Q4 2020 Atlantic Capital Bancshares Inc Earnings Call
Good day and welcome to the Atlantic Capital Bank fourth quarter 2020 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the Starkey followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your touched on.
On phone withdraw your question. Please press Star then two.
I'd now like to turn the conference over to Gray Fleming Chief Risk Officer. Please go ahead Sir.
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 wish to caution you that we.
We will be making forward looking statements. During this call and that actual results may differ materially. We encourage you to review the disclaimer on the earnings release dealing with forward looking information. This disclaimer applies equally to statements made on this call. In addition, some discussions may include references to non-GAAP financial measures information about those measures including reckon.
Filiation 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 the CEO of Atlantic Capital Doug Williams.
Thank you, Greg and good afternoon.
I.
I believe you've seen our results now on our earnings release and on 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 teammates at Atlantic Capital.
There are people, who have extraordinary talent in high character, who built on attractive purpose and performance driven culture.
Our purpose is to fuel client prosperity and I believe we did that extraordinarily well in 2020.
Well, what we will do this afternoon as I'll make some overview comments about the year.
And didn't 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 on page three.
This is an overview of the quarter of the year.
We with the fourth quarter, we produced four quarters of solid operating performance and strong year over year growth.
Pre tax pre incentive net revenue.
During the pandemic environment, we grew loans, excluding triple P repayments and forgiveness.
On the 1% 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 three basis points to 16 basis points in the fourth quarter.
And we repurchased 823000 shares totaling $11.5 million at an average price of $13.98.
The business environment during the quarter.
It was stable to improving.
Loan deferrals remain below 1% of total loans, reflecting resilient borrowers with optimism about 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 trophy 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 on Triple P loans.
The credit environment, generally with stable and improving during the quarter overall credit quality remained steady with limited charge offs and loan non accrual levels. The allowance for credit losses remained robust at 155 basis points.
Of loans held for investment.
And 1.7% of loans, excluding triple P loans.
Loan deferrals as mentioned were under 1% of loans and there were no transitions from loan deferrals to non accruals at year end.
Annualized net charge offs were five basis points during the quarter on.
11 basis points for the year.
Nonperforming assets remained at low levels at 13 basis points of total assets.
Turning to page four financial highlights.
We reported diluted earnings per share at <unk> 48 for the fourth quarter.
That's an 80% annualized increase or eight cents per share from the third quarter of 2020.
On 16.
Or 50% annual 50%, 50% from the fourth quarter of 2019.
More significantly pre provision net revenue was $12 $8 million from the quarter.
A 73% annualized increase from the third quarter and 28% over the fourth quarter of 2019.
Total loans held for investment.
Increased 11% annualized in the quarter and 20% annualized year over year.
Total loans, excluding triple P loans increased 21% annualized during the fourth quarter and were up 10% year over year.
Total deposits increased 65% annualized in the fourth quarter and were up 34% year over year.
And deposits average during the quarter increased 57% annualized.
And 36% year over year.
Tangible book value increased to $15.62 a share.
The net interest margin declined to 2.91% Pat Oakes will have more information about that for you on a minute.
And the efficiency ratio was 51, 3% during the quarter.
Capital ratios are still robust.
With a total common tangible common equity to total assets to tangible assets ratio of just under 9% that's down from 11% in the third quarter because of the tremendous growth in the balance sheet, particularly deposits from the excess liquidity that we carried during the quarter.
If you turn to page five.
Loan production was strong during the fourth quarter as mentioned loan growth, excluding triple P loans was up 10% year over year, and 21% annualized linked quarter basis, we processed $42 million from Triple T loan forgiveness applications during the quarter.
These trends sustained a strong five year trends and total loans at 10% compound average rate of growth in commercial loans.
Those are C&I and owner occupied real estate loans, which have grown 13% on a compound basis over the last five years the composition of our loan portfolio remains consistent.
60% of loans.
Were owner occupied commercial real estate loans commercial industrial loans or triple P loans, where the source of repayment as corporate cash flow.
Commercial real estate loans were 30% of total.
Consumer loans were 10% of the total.
In the fourth quarter.
Our fixed rate loans.
Including Triple P loans were 50% of loans in floating rate loans index.
Indexed to prime or LIBOR, where 50% of loans.
On page six we continue to see very strong growth in core deposits.
Year over year deposits were up 34% on an annualized basis in the fourth quarter loans were up 65%.
Are there there was seasonal growth in the in the fourth quarters, we usually see.
But.
On the growth was throughout our various lines of business are very diverse growth.
Treasury management and processing relationships resulted in strong demand deposit account growth.
Deposits are now 34% of total deposits and they grew 34% a.
Our year over year of 36% year over year on 57% annualized in the fourth quarter.
Growth in time deposits was generated from our Fintech partnership, where we make CD secured loans.
And the cost of those interest bearing deposits decreased three basis points to 25 basis points from the fourth quarter.
For the last five years total deposits have grown at a 19% compound average rate growth and demand deposits have grown at a 25% compound average rate of growth.
Pat Oakes will now review the financials for you.
Thanks, Doug So I'm on slide seven and as Doug mentioned earlier, we had solid growth in income over the last few quarters.
Including strong growth in revenue from both net interest income and non interest income.
Net interest income benefited from good growth in our heavy 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 eight.
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.
Doug mentioned earlier it 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 on NIM over the next few quarters.
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 nine.
You'll see that the strong growth in deposits pushed down on 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.
Okay.
On slide 10, a quick update on PPP loans as of December 31, we had $192 million in loans remaining on our balance sheet.
With about $4 3 million remaining in fees to be recognized as Doug mentioned, we began round two this week with existing clients and we are outsourcing the processing these loans, which will impact expenses.
So if you flip to page 11 on go to more detail about expenses.
Another nice decrease on the efficiency ratio at 50, 51%.
As expenses have remained relatively stable over the last few years and the fourth quarter. We benefited primarily from an increase in salary deferrals from the pickup in loan production that Doug mentioned during the quarter.
And the recovery of 290000.
The third quarter losses on customer accounts.
We expect.
Net expenses will increase in 2021 somewhere between mid to high single digits from a combination of things from some new hiring.
The increase in our incentive comp accrual.
Outsourcing of PPP loan processing and investments in some of our growth businesses.
On to slide 12, with the on capital as Doug mentioned earlier, our capital levels remained strong but were impacted in the fourth quarter by this strong deposit growth and our corresponding increase besides of the balance sheet, which reduced both our tangible common tier one leverage ratios.
And as Doug mentioned earlier, we continue to repurchase shares we repurchased 823000 shares totaling $11 5 million.
On an average price of $30 98, and we have roughly seven 3 million remaining of our $25 million share repurchase program.
Now I'll turn it over to Greg.
Thanks, Pat I'll touch on a few slides from the credit perspective, starting on page 13.
Doug is really covered most of the charge offs on non accruals remain low in the fourth quarter only five basis points of annualized charge offs for the quarter.
Our credit side, one levels were basically stable. This quarter you can see in the chart on the bottom right debt within that criticized category, we had a little bit of migration and.
And to classify that just reflects some lingering COVID-19 driven softness with a few borrowers and.
We don't see at this point those are heading towards non accrual.
On page on the next page the on.
This just kind of gives our people on 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 got credit in the quarter.
On page 15, just an update on deferrals or deferrals as Doug mentioned remain under 1% of loans.
None of those that have expired or on non accrual at the end of the year.
On the small increases we saw on Q4 were from primarily from our hotel and SBA portfolios.
On the SBA side as you know the SBA encouraged existing borrowers to request deferrals. After the cares act subsidy payments expired in the fourth quarter.
But with those subsidy payments now scheduled to resume.
For those borrowers in February these requests have pretty much stopped coming on.
And finally on page 16. This is our same COVID-19 sensitive slide it's a I would say getting a little bit less relevant now as we're really just focused more on individual borrowers with them as opposed to category you'll.
Youll see little change on these balances from last quarter other than and hotels, which I'll touch on on a second we are seeing broad impact on significant industry segments that are in our portfolio on.
On the hotels from our hotels have slowly continue to improve occupancy levels over the last few months you can see the November numbers were improved over.
August numbers.
Most of our hotels are operating at or above breakeven, which in some cases includes day lower broke even breakeven after cutting costs.
Most of them also we're expecting from normal seasonal slowdowns in the winter months ahead.
They are hoping it's going to be the head of some good rebalanced in the spring if we can make good progress with vaccines and get people traveling again.
Finally, our <unk> and the quick serve restaurants, and the restaurants segment I will just note that has continued to perform very well and we're now actively looking at some new line overtime opportunities with some of the strong franchise ores.
Really proven themselves over the last few quarters.
And with that I'll turn it back over to Doug.
Yes.
Thank you gray.
In terms of talking about the outlook I'd, just like to highlight pad oaks' comment.
When talking about non interest expense you mentioned that we expect noninterest expense to grow in the mid to high single digit.
Percentage.
Range in 2021.
You mentioned several factors the most prominent of those or investment in new business and growing new businesses and also in new hiring and we expect a double digit percentage increase in head count during the year. This is really an opportunistic play on our part because we see.
<unk> to grow revenue exceeding that level of expense growth.
If you look back at pages, five and six you see that we have now a very spur on five year track record of double digit percentage growth in loans and deposits.
We've also continued to grow all of our business during the pandemic.
Because our people we're executing on our high level and we have healthy pipelines for new business, we haven't on attractive culture, and I have a lot of confidence on our ability to continue to execute at that level, we find that our clients want to do more business with us and our prospects, we want to do business with Atlantic capital.
There is a lot of near term uncertainty about the strength and pace of economic recovery, particularly early in 2021 a.
While the vaccine is being administered and we seek to slow the spread of the virus, but that's more than offset by the confidence we have and the opportunities to sustain revenue growth at a high level and continued to produce solid performance over the next two years.
So we do have a very optimistic perspective on.
On 2021, particularly in the second half of the year and into 2022, and a high level of confidence that Atlantic capital will continue to sustain high levels of growth in loans and deposits service charge income net interest income and earnings.
With that we'll be happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
On a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Jennifer Dimber with <unk> Securities. Please go ahead.
Yeah.
Thank you.
Good afternoon.
Good afternoon, Jennifer Hello, Oh, Oh, the loan growth that you had this quarter you know quite strong and certainly stand out for the industry. You said on the 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.
Well the opportunities are for our broad based if we looked at our pipelines in our various businesses.
They're they're strong in the commercial arena, they're strong in commercial real estate.
And.
Really we saw them on.
A meaningful pickup in activity and the pipelines are.
In those categories.
During the fourth quarter, if you look at the whole of 2020.
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 weak.
So we got closer to our target there with respect to Outstandings and saw a 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.
Yeah.
So do you think you can get NII growth, even with the margin pressure because your line grants can be pretty healthy this year.
We think so.
Yes.
And Pat what kind of margin pressure or do you think you'll experience as we go through the year and what are you seeing in terms of lending competition right now.
Okay.
I'll start on the NIM and then Doug you can jump in on on competition.
Yes.
Excluding the impact of excess liquidity, which could create some volatility N P. P P, which also Chris on volatility.
Yeah, 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 on that so.
On the core margin could trend down a little bit from here and hopefully as we get closer into the year It will start to stabilize.
On the core was on a 311 could you see it decrease a few more basis points per quarter, possibly.
Yes, Jennifer I would just say on on loan yields we've seen them over the course of 2020, we saw a lot of repricing of fixed rate loans.
Floating rate loans, which are now about 50% of all of our mix reprice instantly when rates are reduced but what we saw over the course of.
Of 2020 was a lot of repricing in the fixed rate loans. So I think we're really through that so I think.
Loan yields should be you.
Comparatively stable over the course of 2021.
With respect to competition.
You know that.
The competitive environment is sort of like it always has been we really haven't seen any new competitors.
And our principle competition continues to be the large banks.
Thanks, so much.
And I will know Jennifer that there is probably from a 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.
Thank you.
And our next question will come from Michael Rose with Raymond James. Please go ahead.
Hey, good afternoon, everyone and hope you're doing well.
Just a follow up on the loan growth question, how much of the debt or maybe.
Maybe if you can size for us, but how much of it is kind of.
Drawdowns on lines or things like that versus actual new activity. Obviously some of the growth was and wasn't CRE was that like funding up of construction projects was that new business.
If you can give us some color around kind of <unk>.
Organic new customers versus existing customer utilization. Thanks, yeah.
On the C&I category. It was it was more existing clients not draws under lines of credit lines of credit we actually usage has been pretty stable throughout the pandemic. We did see a modest rise in the first and second quarters, but.
Those lines are 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 hold.
On behalf of our clients. There also been some new clients that we've added on our in our commercial area.
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 you know part of our.
Something about 2021 is we do see those construction commitments.
Being 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.
Ross books, and their optimism about the future and their willingness to invest in that future.
Okay, and then on the on the hiring front I mean, it does seem like a little bit of a change from the past couple of quarters. It now seems like you guys are fully in.
Growth mode. I think you said, Doug Guy and a double digit number of hires or 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 a plan as you expected for the year.
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 we put those numbers in the budget.
So we feel free to talk artistically add those people.
You know I don't know if we'll add that many people or will have 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.
In front of us to turn new business and grow revenue.
No I appreciate that makes it 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.
How sticky, particularly those latter two might be is in moving to the into the next couple of quarters. It seems like the deposits you're expecting will stick around a little bit.
Yeah, I'll I'll, let Pat Oakes sort of 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 of the deposit growth is really combination of pigs.
Existing clients with more liquidity.
We do do business with a lot of successful enterprises in a lot of wealthy people.
And they have built liquidity over the course of 2020.
And they feel confident in.
Placing debt liquidity with us and there is a seasonal character to that as we saw on 2019 than in prior years.
But we also have a very strong level of core.
Relationship deposit growth.
It is reflective of growth in those businesses and also the acquisition that are you know the new business development activity that we have.
And if you go back and look at those pages six and seven in our deck.
Page seven in particular, which was about deposits you see a very attractive five year.
Our track record of total deposit growth in demand deposit growth.
Everything we're seeing in terms of new.
New business acquisition new.
New business development.
Suggests that we can sustain those kind of trends.
So those fees.
Uh huh.
And now I'll pass on to more color, yeah, probably a little more color on the fourth quarters. So typically we see a run up seems on deposits ended the year. At this time does that money came on earlier and in fact, a lot of it's still around so it's going to inflate deposit balances in the first quarter net we think like I mentioned earlier that some of that will start.
The decrease as we go through the first quarter net second quarter.
It's just hard to predict the timing on this like Doug said.
We got good core growth.
Some of our customers have a lot more liquidity than they did previously and along with the season on 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 couple of quarters.
I think it's really reflective of the franchise that we have built and are building.
We have a strong treasury management services capability and.
And we've really use 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.
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 built.
And we're building net.
Yeah, that's why I definitely tells the story and I think he is doing a great job on maybe just one final one for from me.
You got a little bit left on the repurchase to go obviously raise some debt to help fund it capital levels under pressure this quarter because of the balance sheet growth.
What socks, though at one one on tangible.
Could we look to see you use the remaining and potentially re up on the buyback. Thanks.
Yeah, Michael I think you know, we 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 array of opportunities are available to us as they always have been.
We have a we're in a great position with respect to capital we have a lot of flexibility to deploy that capital.
For shareholder advantage and of course that includes reinvestment in our existing business.
A new share repurchase program and the possibility of a regular dividend as well. So all those things are in front of us.
We will come back after the first quarter in and talk to our board about those those are.
Options and.
And we'll be communicating accordingly.
Perfect I appreciate all the color. Thank you.
Thank you.
Our next question will come from Steve call Murray with G. Research. Please go ahead.
Hey, guys good afternoon.
Good afternoon Hello.
Pat I Wonder if you go back to one of your 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 I could 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.
The securities book versus waiting for additional expense.
Yeah. So I think we're gonna 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 will 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 will look at other alternatives. We also all trying to lower deposit costs and trying to look at our deposit base to make sure. We have a true core debates 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.
Okay, Okay I'm going.
To add around that.
No you know we.
As I mentioned, we do have an optimistic perspective with 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.
Through the vaccination process and so forth I think the economy, where we're strong.
Will the economic recovery will.
Solidify and accelerate and that's going to suggest that the loan demand will improve.
Improve as well, having said that we have I think very healthy pipelines at this point of the year.
So I think the opportunity too.
To replicate it in fact improve on.
<unk> thousand Twenty's loan growth record in 2021 is very good.
Again, the mix of that loan growth I think will change it will be more on the commercial segments as opposed to this particular consumer program that we had a lot of growth during 2020.
Sure sure. Thanks.
Maybe actually going off on that point next I mean.
I I get that the the lending opportunities have been broad base wondering if you have any sort of commentary as far as like industry level on opportunities in the in the commercial lending book I know in the prepared comments.
As mentioned opportunities opening up in <unk> is there any other specific area of industry, that's improving youre seeing strong demand.
I think it's it's really broad based Steve Gray did mentioned the <unk> and that was early in the pandemic.
Identified as a particular area of concern but.
You know are the performance on <unk> clients over the course of 2020 was was quite strong and we saw very favorable year over year revenue comparisons.
As we look at that business in particular.
Seen strength building on strength and we're seeing a lot of those clients.
You know looking to expand their businesses in more borrowing money to do that and so were and.
We have a lot of confidence in our team to we think we've got some very good bankers in that space.
And Oh awesome very good credit people.
And we and we think there are there going to be some good opportunities to continue to expand that particular part of our business, but that's really true across the board.
You know our Atlanta clients are.
Our resilient they are showing.
Their confidence in the future with it with new investments in acquisitions, and we're able to finance those for them.
So really in every aspect of our business we're seeing.
I'm optimistic borrowers.
And our.
Clients generally who you were.
Maybe our borrowers but.
Who are willing to invest in the future and that really seems to be driving opportunity for us.
Okay, and then and then maybe a question on credit I appreciate all the detail on on the deferrals and on the total book I was wondering if you guys saw any sort of credit enhancements from sponsors.
The hotel portfolio, and if you've been able to receive those.
Okay.
So Steve this is gray.
We have and the.
A hotel, but really just you know kind of in 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.
Sponsors so we haven't.
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.
The property might be on a location that was hit a little bit harder than average.
Generally speaking we've on the CRE side than working with developers that had other properties that might be doing really well and so overall cash flows have held up nicely.
We haven't I haven't had to look at either active.
Active sales discussions or.
Additional credit enhancement.
Okay, Okay very good.
One final one from me maybe for maybe for Pat I was.
Just wondering about the tax rate expectations for 2021.
I wouldnt, assuming assuming we make more money and pre tax income goes up.
Rate could increase slightly from where it was in 2020, but I wouldn't expect anything significant.
From what we saw in 2020.
Okay. Okay fair enough. Thank you that's all I have.
Our next question will come from Stephen Scouten with Piper Sandler. Please go ahead.
Hey, guys good afternoon.
Hi, Steven.
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 are kind of a 13 and a half.
Run rate, we had in the fourth quarter, because obviously, if you could talk a little bit of a jump here already yeah.
I'm talking full year 'twenty versus full year 'twenty, one got it okay helpful.
Now obviously in first quarter just to be just to be clear for first quarter expenses are typically higher for us with.
Benefits expense being higher on payroll taxes.
So you have that piece of debt and first call Ross be higher from some of the PPP processing.
That will occur in the first quarter.
So there'll be a little bit inflated there, but then obviously from the full year the loss will be higher.
Okay, great and anything nothing unusual in the upticks in some of these categories in fourth quarter or just kind of the start of some of these incremental investments you guys have spoken to.
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 more salary deferral expense since we had bigger loan production and then other expenses were down but everything else is just noise.
So you didn't see a lot of that you'll start to see that next year.
Yeah, Okay, Yeah, I guess, what I was looking at like core other expense stripping out some of the.
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 youre thinking about it just as the base Yep.
Okay.
And then when you talk about Doug you talked about the percentage head count increase kind of double digit percent increase in head count.
What kind of base are we talking about working off of.
Are you, saying revenue producers and if so how many are we starting with and what what could that really looked like yeah.
Stephen I'm reluctant to put on a particular number on on all of that because.
This is opportunistic.
On have to do this where you see opportunities that.
<unk> 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 we have a little over 200 people in the company right now.
We could potentially increase that head count by a double digit percentage.
And if we do that I would think it would be.
Roughly equally balanced between producing positions and.
Support positions.
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 this these deposit inflows.
Last year was surround 200 250 million that came back out in the first quarter.
But this quarter the increase was almost 700 million so.
Is this 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 four or 500 million that could come back out because it's obviously.
Pretty sizable relative to the balance sheet.
Right right.
So you've got two components there right the period.
<unk> was $700 million, but the average increase was $400 million right. So.
That kind of gives you a rough idea on the additional 300 million that came in at towards the end derived debt.
It would most likely leaves.
At some point not a lot of it hasn't left yet, but when will it leave.
This first quarter, but there's such volatility with a lot of these numbers, it's hard to predict what happens besides that.
Sure sure. Okay. No. That's very helpful. And then maybe just last question from me sort of around credit I mean, you noted debt.
Credit credit is great. There's no real issues that I can see obviously net charge offs are de minimis to 11 basis points, but then you're also kind of noted that you're still maintaining reserves, where we've seen some other banks.
Maybe my personal opinion released reserves pretty quickly. So I'm just kind of wondering what you're seeing.
Look towards potential loss content in 2021 and.
Just balancing what you said with some conservatism with what looks like a pretty good credit picture.
Yes, Greg why don't you take that and then I might have a comment on that as well.
Yeah, So Stephen I guess first of all I'm really pleased to.
Here across the industry that the questions now are about reserve releases instead of reserve built and so on.
That's hopefully a good sign.
But I think others have said, it's 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.
Stimulus driven.
Propping up of some borrowers, particularly on the small business segment.
That's the question now, which you know good thing we have a light at the end of the tunnel with the vaccine.
You know being rolled out and so the question now is does that stimulus fully bridged the gap for those or do something up on just just not make it.
And so the charge off picture.
It is just really hard to predict you know.
If the economy doesn't worse worse on and in fact starts improving in the spring or summer, we would expect our reserve percentages to continue to trend down.
But it's those charge offs that really well along with expected loan growth that will really determine.
The size of the dollars and so yeah.
We've still got well forecast and 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 on our CFO model and you know to your point just test.
Have not quite felt like we've rounded the corner in terms of in terms of that uncertainty yet to start changing that materially.
Yeah, Stephen the only thing I would add to that is that.
Unlike some banks, who had a reserve release in.
In the fourth quarter, we really.
You know didn't think that was appropriate for us because of the level of uncertainty.
Particularly through the first part of this year.
Uh huh.
I think if you see reserve release from Atlantic capital will be that.
An indication of our conviction that that uncertainty has greatly diminished in cash.
And.
Things are really.
Solidly on the mainland with respect to the economic recovery.
Yes, no 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.
Yes, Sir.
Our next question will come from Christopher Merrimack with J M. S. Please go ahead.
Hey, good afternoon, thanks for hosting the call this afternoon.
Wanted 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 are 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.
Okay.
No not really Chris.
I mean, we're you know we're kind of like I said on this.
Just working with each individual borrower and.
Pandemic or no theres going to be some borrowers debt.
You know he had a glitch here and there and others that improve or pay off in and while the criticized numbers were flat, there's always movement up and down.
You know I think that the.
We've got classically trained credit folks and.
The the epitopes classically trained credit folks is to be quick to downgrade and flow to upgrade.
And we've tried to emphasize with folks that we need to be you know even on the upgrade side a little bit more real time, but still there is kind of an inclination that is hard to break in credit folks of okay. As soon as I hear about a potential issue all downgrade.
And I wanted to see on a piece of paper evidence of improvement before I upgrade.
And so there is naturally a little bit more lag on that and you know I think in our credit folks mind and I don't want to push too hard on on changing that because it you know its the conservative and right way, but.
Yeah, we've got a few.
On a decent number of payoffs on refinances and some of those that were originally scheduled for fourth quarter have.
Been pushed into the first quarter just for various reasons and so we're still looking at some.
Potential upgrades and payoffs that we.
Thank you at least some of those will happen.
So certainly can't say there won't be any more downgrades, but we're really.
No just saying that's more on a case by case basis on and maybe one example.
Chris from the fourth quarter as you know, we had a hotel on where.
Yes, good sponsorship.
Not really very concern 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 on additional deferral longer than some of our others. Yeah. We just felt like that deserve to be a sub standard grade in terms of you know on identified weakness.
And so that's one that moved from special mention to sub standard, but again. Good news is we feel very comfortable long term with that in terms of location and sponsor.
So it's those kind of movements that we're now seeing more in terms of fine tuning our rates then.
Then bigger trends within industries.
Great. That's helpful background. Thanks for sharing all of that and then Doug just a quick question I think pre pandemic, even talk a little bit about sort of your kind of <unk>.
Policies on the Fintech clients and just as a reminder, but you are not lending to these.
They really kind of separate and distinct depositors with a separate relationship and then you have other small.
Got it.
Theyre processing relationships.
Chris.
So you know what we're doing is we're offering them, our treasury management services and.
That generates substantial deposits flows of course, but also a lot of service charge income.
And if you go back to that.
Page seven in our presentation you see those.
Actually page 22 in the presentation in the appendix is probably the best place to look on who best information on net payments and Fintech business and you see very substantial.
Substantial growth trends in deposits and fee income and processing volumes as well.
Right, but again, it's part of your risk metrics as to not really lent to them, which again correct correct. Yeah on the policy got it correct great. Thanks, Don I just wanted to reiterate that point I appreciate the information today.
Thank you.
Our next question will come from Ross Haberman with R. L. H investments. Please go ahead.
How are you guys nice quarter I just had two very brief questions Annie.
Any issues in the shared national credit book.
On a investments.
Hey, Ross this is great no not really we have a couple of special mentioned in there that.
There's 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 other than the time of pandemic is there a good bit of lag and so they were looking for.
First quarter.
And second quarter financials, where we had already gotten to the point of having additional financials that we have we have a couple of special mentioned on that portfolio, but we're not concerned about either of those and really everything else is holding up nicely.
So all of that put the $200 million there as you grow direct loans, you'll you liquidate that over time does that is that sort of the strategy.
Doug you want I can take that one.
Yeah.
Okay.
I wouldn't say that.
<unk> been in the.
Regional corporate banking business really since inception and.
I once ran the corporate banking business that were cobia.
And so we have on.
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 on the portfolio.
And it's for several years now it's been about 10% of the loan portfolio overall, and where we're comfortable with that level and we would anticipate.
Staying at that level, there's a lot of.
Transaction churn in that book of business.
No.
These loans refinance on the capital markets.
These companies come to the fore with with new financing request and we also have new clients.
On that mix as well.
There's also a lot of.
Amendments and waivers in that kind of stuff. So it's a very active portfolio, but and.
In some years it will show a little more growth in other years it will decline in terms of Outstandings.
But we think it will consistently it has been consistently we will continue to be consistently probably around 10% of on loans overall.
And just one final question I was going on I was looking at the notes the details on on the hotel portfolio.
I think you said $26 million in special mention.
On 10 million in classified.
Or are most of those are all of those taking the second the second.
A round of PPP, now and or I've heard in a number of other calls this week.
A number of banks are dependent on on on the severity of the of the.
Of the occupancy.
Beginning to break up some of these more troubled loans, the a notes and B notes.
Have you have you are you at that stage it with any of these credits.
So I would say Ross, we're not at that stage on any of these credits were actually feeling pretty good about the.
The book, which is about half of it as a non commercial real estate group and that's where we have some really strong sponsors that we think have especially at this point.
Lenny a capital on patients to get through to spring and summer on will help you will 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.
Most of them will be able to take advantage of second draw on Triple P loans.
On the SBA side.
The ones that are.
Seven a loans will get pay.
Payments made by the SBA, starting again in February and.
For hospitality.
Unless I'm the funds run out that that gets them eight months of loan payments from the SBA.
On the ones that had 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 Inc.
Great example of this final last mile. If you will bridge to when we start getting back towards normal and these cares act subsidies subsidies on the Triple P loans I think are really going to end.
End up working well for that industry.
And just one final one final.
Question These subordinated notes.
Banks and preferred stock.
It's been a wash huge amount issued in the last six or nine months have you bought much of that and if so how and how much from how many different issuers.
The issue is if I may ask to sort of help your.
Margin on your spreads.
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.
Okay. What's your overall opinion about that class on possible investments I know, it's been a very popular for offer issue as you know on.
I, just don't know because it's that the illiquidity out.
If it's worth the risk free.
For the out of the deal.
We've looked at it and from the right bank, we'd be willing to do some investments, but I don't think it would be anything significant for us.
Okay, guys. Thanks, a lot and have a wonderful weekend.
Thank you.
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.
<unk>.
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.
Again, thank you for dialing in this afternoon and.
Have a good weekend.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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