Atlantic Capital Bancshares, Inc.
Q1 2018 Earnings Call Transcript

Published: 27 Apr 2018

[Operator:]

Good morning. My name is Devon, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2018 Earnings Conference Call. All lines have been on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Chief Risk Officer, Gray Fleming. Mr. Fleming, you may begin your conference.

[Gray Fleming:]

Thank you, Devon, and thank you, everyone, for joining us this morning. With me today to discuss our results are Doug Williams, Chief Executive Officer; Patrick Oakes, Chief Financial Officer; Rich Oglesby, General Banking Executive; and Kurt Shreiner, our Corporate Financial Services Executive. As a reminder, the Atlantic Capital earnings release is available in the Investor Relations section of our website. I wish to caution you that we’ll 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, Doug Williams.

[Doug Williams:]

Thank you, Gray, and good morning everyone. After the close of the market yesterday, Atlantic Capital reported net income of $5 million or $0.19 per diluted share for the first quarter of 2018, excluding severance expense occurred in the quarter, we calculate net income of $5.9 million or $0.23 per diluted share. These results reflect solid growth in our core corporate and business banking activities, higher loan yields and the benefit of cost-reduction initiatives undertaken in prior quarters. We anticipate continued improvement in operating results throughout 2018 and into next year. According to Federal Reserve data, loan demand and loan growth were seasonally soft during the first quarter, but our corporate and business banking teams grew loans at a solid double-digit percentage – double – at a solid double-digit percentage annualized from the prior quarter and year-over-year. We expect loan demand and growth to strengthen and accelerate over the balance of the year. While average total deposits declined from seasonal highs at year-end, deposits from corporate and business clients grew at a solid pace from the last quarter and year-over-year. These trends were well-established at Atlantic Capital and we anticipate core relationship-based deposit growth to continue. The cumulative effect of five increases from the federal funds rate over the last two years is becoming evident in our net interest margin as the increase of loan yields outpaced the rise of deposit cost. We believe future rate increases will result in further margin expansions. The management changes in cost-reduction initiatives announced in the third and fourth quarters last year and earlier this year, were designed to set the stage for better productivity and enhanced efficiency throughout our company. The initial effect of these changes and initiatives was apparent in our first quarter results and should become more visible over the course of this year. Now Pat Oakes will review the financial details for you. Then I will return with some comments about the outlook for the rest of the year. Pat?

[Patrick Oakes:]

Thank you, Doug, and good morning, everyone. Let me start with our net interest margin. The tax equivalent margin for the quarter was 3.51%, an increase of 12 basis points from the fourth quarter. As we benefited from higher loan and investment yields offset by higher funding costs. Loan yields increased 13 basis points during the quarter, from the increases in the Fed Funds rate and one month LIBOR. We have approximately $1 billion of loans tied to one month LIBOR and $270 million in loans tied to prime. So we expect to continue to benefit from any further increases in rates. The taxes including yield and investments increased 6 basis points to 2.41% from higher yields due to slower prepayments on mortgage bank securities and two less days in the quarter, offset by the negative impact of a lower tax rate on the tax equivalent municipal yield. Our cost of interest-bearing deposits increased 8 basis points to 81 basis point in the quarter, as we continue to experience pressure on deposit costs. As we focused on growing deposits and continue to see increasing pressure on deposit pricing, our cost of deposits might increase at a faster pace over the next few quarters. As a result, we expect our NIM to expand at a more moderate pace with each additional increase in rates. The provision for loan losses was $772,000 in the first quarter compared to $282,000 in the fourth quarter. The first quarter included net charge-offs of $231,000 compared to a net recovery of $192,000 in the fourth quarter. Credit quality remains strong as annualized net charge-offs were 5 basis points, and non-performing assets to total assets were 13 basis points as of March 31. Non-interest income totaled $4 million, an increase of $415,000 from the fourth quarter. SBA income totaled $1.3 million, an increase of $459,000 from the fourth quarter. As I mentioned last quarter, we have added additional SBA bankers in part to replace the revenue we anticipate to lose from the sale of our trust company, and are pleased with the first quarter results from this team. We expect to sale the trust company to close late in the second quarter, and result in a gain of approximately $1.7 million. In addition to losing – in addition to a loss of the trust income, we will have quarterly expense savings of approximately $450,000 and $500,000 from exiting the business. Non-interest expense totaled $18.4 million in the first quarter, which is a decrease of $2.2 million from the fourth quarter. Salaries and employee benefit expense accounted for $1.2 million of the decrease, as we benefited from the strategic actions we discussed in January. The first quarter salaries and benefits included $1.1 million in severance expense, along with seasonally higher payroll taxes. We also benefited in the first quarter from lower than normal professional fees, and a decrease in other non-interest expense compared to the unusually high expenses in the fourth quarter. First quarter also included a $227,000 expense from the write-down in ORE of our previously closed branch. Please note, that we expect some additional volatility in expenses during the second quarter from the sale of the Trust Company, along with the cost of moving our Atlanta corporate headquarters. Total loans held for investment were $1.96 billion at March 31, an increase of $26 million from December 31, and C&I loans grew $21 million, including nice growth in our Atlanta banking franchise and SBA lines of business. Total average deposits in the first quarter decreased $31 million as the fourth quarter seasonal and temporary deposits decreased throughout the first quarter to a more normalized levels. Now I’ll turn it back over to Doug.

[Doug Williams:]

Thank you, Pat. Our objective for 2018 is to build value for our clients, teammates and shareholders by continuing to develop a culture of purpose, service and performance. Our priorities for the year are

[Operator:]

[Operator Instructions] Your first question comes from the line of Stephen Scouten with Sandler O’Neill. Please go ahead. Your line is open.

[Stephen Scouten:]

Hi, guys. How are you doing this morning? Question, maybe a little bit around loan growth. I’m curious just Doug, if you could give us some numbers around what the production levels look like this quarter, especially relative to the last couple of quarters. I mean, CRE pay down is kind of within that and whether or not you think at this point, you can – you see some net growth in Tennessee for the full year, based on what you’re seeing so far?

[Doug Williams:]

Yes, let me get the numbers in front of me. New loan production in the first quarter was just over $92 million. We had fundings under existing commitments of $36 million, and we had payoffs of about $109 million.

[Stephen Scouten:]

Okay. And how about that – the Tennessee piece, I mean do you think that’s something where you could see some net growth for the full year, is that still up in the air as to whether that will be kind of neutral or still slightly detract from growth?

[Doug Williams:]

We hope and anticipate that we’ll have net growth over the course of the year. In the first quarter we saw a continued contraction in loan balances in Tennessee. That seem to be decelerating as the quarter went on, and we hope that we’ll see some net growth beginning in the second quarter in Tennessee. We think the loan growth in the year will be back and waited. The production is strong. The pipelines look good. In the second quarter, we seem to have a high level of repayments in the real estate business related to refinancing churn and also in our large corporate business related to refinancing churn. But should see some growth in the second quarter, but I think, for the year, the growth will be back and waited. And again, we expect the average loan growth for the year in the high-single digits were better.

[Stephen Scouten:]

Okay. And maybe on the loan pricing trends competition wise. Have you seen any changes in terms of how folks are pricing loans post tax reform? I mean, do you get the feeling that people have changed their pricing models already or is some of that additional income being, kind of, competed away in your view?

[Doug Williams:]

We really don’t see that. I’ve noticed from some of the transcripts from other earnings calls that other banks are reporting that. We operated in very competitive markets. The competition has been intense for a considerable period of time. These trends are well-established, and we haven’t seen any noticeable, additional deterioration in pricing post the tax bill. I think that potential is there. But I wouldn’t say we’ve seen any real inflection point and pricing competition in the last quarter.

[Stephen Scouten:]

Okay. And maybe just one last one for me. Just given the dislocation we’ve been seeing in the Atlanta MSA, you got four deals announced over the last three months. Do you think that you guys would look to take advantage, much like you did with the CNS deal, it was 18 months ago, and look to do some team lift-outs or one-off acquisitions of talent, or are you really more focused at this point on the continued expense initiatives and just kind of making what you have more efficient?

[Doug Williams:]

Well, we are, of course, focused on improving our performance. We’re really focused on ourselves right now, but there is a great opportunity for us with merger disruption to opportunistically pursue both bankers and clients. And we’re going to be doing that. But we continue to be very focused on improving our performance.

[Stephen Scouten:]

Okay. So would be open to it but not necessarily any large-scale plans to try to do something...

[Doug Williams:]

I think the best way to say it is we’ll be opportunistic, if we see good people that we want to hire, if we see good clients that we want to add, we’ll be doing that and we’ll be doing that very aggressively. That’s one of the real benefit that comes out of this consolidation. And we benefited from it before as you mentioned and we’ll be ready to benefit again as those opportunities develop.

[Stephen Scouten:]

Fantastic, thanks for the time, guys. Appreciate it.

[Operator:]

Your next question comes from the line of Brady Gailey with KBW. Please go ahead. Your line is open.

[Unidentified Analyst:]

Hi, guys. This is actually Michael [ph] on for Brady. So as you all expected SBA fees saw a nice boost in the quarter. Are you all looking to hire additional members to the SBA team or are you all still confident with the size of that team?

[Kurt Shreiner:]

Yes, this is Kurt Shreiner. We’ve added two new bankers this quarter. In this first quarter we’ll add another banker. In the second quarter, we continue to see that business be very positive Atlanta business for us, and the income expectation you should have going forward it’ll be similar to what you saw this quarter.

[Unidentified Analyst:]

Great, that’s helpful. And I know you all were planning on consolidating two Chattanooga branches this past quarter. Was that successful and are there any additional expense initiatives in the pipeline?

[Patrick Oakes:]

Yes. So we did close or did consolidate one of the branches in Tennessee into another branch. I don’t think you’re going to see any other significant expense initiatives here. At this point, I think our focus is on revenue growth at this point, beside the sale of the trust company.

[Unidentified Analyst:]

Yes, it makes sense. And then, just lastly, just to clarify some wordings. That $1.1 million your breakout, is that just severance expenses or does that include the impact of the higher payroll taxes?

[Patrick Oakes:]

No, that’s just severance.

[Unidentified Analyst:]

Great.

[Operator:]

Your next question comes from the line of Jennifer Demba with SunTrust. Please go ahead. Your line is open.

[Jennifer Demba:]

Thank you. Good morning. Pat, did you quantify the seasonal impact on personnel cost in the first quarter for us so we can kind of get a better idea of what the run rate could be?

[Patrick Oakes:]

Sure. It’s roughly about $400,000.

[Jennifer Demba:]

Okay. And is there anything else unusual in the expenses other than the severance cost?

[Doug Williams:]

We had the ORE right-off. That was related to a branch we had already closed and we got a new appraisal on the property and wrote it down further.

[Patrick Oakes:]

Right, besides that the only thing I would note is you saw professional fees come down quite a bit, it was probably low for the quarter – for the typical quarter. But anything higher, now it’s pretty clean quarter besides that.

[Jennifer Demba:]

Okay. So do you still think that you’ll see a run rate in the second quarter of what we should – a good run rate in the second quarter and what we should expect going forward or you think it’s going to be more of a third quarter impact?

[Patrick Oakes:]

Yes, it’s – the problem with the second quarter is just a lot of noise from whenever we do close the sale of the trust company, which will probably occur later in the quarter, which is expense, obviously, impact the expense base. And we’re also moving our Atlanta headquarters, so there’s going to be some moving expenses and some additional rent expenses around that. So second quarter is a little bit tough. I was hoping second quarter, we can’t get it below $17 million, but it might actually – it’s probably going to fall in the third quarter.

[Jennifer Demba:]

Okay. All right. One more question. Doug, you said you are aiming for the 1% ROA goal next year. At this point, the industry is running at about 115-ish, 120, ROA average with tax reform in there. What do you think needs to happen to get you up to that level? And what kind of time frame we’ll be talking about?

[Doug Williams:]

I haven’t tried to quantify the timeframe, but it’s really more of the same. It’s loan and deposit growth, it’s tight expense management and its margin expansion, all those things will help us get there. And we are, of course, aware of the effect on average industry profitability, or median industry profitability with respect to the tax rate reduction, which in our case is about 15% benefit to earnings – net earnings.

[Jennifer Demba:]

Can you guys – one more question, I’m sorry. Can you just kind of elaborate on the headquarters, move where square footage you’re coming from and going to and the cost associated with it both one-time and ongoing?

[Patrick Oakes:]

Yes, so the ongoing cost is not going to be significantly different because we’re actually – we’re taking on more space, but we’re actually consolidating basically three locations into one. So I think, once we get through all of this the expenses are going to be materially about the same.

[Doug Williams:]

On a per square foot basis it’ll be lower.

[Patrick Oakes:]

Right. I would just more think of where did the right to move a little bit, so we’re going to have double rent expense for a month or two, and obviously, some of the stuff that’s moving expenses that you come along with moving, move this big.

[Doug Williams:]

You shouldn’t expect a material increase and occupancy expense overall, it might be a little lower so.

[Patrick Oakes:]

Right.

[Jennifer Demba:]

Okay. And are you moving your ground floor branch to that new building or?

[Patrick Oakes:]

Yes.

[Doug Williams:]

We are.

[Jennifer Demba:]

Okay. All right. Thank you so much.

[Operator:]

Your next question comes from the line of Steven Comery with Gabelli. Please go ahead. Your line is open.

[Steven Comery:]

Hi, guys. Thanks for taking my question. I was wondering if maybe we could get an update on how much of the loan book is variable rate at the end of the quarter?

[Patrick Oakes:]

Yes, so I commented those numbers earlier, it’s about two-thirds billionish, that’s tied to one month LIBOR, another $270 million-ish that’s tied to prime. And there is almost no floors left to think, that’s right, Roger. So I think just pure flooding rate at this point.

[Steven Comery:]

Okay. I apologize if I missed that. And then, I was just wondering maybe, Doug, you spoke to this kind of qualitative does. Wonder if maybe we could get a feel for kind of the strength of the effects in geography and loan growth. So like how much did Atlanta grow in the quarter versus how much did Tennessee shrink?

[Doug Williams:]

Yes, the – I mean, the Tennessee businesses shrank a bit in the quarter. We had good growth in Atlanta and good growth in our national businesses. We’re really focused in the C&I and owner-occupied real estate categories.

[Steven Comery:]

Okay. And then, I just want to be sure I have all the moving parts on non-interest expense. So there is $1.1 million in severance, there is the change from payroll taxes you just talked about. And then, there is the $450,000 benefit from losing the trust business, we won’t see that until the third quarter though, right?

[Patrick Oakes:]

You’ll see a small benefit in the second quarter, but the full benefit will be in the third quarter, that’s correct.

[Steven Comery:]

Okay, very good. That’s all I had. Thanks.

[Operator:]

Your next question comes from the line of Nancy Bush from NAB Research. Please go ahead. Your line is open.

[Nancy Bush:]

Good morning, gentlemen. Doug, you talked about the focusing on core relationship-based deposit growth. And can you just kind of tell us what kind of conversations you’re having with those core clients now about their deposits? And how to expand relationships and pricing and all that stuff that’s going on?

[Doug Williams:]

Yes, this is really corporate operating business. And it’s very resilient. It is relatively low-cost. A lot of it shows up in demand deposits. And we continue to expand that on the strength of our aggressive calling activity and very competitive corporate treasury management capabilities. And it’s true in our local markets in Georgia, in Tennessee, it’s true in our national businesses, in our payroll businesses and others. And we’ve – I think we’ve got a steady, strong trend of expansion of that business, so we’re in the low double-digits. Over time quarter-to-quarter some of it shows up and increase fees, some of it shows up and increase balances, but we’ve got, I think very strong well-established trends of growth in core relationship-based deposits, which is exactly what we want.

[Nancy Bush:]

One of your Atlanta competitors yesterday, and you may have heard this, said they are aggressively going after core deposits. And I think pretty much everybody in the Atlanta market is saying that at this point. So what – how do you play defense on this? Is it just these conversations? I mean, what has to happened to protect that desk?

[Doug Williams:]

We are – in Tennessee, in particular, we’ve implemented some more aggressive pricing promotions primarily focused on retail and small business activity. We are certainly alert to those opportunities in Georgia. But really the focus of our effort is continuing to build our technology and having a distinctive competitive posture with respect to corporate treasury business. And I think we have a – frankly, I think we have a pretty wide lead over the competition in that respect, and I think we can sustain it.

[Nancy Bush:]

Okay. And also just a final deposit question. Could you just remind us where your betas are right now, and how they progressed and what you expect over the next few quarters?

[Doug Williams:]

Sure. Deposit betas?

[Nancy Bush:]

Yes.

[Patrick Oakes:]

So the deposit beta over the last years’ been roughly about 30%, 31%, little bit less than that in the first quarter. We model – we forecast just about 50% on average on loan deposits. I don’t expect us hopefully not to get there, but I think it’s going to be higher than 31% as we move forward here.

[Nancy Bush:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of William Wallace with Raymond James. Please go ahead. Your line is open.

[William Wallace:]

Thank you. Good morning, guys. Maybe just – maybe a little bit more on the margin. Pat, I thought that you had some prepared remarks around this, and I was trying to keep up but I missed it, but you – the suggestion was that, while you still anticipate margin expansion from hikes, obviously, it sounds like you’re expecting a more moderate level, I believe is the word that you used. Was that – I missed the part about why?

[Patrick Oakes:]

Yes. So the – look, our asset hike is still going to continue to price up nicely. I think what we’re going to see is probably little more pressure on the deposit side. So we have previously given a range for each 25 basis points increase in Fed funds that margin would increase 4 to 8 basis points. Look we’re trying to guide you to a lower number their around the lower end of that range rather than the higher end. After the last two quarters I’ve seen that margin expand nicely. I just – I think we’re going to struggle to see it expand at that level.

[William Wallace:]

Okay. So – but would – in the second quarter it sounds like you’re saying though that you still don’t think your deposit betas are going to jump all the way up to 50%. So would we think about it maybe a little bit higher than that four basis point range in this quarter, and then if we get a hike in June, maybe it’s a little bit less and if we get another hike, like it’ll will kind of ramp down or do you think we’re already there this quarter?

[Patrick Oakes:]

It’s really impacted by what happens to deposit cost and it’s still early in the quarter to know what that’s going to look like. What I’m trying to tell you is, that beta is going to increase. We’ll see where it kind of flushes out in the next few quarters, which is going to put more pressure on that margin. We’ll still expand in lower range.

[William Wallace:]

Okay. Okay, great. And then maybe just to put a bow on all the expense commentary. So we’ve got – if we just kind of forget about the second quarter, by the third quarter when we’ve got the trust expense out and any double rent, et cetera, from the move and we’ve normalized, and we’re talking about kind of a $16.5 million-ish run rate, is that why we are shaking out?

[Patrick Oakes:]

I think that would be in the low end, but we’ll see how it flushes out.

[Doug Williams:]

Less than $17 million probably.

[Patrick Oakes:]

Yes. Less than $17 million.

[William Wallace:]

Okay, all right. That’s it. I appreciate your time, guys. Thank you.

[Operator:]

[Operator Instructions] Your final question comes from the line of Christopher Marinac from FIG Partners. Please go ahead. Your line is open.

[Christopher Marinac:]

Thanks, good morning, guys. I wanted to ask about the payment clients data that you gave in the release. And I’m curious, where should that number go in the future, I know there is a little noise a year ago with Charlotte and amount of changes, but now that you have that kind of cleaned out. Where should that number go? And Doug, as a corollary, should we see the DDA percentage get higher than the 30% as we go into the future?

[Doug Williams:]

You’re asking a lot there. What’s the connection of Charlotte to the payments?

[Christopher Marinac:]

I was just looking at the year-over-year clients…

[Patrick Oakes:]

So I’ll start with the payments business, and Kurt you can join in. We’re seeing that business is growing at a really nice pace. I think, with higher rates, what’s happening is, we need to get paid by higher deposit balances or a fee income. And what’s happening at this point is, I think people are making the choice to keep less deposits and pay more fee income, so that fee income of that group is growing quite nicely at 25% per year, and we’re just not seeing the deposit growth we’ve seen historically in that business. So that’s why that numbers is kind of flattish, but we are seeing in the fee income side. Anything else to add on that?

[Kurt Shreiner:]

And Chris, we could see we have very aggressive calling efforts and winning clients. So it’s a fluctuating number around the choice that the client makes between whether holding balances or paying fees.

[Doug Williams:]

The volume growth in that business is sort of 25% to 30% clip per year, and some of that shows up in the increased balances, some of it shows up in the increase fees. And that mix can change quarter-to-quarter, but the trajectory there is quite solid and we just added a big – we’re awarded a big piece of business right in the first quarter. And that will start coming on stream in the second quarter. We’ve got a good pipeline of opportunities, and we think we’ve got a very distinctive competitive posture in that business.

[Christopher Marinac:]

Okay. So again the – we’re going to see the fee income piece reflect some of the success going forward, and then the dollars and the payment category may as well?

[Doug Williams:]

Correct.

[Christopher Marinac:]

Got it. And then, I know we talked a lot about expenses this morning, but do you have either a goal or a thought about where efficiency should go over time, not looking at second or third quarter but more kind of in the big picture?

[Doug Williams:]

Yes, the efficiency ratio, as I’ve indicated, I think, by – and in 2019 should be below 65%. And of course we’ll continue to drive that south as we have opportunities. The – and you should see steady progress in that direction over the course of this year and then the next. The objective is obviously to grow our revenue at a low to mid-teens percentage basis over time, but grow expenses in the low single digits.

[Christopher Marinac:]

Great. Thanks, Doug. Appreciate it very much.

[Operator:]

And there are no further questions. I’ll now turn the call back to the presenters.

[Doug Williams:]

Well, thank you for your time this morning. We’re available to answer any other questions you may have. Thank you for dialing in.

[Operator:]

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