,052

 
$
4,329

 
$
3,230

 
 
 
 
 
 
 
 
 
 
 
 
 
PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.20

 
$
(0.60
)
 
$
0.16

 
$
0.17

 
$
0.13

 
Diluted earnings per share
 
0.19

 
(0.60
)
 
0.16

 
0.17

 
0.13

 
 
 
 
 
 
 
 
 
 
 
 
 
PERFORMANCE MEASURES
 
 
 
 
 
 
 
 
 
 
 
Return on average equity
 
6.66

%
(18.66
)
%
4.96

%
5.48

%
4.19

%
Return on average assets
 
0.76

 
(2.24
)
 
0.60

 
0.63

 
0.48

 
Taxable equivalent net interest margin
 
3.51

 
3.39

 
3.26

 
3.26

 
3.20

 
Efficiency ratio
 
72.13

 
83.45

 
73.65

 
68.37

 
76.78

 
Equity to assets
 
11.29

 
10.67

 
12.31

 
11.82

 
11.10

 
 
 
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses to loans
 
1.01

%
1.00

%
0.99

%
1.11

%
1.05

%
Net charge-offs
 
$
231

 
$
(192
)
 
$
3,322

 
$
49

 
$
1,290

 
Net charge-offs to average loans(1)
 
0.05

%
(0.04
)
%
0.68

%
0.01

%
0.26

%
NPAs to total assets
 
0.13

 
0.14

 
0.23

 
0.52

 
0.21

 
 
 
 
 
 
 
 
 
 
 
 
 
AVERAGE BALANCES
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
$
1,938,953

 
$
1,898,745

 
$
1,934,505

 
$
1,962,374

 
$
1,949,385

 
Investment securities
 
453,917

 
460,269

 
455,868

 
455,090

 
419,335

 
Total assets
 
2,704,822

 
2,720,070

 
2,701,387

 
2,762,389

 
2,694,715

 
Deposits
 
2,153,885

 
2,194,849

 
2,121,263

 
2,158,675

 
2,111,992

 
Shareholders’ equity
 
306,821

 
326,059

 
323,832

 
316,825

 
308,261

 
Number of common shares - basic
 
25,750,824

 
25,723,548

 
25,699,179

 
25,621,910

 
25,320,690

 
Number of common shares - diluted
 
25,945,773

 
25,888,064

 
25,890,779

 
25,831,281

 
25,672,286

 
 
 
 
 
 
 
 
 
 
 
 
 
AT PERIOD END
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
$
1,960,256

 
$
1,935,326

 
$
1,908,706

 
$
1,963,835

 
$
1,930,965

 
Investment securities
 
458,730

 
449,117

 
447,005

 
450,273

 
456,942

 
Total assets
 
2,718,665

 
2,891,421

 
2,638,412

 
2,702,575

 
2,802,078

 
Deposits
 
2,096,300

 
2,450,665

 
2,103,645

 
2,113,954

 
2,203,039

 
Shareholders’ equity
 
307,059

 
308,425

 
324,754

 
319,435

 
310,967

 
Number of common shares outstanding
 
25,772,208

 
25,712,909

 
25,716,418

 
25,654,521

 
25,535,013

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Annualized.




36


Non-GAAP Performance Measures Reconciliation
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
Taxable equivalent interest income reconciliation
 
 
 
 
 
 
 
 
 
 
Interest income - GAAP
 
$
25,982

 
$
25,137

 
$
24,351

 
$
24,322

 
$
22,461

Taxable equivalent adjustment
 
103

 
213

 
215

 
223

 
255

Interest income - taxable equivalent
 
$
26,085

 
$
25,350

 
$
24,566

 
$
24,545

 
$
22,716

 
 
 
 
 
 
 
 
 
 
 
Taxable equivalent net interest income reconciliation
 
 
 
 
 
 
 
 
 
 
Net interest income - GAAP
 
$
21,517

 
$
21,109

 
$
20,291

 
$
20,489

 
$
19,253

Taxable equivalent adjustment
 
103

 
213

 
215

 
223

 
255

Net interest income - taxable equivalent
 
$
21,620

 
$
21,322

 
$
20,506

 
$
20,712

 
$
19,508

 
 
 
 
 
 
 
 
 
 
 
Taxable equivalent net interest income after provision for loan losses reconciliation
 
 
 
 
 
 
 
 
 
 
Net interest income after provision for loan losses - GAAP
 
$
20,745

 
$
20,827

 
$
19,969

 
$
18,509

 
$
18,619

Taxable equivalent adjustment
 
103

 
213

 
215

 
223

 
255

Net interest income after provision for loan losses - taxable equivalent
 
$
20,848

 
$
21,040

 
$
20,184

 
$
18,732

 
$
18,874

 
 
 
 
 
 
 
 
 
 
 
Taxable equivalent income before income taxes reconciliation
 
 
 
 
 
 
 
 
 
 
Income before income taxes - GAAP
 
$
6,336

 
$
3,801

 
$
5,942

 
$
6,173

 
$
4,732

Taxable equivalent adjustment
 
103

 
213

 
215

 
223

 
255

Income before income taxes - taxable equivalent
 
$
6,439

 
$
4,014

 
$
6,157

 
$
6,396

 
$
4,987

 
 
 
 
 
 
 
 
 
 
 
Taxable equivalent income tax expense reconciliation
 
 
 
 
 
 
 
 
 
 
Income tax expense - GAAP
 
$
1,298

 
$
19,138

 
$
1,890

 
$
1,844

 
$
1,502

Taxable equivalent adjustment
 
103

 
213

 
215

 
223

 
255

Income tax expense - taxable equivalent
 
$
1,401

 
$
19,351

 
$
2,105

 
$
2,067

 
$
1,757

 
 
 
 
 
 
 
 
 
 
 
Taxable equivalent net interest margin reconciliation
 
 
 
 
 
 
 
 
 
 
Net interest margin - GAAP
 
3.49
%
 
3.35
%
 
3.23
%
 
3.23
%
 
3.16
%
Impact of taxable equivalent adjustment
 
0.02

 
0.04

 
0.03

 
0.03

 
0.04

Net interest margin - taxable equivalent
 
3.51
%
 
3.39
%
 
3.26
%
 
3.26
%
 
3.20
%

37


RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
Taxable equivalent net interest income for the first quarter of 2018 totaled $21.6 million, a $2.1 million, or 11%, increase compared to the first quarter of 2017. This increase was primarily driven by a $3.4 million, or 15%, increase in taxable equivalent interest income. The change in taxable equivalent interest income primarily resulted from the following:
a $2.7 million, or 13%, increase in interest income on loans, resulting from increases in the Fed Funds rate; and
a $422,000, or 19%, increase to $2.7 million in taxable equivalent interest income on investment securities, resulting from a $34.6 million, or 8%, increase in average balance, as well as a 46 basis point increase in the yield on taxable investments.
Interest expense for the three months ended March 31, 2018 totaled $4.5 million, a $1.3 million, or 39%, increase from the same period of 2017. The rate paid on interest bearing liabilities increased 30 basis points from the first quarter of 2017 to the first quarter of 2018, driven by an increase in interest rates on deposits and other borrowings. Average interest-bearing deposits were lower mainly due to the branch sale in the second quarter of 2017 and a reduction in brokered deposits. In addition, premium amortization of acquired time deposits reduced interest expense during the first quarter of 2018 in the amount of $65,000, compared to $119,000 in the first quarter of 2017.
Taxable equivalent net interest margin increased to 3.51% for the three months ended March 31, 2018 compared to 3.20% for the three months ended March 31, 2017. The primary reason for the increase in taxable equivalent net interest margin was higher interest rates on loans resulting from Fed Funds rate increases.
The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented. Loan fees are included in interest income on loans.


38


Table 2 - Average Balance Sheets and Net Interest Analysis
 
 
 
 
 
 
(dollars in thousands; taxable equivalent)
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2018
 
2017
 
 
Average Balance
 
Interest Income/Expense
 
Tax Equivalent Yield/Rate
 
Average Balance
 
Interest Income/Expense
 
Tax Equivalent Yield/Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits in other banks
 
$
78,207

 
$
397

 
2.06
%
 
$
72,494

 
$
165

 
0.92
%
Other short-term investments
 
10,346

 
63

 
2.47

 
11,052

 
47

 
1.72

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
    Taxable investment securities
 
375,771

 
2,116

 
2.28

 
339,614

 
1,523

 
1.82

    Non-taxable investment securities(1)
 
78,146

 
579

 
3.00

 
79,721

 
750

 
3.82

Total investment securities
 
453,917

 
2,695

 
2.41

 
419,335

 
2,273

 
2.20

Total loans
 
1,938,953

 
22,675

 
4.74

 
1,949,385

 
19,994

 
4.16

FHLB and FRB stock
 
17,895

 
255

 
5.78

 
19,608

 
237

 
4.90

     Total interest-earning assets
 
2,499,318

 
26,085

 
4.23

 
2,471,874

 
22,716

 
3.73

Non-earning assets
 
205,504

 
 
 
 
 
222,841

 
 
 
 
     Total assets
 
$
2,704,822

 
 
 
 
 
$
2,694,715

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW, money market, and savings
 
1,257,580

 
2,251

 
0.73

 
1,137,088

 
1,315

 
0.47

Time deposits
 
139,788

 
314

 
0.91

 
163,021

 
272

 
0.68

Brokered deposits
 
117,787

 
479

 
1.65

 
191,558

 
460

 
0.97

Total interest-bearing deposits
 
1,515,155

 
3,044

 
0.81

 
1,491,667

 
2,047

 
0.56

Other borrowings
 
156,822

 
592

 
1.53

 
194,478

 
338

 
0.70

Long-term debt
 
49,550

 
829

 
6.79

 
49,381

 
823

 
6.76

     Total interest-bearing liabilities
 
1,721,527

 
4,465

 
1.05

 
1,735,526

 
3,208

 
0.75

Demand deposits
 
638,730

 
 
 
 
 
620,325

 
 
 
 
Other liabilities
 
37,744

 
 
 
 
 
30,603

 
 
 
 
Shareholders’ equity
 
306,821

 
 
 
 
 
308,261

 
 
 
 
     Total liabilities and shareholders’ equity
 
$
2,704,822

 
 
 
 
 
$
2,694,715

 
 
 
 
Net interest spread
 
 
 
 
 
3.18
%
 
 
 
 
 
2.98
%
Net interest income and net interest margin (taxable equivalent)(2)
 
 
 
$
21,620

 
3.51
%
 
 
 
$
19,508

 
3.20
%
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Interest revenue on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 21% for the three months ended March 31, 2018 and 35% for the three months ended March 31, 2017, reflecting the statutory federal income tax rates.
(2) Taxable equivalent net interest income divided by total interest-earning assets using the appropriate day count convention based on the type of interest-earning asset.



39


The following table shows the relative effect on taxable equivalent net interest income for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.
Table 3 - Changes in Taxable Equivalent Net Interest Income
(dollars in thousands)
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018 Compared to 2017
Increase (decrease) Due to Changes in:
 
 
Volume
 
Yield/Rate
 
Total Change
Interest earning assets
 
 
 
 
 
 
Interest bearing deposits in other banks
 
$
29

 
$
203

 
$
232

Other short-term investments
 
(4
)
 
20

 
16

Investment securities:
 
 
 
 
 
 
    Taxable investment securities
 
204

 
389

 
593

    Non-taxable investment securities
 
(12
)
 
(159
)
 
(171
)
Total investment securities
 
192

 
230

 
422

Total loans
 
(122
)
 
2,803

 
2,681

FHLB and FRB stock
 
(24
)
 
42

 
18

Total interest-earning assets
 
71

 
3,298

 
3,369

Interest bearing liabilities
 
 
 
 
 
 
Interest bearing deposits:
 
 
 
 
 
 
NOW, money market, and savings
 
216

 
720

 
936

Time deposits
 
(52
)
 
94

 
42

Brokered deposits
 
(300
)
 
319

 
19

Total interest-bearing deposits
 
(136
)
 
1,133


997

Total borrowings
 
(142
)
 
396

 
254

Total long-term debt
 
3

 
3

 
6

Total interest-bearing liabilities
 
(275
)
 
1,532

 
1,257

Change in net interest income
 
$
346

 
$
1,766

 
$
2,112

Provision for Loan Losses
Management considers a number of factors in determining the required level of the allowance for loan losses and the provision required to achieve what is believed to be appropriate reserve level, including historical loss experience, loan growth, credit risk rating trends, nonperforming loan levels, delinquencies, loan portfolio concentrations and economic and market trends. The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that it considered adequate in relation to the estimated losses inherent in the loan portfolio.
For the three months ended March 31, 2018, the provision for loan losses was $772,000, an increase of $138,000, or 22%, compared to the three months ended March 31, 2017. The higher provision for the three months ended March 31, 2018 was primarily related to higher balances subject to the general reserve. At March 31, 2018, nonperforming loans totaled $2.5 million compared to $4.0 million at March 31, 2017. Net loan charge-offs were 0.05% of average loans (annualized) for the three months ended March 31, 2018 compared to 0.26% for the three months ended March 31, 2017. The allowance for loan losses to total loans at March 31, 2018 was 1.01%, compared to 1.05% at March 31, 2017.

40


Noninterest Income

Noninterest income for the three months ended March 31, 2018 was $4.0 million, a decrease of $126,000, or 3%, compared to the first quarter of 2017. The following table presents the components of noninterest income.
Table 4 - Noninterest Income
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 Three months ended March 31,
 
 Change
 
 
 
2018
 
2017
 
$
 
%
 
Service charges
 
$
1,192

 
$
1,349

 
$
(157
)
 
(12
)
%
Gain (loss) on sales of other assets
 
(46
)
 
78

 
(124
)
 
(159
)
 
Mortgage income
 
304

 
257

 
47

 
18

 
Trust income
 
518

 
407

 
111

 
27

 
Derivatives income (loss)
 
114

 
(51
)
 
165

 
324

 
Bank owned life insurance
 
369

 
378

 
(9
)
 
(2
)
 
SBA lending activities
 
1,302

 
1,227

 
75

 
6

 
Other noninterest income
 
230

 
212

 
18

 
8

 
Total noninterest income
 
$
3,983

 
$
3,857

 
$
126

 
3

%
Service charges for the three months ended March 31, 2018 decreased $157,000, or 12%, from the same period in 2017. The decrease was primarily due to the divestiture of the Cleveland branch in the second quarter of 2017 and lower foreign exchange fees.
Gain on sales of other assets for the three months ended March 31, 2018 decreased $124,000, or 159%, from the same period in 2017 due to $78,000 in net gains on sales of other real estate owned in the first quarter of 2017 and a loss on disposition of fixed assets totaling $46,000 in the first quarter of 2018. Trust income for the three months ended March 31, 2018 increased $111,000, or 27%, from the same period in 2017 due to an increase in managed assets. The Bank entered into an agreement to sell Southeastern Trust Company, which is expected to close in the second quarter of 2018. Derivative income for the first quarter of 2018 increased $165,000, or 324%, from the same period in 2017 due to the quarterly credit valuation adjustment.
Income from SBA lending activities for the first quarter of 2018 increased $75,000, or 6%, from the same period in 2017, due to a higher level of loan sales. During the three months ended March 31, 2018 and 2017, guaranteed portions of 17 and 11 SBA loans totaling $17.7 million and $14.6 million, respectively, were sold in the secondary market.

41


Noninterest Expense
The following table presents the components of noninterest expense.
Table 5 - Noninterest Expense
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 Three months ended March 31,
 
 Change
 
 
 
2018
 
2017
 
$
 
%
 
Salaries and employee benefits
 
$
12,077

 
$
11,065

 
$
1,012

 
9

%
Occupancy
 
1,355

 
1,230

 
125

 
10

 
Equipment and software
 
787

 
805

 
(18
)
 
(2
)
 
Professional services
 
832

 
904

 
(72
)
 
(8
)
 
Postage, printing and supplies
 
58

 
85

 
(27
)
 
(32
)
 
Communications and data processing
 
1,043

 
987

 
56

 
6

 
Marketing and business development
 
190

 
270

 
(80
)
 
(30
)
 
FDIC premiums
 
147

 
314

 
(167
)
 
(53
)
 
Amortization of intangibles
 
343

 
470

 
(127
)
 
(27
)
 
Foreclosed property/problem asset expense
 
282

 
3

 
279

 
9,300

 
Other noninterest expense
 
1,278

 
1,611

 
(333
)
 
(21
)
 
Total noninterest expense
 
$
18,392

 
$
17,744

 
$
648

 
4

%
Noninterest expense for the first quarter of 2018 was $18.4 million, an increase of $648,000, or 4%, from the first quarter of 2017. The increase from the prior year is primarily due to higher salaries and employee benefits due to severance expense.
Salaries and employee benefits expense for the three months ended March 31, 2018 totaled $12.1 million, an increase of $1.0 million, or 9%, from the same period in 2017. The increase was primarily attributable to severance expense of $1.1 million in the first quarter of 2018. Full time equivalent headcount totaled 339 at March 31, 2018, compared to 331 at March 31, 2017, an increase of 8 positions, mainly due to growth in the Bank’s SBA lending team.
Occupancy costs were $1.4 million for the first quarter of 2018, an increase of $125,000, or 10%, compared to the first quarter of 2017. The increase was the result of higher rent expense due to the overlap of leases from the relocation of the Atlanta headquarters.
Professional services costs were $832,000 for the first quarter of 2018, a decrease of $72,000, or 8%, compared to the first quarter of 2017. The decrease was due to lower legal and consulting fees.
Communications and data processing costs were $1.0 million for the first quarter of 2018, an increase of $56,000, or 6%, compared to the first quarter of 2017. The increase was due to a higher volume of transactions with the Bank’s core processor.
FDIC premiums were $147,000 for the first quarter of 2018, a decrease of $167,000, or 53%, compared to the first quarter of 2017. The decrease was due to a lower assessment rate.
Amortization of intangibles includes the amortization of core deposit intangible related to the acquisition of First Security and totaled $343,000 for the three months ended March 31, 2018 and $470,000 for the three months ended March 31, 2017. The decrease in 2018 was partly due to the write-off of core deposit intangibles related to one branch divested during the second quarter of 2017.
Foreclosed property expense for the three months ended March 31, 2018 totaled $282,000, an increase of $279,000 from the same period in 2017. The increase is due to the revaluation and subsequent write-down of an existing other real estate owned property.

42


Income Taxes
Atlantic Capital monitors and evaluates the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, Atlantic Capital evaluates its income tax positions based on current tax law and positions taken by various tax auditors within the jurisdictions where Atlantic Capital is required to file income tax returns.
The income tax provision for the three months ended March 31, 2018 was $1.3 million as compared with $1.5 million for the same period in 2017. The effective tax rate (as a percentage of pre-tax earnings) was 20.5% for the three months ended March 31, 2018 compared to 31.7% for the same period in 2017. The decrease in the effective tax rate for the three months ended March 31, 2018 was due to the tax reform legislation signed into law in December 2017 that lowered the Federal corporate rate to 21%.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis including operating losses and tax credit carryforwards. Net deferred tax assets (deferred tax assets net of deferred tax liabilities and valuation allowance) are reported in the consolidated balance sheet as a component of total assets. As of March 31, 2018, no remeasurement adjustments have been recorded as a result of the revaluation of deferred tax balances for the impact of the 2017 Tax Cuts and Jobs Act. The Company will continue to monitor and record any applicable adjustments in the period the amounts are determined.
Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all positive and negative evidence with more weight given to evidence that can be objectively verified. Each quarter, management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results.
Based on all evidence considered, as of March 31, 2018 and 2017, management concluded that it was more likely than not that the net deferred tax asset would be realized, except as outlined in the following discussion. At March 31, 2018 and 2017, Atlantic Capital recorded a deferred tax asset valuation allowance totaling $8.5 million and $9.2 million, respectively, on certain net operating loss carryforwards due to the fact that certain tax attributes are subject to an annual limitation as a result of the acquisition of First Security, which constituted a change of ownership as defined under Internal Revenue Code Section 382. Management expects to generate future taxable income and believes this will allow for full utilization of Atlantic Capital’s remaining net operating loss carryforwards within the statutory carryforward periods.

43


FINANCIAL CONDITION
Total assets at March 31, 2018 and December 31, 2017 were $2.72 billion and $2.89 billion, respectively. Average total assets for the first quarter of 2018 were $2.70 billion, compared to $2.69 billion in the first quarter of 2017.
Loans
At March 31, 2018, total loans increased $24.9 million, or 1%, to $1.96 billion compared to $1.94 billion at December 31, 2017, primarily due to a $20.8 million, or 3%, increase in commercial and industrial loans and a $30.4 million, or 26%, increase in construction and land loans. These increases were offset by a decrease of $32.7 million, or 6%, in non-owner occupied commercial real estate loans. Table 6 provides additional information regarding Atlantic Capital’s loan portfolio.
Table 6 - Loans
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
% of Total Loans
 
December 31, 2017
 
% of Total Loans
Loans held for sale
 
 
 
 
 
 
 
 
Other loans held for sale
 
$
835

 
 
 
$
1,487

 
 
Total loans held for sale
 
$
835

 
 
 
$
1,487

 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
636,181

 
32
%
 
$
615,359

 
32
%
Commercial real estate:
 
 
 
 
 
 
 
 
Owner occupied
 
353,235

 
18

 
346,746

 
18

Non-owner occupied
 
560,865

 
29

 
593,669

 
30

Construction and land
 
145,904

 
7

 
115,495

 
6

Mortgage warehouse participations
 
44,575

 
2

 
39,981

 
2

Total commercial loans
 
1,740,760

 
88

 
1,711,250

 
88

 
 
 
 
 
 
 
 
 
Residential:
 
 
 
 
 
 
 
 
Residential mortgages
 
105,255

 
5

 
104,484

 
5

Home equity
 
70,712

 
4

 
76,244

 
4

Total residential loans
 
175,967

 
9

 
180,728

 
9

 
 
 
 
 
 
 
 
 
Consumer
 
30,966

 
2

 
29,393

 
2

Other
 
15,181

 
1

 
16,278

 
1

 
 
1,962,874

 
 
 
1,937,649

 
 
Less net deferred fees and other unearned income
 
(3,453
)
 
 
 
(3,810
)
 
 
Total loans held for investment
 
1,959,421

 
 
 
1,933,839

 
 
 
 
 
 
 
 
 
 
 
Total loans
 
$
1,960,256

 
 
 
$
1,935,326

 
 

44


Nonperforming Assets
Nonperforming assets include nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned. Loans are considered to be past due when payment is not received from the borrower by the contractually specified due date. Interest accruals on loans are discontinued when interest or principal has been in default 90 days or more, unless the loan is both secured by collateral that is sufficient to repay the debt in full and the loan is in the process of collection. When a loan is placed on nonaccrual status, interest accrued and not paid in the current accounting period is reversed against current period income. Interest accrued and not paid in prior periods, if significant, is reversed against the allowance for loan losses.
Income on such loans is subsequently recognized on a cash basis as long as the future collection of principal is deemed probable or after all principal payments are received. Commercial loans are placed back on accrual status after sustained performance of timely and current principal and interest payments and it is probable that all remaining amounts due, both principal and interest, are fully collectible according to the terms of the loan agreement. Residential loans and consumer loans are generally placed back on accrual status when they are no longer past due.
Purchased Credit Impaired (“PCI”) loans accounted for under ASC 310-30 are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered as performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments. PCI loans were not classified as nonaccrual at March 31, 2018 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and collection was probable. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.
At March 31, 2018, Atlantic Capital’s nonperforming assets totaled $3.4 million, or 0.13% of total assets, compared to $4.1 million, or 0.14% of total assets, at December 31, 2017. The decrease was primarily due to a loan relationship totaling $298,000 which was past due 90 days and still accruing as of December 31, 2017 but became current in the first quarter, as well as a $288,000, or 24%, decrease in other real estate owned due to write downs.
Nonaccrual loans totaled $2.5 million and $2.6 million as of March 31, 2018 and December 31, 2017, respectively. Loans past due 90 days and still accruing totaled $35,000 at March 31, 2018 compared to $298,000 at December 31, 2017. Table 7 provides details on nonperforming assets and other risk elements.
Table 7 - Nonperforming assets
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
Nonaccrual loans
 
$
2,466

 
$
2,614

 
$
4,058

 
$
11,909

 
$
3,212

 
Loans past due 90 days and still accruing
 
35

 
298

 
495

 
391

 
771

 
Total nonperforming loans* (NPLs)
 
2,501

 
2,912

 
4,553

 
12,300

 
3,983

 
Other real estate owned
 
927

 
1,215

 
1,494

 
1,819

 
1,869

 
Total nonperforming assets (NPAs)
 
$
3,428

 
$
4,127

 
$
6,047

 
$
14,119

 
$
5,852

 
NPLs as a percentage of total loans
 
0.13

%
0.15

%
0.24

%
0.63

%
0.21

%
NPAs as a percentage of total assets
 
0.13

 
0.14

 
0.23

 
0.52

 
0.21

 
*Nonperforming loans exclude those loans which are PCI loans
Troubled Debt Restructurings
 
Troubled Debt Restructurings (“TDRs”) are selectively made to provide relief to customers experiencing liquidity challenges or other circumstances that could affect their ability to meet their debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs are not accruing interest and are included as nonperforming assets within nonaccrual loans. TDRs which are accruing interest based on the restructured terms are considered performing. Table 8 summarizes TDRs.

45


Table 8 - Troubled Debt Restructurings
(dollars in thousands)
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
Accruing TDRs
 
$
5,167

 
$
5,323

Nonaccruing TDRs
 

 

    Total TDRs
 
$
5,167

 
$
5,323

Potential Problem Loans
Management identifies and maintains a list of potential problem loans. These are loans that are internally risk graded special mention or below but which are not included in nonaccrual status and are not past due 90 days or more. A loan is added to the potential problem list when management becomes aware of information about possible credit problems of the borrower which raises doubts as to the ability of such borrower to comply with the current loan repayment terms. Potential problem loans totaled $69.7 million and $54.6 million, respectively, as of March 31, 2018 and December 31, 2017. Management closely tracks the financial performance of the borrower and the current values of collateral when assessing the collectability of these loans.
Allowance for Loan Losses
At March 31, 2018, the allowance for loan losses totaled $19.9 million, or 1.01% of loans, compared to $19.3 million, or 1.00% of loans, at December 31, 2017. The increase in the allowance was primarily related to an increase in outstanding loan balances.
Net charge-offs for the first quarter of 2018 and 2017 were $231,000 and $1.3 million, respectively. Table 9 provides details concerning the allowance for loan losses during the past five quarters.
Table 9 - Allowance for Loan Losses (ALL)
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
 
First
 
Fourth
 
Third
 
Second
 
First
 
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Balance at beginning of period
$
19,344

 
$
18,870

 
$
21,870

 
$
19,939

 
$
20,595

 
Provision for loan losses
811

 
312

 
314

 
2,048

 
565

 
Provision for PCI loan losses
(39
)
 
(30
)
 
8

 
(68
)
 
69

 
Loans charged-off:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
(126
)
 

 
(3,292
)
 

 
(781
)
 
Commercial real estate

 

 

 

 
(132
)
 
Construction and land

 

 
(16
)
 

 

 
Residential mortgages
(70
)
 

 

 

 
(46
)
 
Home equity
(58
)
 

 
(31
)
 
(8
)
 

 
Consumer
(3
)
 
(13
)
 
(7
)
 
(57
)
 
(332
)
 
Other

 

 

 

 

 
Total loans charged-off
(257
)
 
(13
)
 
(3,346
)
 
(65
)
 
(1,291
)
 
Recoveries on loans previously charged-off:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
19

 
192

 
1

 
7

 

 
Commercial real estate

 

 

 
2

 

 
Construction and land

 
1

 
15

 

 

 
Residential mortgages

 

 

 
1

 

 
Home equity

 

 

 
1

 

 
Consumer
7

 
12

 
8

 
5

 
1

 
Other

 

 

 

 

 
Total recoveries
26

 
205

 
24

 
16

 
1

 
Net charge-offs
$
(231
)
 
$
192

 
$
(3,322
)
 
$
(49
)
 
$
(1,290
)
 
Balance at period end
$
19,885

 
$
19,344

 
$
18,870

 
$
21,870

 
$
19,939

 
 
 
 
 
 
 
 
 
 
 
 
Net charge-offs (annualized) to average loans
0.05

%
(0.04
)
%
0.68

%
0.01

%
0.26

%
Allowance for loan losses to loans held for investment
1.01

 
1.00

 
0.99

 
1.11

 
1.05

 

46


Investment Securities
Investment securities available-for-sale totaled $458.7 million at March 31, 2018, compared to $449.1 million at December 31, 2017. Available-for-sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. As of March 31, 2018, investment securities available-for-sale had a net unrealized loss of $14.1 million, compared to a net unrealized loss of $5.6 million as of December 31, 2017. Changes in interest rates and credit spreads result in temporary unrealized losses as the market price of securities fluctuate. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed as of March 31, 2018.
Changes in the amount of Atlantic Capital’s available-for-sale securities portfolio result primarily from balance sheet trends including loans, deposit balances and short-term borrowings. When inflows arising from deposits and short-term borrowings exceed loan demand, Atlantic Capital invests excess funds in the securities portfolio or in short-term investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, Atlantic Capital allows interest-bearing balances with other banks to decline and uses proceeds from maturing or sold securities to fund loan demand. Details of investment securities at March 31, 2018 and December 31, 2017 are provided in Table 10.
Table 10 - Securities
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
Available-For-Sale Securities
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
U.S. Government agencies
 
$
37,364

 
$
36,532

 
$
34,699

 
$
34,111

U.S. states and political divisions
 
92,005

 
85,813

 
92,169

 
90,001

Trust preferred securities
 
4,761

 
4,650

 
4,754

 
4,650

Corporate debt securities
 
12,925

 
12,457

 
12,948

 
12,622

Residential mortgage-backed securities
 
325,809

 
319,278

 
310,129

 
307,733

Total
 
$
472,864

 
$
458,730

 
$
454,699

 
$
449,117

The effective duration of Atlantic Capital’s securities at March 31, 2018 was 4.99 years.
Goodwill and Other Intangible Assets
Atlantic Capital’s core deposit intangible representing the value of the acquired deposit base, is an amortizing intangible asset that is required to be tested for impairment only when events or circumstances indicate that impairment may exist. There were no events or circumstances that led management to believe that any impairment existed at March 31, 2018 in Atlantic Capital’s other intangible assets.
Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. Atlantic Capital evaluates its goodwill annually, or more frequently if necessary, to determine if any impairment exists.

47


LIQUIDITY AND CAPITAL RESOURCES
Deposits
At March 31, 2018, total deposits were $2.10 billion, a decrease of $354.4 million, or 14%, from December 31, 2017. Noninterest-bearing demand deposits decreased $132.6 million, or 18%, and money market deposits decreased $206.4 million, or 18%, from December 31, 2017 to March 31, 2018. The decrease was the result of seasonal volatility and a large increase in temporary deposits during the quarter ended December 31, 2017.
Total average deposits for the quarter ended March 31, 2018 were $2.15 billion, an increase of $41.9 million, or 2%, from the same period in 2017. Average interest-bearing demand deposits increased $38.3 million, or 13%, average money market deposits increased $82.9 million, or 10%, and average brokered deposits decreased $73.8 million, or 39%, for the quarter ended March 31, 2018 from the same period in 2017. Table 11 provides additional information regarding deposits during the past five quarters.
Table 11 - Deposits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period End Deposits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
Linked Quarter Change
 
Year Over Year Change
DDA
 
$
599,838

 
$
732,442

 
$
599,292

 
$
612,744

 
$
606,386

 
$
(132,604
)
 
$
(6,548
)
NOW
 
302,636

 
306,331

 
270,740

 
250,254

 
259,760

 
(3,695
)
 
42,876

Savings
 
29,407

 
26,573

 
30,131

 
30,170

 
30,756

 
2,834

 
(1,349
)
Money Market
 
911,449

 
1,117,891

 
865,238

 
882,824

 
916,390

 
(206,442
)
 
(4,941
)
Time
 
140,594

 
138,612

 
144,250

 
142,915

 
150,867

 
1,982

 
(10,273
)
Brokered
 
112,376

 
128,816

 
193,994

 
195,047

 
209,385

 
(16,440
)
 
(97,009
)
Deposits to be assumed in branch sale
 

 

 

 

 
29,495

 

 
(29,495
)
Total Deposits
 
$
2,096,300

 
$
2,450,665

 
$
2,103,645

 
$
2,113,954

 
$
2,203,039

 
$
(354,365
)
 
$
(106,739
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payments Clients
 
$
311,943

 
$
405,873

 
$
239,079

 
$
250,104

 
$
321,899

 
$
(93,930
)
 
$
(9,956
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Deposits(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
Linked Quarter Change
 
Year Over Year Change
 
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
 
DDA
 
$
638,730

 
$
649,218

 
$
628,029

 
$
626,330

 
$
620,325

 
$
(10,488
)
 
$
18,405

NOW
 
329,171

 
338,741

 
291,810

 
293,160

 
290,862

 
(9,570
)
 
38,309

Savings
 
29,609

 
29,851

 
30,236

 
30,468

 
30,306

 
(242
)
 
(697
)
Money Market
 
898,800

 
907,524

 
870,618

 
860,116

 
815,920

 
(8,724
)
 
82,880

Time
 
139,788

 
140,921

 
143,862

 
149,898

 
163,021

 
(1,133
)
 
(23,233
)
Brokered
 
117,787

 
128,594

 
156,708

 
198,703

 
191,558

 
(10,807
)
 
(73,771
)
Total Deposits
 
$
2,153,885

 
$
2,194,849

 
$
2,121,263

 
$
2,158,675

 
$
2,111,992

 
$
(40,964
)
 
$
41,893

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payments Clients
 
$
256,794

 
$
234,558

 
$
209,851

 
$
244,157

 
$
273,630

 
$
22,236

 
$
(16,836
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing deposits as a percentage of average deposits
 
29.7
%
 
29.6
%
 
29.6
%
 
29.0
%
 
29.4
%
 
 
 
 
Cost of deposits
 
0.57
%
 
0.52
%
 
0.50
%
 
0.46
%
 
0.39
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes average balances of deposits to be assumed in branch sale.
 
 
 
 
 
 
 
 

48


Short-Term Borrowings
At March 31, 2018 and December 31, 2017, balances of federal funds purchased were $40.0 million and $0, respectively. There were securities sold under repurchase agreements with commercial checking customers totaling $7.9 million and $0 as of March 31, 2018 or December 31, 2017, respectively.
As a member of the Federal Home Loan Bank of Atlanta (“FHLB”), Atlantic Capital has the ability to acquire short and long-term advances through a blanket agreement secured by our unencumbered qualifying 1-4 family first mortgage loans and by pledging investment securities or individual, qualified loans, subject to approval of the FHLB. At March 31, 2018 and December 31, 2017, Atlantic Capital had FHLB advances of $185.0 million and $45.0 million, respectively. FHLB borrowings increased due to an increase in short-term funding needs.
Long-Term Debt
During the third quarter of 2015, Atlantic Capital issued $50.0 million in fixed-to-floating rate subordinated notes due in 2025, all of which was outstanding at March 31, 2018.
Liquidity Risk Management

Liquidity risk is the risk that an institution will be unable to generate or obtain sufficient funding, at a reasonable cost, to meet operational cash needs and to take advantage of revenue producing opportunities as they arise. Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, operational, legal and reputation risks that can affect an institution’s liquidity risk profile. Liquidity management involves maintaining Atlantic Capital’s ability to meet the daily cash flow requirements of Atlantic Capital’s customers, both depositors and borrowers.
Atlantic Capital utilizes various measures to monitor and control liquidity risk across three different types of liquidity:
tactical liquidity measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon;
structural liquidity measures the amount by which illiquid assets are supported by long-term funding; and
contingent liquidity utilizes cash flow stress testing across three crisis scenarios to determine the adequacy of Atlantic Capital’s liquidity.

Atlantic Capital aims to maintain a diverse mix of existing and potential liquidity sources to support the liquidity management function. At its core is a reliance on the customer deposit book, due to the low cost it offers. Other sources of liquidity include asset-based liquidity in the form of cash and unencumbered securities, as well as access to wholesale funding from external counterparties, primarily advances from the FHLB of Atlanta, Federal Funds lines and other borrowing facilities. Atlantic Capital aims to avoid funding concentrations by diversifying external secured and unsecured funding with respect to maturities, counterparties and nature. At March 31, 2018, management believed that Atlantic Capital had sufficient on-balance sheet liquidity to meet its funding needs.
At March 31, 2018, Atlantic Capital had access to $335.0 million in unsecured borrowings and $711.6 million in secured borrowings through various sources. Atlantic Capital also has the ability to attract more retail deposits by offering aggressively priced rates.

Shareholders’ Equity and Capital Adequacy
Shareholders’ equity at March 31, 2018 was $307.1 million, a decrease of $1.4 million from December 31, 2017. Atlantic Capital and the Bank are required to meet minimum capital requirements imposed by regulatory authorities. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on Atlantic Capital’s consolidated financial statements. Tables 12 and 13 provide additional information regarding regulatory capital requirements and Atlantic Capital’s capital levels. Accumulated other comprehensive income, which includes unrealized gains and losses on securities available-for-sale and unrealized gains and losses on derivatives qualifying as cash flow hedges, is excluded in the calculation of regulatory capital ratios.



49


Table 12 - Capital Ratios
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Consolidated
 
 Bank
 
 Regulatory Guidelines
 
 
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
Minimum
 
Well capitalized
 
Minimum Capital plus capital conservation buffer 2019
 
Risk based ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
 
11.3

%
11.2

%
12.8

%
12.7

%
4.5

%
6.5

%
7.0

%
Tier 1 Capital
 
11.3

 
11.2

 
12.8

 
12.7

 
6.0

 
8.0

 
8.5

 
Total capital
 
14.3

 
14.1

 
13.7

 
13.6

 
8.0

 
10.0

 
10.5

 
Leverage ratio
 
10.1

 
9.7

 
11.3

 
11.1

 
4.0

 
5.0

 
 N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
 
$
266,769

 
$
259,865

 
$
303,540

 
$
295,629

 
 
 
 
 
 
 
Tier 1 capital
 
266,769

 
259,865

 
303,540

 
295,629

 
 
 
 
 
 
 
Total capital
 
337,118

 
329,641

 
324,312

 
315,870

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk weighted assets
 
2,364,023

 
2,330,574

 
2,363,349

 
2,330,171

 
 
 
 
 
 
 
Quarterly average total assets for leverage ratio
 
2,652,005

 
2,667,652

 
2,681,691

 
2,675,228

 
 
 
 
 
 
 
Atlantic Capital continues to exceed minimum capital standards and the Bank remains “well-capitalized” under regulatory guidelines.
In July 2013, bank regulatory agencies approved the Basel III capital guidelines, which are aimed at strengthening existing capital requirements for bank holding companies through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and balance sheet exposure. Atlantic Capital and the Bank became subject to the requirements of Basel III effective January 1, 2015, subject to a transition period for several aspects of the rule.
Under the revised rules, Atlantic Capital’s common equity tier 1 ratio was 11.3% at March 31, 2018, exceeding the fully phased-in minimum of 7.0%, which includes the 2.5% minimum capital conservation buffer. Management continues to monitor Basel III developments and remains committed to managing Atlantic Capital’s capital levels in a prudent manner.
Table 13 - Tier 1 Common Equity
(dollars in thousands)
 
 
 
 
 
 
 
 
 
March 31, 2018
 
Tier 1 capital
 
$
266,769

 
Less: restricted core capital
 

 
Tier 1 common equity
 
$
266,769

 
 
 
 
 
Risk-adjusted assets
 
$
2,364,023

 
Tier 1 common equity ratio
 
11.3

%
Off-Balance Sheet Arrangements
Atlantic Capital makes contractual commitments to extend credit and issues standby letters of credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. In addition to commitments to extend credit, Atlantic Capital also issues standby letters of credit which are assurances to a third party that it will not suffer a loss if the customer fails to meet a contractual obligation to the third party. At March 31, 2018, Atlantic Capital had issued commitments to extend credit of approximately $688.3 million and standby letters of credit of approximately $13.6 million through various types of commercial lending arrangements.
Based on historical experience, many of the commitments and letters of credit will expire unfunded. Through its various sources of liquidity, Atlantic Capital believes it will be able to fund these obligations as they arise. Atlantic Capital evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is

50


based on Atlantic Capital’s credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
Contractual Obligations
There have been no significant changes in Atlantic Capital’s contractual obligations at March 31, 2018 compared to December 31, 2017.
RISK MANAGEMENT
Effective risk management is critical to Atlantic Capital’s success. The Dodd-Frank Act requires that bank holding companies with total assets in excess of $10 billion establish an enterprise-wide risk committee consisting of members of its board of directors. Although Atlantic Capital does not have total assets in excess of $10 billion, the Bank’s board of directors has an Audit and Risk Committee that, among other responsibilities, provides oversight of enterprise-wide risk management activities. The Audit and Risk Committee reviews the Bank’s activities in identifying, measuring and mitigating existing and emerging risks (including credit, liquidity, interest-rate, compliance, operational, strategic and reputational risks). The committee monitors management’s execution of risk management practices in accordance with the risk appetite of the Bank, reviews supervisory examination reports together with management’s response to such examinations and discusses legal matters that may have a material impact on the financial statements or Atlantic Capital’s compliance policies. With guidance from and oversight by the Audit and Risk Committee, management continually refines and enhances its risk management policies and procedures to maintain effective risk management programs and processes.
Credit Risk Management
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Atlantic Capital manages credit risk closely by having appropriate policies and procedures for the types of loans we make. To ensure that lending policies and procedures are followed, Atlantic Capital has an independent credit review function that conducts risk reviews and analyses of loans to help assure compliance with credit policies and to monitor asset quality trends. The risk reviews include portfolio analysis by industry, collateral type and product. Atlantic Capital has implemented policies and procedures designed to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain adequate allowances for loan losses that are inherent in the loan portfolio.
Market Risk Management
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. Atlantic Capital’s market risk arises primarily from interest rate risk inherent in Atlantic Capital’s lending and deposit-taking activities. The structure of Atlantic Capital’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. Atlantic Capital does not maintain a trading account nor is Atlantic Capital subject to currency exchange risk or commodity price risk. Since interest rate risk is by far the most significant element of Atlantic Capital’s market risk, we rely on the risk management methods noted below for interest rate risk to manage market risk.
Interest Rate Risk Management
Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes. Market interest rates also have an impact on the interest rate and repricing characteristics of loans that are originated as well as the rate characteristics of interest-bearing liabilities.
Atlantic Capital assesses interest rate risk by forecasting net interest income under various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. Atlantic Capital’s rate shock simulation, as of March 31, 2018, indicates that, over a 12-month period, net interest income is estimated to increase by 10.87% with rates rising 200-basis points. The increase in net interest income is primarily due to the short-term repricing characteristics of the loan portfolio, combined with a favorable funding mix. Atlantic Capital’s loan portfolio consists mainly of floating rate loans. Atlantic Capital’s core client deposits are likely to allow Atlantic Capital to lag short term interbank rate indices when pricing deposits. Transaction accounts comprise a significant amount of Atlantic Capital’s total deposits.

51


Table 14 provides the impact on net interest income resulting from various interest rate scenarios as of March 31, 2018 and December 31, 2017.
Table 14 - Net Interest Income Sensitivity Simulation Analysis
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated change in net interest income
Change in interest rate (basis point)
 
March 31, 2018
 
December 31, 2017
-100
 
(6.46
)
%
 
 
(10.68
)
%
 
+100
 
5.63

 
 
 
7.68

 
 
+200
 
10.87

 
 
 
15.64

 
 
+300
 
16.09

 
 
 
23.30

 
 
Atlantic Capital also utilizes the market value of equity (“MVE”) as a tool in measuring and managing interest rate risk. Long-term interest rate risk exposure is measured using the MVE sensitivity analysis to study the impact of long-term cash flows on capital. As of March 31, 2018, the MVE calculated with a 200-basis point shock up in rates decreased by 4.16% from the base case MVE value. Table 15 presents the MVE profile as of March 31, 2018 and December 31, 2017.
Table 15 - Market Value of Equity Modeling Analysis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated % change in MVE
Change in interest rate (basis point)
 
March 31, 2018
 
December 31, 2017
-100
 
(1.15
)
%
 
 
(3.09
)
%
 
+100
 
(1.45
)
 
 
 
1.31

 
 
+200
 
(4.16
)
 
 
 
1.38

 
 
+300
 
(17.60
)
 
 
 
0.59

 
 
Atlantic Capital may utilize interest rate swaps, floors, collars or other derivative financial instruments in an attempt to manage Atlantic Capital’s overall sensitivity to changes in interest rates.


52


ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Part I, Item 2 of this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Management.”

ITEM 4.
CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of March 31, 2018, the Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2018.
No changes were made to the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

53


PART II - OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS

In the ordinary course of operations, Atlantic Capital and the Bank are defendants in various legal proceedings. Additionally, in the ordinary course of business, Atlantic Capital and the Bank are subject to regulatory examinations and investigations. Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter which would result in a material adverse change, either individually or in the aggregate, in the consolidated financial condition or results of operations of Atlantic Capital.

ITEM 1A.
RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the Company’s Annual Report on Form 10-K for the period ended December 31, 2017, under Part I, Item 1A “Risk Factors,” because these risk factors may affect the operations and financial results of the Company. Our evaluation of our risk factors has not changed materially since those discussed in the Annual Report. The risks described in the Annual Report are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5.
OTHER INFORMATION

None.

54


ITEM 6.
EXHIBITS
Amended and Restated Articles of Incorporation of Atlantic Capital Bancshares, Inc., which is incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-4 (file no. 333-204855), initially filed with the Securities and Exchange Commission on June 10, 2015
Amended and Restated Bylaws of Atlantic Capital Bancshares, Inc., which is incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (file no. 001-37615), filed with the Securities and Exchange Commission on January 19, 2017
Executive Officer Long Term Incentive Plan (as Amended and Restated Effective April 19, 2018), which is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (file no. 001-37615), filed with the Securities and Exchange Commission on April 20, 2018.*
Form of Restricted Stock Award Agreement (Employees - with Employment Agreement) under the 2015 Stock Incentive Plan*
Form of Restricted Stock Award Agreement (Employees - without Employment Agreement) under the 2015 Stock Incentive Plan*
Form of Restricted Stock Unit Agreement (Employees - with Employment Agreement) under the 2015 Stock Incentive Plan*
Form of Restricted Stock Unit Agreement (Employees - without Employment Agreement) under the 2015 Stock Incentive Plan*
Form of Stock Option Agreement (Employees - with Employment Agreement) under the 2015 Stock Incentive Plan*
Form of Stock Option Agreement (Employees - without Employment Agreement) under the 2015 Stock Incentive Plan*
Form of Performance Share Award Agreement (Employees - with Employment Agreement) (Executive Officer Long Term Incentive Plan (“LTIP”) Award)*
Form of Performance Share Award Agreement (Employees - without Employment Agreement) (Executive Officer Long Term Incentive Plan (“LTIP”) Award)*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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The following materials from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017; (ii) the Consolidated Statements of Income for the three months ended March 31, 2018 and 2017; (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017; (iv) the Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2018 and 2017; (v) the Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017; and (vi) the Notes to the Unaudited Consolidated Financial Statements

* Management contract or compensatory plan or arrangement.
 


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
ATLANTIC CAPITAL BANCSHARES, INC.
 
 
 
/s/ Douglas L. Williams
 
Douglas L. Williams
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
 
/s/ Patrick T. Oakes
 
Patrick T. Oakes
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
 
 
 
Date: May 9, 2018
 
 
 
 



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