U.S. Markets open in 7 hrs 53 mins

Edited Transcript of ACBI earnings conference call or presentation 27-Oct-17 2:00pm GMT

Q3 2017 Atlantic Capital Bancshares Inc Earnings Call

Oct 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Atlantic Capital Bancshares Inc earnings conference call or presentation Friday, October 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Douglas L. Williams

Atlantic Capital Bancshares, Inc. - CEO & Director

* Gray Fleming

* Kurt A. Shreiner

Atlantic Capital Bank, National Association - EVP

* Patrick Timothy Oakes

Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary

* Richard A. Oglesby

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

================================================================================

Conference Call Participants

================================================================================

* Brady Matthew Gailey

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

* Christopher William Marinac

FIG Partners, LLC, Research Division - Director of Research

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Nancy Avans Bush

NAB Research, LLC, Research Division - Research Analyst

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research

* Steven Comery

G. Research, LLC - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. Thank you for standing by, and welcome to the third quarter 2017 earnings conference call. (Operator Instructions) I would now like to hand the floor to Rich Oglesby, General Banking Executive. Thank you. Mr. Oglesby, I hand the floor to you.

--------------------------------------------------------------------------------

Richard A. Oglesby, Atlantic Capital Bancshares, Inc. - Chief Credit & Risk Management Officer and Executive VP [2]

--------------------------------------------------------------------------------

Thank you, operator. Good morning, and thank you all for joining us for our Third Quarter 2017 Earnings Call. Doug Williams, President and CEO; Patrick Oakes, Chief Financial Officer; Gray Fleming, Chief Risk Officer; and Kurt Shreiner; our Corporate Financial Services Executive are here with me to discuss the results.

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 turn the call over to the CEO of Atlantic Capital, Doug Williams.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Rich, and good morning. Today, Atlantic Capital reported third quarter net earnings of $4.1 million or $0.16 per diluted share compared to $4.3 million or $0.17 per diluted share in the second quarter of 2017. These results fell short of our expectations.

Third quarter results were negatively affected, as we communicated to you in our second quarter call and along the way during this quarter by: an exceptionally heavy volume of expected and unanticipated loan repayment; lower than budgeted SBA income as a result of a leadership change initiated over the last couple of quarters; and the expense of the Stone Point secondary offering in August.

Expected and unanticipated loan repayments during the quarter totaled $136 million. Loans held for investment production during the quarter totaled $86 million. For comparison, in the first quarter, we saw $91 million in repayments and $97 million in production. In the second quarter, $66 million of loans were repaid and we produced $107 million.

Three weeks ago, Atlantic Capital announced Mike Kramer's retirement and a new leadership team to lead the company forward to better operating results. Our board and this new leadership team began work on an updated strategic plan and 2018 budget in the third quarter, and expect to complete the plan and begin its implementation later this quarter.

The announcement of this new leadership team and the elimination of the Chief Operating Officer position is the first element of the strategy refreshment and organizational restructuring designed to improve our operating performance. We'll be sharing our strategic priorities and key initiatives for 2018 with you early in the first quarter.

As you know, Mike Kramer resigned as officer of the company effective later in December, and as a director effective at the end of this month, to retire from banking and to pursue other business and leadership opportunities. Mike has had a distinguished career in banking. The recovery, recapitalization and sale of First Security was a landmark accomplishment and one of the few success -- real success stories during the past banking crisis. Since the merger, he has been a valued partner of Atlantic Capital. With his integration work here now complete, we wish him all the best in the years ahead. Thank you, Mike.

Rich Oglesby, General Banking Executive and Kurt Shreiner, Corporate Financial Services Executive, now lead teams of talented market and line of business managers and bankers capable of lifting our performance in 2018 and beyond. Specifically, Rich will strengthen the partnership between our credit and business development functions and improve the productivity of our bankers. Kurt has a strong record of success in building high-growth businesses at Atlantic Capital and will be responsible for additional investments in those businesses. Rich and Kurt, as we mentioned earlier, are with us today in their new roles and they'll help me answer your questions in a few minutes.

Rich developed a deep bench of talent as our Chief Credit and Risk Management Officer, and we're pleased to have Gray Fleming as Chief Risk Officer and Robert Bugbee as Chief Credit Officer. Gray is with us today also and will be a regular participant in these calls going forward.

Now Pat Oakes will take you through the financials, then I'll come back with some comments about our strategic plan.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Doug, and good morning, everyone. Let me start with our net interest margin. The margin from the third quarter was 3.26%, unchanged from the second quarter. Excluding the impact of purchase accounting, our core margin expanded by 5 basis points to 3.20%. Loan yields, exclude the impact of loan accretion income, increased 10 basis points during the quarter as we benefited from a June increase in the Fed Funds rate, offset by slightly lower loan fees.

Our cost of deposits increased 4 basis points in the third quarter compared to an increase of 7 basis points in the second quarter as we continually experience some pressure on deposit rates. As a reminder, we have approximately $500 million in rate-sensitive deposits that are highly correlated to each increase in the Fed Funds rate.

We have also seen some increase in rates for the remainder of our deposits and see an increase in pricing for new commercial deposits. The provision expense for the third quarter was $322,000 compared to $2 million in the second quarter. The second quarter included the downgrade of a $7.7 million loan relationship to nonperforming and an additional $1 million for specific reserve related to this downgrade. The third quarter included a $3.3 million charge-off of this loan relationship, which had a total $2.75 million specific reserve as of June 30.

Total noninterest income was $3.5 million compared to $5.3 million in the second quarter. As a reminder, the second quarter included a number of onetime items, including gains on the sale of our branch in Tennessee, sale of ORE and the sale of a tax credit investment.

SBA income also decreased to $283,000 in the third quarter as we experienced a decrease in the amount of loans sold during the quarter from a slowdown in production. During the third quarter, we announced the hiring of Jeff Roegge as the new leader of our SBA team. He's already begun recruiting and hiring additional SBA bankers, and anticipates having his full team in place by the end of the first quarter of 2018.

Noninterest expense declined by $119,000 to $17.5 million in the second quarter as we maintain our focus on controlling the growth in expenses. The third quarter included $395,000 expenses related to the public offering of common stock by a selling shareholder. Salary and benefits declined $194,000, mainly from a lower incentive accrual due to the bank's performance in 2017. This was offset by the full impact in expenses of our new team of bankers in Charlotte.

Total loans were $1.91 billion at September 30, a decrease of $55 million from June 30, mainly as a result of the higher loan payoffs and decreases in the balances of existing lines of credit Doug discussed earlier. Mortgage warehouse participations also decreased $6.4 million in the third quarter to $41.6 million.

Total average deposits in the third quarter were $2.1 billion, a decrease of $37 million from the second quarter. A decrease in average deposits included the remaining impact from the second quarter sale of our Cleveland branch of $14 million and a decrease in the average balance of our broker deposits of $42 million. This accounted for a total decline in average deposits of $56 million in the third quarter. Without these reductions, the third quarter average deposits would have increased $19 million.

Now I'll turn it back over to Doug.

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Pat. The strategic plan now under development is designed to reevaluate our objectives and accelerate our path to improved performance. Let me highlight a few key areas of focus.

First, an explanation of why we are not currently performing better probably best illustrates the path to improvement. Atlantic Capital has several businesses now earning a 1% or better ROA on a fully absorbed after-tax basis. Those businesses include the commercial real estate finance group, the Atlanta and regional corporate banking groups, and SBA lending. Together, these groups comprise 2/3 of our business.

Our acquired Tennessee businesses operate around breakeven levels of profitability, and new investments, like Charlotte and franchise finance, are not yet contributing profit in any meaningful way. While our current profitability metrics would be better without Tennessee and our new investments, we believe these currently underperforming businesses will build franchise and shareholder value and strengthen our balance sheet and earnings in the long term.

Second, with respect to our Tennessee and Northwest Georgia business, Chattanooga, Dalton and Knoxville are attractive markets with good population growth and density of small to midsized businesses. Loan and deposit growth is critical to improving our performance in those markets. We have strong leadership and capable teams now revitalizing our business development efforts there. We've added 4 new bankers in these markets this year and plan to add 3 more to replenish the complement of 11 bankers there.

Our original rationale for acquiring First Security was sound. One, an efficient route to the public markets; two, geographic diversification; and three, diversification of deposit gathering sources. We believe that last point is critical in building long-term franchise value. As rates rise, systemic liquidity is withdrawn and competition intensifies, these low beta deposits will become more valuable.

Third, we're making new investments in high-growth businesses like SBA, franchise finance, and payments and FinTech banking. SBA has added a new leader, 2 new origination bankers and a new credit officer over the last couple of months. Other new hires are in the pipeline. We've added junior and senior level talent to our franchise finance and capital markets team with a view to new loan origination and distribution. Our payments and FinTech banking business continues to expand at a sustainable 25% per annum pace or better.

Fourth, Atlantic Capital has a good record of expense -- of disciplined expense management, and we anticipate the recently announced management restructuring and other initiatives that will result in modestly lower expenses next year. And we continue to consider new banker productivity, process efficiency and other cost-saving ideas.

Fifth, our business model is built for higher rates and becomes more efficient with scale. Recent increases in the Fed Funds rate have resulted in higher loan yields and core net interest margin expansion. We are one of the more asset-sensitive banking companies and currently model a 7% to 8% benefit to the net interest margin from a 100 basis point increase in rates.

This remains an important element of our earnings equation. Scale will lever the expense base, create more -- a more granular loan portfolio and help moderate the impact of volatility in loan repayments. Achieving greater scale through above average but sound and reliable organic growth, and possible strategic transactions, is an important element in our path to better performance.

Finally, we recognized that Atlantic Capital and much of our industry does not currently earn its cost to capital. Accordingly, part of our strategic planning work is to evaluate our capital management philosophy and capital structure to align reasonable growth expectations, risk management objectives and return aspirations.

With that, operator, we are now prepared to answer questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question comes from the line of Stephen Scouten of Sandler O'Neill.

--------------------------------------------------------------------------------

Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [2]

--------------------------------------------------------------------------------

Can you talk a little bit maybe about, on a high level, what you expect from a pace of new hires moving forward? I mean, obviously, we've seen a lot of announcements there, some significant activity. Can you talk about what you would expect there? And maybe along with that, what the expense add could be and what the scale of the longer-term impact of these people is in your mind?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Let me get several people involved in that answer. First, with respect to the hires in Tennessee that we talked about, those were really replenishing the complement that was in place. So we're replacing bankers that were lost. We do have some new hires in SBA and we've hired a new leader and 2 new bankers in the last quarter. And we have 5 in the pipeline, Kurt?

--------------------------------------------------------------------------------

Kurt A. Shreiner, Atlantic Capital Bank, National Association - EVP [4]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

We are also -- we don't have -- we haven't determined the number of this, but we're also looking at some new mortgage loan origination officers. Pat, do you have a comment on the expense or if you want to wait till that's more fully....

--------------------------------------------------------------------------------

Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [6]

--------------------------------------------------------------------------------

Or maybe could you just say what's the, maybe, increase in total SPE lender headcount like year-over-year, since you said some of those are replacement people? Just frame up in total how many more people do you have.

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [7]

--------------------------------------------------------------------------------

This year?

--------------------------------------------------------------------------------

Richard A. Oglesby, Atlantic Capital Bancshares, Inc. - Chief Credit & Risk Management Officer and Executive VP [8]

--------------------------------------------------------------------------------

Right? In bankers?

--------------------------------------------------------------------------------

Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [9]

--------------------------------------------------------------------------------

Correct. Yes.

--------------------------------------------------------------------------------

Richard A. Oglesby, Atlantic Capital Bancshares, Inc. - Chief Credit & Risk Management Officer and Executive VP [10]

--------------------------------------------------------------------------------

And so we can tell you from June 30, it's up about 5 from June 30 now and then there's the other ones that we're going to add that Doug has just mentioned, which is a few more in SBA and probably 2 or 3 more in mortgage, plus the replacements that we have in Tennessee of 3, at this point.

--------------------------------------------------------------------------------

Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [11]

--------------------------------------------------------------------------------

Okay. And so I guess as you guys -- obviously, you've gone through your strategic planning work. Can you think about what the potential the Charlotte markets could be and maybe getting Tennessee back contributing a little bit more? I mean, help from investment loans ex warehouse were up like 1.4% year-over-year. And so how do we think about what that can shift to? I mean, it feels like the kind of 10% conversation. I mean, that feels like a stretch and I know there's been heavy paydown activity, but I guess, what would make us think that, that would subsist or subside? And how do you think about growth moving forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. That's a good question, Stephen, and we're trying to determine what the appropriate growth rate is in 2018. And if you look at the core businesses outside of divested branches and all that sort of thing, in 2016, we grew loans right around 9%. The first half of this year, we grew loans around 9% in those businesses. With the third quarter, that growth rate has been reduced to about 7%. So we're seeing that loan demand is softer than we anticipated, competition is more intense, and frankly, we've seen several other banks report loan account shrinkage in the quarter. We've seen some that have had very substantial loan growth as well, and I tell you, we are a little skeptical about that. But we're trying to get our hands around what an appropriate level of growth is for 2018, and we'll be sharing our perspective on that with you probably January.

--------------------------------------------------------------------------------

Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [13]

--------------------------------------------------------------------------------

Okay. Okay. Fair enough. And then maybe one last one just on kind of the balance of reserves. I mean, I guess, ex the one charge-off you had, some releasing of your reserves this quarter on a core basis, maybe as I think about it. And is that something based on your modeling and what you are seeing from trailing charge-offs what you would expect to continue? Or do we see more kind of standard provisioning on new growth as growth returns moving forward?

--------------------------------------------------------------------------------

Richard A. Oglesby, Atlantic Capital Bancshares, Inc. - Chief Credit & Risk Management Officer and Executive VP [14]

--------------------------------------------------------------------------------

Stephen, this is Rich. I'm going to take this for Gray since I was the one that worked on the allowance as we got through the end of the quarter. The thing I'd say is that with the shrinkage of the loan portfolio, the allowances are going to end up being smaller. And so I think we're probably where we need to be, and that's going to be driven by growth going forward. I think we've got the credit quality thing feeling much better now. This was a tough hit with this one loan. But sub-standards are down pretty well, and I think we're going to potentially see some improvement in that even. And so I think where we are with the reserve is probably right where we need to be and where we're looking at being going forward.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Your next question comes from the line of Jennifer Demba with SunTrust.

--------------------------------------------------------------------------------

Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

--------------------------------------------------------------------------------

So when we look at your loan production this quarter...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jennifer, I'm sorry, we can't hear you.

--------------------------------------------------------------------------------

Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [18]

--------------------------------------------------------------------------------

Can you hear me now?

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [19]

--------------------------------------------------------------------------------

Yes. Thank you. Much better.

--------------------------------------------------------------------------------

Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

--------------------------------------------------------------------------------

Okay. Okay. When you looked at your loan production this quarter, how is it broken down geographically?

--------------------------------------------------------------------------------

Unidentified Company Representative, [21]

--------------------------------------------------------------------------------

Did you hear the question? I couldn't.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Geographic breakdown of loan growth or loan changes during the quarter.

--------------------------------------------------------------------------------

Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary [23]

--------------------------------------------------------------------------------

You're talking about new production versus payoffs?

--------------------------------------------------------------------------------

Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

--------------------------------------------------------------------------------

Yes. Correct.

--------------------------------------------------------------------------------

Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary [25]

--------------------------------------------------------------------------------

Yes. So it was pretty spread out. I mean, Atlantic corporate had a pretty good quarter growing, along with a lot of purch groups had a pretty good growth, and we did see some growth in regional corporate banking also. So it was pretty spread out throughout the bank.

--------------------------------------------------------------------------------

Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

--------------------------------------------------------------------------------

And what are the Charlotte outstandings at this point?

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [27]

--------------------------------------------------------------------------------

Jennifer, I think you said something about Charlotte?

--------------------------------------------------------------------------------

Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [28]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Since we announced our presence there or established our presence there, we've originated about $40 million of loan business, primarily in commercial real estate and SBA. The C&I production has been slower than we anticipated. As you know, we hired our bankers in May and June. They've been very active in the market. They got a robust pipeline. We think they're going to be closing business any day now in the C&I book. But the production so far has been in commercial real estate and SBA.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Your next question comes from the line of Steven Comery with Gabelli.

--------------------------------------------------------------------------------

Steven Comery, G. Research, LLC - Research Analyst [31]

--------------------------------------------------------------------------------

I was just wondering if you can kind of give us some detail about why paydowns were so elevated this quarter versus previous ones? I know we've heard kind of other banks talk about clients seeking permanent financing as opposed to bank loans. Is that what you guys would attribute it to? And how would you expect whatever the reason is to persist?

--------------------------------------------------------------------------------

Richard A. Oglesby, Atlantic Capital Bancshares, Inc. - Chief Credit & Risk Management Officer and Executive VP [32]

--------------------------------------------------------------------------------

Steven, this is Rich. Thanks for the question. We have a commercial real estate business that has ups and downs related to refinance to the permanent market that we expect all the time. And so I think what we saw in third quarter for commercial real estate is relatively typical. I think your insight on the refinancing is right on. We had 2 core Atlanta corporate clients that basically had sales of their companies and that paid down debt, so that's a capital situation. We had 3 in our regional corporate business that access the long-term debt market. Rates are low; they're getting really good terms. And so it's not about relationship with Atlantic Capital, it's about working on their balance sheets. And so that was a good amount of what hit us in the third quarter.

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [33]

--------------------------------------------------------------------------------

And it was double -- more than double what we saw in the second quarter, so it had a particularly dramatic effect.

--------------------------------------------------------------------------------

Steven Comery, G. Research, LLC - Research Analyst [34]

--------------------------------------------------------------------------------

Okay. My next question was about deposits. The total was down in this quarter, but checking -- or interest checking as a category was up. I was kind of wondering if you guys have updated thoughts on your deposit gathering strategy to the branches?

--------------------------------------------------------------------------------

Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary [35]

--------------------------------------------------------------------------------

So yes, so I would focus on -- step one is when you look at deposits, I would focus on average deposits. And in my initial remarks, you've heard me talk about some of the things that caused some volatility there regarding -- and sell the Cleveland branch in the second quarter and then some moving of our [Berger] deposits. Core deposits have grown nicely and they continue to grow nicely. So if you're talking about strategies around that, a lot of things are going on at this point. On the retail side, we've got a little more aggressive of going after some deposits in the Tennessee market, particularly around CDs. And we're seeing some good growth in our core accounts here, in particular on our payments business.

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [36]

--------------------------------------------------------------------------------

Yes. I mean, I'd just highlight a couple. We've had very good stability in the retail deposit base in Tennessee through all of our conversion and integration work in 2016. This year, particularly after Joe DiNicolantonio joined us in May, we've seen a revitalization of business development activity on the deposit side in the branches. We've had some promotions at play and so forth, and that's shown some good results. The core corporate banking business in both Tennessee and Georgia continues to be a good deposit generator. And then we've had very rapid growth in this payments and FinTech business, as I mentioned, 25% or so per annum. And we think that trajectory is well established and is sustainable well into the future. So we've got a number of engines in deposit growth. There's some seasonality that sort of mask that through the second and third quarters of the year. We'll see those deposits ramp-up over the fourth quarter and into the first quarter before sort of beginning the seasonal lull in the second and third quarters.

--------------------------------------------------------------------------------

Richard A. Oglesby, Atlantic Capital Bancshares, Inc. - Chief Credit & Risk Management Officer and Executive VP [37]

--------------------------------------------------------------------------------

Doug, I think -- this is Rich. The other thing I think I'd add is that, while income checking is a very big product in the retail bank, it's also an important product in our not-for-profit business. And so a lot of what you see in that particular category is also kind of commercial related.

--------------------------------------------------------------------------------

Steven Comery, G. Research, LLC - Research Analyst [38]

--------------------------------------------------------------------------------

Okay. Very good. Then maybe one more for me. Pat, you alluded to some increase in deposits cost outside of the $500 million that's high beta. Can you give us a sense of the magnitude of the increase there or the deposit beta on those ex $500 million deposits?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. The deposit beta has been in the 20s, 20-percent-ish range. I think it's anywhere between 10% and 20%. It was more like 5% or 10% in the second quarter and it probably picked up a little bit to more like 20% in the third quarter.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Your next question comes from the line of Nancy Bush with NAB Research.

--------------------------------------------------------------------------------

Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [41]

--------------------------------------------------------------------------------

I guess I would go back to the issue of the SBA shortfall. When you look at what has happened there, is it an issue of not being in the right industries? Is it an issue of outreach? I mean, what's the issue? And how -- can you just sort of project the visibility of that business getting better?

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [42]

--------------------------------------------------------------------------------

Yes. Sure. It's really a function of people. We initiated a leadership change in that business in the second quarter. The former leader departed. We hired Jeff Roegge to lead that business in the third quarter. We had budgeted several new hires that would originate the business, that would result in a ramp-up of both production and fee income in this last half of this year. So we didn't make those -- given that leadership change, we didn't make those hires. But we have since made those hires and have others on the book. So I think in the second, third quarter, we've seen lower SBA income than we have budgeted and what we anticipated, and we should see that begin to pick up pretty substantially next year. Fourth quarter, I think, will probably be similar to what we saw in the second and third as these people come on board and be productive. But -- so that business had -- the investment in that business, which is in people, has a very quick payback, and so we think we have good visibility to substantial improvement in SBA in 2018.

--------------------------------------------------------------------------------

Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary [43]

--------------------------------------------------------------------------------

And another thing around the third quarter, just to highlight, yes, the income was down. It was really only one less loan, but there were a lot smaller loans in the quarter. So that obviously impacts the income you can earn off of those. So it really -- there's so many factors that impact this.

--------------------------------------------------------------------------------

Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [44]

--------------------------------------------------------------------------------

Okay. Secondly, I guess I have to ask this question Doug, and I apologize in advance. But when you look at Tennessee, what -- the rationale, I get. The execution, I don't. So when you look back, what did you miss? What should you have done that you didn't do or vice versa? I mean, how do you just conduct the postmortem on that deal?

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [45]

--------------------------------------------------------------------------------

Yes. I'd say, first of all, First Security was -- if you look at the 10 quarters since the recapitalization before we acquired them, they had 4 quarters where they reported a profit. There was -- there were 3 quarters in 2014 and 1 quarter -- 1 or 3 reporting quarters in 2015. And those profits were really reported on the strength of some earnings bridge initiatives, the TriNet business and SBA certificates and some other things. The core businesses were really operating around breakeven. We anticipated a good bit of growth in 2015 before the merger closed. And in 2016, after the merger closed, that didn't materialize. Our people were distracted by integration and conversion work. We had a number of bankers depart. So yes, I think the postmortem would really be that we anticipated an inflection point in earnings and growth that didn't materialize. And then second, the integration and conversion work was not smooth and distracted our folks and as a result, they weren't in the market. And we've made some substantial management changes there. We feel like we've got the right management team in place now. We've got new bankers with new energy. And over the course of this summer, we've started to see some good results there. And Rich was just telling me before the call that he was in Tennessee yesterday and really came back feeling really excited about what's going on there and the prospects for pretty nice recovery in our results there over the next several months.

--------------------------------------------------------------------------------

Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [46]

--------------------------------------------------------------------------------

Now I would have to ask you the same question about visibility. Are we looking at multiyear, multi-quarter? How do you get to that 1% ROA?

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [47]

--------------------------------------------------------------------------------

In Tennessee?

--------------------------------------------------------------------------------

Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [48]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [49]

--------------------------------------------------------------------------------

It's really, I would say at this point, it's a multiyear project. Going from breakeven results to a mature level of profitability there is a multiyear project.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

(Operator Instructions) And your next question comes from the line of Christopher Marinac with FIG Partners.

--------------------------------------------------------------------------------

Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research [51]

--------------------------------------------------------------------------------

Doug, I wanted to talk a little bit about expenses. And are there any additional billed expenses that are not in the run rate we see in Q3? I just want to get a sense kind of how those are going to evolve the next several quarters?

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [52]

--------------------------------------------------------------------------------

Chris, we couldn't quite hear you. If you could say that again.

--------------------------------------------------------------------------------

Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research [53]

--------------------------------------------------------------------------------

Are the expenses in this quarter, are they going to be higher next year just for additional spending as you build out Charlotte and other areas? Just curious on the run rate from expenses?

--------------------------------------------------------------------------------

Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary [54]

--------------------------------------------------------------------------------

Yes. So we'll give more guidance around that when we get to the first quarter. But our goal is to not grow expenses next year. Our goal is to find some things and -- we'll tell you, at this point, when we get more clarity in January, is that expenses will not be higher next year, but we'll talk more about that in January.

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [55]

--------------------------------------------------------------------------------

There are some investments we're making and -- but there are also some initiatives to reduce expenses and build some more efficiency. So on a net basis, I think we'll be down.

--------------------------------------------------------------------------------

Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary [56]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research [57]

--------------------------------------------------------------------------------

Great. That's helpful. And on the loan charge-off that you had and explained earlier, was that a -- was that something new or was that related to the loan that had been -- was recognized a few quarters ago? I just want to clarify that.

--------------------------------------------------------------------------------

Gray Fleming, [58]

--------------------------------------------------------------------------------

Christopher, this is Gray. That was related to a resolution of that $7.7 million relationship that we mentioned last quarter. So the charge-off was about $3.3 million and the net P&L impact was about $600,000 in the third quarter.

--------------------------------------------------------------------------------

Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research [59]

--------------------------------------------------------------------------------

Okay. So this is now completely behind you as a result?

--------------------------------------------------------------------------------

Gray Fleming, [60]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research [61]

--------------------------------------------------------------------------------

Okay. Great. From a standpoint of new deposit demand, I just want to get back to -- I know you made some earlier comments, but are customers keeping more cash or the same amount of cash? Or do you see them changing deposit behavior just as a general -- more of commercial account inquiry?

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [62]

--------------------------------------------------------------------------------

I think in the commercial business, we don't see a lot of change in behavior. I think it's beginning to get more competitive there, and that's been a more recent development. To move idle cash, if you will, on the part of commercial clients has gotten more expensive. The -- I don't think the -- our commercial customers are generally operating with less liquidity than they have in the past, so -- and those deposits are not leaving the banking system. In the private banking and retail worlds, the competition has clearly gotten more intense, particularly for higher deposit or larger deposit numbers. And there are -- there is competition, both inside the banking industry and outside the banking industry for that money. I think we're really kind of -- there's been a change, really mostly in the last quarter, with respect to deposit pricing and so forth.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

We have a follow-up question from the line of Stephen Scouten with Sandler O'Neill.

--------------------------------------------------------------------------------

Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [64]

--------------------------------------------------------------------------------

I just wanted to follow up on Chris' question about the expense run rate. Is it right to think about the expense run rate heading into 4Q as $300,000, $400,000 less, maybe $17.1 million ex the secondary costs? Or is that not fair? And then also, what kind of onetime charges do you expect from the management changes in 4Q?

--------------------------------------------------------------------------------

Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary [65]

--------------------------------------------------------------------------------

So I would expect more fourth quarter expenses probably to be flattish based on some of the new -- I think they had some other things going on. So that $17.5 million-ish range excluding any onetime expenses. And those onetime expenses, at this point, we estimate for the fourth quarter probably about $1.2 million.

--------------------------------------------------------------------------------

Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [66]

--------------------------------------------------------------------------------

Okay. Great. And then maybe one last question, too, following up on the NIM. In a quarter here, and heading to the fourth quarter, we won't see a rate hike. You may start to see some moves up late in the quarter in LIBOR, I guess, and if we do see the December rate hike. But what do you think the NIM does maybe on a quarter where you don't have a rate hike? And do you still kind of expect the 5 basis points in quarters where we do see a rate hike?

--------------------------------------------------------------------------------

Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary [67]

--------------------------------------------------------------------------------

Yes. So the a core margin of 3.20-ish for the third quarter, if we don't get a rate increase, it's -- hopefully, it will stay flattish in that 3.20% range. The loan yields won't move much. You may get a little bit of increase in deposit cost here, but I think that will be offset by -- investment yield was down a little bit, we expect that to pick back up a little bit. So I would assume that core range. And you're right, if we do get a rate increase in December, LIBOR will run up in front of that. And maybe we'll get a slight benefit in December from that, but probably nothing material.

--------------------------------------------------------------------------------

Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [68]

--------------------------------------------------------------------------------

Okay. And then on a quarter, say, like 1Q '18, if you do have the December hike, you'd still expect kind of core NIM expansion 4 to 5 bps in total?

--------------------------------------------------------------------------------

Patrick Timothy Oakes, Atlantic Capital Bancshares, Inc. - CFO, EVP, Treasurer & Secretary [69]

--------------------------------------------------------------------------------

At this point, yes.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

(Operator Instructions) And your next question comes from the line of Brady Gailey with KBW.

--------------------------------------------------------------------------------

Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [71]

--------------------------------------------------------------------------------

I hopped on late, so you all might have already addressed this. But on the loan shrinkage this quarter, I know earlier this year you guys lost one of your more senior lenders. Would 3Q shrinkage be at all driven by the loss of that lender? Or is it more...

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [72]

--------------------------------------------------------------------------------

Not at all. Not at all. Let me be emphatic about that. It has nothing to do with the loss of any lenders in Atlanta. We do have this issue in Tennessee that we are replenishing the complement there, and not having bankers and not having bankers in the market has resulted in lack of loan growth in Tennessee. But in Atlanta, we continue to see, see good loan growth and we have, I think, sufficient capacity in place to sustain that.

--------------------------------------------------------------------------------

Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [73]

--------------------------------------------------------------------------------

All right. And then lastly, on the mortgage warehouse, it's really come down pretty notably kind of over the years. It's now just 2% of loans. Do you anticipate that coming back at all? Or do you think that, that's going to kind of be where it's at for the foreseeable future?

--------------------------------------------------------------------------------

Richard A. Oglesby, Atlantic Capital Bancshares, Inc. - Chief Credit & Risk Management Officer and Executive VP [74]

--------------------------------------------------------------------------------

Our expectation is that it's probably going to be flat and watching the mortgage market is going to help us see which direction it might go. So if the mortgage market gets more and more busy, then we'll probably have more fundings under those commitments. But we're not anticipating that getting back to the level that it was, say, in the third quarter of last year.

--------------------------------------------------------------------------------

Operator [75]

--------------------------------------------------------------------------------

Thank you. At this time, there are no further questions. I would like to return the floor for closing remarks.

--------------------------------------------------------------------------------

Douglas L. Williams, Atlantic Capital Bancshares, Inc. - CEO & Director [76]

--------------------------------------------------------------------------------

Okay. Thank you for dialing in today. We look forward to talking to any of you that are interested over the next few days. And we'll see you next quarter. Thanks.

--------------------------------------------------------------------------------

Operator [77]

--------------------------------------------------------------------------------

Thank you for your participation in today's third quarter 2017 earnings conference call. You may now disconnect.