Atlantic Capital Bancshares, Inc.
Q4 2020 Earnings Call Transcript

Published: 22 Jan 2021

[Operator:]

Good day, and welcome to the Atlantic Capital Bank Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Gray Fleming, Chief Risk Officer. Please go ahead sir.

[Gray Fleming:]

Thank you, Chuck, and thank you all for joining our fourth quarter 2020 earnings call. With me today to discuss our results are Doug Williams, Chief Executive Officer; and Patrick Oakes, Chief Financial Officer. As a reminder, the Atlantic Capital earnings release and investor presentation are available in the Investor Relations section of our website.

[Doug Williams:]

Thank you, Gray, and good afternoon. I believe you've seen our results now, our earnings release and an investor presentation was filed on Form 8-K last night. And I believe you have access to those materials now. Before I get started this afternoon, I'd like to thank my partners and teammates at Atlantic Capital. They are people of extraordinary talent and high character who built an attractive purpose and performance driven culture. Our purpose is to fuel client prosperity, and I believe we did that extraordinarily well in 2020. What we'll do this afternoon is I'll make some overview comments about the year and then I ask Pat Oakes to review the financials in more detail, Gray Fleming will then give you a summary of the credit environment and I'll return with a brief comment about our outlook and then we'll be happy to take whatever questions you may have. If you turn to the investor presentation and Page 3, this is an overview of the quarter and the year. With the fourth quarter, we produced four quarters of solid operating performance and strong year-over-year growth and pre-tax pre-incentive net revenue during the pandemic environment. We grew loans excluding PPP repayments and forgiveness 21% annualized on a linked quarter basis and 10% year-over-year. We reported another quarter of strong growth in core relationship deposits and service charge income. Deposit costs were reduced 3 basis points to 16 basis points in the fourth quarter. And we've repurchased 823,000 shares totaling $11.5 million at an average price of $13.98. The business environment during the quarter was stable to improving. Loan deferrals remained below 1% of total loans, reflecting resilient borrowers with optimism about the future. Our loan pipelines recovered strongly during the fourth quarter as these clients made plans for new investment. Our treasury management and payment processing business grew at a strong pace during the quarter. We processed $40 million of PPP loan forgiveness applications during the fourth quarter and subsequent to year end really in the last few days now. We began accepting applications for the second round of PPP loans. The credit environment generally was stable and improving during the quarter. Overall credit quality remains steady with limited charge-offs and low nonaccrual levels. The allowance for credit losses remained robust at 155 basis points of loans held for investment and 1.7% of loans excluding PPP loans.

[Patrick Oakes:]

Thanks, Doug. So, I'm on Slide 7. And as Doug mentioned earlier, we had solid growth in income over the last few quarters, this included strong growth in revenue from both net interest income and noninterest income. Net interest income benefited from good growth in earning assets, which was offset by our lower NIM, which I'll go into more detail later. And non-interest income included strong growth in service charge income from both our payments and fintech businesses along with stronger SBA income. Expenses were down nicely and I'll go into more detail later on that. On Slide 8, as you can see, there was a fairly big drop in our NIM of 23 basis points. We did see some pressure on loan yields, but the biggest impact was like Doug mentioned earlier, was from the strong deposit growth and growth in cash balances, which impacted our NIM by about 30 basis points. If you exclude the 10 basis point benefit we got from PPP loans during the quarter and excess cash in the quarter. Our core NIM was closer to a 3.11% for the fourth quarter. I would expect this excess liquidity will continue to cause some volatility in our NIM over the next few quarters. So I would focus on growth in net interest income rather than NIM as we continue to grow earning assets over the next several quarters. On Slide 9, you'll see that the strong growth in deposits pushed down our loan-to-deposit ratio to 77% in the fourth quarter and drove a $300 million increase in cash at the Fed. During the first quarter, some of these excess deposits should leave the bank and we also expect continued growth in core deposits. So I would expect our loan-to-deposit ratio to trend up and cash to trend down as we move through 2021.

[Gray Fleming:]

Thanks Pat. I'll touch on a few slides from the credit perspective, starting on Page 13. Doug has really covered most of this, charge-offs and non-accruals remained low in the fourth quarter. Only five basis points of annualized charge-offs for the quarter. Our criticized loan levels were basically stable this quarter. You can see in the chart on the bottom right that within that criticized category we had a little bit of migration into classified that just reflect some lingering COVID-driven softness with a few borrowers. And we don't see at this point those heading towards non-accrual. On page – on the next page, this just kind of gives our CECL and allowance perspective. You can see that the allowance as a percentage of loans came down a little bit this quarter due to some improvement in our economic forecast that we use, but tempered somewhat by the remaining uncertainty in our outlook. We did have a small provision and an increase in the reserve dollars this quarter driven by loan growth in the quarter.

[Doug Williams:]

Thank you, Gray. In terms of talking about the outlook, I just like to highlight Pat Oakes’ comment when talking about non-interest expense. He mentioned that we expect non-interest expense to grow in the mid to high single-digit. Percentage range in 2021, he mentioned several factors. The most prominent those are investment in new business and growing new businesses and also in new hiring. And we expect a double-digit percentage increase in headcount during the year. This is really an opportunistic play on our part because we see opportunities to grow revenue exceeding that level of expense growth. If you look back at pages 5 and 6, you see that we have now a very spurn five-year track record of double-digit percentage growth in loans and deposits. We've also continued to grow all of our businesses during the pandemic because our people were executed at a high level. And we have healthy pipelines for new business. We have an attractive culture. And I have a lot of confidence, our ability to continue to execute at that level. We find that our clients want to do more business with us and our prospects want to do business with Atlantic Capital.

[Operator:]

We will now begin the question-and-answer session. And our first question will come from Jennifer Demba with Truist Securities. Please go ahead.

[Jennifer Demba:]

Thank you. Good afternoon.

[Doug Williams:]

Good afternoon, Jennifer.

[Patrick Oakes:]

Hello.

[Jennifer Demba:]

So the loan growth that you had this quarter quite strong and certainly stand out for the industry, you said in the release, it’s pretty broad based, but can you give us some more color behind what kind of opportunities you’re seeing here?

[Doug Williams:]

Well, the opportunities are broad based. If we look at our pipelines and our various businesses, they’re strong and the commercial arena, they’re strong in commercial real estate. And really we saw a meaningful pickup in activity and the pipelines in those categories during the fourth quarter. If you look at the whole of 2020, a substantial portion of that growth was really driven by the self lender portfolio, the CD-secured loans. But over time, over the course of the year, we really saw a shift as we sort of got closer to our target there with respect to outstandings and saw really rejuvenated demand and opportunity in the commercial segments. And that’s what we expect in 2021. We think we will see good opportunities in most commercial segments.

[Jennifer Demba:]

So you think you can get NII growth even with the margin pressure, because your loan growth going to be pretty healthy this year.

[Doug Williams:]

We think so.

[Patrick Oakes:]

Yes.

[Jennifer Demba:]

And Pat, what kind of margin pressure do you think you’ll experience as we go through the year? And what are you seeing in terms of lending competition right now?

[Patrick Oakes:]

I’ll start in the NIM and then Doug, you can jump in on loan competition.

[Doug Williams:]

Yes.

[Patrick Oakes:]

Excluding the impact of excess liquidity, which could create some volatility and PPP, which also create some volatility, we may see a little bit more pressure on loan yields. We did see a little bit in the fourth quarter, but hopefully, we’re getting closer to the bottom of that. So the core new margin could trend down a little bit from here and hopefully as we get closer to end of the year, we'll start to stabilize. The core was on a 311. Could you see a decrease fewer basis points per quarter, possibly.

[Doug Williams:]

Yes. Jennifer, I’d just say, on loan yields, we've seen over the course of 2020, we saw a lot of repricing of fixed rate loans. The floating rate loans, which are now about 50% of our mix, reprice instantly, when rates are reduced. But what we saw over the course of 2020 was a lot of repricing the fixed rate loans. I think we're really through that. So I think loan yields should be comparatively stable over the course of 2021. With respect to competition, the competitive environment is sort of like, it always has been, we really haven't seen any new competitors and our principal competition continues to be the large banks.

[Jennifer Demba:]

Thanks so much.

[Patrick Oakes:]

And I will know Jennifer that there is probably some little bit of room still left to cut deposit costs, not significant, but I think you will continue to see that trend down slightly over the next few quarters.

[Jennifer Demba:]

Thank you.

[Operator:]

And our next question will come from Michael Rose with Raymond James. Please go ahead.

[Michael Rose:]

Hey, good afternoon, everyone. Hope, you're doing well. Just a follow-up on the loan growth question, how much of the – maybe you can size this for us, but how much of it is kind of draw downs on lines or things like that versus actual new activity, obviously, some of the growth wasn't CRE. Was that like funding up of construction projects, was that a new business. Just if you can give us some color around kind of organic new customers versus existing customer utilization. Thanks.

[Doug Williams:]

Yes. In the C&I category, it was more existing clients, not draws under lines of credit. We've actually usage has been pretty stable throughout the pandemic. We did see a modest rise in the first and second quarters, but those lines were paid down to more normal levels. And we really haven't seen a significant increase in line usage, but we have been financing, new projects and M&A activity on behalf of our clients. There also been some new clients that we've added in our commercial area. Commercial real estate had a very strong year, particularly the second half of the year, both in terms of growing loan outstandings and growing new commitments. I think we added something like in that area, we added something like $50 million of new commitments, unfunded commitments in the fourth quarter. So part of our optimism about 2021, as we do see those construction commitments being drawn on over the course of 2021. And we think the pipelines in the commercial area continued to be quite strong reflecting the resiliency of our clients and our prospects and their optimism about the future and their willingness to invest in that future.

[Michael Rose:]

Okay. And then on the hiring front, I mean, that does seem like a little bit of a change from the past couple of quarters, and now it seems like you guys are fully in growth mode. I think you said Doug double-digit number of hires. Are those kind of like in the pipeline at this point and you'll look to add as the year goes on or is that kind of the plan as you expected for the year?

[Doug Williams:]

I would characterize it, Michael, is more opportunistic. We do – we are constantly engaged in dialogue with perspective new hires and we’re active in the market. We see a lot of interest, but we put those numbers in the budget. So we feel free to talk and basically add those people. I don’t know if we’ll add that many people or we’ll add fewer people, but I think we will add people over the course of the year. And a lot of those will be new producing bankers, but also support people. We’re building capacity because of the opportunities we see in front of us to turn new business and grow revenue.

[Michael Rose:]

No, I appreciate that. That makes complete sense. One thing I noticed and just switching gears to deposits. In the press release, you mentioned that you had the seasonal inflow obviously, but you also mentioned a fintech relationship and then also the treasury management side. I mean, can you kind of parse out, how much was kind of the seasonal inflow versus the treasury versus the fintech relationship? And how sticky particularly those latter two might be as we move into the next couple of quarters? It seems like the deposits you’re expecting will stick around a little bit.

[Doug Williams:]

Yes. I’ll let Pat Oakes talk about the detail there. I’ll give you a little bit more of an overview. I don’t have that breakdown in front of me. But it was a combination. The deposit growth is really combination of existing clients with more liquidity. We do business with a lot of successful enterprises and a lot of wealthy people. And they have built liquidity over the course of 2020, and they feel confident in placing that liquidity with us. And there is a seasonal character to that as we saw in 2019 and in prior years. But we also have a very strong level of core relationship deposit growth that is reflective of growth in those businesses and also the acquisition that – the new business development activity that we have. And if you go back and look at those Pages 6 and 7 in our deck, well, Page 7 in particular, which is about deposits, you see a very attractive five-year track record of total deposit growth and demand deposit growth. And everything we’re seeing in terms of new business acquisition, new business development suggests that we can sustain those kinds of trends. Those would be my comments.

[Patrick Oakes:]

Yes. I’ll add probably a little more color on the fourth quarters. So typically we see a run up seasonal deposits at the end of the year. This time that money came in earlier. And in fact, a lot of it’s still around. So it’s going to inflate deposit balances in the first quarter. Now we think, like I mentioned earlier that some of that will start to decrease as we go through the first quarter and into the second quarter it’s just hard to predict the timing on this. Like Doug said, we have good core growth. Some of our customers have a lot more liquidity than they did previously. And along with the seasonal liquidity, it’s just hard. But it’s all positive. And I think some of it will leave, but I think a lot of this will stay for at least the several – next several quarters.

[Doug Williams:]

Yes. I think it’s really reflective of a franchise that we have built and are building. We have a strong treasury management services capability, and we’ve really used that to build the liability side of the balance sheet. Our clients have a lot of confidence in our execution. They have a lot of confidence in our fortress balance sheet and they see us as a long-term player and these are long-term stick to the ribs type relationships with recurring income streams attached to them. So it’s really indicative of the strength of the business that we've built and we’re building.

[Michael Rose:]

Yes, that's why it definitely tells a story, and I think you guys are doing a great job. Maybe just one final one for me, you got a little bit left on the repurchase to go, obviously, raise some debt to help fund it. Capital levels are under pressure this quarter because of the balance sheet growth. But stocks still are one intangible, could we look to see you use the remaining and potentially re-up on the buyback? Thanks.

[Doug Williams:]

Yes. Michael, I think, we do have – still have a good bit of excess capital above well-capitalized standards. We want to keep that cushion above well-capitalized standards really for policy reasons. But we do have excess capital above those levels. We think we're going to be a strong generator of capital going forward. And so we do anticipate completing that $25 million authorization. And then we'll determine what capital management actions we want to take for the remainder of 2021. And the same arrays of opportunities are available to us as they always have been. We have – we're in a great position with respect to capital. We have a lot of flexibility to deploy that capital for shareholders advantage. And of course, that includes reinvestment in our existing business, a new share repurchase program and the possibility of a regular dividends as well. So all those things are in front of us, we'll come back after the first quarter and talk to our Board about those options and we'll be communicating accordingly.

[Michael Rose:]

Perfect. I appreciate all the color. Thank you.

[Operator:]

Our next question will come from Steve Comery with G. Research. Please go ahead.

[Steve Comery:]

Good afternoon. Pat, I wanted to go back to one of your last couple of comments about sort of some of these excess deposits leaving. You expect a lot to say, kind of wonder if it could like pick your brain about opportunities for deploying that excess liquidity, if a lot of it does stay and sort of how you guys think about using that in securities book versus waiting for addition demand.

[Patrick Oakes:]

Yes. So I think we're going to be patient to deploy a lot of it to make sure we understand how much is sticky and how much is not. So, but we are purchasing securities, we purchased quite a bit in the fourth quarter and we'll be active again in the first quarter putting some of that to use. We're hoping loan growth will take care of some of that over time also. And then we'll look at other alternatives and we also are trying to lower deposit costs and try to look at our deposit base to make sure we have a true core to base. We don't have much in wholesale funding with this bank, almost nothing. So there's not much we can do about chasing off deposits. So the focus will be trying to find good earning assets that we can put on the books definitely.

[Steve Comery:]

Okay. Very good.

[Patrick Oakes:]

Doug, I don’t know if you have anything to add around that?

[Doug Williams:]

No. I think, as I mentioned, we do have an optimistic perspective with respect to loan growth. We've had a very good five-year track record of loan growth, particularly in the commercial segments. And I think the next couple of quarters here have a fair amount of uncertainty because of the pandemic. But as we move through the vaccination process and so forth, I think the economy will – the economic recovery will solidify and accelerate and that’s going to suggest that the loan demand will improve as well. Having said that, we have, I think, very healthy pipelines at this point of the year. And so I think the opportunity to replicate and in fact, improve on 2020s loan growth record in 2021 is very good. Again, the mix of that loan growth, I think will change. It will be more in the commercial segments as opposed to this particular consumer program that we had a lot of growth in during 2020.

[Steve Comery:]

Sure, sure. Thanks. Yes, maybe actually going off of that point next. I mean, I get that the lending opportunities have been broad-based, wondering if you have any sort of commentary as far as like industry level opportunities in the commercial lending book. I know in the prepared comments, you guys mentioned opportunities opening up in QSR. Is there any other specific area of industry that’s improving or seeing strong demand?

[Doug Williams:]

I think, it’s really broad based, Steve. Gray did mentioned the QSRs and that was early in the pandemic identified as a particular area of concern, but our – the performance of our QSR clients over the course of 2020 was quite strong and we saw very favorable year-over-year revenue comparisons. And as we look at that business in particular we’re seeing straight building on straight, and we’re seeing a lot of those clients looking to expand their businesses and borrowing money to do that. And so we’re – and we have a lot of confidence in our team too. We think we’ve got some very good bankers in that space and who are also very good credit people. And we think there are going to be some good opportunities to continue to expand that particular part of our business. So that’s really true across the board. Our Atlanta clients are resilient. They are showing their confidence in the future with new investments and acquisitions, and we’re able to finance those for them. So really in every aspect of our business, we’re seeing optimistic borrowers and clients generally who are – maybe our borrowers, but who were willing to invest in the future and that really seems to be driving opportunity for us.

[Steve Comery:]

Okay. And then maybe a question on credit, I appreciate all the detail on the deferrals in the hotel book, I was wondering, if you guys have saw any sort of credit enhancements from sponsors of the hotel portfolio, and if you’ve been able to receive those?

[Gray Fleming:]

So Steve, this is Gray. We have in the hotel book really just, kind of been focusing on who the sponsors are and what sort of capacity for either patients or additional capital, or both. And so we haven’t actually had many deferral requests after the initial deferrals in the hotel book and have largely taken our comfort either where we did grant on initial deferral, or now that they don’t need deferrals with just the strength of those sponsors. So, we haven’t really looked for additional credit enhancement beyond kind of seeing what they have available to them and kind of how their portfolio as a whole is looking. And so even in a few cases where the property might be in a location that was hit a little bit harder than average generally speaking, we’ve on the CRE side, been working with developers that had other properties that might be doing really well. And so, overall, cash flows have held up nicely. And we haven't had to look at either active sale discussions or additional credit enhancement.

[Steve Comery:]

Okay. Okay. Very good. Maybe one final one for me, maybe for Pat. Just wondering about the tax rate expectations for 2021.

[Patrick Oakes:]

I wouldn't – assuming we make more money and pre-tax income goes up. The tax rate could increase slightly from where it was in 2020, but I wouldn't expect anything significant than what we saw in 2020.

[Steve Comery:]

Okay, okay. Fair enough. Thank you. That's all I have.

[Operator:]

Our next question will come from Stephen Scouten with Piper Sandler. Please go ahead.

[Stephen Scouten:]

Hey, guys. Good afternoon.

[Doug Williams:]

Hi, Stephen.

[Stephen Scouten:]

I wanted to just tie up a couple of comments you made around some of the guidance. First, on the expenses when you talk about the mid to high single digit kind of growth for next year, are you talking about full year expenses or kind of this $13.5 million run rate we had in the fourth quarter because obviously it took a little bit of a jump here already, yes.

[Patrick Oakes:]

I am talking full year 2020 versus full year 2021.

[Stephen Scouten:]

Got it. Okay. Helpful.

[Patrick Oakes:]

Now obviously in first quarter – just to be clear, first quarter expenses are typically higher for us with obviously benefits expense being higher on payroll taxes. So you have that piece of it and the first quarter will also be higher from some of the PPP processing that will occur in the first quarter. So there will be a little bit inflated there, but then obviously for the full year the loss will be unfair.

[Stephen Scouten:]

Okay, great. And anything – nothing unusual in the upticks in some of these categories in fourth quarter, or just kind of the start with some of these incremental investments you guys have spoken to.

[Patrick Oakes:]

So in the fourth quarter, expenses were, you didn't really see an uptick in much, right. In fact, you saw a decrease in areas like salary and benefits from like I talked about some of the more salary deferral expense since we had bigger loan production and then other expenses were down, but everything else was just noise. So, no, you didn't see a lot of that. You'll start to see that next year.

[Stephen Scouten:]

Yes, okay. Yes, I guess, when I was looking at like core other expense stripping out some of the – like the losses from last quarter, it looked like kind of core expenses were up a little bit, but I guess it all depends on what you're thinking about as the base, yes.

[Patrick Oakes:]

Right.

[Stephen Scouten:]

Okay. And then when you talk about – Doug, you talked about the percentage headcount increase kind of double digit percent increase in headcount. What kind of base are we talking about working off of? Like, I mean, are you saying revenue producers?

[Doug Williams:]

Yes.

[Stephen Scouten:]

And if so, how many are we starting with? And what could that really look like?

[Doug Williams:]

Yes. Stephen, I'm reluctant to put a particular number on all that because this is opportunistic. We don't have to do this. We see opportunities that suggest that these investments would be prudent and appropriate in terms of creating that kind of revenue growth later this year and into 2022, but having said that, we have a little over 200 people in the company right now. We could potentially increase that headcount by double digit percentage. And if we do that, I would think it would be roughly equally balanced between producing positions and support positions.

[Stephen Scouten:]

Got it. Okay, helpful. Thank you. And then I know this question has kind of been asked a couple of times, but I'm going to take one shot at it. I mean, when you look at these deposit inflows, I mean last year was around $200 million, $250 million that came back out in the first quarter. But this quarter, the increase was almost $700 million. So is the seasonal flow similar to what it was last year, and would we expect something in the $200 million range to come back out or are we talking more like $400 million or $500 million that could come back out, because it's obviously pretty sizeable relative to the balance sheet.

[Patrick Oakes:]

Right. So you got two components there, right. The period end increase was $700 million, but the average increase was $400 million, right. So that kind of gives you a rough idea of the additional $300 million that came in at, towards the end, right. That would most likely leave at some point. Now a lot of it hasn't left yet, but when will it leave, I’d assume in this first quarter, but there's such volatility with a lot of these numbers, it's hard to predict what happens besides that.

[Stephen Scouten:]

Sure, sure. Okay. So, that's very helpful. And then maybe just last question for me, sort of around credit. I mean, you noted that credit is great. No real issues that I can see, obviously net charge-offs are de-minimis to 11 basis points, but then you also kind of noted that still maintaining reserves where we've seen some other banks, maybe my personal opinion release reserves pretty critically. So I'm just kind of wondering what you're seeing as you look towards potential loss content in 2021, just balancing what you said was some conservatism with what looks like a pretty good credit picture.

[Doug Williams:]

Yes. Gray, why don't you take that? And then I might have a comment on that as well.

[Gray Fleming:]

So, Steven, I guess first of all, I'm really pleased to hear across the industry that the questions now are about reserve releases instead of reserve builds. And so I think that's hopefully a good sign. But like, I think others have said, it's really hard to predict along those lines. We haven't seen losses as you pointed out. We still think that there's at least some stimulus driven propping up of some borrowers particularly in the small business segment that, the question now which you know good thing, we have a light at the end of the tunnel with the vaccine being rolled out. And so the question now is does stimulus fully bridge the gap for those or do some of them just not make it. And so the charge off picture is just really hard to predict. If the economy doesn't worsen and in fact starts improving in the spring or summer, we would expect our reserve percentages to continue to trend down. But if those charge offs, that really will along with expected loan growth that will really determine kind of the size of the dollars and so we’ve still got, while forecasts in our models have improved a little bit over the last couple of quarters. We've still got a decent bit of uncertainty built into our outlook and our CECL model. And to your point, just to have not quite felt like we rounded the corner in terms of that uncertainty to start changing that materially.

[Doug Williams:]

Steven, the only thing I would add to that is that unlike some banks, who had reserve release in the fourth quarter we really didn't think that was appropriate for us because of the level of uncertainty particularly through the first part of this year. And I think if you see reserve released from Atlantic Capital will be that an indication of our conviction that uncertainty has greatly diminished and things were really solidly on demand with respect to the economic recovery.

[Stephen Scouten:]

Yes. Yes. That's great. I agree with that theory personally, for whatever that's worth. But thank you guys for all the color. I appreciate it.

[Doug Williams:]

Yes, sir.

[Operator:]

Our next question will come from Christopher Marinac with JMS. Please go ahead.

[Christopher Marinac:]

Hey, good afternoon. Thanks for hosting the call this afternoon. I just want to go back to Gray and some of the credit points you've been making. It doesn't seem like there's anything new on the risk grade ratings, or simply moving the existing items around from Q3 and Q4. Do you see any potential for new inflows coming in these next couple of quarters? Just curious on your outlook for new problems to arise?

[Gray Fleming:]

Not really, Chris. I mean, we're kind of, like I said, in this just working with each individual borrower and pandemic or no, there's going to be some borrowers that hit a glitch here and there and others that improve or pay off. And while the criticized numbers were flat, there's always movement up and down. I think that we've got classically trained credit folks and the impetus of those classically trained credit folks is to be quick to downgrade and slow to upgrade. And we've tried to emphasize with folks that we need to be, even on the upgrade side a little bit more real time, but still there's kind of an inclination that's hard to break and credit folks of, okay, as soon as I hear about a potential issue, I’ll downgrade. And I want to see on a piece of paper, evidence of improvement before I upgrade. And so there's naturally a little bit more lag on that end. I think in our credit folks mind, and I don't want to push too hard on changing that, because it's the conservative and right way. But yes, we've got a few a decent number of payoffs or refinances, and some of those that were originally scheduled for fourth quarter have been pushed into first quarter just for various reasons. And so we're still looking at some potential upgrades and payoffs that we think at least some of those will happen. So certainly can't say there won't be any more downgrades, but we're really just seeing this more on a case by case basis. And maybe one example Chris from the fourth quarter is, we had a hotel loan where good sponsorship, not really very concerned longer term, great location but given what they were expecting for the winter, they asked us for an additional deferral. And as we kind of thought about needing to do an additional deferral longer than some of our others. We just felt like that deserved to be a substandard grade in terms of an identified weakness. And so that's one that moved from special mentioned to substandard, but again, good news is we feel very comfortable long term with that in terms of location and sponsor. So those kinds of movements that we're now seeing more in terms of fine tuning our grades, then bigger trends within industries.

[Christopher Marinac:]

Great. That's helpful background. Thanks for sharing all of that. And then Doug, just a quick question, I think pre-pandemic, you had talked a little bit about sort of your kind of policies on the FinTech clients. And it just as a reminder, you're not lending to these folks. They're really kind of separate and distinct depositers with a separate relationship and then you have other?

[Doug Williams:]

Their processing relationships Chris, and so what we're doing is we're offering them our treasury management services and that generates substantial deposit flows, of course but also a lot of service charge income. And if you go back to that Page 7 in our presentation, you see those – actually Page 22 in the presentation in the appendix is probably the best way to look on, best information on that payments and fintech business. And you see very substantial growth trends and deposits and fee income and processing volumes as well.

[Christopher Marinac:]

Right. But again, its part of your risk metrics is to not really lend to them, with again...

[Doug Williams:]

Correct. Correct. Yes.

[Christopher Marinac:]

With the policy. Got it.

[Doug Williams:]

Great.

[Christopher Marinac:]

Thanks, Doug. Just want to reiterate that point, appreciate the information today.

[Doug Williams:]

Thank you.

[Operator:]

Our next question will come from Ross Haberman with RLH Investments. Please go ahead.

[Ross Haberman:]

How are you guys? Nice quarter? I just had two very brief questions. Any issues in the shared national credit book of investments?

[Gray Fleming:]

Hey Ross, this is Gray. No, not really. We have a couple of special mentions in there that those kind of track with OCC, shared national credit reviews and this most recent review it was in the third quarter. I think the problem with those in the time of pandemic is there are a good bit of lag? And so they were looking, I think at first quarter and second quarter financials where we had already gotten to the point of having additional financial. So we have a couple of special mentions in that portfolio, but we're not concerned about either of those and really everything else is holding up nicely.

[Ross Haberman:]

The thought of that $200 million there, as you grow direct loans, you'll liquidate that stuff over time. Is that sort of the strategy?

[Gray Fleming:]

Pat, you want to take that one?

[Patrick Oakes:]

Yes. No, I wouldn't say that. We've been in the regional corporate banking business really since inception and I once ran the corporate banking business at Wacovia and so we have, and we have other people that have worked in the large corporate arena as well. So we have a lot of comfort with that type of credit, and we've always wanted it to be a part of our mix. It is generally a positive quality weight in the portfolio. And it's for several years now, it's been about 10% of the loan portfolio overall, and we're comfortable with that level, and we would anticipate sustaining it at that level. There's a lot of transaction churn in that book of business. These loans are refinanced in the capital markets. These companies come to the fore with new financing requests and we also have new clients in that mix as well. There's also a lot of amendments and waivers and that kind of stuff. So it's a very active portfolio, but, and some years it will show a little more growth and other years will decline in terms of outstandings. But we think it will consistently – it has been consistently and will continue to be consistently, probably around 10% of our loans overall.

[Ross Haberman:]

And just one final question. I was looking at the notes, the details on the hotel portfolio. I think you said $26 million in special mention and $10 million in classified; are most of those or all of those taking the second row around of PPP now, and/or I've heard in a number of other calls this week, a number of banks are depending on the severity of the occupancy beginning to break up some of these more troubled loans to A notes and B notes. Have you – are you at that stage with any of these credits?

[Gray Fleming:]

So I would say Ross, we're not at that stage on any of these credits. We're actually feeling pretty good about the book, which is about half of it is in our commercial real estate group and that's where we have some really strong sponsors that we think have, especially at this point plenty of capital and patience to get through to spring and summer, and we'll hope, you'll see a rebound and on the SBA side we've got some pretty good operators there, they don't have as much by definition access to capital, but they've been able to do a lot of good things with expenses. And to your first question, yes, we think a number of these, if not most of them will be able to take advantage of second draw PPP loans on the SBA side the ones that are 7A loans will get payments made by the SBA starting again in February and for hospitality unless the funds run out that gets them eight months of loan payments from the SBA, the ones that 504 loans, they get a similar type of assistance and subsidy payment on that second-lien debenture piece. So hotels, I think is going to end up being a great example of this final last mile, if you’re well bridge to – when we start getting back towards normal and these cares act subsidies and the PPP loans I think are really going to end up working well for that industry.

[Ross Haberman:]

And just one final question, these subordinated notes of banks and preferred stock, there is been a lot – huge amount issued in the last six or nine months. Have you bought much of that? And if so, how much from how many different issuers, if I may ask to help your marginally spread?

[Doug Williams:]

We have not bought any recently, we did buy some back in 2019, we have looked at it, but have not been very active up to this point.

[Ross Haberman:]

Okay. What's your overall opinion about that class of possible investments? I know it's been very popular for issuers. I just don't know because of the illiquidity, how if it's worth the risk for the added deal.

[Doug Williams:]

We've looked at it and for the right bank, we'd be willing to do some investments, but I don't think it'd be anything significant for us.

[Ross Haberman:]

Okay, guys. Thanks a lot. Have a wonderful weekend.

[Doug Williams:]

Thank you.

[Ross Haberman:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Doug Williams for any closing remarks, please go ahead, sir.

[Doug Williams:]

Thank you. We appreciate everyone dialing in this afternoon. Had a very strong fourth quarter and considering the pandemic circumstances, very strong performance for all of 2020. Let me reiterate that we're quite optimistic about 2021 and 2022, we think that the trends that we've established over the last five years in terms of growth in loans and deposits, growth in revenue and growth in earnings are sustainable. And we think Atlantic Capital's best days are still ahead of us. So again, thank you for dialing in this afternoon and have a good weekend.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.