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EX-32.2 - EXHIBIT 32.2 - Atlantic Capital Bancshares, Inc.a20160930-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Atlantic Capital Bancshares, Inc.a20160930-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Atlantic Capital Bancshares, Inc.a20160930-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Atlantic Capital Bancshares, Inc.a20160930-ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
newacblogosa04.jpg
_______________________________________________
FORM 10-Q
_______________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from              to             
COMMISSION FILE NO. 001-37615
_________________________________________________
ATLANTIC CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
_________________________________________________
Georgia
20-5728270
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
3280 Peachtree Road NE, Suite 1600 Atlanta, Georgia
30305
(Address of principal executive offices)
(Zip Code)
 
(404) 995-6050
 
 
(Registrant’s telephone number, including area code)
 
 
Not Applicable
 
 
(Former name, former address, and former fiscal year, if changed since last report)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
ý
 
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, no par value: 25,020,196 shares outstanding as of November 1, 2016



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



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

Atlantic Capital Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
 
September 30,
2016
 
December 31,
2015
(in thousands, except share data)
(unaudited)
 
ASSETS
 
 
 
Cash and due from banks
$
44,563

 
$
45,848

Interest-bearing deposits in banks
75,750

 
130,900

Other short-term investments
23,159

 
26,137

Cash and cash equivalents
143,472

 
202,885

Securities available-for-sale
348,484

 
346,221

Other investments
26,370

 
8,034

Loans held for sale
46,600

 
95,465

Loans held for investment
2,008,102

 
1,790,669

Less: allowance for loan losses
(18,534
)
 
(18,905
)
Loans, held for investment, net
1,989,568

 
1,771,764

Branch premises held for sale
5,201


7,200

Premises and equipment, net
15,213

 
23,145

Bank owned life insurance
61,766

 
60,608

Goodwill and intangible assets, net
30,071

 
35,232

Other real estate owned
1,727

 
1,982

Other assets
92,772

 
86,244

Total assets
$
2,761,244

 
$
2,638,780

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
557,783

 
$
544,561

Interest-bearing checking
260,531

 
232,868

Savings
29,658

 
28,922

Money market
974,072

 
875,441

Time
172,348

 
183,206

Brokered deposits
194,464

 
183,810

Deposits to be assumed in branch sale


213,410

Total deposits
2,188,856

 
2,262,218

Federal funds purchased and securities sold under agreements to repurchase

 
11,931

Federal Home Loan Bank borrowings
170,000

 

Long-term debt
49,324

 
49,197

Other liabilities
44,601

 
27,442

Total liabilities
2,452,781

 
2,350,788

SHAREHOLDERS’ EQUITY
 
 
 
Preferred Stock, no par value – 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2016 and December 31, 2015

 

Common stock, no par value – 100,000,000 shares authorized; 24,950,099 and 24,425,546 shares issued and outstanding as of September 30, 2016, and December 31, 2015, respectively
290,835

 
286,367

Retained earnings
14,927

 
3,141

Accumulated other comprehensive income (loss)
2,701

 
(1,516
)
Total shareholders’ equity
308,463

 
287,992

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
2,761,244

 
$
2,638,780


See Accompanying Notes to Consolidated Financial Statements
1


Atlantic Capital Bancshares, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands, except per share data)
2016
 
2015
 
2016
 
2015
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
20,511

 
$
9,423

 
$
60,418

 
$
27,874

Investment securities – available-for-sale
1,293

 
664

 
4,221

 
2,077

Interest and dividends on other interest-earning assets
491

 
247

 
1,271

 
776

Total interest income
22,295

 
10,334

 
65,910

 
30,727

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest on deposits
1,956

 
751

 
5,470

 
2,262

Interest on Federal Home Loan Bank advances
133

 
52

 
324

 
283

Interest on federal funds purchased and securities sold under agreements to repurchase
37

 
20

 
191

 
69

Interest on long-term debt
815

 
17

 
2,457

 
17

Other

 

 
38

 

Total interest expense
2,941

 
840

 
8,480

 
2,631

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
19,354

 
9,494

 
57,430

 
28,096

Provision for loan losses
463

 
(137
)
 
1,608

 
412

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
18,891

 
9,631

 
55,822

 
27,684

NONINTEREST INCOME
 
 
 
 
 
 
 
Service charges
1,270

 
521

 
4,160

 
1,348

Gain on sales of securities available-for-sale

 
10

 
44

 
10

Gain on sales of other assets
71

 

 
150

 

Mortgage income
632

 

 
1,418

 

Trust income
361

 

 
1,061

 

Derivatives income
69

 
67

 
232

 
215

Bank owned life insurance
424

 
227

 
1,215

 
1,794

SBA lending activities
959

 
745

 
3,043

 
2,006

Gains on sale of TriNet loans

 

 
1,144

 

Gains on sale of branches

 

 
3,885

 

Other noninterest income
216

 
159

 
950

 
566

Total noninterest income
4,002

 
1,729

 
17,302

 
5,939

NONINTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
10,059

 
4,859

 
31,034

 
14,437

Occupancy
1,235

 
419

 
3,609

 
1,263

Equipment and software
862

 
243

 
2,272

 
687

Professional services
442

 
208

 
1,950

 
613

Postage, printing and supplies
61

 
21

 
389

 
63

Communications and data processing
617

 
313

 
2,227

 
986

Marketing and business development
269

 
90

 
853

 
213

FDIC premiums
415

 
161

 
1,306

 
516

Merger and conversion costs
579

 
718

 
2,538

 
1,982

Amortization of intangibles
520

 

 
1,950

 

Other noninterest expense
2,237

 
639

 
6,377

 
1,934

Total noninterest expense
17,296

 
7,671

 
54,505

 
22,694

INCOME BEFORE PROVISION FOR INCOME TAXES
5,597

 
3,689

 
18,619

 
10,929

Provision for income taxes
1,889

 
1,463

 
6,833

 
4,087

NET INCOME
$
3,708

 
$
2,226

 
$
11,786

 
$
6,842

NET INCOME PER SHARE:
 
 
 
 
 
 
 
Net income per share – basic
$
0.15

 
$
0.16

 
$
0.48

 
$
0.51

Net income per share – diluted
$
0.15

 
$
0.16

 
$
0.47

 
$
0.49


See Accompanying Notes to Consolidated Financial Statements
2


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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Net income
$
3,708

 
$
2,226

 
$
11,786

 
$
6,842

Other comprehensive income
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period, net of tax of $(329), $244, $2,354, and $91, respectively
(524
)
 
392

 
3,771

 
147

Reclassification adjustment for gains included in net income net of tax of $0, $4, $17, and $4, respectively

 
(6
)
 
(27
)
 
(6
)
Unrealized gains (losses) on available-for-sale securities, net of tax
(524
)
 
386

 
3,744

 
141

Cash flow hedges:
 
 
 
 
 
 
 
Net unrealized derivative gains (losses) on cash flow hedges, net of tax of $(169), $324, $301, and $507, respectively
(269
)
 
523

 
473

 
816

Changes from cash flow hedges
(269
)
 
523

 
473

 
816

Other comprehensive income (loss), net of tax
(793
)
 
909

 
4,217

 
957

Comprehensive income
$
2,915

 
$
3,135

 
$
16,003

 
$
7,799







See Accompanying Notes to Consolidated Financial Statements
3


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

 
 
Common Stock
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
(in thousands, except share data)
 
Shares
 
Amount
 
Retained Earnings
 
Treasury Stock
 
Total
Balance - December 31, 2014
 
13,497,118

 
$
136,335

 
$
4,460

 
$
609

 
$
(475
)
 
$
140,929

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 


Net Income
 

 

 
6,842

 

 

 
6,842

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

 

 

 
141

 

 
141

Change in unrealized gains on cash flow hedges
 

 

 

 
816

 

 
816

Total comprehensive income
 
 
 
 
 


 
 
 
 
 
7,799

Acquisition of treasury stock
 

 

 

 

 
(707
)
 
(707
)
Issuance of restricted stock
 
62,091

 

 

 

 

 

Restricted stock activity
 

 
503

 

 

 

 
503

Issuance of common stock for long-term incentive plan
 
102,758


1,285

 

 

 

 
1,285

Stock-based compensation
 

 

 

 

 

 

Balance - September 30, 2015
 
13,661,967

 
$
138,123

 
$
11,302

 
$
1,566

 
$
(1,182
)
 
$
149,809

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2015
 
24,425,546

 
$
286,367

 
$
3,141

 
$
(1,516
)
 
$

 
$
287,992

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 

 

 
11,786

 

 

 
11,786

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

 

 

 
3,744

 

 
3,744

Change in unrealized gains on cash flow hedges
 

 

 

 
473

 

 
473

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
16,003

Acquisition of treasury stock
 

 

 

 

 

 

Issuance of restricted stock
 
91,486

 

 

 

 

 

Issuance of common stock for option exercises
 
366,918


2,568

 

 

 

 
2,568

Issuance of common stock for long-term incentive plan
 
66,149

 
884

 

 

 

 
884

Restricted stock activity
 

 
378

 

 

 

 
378

Stock-based compensation
 

 
638

 

 

 

 
638

Balance - September 30, 2016
 
24,950,099

 
$
290,835

 
$
14,927

 
$
2,701

 
$

 
$
308,463



See Accompanying Notes to Consolidated Financial Statements
4


Atlantic Capital Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended
 
September 30,
(in thousands)
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
11,786

 
$
6,842

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Provision for loan losses
1,608

 
412

Depreciation, amortization, and accretion
4,550

 
1,462

Amortization of restricted stock compensation
378

 
503

Stock option compensation
638

 

Gain on sales of available-for-sale securities
(44
)
 
(10
)
Net write downs and (gains) on sales of other real estate owned
(114
)
 
(86
)
Net increase in cash value of bank owned life insurance
(1,167
)
 
(682
)
Gain on bank owned life insurance
(27
)
 
(1,112
)
Net gains on sale of branches
(3,885
)
 

Changes in operating assets and liabilities -
 
 
 
Net change in loans held for sale
13,716

 

Net (increase) decrease in other assets
(10,224
)
 
(3,031
)
Net increase (decrease) in accrued expenses and other liabilities
(2,237
)
 
772

Net cash provided by operating activities
14,978

 
5,070

 INVESTING ACTIVITIES
 
 
 
Activity in securities available-for-sale:
 
 
 
Prepayments
32,438

 
18,077

Maturities and calls
26,932

 
5,874

Sales
65,103

 
5,095

Purchases
(117,950
)
 
(23,285
)
Net increase in loans held for investment
(220,030
)
 
(6,695
)
(Purchases) proceeds of Federal Home Loan Bank stock, net
(8,569
)
 
642

(Purchases) proceeds of Federal Reserve Bank stock, net
(3,055
)
 

Proceeds from bank owned life insurance benefits
36

 
1,886

Proceeds from sales of other real estate
1,814

 
1,590

Net cash paid for branch divestiture
(140,295
)
 

Purchases of premises and equipment, net
(467
)
 
(242
)
Net cash used in investing activities
(364,043
)
 
2,942

FINANCING ACTIVITIES
 
 
 
Net change in deposits
116,885

 
22,763

Proceeds from Federal Home Loan Bank advances
915,000

 
638,000

Repayments of Federal Home Loan Bank advances
(745,000
)
 
(651,517
)
Issuance of subordinated debentures

 
50,000

Proceeds from exercise of stock options
2,767

 

Acquisition of treasury stock

 
(707
)
Net cash provided by financing activities
289,652

 
58,539

NET CHANGE IN CASH AND CASH EQUIVALENTS
(59,413
)
 
66,551

CASH AND CASH EQUIVALENTS – beginning of period
202,885

 
94,250

CASH AND CASH EQUIVALENTS – end of period
$
143,472

 
$
160,801

 
 
 
 
 
Nine Months Ended
 
September 30,
 
2016
 
2015
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
 
 
 
Interest paid
$
9,386

 
$
2,652

Income taxes paid
$
3,462

 
$
3,769

 

See Accompanying Notes to Consolidated Financial Statements
5



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

NOTE 1 – ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accounting and financial reporting policies of Atlantic Capital Bancshares, Inc. (“Atlantic Capital”) and its subsidiary conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. On October 31, 2015, Atlantic Capital completed its acquisition of First Security Group, Inc. and its subsidiary FSGBank, N.A. (together, “First Security”). In connection with the acquisition, Atlantic Capital’s subsidiary Atlantic Capital Bank, a Georgia chartered commercial bank merged with and into FSGBank, N.A, which subsequently changed its name to Atlantic Capital Bank, National Association (the “Bank”). The consolidated financial statements reflect the results of operations of Atlantic Capital and Atlantic Capital Bank, and the results of operations of First Security subsequent to the date of acquisition. In connection with the acquisition, Atlantic Capital issued approximately 8,790,193 shares of common stock as partial consideration to former shareholders of First Security, with the remaining consideration consisting of approximately $47.1 million in cash. See Note 3 to the Consolidated Financial Statements for additional information.
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Atlantic Capital’s filing on Form 10-K. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. Certain prior period amounts have been reclassified to conform to the current year presentation.
NOTE 2 – ACCOUNTING STANDARDS UPDATES AND RECENTLY ADOPTED STANDARDS
In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. The amendments are effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. As this guidance only affects the classification within the statement of cash flows, this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public companies for annual periods beginning after December 13, 2019, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Atlantic Capital is in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements and disclosures.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 simplify several aspects of accounting for employee share-based payments including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some areas of the simplification apply only to nonpublic entities. The new guidance will require all income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest or are settled and additional paid in capital pools will be eliminated. The guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Companies will be required to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimating

6


the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as currently required, through an accounting policy election. The guidance will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s income tax withholding obligation. The guidance requires an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption will be permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance, however all of the guidance must be adopted in the same period. If early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period. The adoption of this guidance is not expected to have a material effect on Atlantic Capital’s financial position or results of operations.
In February 2016, the FASB issued Accounting Standards Update 2016-2, Leases. Under the new guidance, leases classified as operating leases under previous GAAP must be recorded on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Atlantic Capital is evaluating the impact of this update to Atlantic Capital’s financial position and results of operations.
In January 2016, the FASB issued ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The guidance in this update requires that equity investments (except those accounting for under the equity method of accounting) be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In addition, the guidance addresses various disclosure and presentation issues related to financial instruments. For public entities, this update is effective for fiscal years beginning after December 15, 2017 with early application permitted. The adoption of this update is not expected to have a material impact on Atlantic Capital’s consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers. This update is a joint project with the International Accounting Standards Board initiated to clarify the principles for recognizing revenue and to develop a common revenue standard that is meant to remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, provide more useful information to users of financial statements and simplify the preparation of financial statements. The guidance in this update supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and most industry-specific guidance throughout the Industry Topics of Codification. In August 2015, the FASB deferred the effective date of this ASU by one year. For public companies, it is effective for annual and interim periods beginning after December 15, 2017. Atlantic Capital is evaluating the impact of this update and does not believe it will have a significant impact to Atlantic Capital’s financial position or results of operations.

NOTE 3 – ACQUISITIONS AND DIVESTITURES

On October 31, 2015, Atlantic Capital completed the acquisition of First Security. First Security operated twenty-five branches in Georgia and Tennessee. In connection with the acquisition, Atlantic Capital acquired approximately $801.1 million of loans and assumed approximately $970.0 million of deposits.

Acquisition-related costs totaled $579,000 and $2.5 million for the three and nine months ended September 30, 2016, and $718,000 and $2.0 million for the three and nine months ended September 30, 2015, respectively, and were included in noninterest expense in the consolidated income statement. Acquisition related costs primarily include severance costs, professional services, data processing fees related to systems conversion and other noninterest expenses.

7



A summary of assets received and liabilities assumed for First Security, as well as the associated fair value adjustments, are as follows:
 
 
First Security Group, Inc. (As Reported)
 
Fair Value Adjustments
 
As recorded by Atlantic Capital
 
 
(in thousands)
 
 
 
 
 
 
 
Fair value of assets acquired:
 
 
 
 
 
 
  Cash and due from banks
 
$
26,721

 
$

 
$
26,721

  Investment securities
 
199,104

 
3,748

 
202,852

  Loans held for sale
 
44,452

 

 
44,452

  Loans
 
812,196

 
(11,059
)
 
801,137

       Less allowance for loan losses
 
(9,385
)
 
9,385

 

              Loans, net
 
802,811

 
(1,674
)
 
801,137

  Premises and equipment, net
 
29,246

 
(1,086
)
 
28,160

  Other intangible assets (1)
 

 
9,544

 
9,544

  Other real estate owned
 
2,493

 
(438
)
 
2,055

  Other assets (2)
 
47,559

 
58,709

 
106,268

      Total assets acquired
 
$
1,152,386

 
$
68,803

 
$
1,221,189

Fair value of liabilities acquired:
 

 

 

  Deposits:
 

 

 

       Noninterest bearing demand
 
$
178,174

 
$

 
$
178,174

       Interest bearing demand
 
121,063

 

 
121,063

       Savings and money market
 
274,099

 

 
274,099

       Time
 
253,673

 
2,233

 
255,906

       Brokered
 
140,780

 

 
140,780

                     Total deposits
 
967,789

 
2,233

 
970,022

   Federal funds purchased and securities sold under agreements to repurchase
 
12,739

 

 
12,739

   Federal Home Loan Bank advances
 
72,890

 

 
72,890

Other borrowings
 

 

 

   Other liabilities (3)
 
10,942

 
6,840

 
17,782

        Total liabilities acquired
 
1,064,360

 
9,073

 
1,073,433

        Net assets acquired
 
$
88,026

 
$
59,730

 
$
147,756

        Total consideration paid to First Security shareholders
 
 
 
 
 
171,108

Goodwill
 
 
 
 
 
$
23,352

(1) Reflects core deposit intangible related to acquired deposits.
(2) Reflects the recognition of First Security’s deferred tax assets totaling approximately $50 million and approximately $9 million in deferred tax assets established as a result of other purchase accounting adjustments.
(3) Reflects approximately $5 million in deferred tax liabilities established as a result of purchase accounting adjustments.
 
 
 
 
 
 
 


8


 
 
 
(in thousands)
 
Total Purchase Price Consideration
 
 
 
Aggregate Cash Consideration
 
$
47,098

Aggregate Stock Consideration
 
121,305

Estimated Value associated with converted stock awards
 
2,705

Total Purchase Price Consideration
 
$
171,108

 
 
 

During the third quarter of 2016, Atlantic Capital recorded measurement period adjustments that decreased goodwill by $687,000. The adjustments reduced the TriNet Servicing Asset as well as increased the Deferred Tax Asset. During the nine months ended September 30, 2016, measurement period adjustments to goodwill totaled $1.6 million.

Divestiture of Branches

On December 17, 2015, the Bank entered into two separate definitive agreements to sell seven branches in the Bank’s Tennessee market. The agreement with First Freedom Bank included the sale of three branches located in Algood, Cookeville and Gainesboro, Tennessee for a premium of 2.25% of deposits. The agreement with Athens Federal Community Bank, N.A. included the sale of four branches in Athens, Lenoir City, Madisonville and Sweetwater, Tennessee for a premium of 3.50% of deposits. Both transactions closed in the second quarter of 2016 and resulted in a combined gain of $3.9 million as well as a reduction of approximately $191.0 million in deposits, approximately $34.7 million in loans and approximately $8.6 million in other assets. The gain was somewhat reduced by an impairment of $2.0 million in core deposit intangibles, which was offset by a $344,000 reversal in time deposit premium. There were also $305,000 of expenses associated with the divestitures included in noninterest expense in the second quarter of 2016.







9



NOTE 4 – BALANCE SHEET OFFSETTING
Atlantic Capital enters into reverse repurchase agreements in order to invest short-term funds and repurchase agreements for short-term liquidity needs.
The following table presents a summary of amounts outstanding under reverse repurchase agreements, repurchase agreements, and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of September 30, 2016 and December 31, 2015.
(in thousands)
 
 
 
 
 
 
 
 Gross Amounts not Offset in the Balance Sheet
 
 
September 30, 2016
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset on the Balance Sheet
 
Net Asset Balance
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Reverse repurchase agreements
 
$
16,074

 
$

 
$
16,074

 
$
(16,074
)
 
$

 
$

Derivatives
 
15,599

 

 
15,599

 

 

 
15,599

Total
 
$
31,673

 
$

 
$
31,673

 
$
(16,074
)
 
$

 
$
15,599

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

 
$

 
$

 
$

 
$

 
$

Derivatives
 
14,449

 

 
14,449

 
(14,992
)
 
(2,312
)
 

Total
 
$
14,449

 
$

 
$
14,449

 
$
(14,992
)
 
$
(2,312
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Gross Amounts not Offset in the Balance Sheet
 
 
December 31, 2015
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset on the Balance Sheet
 
Net Asset Balance
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Reverse repurchase agreements
 
$
13,666

 
$

 
$
13,666

 
$
(13,666
)
 
$

 
$

Derivatives
 
6,554

 

 
6,554

 

 

 
6,554

Total
 
$
20,220

 
$

 
$
20,220

 
$
(13,666
)
 
$

 
$
6,554

 
 
 
 
 
 
 
 
 Gross Amounts not Offset in the Balance Sheet
 
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset on the Balance Sheet
 
Net Liability Balance
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Repurchase agreements
 
$
11,931

 
$

 
$
11,931

 
$
(14,744
)
 
$

 
$

Derivatives
 
6,163

 

 
6,163

 
(10,268
)
 
(3,240
)
 

Total
 
$
18,094

 
$

 
$
18,094

 
$
(25,012
)
 
$
(3,240
)
 
$


10



NOTE 5 – SECURITIES
The following table presents the amortized cost, unrealized gains and losses, and fair value of securities available-for-sale at September 30, 2016 and December 31, 2015.
 Available-For-Sale
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
September 30, 2016
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
U.S. Government agencies
$
21,806

 
$
237

 
$
(26
)
 
$
22,017

U.S. states and political divisions
82,879

 
854

 
(518
)
 
83,215

Trust preferred securities
4,720

 

 
(327
)
 
4,393

Corporate debt securities
20,004

 
324

 
(858
)
 
19,470

Residential mortgage-backed securities-agency
216,364

 
3,791

 
(766
)
 
219,389

Total
$
345,773

 
$
5,206

 
$
(2,495
)
 
$
348,484

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
U.S. treasuries
$
4,952

 
$
3

 
$
(33
)
 
$
4,922

U.S. Government agencies
65,373

 
249

 
(770
)
 
64,852

U.S. states and political divisions
27,751

 
301

 
(262
)
 
27,790

Trust preferred securities
4,732

 

 
(457
)
 
4,275

Corporate debt securities
20,653

 
52

 
(188
)
 
20,517

Residential mortgage-backed securities-agency
226,142

 
1,019

 
(3,296
)
 
223,865

Total
$
349,603

 
$
1,624

 
$
(5,006
)
 
$
346,221


The following table presents the amortized cost and fair value of debt securities by contractual maturity at September 30, 2016. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
Available-For-Sale
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Within 1 year
$
4,611

 
$
4,641

Over 1 year through 5 years
9,497

 
9,264

5 years to 10 years
44,085

 
44,372

Over 10 years
71,216

 
70,818

 
129,409

 
129,095

Mortgage-backed residential securities
216,364

 
219,389

Total
$
345,773

 
$
348,484



11


The following table summarizes available-for-sale securities in an unrealized loss position as of September 30, 2016 and December 31, 2015.
 
 
 
Less than 12 months
 
12 months or greater
 
Totals
Available-For-Sale
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(in thousands)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$

 
$

 
3,036

 
$
(26
)
 
$
3,036

 
$
(26
)
U.S. states and political divisions
 
38,899

 
(518
)
 

 

 
38,899

 
(518
)
Trust preferred securities
 

 

 
4,394

 
(327
)
 
4,394

 
(327
)
Corporate debt securities
 
5,782

 
(858
)
 

 

 
5,782

 
(858
)
Residential mortgage-backed securities
 
92,442

 
(495
)
 
23,939

 
(271
)
 
116,381

 
(766
)
Totals
 
$
137,123

 
$
(1,871
)
 
$
31,369

 
$
(624
)
 
$
168,492

 
$
(2,495
)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasuries
 
$

 
$
(33
)
 
$

 
$

 
$

 
$
(33
)
U.S. Government agencies
 
24,380

 
(526
)
 
22,218

 
(244
)
 
46,598

 
(770
)
U.S. states and political divisions
 
11,280

 
(249
)
 
2,248

 
(13
)
 
13,528

 
(262
)
Trust preferred securities
 

 

 
4,275

 
(457
)
 
4,275

 
(457
)
Corporate debt securities
 
15,168

 
(188
)
 

 

 
15,168

 
(188
)
Residential mortgage-backed securities
 
143,611

 
(2,634
)
 
40,152

 
(662
)
 
183,763

 
(3,296
)
Totals
 
$
194,439


$
(3,630
)
 
$
68,893

 
$
(1,376
)
 
$
263,332

 
$
(5,006
)

At September 30, 2016, there were 124 available-for-sale securities that were in an unrealized loss position. Atlantic Capital does not intend to sell and does not believe it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at September 30, 2016 and December 31, 2015 were attributable to changes in interest rates.
Management evaluates securities for other-than-temporary impairment on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three or nine months ended September 30, 2016 or 2015.
Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three and nine months ended September 30, 2016 and 2015.
 
 
 Three Months Ended September 30,
 
 Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Proceeds from sales
 
$

 
$
5,095

 
$
65,103

 
$
5,095

Gross realized gains
 

 
10

 
449

 
10

Gross realized losses
 

 

 
(405
)
 

Net gains on sales of securities
 
$

 
$
10

 
$
44

 
$
10


Investment securities with a carrying value of $95.0 million and $39.3 million were pledged to secure borrowings at September 30, 2016 and December 31, 2015, respectively.

12



NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio as of September 30, 2016 and December 31, 2015, is summarized below.
 
September 30,
2016
 
December 31,
2015
 
(in thousands)
Loans held for sale
 
 
 
TriNet loans held for sale
$
43,157

 
$
58,934

Branch loans held for sale

 
35,470

Other loans held for sale
3,443

 
1,061

Total loans held for sale
$
46,600

 
$
95,465

 
 
 
 
Loans held for investment
 
 
 
Commercial loans:
 
 
 
Commercial and industrial
$
533,632

 
$
467,083

Commercial real estate
863,283

 
846,413

Construction and land
213,336

 
166,358

Mortgage warehouse loans
171,251

 
84,350

Total commercial loans
1,781,502

 
1,564,204

Residential:
 
 
 
Residential mortgages
100,046

 
110,381

Home equity
78,952

 
80,738

Total residential loans
178,998

 
191,119

Consumer
30,453

 
30,451

Other
20,736

 
6,901

Total loans
2,011,689

 
1,792,675

Less net deferred fees and other unearned income
(3,587
)
 
(2,006
)
Less allowance for loan losses
(18,534
)
 
(18,905
)
Loans held for investment, net
$
1,989,568

 
$
1,771,764


At September 30, 2016 and December 31, 2015, loans with a carrying value of $531.8 million and $168.1 million, respectively, were pledged as collateral to secure FHLB advances and the Federal Reserve discount window.
At September 30, 2016 and December 31, 2015, the carrying value and outstanding balance of Purchased Credit Impaired (“PCI”) loans accounted for under ASC 310-30 was $17.2 million and $24.3 million, respectively. The following table presents changes in the value of the accretable yield for acquired loans accounted for under ASC 310-30.

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2016
 
 
(in thousands)
Balance at beginning of period
 
$
1,826

 
$
2,369

Additions due to acquisitions
 

 

Accretion
 
(341
)
 
(884
)
Reclassification of nonaccretable discount due to improvement in expected cash flows
 
2,404

 
2,404

Other changes, net
 
295

 
295

Balance at end of period
 
$
4,184

 
$
4,184


In addition to the accretable yield on PCI loans, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest income over the life of the loans. At September 30, 2016, the remaining accretable fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $4.2 million.

13


The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period. It is comprised of specific reserves for impaired loans and a general allowance for pools of loans with similar characteristics not individually evaluated. The allowance is regularly evaluated for loan losses to maintain an adequate level to absorb probable current inherent losses in the loan portfolio. Factors contributing to the determination of the allowance include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. Most loan commitments rated substandard or worse are specifically reviewed for loss potential. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans.
The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2016 and 2015.

 
 
2016
 
2015
Three Months Ended September 30,
 
Commercial
 
Residential
 
Consumer
 
Total
 
Commercial
 
Residential
 
Consumer
 
Total
 
 
(in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
16,469

 
$
1,389

 
$
519

 
$
18,377

 
$
11,365

 
$
398

 
$
222

 
$
11,985

Provision for loan losses
 
409

 
64

 
(10
)
 
463

 
(70
)
 
(65
)
 
(2
)
 
(137
)
Loans charged-off
 
(287
)
 
(9
)
 
(65
)
 
(361
)
 

 

 

 

Recoveries
 
34

 
7

 
14

 
55

 
14

 

 

 
14

Total ending allowance balance
 
$
16,625

 
$
1,451

 
$
458

 
$
18,534

 
$
11,309

 
$
333

 
$
220

 
$
11,862

 
 
2016
 
2015
Nine Months Ended September 30,
 
Commercial
 
Residential
 
Consumer
 
Total
 
Commercial
 
Residential
 
Consumer
 
Total
 
 
(in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
16,537

 
$
1,981

 
$
387

 
$
18,905

 
$
10,967

 
$
347

 
$
107

 
$
11,421

Provision for loan losses
 
1,934

 
(503
)
 
177

 
1,608

 
313

 
(14
)
 
113

 
412

Loans charged-off
 
(1,897
)
 
(34
)
 
(249
)
 
(2,180
)
 

 

 

 

Recoveries
 
51

 
7

 
143

 
201

 
29

 

 

 
29

Total ending allowance balance
 
$
16,625

 
$
1,451

 
$
458

 
$
18,534

 
$
11,309

 
$
333

 
$
220

 
$
11,862


The general component of the allowance for loan losses is based on the incurred losses inherent in the portfolio. The loss factors are determined through the generation of probabilities of default (“PDs”) and losses given default (“LGDs”) for groups of similar loans with similar credit grades where Loss Rate = PD x LGD. The PDs and LGDs for the loan portfolio are calculated based on Atlantic Capital’s loss history as well as available market-based data. The loss factor for each pool of loans is adjusted based on Qualitative and Environmental factors to account for conditions in the current environment which management believes are likely to cause a difference between the calculated loss based on historical performance and the incurred loss in the existing portfolio. These factors include: changes in policies and procedures, changes in the economy, changes in nature or volume of the portfolio and in the terms of loans, changes in lending management, changes in past dues and credit migration, changes in the loan review system, changes in the value of collateral and concentration risk and changes in external factors, such as competition, legal and regulatory. On a quarterly basis, management evaluates these factors in order to determine an adjustment unique to Atlantic Capital and its market.
Charge-offs are recognized when the amount of the loss is quantifiable and timing is known. Collateral based loan charge-offs are measured based on the difference between the loan’s carrying value, including deferred fees, and the estimated net realizable value of the loan. When assessing property value for the purpose of determining a charge-off, a third-party appraisal or an independently derived internal evaluation is generally employed.
A loan is considered to be impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. A specific allowance is established for individually evaluated impaired loans as needed. Reserves on impaired loans are measured based on the present value

14


of expected future cash flows discounted at the loan’s effective interest rate or the observable market price, or the fair value of the underlying collateral of the loan if the loan is collateral dependent.
Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. Atlantic Capital’s policy is to place loans on nonaccrual status, when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not both well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.
PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans accounted for under ASC 310-30 were not classified as nonaccrual at September 30, 2016 or December 31, 2015, as the carrying value of the respective loan or pool of loans’ cash flows were considered estimable and collection was probable. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows (accretable yield), is being recognized on all acquired loans being accounted for under ASC 310-30.

15


The balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method is presented in the following table as of September 30, 2016 and December 31, 2015.
September 30, 2016
 
Commercial
 
Residential
 
Consumer
 
Total
 
 
(in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
Ending allowance balance attributable to loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
686

 
$
65

 
$

 
$
751

Collectively evaluated for impairment
 
15,939

 
1,386

 
458

 
17,783

PCI
 

 

 

 

Total ending allowance balance
 
$
16,625

 
$
1,451

 
$
458

 
$
18,534

 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
8,650

 
$
406

 
$

 
$
9,056

Loans collectively evaluated for impairment
 
1,760,717

 
173,501

 
51,178

 
1,985,396

PCI
 
12,135

 
5,091

 
11

 
17,237

Total ending loans balance
 
$
1,781,502

 
$
178,998

 
$
51,189

 
$
2,011,689

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Commercial
 
Residential
 
Consumer
 
Total
 
 
(in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
Ending allowance balance attributable to loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
1,619

 
$

 
$

 
$
1,619

Collectively evaluated for impairment
 
14,918

 
1,981

 
387

 
17,286

PCI
 

 

 

 

Total ending allowance balance
 
$
16,537

 
$
1,981

 
$
387

 
$
18,905

 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
 
$
12,049

 
$

 
$

 
$
12,049

Loans collectively evaluated for impairment
 
1,534,507

 
184,447

 
37,323

 
1,756,277

PCI
 
17,648

 
6,672

 
29

 
24,349

Total ending loans balance
 
$
1,564,204

 
$
191,119

 
$
37,352

 
$
1,792,675




16


The following tables present information on Atlantic Capital’s impaired loans for the three and nine months ended September 30, 2016 and 2015:
 
For the Three Months Ended September 30,
 
2016
 
2015
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average Balance of Recorded Investment While Impaired
 
Interest Income Recognized During Impairment
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average Balance of Recorded Investment While Impaired
 
Interest Income Recognized During Impairment
 
(in thousands)
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
3,118

 
$
3,057

 
$

 
$
3,028

 
$
40

 
$

 
$

 
$

 
$

 
$

Commercial real estate

 

 

 

 

 
1,659

 
1,659

 

 
1,659

 
14

Construction and land

 

 

 

 

 

 

 

 

 

Residential mortgages

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Total
$
3,118

 
$
3,057

 
$

 
$
3,028

 
$
40

 
$
1,659

 
$
1,659

 
$

 
$
1,659

 
$
14

Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
4,461

 
$
4,461

 
$
481

 
$
4,461

 
$

 
$

 
$

 
$

 
$

 
$

Commercial real estate
1,132

 
1,132

 
205

 
1,132

 

 
4,912

 
4,912

 
693

 
4,890

 
34

Construction and land

 

 

 

 

 

 

 

 

 

Residential mortgages
406

 
406

 
65

 
406

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Total
$
5,999

 
$
5,999

 
$
751

 
$
5,999

 
$

 
$
4,912

 
$
4,912

 
$
693

 
$
4,890

 
$
34

Total impaired loans
$
9,117

 
$
9,056

 
$
751

 
$
9,027

 
$
40

 
$
6,571

 
$
6,571

 
$
693

 
$
6,549

 
$
48


17


 
For the Nine Months Ended September 30,
 
2016
 
2015
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average Balance of Recorded Investment While Impaired
 
Interest Income Recognized During Impairment
 
Unpaid
Principal
Balance
 
Recorded
Investment
 
Related
Allowance
 
Average Balance of Recorded Investment While Impaired
 
Interest Income Recognized During Impairment
 
(in thousands)
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
3,118

 
$
3,057

 
$

 
$
2,960

 
$
112

 
$

 
$

 
$

 
$

 
$

Commercial real estate

 

 

 

 

 
1,659

 
1,659

 

 
1,659

 
41

Construction and land

 

 

 

 

 

 

 

 

 

Residential mortgages

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Total
$
3,118

 
$
3,057

 
$

 
$
2,960

 
$
112

 
$
1,659

 
$
1,659

 
$

 
$
1,659

 
$
41

Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
4,461

 
$
4,461

 
$
481

 
$
4,461

 
$

 
$

 
$

 
$

 
$

 
$

Commercial real estate
1,132

 
1,132

 
205

 
1,132

 

 
4,912

 
4,912

 
693

 
4,904

 
100

Construction and land

 

 

 

 

 

 

 

 

 

Residential mortgages
406

 
406

 
65

 
406

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

Mortgage warehouse

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Total
$
5,999

 
$
5,999

 
$
751

 
$
5,999

 
$

 
$
4,912

 
$
4,912

 
$
693

 
$
4,904

 
$
100

Total impaired loans
$
9,117

 
$
9,056

 
$
751

 
$
8,959

 
$
112

 
$
6,571

 
$
6,571

 
$
693

 
$
6,563

 
$
141


Atlantic Capital evaluates loans in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors. Troubled debt restructurings (“TDR”) are loans in which Atlantic Capital has modified the terms or granted an economic concession to a borrower who is experiencing financial difficulties. These modifications may include interest rate reductions, term extensions and other concessions intended to minimize losses.
As of September 30, 2016 and December 31, 2015, the Company had a recorded investment in TDRs of $7.8 million and $9.1 million, respectively. During the three and nine months ended September 30, 2016, the modification of terms for one Commercial and Industrial loan included an extension of the maturity date and related amortization period date of two years. The modification of terms for two Commercial Real Estate loans established an interest only payment period of six months. No loans modified as TDRs in the 12 months prior to September 30, 2016 have defaulted.

18



The Company did not modify any new loans as a TDR during the three and nine months ended September 30, 2015. Loans, by portfolio class, modified as TDRs during the three and nine months ended September 30, 2016 are as follows (in thousands):
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
September 30, 2016
 
 
 
 
 
Commercial and industrial
1
 
$
4,170

 
$
4,170

Commercial real estate
2
 
614

 
614

Total
3
 
$
4,784

 
$
4,784

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

19



As of September 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows.

 
Pass
 
Special Mention
 
Substandard Accruing
 
Substandard Nonaccruing
 
Doubtful Nonaccruing
 
Total
 
(in thousands)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
501,594

 
$
13,695

 
$
12,796

 
$
16

 
$

 
$
528,101

Commercial real estate
849,851

 
6,166

 
1,193

 

 

 
857,210

Construction and land
207,977

 
4,828

 

 

 

 
212,805

Residential mortgages
96,460

 

 
394

 
12

 

 
96,866

Home equity
77,041

 

 

 

 

 
77,041

Mortgage warehouse
171,251

 

 

 

 

 
171,251

Consumer/Other
51,178

 

 

 

 

 
51,178

Total loans, excluding PCI loans
$
1,955,352

 
$
24,689

 
$
14,383

 
$
28

 
$

 
$
1,994,452

Commercial and industrial
$
3,565

 
$
1,222

 
$
397

 
$

 
$
347

 
$
5,531

Commercial real estate
490

 
362

 
4,627

 

 
594

 
6,073

Construction and land

 
254

 
277

 

 

 
531

Residential mortgages
99

 
1,363

 
1,718

 

 

 
3,180

Home equity
30

 
1,316

 
565

 

 

 
1,911

Mortgage warehouse

 

 

 

 

 

Consumer/Other

 
1

 
9

 

 
1

 
11

Total PCI loans
$
4,184

 
$
4,518

 
$
7,593

 
$

 
$
942

 
$
17,237



 
Pass
 
Special Mention
 
Substandard Accruing
 
Substandard Nonaccruing
 
Doubtful Nonaccruing
 
Total
 
(in thousands)
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
450,523

 
$
2,507

 
$
2,707

 
$
3,235

 
$

 
$
458,972

Commercial real estate
826,339

 
5,411

 
1,659

 
4,449

 

 
837,858

Construction and land
161,226

 
4,150

 

 

 

 
165,376

Residential mortgages
105,948

 

 
200

 

 

 
106,148

Home equity
78,189

 

 
110

 

 

 
78,299

Mortgage warehouse
84,350

 

 

 

 

 
84,350

Consumer/Other
37,312

 
11

 

 

 

 
37,323

Total loans, excluding PCI loans
$
1,743,887

 
$
12,079

 
$
4,676

 
$
7,684

 
$

 
$
1,768,326

Commercial and industrial
$

 
$
5,142

 
$
2,786

 
$
183

 
$

 
$
8,111

Commercial real estate
1,063

 
850

 
5,465

 
1,177

 

 
8,555

Construction and land
27

 
354

 
601

 

 

 
982

Residential mortgages

 
1,929

 
2,053

 
251

 

 
4,233

Home equity

 
1,606

 
492

 
341

 

 
2,439

Mortgage warehouse

 

 

 

 

 

Consumer/Other

 
15

 
13

 
1

 

 
29

Total PCI loans
$
1,090

 
$
9,896

 
$
11,410

 
$
1,953

 
$

 
$
24,349




20



Atlantic Capital monitors loans by past due status. The following table presents the aging of the recorded investment in past due loans as of September 30, 2016 and December 31, 2015 by class of loans.
 
 
As of September 30, 2016
 
Accruing Current
 
30-89
Days
Past Due
 
Accruing
90+ Days
Past Due
 
Nonaccruing
 
PCI Loans
 
Total
 
(in thousands)
Loans by Classification
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
528,579

 
$
4,633

 
$
404

 
$
16

 
$
5,531

 
$
533,632

Commercial real estate
862,598

 
685

 

 

 
6,073

 
863,283

Construction and land
212,382

 
887

 
67

 

 
531

 
213,336

Residential mortgages
99,144

 
608

 
282

 
12

 
3,180

 
100,046

Home equity
77,574

 
1,378

 

 

 
1,911

 
78,952

Mortgage warehouse
171,251

 

 

 

 

 
171,251

Consumer
50,732

 
448

 
9

 

 
11

 
51,189

Total Loans
$
2,002,260

 
$
8,639

 
$
762

 
$
28

 
$
17,237

 
$
2,011,689


 
As of December 31, 2015
 
Accruing Current
 
30-89
Days
Past Due
 
Accruing
90+ Days
Past Due
 
Nonaccruing
 
PCI Loans
 
Total
 
(in thousands)
Loans by Classification
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
455,647

 
$

 
$
90

 
$
3,235

 
$
8,111

 
$
467,083

Commercial real estate
832,845

 

 
564

 
4,449

 
8,555

 
846,413

Construction and land
165,376

 

 

 

 
982

 
166,358

Residential mortgages
106,042

 
106

 

 

 
4,233

 
110,381

Home equity
78,299

 

 

 

 
2,439

 
80,738

Mortgage warehouse
84,350

 

 

 

 

 
84,350

Consumer
37,082

 
30

 
123

 
88

 
29

 
37,352

Total Loans
$
1,759,641

 
$
136

 
$
777

 
$
7,772

 
$
24,349

 
$
1,792,675


21



NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill and other intangible assets as of September 30, 2016 and December 31, 2015 is summarized below:

 
September 30,
 
December 31,
 
2016
 
2015
 
(in thousands)
Core deposit intangible
$
9,544


$
9,544

Less: accumulated amortization
(2,477
)

(526
)
Less: impairment related to divested branches
(1,948
)
 

Core deposit intangible, net
5,119


9,018

Servicing assets, net
3,193


2,862

Total other intangibles, net
8,312


11,880

Goodwill
21,759


23,352

Total goodwill and other intangible assets, net
$
30,071


$
35,232

 
 
 
 

During the third quarter of 2016, Atlantic Capital recorded $551,000 of impairment to the TriNet servicing asset. A portion of this charge, totaling $390,000, was recorded as a measurement period adjustment to goodwill. The remaining $161,000 was recorded as a third quarter 2016 expense.

NOTE 8 – SERVICING RIGHTS

SBA Servicing Rights

SBA servicing rights are initially recorded at fair value. Subsequently, Atlantic Capital accounts for SBA servicing rights using the amortization method and they are included in other assets. As of September 30, 2016 and December 31, 2015, the balance of SBA loans sold and serviced by Atlantic Capital totaled $104.3 million and $65.9 million, respectively.

Changes in the balance of servicing assets for the three and nine months ended September 30, 2016 and 2015 are presented in the following table.


 
 
 Three months ended September 30,
 
Nine months ended September 30,
SBA Loan Servicing Rights
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Beginning carrying value, net
 
$
2,117

 
$
1,055

 
$
1,687

 
$
782

Additions
 
328

 
243

 
889

 
603

Amortization
 
(125
)
 
(39
)
 
(256
)
 
(126
)
Impairment
 

 

 

 

             Ending carrying value
 
$
2,320

 
$
1,259

 
$
2,320

 
$
1,259




22


At September 30, 2016, the sensitivity of the fair value of the SBA loan servicing rights to immediate changes in key economic assumptions are presented in the table below.
Sensitivity of the SBA Servicing Asset
 
September 30, 2016
 
 
 
(dollars in thousands)
 
Fair value of retained servicing assets
 
$
2,408

 
Weighted average life
 
6.60 years

 
Prepayment speed:
 
7.69

%
Decline in fair value due to a 10% adverse change
 
$
(78
)
 
Decline in fair value due to a 20% adverse change
 
$
(136
)
 
Weighted average discount rate
 
12.14

%
Decline in fair value due to a 100 bps adverse change
 
$
(87
)
 
Decline in fair value due to a 200 bps adverse change
 
$
(151
)
 

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

TriNet Servicing Rights

Changes in the balance of TriNet servicing assets for the three and nine months ended September 30, 2016 and 2015 are presented in the following table.

 
 
 Three months ended September 30,
 
Nine months ended September 30,
TriNet Servicing Rights
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Beginning carrying value, net
 
$
1,471

 
$

 
$
1,175

 
$

Additions
 

 

 
406

 

Amortization
 
(47
)
 

 
(157
)
 

Impairment
 
(551
)
 

 
(551
)
 

             Ending carrying value
 
$
873

 
$

 
$
873

 
$


During the third quarter of 2016, Atlantic Capital recorded $551,000 of impairment to the TriNet servicing asset. A portion of this charge, totaling $390,000, was recorded as a measurement period adjustment to goodwill. The remaining $161,000 was recorded as a third quarter 2016 expense.


23


At September 30, 2016, the sensitivity of the fair value of the TriNet servicing rights to immediate changes in key economic assumptions are presented in the table below.
Sensitivity of the TriNet Servicing Rights
 
September 30, 2016
 
 
 
(dollars in thousands)
 
Fair value of retained servicing assets
 
$
873

 
Weighted average life
 
9.61 years

 
Prepayment speed:
 
5.00

%
Decline in fair value due to a 10% adverse change
 
$
(61
)
 
Decline in fair value due to a 20% adverse change
 
$
(73
)
 
Weighted average discount rate
 
8.00

%
Decline in fair value due to a 100 bps adverse change
 
$
(26
)
 
Decline in fair value due to a 200 bps adverse change
 
$
(50
)
 

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


24



NOTE 9 – OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) for Atlantic Capital consists of changes in net unrealized gains and losses on investment securities available-for-sale and derivatives.  The following tables present a summary of the changes in accumulated other comprehensive income (loss) balances for the applicable periods.
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2016
 
September 30, 2016
 
Pre-Tax Amount
 
Income Tax (Expense) Benefit
 
After-Tax Amount
 
Pre-Tax Amount
 
Income Tax (Expense) Benefit
 
After-Tax Amount
 
(in thousands)
Accumulated other comprehensive income (loss) beginning of period
$
5,691

 
$
(2,197
)
 
$
3,494

 
$
(2,455
)
 
$
939

 
$
(1,516
)
Unrealized net gains (losses) on investment securities available-for-sale
(853
)
 
329

 
(524
)
 
6,125

 
(2,354
)
 
3,771

Reclassification adjustment for net realized gains (losses) on investment securities available-for-sale

 

 

 
(44
)
 
17

 
(27
)
Unrealized net gains (losses) on derivatives
(438
)
 
169

 
(269
)
 
774

 
(301
)
 
473

Accumulated other comprehensive income (loss) end of period
$
4,400

 
$
(1,699
)
 
$
2,701

 
$
4,400

 
$
(1,699
)
 
$
2,701

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2015
 
September 30, 2015
 
Pre-Tax Amount
 
Income Tax (Expense) Benefit
 
After-Tax Amount
 
Pre-Tax Amount
 
Income Tax (Expense) Benefit
 
After-Tax Amount
 
(in thousands)
Accumulated other comprehensive income (loss) beginning of period
$
1,064

 
$
(407
)
 
$
657

 
$
986

 
$
(377
)
 
$
609

Unrealized net gains (losses) on investment securities available-for-sale
636

 
(244
)
 
392

 
238

 
(91
)
 
147

Reclassification adjustment for net realized gains on investment securities available-for-sale
(10
)
 
4

 
(6
)
 
(10
)
 
4

 
(6
)
Unrealized net gains (losses) on derivatives
847

 
(324
)
 
523

 
1,323

 
(507
)
 
816

Accumulated other comprehensive income (loss) end of period
$
2,537

 
$
(971
)
 
$
1,566

 
$
2,537

 
$
(971
)
 
$
1,566





25



NOTE 10 – EARNINGS PER COMMON SHARE

Basic earnings per share amounts are computed by dividing net income by the weighted average number of shares of common stock outstanding.
Diluted earnings per share amounts are computed by dividing net income by the weighted average number of shares of common stock outstanding and the dilutive effects of the shares awarded under the stock option plan, based on the treasury stock method using an average fair market value of the stock during the respective periods.
The following table represents the earnings per share calculations for the three and nine months ended September 30, 2016 and 2015.
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
(in thousands, except per share amounts)
 
 
 
 
 
 
 
 
Net income available to common shareholders
 
$
3,708

 
$
2,226

 
$
11,786

 
$
6,842

Weighted average shares outstanding
 
 
 
 
 
 
 
 
Basic (1)
 
24,891,822

 
13,562,125

 
24,674,953

 
13,527,195

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and warrants
 
368,458

 
342,270

 
431,297

 
339,117

Diluted
 
25,260,280

 
13,904,395

 
25,106,250

 
13,866,312

Income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.15

 
$
0.16

 
$
0.48

 
$
0.51

Diluted
 
$
0.15

 
$
0.16

 
$
0.47

 
$
0.49

(1) Unvested restricted shares are participating securities and included in basic share calculations.
 
 
 
 
Stock options and warrants outstanding of 162,428 at September 30, 2016 and 0 at September 30, 2015 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. These awards were considered anti-dilutive because the exercise price of the award was higher than the market value of the shares.
The Amended and Restated Articles of Incorporation of Atlantic Capital, which were approved by the Board of Directors on March 24, 2015 and by Atlantic Capital’s shareholders on May 21, 2015, authorize Atlantic Capital to issue 110,000,000 shares of capital stock, of which 10,000,000 shares are designated as preferred stock, no par value per share, and 100,000,000 shares are designated as common stock, no par value per share. Prior periods have been restated to reflect the change in the par value of the common stock from $1 to no par value.
At September 30, 2016, 24,950,099 shares of common stock were issued and outstanding. At December 31, 2015, 24,425,546 shares of common stock were issued and outstanding.
The primary source of funds available to Atlantic Capital is payments of dividends from the Bank. The Bank has not paid any dividends to Atlantic Capital in 2016 or 2015. Banking laws and other regulations limit the amount of dividends a bank subsidiary may pay without prior regulatory approval. Additionally, Atlantic Capital’s ability to pay dividends to its shareholders will depend on the ability of the Bank to pay dividends to Atlantic Capital. The Bank is subject to regulatory restrictions on the payment of cash dividends, which generally may be paid only from current earnings.
NOTE 11 – DERIVATIVES AND HEDGING
Risk Management
Atlantic Capital’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, Atlantic Capital primarily uses interest rate swaps as part of its interest rate risk management strategy.
Cash Flow Hedges
At September 30, 2016, Atlantic Capital’s interest rate swaps designated as cash flow hedges involve the payment of floating-rate amounts to a counterparty in exchange for receiving fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. At September 30, 2016 and December 31, 2015, Atlantic Capital had interest rate swaps designated as cash flow hedges with an aggregate notional amount of $50.0 million, respectively.

26


No hedge ineffectiveness gains or losses were recognized on active cash flow hedges in 2016 or 2015. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Atlantic Capital expects that approximately $371,000 will be reclassified as an increase to loan interest income over the next twelve months related to these cash flow hedges.
Customer Swaps
Atlantic Capital also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of clients desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. In order to economically hedge the interest rate risk associated with offering this product, Atlantic Capital simultaneously enters into derivative contracts with third parties to offset the customer contracts, such that Atlantic Capital minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts reduce over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to clients.
Atlantic Capital’s derivative instruments are recorded at fair value in other assets and accrued interest receivable and other liabilities and accrued interest payable in the Consolidated Balance Sheets. The changes in the fair value of the derivative instruments are recognized in other noninterest income in the Consolidated Statements of Income. At September 30, 2016 and December 31, 2015, Atlantic Capital had interest rate swaps related to this program with an aggregate notional amount of $139.0 million and $137.1 million, respectively.
Atlantic Capital acquired a loan level hedging program, which First Security utilized to accommodate clients preferring a fixed rate loan. The loan documents include an addendum with a zero premium collar. The zero premium collar is a cap and a floor at the same interest rate, resulting in a fixed rate to the borrower. To hedge this embedded option the Bank entered into a dealer facing trade exactly mirroring the terms in the loan addendum.
Counterparty Credit Risk
As a result of its derivative contracts, Atlantic Capital is exposed to credit risk. Specifically approved counterparties and exposure limits are defined. On a quarterly basis, the customer derivative contracts and related counterparties are evaluated for credit risk and an adjustment is made to the contract’s fair value. This adjustment is recognized in the Consolidated Statements of Income.
Most derivative contracts with clients are secured by collateral. Additionally, in accordance with the interest rate agreements with derivatives dealers, Atlantic Capital may be required to post margin to these counterparties. At September 30, 2016 and December 31, 2015, Atlantic Capital had minimum collateral posting thresholds with certain of its derivative counterparties and posted collateral of $17.3 million and $13.5 million, respectively, against its obligations under these agreements. Cash collateral related to derivative contracts is recorded in other assets in the Consolidated Balance Sheets.
Atlantic Capital has master netting agreements with the derivatives dealers with which it does business, but reflects gross assets and liabilities on the Consolidated Balance Sheets.
In conjunction with the FASB’s fair value measurement guidance, management made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting arrangements on a net basis.
To accommodate clients, Atlantic Capital occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. This allows clients to execute an interest rate swap with one bank while allowing for distribution of the credit risk among participating members. Credit risk participation agreements arise when Atlantic Capital contracts with other financial institutions, as a guarantor, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. At September 30, 2016 and December 31, 2015, Atlantic Capital had credit risk participation agreements with a notional amount of $4.7 million and $22.4 million, respectively.

27


The following table reflects the estimated fair value positions of derivative contracts and credit risk participation agreements as of September 30, 2016 and December 31, 2015:
Derivatives designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
September 30, 2016
 
December 31, 2015
Interest Rate Products
 
Balance Sheet Location
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
Cash flow hedge of LIBOR based loans
 
 Other assets
 
$
50,000

 
$
1,351

 
$
50,000

 
$
474

 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
September 30, 2016
 
December 31, 2015
Interest Rate Products
 
Balance Sheet Location
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
Customer swap positions
 
 Other assets
 
$
69,510

 
$
3,098

 
$
68,560

 
$
1,617

Zero premium collar
 
 Other assets
 
99,399

 
11,150

 
101,407

 
4,463

 
 
 
 
$
168,909

 
$
14,248

 
$
169,967

 
$
6,080

 
 
 
 
 
 
 
 
 
 
 
Dealer offsets to customer swap positions
 
 Other liabilities
 
$
69,510

 
$
3,298

 
$
68,560

 
$
1,697

Credit risk participation
 
 Other liabilities
 
4,680

 
1

 
22,447

 
3

Dealer offset to zero premium collar
 
 Other liabilities
 
99,399

 
11,150

 
101,407

 
4,463

 
 
 
 
$
173,589

 
$
14,449

 
$
192,414

 
$
6,163

The following table reflects the impact to the Consolidated Statements of Income related to derivative contracts for the three and nine months ended September 30, 2016 and 2015:
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
 
 Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
 
 Gain or (Loss) Reclassified from Accumulated OCI in Income (Effective Portion)
 
 Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
 
 Gain or (Loss) Reclassified from Accumulated OCI in Income (Effective Portion)
 
 
2016
 
2015
 
Location
 
2016
 
2015
 
2016
 
2015
 
Location
 
2016
 
2015
Interest rate swaps
 
$
(269
)
 
$
523

 
Interest income
 
$
177

 
$
214

 
$
473

 
$
816

 
Interest income
 
$
546

 
$
435


NOTE 12 – SUBORDINATED DEBT
On September 28, 2015, Atlantic Capital issued subordinated notes (the “Notes”) totaling $50.0 million in aggregate principal amount. The Notes are due September 30, 2025 and bear a fixed rate of interest of 6.25% per year until September 29, 2020. From September 30, 2020 to the maturity date, the interest rate will be a floating rate equal to the three-month LIBOR plus 468 basis points. The Notes were priced at 100% of their par value. The Notes qualify as Tier 2 regulatory capital.
Subordinated debt is summarized as follows.
 
 
September 30, 2016
 
December 31, 2015
 
 
(in thousands
Floating rate 10 year capital securities, with interest paid semi-annually at an annual fixed rate of 6.25% until September 30, 2020
 
$
50,000

 
$
50,000

Principal amount of subordinated debt
 
$
50,000

 
$
50,000

Less debt issuance costs
 
 
676

 
 
803

Subordinated debt, net
 
$
49,324

 
$
49,197

All subordinated debt outstanding at September 30, 2016 matures after more than five years.

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NOTE 13 – SHARE-BASED COMPENSATION

Atlantic Capital sponsors a stock incentive plan for the benefit of directors and employees. Under the 2015 Stock Incentive Plan, there were approximately 4,525,000 shares reserved for issuance to directors and employees. The Compensation Committee has the authority to grant the following: an incentive or nonqualified option; a restricted stock award (including a restricted stock award or a restricted unit award); a performance award (including a performance share award or a performance unit award); a phantom stock award; a dividend equivalent award; or any other award granted under the plan.

As of September 30, 2016, approximately 4,000,000 additional awards could be granted under the plan. Through September 30, 2016, incentive stock options, nonqualified stock options, restricted and non-restricted stock awards have been granted under the plan. Stock options are granted at a price which is no less than the fair market value of a share of Atlantic Capital common stock on the grant date. Stock options generally vest over three years and expire after ten years.

As of September 30, 2016 and December 31, 2015, warrants for 363,000 and 588,000 shares, respectively, were outstanding for the purchase of common stock at a price of $10.00 per warrant. The warrants were issued as of May 14, 2007, the date of issuance of common stock sold in the initial private placement, and are exercisable for a period of ten years following the issuance.

The Company estimates the fair value of its options and warrants awards using the Black-Scholes option pricing model. The risk-free rate for periods within the contractual life of the option and warrant is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options or warrants granted during the nine months ended September 30, 2016 and 2015.

The following table represents stock option and warrant activity for the nine months ended September 30, 2016:
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding, December 31, 2015
2,369,759

 
$
11.30

 
 
 
 
Exercised
(716,408
)
 
10.03

 
 
 
 
Forfeited
(7,836
)
 
10.76

 
 
 
 
Expired
(2,028
)
 
47.89

 
 
 
 
Outstanding, September 30, 2016
1,643,487

 
$
11.82

 
4.25
 
$
5,531

 
 
 
 
 
 
 
 
Exercisable, September 30, 2016
1,313,131

 
$
11.23

 
3.16
 
$
5,280


Atlantic Capital recognized compensation expense relating to stock options of $192,000 and $638,000 for the three and nine months ended September 30, 2016, respectively. No compensation expense related to stock options was recognized in the three and nine months ended September 30, 2015. Using the Black-Scholes pricing model, the amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period.

The following table represents restricted stock activity for the nine months ended September 30, 2016:
 
Shares
 
Weighted Average Grant-Date Fair Value
Outstanding, December 31, 2015
217,658

 
$
13.07

Granted
91,486

 
14.20

Vested
(33,786
)
 
10.91

Forfeited
(18,386
)
 
14.24

Outstanding, September 30, 2016
256,972

 
$
13.67



29


Compensation expense for restricted stock is based on the fair value of restricted stock awards at the time of grant, which is equal to the value of Atlantic Capital’s common stock on the date of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting period. For the three months ended September 30, 2016 and 2015, compensation expense of $71,000 and $189,000, respectively, was recognized related to restricted stock awards. For the nine months ended September 30, 2016 and 2015, compensation expense of $527,000 and $503,000, respectively, was recognized related to restricted stock awards.

As of September 30, 2016, there was $2.4 million of unrecognized compensation cost related to restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 3.13 years.

NOTE 14 – FAIR VALUE MEASUREMENTS

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

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

Atlantic Capital applied the following fair value hierarchy:

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

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

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

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement. There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the nine months ended September 30, 2015. There was one transfer between Level 2 and Level 3 and no transfers between Level 1 and Level 2 during the nine months ended September 30, 2016.

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

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

30


approach used to estimate exposures to counterparties is also used by Atlantic Capital to estimate its own credit risk on derivative liability positions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the assets that were measured at fair value on a recurring basis by level within the fair value hierarchy as reported in the Consolidated Balance Sheets at September 30, 2016 and December 31, 2015.

 
Fair Value Measurements at
 
September 30, 2016 Using:
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in thousands)
Securities available-for-sale—
 
 
 
 
 
 
 
U.S. government agencies
$

 
$
22,017

 
$

 
$
22,017

U.S. states and political subdivisions

 
83,215

 

 
83,215

Trust preferred securities

 
4,393

 

 
4,393

Corporate debt securities

 
19,470

 

 
19,470

Mortgage-backed securities

 
219,389

 

 
219,389

Total securities available-for-sale
$

 
$
348,484

 
$

 
$
348,484

Interest rate derivative assets
$

 
$
15,599

 
$

 
$
15,599

Interest rate derivative liabilities
$

 
$
14,449

 
$

 
$
14,449


 
Fair Value Measurements at
 
December 31, 2015 Using:
 
Quoted Prices in
Active Markets for
Identical Securities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in thousands)
Securities available-for-sale—
 
 
 
 
 
 
 
U.S. treasuries
$

 
$
4,922

 
$

 
$
4,922

U.S. government agencies

 
64,852

 

 
64,852

U.S. states and political subdivisions

 
27,790

 

 
27,790

Trust preferred securities

 
4,275

 

 
4,275

Corporate debt securities

 
20,517

 

 
20,517

Mortgage-backed securities

 
221,451

 
2,414

 
223,865

Total securities available-for-sale
$

 
$
343,807

 
$
2,414

 
$
346,221

Interest rate derivative assets
$

 
$
6,554

 
$

 
$
6,554

Interest rate derivative liabilities
$

 
$
6,163

 
$

 
$
6,163

 
The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values:
 
 
Securities Available-for-Sale
 
 
(in thousands)
December 31, 2015
 
$
2,414

Change due to presence of observable market data
 
(2,414
)
September 30, 2016
 
$



31




For the nine months ended September 30, 2016 and 2015, there was not a change in the methods and significant assumptions used to estimate fair value.

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

The following table presents the assets that were measured at fair value on a nonrecurring basis by level within the fair value hierarchy as reported in the Consolidated Balance Sheets at September 30, 2016 and December 31, 2015.
September 30, 2016
 
Level 1
Fair Value
Measurement
 
Level 2
Fair Value
Measurement
 
Level 3
Fair Value
Measurement
 
Total
 
(in thousands)
Impaired Loans
 
$

 
$

 
$
5,998

 
$
5,998


December 31, 2015
 
Level 1
Fair Value
Measurement
 
Level 2
Fair Value
Measurement
 
Level 3
Fair Value
Measurement
 
Total
 
(in thousands)
Impaired Loans
 
$

 
$

 
$
4,449

 
$
4,449


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

Assets and Liabilities Not Measured at Fair Value

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

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

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

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

32


The following table presents the estimated fair values of Atlantic Capital’s financial instruments at September 30, 2016 and December 31, 2015.
 
 
Fair Value Measurements at
 
September 30, 2016 Using:
 
Carrying
Value
 
Quoted Prices in Active markets for Identical Securities (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
Cash and due from banks
$
44,563

 
$
44,563

 
$

 
$

Interest bearing deposits in banks
75,750

 
75,750

 

 

Other short-term investments
23,159

 
23,159

 

 

Total securities available-for-sale
348,484

 

 
348,484

 

FHLB stock
9,617

 

 

 
9,617

Federal Reserve Bank stock
9,670

 

 

 
9,670

Loans held for investment, net
1,989,568

 

 

 
1,985,222

Derivative assets
15,599

 

 
15,599

 

Financial liabilities
 
 
 
 
 
 
 
Deposits
$
2,188,856

 
$

 
$
2,155,274

 
$

Federal funds purchased and securities sold under agreements to repurchase

 

 

 

Subordinated debt
49,324

 

 
49,324

 

FHLB advances
170,000

 

 
169,803

 

Derivative financial instruments
14,449

 

 
14,449

 


 
Fair Value Measurements at
 
December 31, 2015 Using:
 
Carrying
Value
 
Quoted Prices in Active markets for Identical Securities (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
Cash and due from banks
$
45,848

 
$
45,848

 
$

 
$

Interest-bearing deposits in other banks
130,900

 
130,900

 

 

Reverse repurchase agreements
13,666

 
13,666

 

 

Total securities available-for-sale
346,221

 

 
343,807

 
2,414

FHLB stock
8,034

 

 

 
8,034

Loans held for investment, net
1,771,764

 

 

 
1,752,796

Derivative assets
6,554

 

 
6,554

 

Financial liabilities
 
 
 
 
 
 
 
Deposits
$
2,048,808

 
$

 
$
2,018,898

 
$

Federal funds purchased and securities sold under agreements to repurchase
11,931

 
11,931

 

 

Subordinated debt
49,197

 

 
49,197

 

Derivative financial instruments
6,163

 

 
6,163

 



33



NOTE 15 – COMMITMENTS AND CONTINGENCIES

Atlantic Capital is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, most of which are standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract amounts of these instruments reflect the extent of involvement Atlantic Capital has in particular classes of financial instruments.

Standby letters of credit are written conditional commitments issued by Atlantic Capital to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Most letters of credit expire in less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Atlantic Capital’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Atlantic Capital uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Atlantic Capital’s maximum exposure to credit risk for unfunded loan commitments and standby letters of credit at September 30, 2016 and December 31, 2015 was as follows:
 
 
September 30,
2016
 
December 31,
2015
 
 
 
Commitments to extend credit
$
646,460

 
$
559,448

 
Standby letters of credit
13,855

 
10,502

 
 
$
660,315

 
$
569,950

 

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

34




ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

35


increased costs associated with operating as a public company;
competition from other financial services companies could adversely affect operations; or
other risks and factors identified in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2016 (the “Annual Report”) in Part I, Item 1A under the heading “Risk Factors.”
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of Atlantic Capital are in accordance with GAAP and conform to general practices within the banking industry. Atlantic Capital’s financial position and results of operations are affected by management’s application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in Atlantic Capital’s consolidated financial position and/or consolidated results of operations. The more critical accounting and reporting policies include Atlantic Capital’s accounting for the allowance for loan losses, fair value measurements, and income tax related items. Significant accounting policies are discussed in Note 1 of the consolidated financial statements within Atlantic Capital’s Annual Report on Form 10-K.
The following is a summary of Atlantic Capital’s critical accounting policies that are material to the consolidated financial statements and are highly dependent on estimates and assumptions.
Allowance for loan losses.
The allowance for loan losses (ALL) is management’s estimate of probable credit losses inherent in Atlantic Capital’s loan portfolio at the balance sheet date. Atlantic Capital determines the allowance for loan losses based on an ongoing estimation process. This estimation process is inherently subjective, as it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans and losses incurred as of the balance sheet date in Atlantic Capital’s loan portfolio. Those estimates may be susceptible to significant change. Increases to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.
The allowance is the accumulation of various components that are calculated based on an independent estimation process. All components of the allowance for loan losses represent estimates based on data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends, peer analysis, recent loan loss experience, collateral type, loan volumes, seasoning of the loan portfolio, economic conditions, and the findings of internal credit quality assessments and results from external bank regulatory examinations.
While management uses the best information available to establish the allowance for loan losses, future adjustments may become necessary if conditions differ substantially from the assumptions used in making the estimates. In addition, regulatory examiners may require adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Such adjustments to original estimates, as necessary, are made and reflected in the financial results in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.
Management continuously monitors and actively manages the credit quality of the entire loan portfolio and recognizes provision expense to maintain the allowance at an appropriate level. Specific allowances for impaired loans are determined by analyzing estimated cash flows discounted at a loan’s original rate or collateral values in situations where Atlantic Capital believes repayment is dependent on collateral liquidation.
Management considers the established ALL adequate to absorb losses that relate to loans outstanding at September 30, 2016, although future additions may be necessary based on changes in economic conditions, collateral values, erosion of the borrower’s access to liquidity and other factors. If the financial condition of borrowers were to deteriorate, resulting in an impairment of their ability to make payments, Atlantic Capital’s estimates would be updated and additions to the ALL may be required.





36


Fair value measurements.
Atlantic Capital’s impaired loans and foreclosed assets may be measured and carried at fair value, the determination of which requires management to make assumptions, estimates and judgments. At September 30, 2016, the percentage of total assets measured at fair value was 13%, which is primarily securities available-for-sale. See Note 14 “Fair Value Measurements” in the consolidated financial statements for additional disclosures regarding the fair value of our assets and liabilities.
When a loan is considered individually impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. In addition, foreclosed assets are carried at the lower of cost, fair value, less cost to sell, or listed selling price less cost to sell, following foreclosure. Fair value is defined by GAAP “as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.” GAAP further defines an “orderly transaction” as “a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets. It is not a forced transaction (for example, a forced liquidation or distress sale).” Although management believes its processes for determining the value of impaired loans and foreclosed properties are appropriate and allow Atlantic Capital to arrive at a fair value, the processes require management judgment and assumptions and the value of such assets at the time they are revalued or divested may be significantly different from management’s determination of fair value. In addition, because of subjectivity in fair value determinations, there may be grounds for differences in opinions, which may result in disagreements between management and Atlantic Capital’s regulators, disagreements which could cause Atlantic Capital to change its judgments about fair value.
The fair values for available-for-sale securities are generally based upon quoted market prices or observable market prices for similar instruments. Atlantic Capital utilizes a third-party pricing service to assist with determining the fair value of its securities portfolio. The pricing service uses observable inputs when available including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment by management. Atlantic Capital periodically reviews available-for-sale securities that are in an unrealized loss position to determine whether other-than-temporary impairment exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost-basis. The primary factors Atlantic Capital considers in determining whether impairment is other-than-temporary are long term expectations and recent experience regarding principal and interest payments, and Atlantic Capital’s ability and intent to hold the security until the amortized cost basis is recovered.

Atlantic Capital uses derivatives primarily to manage interest rate risk. The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and pricing models that are primarily sensitive to market observable data.
Income taxes.
Atlantic Capital recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies by jurisdiction and entity in making this assessment.

Non-GAAP Financial Measures

This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP and should be read along with Table 1, which provides a reconciliation of non-GAAP financial measures to GAAP financial measures. Management uses the following non-GAAP financial measure in its analysis of Atlantic Capital’s performance: taxable equivalent net interest income. Management uses this non-GAAP financial measure because it believes it provides a greater understanding of ongoing performance and operations, enhances comparability with prior periods, and provides users of our financial information with a meaningful measure for assessing our financial results and credit trends. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as an alternative to any measure of performance or financial condition as determined in accordance with GAAP. In addition, non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures presented by other companies. Investors should consider Atlantic Capital’s performance and financial condition as reported under GAAP and all other relevant information when

37


assessing the performance or financial condition of the Company. A reconciliation of this non-GAAP financial measure to GAAP financial measures is included in Table 1.
EXECUTIVE OVERVIEW AND EARNINGS SUMMARY
On October 31, 2015, Atlantic Capital completed the acquisition of First Security and its wholly-owned bank subsidiary FSGBank. The acquired entity’s results are included in Atlantic Capital’s consolidated results beginning on October 31, 2015, the acquisition date.
During the third quarter of 2016, Atlantic Capital made the decision to close the TriNet Lending division. Sales of additional TriNet loans are expected in the fourth quarter of 2016, or first quarter of 2017, resulting in additional fee income and a reduction in loan balances. A portion of the cost savings from the closure of the TriNet division will be reinvested into the SBA lending division.
Atlantic Capital also announced its intent to open a corporate banking office in Charlotte, North Carolina, as part of the ongoing effort to build capacity for growth in revenue and improvement in profitability
Atlantic Capital reported net income of $3.7 million for the third quarter of 2016. This compared to net income of $2.2 million for the third quarter of 2015. Diluted income per common share was $.15 for the third quarter of 2016 compared to diluted income per common share of $.16 for the third quarter of 2015.
For the nine months ended September 30, 2016, Atlantic Capital reported net income of $11.8 million. This compared to net income of $6.8 million for the first nine months ended September 30, 2015. Diluted income per common share was $.47 for the nine months ended September 30, 2016 compared to $.49 for the same period in 2015.
The increase in net income for the three months ended September 30, 2016, compared to the same period in 2015, is primarily the result of a $9.9 million increase in net interest income and a $3.9 million gain on the sale of seven branches, offset by a $5.2 million increase in salary and benefits expenses. The increases in interest income and salary and benefits expenses are related to the acquisition of First Security.
For the nine months ended September 30, 2016 compared to the first nine months of 2015, the increase in net income was primarily attributable to a $29.3 million, or 104%, increase in net interest income. In addition, noninterest income increased $11.4 million, or 191%, due to the $3.9 million gain on sale of branches, increased service charges, and higher trust and mortgage income due to the acquisition of First Security. This was offset by a $31.8 million, or 140%, increase in noninterest expense, resulting primarily from a $16.6 million increase in salary and benefits expenses and increases in other noninterest expenses related to the acquisition of First Security.
Taxable equivalent net interest income was $19.5 million for the third quarter of 2016, compared to $9.5 million for the third quarter of 2015. Taxable equivalent net interest margin increased to 3.12% for the three months ended September 30, 2016 from 2.93% for the three months ended September 30, 2015. For the nine months ended September 30, 2016, net interest income was $57.7 million compared to $28.1 million for the same period of 2015. Net interest margin increased to 3.11% for the nine months ended September 30, 2016 from 2.91% for the nine months ended September 30, 2015. The margin increases for the three and nine months ended September 30, 2016 compared to the prior year were primarily due to higher yields on loans and the increase in loan volume from First Security.
Provision for loan losses for the quarter ended September 30, 2016 totaled $463,000, an increase of $600,000 from the quarter ended September 30, 2015. The higher provision for the three months ended September 30, 2016 resulted from an increase in the general component of the allowance due to loan growth and an increase in reserves of $58,000 for specifically evaluated impaired credits. For the nine months ended September 30, 2016, Atlantic Capital’s provision for loan losses was $1.6 million compared to a provision of $412,000 for the first nine months of 2015. The increase was primarily due to the same factors resulting in the quarterly increase, namely the growth in loan balances due to the acquisition of First Security.
Noninterest income increased $2.3 million, or 131%, to $4.0 million from the third quarter of 2015. The increase was primarily due to a $749,000 increase in service charges. The addition of mortgage income and trust income from the acquisition of First Security also increased noninterest income by $993,000 compared to the quarter ended September 30, 2015. For the first nine months of 2016, noninterest income increased $11.4 million, or 191%, to $17.3 million. The increase was primarily due to the same factors resulting in the quarterly increase as well as the $3.9 million gain on the sale of seven branches and the $1.1 million in gains on the sale of TriNet loans.
For the third quarter of 2016, noninterest expense increased $9.6 million, or 125%, compared to the third quarter of 2015. Noninterest expense totaled $54.5 million for the nine months ended September 30, 2016, compared to $22.7 million for the same period in 2015. The most significant components of the increase for the quarterly and year-to-date periods were higher salary and benefit, occupancy, equipment and software, and data processing expenses related to the acquisition of First Security. The payment of incentives for new strategic hires during the three and nine months ended September 30, 2016 contributed to the increase in salary and benefit expense.

38


Table 1 - Quarterly Selected Financial Data
 
 
 
 
 
 
 
(in thousands, except share and per share data; taxable equivalent)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
 For the nine months ended September 30,
 
 
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
2016
 
2015
 
INCOME SUMMARY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
22,428

 
$
22,190

 
$
21,553

 
$
18,270

 
$
10,345

 
$
66,171

 
$
30,760

 
Interest expense
 
2,941

 
2,907

 
2,632

 
2,292

 
840

 
8,480

 
2,631

 
Net interest income
 
19,487

 
19,283

 
18,921

 
15,978

 
9,505

 
57,691

 
28,129

 
Provision (credit) for loan losses
 
463

 
777

 
368

 
7,623

 
(137
)
 
1,608

 
412

 
Net interest income after provision for loan losses
 
19,024

 
18,506

 
18,553

 
8,355

 
9,642

 
56,083

 
27,717

 
Noninterest income
 
4,002

 
8,880

 
4,420

 
3,460

 
1,729

 
17,302

 
5,939

 
Noninterest expense
 
17,296

 
18,943

 
18,266

 
23,239

 
7,671

 
54,505

 
22,694

 
    Income (loss) before income taxes
 
5,730

 
8,443

 
4,707

 
(11,424
)
 
3,700

 
18,880

 
10,962

 
Income tax expense (benefit)
 
2,022

 
3,296

 
1,776

 
(3,263
)
 
1,474

 
7,094

 
4,120

 
Net income (loss)
 
$
3,708

 
$
5,147

 
$
2,931

 
$
(8,161
)
 
$
2,226

 
$
11,786

 
$
6,842

 
 
 
 
 
 
 
 
 
 
 
   
 
   
 
   
 
PER SHARE DATA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Basic earnings per share
 
$
0.15

 
$
0.21

 
$
0.12

 
$
(0.40
)
 
$
0.16

 
$
0.48

 
$
0.51

 
    Diluted earnings per share
 
0.15

 
0.20

 
0.12

 
(0.40
)
 
0.16

 
0.47

 
0.49

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PERFORMANCE MEASURES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Return on average equity
 
4.84

%
6.88

%
4.02

%
(13.22
)
%
6.08

%
5.25

%
6.3

%
    Return on average assets
 
0.55

 
0.76

 
0.45

 
(1.45
)
 
0.66

 
0.58

 
0.67

 
    Taxable equivalent net interest margin
 
3.12

 
3.12

 
3.26

 
3.13

 
2.93

 
3.11

 
2.91

 
    Efficiency ratio
 
74.05

 
67.44

 
77.12

 
119.74

 
68.35

 
72.93

 
66.68

 
    Equity to assets
 
11.17

 
10.83

 
10.81

 
10.91

 
10.53

 
11.17

 
10.91

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses to loans
 
0.92

%
0.95

%
0.93

%
1.06

%
1.13

%
0.92

%
1.13

%
Net charge-offs
 
$
306

 
$
8

 
$
1,665

 
$
580

 
$
(14
)
 
$
1,979

 
$
(29
)
 
Net charge-offs to average loans(1)
 
0.06

%

%
0.35

%
0.15

%
(0.01
)
%
0.13

%

%
NPAs to total assets
 
0.09

 
0.07

 
0.08

 
0.40

 

 
0.09

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVERAGE BALANCES
 
 
 
 
 

 

 

 
 
 
 
 
Total loans
 
$
2,003,180

 
$
2,000,685

 
$
1,881,749

 
$
1,583,280

 
$
1,052,785

 
$
1,965,092

 
$
1,051,878

 
Investment securities
 
335,880

 
358,439

 
357,728

 
255,312

 
134,016

 
372,208

 
135,961

 
Total assets
 
2,717,996

 
2,718,110

 
2,620,750

 
2,248,614

 
1,349,997

 
2,704,670

 
1,359,059

 
Deposits
 
2,163,569

 
2,135,292

 
2,155,683

 
1,886,292

 
1,101,434

 
2,164,477

 
1,100,402

 
Shareholders’ equity
 
306,642

 
299,170

 
291,806

 
246,842

 
146,430

 
299,048

 
144,816

 
Number of common shares - basic
 
24,891,822

 
24,644,755

 
24,485,900

 
20,494,895

 
13,562,125

 
24,674,953

 
13,527,195

 
Number of common shares - diluted
 
25,260,280

 
25,158,694

 
24,993,597

 
21,004,577

 
13,904,395

 
25,106,250

 
13,866,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Annualized.
 
 
 
 

39


Table 1 - Quarterly Selected Financial Data (continued)
 
 
 
 
 
 
 
 
(in thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
 For the nine months ended September 30,
 
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
2016
 
2015
AT PERIOD END
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
$
2,054,702

 
$
1,971,198

 
$
1,982,054

 
$
1,886,134

 
$
1,046,437

 
$
2,054,702

 
$
1,046,437

Investment securities
 
348,484

 
328,370

 
366,641

 
346,221

 
127,168

 
348,484

 
127,168

Total assets
 
2,761,244

 
2,807,822

 
2,726,888

 
2,638,780

 
1,381,698

 
2,761,244

 
1,381,698

Deposits
 
2,188,856

 
2,158,305

 
2,282,462

 
2,262,218

 
1,128,608

 
2,188,856

 
1,128,608

Shareholders’ equity
 
308,463

 
304,066

 
296,015

 
287,992

 
149,809

 
308,463

 
149,809

Number of common shares outstanding
 
24,950,099

 
24,750,163

 
24,569,823

 
24,425,546

 
13,562,125

 
24,950,099

 
13,562,125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Performance Measures Reconciliation
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
 For the nine months ended September 30,
 
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
2016
 
2015
Interest income reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income - GAAP
 
$
22,295

 
$
22,116

 
$
21,499

 
$
18,240

 
$
10,334

 
$
65,910

 
$
30,727

Taxable equivalent adjustment
 
133

 
74

 
54

 
30

 
11

 
261

 
33

Interest income - taxable equivalent
 
$
22,428

 
$
22,190

 
$
21,553

 
$
18,270

 
$
10,345

 
$
66,171

 
$
30,760

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income - GAAP
 
$
19,354

 
$
19,209

 
$
18,867

 
$
15,948

 
$
9,494

 
$
57,430

 
$
28,096

Taxable equivalent adjustment
 
133

 
74

 
54

 
30

 
11

 
261

 
33

Net interest income - taxable equivalent
 
$
19,487

 
$
19,283

 
$
18,921

 
$
15,978

 
$
9,505

 
$
57,691

 
$
28,129

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income after provision for loan losses reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income after provision for loan losses - GAAP
 
$
18,891

 
$
18,432

 
$
18,499

 
$
8,325

 
$
9,631

 
$
55,822

 
$
27,684

Taxable equivalent adjustment
 
133

 
74

 
54

 
30

 
11

 
261

 
33

Net interest income after provision for loan losses - taxable equivalent
 
$
19,024

 
$
18,506

 
$
18,553

 
$
8,355

 
$
9,642

 
$
56,083

 
$
27,717

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes - GAAP
 
$
5,597

 
$
8,369

 
$
4,653

 
$
(11,454
)
 
$
3,689

 
$
18,619

 
$
10,929

Taxable equivalent adjustment
 
133

 
74

 
54

 
30

 
11

 
261

 
33

Income (loss) before income taxes - taxable equivalent
 
$
5,730

 
$
8,443

 
$
4,707

 
$
(11,424
)
 
$
3,700

 
$
18,880

 
$
10,962

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense (benefit) reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense (benefit) - GAAP
 
$
1,889

 
$
3,222

 
$
1,722

 
$
(3,293
)
 
$
1,463

 
$
6,833

 
$
4,087

Taxable equivalent adjustment
 
133

 
74

 
54

 
30

 
11

 
261

 
33

Income tax expense (benefit) - taxable equivalent
 
$
2,022

 
$
3,296

 
$
1,776

 
$
(3,263
)
 
$
1,474

 
$
7,094

 
$
4,120



40



RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
Taxable equivalent net interest income for the third quarter of 2016 totaled $19.5 million, a $10.0 million, or 105%, increase compared to the third quarter of 2015. This increase was primarily driven by a $12.1 million, or 117%, increase in interest income. The interest income increase primarily resulted from the following:
an $11.1 million, or 118%, increase to $20.5 million in interest income on loans, resulting from a $950.4 million, or 90%, increase in average balance, due primarily to the addition of the First Security loan portfolio as well as organic loan growth; and
Net accretion income on acquired loans totaling $576,000.
The company recorded a $751,000 increase in tax equivalent interest income on investment securities due to the addition of the First Security portfolio. The increase resulted from a $201.9 million increase in the average balance of securities and was offset by a 33 basis point decline in the yield.
Interest expense for the three months ended September 30, 2016 totaled $2.9 million, a $2.1 million, or 250%, increase from the same period of 2015. The rate paid on interest bearing liabilities increased 26 basis points from the third quarter of 2015 to the third quarter of 2016, driven by an increase in the balance of long-term debt to $49.3 million in 2016, compared to zero in 2015. In addition, premium amortization of acquired time deposits reduced interest expense during the third quarter of 2016 in the amount of $170,000.
Taxable equivalent net interest income for the nine months ended September 30, 2016 totaled $57.7 million, a $29.6 million, or 105%, increase compared to the same period in 2015. This increase was primarily driven by a $35.4, or 115%, increase in interest income. The interest income increase primarily resulted from the following:
a $32.5 million, or 117%, increase to $60.4 million in interest income on loans, resulting from a $913.2 million, or 87%, increase in average balance, due primarily to the addition of the First Security loan portfolio as well as organic loan growth; and
Net accretion income on acquired loans totaling $2.0 million.
Interest expense for the nine months ended September 30, 2016 totaled $8.5 million, a $5.8 million, or 222%, increase from the same period of 2015, primarily due to a $2.5 million increase in interest paid on long-term debt. The rate paid on interest bearing liabilities increased 23 basis points from the first nine months of 2015 to the same period of 2016, driven by an increase in the balance of long-term debt to approximately $49.3 million in 2016, compared to zero in 2015. In addition, premium amortization of acquired time deposits reduced interest expense during the first nine months of 2016 in the amount of $712,000.
Taxable equivalent net interest margin increased to 3.12% from 2.93% for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. Taxable equivalent net interest margin increased to 3.11% compared to 2.91% for the nine months ended September 30, 2016 compared to the same period in 2015. The primary reason for the increase in taxable equivalent net interest margin quarter-over-quarter and for the first nine months of 2016 compared to 2015 was the increase in loan volume and the higher yield earned on the First Security loan portfolio. Net accretion income on the acquired loans discount totaled $576,000 and $2.0 million for the three and nine months ended September 30, 2016, and also contributed to the increase in taxable equivalent net interest margin.
Overall funding costs remained relatively stable from 2015 to 2016 although the long-term debt issued in September of 2015 added a relatively high cost funding source to the balance sheet.
The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented. Loan fees are included in interest income on loans.


41


Table 2 - Average Balance Sheets and Net Interest Analysis
 
 
 
 
 
 
(Dollars in thousands; taxable equivalent)
 
 
 
 
 
 
 
 
 
 
 Three months ended September 30,
 
 
2016
 
2015
 
 
Average Balance
 
Interest Income/Expense
 
Yield/Rate
 
Average Balance
 
Interest Income/Expense
 
Yield/Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits in other banks
 
$
109,883

 
$
158

 
0.57
%
 
$
51,076

 
$
29

 
0.23
%
Other short-term investments
 
18,741

 
60

 
1.27
%
 
43,786

 
166

 
1.52
%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
    Taxable investment securities
 
283,303

 
1,033

 
1.45
%
 
131,732

 
644

 
1.94
%
    Non-taxable investment securities(1)
 
52,577

 
393

 
2.97
%
 
2,284

 
31

 
5.44
%
Total investment securities
 
335,880

 
1,426

 
1.69
%
 
134,016

 
675

 
2.02
%
Total loans
 
2,003,180

 
20,511

 
4.07
%
 
1,052,785

 
9,423

 
3.59
%
FHLB and FRB stock
 
17,192

 
273

 
6.32
%
 
4,584

 
52

 
4.48
%
     Total interest-earning assets
 
2,484,876

 
22,428

 
3.59
%
 
1,286,247

 
10,345

 
3.19
%
Non-earning assets
 
233,120

 
 
 
 
 
63,750

 
 
 
 
     Total assets
 
$
2,717,996

 
 
 
 
 
$
1,349,997

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW, money market, and savings
 
1,236,828

 
1,338

 
0.43
%
 
661,265

 
646

 
0.39
%
Time deposits
 
175,135

 
241

 
0.55
%
 
15,756

 
15

 
0.37
%
Brokered deposits
 
196,598

 
377

 
0.76
%
 
98,939

 
90

 
0.36
%
Total interest-bearing deposits
 
1,608,561

 
1,956

 
0.48
%
 
775,960

 
751

 
0.38
%
Other borrowings
 
157,957

 
170

 
0.43
%
 
94,031

 
89

 
0.38
%
Long-term debt
 
49,296

 
815

 
6.58
%
 

 

 
%
     Total interest-bearing liabilities
 
1,815,814

 
2,941

 
0.64
%
 
869,991

 
840

 
0.38
%
Demand deposits
 
555,008

 
 
 
 
 
325,474

 
 
 
 
Other liabilities
 
40,532

 
 
 
 
 
8,102

 
 
 
 
Shareholders’ equity
 
306,642

 
 
 
 
 
146,430

 
 
 
 
     Total liabilities and shareholders’ equity
 
$
2,717,996

 
 
 
 
 
$
1,349,997

 
 
 
 
Net interest spread
 
 
 
 
 
2.95
%
 
 
 
 
 
2.81
%
Net interest income and net interest margin(2)
 
 
 
$
19,487

 
3.12
%
 
 
 
$
9,505

 
2.93
%
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Interest revenue on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 35%, reflecting the statutory federal income tax rate.
(2) Taxable equivalent net interest income divided by total interest-earning assets using the appropriate day count convention based on the type of interest-earning asset.

42


Table 2 - Average Balance Sheets and Net Interest Analysis (continued)
 
 
 
 
(Dollars in thousands; taxable equivalent)
 
 
 
 
 
 
 
 
 
 
 Nine months ended September 30,
 
 
2016
 
2015
 
 
Average Balance
 
Interest Income/Expense
 
Yield/Rate
 
Average Balance
 
Interest Income/Expense
 
Yield/Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits in other banks
 
$
100,279

 
$
481

 
0.64
%
 
$
46,376

 
$
87

 
0.25
%
Other short-term investments
 
24,120

 
244

 
1.35
%
 
54,843

 
547

 
1.33
%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
    Taxable investment securities
 
337,263

 
3,714

 
1.47
%
 
133,641

 
2,016

 
2.02
%
    Non-taxable investment securities(1)
 
34,945

 
768

 
2.94
%
 
2,320

 
94

 
5.42
%
Total investment securities
 
372,208

 
4,482

 
1.61
%
 
135,961

 
2,110

 
2.07
%
Total loans
 
1,965,092

 
60,418

 
4.11
%
 
1,051,878

 
27,874

 
3.54
%
FHLB and FRB stock
 
13,825

 
546

 
5.28
%
 
4,599

 
142

 
4.13
%
     Total interest-earning assets
 
2,475,524

 
66,171

 
3.57
%
 
1,293,657

 
30,760

 
3.18
%
Non-earning assets
 
229,146

 
 
 
 
 
65,402

 
 
 
 
     Total assets
 
$
2,704,670

 
 
 
 
 
$
1,359,059

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW, money market, and savings
 
1,182,520

 
3,646

 
0.41
%
 
655,641

 
1,890

 
0.39
%
Time deposits
 
221,937

 
654

 
0.39
%
 
16,094

 
46

 
0.38
%
Brokered deposits
 
210,803

 
1,170

 
0.74
%
 
120,676

 
326

 
0.36
%
Total interest-bearing deposits
 
1,615,260

 
5,470

 
0.45
%
 
792,411

 
2,262

 
0.38
%
Other borrowings
 
156,148

 
553

 
0.47
%
 
104,861

 
369

 
0.47
%
Long-term debt
 
49,254

 
2,457

 
6.66
%
 

 

 
%
     Total interest-bearing liabilities
 
1,820,662

 
8,480

 
0.62
%
 
897,272

 
2,631

 
0.39
%
Demand deposits
 
549,217

 
 
 
 
 
307,991

 
 
 
 
Other liabilities
 
35,743

 
 
 
 
 
8,980

 
 
 
 
Shareholders’ equity
 
299,048

 
 
 
 
 
144,816

 
 
 
 
     Total liabilities and shareholders’ equity
 
$
2,704,670

 
 
 
 
 
$
1,359,059

 
 
 
 
Net interest spread
 
 
 
 
 
2.95
%
 
 
 
 
 
2.79
%
Net interest income and net interest margin(2)
 
 
 
$
57,691

 
3.11
%
 
 
 
$
28,129

 
2.91
%
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Interest revenue on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 35%, reflecting the statutory federal income tax rate.
(2) Taxable equivalent net interest income divided by total interest-earning assets using the appropriate day count convention based on the type of interest-earning asset.










43


The following table shows the relative effect on net interest income for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.
Table 3 - Changes in Net Interest Income
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016 Compared to 2015
Increase (decrease) Due to Changes in:
 
Nine Months Ended September 30, 2016 Compared to 2015
Increase (decrease) Due to Changes in:
 
 
Volume
 
Yield/Rate
 
Total Change
 
Volume
 
Yield/Rate
 
Total Change
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits in other banks
 
$
85

 
$
44

 
$
129

 
$
258

 
$
136

 
$
394

Other short-term investments
 
(79
)
 
(27
)
 
(106
)
 
(310
)
 
7

 
(303
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
    Taxable investment securities
 
550

 
(161
)
 
389

 
2,245

 
(547
)
 
1,698

    Non-taxable investment securities
 
376

 
(14
)
 
362

 
717

 
(43
)
 
674

Total investment securities
 
926

 
(175
)
 
751

 
2,962

 
(590
)
 
2,372

Total loans
 
9,800

 
1,288

 
11,088

 
28,099

 
4,445

 
32,544

FHLB and FRB stock
 
200

 
21

 
221

 
364

 
40

 
404

Total interest-earning assets
 
10,932

 
1,151

 
12,083

 
31,373

 
4,038

 
35,411

Interest bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
NOW, money market, and savings
 
628

 
64

 
692

 
1,626

 
130

 
1,756

Time deposits
 
219

 
7

 
226

 
607

 
1

 
608

Internet and brokered deposits
 
188

 
99

 
287

 
501

 
343

 
844

Total interest-bearing deposits
 
1,035

 
170


1,205

 
2,734

 
474

 
3,208

Total borrowings
 
70

 
11

 
81

 
182

 
2

 
184

Total long-term debt
 
815

 

 
815

 
2,457

 

 
2,457

Total interest-bearing liabilities
 
1,920

 
181

 
2,101

 
5,373

 
476

 
5,849

Change in net interest income
 
$
9,012

 
$
970

 
$
9,982

 
$
26,000

 
$
3,562

 
$
29,562


Provision for Loan Losses
Management considers a number of factors in determining the required level of the allowance for loan losses and the provision required to achieve what is believed to be appropriate reserve level, including historical loss experience, loan growth, credit risk rating trends, nonperforming loan levels, delinquencies, loan portfolio concentrations and economic and market trends. The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that it considered adequate in relation to the estimated losses inherent in the loan portfolio.

For the three months ended September 30, 2016, the provision for loan losses was $463,000, an increase of $600,000, or 438%, compared to the three months ended September 30, 2015. For the nine months ended September 30, 2016, the provision for loan losses was $1.6 million, an increase of $1.2 million, or 290%, compared to the nine months ended September 30, 2015.

The higher provision for the three and nine months ended September 30, 2016 resulted from an increase in the general component of the allowance due to loan growth from the acquisition and an increase in reserves of $58,000 for specifically evaluated impaired credits. At September 30, 2016, nonperforming loans totaled $792,000 compared to $0 at September 30, 2015. Net loan charge-offs were 0.06% and 0.13%, respectively, of average loans (annualized) for the three and nine months ended September 30, 2016 compared to 0.00% and 0.00%, respectively, for the three and nine months ended September 30, 2015. The allowance for loan losses to total loans at September 30, 2016 was 0.92%, compared to 1.13% at September 30, 2015.


44


Noninterest Income

Noninterest income for the three and nine months ended September 30, 2016 was $4.0 million and $17.3 million, respectively, an increase of $2.3 million, or 131%, compared to the third quarter of 2015, and an increase of $11.4 million, or 191%, from the nine months ended September 30, 2015. The following table presents the components of noninterest income.

Table 4 - Noninterest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Three months ended September 30,
 
 Change
 
 Nine months ended September 30,
 
 Change
 
 
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
 
Service charges
 
$
1,270

 
$
521

 
$
749

 
144

%
$
4,160

 
$
1,348

 
$
2,812

 
209

%
Securities gains, net
 

 
10

 
(10
)
 
(100
)
 
44

 
10

 
34

 
340

 
Gain on sale of other assets
 
71

 

 
71

 

 
150

 

 
150

 

 
Mortgage income
 
632

 

 
632

 

 
1,418

 

 
1,418

 

 
Trust income
 
361

 

 
361

 

 
1,061

 

 
1,061

 

 
Derivatives income
 
69

 
67

 
2

 
3

 
232

 
215

 
17

 
8

 
Bank owned life insurance
 
424

 
227

 
197

 
87

 
1,215

 
1,794

 
(579
)
 
(32
)
 
SBA lending activities
 
959

 
745

 
214

 
29

 
3,043

 
2,006

 
1,037

 
52

 
Tri net activities
 

 

 

 

 
1,144

 

 
1,144

 

 
Gains on sale of branches
 

 

 

 

 
3,885

 

 
3,885

 

 
Other noninterest income
 
216

 
159

 
57

 
36

 
950

 
566

 
384

 
68

 
Total noninterest income
 
$
4,002

 
$
1,729

 
$
2,273

 
131

%
$
17,302

 
$
5,939

 
$
11,363

 
191

%

Service charges for the third quarter and first nine months of 2016 increased $749,000, or 144%, and $2.8 million, or 209%, respectively, from the same periods in 2015. The increase was primarily due to the addition of First Security deposits. Mortgage income and trust income for the third quarter and first nine months of 2016 increased from the third quarter and first nine months of 2015 due to these new lines of business acquired from First Security. Bank owned life insurance income for the first nine months of 2016 decreased $579,000, or 32%, from the same period in 2015 due to a $1.1 million non-recurring gain on bank-owned life insurance in the second quarter of 2015.

In addition, SBA lending activities for the third quarter and first nine months of 2016 increased $214,000, or 29%, and $1.0 million, or 52%, respectively, from the same periods in 2015, due to a higher level of loan sales. During the three months ended September 30, 2016 and 2015, guaranteed portions of 16 and 11 SBA loans with principal balances of $18.5 million and $13.2 million, respectively, were sold in the secondary market. During the nine months ended September 30, 2016 and 2015, guaranteed portions of 36 and 30 SBA loans with principal balances of $48.5 million and $32.4 million, respectively, were sold in the secondary market. During the nine months ended September 30, 2016, the TriNet lending division contributed $1.1 million in noninterest income from the sale of loans. During the third quarter of 2016, Atlantic Capital made the decision to close the TriNet Lending division.
On December 17, 2015, Atlantic Capital announced that it had entered into agreements for the sale of seven legacy FSGBank branches in Eastern Tennessee. The sale of four of the branches closed on April 1, 2016 and the sale of the remaining three branches closed on May 13, 2016. The branch sales resulted in a net gain of $3.9 million for the nine months ended September 31, 2016 and included the sale of approximately $191.0 million in deposits, $34.7 million in loans and $8.6 million in other assets. The net gain included the write-off of $2.0 million in core deposit intangibles. In addition, $305,000 in expenses related to the sales were recorded in noninterest expense.




45


Noninterest Expense
The following table presents the components of noninterest expense.

Table 5 - Noninterest Expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Three months ended September 30,
 
 Change
 
Nine months ended September 30,
 
 Change
 
 
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
 
Salaries and employee benefits
 
$
10,059

 
$
4,859

 
$
5,200

 
107

%
$
31,034

 
$
14,437

 
$
16,597

 
115
%
Occupancy
 
1,235

 
419

 
816

 
195

 
3,609

 
1,263

 
2,346

 
186
 
Equipment and software
 
862

 
243

 
619

 
255

 
2,272

 
687

 
1,585

 
231
 
Professional services
 
442

 
208

 
234

 
113

 
1,950

 
613

 
1,337

 
218
 
Postage, printing and supplies
 
61

 
21

 
40

 
190

 
389

 
63

 
326

 
517
 
Communications and data processing
 
617

 
313

 
304

 
97

 
2,227

 
986

 
1,241

 
126
 
Marketing and business development
 
269

 
90

 
179

 
199

 
853

 
213

 
640

 
300
 
FDIC premiums
 
415

 
161

 
254

 
158

 
1,306

 
516

 
790

 
153
 
Merger and conversion costs
 
579

 
718

 
(139
)
 
(19
)
 
2,538

 
1,982

 
556

 
28
 
Amortization of intangibles
 
520

 

 
520

 

 
1,950

 

 
1,950

 
 
Other noninterest expense
 
2,237

 
639

 
1,598

 
250

 
6,377

 
1,934

 
4,443

 
230
 
Total noninterest expense
 
$
17,296

 
$
7,671

 
$
9,625

 
125

%
$
54,505

 
$
22,694

 
$
31,811

 
140
%

Noninterest expense for the third quarter of 2016 was $17.3 million, an increase of $9.6 million, or 125%, from the third quarter of 2015. For the nine months ended September 30, 2016, noninterest expense totaled $54.5 million, an increase of $31.8 million, or 140%, from the same period in 2015. The increase from the prior year mostly reflects higher salaries, employee benefits, occupancy, equipment and software and data processing expenses related to the acquisition of First Security.
Salaries and employee benefits expense for the three months ended September 30, 2016 totaled $10.1 million, an increase of $5.2 million, or 107%, from the same period in 2015. The increase was due to continued investment in new talent as well as additional staff from the First Security acquisition. For the first nine months of 2016, salaries and employee benefits of $31.0 million increased $16.6 million, or 115%, from the first nine months of 2015. Full time equivalent headcount totaled 328 at September 30, 2016, compared to 105 at September 30, 2015, an increase of 223 positions, mainly from the First Security acquisition.
Occupancy expense of $1.2 million for the third quarter of 2016 increased $816,000, or 195%, from the third quarter of 2015. For the nine months ended September 30, 2016, occupancy expenses were $3.6 million, an increase of $2.3 million, or 186%, from the first nine months of 2015. The increase was due to a higher number of locations due to the acquisition.
Equipment and software expense increased $619,000, or 255%, to $862,000 for the third quarter of 2016, compared to the third quarter of 2015. For the nine months ended September 30, 2016, equipment and software expense was $2.3 million, an increase of $1.6 million, or 231%, from the first nine months of 2015. The increase was attributable to the acquisition of First Security.
Professional services fees increased $234,000, or 113%, to $442,000 for the third quarter of 2016, compared to the third quarter of 2015. For the nine months ended September 30, 2016, professional services fees were $2.0 million, an increase of $1.3 million, or 218%, from the first nine months of 2015. The increase was primarily due to the addition of First Security as well as an overall higher cost associated with operating as a public company.
Communications and data processing expense was $617,000 for the three months ended September 30, 2016, an increase of $304,000, or 97%, from the three months ended September 30, 2015. For the nine months ended September 30, 2016, communications and data processing expenses were $2.2 million, an increase of $1.2 million, or 126%, from the first nine months of 2015. The increase was primarily attributable to the acquisition of First Security, which operated on separate core systems until the conversion to Atlantic Capital’s systems early in the third quarter of 2016.
Merger and conversion costs were $579,000 for the third quarter of 2016, a decrease of $139,000, or 19%, compared to the third quarter of 2015. For the nine months ended September 30, 2016, merger and conversion costs were $2.5 million, an increase of $556,000, or 28%, from the first nine months of 2015. Merger expenses include professional fees, severance and data conversion costs.

46


Atlantic Capital expects merger-related costs to continue to decrease in future periods following completion of the integration of First Security’s operations.
Amortization of intangibles includes the amortization of core deposit intangible related to the acquisition of First Security and totaled $520,000 and $1.9 million for the three and nine months ended September 30, 2016.
Income Taxes
Atlantic Capital monitors and evaluates the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, Atlantic Capital evaluates its income tax positions based on current tax law and positions taken by various tax auditors within the jurisdictions where Atlantic Capital is required to file income tax returns.
The income tax provision for the third quarter and first nine months of 2016 was $1.9 million and $6.8 million, respectively, as compared with $1.5 million and $4.1 million, respectively, for the same periods in 2015. The effective tax rate (as a percentage of pre-tax earnings) was 33.8% and 36.7%, respectively, for each period of 2016 compared to 39.7% and 37.4%, respectively, for each period of 2015. The changes in the effective tax rates for the three and nine months ended September 30, 2016 were driven by the impact of non-deductible merger expenses and the increase in non-taxable income on municipal securities purchased throughout 2016.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis including operating losses and tax credit carryforwards. Net deferred tax assets (deferred tax assets net of deferred tax liabilities and valuation allowance) are reported in the consolidated balance sheet as a component of total assets.
Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all positive and negative evidence with more weight given to evidence that can be objectively verified. Each quarter, management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results.
Based on all evidence considered, as of September 30, 2016 and 2015, management concluded that it was more likely than not that the net deferred tax asset would be realized, except as outlined in the following discussion. At September 30, 2016, Atlantic Capital had a deferred tax asset valuation allowance totaling $9.0 million on certain net operating loss carryforwards due to the fact that certain tax attributes are subject to an annual limitation as a result of the acquisition of First Security, which constituted a change of ownership as defined under Internal Revenue Code Section 382. Management expects to generate higher levels of future taxable income and believes this will allow for full utilization of Atlantic Capital’s remaining net operating loss carryforwards within the statutory carryforward periods.
FINANCIAL CONDITION
Total assets at September 30, 2016 and December 31, 2015 were $2.76 billion and $2.64 billion, respectively. Average total assets for the third quarter of 2016 were $2.72 billion, compared to $2.25 billion in the fourth quarter of 2015. The balances acquired from First Security were included in Atlantic Capital’s average balances subsequent to the acquisition date.
Loans
At September 30, 2016, total loans increased $168.6 million, or 9%, to $2.05 billion compared to $1.89 billion at December 31, 2015, primarily due to an increase of $86.9 million in the mortgage warehouse as well as a $66.5 million increase in commercial and industrial loans. Details of loans are provided in Table 6.



47


Table 6 - Loans
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
% of Total Loans
 
 
December 31, 2015
 
% of Total Loans
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
 
 
 
 
 
 
 
 
 
 
TriNet loans held for sale
 
$
43,157

 
 
 
 
$
58,934

 
 
 
Branch loans held for sale
 

 
 
 
 
35,470

 
 
 
Other loans held for sale
 
3,443

 
 
 
 
1,061

 
 
 
Total loans held for sale
 
$
46,600

 
 
 
 
$
95,465

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
 
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
533,632

 
27

%
 
$
467,083

 
26

%
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
337,277

 
17

 
 
320,656

 
18

 
Non-owner occupied
 
526,006

 
26

 
 
525,757

 
29

 
Construction and land
 
213,336

 
11

 
 
166,358

 
9

 
Mortgage warehouse loans
 
171,251

 
9

 
 
84,350

 
5

 
Total commercial loans
 
1,781,502

 
89

 
 
1,564,204

 
87

 
 
 
 
 
 
 
 
 
 
 
 
Residential:
 
 
 
 
 
 
 
 
 
 
Residential mortgages
 
100,046

 
5

 
 
110,381

 
6

 
Home equity
 
78,952

 
4

 
 
80,738

 
5

 
Total residential loans
 
178,998

 
9

 
 
191,119

 
11

 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
30,453

 
2

 
 
30,451

 
2

 
Other
 
20,736

 
1

 
 
6,901

 

 
 
 
2,011,689

 
 
 
 
1,792,675

 
 
 
Less net deferred fees and other unearned income
 
(3,587
)
 
 
 
 
(2,006
)
 
 
 
Less allowance for loan losses
 
(18,534
)
 
 
 
 
(18,905
)
 
 
 
Loans held for investment, net
 
$
1,989,568

 
 
 
 
$
1,771,764

 
 
 

Nonperforming Assets
Nonperforming assets include nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned. Loans are considered to be past due when payment is not received from the borrower by the contractually specified due date. Interest accruals on loans are discontinued when interest or principal has been in default 90 days or more, unless the loan is both secured by collateral that is sufficient to repay the debt in full and the loan is in the process of collection. When a loan is placed on nonaccrual status, interest accrued and not paid in the current accounting period is reversed against current period income. Interest accrued and not paid in prior periods, if significant, is reversed against the allowance for loan losses.
Income on such loans is subsequently recognized on a cash basis as long as the future collection of principal is deemed probable or after all principal payments are received. Commercial loans are placed back on accrual status after sustained performance of timely and current principal and interest payments and it is probable that all remaining amounts due, both principal and interest, are fully collectible according to the terms of the loan agreement. Residential loans and consumer loans are generally placed back on accrual status when they are no longer past due.
Purchased Credit Impaired (“PCI”) loans accounted for under ASC 310-30 are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered as performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments. PCI loans were not classified as nonaccrual at September 30, 2016 as the carrying value of the respective loan or pool of loans cash flows were

48


considered estimable and collection was probable. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.
At September 30, 2016, Atlantic Capital’s nonperforming assets totaled $2.5 million, or 0.09% of assets, compared to $10.5 million, or 0.40% of assets, at December 31, 2015. The decrease was primarily due to the first quarter 2016 payoff and sale of $7.7 million in loans classified as nonperforming as of December 31, 2015.
Nonaccrual loans totaled $28,000 and $7.8 million as of September 30, 2016 and December 31, 2015, respectively. The decrease was primarily due to the payoff and sale of loans classified as nonaccrual at December 31, 2015. Loans past due 90 days and still accruing totaled $762,000 at September 30, 2016 compared to $777,000 at December 31, 2015. Table 7 provides details on nonperforming assets and other risk elements.

Table 7 - Nonperforming assets
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
 
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
Nonaccrual loans
 
$
28

 
$
657

 
$
409

 
$
7,772

 
$

 
Loans past due 90 days and still accruing
 
762

 
265

 
157

 
777

 

 
Total nonperforming loans* (NPLs)
 
790

 
922

 
566

 
8,549

 

 
Other real estate owned
 
1,727

 
951

 
1,760

 
1,982

 
27

 
Total nonperforming assets (NPAs)
 
$
2,517

 
$
1,873

 
$
2,326

 
$
10,531

 
$
27

 
NPLs as a percentage of total loans
 
0.04

 
0.05

%
0.02

%
0.45

%

%
NPAs as a percentage of total assets
 
0.09

 
0.07

 
0.08

 
0.40

 

 
*Nonperforming loans exclude those loans which are purchased credit-impaired loans
Troubled Debt Restructurings
 
TDRs are selectively made to provide relief to customers experiencing liquidity challenges or other circumstances that could affect their ability to meet their debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs are not accruing interest and are included as nonperforming assets within nonaccrual loans. TDRs which are accruing interest based on the restructured terms are considered performing. Table 8 summarizes TDRs.
Table 8 - Troubled Debt Restructurings
(Dollars in thousands)
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
Accruing TDRs
 
$
7,780

 
$
4,616

Nonaccruing TDRs
 

 
4,449

    Total TDRs
 
$
7,780

 
$
9,065


Potential Problem Loans
Management identifies and maintains a list of potential problem loans. These are loans that are internally risk graded special mention or below but which are not included in nonaccrual status and are not past due 90 days or more. A loan is added to the potential problem list when management becomes aware of information about possible credit problems of the borrower which raises serious doubts as to the ability of such borrower to comply with the current loan repayment terms. Potential problem loans totaled $39.1 million and $16.8 million, respectively, as of September 30, 2016 and December 31, 2015. As a number of potential problem loans are real estate secured, management closely tracks the current values of real estate collateral when assessing the collectability of these loans.


49


Allowance for Loan Losses
At September 30, 2016, the allowance for loan losses totaled $18.5 million, or 0.92% of loans, compared to $18.9 million, or 1.06% of loans, at December 31, 2015. The decrease in the allowance was due to the payoff and sale of two relationships during the first quarter of 2016 that required specific reserves totaling $1.6 million at December 31, 2015.
Net charge-offs during the third quarter of 2016 and 2015 were $306,000 and $(14,000), respectively. For the nine months ended September 30, 2016, net charge-offs totaled $2.0 million compared to $(29,000) for the nine months ended September 30, 2015. Table 9 provides details concerning the allowance for loan losses during the past five quarters.
Table 9 - Allowance for Loan Losses (ALL)
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
Third
 
Second
 
First
 
Fourth
 
Third
 
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Balance at beginning of period
$
18,377

 
$
17,608

 
$
18,905

 
$
11,862

 
$
11,985

 
Provision for loan losses
463

 
777

 
368

 
7,623

 
(137
)
 
Loans charged-off:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
(61
)
 
(5
)
 
(1,465
)
 

 

 
Commercial real estate
(226
)
 

 
(140
)
 
(500
)
 

 
Residential mortgages

 
(2
)
 

 

 

 
Home equity
(9
)
 
(23
)
 

 

 

 
Consumer
(60
)
 
(38
)
 
(146
)
 
(128
)
 

 
Other
(5
)
 

 

 

 

 
Total loans charged-off
(361
)
 
(68
)
 
(1,751
)
 
(628
)
 

 
Recoveries on loans previously charged‑off:
 
 
 
 
 
 
 
 
 
 
Construction and land
12

 

 
15

 

 
14

 
Commercial and industrial
2

 

 
2

 

 

 
Commercial real estate
20

 

 

 

 

 
Residential mortgages
5

 

 

 

 

 
Home equity
2

 

 

 

 

 
Consumer
12

 
60

 
69

 
48

 

 
Other
2

 

 

 

 

 
Total recoveries
55

 
60

 
86

 
48

 
14

 
Net charge-offs
$
(306
)
 
$
(8
)
 
$
(1,665
)
 
$
(580
)
 
$
14

 
Balance at period end
$
18,534

 
$
18,377

 
$
17,608

 
$
18,905

 
$
11,862

 
 
 
 
 
 
 
 
 
 
 
 
Net charge-offs (annualized) to average loans
0.06

%

%
0.35

%
0.15

%
(0.01
)
%
Allowance for loan losses to total loans
0.92

 
0.95

 
0.93

 
1.06

 
1.13

 

Investment Securities
Investment securities available-for-sale totaled $348.5 million at September 30, 2016, compared to $346.2 million at December 31, 2015. Available-for-sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. As of September 30, 2016, investment securities available-for-sale had a net unrealized gain of $2.7 million, compared to a net unrealized loss of $3.4 million as of December 31, 2015. Market changes in interest rates and credit spreads result in temporary unrealized losses as the market price of securities fluctuate. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed as of September 30, 2016.
Changes in the amount of Atlantic Capital’s investment securities portfolio result primarily from balance sheet trends including loans, deposit balances and short-term borrowings. When inflows arising from deposits and short-term borrowings exceed loan demand, Atlantic Capital invests excess funds in the securities portfolio or in short-term investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, Atlantic Capital allows interest-bearing balances with other banks

50


to decline and uses proceeds from maturing or sold securities to fund loan demand. Details of investment securities at September 30, 2016 and December 31, 2015 are provided in Table 10.

Table 10 - Investment Securities
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
 
Available for Sale Securities
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
U.S. Treasuries
 
$

 
$

 
$
4,952

 
$
4,922

 
U.S. Government agencies
 
21,806

 
22,017

 
65,373

 
64,852

 
U.S. states and political divisions
 
82,879

 
83,215

 
27,751

 
27,790

 
Trust preferred securities
 
4,720

 
4,393

 
4,732

 
4,275

 
Corporate debt securities
 
20,004

 
19,470

 
20,653

 
20,517

 
Residential mortgage-backed securities-agency
 
216,364

 
219,389

 
226,142

 
223,865

 
Total
 
$
345,773

 
$
348,484

 
$
349,603

 
$
346,221

 
The effective duration of Atlantic Capital’s investment securities at September 30, 2016 was 4.05 years.
Goodwill and Other Intangible Assets
Atlantic Capital’s core deposit intangible representing the value of the acquired deposit base, is an amortizing intangible asset that is required to be tested for impairment only when events or circumstances indicate that impairment may exist. There were no events or circumstances that led management to believe that any impairment existed at September 30, 2016 in Atlantic Capital’s other intangible assets.

Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. Atlantic Capital evaluates its goodwill annually, or more frequently if necessary, to determine if any impairment exists.

51


LIQUIDITY AND CAPITAL RESOURCES
Deposits
Table 11 - Deposits
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period End Deposits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
Linked Quarter Change
 
Year Over Year Change
 
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DDA
 
$
557,783

 
$
592,043

 
$
560,363

 
$
544,561

 
$
328,065

 
$
(34,260
)
 
$
229,718

NOW
 
260,531

 
231,091

 
215,176

 
232,868

 
135,350

 
29,440

 
125,181

Savings
 
29,658

 
30,839

 
29,788

 
28,922

 
321

 
(1,181
)
 
29,337

Money Market
 
974,072

 
913,094

 
862,120

 
875,441

 
550,879

 
60,978

 
423,193

Time
 
172,348

 
178,615

 
187,750

 
183,206

 
15,434

 
(6,267
)
 
156,914

Brokered
 
194,464

 
212,623

 
229,408

 
183,810

 
98,559

 
(18,159
)
 
95,905

Deposits to be assumed in branch sale
 

 

 
197,857

 
213,410

 

 

 

Total Deposits
 
$
2,188,856

 
$
2,158,305

 
$
2,282,462

 
$
2,262,218

 
$
1,128,608

 
$
30,551

 
$
1,060,248

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payments Clients
 
$
212,049

 
$
295,440

 
$
300,348

 
$
261,102

 
$
170,554

 
$
(83,391
)
 
$
41,495

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Deposits(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
Linked Quarter Change
 
Year Over Year Change
 
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DDA
 
$
555,008

 
$
538,422

 
$
554,547

 
$
486,860

 
$
325,474

 
$
16,586

 
$
229,534

NOW
 
282,701

 
272,556

 
302,376

 
254,821

 
154,776

 
10,145

 
127,925

Savings
 
30,692

 
35,090

 
45,571

 
30,024

 
425

 
(4,398
)
 
30,267

Money Market
 
923,435

 
865,447

 
769,369

 
730,582

 
506,064

 
57,988

 
417,371

Time
 
175,135

 
203,679

 
267,330

 
184,257

 
15,756

 
(28,544
)
 
159,379

Brokered
 
196,598

 
220,098

 
216,490

 
199,748

 
98,939

 
(23,500
)
 
97,659

Total Deposits
 
$
2,163,569

 
$
2,135,292

 
$
2,155,683

 
$
1,886,292

 
$
1,101,434

 
$
28,277

 
$
1,062,135

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payments Clients
 
$
184,895

 
$
176,474

 
$
155,860

 
$
198,539

 
$
140,346

 
$
8,421

 
$
44,549

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing deposits as a percentage of average deposits
 
25.7
%
 
25.2
%
 
25.7
%
 
25.8
%
 
29.6
%
 
 
 
 
Cost of deposits
 
0.36
%
 
0.35
%
 
0.31
%
 
0.28
%
 
0.27
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes average balances of deposits to be assumed in branch sale.
 
 
 
 
 
 
At September 30, 2016, total deposits were $2.19 billion, a decrease of $73.4 million, or 3%, since December 31, 2015. Interest-bearing checking increased $27.7 million, or 12%, and money markets increased $98.6 million, or 11%, from December 31, 2015 to September 30, 2016. The decrease in deposits was due to the divestiture of seven legacy First Security branches, which closed during the second quarter of 2016. Approximately $191.0 million in deposits were sold as part of the divestitures.

52


Short-Term Borrowings
At September 30, 2016, and December 31, 2015, securities sold under repurchase agreements with commercial checking customers totaled $0 and $11.9 million, respectively. There were no balances of federal funds purchased as of September 30, 2016 or December 31, 2015.
As a member of the Federal Home Loan Bank of Atlanta (“FHLB”), Atlantic Capital has the ability to acquire short and long-term advances through a blanket agreement secured by our unencumbered qualifying 1-4 family first mortgage loans and by pledging investment securities or individual, qualified loans, subject to approval of the FHLB. At September 30, 2016 and December 31, 2015, Atlantic Capital had FHLB advances of $170.0 million and $0, respectively. The balance of FHLB borrowings increased due to the sale of deposits in the branch divestitures.
Long-Term Debt
During the third quarter of 2015, Atlantic Capital issued $50.0 million in fixed-to-floating rate subordinated notes due in 2025, all of which was outstanding at September 30, 2016.
Liquidity risk management

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

Atlantic Capital aims to maintain a diverse mix of existing and potential liquidity sources to support the liquidity management function. At its core is a reliance on the customer deposit book, due to the low cost it offers. Other sources of liquidity include asset-based liquidity in the form of cash and unencumbered securities, as well as access to wholesale funding from external counterparties, primarily advances from the FHLB of Atlanta, Federal Funds lines and other borrowing facilities. Atlantic Capital aims to avoid funding concentrations by diversifying external secured and unsecured funding with respect to maturities, counterparties and nature. At September 30, 2016, Atlantic Capital expected to maintain sufficient on-balance sheet liquidity to meet its funding needs.
At September 30, 2016, Atlantic Capital had access to $350.0 million in unsecured borrowings and $510.8 million in secured borrowings through various sources. Atlantic Capital also has the ability to attract more retail deposits by offering aggressively priced rates.

Shareholders’ Equity and Capital Adequacy
Shareholders’ equity at September 30, 2016 was $308.5 million, an increase of $20.5 million, or 7%, from December 31, 2015. Accumulated other comprehensive income, which includes unrealized gains and losses on securities available-for-sale and unrealized gains and losses on derivatives qualifying as cash flow hedges, is excluded in the calculation of regulatory capital ratios. Excluding the change in the accumulated other comprehensive income, shareholders’ equity increased $16.3 million, or 6%, from December 31, 2015.
Atlantic Capital and the Bank are required to meet minimum capital requirements imposed by regulatory authorities. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on Atlantic Capital’s consolidated financial statements.


53



Table 12 - Capital Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 Consolidated
 
 Bank
 
 Regulatory Guidelines
 
 
 
 
 
 
 
 
 
 
 
Minimum
 
Well capitalized
 
 
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
 
Prior to January 1, 2015
 
Beginning January 1, 2015
 
Prior to January 1, 2015
 
Beginning January 1, 2015
 
Risk based ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
 
9.7

%
9.8

%
11.2

%
11.4

%
N/A

%
4.5

%
 N/A

%
6.5

%
Tier 1 Capital
 
9.7

 
9.8

 
11.2

 
11.4

 
4.0

 
6.0

 
6.0

 
8.0

 
Total capital
 
12.5

 
12.9

 
11.9

 
12.3

 
8.0

 
8.0

 
10.0

 
10.0

 
Leverage ratio
 
8.9

 
9.9

 
10.2

 
11.6

 
4.0

 
4.0

 
5.0

 
5.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
 
$
235,939

 
$
215.812

 
$
271,744

 
$
251.727

 
 
 
 
 
 
 
 
 
Tier 1 capital
 
235,939

 
215,812

 
271,744

 
251,727

 
 
 
 
 
 
 
 
 
Total capital
 
304,477

 
284,663

 
290,958

 
271,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk weighted assets
 
2,436,626

 
2,200,478

 
2,435,100

 
2,200,387

 
 
 
 
 
 
 
 
 
Quarterly average total assets for leverage ratio
 
2,648,172

 
2,174,918

 
2,652,224

 
2,175,049

 
 
 
 
 
 
 
 
 
Atlantic Capital continues to exceed minimum capital standards and the Bank remains “well-capitalized” under regulatory guidelines.
In July 2013, bank regulatory agencies approved the Basel III capital guidelines, which are aimed at strengthening existing capital requirements for bank holding companies through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and balance sheet exposure. Atlantic Capital and the Bank became subject to the requirements of Basel III effective January 1, 2015, subject to a transition period for several aspects of the rule.
Under the revised rules, Atlantic Capital’s common equity tier 1 ratio was 9.7% at September 30, 2016, exceeding the fully phased-in minimum of 7.0%, which includes the 2.5% minimum conservation buffer. Management continues to monitor Basel III developments and remains committed to managing Atlantic Capital’s capital levels in a prudent manner.

Table 13 - Tier 1 Common Equity Under Basel III
(dollars in thousands)
 
 
 
 
 
 
 
 
 
September 30, 2016
 
Tier 1 capital
 
$
235,939

 
Less: restricted core capital
 

 
Tier 1 common equity
 
$
235,939

 
 
 
 
 
Risk-adjusted assets
 
$
2,436,626

 
Tier 1 common equity ratio
 
9.7

%


54


Table 14 discloses the minimum and well-capitalized requirements for the transitional period beginning during 2016 and the fully phased-in requirements that becomes effective during 2019.

Table 14 - Basel III Capital Requirements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basel III minimum requirement 2016
 
Basel III well capitalized 2016
 
Minimum Capital plus capital conservation buffer 2019
 
Common equity tier I to risk weighted assets
 
 
4.5

%
6.5

%
7.0

%
Tier 1 capital to risk weighted assets
 
 
6.0

 
8.0

 
8.5

 
Total capital ratio to risk weighted assets
 
 
8.0

 
10.0

 
10.5

 
Leverage ratio
 
 
4.0

 
5.0

 
 N/A

 
Off-Balance Sheet Arrangements
Atlantic Capital makes contractual commitments to extend credit and issues standby letters of credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. In addition to commitments to extend credit, Atlantic Capital also issues standby letters of credit which are assurances to a third party that it will not suffer a loss if the customer fails to meet a contractual obligation to the third party. At September 30, 2016, Atlantic Capital had issued commitments to extend credit of approximately $646.5 million and standby letters of credit of approximately $13.9 million through various types of commercial lending arrangements.
Based on historical experience, many of the commitments and letters of credit will expire unfunded. Through its various sources of liquidity, Atlantic Capital believes it will be able to fund these obligations as they arise. Atlantic Capital evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on Atlantic Capital’s credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
Contractual Obligations
There have been no significant changes in Atlantic Capital’s contractual obligations at September 30, 2016 compared to December 31, 2015.
RISK MANAGEMENT
Effective risk management is critical to Atlantic Capital’s success. The Dodd-Frank Act requires that bank holding companies with total assets in excess of $10 billion establish an enterprise-wide risk committee consisting of members of its board of directors. Although Atlantic Capital does not have total assets in excess of $10 billion, the Bank’s board of directors has an Audit and Risk Committee that, among other responsibilities, provides oversight of enterprise-wide risk management activities. The Audit and Risk Committee reviews the Bank’s activities in identifying, measuring and mitigating existing and emerging risks (including credit, liquidity, interest-rate, compliance, operational, strategic and reputational risks). The committee monitors management’s execution of risk management practices in accordance with the risk appetite of the Bank, reviews supervisory examination reports together with management’s response to such examinations and discusses legal matters that may have a material impact on the financial statements or Atlantic Capital’s compliance policies. With guidance from and oversight by the Audit and Risk Committee, management continually refines and enhances its risk management policies and procedures to maintain effective risk management programs and processes.
Credit risk management
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Atlantic Capital’s independent credit review function conducts risk reviews and analyses of loans to help assure compliance with credit policies and to monitor asset quality trends. The risk reviews include portfolio analysis by geographic location, industry, collateral type and product. Atlantic Capital strives to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain adequate allowances for loan losses that are inherent in the loan portfolio.

55


Market Risk
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. Atlantic Capital’s market risk arises primarily from interest rate risk inherent in Atlantic Capital’s lending and deposit-taking activities. The structure of Atlantic Capital’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. Atlantic Capital does not maintain a trading account nor is Atlantic Capital subject to currency exchange risk or commodity price risk.
Interest rate risk management
Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes. Market interest rates also have an impact on the interest rate and repricing characteristics of loans that are originated as well as the rate characteristics of interest-bearing liabilities.
Atlantic Capital assesses interest rate risk by forecasting net interest income under various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. Atlantic Capital’s rate shock simulation, as of September 30, 2016, indicates that, over a 12-month period, net interest income is estimated to increase by 12.84% with rates rising 200-basis points. The increase in net interest income is primarily due to the short-term repricing characteristics of the loan portfolio, combined with a favorable funding mix. Atlantic Capital’s loan portfolio consists mainly of floating rate loans. Atlantic Capital’s core deposits are likely to allow Atlantic Capital to lag short term interbank rate indices when pricing deposits. Transaction accounts comprise a significant amount of Atlantic Capital’s total deposits.
Table 15 provides the impact on net interest income resulting from various interest rate scenarios as of September 30, 2016 and December 31, 2015.
Table 15 - Net Interest Income Sensitivity Simulation Analysis
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated increase in net interest income
Change in interest rate (basis point)
 
September 30, 2016
 
December 31, 2015
+100
 
5.89

%
 
 
6.52

%
 
+200
 
12.84

 
 
 
14.00

 
 
+300
 
20.37

 
 
 
21.99

 
 
Atlantic Capital also utilizes the market value of equity (MVE) as a tool in measuring and managing interest rate risk. Long-term interest rate risk exposure is measured using the MVE sensitivity analysis to study the impact of long-term cash flows on capital. As of September 30, 2016, the MVE calculated with a 200-basis point shock up in rates decreased by 0.36% from the base case MVE value. Table 16 presents the MVE profile as of September 30, 2016 and December 31, 2015.
Table 16 - Market Value of Equity Modeling Analysis
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated % change in MVE
Change in interest rate (basis point)
 
September 30, 2016
 
December 31, 2015
+100
 
(0.62
)
%
 
 
2.57

%
 
+200
 
(0.36
)
 
 
 
2.29

 
 
+300
 
(0.83
)
 
 
 
2.47

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

56



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

ITEM 4.
CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2016, the Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2016.
No changes were made to the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

57


PART II - OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS

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

ITEM 1A.
RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the Company’s Annual Report on Form 10-K for the period ended December 31, 2015, under Part I, Item 1A “Risk Factors,” because these risk factors may affect the operations and financial results of the Company. Our evaluation of our risk factors has not changed materially since those discussed in the Annual Report. The risks described in the Annual Report are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results.

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

None.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5.
OTHER INFORMATION

None.
ITEM 6.
EXHIBITS

The exhibits listed in the accompanying Exhibit Index are filed as part of this report.

 


58


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
ATLANTIC CAPITAL BANCSHARES, INC.
 
 
 
/s/ Douglas L. Williams
 
Douglas L. Williams
 
Chief Executive Officer (Principal Executive Officer)
 
 
 
 
 
/s/ Patrick T. Oakes
 
Patrick T. Oakes
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
 
 
 
Date: November 10, 2016
 
 
 
 


59



EXHIBIT INDEX

3.1
Amended and Restated Articles of Incorporation of Atlantic Capital Bancshares, Inc.*
3.2
Amended and Restated Bylaws of Atlantic Capital Bancshares, Inc.*
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015; (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015; (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015; (iv) the Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2016 and 2015; (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015; and (vi) the Notes to the Unaudited Consolidated Financial Statements
* Incorporated by reference to Atlantic Capital’s Registration Statement on Form S-4 (file no. 333-204855), initially filed with the Securities and Exchange Commission on June 10, 2015.


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