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Edited Transcript of ACBI earnings conference call or presentation 31-Jan-20 2:00pm GMT

·21 mins read

Q4 2019 Atlantic Capital Bancshares Inc Earnings Call Feb 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Atlantic Capital Bancshares Inc earnings conference call or presentation Friday, January 31, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Ashley C. Carson Atlantic Capital Bancshares, Inc. - EVP of Corporate & Community Affairs * Douglas L. Williams Atlantic Capital Bancshares, Inc. - President, CEO & Director * Patrick Timothy Oakes Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO ================================================================================ Conference Call Participants ================================================================================ * Christopher William Marinac Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst * Jennifer Haskew Demba SunTrust Robinson Humphrey, Inc., Research Division - MD * Stephen Kendall Scouten Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Steven Comery Morgan Group Holding Co. - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to the Atlantic Capital Bank Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note today's event is being recorded. I'd now like to turn the conference over to Ashley Carson, Executive Vice President, Corporate and Community Affairs. Please go ahead. -------------------------------------------------------------------------------- Ashley C. Carson, Atlantic Capital Bancshares, Inc. - EVP of Corporate & Community Affairs [2] -------------------------------------------------------------------------------- Thank you, Rocco, and thank you all for joining us for our fourth quarter 2019 earnings call. With me today to discuss our results are Doug Williams, Chief Executive Officer; Patrick Oakes, Chief Financial Officer; Gray Fleming, Chief Risk Officer; and Kurt Shreiner, President of Corporate Financial Services. As a reminder, the Atlantic Capital earnings release is available in the Investor Relations section of our website. I wish to caution you that we will be making forward-looking statements during this call and that actual results may differ materially. We encourage you to review the disclaimer in the earnings release dealing with forward-looking information. This disclaimer applies equally to statements made in this call. In addition, some discussions may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release. And with that, I will turn the call over to our CEO of Atlantic Capital, Doug Williams. -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Ashley, and good morning. For the fourth quarter of 2019 and for all of 2019, Atlantic Capital reported strong growth in earnings per share, average core deposits and average loans while maintaining sound credit quality and a fortress balance sheet. We begin 2020 with strong momentum in all of our businesses. Building an attractive and distinctive culture as a competitive weapon is a key priority at Atlantic Capital, and we were pleased to report in 2019 that our company was recognized by the American Banker as a best bank to work for and by the Atlanta Business Chronicle as a best place to work. 2 key elements of this purpose and performance-driven culture, client-focused teamwork and risk management expertise, are foundational to our results. As you've seen from the earnings release, Atlantic Capital reported net income from continuing operations of $7.1 million or $0.32 per diluted share in the fourth quarter of 2019 and net income from continuing operations of $28.2 million or $1.20 per diluted share for all of 2019. Average loans from continuing operations grew at a 12.5% annualized pace in the fourth quarter and increased 10.6% from 2018. Average deposits from continuing operations were up 40% annualized in the fourth quarter and grew 21% year-over-year. Noninterest-bearing deposits were 33.5% of total deposits at year-end, and average balances were up 50% annualized in the fourth quarter and increased 20% for the year. This strong loan and deposit growth from new and expanded client relationships is the direct product of a company aligned for the common purpose of fueling client prosperity with thoughtful and tailored credit and treasury management solutions and reliable service delivery. Atlantic Capital's credit quality continues to be among the best in banking. Net charge-offs to average loans were 7 basis points for the quarter and 11 basis points for the full year. Nonperforming assets to total assets were 26 basis points at year-end. Our strong capital position enabled us to repurchase 452,000 shares in the fourth quarter for $8.1 million and 4.5 million shares or approximately 17% of total shares since November of 2018 for $79 million. Now Pat Oakes is going to review the financials with you in more detail. -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [4] -------------------------------------------------------------------------------- Thanks, Doug, and good morning, everyone. The net interest margin for the fourth quarter was 3.38%, a 14 basis point decline from the 3.52% margin in the third quarter. The decline was larger than anticipated and primarily the result of an increase in liquidity due to the strong deposit growth in the quarter. This change in mix lowered the NIM by approximately 9 basis points. As expected, loan yields decreased 23 basis points to 4.95% during the fourth quarter. And I think we have now seen most of the impact from last year's decrease in the fed funds rates. I'm particularly pleased with our progress in reducing the cost of deposits during the fourth quarter. The cost of interest-bearing deposits decreased 22 basis points during the quarter to 1.36%, as our bank has done a good job working with our customers to reduce rates where possible. Our overall cost of deposits decreased 16 basis points to 90 basis points. These trends, combined with solid growth in DDA, were able to offset a significant part of the pressure from the loans side. Even though I'm pleased with our progress in reducing rates, we will continue to look for opportunities to further decrease deposit costs in the first quarter of 2020. Considering all this, I expect our NIM to increase in the first quarter from the 3.38% we reported in the fourth quarter. In addition to the drop in our cost of funding, it was also nice to see another quarter of strong deposit growth even if the fourth quarter numbers were inflated as a result of typical year-end seasonality. As a reminder, due to the volatility with our deposit balances, it's important to focus on quarterly average balances rather than period-end balances. The fourth quarter was a good example with period-end growth of $645 million compared to average growth of $197 million. I estimate approximately half of our -- half of the average deposit growth in the quarter was due to the run-up in year-end deposits that have already left the bank in the first quarter. As we have seen in some previous years, I would not be surprised to see deposits down slightly in the first quarter while continuing to see strong year-over-year growth. One of our goals for 2019 was to improve our liquidity and replace some of the funding we lost as part of the branch sale, and I think we can say we were successful. The fourth quarter average deposit growth also included an increase of $80 million in noninterest-bearing deposits from strong growth across many -- most of our lines of business, particularly our payments business. Period-end growth in the fourth -- period-end loan growth in the fourth quarter was $37 million. That included a $9 million reduction in mortgage warehouse loans as we move to exit that business in the first quarter. Multifamily loans increased $38 million in the quarter, primarily to -- due to $28 million in construction loans that moved to permanent financing, not a change in lending focus. Noninterest income in the fourth quarter totaled $2.7 million. This included another strong quarter for service charge income, driven by continued strong growth in our payments business. We expect this momentum to continue and should be a nice source of revenue growth in 2020. SBA income decreased in the fourth quarter as a result of less gain-on-sale income due to fewer loan sales. SBA loan production remained solid, and I expect the gain income in the first quarter to be similar to what we experienced in earlier quarters of 2019. Finally, let me briefly touch on a few items that caused the increase in expenses in the fourth quarter. Salaries and benefits increased from the impact of support staff hires, along with an increase in our incentive accrual. The increase in data processing expense included the impact from growth in our payments business, along with approximately $125,000 in onetime expenses. Now I'll turn it back over to Doug. -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Patrick. With strong momentum to begin the year and substantial opportunity from Atlanta market growth and dislocation and from burgeoning prospects in the national high-volume payments in the fintech arena, Atlantic Capital will be sharply focused on: number one, accelerating growth in existing and new client relationships in our Atlanta businesses; and number two, growing deposits and service charge income from expanding to new payments and fintech relationships and alliances in 2020. While uncertainties abound, data indicate that the U.S. economy is firming and begins 2020 on sound footing. The Atlanta economy is diverse and growing at a vigorous pace. In particular, expected population growth in the Atlanta region over the next 3 years will be the second highest among the largest 10 MSAs in the U.S. Atlanta is a popular destination for corporate relocations and new business creation has been strong. There are over 221,000 businesses in the MSA and more than 24,000 of those have revenues between $1 million and $500 million, which is our primary target market segment. We, of course, are well aware of the dislocation from M&A activity involving Atlanta area banks over the last couple of years, particularly the merger of BB&T and SunTrust to create Truist. We expect an historic opportunity to re-order the competitive landscape, add bankers and clients and accelerate our growth. As you know, we added 12 new producing bankers in 2019, and we expect them to become productive this year. We'll also continue to opportunistically add bankers over the course of 2020. Atlanta is America's payments hub, with an estimated 70% of all domestic payments flowing through Atlanta. Atlantic Capital is building a rapidly growing payments and fintech banking business based on our treasury management expertise and a reliable transaction processing capability. We grew ACH payments volumes over 50% in 2019 and see opportunity to expand deposit balances and noninterest income at a robust pace as we add new payments relationships and form alliances with payments-oriented fintech companies. We expect sustained loan and deposit growth in the 10% to 12% range in 2020 and more growth in noninterest-bearing demand deposits. Assuming stable monetary policy without reductions in the federal funds rate, the net interest margin should stabilize in the first quarter. We have considerable capital management flexibility. With over $6 million remaining under our $85 million repurchase program authorized in November of 2018, we anticipate undertaking further capital management actions when that program is completed. You'll remember that our $50 million 6.25% subordinated holding company notes are callable in September. Refinancing those notes in whole or in part, along with an additional share repurchase program or a regular dividend, will be considered later in the first quarter. In sum, we're pleased with our progress in 2019 and expect continued progress in 2020. Now we're ready to attempt to answer any questions you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And today's first question comes from Jennifer Demba of SunTrust. -------------------------------------------------------------------------------- Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [2] -------------------------------------------------------------------------------- Doug, you said you are interested in more hiring this year if the opportunities arise. I think you said you hired, what, a dozen people last year. I mean, would you anticipate maybe getting to half that this year? Or do you have any sense based on what your pipeline is right now? -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- We're actively in the market recruiting, and I would be surprised if we hired as many as we did in 2019, but we're opportunistic. If we see good bankers that fit with us, we'll be quick to hire them. We have fewer than that budgeted for 2020. But I've told all our people, "Don't be constrained by the budget. If you find good people, we'll hire them and benefit from the business they bring over." -------------------------------------------------------------------------------- Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [4] -------------------------------------------------------------------------------- Okay. And Pat, could you talk about the CECL adjustment, what we're looking this quarter, rather? -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [5] -------------------------------------------------------------------------------- Yes. So there won't be material changes to retained earnings with the day 1 mark. And then going forward, with CECL, we'll probably see a small decrease in our allowance going forward the first quarter. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- (Operator Instructions) Today's next question comes from Steve Comery of G.research. -------------------------------------------------------------------------------- Steven Comery, Morgan Group Holding Co. - Research Analyst [7] -------------------------------------------------------------------------------- I wanted to ask about the deposits balance. Pat, you kind of mentioned that you've seen a decent amount of the growth. You said about half of the growth already run off through the first quarter. And then after that, you mentioned the noninterest growth as coming from growth in business. Should I interpret that as meaning that most of the runoff has come in the other categories? Or how should I think about that? -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [8] -------------------------------------------------------------------------------- Yes, I would think so. It's going to come more in money market probably than it will in DDA. You may see a little bit of runoff in DDA, but I think most of it will come in money market. -------------------------------------------------------------------------------- Steven Comery, Morgan Group Holding Co. - Research Analyst [9] -------------------------------------------------------------------------------- Okay. That's good. And then secondly, on sort of the hires, about what Jennifer was asking about, maybe if you could help us think about like sort of what the payback period is for that and how long it kind of takes new bankers you bring on to hit the ground running and start producing loans. -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Yes. In terms of sort of breakeven, we would expect that in 6 to 12 months, and we would expect them to begin to become profitable in terms of producing some payback in the 12- to 18-month time frame. -------------------------------------------------------------------------------- Steven Comery, Morgan Group Holding Co. - Research Analyst [11] -------------------------------------------------------------------------------- Okay, good. And then maybe one more for me. Doug, you talked about some of the capital actions you guys are considering, maybe a regular dividend or further repurchases. How do you think about that, kind of the push and pull between the 2 options? And like sort of does the stock's valuation play a role there? And how do you think about that? -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- Yes, valuation certainly plays a role. And there's a third element in there, too, and that's the what we do about the subordinated notes, and we can obviously redeem those. We could refinance them in whole or in part. We could theoretically do a larger issuance. So we've got all those levers to play with, and we're cognizant of the target capital levels we have for total risk-based capital and Tier 1 capital at both the holding company and the bank level as we do that. So we've got a number of variables to play with. Between the 2 that you mentioned, regular dividend and share repurchase, we generally see a share repurchase program as being a more efficient use of capital than a regular dividend. But that could change at certain share price levels. So we're keeping that all in front of us at this point, and we'll make decisions closer to the time when we have to make those decisions regarding the subordinated notes. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- And our next question today comes from Christopher Marinac of Janney Montgomery Scott. -------------------------------------------------------------------------------- Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [14] -------------------------------------------------------------------------------- Pat, just want to drill down on the nonrecurring expenses that were mentioned. Is there anything meaningful there? -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [15] -------------------------------------------------------------------------------- I think what -- I highlighted a few things, right, salary and benefits, maybe a little bit with a little bit higher incentive accrual. In the data processing side, there were some onetime expenses in that category. Noninterest expense, they've had a little bit around some franchise tax, but that's really it. -------------------------------------------------------------------------------- Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [16] -------------------------------------------------------------------------------- Okay. So in terms of the absolute number on some of those onetime adjustments, those are still relatively small just in general. -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [17] -------------------------------------------------------------------------------- It's a few hundred thousand dollars probably, yes. -------------------------------------------------------------------------------- Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [18] -------------------------------------------------------------------------------- Okay. A few hundred thousand, okay. That's what I wanted to get at. Great. And then when we look at the overall deposits coming from Q4 into Q1, does seasonality kind of work against you or work towards you? And then I was just curious kind of how you look at kind of net new clients coming in on your both demand deposits as well as just core deposits in general. -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Let me make sure I understand your question, Chris. Seasonality does play a role in the fourth quarter, and we begin to see some runoff in the first and second quarters and then sort of buildup in the third and fourth quarters. So there is some seasonality in the deposit build pattern, if you will, but underlying that is good core deposit growth, good core client growth throughout the year. And so we really think, rather than looking quarter-to-quarter at what happens with respect to deposit balances, you really need to look at year-over-year comparisons. And as you have seen, those are quite strong and have been for a sustained period of time. -------------------------------------------------------------------------------- Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [20] -------------------------------------------------------------------------------- Right. I was getting at that, too. I see that change in average that you had put in the press release, which I think was good. So again, as we get into first and second quarter, the seasonality is what it is, but the year-over-year comparison should still be quite positive like they just were. -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [21] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [22] -------------------------------------------------------------------------------- Yes. The average growth will be slower in the first quarter, and then it builds up throughout the year from there. But year-over-year, it's you should see continued strong growth. -------------------------------------------------------------------------------- Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [23] -------------------------------------------------------------------------------- Okay. And then one final thing up. You may have mentioned this and I just missed it. Is there a basis point impact to kind of the excess deposits and liquidity in the quarter? Does that -- I'm sure that's part of the margin [component]. -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- On the margin... -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [25] -------------------------------------------------------------------------------- Yes. Yes. We -- I said in my prepared remarks about 9 basis points. -------------------------------------------------------------------------------- Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [26] -------------------------------------------------------------------------------- So it's 9. Great. Should that be narrower, do you think? And any thoughts about how quickly that goes, gets deployed? -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [27] -------------------------------------------------------------------------------- So that's 9 third quarter versus fourth quarter, right, so we'd expect to -- hopefully, to get most of that back in the first quarter. And that's why you might see a slight pickup in the margin in the first quarter. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- And our next question today comes from Stephen Scouten of Piper Sandler. -------------------------------------------------------------------------------- Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [29] -------------------------------------------------------------------------------- A quick clarification there, Pat. That 9 basis point impact, is that just on -- is that -- that's not on the NIM and cumulative, is it? Or is that -- can you specify that? -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [30] -------------------------------------------------------------------------------- Yes. So that was a negative impact of all that excess cash, all the excess deposit growth sitting in cash in the fourth quarter. So as those deposits leave and we lower our cash balances, you'll see a pickup in the NIM. That was third quarter versus fourth... -------------------------------------------------------------------------------- Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [31] -------------------------------------------------------------------------------- That's 9 basis points in total on the NIM. -------------------------------------------------------------------------------- Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, Secretary, Treasurer & CFO [32] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [33] -------------------------------------------------------------------------------- Okay. Great. And then just kind of... -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [34] -------------------------------------------------------------------------------- Let me just say something about the deposit runoff that we'll see in the first quarter. That's really a function of the seasonal pattern we talk about. That business will come back. And it's we'll see a lot of this business come back at the end of 2020. So it's not onetime. It's not temporary. It's just seasonal, so... -------------------------------------------------------------------------------- Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [35] -------------------------------------------------------------------------------- Sure. Sure. That's great. And you guys had a good little pop here in multifamily lending, it looked like. Can you talk a little bit about maybe where specifically that came from, if that's Atlanta or if that's more diversed than just Atlanta and then maybe how you're thinking about that business today? Because over the last couple years, I feel like that was a line of business people were shying away from a little bit, but I haven't really seen any of those fears materialize in actual issues. So curious to how you're thinking about it and where that growth came from. -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [36] -------------------------------------------------------------------------------- So I think the growth in multifamily was $38 million for the quarter. $28 million of that was migration from construction to multifamily as those loans switched from construction loans to mini-perm loans. So most of it is just reclassification. We continue to have a generally defensive posture with respect to multifamily commitments. We are very selective. We haven't really changed our posture there at all, although as you point out, a lot of the fears about multifamily have yet to be realized or materialize at this point. -------------------------------------------------------------------------------- Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [37] -------------------------------------------------------------------------------- Okay. Perfect. And then just kind of thinking about the competitive landscape for you all here in Atlanta and with your customer base, obviously got one large regional kind of announcing an entry into this market. We had another larger MOE that sort of tangentially affects this market. So I'm kind of curious how you guys are thinking about your position in the marketplace and how you compete effectively against some of these new entrants and a bigger continual focus on the Atlanta MSA. -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [38] -------------------------------------------------------------------------------- Yes. Clearly, those new competitors that are coming into the market see the same things we do in terms of the magnitude of the opportunity. We welcome them to Atlanta. And we expect to have good, solid competition with them over time, but we think we have a long lead over all of them, particularly in the C&I and commercial segments generally. We have a very strong team that's very effective in the marketplace. As you've seen, we've had good loan and deposit growth from this market for a sustained period of time, and we like our competitive position. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks. -------------------------------------------------------------------------------- Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [40] -------------------------------------------------------------------------------- All right. Thank you very much, Rocco. We appreciate you all dialing in this morning. We're pleased with our progress in 2019. We expect continued progress in 2020, and we look forward to giving you more good reports as the year goes on. Please call us today, next week if you have any more questions. We look forward to talking with you. Thank you very much. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Thank you. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.