Q3 2019 Earnings Call

Good morning, welcome to the Atlanta Capital Bank third quarter 2019 earnings Conference call.

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After today's presentation, there will be an opportunity to ask questions.

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Please note today's event is being recorded.

Now, let's turn the conference over to actually Carson Executive Vice President corporate is meant to be Affairs officer. Please go ahead.

Thank you Rocco.

Thank you all for joining us for third quarter 2019 earnings call with me today to discuss our results our debt Williams, Chief Executive Officer, and Patrick Okay, Chief Financial Officer as a reminder, the Atlantic capital earnings release is available in the Investor Relations section of our website <unk>.

I wish to caution you that we'll be making forward looking statements during that call and the actual results may differ materially. We encourage you to review the disclaimer and the earnings release dealing with forward looking information.

This disclaimer applies equally to statements made in the call.

In addition, some discussions may include references to non-GAAP financial measures information about those measures, including reconciliations to GAAP measures may be found in our FTP filings and in our earnings release.

And with that I'll turn the call over to our CEO of Atlanta capital Doug Williams.

Thank you Ashley and good morning.

Lets followed loan and deposit growth from new and expanded client relationships disciplined expense management and sound credit quality Atlanta capital recorded another quarter strong operating results.

As you've seen we reported net income from continuing operations of $7.6 million worth 33 cents per diluted share for the third quarter of 2019 compared to $7 million or 27 cents per diluted share for the third quarter of 2018 and $7 million were 29.

<unk> per diluted share for the second quarter 2019.

Loans held for investment from continuing operations grew 10% annualized from the second quarter and 10% over the third quarter 2018.

Commercial and industrial <unk> owner occupied commercial real estate loans increased 14% linked quarter annualized and grew 20% from the third quarter of 2018.

For the last 15 quarters, which is our history as a public company. This core category of loads from continued operations has grown at a compound average annual rate of 20%.

Average deposits in the third quarter up 10% annualized over the second quarter and 18% compared to the third quarter 2018.

Average non interest bearing demand deposits increased 34% annualized compared to the second quarter and 14% from the third quarter of 2018.

Noninterest bearing demand deposits were 33% of total average deposits during the third quarter and have grown at a compound average annual rate of over 18% for the last 15 quarters.

This loan and deposit growth from new and expanded client relationships over the last 15 orders is the direct product of a company aligned for the common purpose of fueling client prosperity, what fault full and tailored credit and Treasury management solutions and reliable service delivery.

Building on attractive and distinctive culture is a competitive weapon is a key priority at Atlanta capital.

And we're pleased to report that our company was recognized last quarter by the American banker as a best bank to work for.

Two key elements of this purpose and performance driven culture client focus teamwork and risk management expertise, our foundational to our results.

Our talented experienced bankers credit officers Treasury management officers and operational delivery and support professionals work, well together to design and deliver solutions and service to our clients.

Good teamwork is making our company more productive inefficient.

While investing in new capacity to pursue opportunities and the Atlanta market and in our specialized treasury management and transaction processing businesses.

Noninterest expense in the third quarter of 2019 was actually down from that in the second quarter and grew at a modest pace year over year.

Sound risk management practices to enable sustainable growth at Atlanta capital and our results show it.

Net charge offs for the quarter were 11 basis points of loans held for investment and 12 basis points year to date.

Nonperforming assets were 29 basis points of assets at quarter end.

Now pad Oaks will review the financials with you in more detail and then I'll return to offer perspective on our properties and the outlook for the fourth quarter.

Yep.

Thanks, Doug and good morning, everyone I'm happy to report on the strong result for Atlanta capital in our first full quarter. After the closing their branch sale. In April . This included net income routine operations of 33 cents per diluted share an increase of 22% compared to the third quarter up 2018.

Tangible book value per share of 13 91.

Also an increase of 22% from September Thirtyth 2018.

Another quarter of solid loan to deposit growth, a loan and deposit ratio of 92%.

And in essence is on expense management.

We're pleased with these results despite the decline on interest margin from the recent cuts and the fed funds rate.

The NIM in the third quarter was 350 to a nine basis point decline from the 361 margin in the second quarter. This was inline with our expectations.

The main drivers that its quarterly production were lower loan yields due to the decline in short term interest rates, mainly one month LIBOR.

And an increase in excess cash from higher volatility in our deposit balances.

This is all offset by a decrease.

And our cost of interest bearing deposits and the solid growth in noninterest bearing deposits Doug mentioned earlier.

With the uncertainty of future rate cuts, providing further guidance on our NIM is difficult to bank remains asset sensitive with approximately 65% of our loan book floating rate and 50% of loans tied to one month LIBOR.

This will continue to put pressure on our margin.

For the third quarter loan yields decreased 16 basis points to 518.

During the third quarter, we were successful in reducing the cost of interest bearing deposits eight basis points to 158.

This included the benefit from lower rates in our market index deposits and rig seats.

Along with some decrease our negotiated rates, which account for about 45% of our interest bearing deposits.

Bankers continue working with their customers to reduce deposit costs as much as competition will allow.

But there was a lag with how quickly we can reduce these negotiated rates.

Our overall cost of deposits decreased nine basis points to 1.06%.

Non interest income totaled 2.8 million in the third quarter compared to 2.9 million in the prior quarter and 2.3 million in the third quarter of 2018.

Service charge income grew 25% linked quarter annualized and 15% from the third quarter of 2018.

By continued strong growth in our payments and Fintech businesses.

The quarter also included a gain of 253000 on the sale of Securities.

As we extended the duration of the investment portfolio in order to reduce the asset sensitivity the balance sheet by selling short duration securities and began replacing with municipal securities.

We have continued to purchase additional municipal securities and are held to maturity portfolio during the fourth quarter.

This will improve income and reduce our asset sensitivity, but where was it result in some additional pressure on our NIM.

I am pleased with our continued focus on managing expenses poster branch sale.

Total expenses in the third quarter decreased 577000 to 12.7 million.

We benefited in the third quarter from an FDIC assessment credit that lowered the FDIC expense by 368000 from the second quarter.

Based on our remaining credits that can be applied to future invoices, we do not anticipate having an FDIC premium expense for the next few quarters.

We continue to actively purchase shares under our 85 million dollar share repurchase program.

During the quarter, we purchased 20 $120.1 billion or 1.2 million shares at an average price of $17.29.

This brings the total program repurchases to $70.9 million or 4.1 billion shares and has reduced our share count by approximately 16%.

Given all the share repurchase activity, our tangible common equity ratio decreased to 12.9% at quarter end down from 13.4% from June Thirtyth.

We remain focused on capital management and improving both our return on equity and earnings per share.

Now I will turn it back over to Doug.

In earlier calls this year, we've shared the following priorities with you number one complete the transformational or rather rough formational divestiture of our Tennessee and northwest Georgia business.

Number two investing growth capacity for our at last on specialty businesses.

Number three focus on deposit growth by building Treasury management and transaction processing based relationships.

Number four maintain best in class credit quality.

And number five employees shareholder return and have seen capital management strategies.

I think you'll agree that we've addressed each of these priorities with energy and discipline and that our results reflect compelling progress and building the value of our company.

We expect more progress on the fourth quarter.

Our bankers are energetically pursuing new opportunities and new business pipelines remain solid.

Good teamwork is improving our productivity and efficiency.

Credit risk as well managed.

While the effect of interest rate reductions will become more apparent in the fourth quarter.

We expect to sustain these good operating trends.

Our planning for 2020 is well underway.

Although the course of the economy and interest rates is uncertain, we see considerable opportunity for Atlanta capital in the midst of Atlanta market turmoil and in our specialty businesses.

We're well positioned with an energetic and engage team.

New business development capacity and robust capital flexibility to address these opportunities.

Now, we'll be happy to answer your questions.

Thank you.

I'll begin the question answer session.

You asked a question in your press Star then one on your Touchtone phone.

If you are using the speakerphone, please pick up their handsets were pressing the keys.

Your question. Please press Star then too.

Today's first question comes from.

KBW. Please go ahead.

Hey, good morning, guys boarding Brady.

But I wanted to start with the buyback.

Bought back a material amount of your stock over the last year. It feels like at this pace, you'll have the $85 million.

In the fourth quarter.

When that happens you are still going have excess capital. So how how do you think about additional buybacks and 2020.

I'll start I think the initial goal here is to complete the $85 million buyback program, we're still on planning processes capital planning process with the board.

And so I think more to come in January once we get this program finished but any additional steps we want take.

Yeah, I'd, just say that were evaluating various strategies going forward will sharing those with the board and we'll have more information for you in January .

We really like the capital position that we have finishing out the year.

We have a lot of Flexibilities I've mentioned.

And that capital can serve both defensive and offensive purposes.

Okay, and then Pat you mentioned, making some changes and the bond portfolio and buying communities. If you look at the average balance of the bond book in the third quarter was about 340 million do you expect that to go a lot higher with these changes or is it.

Or just.

A mix shift and those balances should stay fairly stable going forward well part of the reason it's down it's because of the sales that we did as we were doing the restructuring so you'll see that build back up and most likely increase from what we the balance was in the second quarter.

Okay, and anything on Cecil and the likely impact coming up here in 90 days.

So we're still in the final stages of finalizing Matt.

At this point, we don't expect a material change and what our allowance is going to be based on our business model being so commercial focused and short duration portfolio.

All right and then just last for me.

Your mortgage warehouse business I know you all.

Partner with another bank in that business, but it's gotten down to 1% up loans.

That business has been a lot more robust recently, just given the backdrop of mortgage rates I mean do you expect.

To start to participate more in that program with the warehouse space be it a lot more robust nowadays.

We did not Brady, we I would anticipate those balances will continue to diminish over the next couple of quarters.

Okay, great. Thanks for the target.

Q.

Our next question comes from Stephen scope of Sandler O'neil. Please go ahead.

Hi, good morning.

Good morning, Steven.

Maybe to follow up on Brady's last question here, a little bit just around the overall loan growth expectations kind of if you could give some color on how your pipelines are looking and really what you're seeing from customers in regards to loan demand, maybe a loan demand maybe quarter over quarter origination and paydown activity kind of how that compares to what we've seen in the last few quarters.

Yeah, we as I've mentioned that the pipelines remain solid and we Oh, we think we can generally sustain the trajectory is that we've been on this and this year in prior years with respect to loan growth in various categories.

Having said that demand has softened up a bit this year less evident in the data and also anecdotally.

And it's very difficult to excuse me to.

To calibrate that for not only the fourth quarter, but but 2020.

I think we guided you to high single digit loan growth for the year.

And that's still looks like a reasonable expectation.

So you know.

Finished the year out probably mid 7% to 9% range I would guess.

Okay helpful and maybe fallen back on capital little bit too I know you said you're still in this planning stages, but how do you think about.

Capital moving you no longer term I guess what.

An appropriate level of capital would be whether that T or total risk base or whatever ratio you look to most most centrally but how do you think about that long term where you'd like to operate.

So the biggest constraint for US is total risk based capital at the bank and a lot. That's a business model, we have a lot of unfunded commitments that kind of.

Require little more capital associated with that so that's our biggest constraints, we'd like to get Tc ratio down obviously from the almost 13% we're at now but.

There is a constraint around that but you're right, we are well overcapitalized and well aware that Mike Doug said thats, good offensively and defensively.

Okay, Great and then maybe last thing for me just kind of can you talk about where you're investing today in the Atlanta marketplace, whether that certain segments pace of new hiring goals. If there are certain submarkets in the Atlanta I must say, you're really focused on today, just kind of give us a feel for for what the direction of incremental investments will be.

As we told you at our second quarter call. We've we've hired over 25 people this year, including 12, new producers I think seven new credit officers and the remainder would be operational service delivery of folks.

The pace of hiring has slowed were.

Anticipating the next few quarters here to absorb that growth and see it become more productive, particularly as we move into 2020.

We will remain very opportunistic with respect to hiring more people when we find good people that want to work at Atlanta capital.

We'll we'll be quick to hire them.

But I think it will take a little time to absorb the folks we've hired and see them become productive.

Hiring has been sort of across the scope of our businesses both here in Atlanta and in our specialty businesses.

And we have expectations for not only loan growth, but deposit growth and as you've seen we've had deposit growth. This year, that's been very strong and in fact as outpaced loan growth.

That may well continue into the next few quarters.

Super Thanks for the color guys appreciate it.

Our next question comes from Jennifer Demba of Suntrust. Please go ahead.

Thank you good morning, good morning.

Question on credit still very good for you I'm, just wondering what you're seeing kind of.

Underneath the covers any cracks in any certain sectors.

What you trend in criticized loans that kind of thing.

Yes credit stats remain solid we're not seeing any unusual or broad based problems I'd say the migration trends are very stable.

We are certainly mindful of late cycle management behavior, particularly the C and I world.

And we are cautious as we told you with respect to see our E business.

At this point in the cycle.

However, our charge offs remain low we've seen no meaningful change in classified loan levels and in fact, a with some expected pay offs refinancing pay offs away from us in the fourth quarter, we should see classified.

Totals move down over time so.

We feel good about credit at this point, there's always the possibility of the unexpected occurring.

But we think a credit quality is stable and likely to remain so.

Thanks, so much sure.

And our next question today comes from Steve.

Oh Gee research. Please go ahead.

Hey, guys good morning warning learning.

Just wanted to ask about deposit pricing I'm, just kind of some general color on what you guys are seeing in your market and whether or not you expect.

Or just how you expect mix to kind of it's kind of look going forward with with the fed policy.

Now when you say mix.

What are you referring to.

Yes, so I mean, there was a pretty substantial reduction in the quarter and broker deposits, maybe just some comments on.

How you look at that funding source at this point.

Well the focus here, it's been growing on growing core deposits and obviously as you can see we've been pretty successful with that and what that allows us to do is pay off some of these higher cost deposits and wholesale funding.

Yeah, we had increased broker deposits with the branch sale in anticipation of that because obviously, we sold off a significant about of deposits now all the growth. We've seen we've been a pay some of that off which is great helps margin. It helps funding. So that's the goal going forward to continue to do that.

You can see that with our D.A. at 30% to 33% of deposits.

Okay, and then just just kind of generally I mean, how are you guys thinking about about deposit competition are you seeing anything different.

You know falling said changes or anything recently like that.

Yes, So look were commercial bank.

So a lot of what we have as relationship based.

So yes, we're competing with the overall relationship with other banks. So it's not initially.

Special that we see advertise somewhere it's more just competing for the business individually.

So it's a lot of negotiation with individual customers and overall relationship along with what's going on in the market. So it's a lot of one offs.

Okay fair enough. Thanks.

Next question today comes from Nancy Bush.

Research. Please go ahead.

Good morning, gentlemen, I'm just a general question for you dog and cat the issues that we're seeing that liquidity issues that we're seeing in the markets. These days, which seem to vary from day to day, given your you're growing payments business et cetera, do these issues hit you at all or do they concern you at all.

[noise] they haven't at this point Nancy as Weve said, we've had really strong deposit growth. This year, we maintain a lot of liquidity on the balance sheet and have a lot of access to liquidity.

From various sources.

So we've been able to manage that.

Hey, today volatility I think very well up to this point and.

And I think will.

We expect to continue to build to do that no one of things we've discussed as well.

Approaching year end is what potential liquidity sees at year end is it's holding more cash so you could potentially see our cash balances increase.

At the bank, just as protection going into year end.

So there would not but there you don't anticipate the data itself would have a material impact on the margin.

Not material. Okay. Secondly, this whole issue negotiated rates and negotiating negotiated rates I guess you'd call. It Europe hardly the only one who is in that process right. Now I'm. Just wondering if you can give some color on how those discussions go I mean do you have to say, okay, we'd like to negotiate.

At the rates, but we need to offer you were going to offer you something in fees or whatever I mean, how does that work.

Yes look there are lot of this as an overall relationship right you're typically not negotiating anything beside that deposit rate because we've already got there were lesser rest of relationship and we were faced with these customers as rates increase of paying them higher rates on the idea is we're expecting same thing as rates move down I think most customers get that most of our bankers get that.

But look this was a big change rates moved very very quickly. So it's getting everybody comfortable with that shift so there's just a lag.

We don't lose a customer we're cutting a deposit rate, but we also.

Need to be fair on both sides. So it just to work in progress and I would say that you know with respect to sort of excess corporate cash it's a it's a national market.

Competition for that as National So you see these.

Very high money market rates from online banks or muddy money market funds and so forth and.

Generally what our relationship customers are looking for is just not in that direction. We don't necessarily have to match those rates, but we have to move in that direction right and a and then we could this past says we find that they understand.

What's going on and and they're willing to to move down over a period of time, but there's a lag there and we expect to have more success.

As we move forward in terms of lowering rates than we've had so far this this year with really just quarter of lower rates.

And just ancillary to that.

You know the deposit market and Atlanta has tended to do crazy things over time and I'm wondering how the competitive situation. This sort of rationality situation and deposit pricing is shaping up right now.

Yes, I don't know that Atlanta is at this and the at this point a lot different from anywhere else in the country I think we saw rates run up.

Last year and earlier this year.

And now they're coming off.

The competitive rates that are being offered in the market, but again to the progress is not as fast as we would likely to be slower going down, but it was going up.

Okay, Alright, thank you very much.

And our next question today comes from Christopher Marinac of Janney Montgomery Scott. Please go ahead.

Good morning, Doug you mentioned, the Fintech at businesses and success on deposits. There could you elaborate further on sort of what's happening there and sort of how that can.

Further propellant for 2020.

Yes, it's really we think it as an exciting opportunity we have positioned ourselves very nicely I think in the in the payment Sally that is Atlanta.

We're working with a number of companies here as well as a across the country. We have a really solid pipelines out into the next through three quarters in terms of.

New payments volume May CH volume and that should result in higher demand deposits and higher service charge income.

Going forward. So we're we're very optimistic about that we think we've carved out a.

A highly competitive nishan that business, we very confident.

And the Treasury management services and item processing.

And.

This is a real area of strength for for our company and and.

It should show up in results over the next to next few quarters here.

Okay, great and is it possible that the DTA ratio just sort of thought rising slightly as it was automotives well, we hope so I don't know if it will you know you've sort of got some countervailing forces there at work.

We've been pleased that it's held up a sore in excess of 30% for the last several quarters now and a and had good growth in those balances obviously, an important element of.

Mitigating margin compression will be to gather more noninterest bearing deposits. So that's core to our strategies and.

As particularly a part of this.

Transaction processing Treasury management of business that we have.

Okay, great. Thank you for that and then as a follow up the nation's question about negotiated rates. What are you seeing on the ability of customers to do loan floors or even to negotiate something favorable for you in terms of prepayment penalties that get waived or at least a.

A reasonable for both sides.

I think we're just starting to see some of that in the market there are opportunities to refinance the lower fixed rates and so that's creating some interest among various customers here and elsewhere.

To do that.

We we also were trying to get some LIBOR floors and some of our loans going forward I think thats a new.

Aspect in the market and we'll see if that were successful doing that going forward, but something we're starting to do.

Great. Thank you Doug.

And our next question comes from William Wallace of Raymond James. Please go ahead.

Thanks, Good morning, guys I'll be brief most questions have been asked but as a quick follow up to Chris' question on floors.

Do you have do you have any loans that are sitting at floors today.

We were I don't think we do Wally if we do its is de Minimis.

We haven't we haven't seen floors.

Sort of competitively in the market for I don't know three years or so now and so that's why I was saying you know we we'd like to start getting some of those of whether that will work competitively remains to be seen and we're early in our effort to do that I think quality by having more success doing fixed rate yeah, rather than doing.

Floors.

35% or loan portfolios that fixed probably a higher percentage of our new business is doing fixed right. So it's hard to move the needle significantly, but that's probably where wrap more luck.

Is that because you're you're doing less see nylons, given where we are in the cycle or is that because you're shifting the focus.

Shifting the focus we're shifting the focus in response to borrower demand.

Theres more interested in doing fixed rate financing now than there has been in the past and obviously, we have more interest in that and we have more interest in that and as bets as incrementally we're seeing a good portion of our growth there.

We are doing more C and I, we are doing more owner occupied commercial real estate, which is seeing high at a different regulatory call code, but.

But the C and I businesses, we broadly defined as we mentioned has been growing at a very nice pays for 15 quarters now 20% per annum compounded.

So we have a we have robust growth in that sector of our business, which is now about 60% of the total mix.

Okay, and then and then just two questions on on NIM, Pat do you have the what a net interest margin was for the month of September .

Yes, but we don't we don't disclose it.

Lower.

So what I'll, let up I guess, that's but to answer that is if we don't get any further rate cuts were going to see some more margin pressure here without any further rate cuts probably another.

Just another six or eight basis points, probably alone with that and then you add in any rate cuts in October December obviously will add on top of that so.

And that's that all that does not does that that six to eight does that include what we've already seen from live or in October .

That would be additional pressure that would be the additional pressure from LIBOR. Obviously, we didn't see because the rate cut was still late in September we didn't see allowed the impact from lower LIBOR in September we saw some but not all of that.

We'll see more of that in October and then obviously kind of benefits and deposit cost cuts, but more to come with that so as I've said before there's going to initial lag with our margin right around the deposit side and hopefully we can start to catch up that seems to get through these rate cuts right understood and Pat I know you said, it and the prepared remarks, but but I couldn't write fast enough what's that.

Dollar amount tied to LIBOR or the dollar amount tied to prime.

So dollar amount tied to LIBOR or is just over.

900 million.

Well I'll pull it up for you.

[noise] Roger do you have a fitness.

It's Ralph I'll get it back to you is roughly 50% yeah.

Well I heard a million yeah.

And another 900 million.

And then another 900 us on price and the Prime is about 200 225 million okay. Okay great.

Thanks, guys I really appreciate the time currently.

And ladies and gentlemen. This includes a question and answer session I want to turn the conference back over to the management team for any final remarks.

Alright, we appreciate you dialing in this morning.

Very pleased with our results and were available to have further discussion.

Today, and and first part of next week for anybody that wants to thank you very much.

Thank you Sir todays conference has now concluded we thank you all for attending today's presentation you may now disconnect.