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Edited Transcript of ACBI earnings conference call or presentation 24-Apr-20 1:30pm GMT

Q1 2020 Atlantic Capital Bancshares Inc Earnings Call

May 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Atlantic Capital Bancshares Inc earnings conference call or presentation Friday, April 24, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas L. Williams

Atlantic Capital Bancshares, Inc. - President, CEO & Director

* Gary G. Fleming

Atlantic Capital Bancshares, Inc. - Executive VP & Chief Risk Officer

* Patrick Timothy Oakes

Atlantic Capital Bancshares, Inc. - Executive VP, CFO & Secretary

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Conference Call Participants

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* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Brandon Thomas King

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Feddie Justin Strickland

Janney Montgomery Scott LLC, Research Division - Associate

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Stephen Kendall Scouten

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Steven Comery

Morgan Group Holding Co. - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Atlantic Capital Bank First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Gray Fleming, Chief Risk Officer. Please go ahead.

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Gary G. Fleming, Atlantic Capital Bancshares, Inc. - Executive VP & Chief Risk Officer [2]

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Thank you, Chad, and thank you all for joining our first quarter 2020 earnings call. With me today to discuss our results are Doug Williams, Chief Executive Officer; and Patrick Oakes, Chief Financial Officer.

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 the CEO of Atlantic Capital, Doug Williams.

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [3]

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Thank you, Gray, and good morning, and thank you all for joining us. I will make a few remarks highlighting our first quarter results, explaining how Atlantic Capital is managing through the pandemic, and summarizing what we are doing to help our clients; then Pat Oakes will review the financials for you; and Gray Fleming, our Chief Risk Officer, will provide an overview of our loan portfolio and our provision for credit losses. After Gray's remarks, we will all be available to answer your questions.

Atlantic Capital entered the COVID-19 crisis in a position of strength with solid first quarter operating results, a fortress balance sheet and sound business continuity plans. With that strength, our company will provide needed assistance to businesses in our community, add new client relationships and strive to continue to build meaningful shareholder value through the crisis.

As reported yesterday, after the close of the market, Atlantic Capital posted first quarter net income of $2.1 million or $0.10 per diluted share. Pretax earnings before provision for credit losses were $10.7 million for the quarter, a 7% increase, 28% annualized from the fourth quarter of 2019 and 19% above that in the first quarter of 2019.

The provision for credit losses was $8.1 million, reflecting adoption of the current expected credit loss methodology and the prospect of potential deterioration in credit quality from the curtailment of economic activity in response to the pandemic. The increase was attributable to credit migration observed at the end of the quarter due to the pandemic and forecasted deterioration in macroeconomic conditions.

At quarter end, the allowance for loan losses was 1.29% of loans and 3.8x nonperforming loans compared to 0.99% of loans and 2.5x nonperforming loans at 12/31/19. Net charge-offs were 4 basis points of loans for the quarter, and nonperforming assets were 27 basis points of total assets.

Atlantic Capital's credit quality results have been consistently among divested banking since its inception in 2007 and are evidence of strong credit risk management competency.

Loans held for investment increased 12.7% annualized from the fourth quarter of 2019 and were up 11.4% from the first quarter of 2019. Most of the loan growth during the quarter was ordinary organic growth across our various businesses and was unrelated to the pandemic. In particular, C&I loans were up $55 million. While most of that was normal organic line usage, some of the withdrawals were probably pandemic related. We're still making good loans, but have assumed a more cautious underwriting posture given the prevailing economic uncertainties.

Average deposits from continuing operations grew 26% from the first quarter of 2019, as we added new client relationships and expanded existing ones. Average noninterest-bearing deposits -- demand deposits increased 24% year-over-year and were approximately 32% of total average deposits during the quarter. With this strong, reliable and growing core deposit funding base, plentiful balance sheet liquidity and access to significant wholesale funding, Atlantic Capital will maintain robust funding capacity for future client needs.

As you know, Atlantic Capital completed its $85 million share repurchase program during the first quarter and announced a new $25 million authorization. We paused that second authorization to preserve strong holding company liquidity. At quarter end, tangible book value rose to $14.54 per share, tangible common equity to tangible assets was 11.57% and the estimated total risk-based capital ratio was 14.9%. The various stress scenarios remodel indicate Atlantic Capital's capital ratios will remain significantly above well-capitalized standards.

Our incident response team began meeting regularly in early February to tailor our business continuity plans through the developing crisis. Nonessential business travel and attendance at large meetings were suspended in early March. Since March 16, except for essential staff at our 2 deposit-taking offices, over 95% of our associates have functioned smoothly and effectively in a work-from-home arrangement and can continue to do so for as long as necessary.

My associates have been flexible, resourceful and committed throughout the crisis. Their priority is to help our clients and communities navigate through the crisis to the better days of a return to prosperity. As soon as reports of the coronavirus surfaced, our bankers began to talk to their clients about the potential effects on them. At first, the concerns were primarily about supply chains. As we moved into early March, it became clear that all aspects of economic life would be affected and many of our borrowers would suffer liquidity constraints. We initiated a program of 90-day principal and interest payment deferrals for those who asked for it. As of Tuesday of this week, we've deferred payments on $389 million of loans or about 20% of total loans for 311 borrowers.

We are participating in the Paycheck Protection Program and received SBA authorization and disperse funds for over 600 loans or about 75% of applications submitted to us, totaling more than $220 million before the first round of appropriations was depleted. Additional applications are pending, and we hope to receive authorization for those when the program has opened up again, and we now understand that will be Monday morning.

With limited clarity on the spread of the virus and the pattern and timing of economic recovery, we'll not be offering full year guidance with respect to our earnings outlook, credit metrics or balance sheet growth. We will, however, tell you with firm resolve and strong conviction that Atlantic Capital will remain the fortress for our clients and shareholders, and we will do whatever is necessary, consistent with sound banking practice, to get them and our company through the pandemic and return to prosperity.

Now Pat Oakes will review the financials for you.

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Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, CFO & Secretary [4]

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Thanks, Doug, and good morning, everyone. With our solid capital position, strong core funding and access to significant wholesale funding, we're in a great position during this period of uncertainty. Our average loan-to-deposit ratio improved again to 84% compared to 87% in the fourth quarter and 95% in the first quarter of 2019. If you include our significant borrowing capacity, we have ample liquidity available to manage this pandemic and to fund items such as the PPP loans. Our net interest margin expanded 3 basis points to 3.41% as the 18 basis point decrease in loan yields was more than offset by the 27 basis point drop in the cost of interest-bearing deposits.

As most of you are aware, the drop in Fed Funds rate during the first quarter did not initially include a similar decrease in 1-month LIBOR. With about 50% of our loans tied to LIBOR, this allowed loan yields to remain higher in March and April. The spread between LIBOR and Fed funds has now started to normalize, resulting in loan yields trending down during the second quarter.

I am pleased with our banker's ability to reduce our cost of deposits during the first quarter and expect further decreases in the second quarter. But these reductions to deposit costs will most likely not offset the impact from the drop in loan yields. This will result in some margin compression over the next few quarters, excluding any impact from the PPP loans.

Interest income in the second quarter will benefit from the funding of the PPP loans, especially if the portion of the loans are forgiven during the quarter, and we are able to accelerate the recognition of the fee income.

Noninterest income in the first quarter was $2.4 million. This included another strong quarter for service charge income across our commercial lines of business.

SBA income decreased from less gain-on-sale income due to slower loan production, lower loan-sale premiums, which led to our decision to hold some of the government-guaranteed portion of the 7(a) loans. Our SBA team is currently focused on assisting our bankers with the PPP program. So our traditional SBA income will be impacted again in the second quarter.

Salary and benefits expense was $8.5 million in the first quarter, unchanged compared to the fourth quarter, as the seasonally higher benefits expense was offset by a decrease in our incentive accrual.

The provision for credit losses was $8.1 million in the first quarter. This included a $7.4 million provision for loan losses and a $671,000 provision for unfunded commitments. The increase was primarily in response to the expected impact from the economic slowdown caused by the pandemic.

Now let me turn it back over to Gray to walk you through the loan presentation we posted with our earnings release. Gray?

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Gary G. Fleming, Atlantic Capital Bancshares, Inc. - Executive VP & Chief Risk Officer [5]

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Thanks, Pat. I will start on Page 3 of the presentation that hopefully everyone has. This is just a general overview of our credit situation. As Doug and Pat both mentioned, our credit quality remained very strong in the first quarter with low charge-offs and nonperforming assets. That said, COVID-19 and the resulting shutdowns across the country are affecting almost every industry, and we, like other banks, are really scrutinizing the entire portfolio.

Our allowance, as Pat mentioned, was 1.29% of total loans compared to 0.99% at December 31. After the day 1 impact of adopting CECL, which resulted in a small decrease in the allowance, our first quarter provision was $7.4 million. That was, as Pat said, mostly driven by heavier weighting of both adverse and severe economic forecast scenarios.

On the borrower assistance front, Doug mentioned, both the Paycheck Protection Program and payment deferrals that we've offered. The other one that I will highlight is the CARES Act subsidy for SBA loans. SBA will be making the next 6 monthly payments for all existing SBA loans. And for us, that affects about $125 million of SBA outstandings on our books.

Like I mentioned, we're monitoring the entire portfolio very closely in light of the current environment. But we're also closely monitoring the hotel, restaurant and retail segments of our portfolios. And we'll go into some more detail. These portfolios are the result in each case of targeted strategies with specific loan products provided to top-tier borrowers and managed by specific business units.

Just a couple of quick highlights before we get into those details. 39% of our hotel outstandings are either SBA guaranteed or low loan-to-value SBA 504 loans. 87% of our restaurant outstandings are in our franchise finance group, and that's primarily split between Dunkin' and other QSRs. And 63% of our retail outstandings are in industries that have been determined or deemed to be essential businesses by most states.

Finally, on credit overall, I'll just say that we're cautiously considering any new loan exposure outside of the PPP across all industries.

Next, on Page 4. This is just a brief summary of the overall loan portfolio. As a reminder, we're a commercial-focused bank and have a commercial-focused loan portfolio. We're about 58% commercial, 36% commercial real estate and 6% consumer. I will note, on the consumer, about 40% of that is cash secured.

We have a granular portfolio, average loan size of $616,000, and we have about 21 loans that are larger than $10 million. We're a southeast-focused lender. 65% of our outstandings are with Georgia-based borrowers. If you remove the national businesses, SBA, franchise and TriNet, that number in Georgia is about 80%.

In the bottom couple of charts, you can see commercial real estate concentrations by property type and then our commercial concentrations by industry. And I will touch on a few of those in the next slides.

On Page 5, this goes through our hotel outstandings. All of this is as of 3/31 in terms of outstandings, but we've got some information about deferrals that are a little bit more current. In hotel, we have $113 million outstanding. 53% of that is commercial real estate in that group, with a handful of select known developers. And the other 47% is in our SBA group. Most of that, as you can see in the bottom right chart, is either guaranteed or those low loan-to-value SBA 504 loans. 90% of our hotel outstandings are with large national brands. $42 million or 37% of this book are under payment deferrals. And pre-pandemic, as of 3/31, we had no nonaccrual or classified loans in the hotel portfolio.

Turning over to Page 6. Let's walk through our restaurant outstandings. We had $176 million of outstandings with restaurants. As you can see in the bottom right chart, this is very much a targeted franchise finance strategy with concepts that we know well and with experienced multi-store operators. 97% of this exposure is QSRs and about half of that is Dunkin', a brand that we know very well and feel very good about. The other QSRs are comprised of approximately 20 different concepts, and none of those are over $10 million in outstandings. The vast majority of our QSR customers are open and operating via drive-through, takeout and delivery. And in pretty much all of these cases, the franchise owners we're seeing, are providing very good support to their franchisees. Our average loan size in restaurants is $748,000. And as you might expect, deferral requests were fairly common in this portfolio with about 74% under deferral. Again, pre-pandemic, as of 3/31, we had no nonaccruals in the restaurant book and less than $1 million in classified.

Next on Page 7. This slide is a little busier because retail exposure is a broader definition and is spread out over more groups. From a total retail perspective, we have $289 million outstanding. This includes commercial and commercial real estate types of loans. But if you look at the first 4 categories in the chart at the bottom, this represents 63% of the retail portfolio. And these are the industries that, again, by most states have been deemed essential. And so if you look at just nonessential retail that comes out to $106 million in total, and that's the lower part of the chart.

An example of the essential versus nonessential, a good example, is the TriNet column in that bottom chart, which is our largest portion of the retail book. 85% of our TriNet exposure is either drugstores or dollar stores, and those are open and operating, in a lot of cases, quite well. If you hone in a little bit on the nonessential categories, you'll see that most of that is in the commercial real estate book. And even though we've call that nonessential, a lot of those are centers that are anchored by essential businesses like grocery stores. Most of the rest of the nonessential categories are in our shared national credit portfolio, and these are some large, strong national brands that we feel, while certainly being impacted, have a better chance than smaller companies of getting through this situation.

About $45 million or 16% of this overall retail book is under deferral. If you -- that really is in the commercial real estate and franchise columns. And so if you've looked at just those 2 totals, it's closer to 38% of those balances that are under deferral. Again, pre-pandemic, we had about $200,000 in nonaccrual and $2.4 million in classified loans in this book.

And finally, I just wanted to touch on the shared national credit portfolio. We have $190 million as of 3/31 outstanding in this book. This is across 22 borrowers with an average commitment of $12 million. Most of these are southeast-based companies. 17% are highly leveraged transactions, as defined. And as of 3/31, we had no nonaccruals and no classified loans in this book. You can see in the bottom chart that it's fairly spread out in terms of industry and business types.

And with that, I will turn it back over to Doug for some closing comments.

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [6]

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All right. Chad, we're ready to open the lines to questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today will be from Stephen Scouten with Piper Sandler.

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Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [2]

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I'm curious relative to your loan loss reserve. It looks like it's up to 1.29% loan. I'm wondering relative to the build-out of those reserves, if it's more highly allocated to some of these loan categories that you've outlined in the presentation. And if so, if you have any details around some of those more specific allocations?

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Gary G. Fleming, Atlantic Capital Bancshares, Inc. - Executive VP & Chief Risk Officer [3]

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Stephen, this is Gray. We haven't really gotten to the point of allocating by industry. This is really call code-based and model-based. And so it naturally flows as we have grade changes within a certain category. But beyond that, right now, we're relying on the CECL methodology and the forecasts that influence that, and those apply across the board. And so before that, it's still driven by individual grades and individual PD and LGD history.

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Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [4]

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Okay. Helpful. And then maybe thinking about the NIM for a second, you guys noted that you made some municipal security investments. I'm wondering if you can frame those investments up in terms of the size and the timing and the yields potentially, just to give us a view for how that could help to minimize compression from here.

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Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, CFO & Secretary [5]

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Sure. So a lot of that was done in March. Obviously, with the sell-off in the municipal markets, we try to take advantage of what was going on there. And it was basically about $60 million-ish or so in late in the quarter, and we were able to pick up yields 4.50% to 5% in that general range. So you're right. Going forward, that will help the margin, hopefully.

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Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [6]

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Okay. Great. And then just maybe last question for me. Thinking about the sub-debt. I know you guys have talked about maybe that could be a pursuit for you moving forward here with capital planning. With, I guess, lack of sub-debt deals that we're seeing being done right now and pricing expectations have maybe increased a little bit relative to where they were. Is that still on the table for you guys down the road? Or is it really too early to even think about things like that?

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Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, CFO & Secretary [7]

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It's probably a little bit too early. So what I'm hearing is the market is open, it's functioning. Obviously, nowhere near the levels we saw even earlier this year. So the debt is 6.25 now. Well, I'm being told if we were to issue now, we could probably do a little bit better than that, but probably not significantly. So you're right, it's not as attractive as it was. So the question is, if -- when we get to September, if rates where they are now today, what do we do? We have the option of refinancing it, obviously. We have the option of let them go to floating rate, which would be probably in the low 5s, but we'd start to lose capital treatment at that point. So it's probably too early to say what we're going to do. But we'll keep you guys updated.

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Operator [8]

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The next question will be from Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [9]

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So good to see personnel expenses relatively flattish here. I know you guys have made some hires. Can you just talk about some of the opportunities as you kind of move forward? I know probably all trying to contain expenses at this point, but there's probably an opportunity to opportunistically add here. So what should we think about in terms of your hiring plans?

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [10]

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Our hiring plans for -- before the pandemic, our hiring plans for 2020 were more modest than the hiring we did in 2019. And I'd just say we're going to be more cautious going forward until there's more clarity around the course of the pandemic and the economic -- or timing of the economic recovery. But we -- if we find good bankers, we'll hire them. We'll probably need to continue to add some support positions here and there. But I think generally, our hiring activity will be more constrained this year than it was last year, and that will contribute to our ability to manage noninterest expense maybe more tightly than we had anticipated for this year.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [11]

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Okay. That's helpful. And then just wanted to -- and I'm sorry if you addressed this in the prepared comments, I got in a little bit late. But I just wanted to talk about the PPP program. It looks like you guys had some good approvals. It looks like we're going to get round 2 here beginning next week. Can you talk about kind of where you stand in the pipeline? And then maybe, Pat, if you can kind of walk us through what you'd expect in terms of the fee impact? And how that's all going to kind of flow through the income and balance sheet?

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [12]

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Yes. Michael, I don't know what you heard, but we received authorization for a little over 600 loans. It was over $220 million. And that was about 75% of our applicant backlog. So we've got another 200-plus to have approved, if we can. We understand the program is going to open up, again, Monday morning, and we've got them lined up, ready to go. So hopefully, we'll be able to get all those authorized and dispersed over the next week or so here. We've only done this for clients, both borrowing and nonborrowing clients. And we seem to be -- have gotten through it pretty efficiently compared to some others.

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Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, CFO & Secretary [13]

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And Michael, around the fees, the average rate so far has been about 2.9-ish percent. So that's $6 million, $6.5 million in income. And then with the additional $50 million or so, that could be another $1.5 million or so, just rough numbers.

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [14]

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The remaining 200-plus applications, we think, are worth about $50 million.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [15]

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Okay. That's exactly what I was looking for. Very helpful. And maybe just one more for me. I appreciate the color around the kind of at-risk portfolios at this point. I understand you guys are in a relatively healthy southeast market where immigration is -- has been relatively strong, and the demographic trends are strong, but the numbers are a little bit higher what some of your peers have reported. Obviously, it's apples versus orange in terms of an exercise. But how can you help us feel comfortable that loss content in some of those more at-risk categories won't be -- if I go back and look at industry trends relative to those categories, what they were in kind of the great recession?

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Gary G. Fleming, Atlantic Capital Bancshares, Inc. - Executive VP & Chief Risk Officer [16]

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Michael, this is Gray. And you're right to point out that the numbers from a percentage standpoint do look a little higher for us since we don't have a retail book to kind of be a part of that calculation. I'd just say these are certainly areas that are having stress. We feel very good about the borrowers and developers that we've worked with in these areas. And while we certainly underwrite to recession, it's hard for anybody to say they underwrote to what's going on right now. But with good operators that have multiple locations, when you talk about restaurants and good brands for restaurants and hotels, we really think, particularly if the country can start moving again without this dragging out too long, these -- for the most part, all of our borrowers in these areas or most of our borrowers are well positioned to come out of this. It's right to focus on these at-risk portfolios. A lot of these can come back fairly quickly. We're trying to make sure, too, that we look at the rest of our portfolio, as I mentioned, commercial real estate, C&I. If you have consumer, that's something to pay attention to, too. It's -- a lot of it comes down to how long this lasts. And as we're all seeing, a lot of different industries that you might not have expected are being impacted in strange ways. So we feel pretty good about these segments because of the targeted nature of how we've approached them. But we're being cautious about these as well as just about everything else that isn't seeing the few rare bumps from what's going on.

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [17]

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And Michael, I would add that, within each of these apparently-vulnerable categories, we think we're positioned very well. We're in restaurants, where we're in quick service. We're in quick service, but we're with strong operator like Dunkin'. In the retail category, we're heavily weighted toward essential and near essential businesses. So again, we think there's a lot of resiliency there. And we think these companies or these businesses are likely to recover quicker as the economy gets reengaged here.

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Operator [18]

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Our next question comes from Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [19]

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When you look at loan growth, it was fairly robust. I think period-end balances were up about 13% linked quarter annualized.

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [20]

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Correct.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [21]

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Outside of the PPP, how do you envision loan growth trending for the remainder of this year?

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [22]

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Yes, that's a really hard question to answer, Brady. I -- we are making new loans, but we will be very cautious in doing that until the economic picture is clear. So I think you would expect to see loan growth slow, but we continue to add new business. We're also seeing some fallout from the PPP at other institutions, and we're having some clients indicate interest in moving their business to Atlantic Capital. So I think we'll continue to add business. I think that will tend to be more treasury management and depository business than borrowing business. But I'm sure we'll continue to add some new borrowers as well. So we'll see, but we're -- we really don't have any confidence level in terms of offering an outlook for the year with respect to loan growth.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [23]

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All right. And then moving on to the net interest margin. I'm just wondering the sensitivity here. Do you happen to know by how many basis points your NIM will drop with every 25 basis point cut? I realize it sounds like the muni purchases and the P3 will help offset that. I'm just trying to figure out the sensitivity there.

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Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, CFO & Secretary [24]

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Yes. No, it's a little tough, right? The 25 basis points -- the basis point move by 25 basis points is a little difficult with where LIBOR is. It all depends on how much LIBOR drops is that 50% of our loan portfolio. That was at 1% at March 31 compared to Fed funds, 25 basis points. And that's already come down to 44 basis points. So it gets really, really difficult this quarter to kind of predict what that's going to do and the level of how quick we can take deposit costs down. So I can't really give much guidance for the second quarter to tell you. It's going to drop, but I don't think it will be really significant in the second quarter. I think we'll continue to see a decrease in the third quarter when that loan yield levels off and deposit costs level off. So at this point, Brady, it's really, really difficult to tell you how quickly it's going to drop and what that magnitude is.

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Operator [25]

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The next question will be from Feddie Strickland with FIG Partners.

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Feddie Justin Strickland, Janney Montgomery Scott LLC, Research Division - Associate [26]

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Was just wondering what happens with deferrals and recognizing these as new special mention or substandard? Can you just give a little bit more color on your process for grading changes and kind of what to expect in the 10-Q going forward?

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Gary G. Fleming, Atlantic Capital Bancshares, Inc. - Executive VP & Chief Risk Officer [27]

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Feddie, this is Gray. So we were pretty liberal with our offering of deferrals to any of our customers who felt that they were being impacted. And so I don't think that it's a good indication right now of anything as it relates to grade changes or problem situations. And we've had very few of those. And as you know, the regulators and FASB have given very good guidance that deferrals related to COVID-19 do not need to be classified as TDRs. And so we and other banks are taking that approach. As we get further into this, if we get to a point of customers needing to ask for further deferrals, we might look a little harder at the specifics behind it. But we really have been trying to be very open and quick in this initial round with offering deferrals. And so have a lot of good customers that just are nervous and want to be able to preserve some capital, and we have wanted to accommodate that. So I don't think at this point, it's a good correlation at all for where we see the grades or the problems.

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Feddie Justin Strickland, Janney Montgomery Scott LLC, Research Division - Associate [28]

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Got it. I appreciate it. And just one more follow-up real quick. I was wondering if you can give us a quick refresh just regarding your Fintech customers. Do you still see some more opportunities here in the digital business?

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [29]

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Yes, we do, Feddie. We -- that business continues to grow, both our payments business, which is largely payroll companies and then the Fintech business, which is partnership with different firms, continues to grow. We've got a nice backlog of new business coming online over the next couple of quarters, and that seems to be very resilient. Particularly in the payments business, the ACH volumes that we have historically seen seem to be holding up very nicely. We would expect a little deterioration in those -- on those -- in those item volumes. But we really haven't seen that yet. So that seems to be quite resilient at this point and good opportunities ahead for us.

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Operator [30]

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The next question comes from Jennifer Demba with SunTrust.

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Brandon Thomas King, SunTrust Robinson Humphrey, Inc., Research Division - Associate [31]

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This is Brandon King on for Jennifer. I just -- previously, you guys stated that you expect deposit growth to outpace loan growth. But I just wanted an update on how you view that going forward in this environment. And also, you can give more color to your pipeline of new treasury management clients?

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [32]

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Yes. We continue to expect strong deposit growth this year. And we saw tremendous deposit growth in the quarter. And it really is driven across our various businesses. We continue to add new clients in our commercial segment in Atlanta, in our business' not-for-profit banking segment and in our payments and Fintech business, which is more national in character. And we don't see any interruption in those trends at all. This Paycheck Protection Program money is mostly showing up in our deposit accounts. And of course, that will be drawn down over time. But I think we'll continue to grow deposits. We've got a nice pipeline of new treasury management opportunities, which drive those deposit levels. And this is a really stable aspect of our balance sheet and stable aspect of our business generally.

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Brandon Thomas King, SunTrust Robinson Humphrey, Inc., Research Division - Associate [33]

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Okay. And with the PPP program, do you expect to fund that mostly with deposit growth? Or do you expect to use some of the Fed facility as well?

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Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, CFO & Secretary [34]

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I don't think we'll have -- it doesn't -- we're going to get all the paperwork finalized for the Fed program. But I don't think we'll need it between what we had -- the borrowing capacity we have and the liquidity that we have, we can fund it on balance sheet.

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Operator [35]

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The next question will come from Steve Comery with G.research.

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Steven Comery, Morgan Group Holding Co. - Research Analyst [36]

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I appreciate the color on NIM going down in future quarters as loans reprice following the rate cuts. I mean just kind of wondering if I can get your thoughts on the effect of this through NII like will the effect be large enough to push NII down. Obviously, growth matters, but just holding it flat for a second.

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Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, CFO & Secretary [37]

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Yes, it's going to be -- yes, it will put pressure on NII, definitely. A lot of that's going to depend on growth that we see. And as Doug mentioned, we're not really giving guidance around loan growth, in particular, with all the uncertainty around that. But obviously, if we don't see the loan growth, yes, obviously, that will impact NII.

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Steven Comery, Morgan Group Holding Co. - Research Analyst [38]

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Okay. And then a similar topic. 50% of loans indexed to LIBOR. Kind of just wondering about the presence of floors, and if any of those are active at this point.

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Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - Executive VP, CFO & Secretary [39]

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Yes. So we have about $150 million between swaps and floors on that portfolio, and they're all obviously in the money. They're in the 2% range, some 1.75%, some up to 2%. But it's all done through the derivatives, not on the customer side.

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Steven Comery, Morgan Group Holding Co. - Research Analyst [40]

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Okay. Fair enough. And then just finally, this was on the presentation slides about cautiously considering new loan exposures outside the PPP program. I guess just not necessarily what you guys are accepting or rejecting, but I guess kind of what sort of inbound interest are you getting? And then sort of what kind of process are you going through now that maybe you wouldn't have gone through pre-pandemic?

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [41]

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Yes. I would say, in the first instance, sort of the inbound flow is from clients and long-standing prospects that have indicated an interest in moving business to us. I think we're going to get sort of another wave of opportunity -- opportunities to consider as fallout from PPP issues and other institutions. They didn't feel like they were well served. They weren't able to get the funding or whatever. And we're just saying, well, now is the time to move our banking business. And that will tend to be more treasury management and depository-type business, I believe. We obviously -- as we look at new credit requests, we have a lens of an uncertain economic environment, and that enters into our underwriting considerations. So I think it would be safe to say that any new loans that we're making are from borrowers in resilient industries that we don't expect to be affected in any material degree by the economic conditions.

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Operator [42]

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(Operator Instructions) The next question will come from Ross Haberman with RLH Investments.

All right. At this time, I'm showing no further questions. So I'd like to turn it back to you, Mr. Williams for any closing remarks.

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Douglas L. Williams, Atlantic Capital Bancshares, Inc. - President, CEO & Director [43]

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Thank you, Chad, and thank you all for dialing in this morning. We hope our comments were useful to you. I would just remind you in closing that Atlantic Capital has a fortress balance sheet. We've had fundamentally sound credit quality throughout our history. We have plentiful liquidity and we a have very robust capital levels. We believe that, that will serve us well, serve our clients well through the crisis. We think we'll come through this and be even stronger, have a more significant market share and do very meaningful things for our clients. So please let us hear from you. We're available to answer any questions you might have. Thank you again. Goodbye.

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Operator [44]

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And thank you for attending today's presentation. At this time, you may all disconnect your lines.