Atlantic Capital Bancshares, Inc.
Q1 2019 Earnings Call Transcript

Published: 26 Apr 2019

[Ashley Carson:]

Thank you, all, for joining us for Atlantic Capital's First Quarter 2019 Earnings Conference Call. With me today to discuss our results are Doug Williams, Chief Executive Officer; Patrick Oakes, Chief Financial Officer; and Greg Fleming, Chief Risk Officer. As a reminder, the Atlantic Capital earnings release is available on the Investor Relations section of our website. I wish to caution you that we will be making forward-looking statements during this call and that actual results may differ materially. We encourage you to review the disclaimer in the earnings release dealing with forward-looking information. This disclaimer applies equally to statements made in this call. In addition, some discussions may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release. And with that, I'll turn the call over to our CEO of Atlantic Capital, Doug Williams.

[Doug Williams:]

Thank you, Ashley, and good morning. We are pleased to report strong and sustained momentum and profit improvement from continuing operations through a period of strategic transition. As you know, we completed the divestiture of our retail mortgage business and 14 banking offices in Tennessee and Northwest Georgia, on April 5 and are now fully engaged in pursuing our refined strategy centered on the Atlanta market and on our national commercial lines of business. For the first quarter, net income from continuing operations was $6.4 million, a 24% increase from the first quarter of 2018. Fully diluted earnings per share were $0.26, up 30% year-over-year. First quarter highlights included strong year-over-year momentum in commercial and industrial loans and noninterest-bearing deposits, net interest margin expansion, sustained, sound credit quality, and progress in our share repurchase program. Loans held for investment, excluding mortgage warehouse, increased 12% from the first quarter of 2018. Commercial and industrial loans were up 22% year-over-year and 21% annualized from the fourth quarter of 2018. Loans to real estate investors, including construction loans, were flat year-over-year and decreased 6% from the fourth quarter of 2018 due to increased repayment velocity, particularly in the multifamily category. Average deposits from continuing operations grew 15% from the first quarter of 2018 and 3% annualized from the fourth quarter of 2018. Average noninterest-bearing deposits were up 14% year-over-year and were 32% of total deposits. Average transaction accounts, that includes demand deposit and now account balances, were approximately 48% of total deposits from continuing operations in the first quarter. The net interest margin from continuing operations expanded to 3.74% from 3.39% in the first quarter of 2018 and 3.66% in the fourth quarter of 2018 as a result of the floor increases in the federal funds rate in 2018 and corresponding increases in one month LIBOR and the prime rate. Credit quality at Atlantic Capital remains among best-in-class. Net charge-offs were 11 basis points of average loans and included a $330,000 charge-off of a legacy Tennessee loan. Nonperforming assets were 40 basis points at quarter-end and included a $3.5 million fully collateralized SBA 7(a) loan in the process of collection. During the quarter, we repurchased 957,000 shares at an average price of $17.84 or a total of $17.1 million. Since we announced our $85 million share repurchases authorization last November, we've spent $31.3 million to buy 1.8 million shares at an average price of $17.39 per share. After Pat Oakes discusses the financials in more details with you, I'll turn to talk about our priorities and the outlook for the balance of the year.

[Patrick Oakes:]

Thanks Doug. Let me start with the improvement in our net interest margin. Our margin from continuing operations expanded another 8 basis points to 3.74% compared to the fourth quarter. The margin benefited from an increase in yield on earning assets of 17 basis points compared to a 15 basis point increase in interest-bearing liabilities. We were helped by an increase in short-term interest rates in the fourth quarter, along with a reduction in FHLB borrowings and investment securities. Net interest income in the first quarter was negatively impacted by two fewer days compared to the fourth quarter, but increased 17% compared to the first quarter of 2018. Loan yields for the first quarter were 5.40%, an increase of 9 basis points compared to the prior quarter primarily as a result of increases in one month LIBOR during the fourth quarter. Higher money market rates in the first quarter led to our costs of interest-bearing deposits increasing 21 basis points to 1.61%. Our overall cost of deposits from continuing operations increased 16 basis points to 1.09%. We anticipate further increases in deposit rates during the second quarter, but believe the magnitude of the increase will decrease. We're still forecasting a margin in the range of 3.50% to 3.55% after the branch divestiture. This range is lower than our current run rate primarily as a result of the approximate $165 million cash payment to fund the branch sale and the impact of higher deposit rates I mentioned earlier. The cash payment will be funded in the second quarter by using a mix of excess cash, selling investment securities, issuing FHLB borrowings and issuing brokered deposits. The mix will depend on market conditions and overall balance sheet trends. We remain asset-sensitive and our margin has benefited from each increase in the Fed fund rates over the last few years. We now feel it is prudent to begin adding protection to limit the impact of a potential decrease in short-term interest rates on our loan yield and margin. We recently began this process by purchasing LIBOR hedges and anticipate gradually adding new positions over the next few quarters. Noninterest income from continuing operations improved to $2.3 million in the first quarter compared to $164,000 in the prior quarter. The increase is primarily the result of the $1.9 million loss in the sale of securities in the fourth quarter and an improvement in SBA income. SBA income totaled $1.1 million, an increase of $661,000 from the prior quarter as SBA production began to normalize after the government shutdown had limited our ability to fund and sell SBA loans. Derivative income in the first quarter reflected a loss of $111,000 from a credit valuation adjustment on our customer's swap portfolio. First quarter expenses are typically higher than the fourth quarter, and this year, the increase was more than normal. Noninterest expense from continuing operations totaled $13.8 million, an increase of $1.6 million. Higher benefit expense accounted for the majority of the increase, most of which should not be repeated in the second quarter. The increase included seasonally higher payroll taxes, higher medical insurance expense, higher 401(k) expense and severance expense unrelated to the branch sale. We're still comfortable with our guidance that the quarterly run rate for total expenses in 2019 should be approximately $13.5 million. This includes the impact of hiring new bankers and the addition of our new offices in Atlanta. The effective tax rate for the first quarter was 21% compared to 12% in the fourth quarter, which included a $996,000 tax benefit related to the branch sale. We anticipate booking a gain of approximately $31 million to $32 million on the branch sale in the second quarter. This estimate assumes intangible impairments of approximately $6 million, with approximately $17 million in goodwill remaining on our balance sheet. These numbers will be finalized by the end of the second quarter and will be included in discontinuing operations. Now I will turn it back over to Doug.

[Doug Williams:]

Thank you, Pat. During our call in January, we shared these 2019 priorities with you

[Operator:]

[Operator Instructions] Your first question comes from the line of Woody Lay from KBW. Your line is open.

[Woody Lay:]

So looking at deposit two quarters ago you had some temporary accounts spiked deposit growth and then some seasonal inflows the last quarter. Based on this I would've thought deposits could have shrunk even more than they did this quarter. Do you think we could see some more shrinkage next quarter?

[Patrick Oakes:]

Yes. So yes we typically in the first half of the year see some seasonal decreases, but didn’t quite see as much we thought in the first quarter but I think that is coming in the second quarter. So I'll not be surprised to see some of those deposits leave in the second quarter.

[Doug Williams:]

Before building in the third and fourth quarter.

[Patrick Oakes:]

Absolutely.

[Doug Williams:]

Yes that's our normal pattern.

[Woody Lay:]

Is there a long-term loans to deposit ratio you're targeting?

[Patrick Oakes:]

Obviously it will increase with the divestiture. We'd like to keep it preferably in the mid-90s. If not work it down from there but it will be difficult to begin and to get much below that.

[Woody Lay:]

Right okay. And then so you’ll mentioned that you have eight hires planned for May I think last quarter you guided hiring 11 to 15 bankers. With even more disruption in the Atlanta market than initially expected could we see some upside to that hiring number?

[Doug Williams:]

Could be, the key is to hire the right people and we're very actively recruiting. We're pleased with the progress we're making so far. We think we're bringing high-quality people into our company, but we're going to be very opportunistic. We're recruiting hard and we're looking for good bankers and good support professionals and will add as many as we can think is appropriate this year. That 15 number is what's in our budget and we may or we may not get there we may exceed it I don't we'll see, but we very actively recruiting and hiring.

[Operator:]

Your next question comes from the line of Stephen Scouten with Sandler O'Neill. Your line is open.

[Stephen Scouten:]

So wanted to get a little more detail on kind of 3Q 2019 I guess expense guidance there, it sounds like you're still feeling like $13.5 million is the right number maybe even beaten that potentially I think I already stay but to get to the $13.5 million. How do we get there I guess in light of the new hires that are still coming online and I guess $13.8 million kind of starting point for this quarter?

[Patrick Oakes:]

Yeah so the $13.8 million was high. So that's definitely going to come down but it's not going to come down as much as it could with all these one-time expenses with the addition of new bankers. So you could see selling and benefit line coming down coming down probably $2,000. And then obviously some of the other expenses are going to go up like occupancy and equipment and trough were couple of thousand dollars. So, you kind of net that out and you get to the roughly 13.5 million or so.

[Stephen Scouten:]

So there's still some significant 500,000 or 600,000 of excess kind of salaries in that $9.2 million number?

[Patrick Oakes:]

Yes mainly in the benefits line.

[Stephen Scouten:]

And can you talk a little bit more about what you're seeing on the loan growth front? Kind of CRE versus C&I versus kind of I guess maybe Atlanta versus more national stuff kind of what the dynamics are playing right now?

[Doug Williams:]

Yes the first quarter was soft as we anticipated. We had guided you to flat to slightly down and we did a little bit better than that actually. Strong growth in C&I which is sort of a sustained trend really over three plus years now. We had a lot of repayment activity in the first quarter in commercial real estate over $50 million repayment activity there. Some of that has continued into the second quarter although we think that's behind us at this point and we'll see some fundings under construction commitments and some term loans fund in our commercial real estate business over the rest of the second quarter. The C&I pipelines both in Atlanta and in the national businesses look really solid. And it's too early to sort of prognosticate how much growth we'll see in the second quarter but I think we'll see very solid growth in the second quarter. And again we iterate the guidance we've given you they don’t balance we'll have loan and deposit growth in the high single digits this year.

[Stephen Scouten:]

And then just last thing for me. On the pace of the buyback and I know some of that's limited just by the volume and the shares and so forth. But how much of that do you think or do you anticipate you might be able to complete in the quarters to come?

[Patrick Oakes:]

I would think at the level you saw in the first quarter probably something we'd see going forward here at least in the second quarter.

[Operator:]

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

[Jennifer Demba:]

Question on the SBA loan that went on nonaccrual. Can you just give us a little information on that what industry was in?

[Doug Williams:]

Yes I'll like Gray Fleming take that.

[Gray Fleming:]

Hi, Jennifer, that was a commercial contractor that focuses on commercial jobs in the Southeast. And we think that the issue there really was working capital management during a wet winter. But the good news is we are well secured there and we're in the process of gathering and working on liquidating that collateral.

[Doug Williams:]

And we have a SBA guarantee.

[Jennifer Demba:]

Can you just talk about what you're thinking in terms of provisioning going forward here? You're going to have loan growth but what do you think underlying asset quality trends?

[Gray Fleming:]

I think from an expense standpoint well as you've seen we had a little blip in charge-offs and non-performs they're still very low. And so a couple of loans that Doug mentioned make those numbers bounce around but you'll see in over Q that our total of criticized loans are down a little bit for the quarter. Our past dues are down. So we're really not seeing any negative trends in those numbers. We’ll just have some bouncing around in some of the quarterly numbers just because they're so small. Yes that said Jennifer small business lending is an important part of our strategy. And as those portfolios grow and mature a lot of that is in the SBA world. We do expect to see some criticized loans and some charge-offs but we expect them to remain fairly small.

[Doug Williams:]

And we would expect to maintain a reserve of around 1% plus or minus over the balance of the year prior to the implementation of CECL.

[Operator:]

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

[Nancy Bush:]

This kind of goes back to this whole issue of expenses and investments and how it all fits together. And I guess in listening to the conference calls this quarter everybody is very excited about the prospects for hiring new business et cetera, et cetera. So how are you going to - this is a new development. So how are you going to balance the need to control expenses and whatever opportunities may be out there for investments and what may be vary sort of turbulent [indiscernible]?

[Doug Williams:]

Yes it's a great question and I would say that we're most importantly opportunistic. We're going to take advantage of the environment and hire good bankers where we think we can't do that. We have this 15 number in our budget I think that gives us a lot of flexibility to do that, do a lot of hiring and also maintain good expense discipline along the lines of what Pat has indicated we expect particularly in the third and fourth quarters. But we're out there, we're pursuing a lot of high-quality bankers and we're making satisfactory progress. I think we'll continue to make satisfactory progress. We believe we're certainly aware of all the other recruiting activity going on but we think we have the best banker employment proposition in the market. We're Atlanta's only hometown business bank. We're hearing a lot about a lot of bankers and clients who are questioning their loyalties to historic Atlanta institutions. I tell you we just received word this morning that a very prominent non-profit enterprise in the Atlanta area is moving their business to us. That will be eight-figure credit relationship and a good solid seven-figure deposit relationship. And that's we got really attractive pipeline of those kind of opportunities.

[Nancy Bush:]

Second question is this could you just discuss the issue of betas in the first quarter. I mean the assumption has been that now the Fed is kind of backed off that betas have quieted but I know sometimes Atlanta is different. So if you could just discuss that issue that would be great?

[Patrick Oakes:]

Hopefully we're at the back end of it now. We're still getting phone calls from clients asking for higher rates. But I think at this point that become a lot less. And I think the rates we can get away with our becoming less also. So we're hoping to get to the second quarter and hopefully things really level off from here. Who knows right we'll see. Lot of competition.

[Operator:]

Your next question comes from the line of Steven Comery with G. Research. Your line is open.

[Steven Comery:]

Just thanks for us on the gain on closing and kind of some of the puts and takes there. I just want to be kind of pull to have this, right but do you have sort of an expectation on what you expect tangible book value to come out at the end of Q2 with all of the changes to intangibles and the gains and losses?

[Patrick Oakes:]

Yes. So I think, obviously there's a lot of moving parts that go in the tangible book value. But if you're thinking just because of the acquisition it's probably over little over $1.

[Steven Comery:]

Okay a $1 up?

[Patrick Oakes:]

Yes.

[Steven Comery:]

Okay. And then earnings would be on top of that?

[Patrick Oakes:]

Yes. Earnings on top of that. Obviously any buyback is less than that. Any changes in OCI can move it around also. So there's a lot of moving pieces Isolating the divestiture is probably a little over $1.

[Steven Comery:]

And then just looking at the loan book, it looks like there's a pretty good increase in construction and so just any kind of color there and also kind of looking at any type of color on the multi-family pay downs and was there any kind of systemic there, was there isolated and what's going on there?

[Gary Fleming:]

On the construction side that was primarily due to the fund ups under existing commercial real estate construction loans. And on the multi-family side, we're very selective in our multi-family lending. And so we have fairly small number of decent size loans. And first quarter was just a good quarter timing-wise for those developers in terms of sale opportunities. So we had fewer large payoffs due to sales of properties, so typical trends, nothing new but with that commercial real estate portfolio in the liquidity in the permanent markets and in the acquisition area, we keep seeing some good payoff activity that puts the loan balances but what those developers are intending to do.

[Doug Williams:]

And we make those loans to be repaid.

[Steven Comery:]

Just one more for me, if I may. So the NIM guidance, it looks like you guys kind of maintain that 350,355 range, mostly because of this cash payment associated with the deal closing. So I'm just kind of wondering here. If that kind of NIM comes down because of increased borrowings and security sales I mean could we see it kind of come back if you guys are able to refund those borrowings with deposits over time? How should we think about that?

[Patrick Oakes:]

Yes possibly. I think the bigger risk we have is that deposit rate increase more than we think and they don't level off here. That's the wild card. So you're right. If we can grow core deposits, obviously it only helps our margin but there's also risk with that. So…

[Doug Williams:]

I'd add that we've had a good track record going several years now of growth and corporate operating businesses shows up as demand deposit account. So good solid double-digit growth, double-digit percentage growth in the bank deposits over several years now. So we feel like we got the product capability, we got the - we got good service quality, we've got bankers that are now where they deliver expertise to their clients and we think we're very competitive in that arena.

[Operator:]

[Operator Instructions] Your next question comes from the line of William Wallace with Raymond James. Your line is open.

[William Wallace:]

One, the cash payment, has that occurred close?

[Patrick Oakes:]

Yes.

[William Wallace:]

So how much cash on hand did you use? Excess cash?

[Patrick Oakes:]

Look this is a daily thing. Right? Our cash balance moves around a lot. So luckily at the time this happened we had a lot of excess deposits. So we were mainly able to use a lot of excess cash and obviously sell some securities and a little bit of borrowings. Like we talked about earlier, there's some seasonality in our deposits in the second quarter. So those will leave and the borrowings will increase and we’ll restructure things as we go through the quarter. But it's going to be a mix of things that we do to fund this….

[Doug Williams:]

But the end of the day assuming no growth in earning assets your earning assets are going to come down $160 million?

[Patrick Oakes:]

Well the earnings assets are not going to come down $165. I wish they could. The earning assets will come down a lot more than that. I think what you’ll see is a good portion of it coming in broker deposits and borrowings. I'd like to shrink earning assets as much as possible but it's only so much we can do there. We're 's still working through that.

[William Wallace:]

And then you mentioned that you are trying to change the interest rate assets since the position of the balance sheet given the current outlook from the Fed, you're putting up some LIBOR hedges and you're going to continue to do that? I assume are you trying to achieve a neutral position?

[Patrick Oakes:]

That will get to neutral. I don't think we're trying to get to the neutral but obviously its asset sensitive as we, if rates would have drop a significant amount impact profitability quite a bit. We're trying to lessen that impact as much as possible. It's going to be factoring out. Look pricing is under evidence and among other factors.

[Doug Williams:]

It's a difficult market to hedge.

[Patrick Oakes:]

Yes.

[William Wallace:]

Okay. And then on the buyback I believe you had to reset correct to achieve the $75 million initial target - you had to get a Board approval?

[Doug Williams:]

No. We don't need Board approval.

[Patrick Oakes:]

We have an $85 million authorization. And we paid a dividend from the bank to the holding company last year of...

[Doug Williams:]

$30 million?

[Patrick Oakes:]

$30 million. And we have some cash at the holding company. We also have additional capacity to pay the dividend from the banks. We are calculating what that needs to be sort of maintain the pace of share repurchase activity that we've had so far.

[Doug Williams:]

And we'll require approval from regulators. So I think that what you're thinking about to do additional…

[-William Wallace:]

Yes, you wanted the deal to close before you get that approval.

[Doug Williams:]

That's correct yes.

[William Wallace:]

Yes. So ideally assuming approval you'd like to keep it in the $10 million-or-so a quarter range if the stocks gets around the level where you've been buying it?

[Doug Williams:]

Yes I mean, so it's probably in that $15 million to higher range that will buyback.

[William Wallace:]

And you got enough to do that much this quarter?

[Patrick Oakes:]

Yes. I mean we'll have to get SEC approval which is not a big deal as we've worked down this cash balance. We've been having conversations about that, that's not a big deal.

[Operator:]

Your next question comes from the line of Christopher Marinac with FIG Partners. Your line is open.

[Christopher Marinac:]

Pat just want to double check on the sort of cost-to-deposits linked quarter from continuing operations. Is it truly only up about two or three basis points? Again waiting in the - your large DDA balance.

[Patrick Oakes:]

So the cost - the overall cost to deposits including DDA it was up to - it was up 16 basis points for continuing operations, basically from 93 basis points to 109 basis points.

[Christopher Marinac:]

I'll go back and double check my math. Thanks for the...

[Patrick Oakes:]

Page 13 of the press release there's a numbers right at the bottom of the page.

[Christopher Marinac:]

So, it leads my other question which was deposit mix. Now that you have the transaction completed could we see the mix changing going forward substantially or will you continue to sort of have similar banks to look out six and 12 months in the future?

[Doug Williams:]

Deposit mix?

[Christopher Marinac:]

Yes.

[Doug Williams:]

Didn’t quite hear what you're saying Chris.

[Christopher Marinac:]

Yes, it was deposit mix Doug, sorry.

[Doug Williams:]

Yes. I think it's been very stable. If you look at the continuing operations numbers that been restated and so forth we've been with 30 plus percent demand deposit - noninterest-bearing demand deposits or percent of total deposits and we've been in the mid-40s or better with transaction accounts as a percent of total. We haven't seen the migration out of DDA that some of our peers are seeing. And I think that's a reflection of the fact that this is corporate operating business and is very resilient and not particularly rate sensitive.

[Christopher Marinac:]

Doug if you look at the future do you see any opportunities to bring new corporate treasury clients in above and beyond what your pipeline is? I'm just curious in terms of the sustainability the pipeline beyond what you already have.

[Doug Williams:]

I think we feel very confident about the sustainability of the pipeline and the disruption in the Atlanta market perhaps that offer some upside to that. We'll see how that develops over the next few months.

[Operator:]

Your next question comes from the line of Nancy Bush with NAV Research. Your line is open.

[Nancy Bush:]

Just one follow-up. You talked about the new office openings. Could we just go back to that remark so the Cobb County office has already opened and Athens and Wales were to come Buckhead?

[Doug Williams:]

Yes, another office in Buckhead. So we opened the Cobb County office loan production office last month. Athens branch will open this summer sometime. Now it's like the Buckhead branch will be sometime in the fall based on connecting issues and so forth in the City of Atlanta but we're making good progress on all those projects.

[Patrick Oakes:]

We signed a lease in both locations now just in the build-out phase.

[Nancy Bush:]

Okay. Now are these sort of - I mean is there a template for an office? Or they staff differently or sort of what do they look like?

[Doug Williams:]

Well there is different. The loan production office in Cobb has three bankers today. We believe there soon will be four bankers. The Athens branch serve a limited service kind of branch or even toward commercial and private banking clients, it's almost second floor of the building in a prominent location in Athens. And then the Buckhead branch is really oriented toward private banking clients. It's on a Semi-Residential Street in Buckhead that we think is very accessible for our clients.

[Operator:]

There are no further questions in queue at this time. I'll turn the conference back over to our presenters.

[Doug Williams:]

All right. We appreciate you all dialing in today. Of course we encourage questions and conversations particularly as the sale-side analyst work on their models. There are lot of complexities to discontinued operations accounting and we know we are sort of mix of a transition with the transaction in the first and second quarter. So please call us for any questions or comments you might have. Look forward to talking to you. Thanks you for dialing in.

[Operator:]

This concludes today's conference call. You may now disconnect.