Management’s Discussion and Analysis of Financial Condition and Results of Operations
MVE
Market value of equity
Nasdaq
Nasdaq Global Select Market
NOW
Negotiable order of withdrawal
NPA
Nonperforming asset
NPL
Nonperforming loan
OCC
Office of the Comptroller of the Currency
OCI
Other comprehensive income
OFAC
Office of Foreign Asset Control
Probability of default
PPP
Paycheck Protection Program
ROU
Right-of-use
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SAR
Stock appreciation right
SBA
Small Business Administration
SBIC
Small Business Investment Companies
SEC
Securities and Exchange Commission
SETCO
Southeastern Trust Company
SOFR
Secured Overnight Financing Rate
TDR
Troubled debt restructuring
UDAAP
Unfair, deceptive or abusive acts or practices
UDAP
Unfair or deceptive acts or practices
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PART I
ITEM 1. BUSINESS
RISK FACTOR SUMMARY
Our business involves significant risks and uncertainties that make an investment in us speculative and risky. The following is a summary list of the principal risk factors that could materially adversely affect our business, financial condition, liquidity and results of operations. These are not the only risks and uncertainties we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors”, together with the other information in this Annual Report on Form 10-K.
Risks Related to the Company and its Banking Operations
COVID-19 has resulted in a significant global economic downturn which has adversely affected, and is expected to continue to adversely affect, our business and results of operations, and the future impacts of the pandemic on the global economy and our business, results of operations, liquidity and financial condition remain uncertain.
We are subject to risks associated with geographic and customer concentration in our lending operations and deposit base, which could negatively impact our asset quality and liquidity, respectively.
Our loan portfolio consists largely of commercial real estate and commercial and industrial loans, which carries higher credit risk than other loans that could adversely affect our financial condition and results of operations.
Lending to small businesses, franchisees and high-growth businesses may expose us to additional risks.
Our SBA lending program is dependent on the federal government and our status as an SBA Preferred Lender, and we face risks associated with originating and selling SBA loans.
PPP loan originations may result in a large number of low-yield loans remaining on our consolidated balance sheets.
Our growing deposit and processing focused business may expose us to additional risks not associated with the provision of core banking products and services.
Regulatory changes related to widely used reference interest rates could adversely affect our revenue, expenses, the value of our loans and other financial instruments, and our interest rate risk.
An economic downturn in the commercial loan market, the commercial real estate industry, and/or in our markets generally could adversely affect our financial condition, results of operations or cash flows.
Our allowance for loan losses may not be adequate to cover actual losses, and we may be required to materially increase our allowance, which may adversely affect our capital, financial condition and results of operations.
Changes in accounting policies or standards could materially affect how we report our financial results and condition.
Changes in policies of monetary authorities and government action could materially adversely affect our profitability.
Fluctuations in interest rates could reduce our profitability.
We are subject to risks in the event of certain borrower defaults, which could have an adverse impact on our liquidity position and results of operations.
We may need to rely on the financial markets to provide needed capital.
Negative publicity about financial institutions, generally, or about us, specifically, could damage our reputation and adversely impact our liquidity, business operations or financial results.
Certain changes in interest rates, inflation, deflation or the financial markets could affect demand for our products and our results of operations and cash flows.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
We face strong competition from larger, more established competitors that may inhibit our ability to compete.
The soundness of other financial institutions with which we do business could adversely affect us.
Environmental liability associated with lending activities could result in losses.
We may not be able to retain, attract and motivate qualified individuals.
A breach of our operational or security systems, or those of our third-party service providers, could disrupt our business, result in unintentional disclosure or misuse of confidential information, or damage our reputation.
Our business is dependent on technology, and an inability to invest in technological improvements or obtain reliable technology and technological support may adversely affect our business, financial condition and results of operations.
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The value of our goodwill and other intangible assets may decline in the future.
We face risks related to potential changes in legislation, including but not limited to, tax law, privacy and information security and anti-money laundering and anti-terrorism, and federal agency leadership, policies, and priorities.
As a participating lender in the SBA’s PPP, we are dependent on the federal government’s continuation and support of the program and on our compliance with program requirements.
Various regulators periodically examine our business and may require us to remediate adverse examination findings.
Risks Related to Ownership of Our Common Stock
Limited trading in our common stock may impact the ability of shareholders to sell their shares and the price of our common stock.
We are no longer an “emerging growth company” and are therefore subject to certain increased disclosure and governance requirements.
Our stock repurchase program may not enhance long-term stockholder value and stock repurchases, if any, could increase the volatility of the price of our common stock and will diminish our cash reserves.
A number of factors could cause the price of our common stock to be volatile or to decline.
The holders of our subordinated notes have rights that are senior to those of our shareholders.
We may borrow funds or issue additional debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.
Our ability to pay dividends to our shareholders is limited.
We may not be able to raise additional capital on terms favorable to us or at all.
Background
Atlantic Capital Bancshares, Inc. (“we,” “us,” “Atlantic Capital,” or the “Company”), a Georgia corporation organized in 2006 and headquartered in Atlanta, Georgia, is the parent of Atlantic Capital Bank, N.A. (the “Bank”). We were founded by a team of senior bankers that recognized a market opportunity to bring large bank expertise and capabilities to small and middle market companies in the Atlanta market. The entrepreneurial spirit that promoted Atlantic Capital to seize the market opportunity is still woven into the Bank’s culture.
In 2015, we became a publicly held company through our acquisition of First Security, a $1.14 billion financial institution headquartered in Chattanooga, Tennessee. In 2019, we completed our exit of the Tennessee and northwest Georgia markets with the sale of 14 branches located in those markets and the residential mortgage banking business associated with those branches. This sale had a positive impact on our financial results, including long-term cost savings, the reallocation of resources to the Atlanta market and in high-growth businesses, improved capital to support our strategic initiatives, and improved profitability.
The advent of the COVID-19 pandemic in 2020 presented unique and unprecedented organizational and economic challenges. Our risk management philosophy served us well during the pandemic. Strong capital levels along with prudent liquidity and risk management allowed us to not only quickly address internal issues, but also help our customers and the communities we serve navigate the pandemic.
In the first half of 2020, we concentrated on providing assistance to our borrowers, including delivering PPP loans. We funded $234 million loans in PPP loans to over 800 borrowers. Every qualified client that applied for a PPP loan with our company received funding. In the latter portion of the year, our clients had modified their business models to operate in the pandemic. We saw a meaningful increase in financings and other activity leading to strong growth in our commercial banking efforts, including commercial real estate. Our fintech and payments business was also very active as these customers were able to continue to grow their businesses during the pandemic.
Our Business Strategy
Our objective is to fuel the prosperity of entrepreneurs and businesses in the markets that we serve.
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We are a team of talented, experienced and entrepreneurial bankers focused on serving commercial and not-for-profit enterprises, fintech and other processing companies, commercial real estate developers and individual clients that value high-touch relationships and deep expertise. Atlanta is our hometown and we are here for our Atlanta clients. In addition, our products and service capabilities and our focus on entrepreneurs are effective in targeted businesses nationally where our flexibility and expertise are highly valued and sought after.
We believe our strengths differentiate us from our competitors and allow us to address the financial needs of our clients. We also believe that these clients will present us with opportunities to originate loans and utilize our treasury management expertise. We will continue to focus on maintaining industry diversity in our target client base to mitigate our loan portfolio risk, increase market presence and leverage the broad industry experience of our commercial and business banking teams.
We recognize that the success of our franchise depends upon the success of our bankers. We are focused on hiring and retaining experienced bankers, providing them with the business development and client service tools they need to build and maintain long-term banking relationships through a deep understanding of each client’s business. We also construct client service teams with the range of expertise necessary to provide collaborative and seamless high-touch service across product lines. We are committed to continued investment through recruiting and employee development as well as product innovation, primarily in our core commercial banking business and our deposit-based and payment processing businesses. We continually evaluate our product offerings, and we rely heavily on input from our bankers as we refine our products to provide creative financial solutions tailored to the changing needs of our clients.
To support our strategic initiatives, we focus on maintaining a balance sheet with strong capital levels, high liquidity, and excellent credit quality, which we believe enable us to not only nimbly expand our teams of service providers as hiring opportunities arise, but also to originate larger loans, invest in new business lines, and attract deposits from high transaction volume payments and financial technology businesses.
We regularly evaluate the profitability and viability of our existing lines of business, the strategic advantages associated with investment in the organic development or acquisition of lines of business that better serve our core banking customers, and the termination of under-used or unprofitable lines of business.
Commercial and Not-for-Profit Banking
We offer a full range of commercial and business banking products to fund our Georgia-based clients’ strategic growth, capital expenditures, working capital requirements and strategic corporate finance activities. Our solutions include working capital and equipment loans, loans supported by owner-occupied real estate and strategic financing funded through both revolving lines of credit and term loans. We also offer outstanding cash and treasury management services with exceptional client service.
We focus on banking small businesses with revenues up to $10 million and middle market companies primarily based in Georgia. We also participate in syndicated loans to larger borrowers, generally located in the Southeast. In addition to customary commercial loans, we offer SBA loans and franchise finance loans to small businesses across a wide range of industries in the Southeast and nationally through a dedicated team of bankers with expertise in these specialized forms of lending. We offer SBA loans under the 7a program as well as the 504 program and periodically offer loans guaranteed by the United States Department of Agriculture.
The terms of our commercial, not-for-profit and business banking loans vary by purpose and by the underlying collateral. The vast majority of these loans are secured by assets of the borrower; however, we periodically make unsecured loans to our most creditworthy clients when circumstances support such activity. Loans to support working capital typically have terms not exceeding one year and are usually fully-secured by accounts receivable and inventory, as well as by personal guarantees of the principals or owners of the business. For loans secured by accounts receivable or inventory, the principal balance is repaid as the assets securing the loan are converted into cash. For loans secured with other types of collateral, the principal balance generally amortizes over the term of the loan. The quality of the commercial borrower’s management and its ability to both properly evaluate and respond to changes affecting its business operations and operating environment are significant factors we evaluate with respect to a commercial borrower’s creditworthiness. In addition to analyzing the
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creditworthiness of franchisee borrowers, we also perform analysis on the franchisors to ensure these franchisees have adequate support from a financially sound franchisor.
Fintech and Payments Businesses
Through our highly experienced Fintech, Payments and Treasury Services teams, we provide an array of high volume payment processing solutions, treasury management and deposit services to companies located throughout the United States.
Our payment technologies and treasury services capabilities are tailored to the needs of clients located across the country in particular industries, such as financial technology, payroll service bureaus and business service clients relying upon high volume funds transfer solutions. Our Fintech and Payments teams assist high transaction volume clients with payment processing through the Automated Clearing House and FedWire systems as well as with transaction compliance, risk monitoring and management. We offer an array of corporate treasury management services designed to improve our clients’ financial efficiency through effective collection and disbursement of funds as well as real time online execution and reporting capabilities.
Commercial Real Estate Finance
Through our commercial real estate team, we offer a full range of treasury management services and a wide variety of loan products, including secured construction loans, secured mini permanent loans and, less frequently, secured or unsecured lines of credit. A large majority of our commercial real estate loan portfolio is secured by a first mortgage security interest in the property financed. Our primary focus is providing loans for our core commercial real estate property types: multifamily (primarily for-rent) housing, office, industrial and retail properties. We occasionally extend unsecured credit to certain commercial real estate clients, which we believe to have exceptional credit quality. The majority of our commercial real estate customers and the largest proportion of our commercial real estate collateral are located in the Atlanta area. We have occasionally extended credit to select clients outside our primary markets, and expect to continue to do so in certain circumstances.
The majority of our commercial real estate loans finance stabilized income producing assets. We also extend loans for construction and development purposes and lines of credit. We seek to actively manage and balance our commercial real estate loan portfolio across various property types and industries to assure appropriate diversification and to manage our exposure to market conditions. We have arranged and participated in syndicated commercial real estate loans to diversify and mitigate our client concentration risk and to support our loan growth goals, and we may continue both in the future.
Private Banking
Through our private banking business team, we offer personal credit products, an array of checking and savings products and online and mobile banking services.
Our private banking credit products include loans to individuals and professional services businesses for personal and investment purposes, such as secured installment and term loans and home equity lines of credit. Repayment of these loans is often primarily dependent upon the borrower’s financial profile and is more likely to be adversely affected by personal hardships as compared to other types of loans. Credit decisions are based on a review of a borrower’s credit and debt history, past income levels and cash flow to assess the ability of the borrower to make future payments. Home equity lines of credit are underwritten based upon our assessment of the borrower’s credit profile and ability to repay the entirety of the obligation.
Competition
We face substantial competition in all areas of our operations from a variety of competitors, many of which are larger and may have more financial resources than we do. Such competitors primarily include national and regional banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including,
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without limitation, savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries.
The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes and continued consolidation. In particular, recent consolidations and disruption in our Atlanta market could result in increased competition as both established institutions and new market entrants position themselves to attract new customers and employees. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance agency and underwriting, and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks. Many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
As of June 30, 2020, according to the FDIC, there were approximately 77 banks and thrifts with operations in metropolitan Atlanta. Large national, super-regional and regional banks may lack the consistency of decision making authority and local focus necessary to provide superior service to our target clients. Conversely, smaller community banks typically lack the sophisticated products, capital and management experience to provide the level of service that our target clients demand. We believe that our product offerings are more robust than those offered by community banks and more tailored to suit our clients’ needs than those offered by large regional and national competitors. In addition, we believe that our collaborative team approach, the decision-making authority vested in our seasoned bankers and our streamlined credit approval process allow us to provide high-touch service at a level not offered by our competitors.
Human Capital Resources
As of December 31, 2020, we employed 201 full-time equivalent individuals. All of our employees are only employees of the Bank. We are not a party to a collective bargaining agreement, and we consider our relations with employees to be good.
Our business strategy relies heavily on professional relationships and the quality of expertise and service provided by our employees. Accordingly, we strive to recruit and retain talented, high-caliber employees who share our values and support our strategic objectives. We offer a comprehensive benefits program to our employees and have designed our compensation programs to attract, retain, and reward employees, mitigate undue risk, and to align with company performance and shareholder value.
Our employment practices are designed to encourage an inclusive, respectful and rewarding workplace, with opportunities for our employees to grow and develop their careers. We provide equal opportunity for all in recruitment, career development, promotion and compensation without regard to age, color, non-disqualifying disability, gender, national origin, race, marital status, veteran status, religion or any other basis that is protected under applicable law. These policies are consistent with, and are an extension of, our existing Code of Business Conduct and Ethics and reflect our commitment to sustainability, diversity and accountability.
We believe that diversity and inclusion are critical to our success and are committed to fostering an environment that encourages diverse viewpoints, backgrounds and experiences. With the support of our management and Board of Directors, we continue to explore additional diversity, equity, inclusion and belonging efforts.
Additional Information
Our principal internet address is www.atlanticcapitalbank.com . The information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K. We have included our website address as a factual reference and do not intend it as an active link to our website. We provide our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and all amendments to those reports, free of charge on www.atlanticcapitalbank.com , as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
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Supervision and Regulation
Bank holding companies and national banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect us. This summary is not intended to be an exhaustive description of the statutes or regulations applicable to their respective businesses. Supervision, regulation and examination of us by regulatory agencies are intended primarily for the protection of depositors rather than of our shareholders. We cannot predict whether or in what form any proposed statute or regulation will be adopted or the extent to which our business may be affected by a statute or regulation. The discussion is qualified in its entirety by reference to applicable laws and regulations. Changes in such laws and regulations may have a material effect on our business and prospects.
Atlantic Capital Bancshares, Inc.
As a bank holding company, we are subject to regulation under the BHCA, as amended and to the regulation, supervision, and examination by the Federal Reserve.
Acquisitions
The BHCA requires every bank holding company to obtain the Federal Reserve’s prior approval before (1) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) acquiring all or substantially all of the assets of a bank; and (3) subject to certain exceptions, merging or consolidating with any other bank holding company. In addition, a bank holding company is generally prohibited from engaging in, or acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company engaged in, non-banking activities. This prohibition does not apply to activities listed in the BHCA or found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or controlling banks as to be a proper incident thereto.
The BHCA further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or that would substantially lessen competition in the banking business, unless the public interest in meeting the needs of the communities to be served outweighs the anti-competitive effects. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy and consideration of convenience and needs issues, which focuses, in part, on the performance under the CRA.
Change in Bank Control
Subject to various exceptions, the BHCA and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is also presumed to exist, although rebuttable, if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and the bank holding company has registered securities under Section 12 of the Exchange Act.
Permitted Activities
Except in certain situations prescribed by statute (including exemptions for financial holding companies), the BHCA generally prohibits a bank holding company from engaging in, or acquiring 5% or more of the voting stock of a company that is not a bank holding company or a bank, and from engaging in activities other than banking; managing or controlling banks or other permissible subsidiaries and performing servicing activities for subsidiaries; and engaging in any activities other than activities that the Federal Reserve has determined by order or regulation are so closely related to banking as to be a proper incident included thereto under the BHCA. In determining whether a particular activity is permissible, the Federal Reserve considers whether performing the activity can be expected to produce benefits to the public that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve has the power to order a bank holding company or its subsidiaries to
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terminate any activity or control of any subsidiary when the continuation of the activity or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.
Under the BHCA, a bank holding company may file an election with the Federal Reserve to be treated as a financial holding company and engage in additional financial activities. The election must be accompanied by a certification that the Company’s insured depository institution subsidiary is “well capitalized” and “well managed.” Additionally, the CRA rating of each subsidiary bank must be satisfactory or better. We have not elected to be treated as a financial holding company.
Support of Bank Subsidiaries
We are required to act as a source of financial and managerial strength for the Bank and to commit resources to support the Bank. This support may be required at times when it would not be in the best interests of our shareholders or creditors to provide it. In addition, any capital loans made by us to the Bank will be repaid only after the Bank’s deposits and various other obligations are repaid in full.
Atlantic Capital Bank, N.A.
The Bank is chartered by the OCC and thus is subject to regulation, supervision and examination by the OCC.
Bank Merger Act
Section 18(c) of the Federal Deposit Insurance Act, commonly known as the “Bank Merger Act,” requires the prior written approval of the OCC before any national bank may (i) merge or consolidate with, (ii) purchase or otherwise acquire the assets of, or (iii) assume the deposit liabilities of, another bank if the resulting institution is to be a national bank.
The Bank Merger Act prohibits the OCC from approving any proposed merger transaction that would result in a monopoly or would further a combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States. Similarly, the Bank Merger Act prohibits the OCC from approving a proposed merger transaction whose effect in any section of the country may be to lessen competition substantially, or to tend to create a monopoly, or which in any other manner would be in restraint of trade. An exception may be made in the case of a merger transaction whose effect would be to substantially lessen competition, tend to create a monopoly, or otherwise restrain trade, if the OCC finds that the anticompetitive effects of the proposed transaction are clearly outweighed by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
In every proposed merger transaction, the OCC must also consider the financial and managerial resources and future prospects of the existing and resulting institutions, the convenience and needs of the communities to be served, and the effectiveness of each insured depository institution involved in the proposed merger transaction in combating money-laundering activities, including in overseas branches.
Capital Adequacy
The final rule adopted by the federal banking regulators implementing the capital reforms published by the Basel Committee on Banking Supervision in Basel III established prompt corrective action requirements for all banks and includes a CET1 risk-based capital measure. CET1 consists of common stock and paid in capital and retained earnings. CET1 is reduced by goodwill, certain intangible assets, net of associated deferred tax liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuation allowance, and certain other items specified in the Basel III capital rules. The capital rules also provide for a number of adjustments to CET1. These include the requirement that mortgage servicing rights, certain deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent such items exceed 10% of CET1 individually or 15% of CET1 in the aggregate.
The risk-based capital and leverage capital requirements under the final rule are set forth in the table that follows.
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Total Risk Based
Tier 1 Risk Based
CET1 Risk Based
Requirement
Capital Ratio
Capital Ratio
Capital Ratio
Leverage Ratio
Well Capitalized
Adequately Capitalized
Undercapitalized
Significantly Undercapitalized
Critically Undercapitalized
Tangible equity to total assets ≤ 2
The final rule also established a “capital conservation buffer” of 2.5% (which was fully phased in as of January 1, 2019), consisting of CET1 capital, above the regulatory minimum capital ratios. Accordingly, an institution will be subject to limitations on capital distributions, dividend payments, share repurchases and payment of discretionary bonuses to executive officers if the institution’s capital falls below the following minimum ratios: (i) total risk-based capital ratio of 10.5%, (ii) Tier 1 risk-based capital ratio of 8.5%, and (iii) a CET1 risk-based capital ratio of 7.0%.
The final rule includes comprehensive guidance with respect to the measurement of risk-weighted assets. For residential mortgages, Basel III retains the risk-weights contained in the current capital rules which assign a risk-weight of 50% to most first-lien exposures and 100% to other residential mortgage exposures. The final rule increased the risk-weights associated with certain on-balance sheet assets, including 150% for high volatility commercial real estate acquisition, development and construction loans, and for the unsecured portion of non-residential mortgage loans that are more than 90 days past due or in nonaccrual status. Capital requirements were also increased for equity exposures, securities lending transactions, OTC derivatives and loan commitments with an original maturity of one year or less.
Under the final rule, certain banking organizations, including the Company and the Bank, are permitted to make a one-time election to continue the current treatment of excluding from regulatory capital most AOCI components, including amounts relating to unrealized gains and losses on available-for-sale debt securities and amounts attributable to defined benefit post-retirement plans. Institutions that elect to exclude most AOCI components from regulatory capital under Basel III will be able to avoid volatility that would otherwise be caused by things such as the impact of fluctuations in interest rates on the fair value of available-for-sale debt securities. The Company and the Bank elected to exclude AOCI components from regulatory capital under Basel III.
In December 2017, the Basel Committee published an update of Basel III (“Basel IV”). The Basel Committee stated that a key objective of Basel IV is to reduce excessive variability of risk-weighted assets in order to enhance comparability of financial institutions’ capital ratios; constrain the use of internally modeled approaches; and complement the risk-weighted capital ratio with a finalized leverage ratio and a revised minimum capital requirement. The federal banking agencies are considering how to appropriately apply the Basel IV standards to institutions in the United States. It is uncertain which of the Basel IV standards will be incorporated into the capital regulations and what effect those standards might have on the Company or the Bank.
On October 29, 2019, the federal banking regulators adopted a final rule, which was effective as of January 1, 2020, to simplify the regulatory capital requirements for certain community banks and holding companies that opt into the CBLR framework. In order to be eligible to opt in to the CBLR framework, an institution must have less than $10 billion in average consolidated assets and a leverage ratio of at least 9.0%, and meet certain other asset-related requirements. If the election is made, the institution would be considered to have satisfied the capital requirements of Basel III adopted by the federal banking regulators, and would be able to satisfy the regulatory capital requirements by calculating and reporting a single leverage ratio, reducing the time associated with risk-weighting assets for capital ratio reporting purposes. An eligible institution may opt in to the CBLR framework in connection with any regulatory financial report, and may opt out of the CBLR framework at any time by completing the Basel III capital ratio calculations in connection with any regulatory financial report. The rule establishes a two-quarter grace period for institutions whose leverage ratio falls below 9.0% but remains above 8.0%. The Company and the Bank have not opted in to the CBLR framework.
Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, ineligibility for expedited treatment of regulatory applications, restrictions on certain acquisitions, a prohibition on accepting brokered deposits and certain other restrictions on its
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business. An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
The FDI Act requires the federal regulatory agencies to take “prompt corrective action” if a depository institution does not meet minimum capital requirements as set forth above. Generally, a receiver or conservator for a bank that is “critically undercapitalized” must be appointed within specific time frames. The regulations also provide that a capital restoration plan must be filed within 45 days of the date a bank is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for a bank required to submit a capital restoration plan must guarantee the lesser of (i) an amount equal to 5% of the bank’s assets at the time it was notified or deemed to be undercapitalized by regulator, or (ii) the amount necessary to restore the bank to adequately capitalized status. This guarantee remains in place until the bank is notified that it has maintained adequately capitalized status for specified time periods. Additional measures with respect to undercapitalized institutions include a prohibition on capital distributions, growth limits and restrictions on activities.
The FDI Act generally prohibits an FDIC-insured bank from making a capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be “undercapitalized.” “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. The federal regulators may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the bank’s capital. In addition, for a capital restoration plan to be acceptable to regulators, the bank’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of: (i) an amount equal to 5% of the bank’s total assets at the time it became “undercapitalized”; and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a bank fails to submit an acceptable plan, it is treated as if it is “significantly .”
“Significantly undercapitalized” insured banks may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and the cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. A bank that is not “well capitalized” is also subject to certain limitations relating to brokered deposits.
As of December 31, 2020, the Bank had capital levels that qualify as “well capitalized” and that meet the “capital conservation buffer” requirements under applicable regulations.
For further detail on capital and capital ratios, see the discussion under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and Note 17 – Regulatory Matters, to the consolidated financial statements.
FDIC Insurance Assessments
The FDIC, through the DIF, insures the deposits of the Bank up to prescribed limits for each depositor (currently, $250,000 per depositor). The assessment paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. The deposit insurance assessment is calculated on the average total consolidated assets of insured depository institutions during the assessment period, less the average tangible equity of the institution during the assessment period as opposed to solely bank deposits at an institution. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. The Bank’s insurance assessments during 2020, 2019, and 2018 were $629,000, $275,000, and $745,000, respectively.
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Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Payment of Dividends
The Company is a legal entity that is separate and distinct from the Bank. While there are various legal and regulatory limitations under federal and state law governing the extent to which banks can pay dividends or otherwise supply funds to holding companies, the principal source of cash revenues for the Company are dividends from the Bank. The relevant federal regulatory agencies also have authority to prohibit a national bank or bank holding company from engaging in conduct that, in the opinion of such regulatory agency, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of a bank, be deemed to constitute an unsafe or unsound practice in conducting its business.
Insured depository institutions, such as the Bank, are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations). In addition, capital rules limit capital distributions, including dividends, if the depository institution does not have a “capital conservation buffer.” See further details above under “—Capital Adequacy.”
National banks are required by federal law to obtain the prior approval of the OCC in order to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus. In addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation).
The Federal Reserve has issued a policy statement that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve, the Federal Reserve may prohibit a bank holding company from paying any dividends if one or more of the holding company’s bank subsidiaries are classified as undercapitalized.
Stock Repurchases
A bank holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve. In addition, the Federal Reserve has indicated that bank holding companies should review their dividend policies, and has discouraged dividend payment ratios that are at maximum allowable levels unless both asset quality and capital levels are strong.
Transactions with Affiliates
Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Regulations promulgated by the Federal Reserve limit the types and amounts of these transactions (including extensions of credit to affiliates, investment in affiliates, the purchase of assets from affiliates, and lending that results in credit exposure to affiliates) that may take place and generally require those transactions to be on an arm’s-length basis. In general, these regulations require that any “covered transactions” between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company be limited to 10% of the bank subsidiary’s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s
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capital and surplus. Further, loans and extensions of credit to affiliates generally are required to be secured by eligible collateral in specified amounts.
Interstate Banking and Branching
The Dodd-Frank Act relaxed previous restrictions on interstate branching and national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. The FDIA requires that the OCC review (1) any merger with an insured bank into a national bank, or (2) any establishment of branches by an insured bank. See “—Bank Merger Act.”
Loans to Directors, Executive Officers and Principal Shareholders
The authority of the Bank to extend credit to its directors, executive officers and principal shareholders, including their immediate family members, corporations and other entities that they control, is subject to substantial restrictions and requirements under the Federal Reserve Act and Regulation O promulgated thereunder, as well as the Sarbanes-Oxley Act. These statutes and regulations impose specific limits on the amount of loans that the Bank may make to directors and other insiders, and specified approval procedures must be followed in making loans that exceed certain amounts. In addition, all loans the Bank makes to directors and other insiders must satisfy the following requirements:
● the loans must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not affiliated with the Bank;
● the Bank must follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with persons who are not affiliated with the Bank; and
● the loans must not involve a greater than normal risk of non-payment or include other features not favorable to the Bank.
Furthermore, the Bank must periodically report all loans made to directors and other insiders to the bank regulators, and these loans are closely scrutinized by the regulators for compliance with Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O. Each loan to a director or other insider must be pre-approved by the Bank’s board of directors with the interested director abstaining from voting.
Community Reinvestment Act
The CRA requires the federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low and moderate-income areas. An institution’s size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions are examined using a performance-based lending, investment and service test. Small institutions are examined using a streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the bank regulatory agency.
The CRA regulations provide for certain disclosure obligations. Each institution must post a notice advising the public of its right to comment to the institution and its regulator on the institution’s CRA performance and to review the institution’s CRA public file. Each lending institution must maintain for public inspection a file that includes a listing of branch locations and services, a summary of lending activity, a map of its communities and any written comments from the public on its performance in meeting community credit needs. The CRA requires public disclosure of a financial institution’s written CRA evaluations. This requirement promotes enforcement of CRA principles by providing the public with the status of a particular institution’s community reinvestment record.
The GLBA made various changes to the CRA. Among other changes, CRA agreements with private parties must be disclosed. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory CRA rating in its latest examination. In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators with recommended changes to the CRA’s implementing regulations to reduce their complexity and associated burden on banks. Subsequently, in December 2019, the OCC and FDIC issued a notice of proposed rulemaking intended to update and modernize the CRA's implementing regulations. On
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May 20, 2020, the OCC finalized its rule while the FDIC, which had joined the OCC’s proposed rulemaking, did not proceed with a final rule. The Federal Reserve, which did not join the OCC and FDIC’s proposal, in October 2020 put forth its own advance notice of proposed rulemaking focused on CRA modernization. We will continue to evaluate the impact of any changes to the regulations implementing the CRA. In late 2020, the OCC approved the our CRA strategic plan, which covers 2021 and 2022 and will be a basis for subsequent CRA examinations. In its last CRA examination, the Bank received a “Satisfactory” rating.
Consumer Laws and Regulations
The Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the following list is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, The Fair and Accurate Credit Transactions Act, The Real Estate Settlement Procedures Act and the Fair Housing Act, among others. These laws and regulations, among other things, prohibit discrimination on the basis of race, gender or other designated characteristics and mandate various disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. These and other laws also limit finance charges or other fees or charges earned in the Bank’s activities.
In addition, the Dodd-Frank Act created the CFPB, which has broad rulemaking and enforcement authority, with respect to a wide range of consumer financial laws, including the authority to prohibit “unfair, deceptive, or abusive” acts and practices. The CFPB has the authority to investigate potential violations of consumer protection laws, issue cease-and-desist orders, and institute civil proceedings in order to impose civil money penalties or injunctions.
Technology Risk Management and Consumer Privacy
Banks are generally expected to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology. Under Section 501 of the GLBA, the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and confidentiality of customer records and information, protection against any anticipated threats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or inconvenience to a customer. Among other matters, the rules require each bank to implement a comprehensive written information security program that includes administrative, technical and physical safeguards relating to customer information, as well as processes to enable recovery of data and business operations, rebuild network capabilities and restore data.
Under the GLBA, a financial institution must also provide its customers with a notice of privacy policies and practices and may not disclose nonpublic personal information about a customer to nonaffiliated third parties unless the institution satisfies various notice and opt-out requirements and the customer has not elected to opt out of the disclosure. All banks are also required to develop initial and annual privacy notices which describe in general terms the bank’s information sharing practices. Banks that share nonpublic personal information about customers with nonaffiliated third parties must also provide customers with an opt-out notice and a reasonable period of time for the customer to opt out of any such disclosure (with certain exceptions). Limitations are placed on the extent to which a bank can disclose an account number or access code for credit card, deposit or transaction accounts to any nonaffiliated third party for use in marketing.
In addition, on December 18, 2020, the federal banking regulators proposed a new cybersecurity-related notification rule that would require banking organizations, including the Company and the Bank, to notify their primary federal regulator promptly of the occurrence of certain significant computer-security incidents. The proposed rule would also impose requirements on bank service providers to notify their affected banking organization customers of certain computer-security incidents.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity
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programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements.
UDAP and UDAAP
Banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” referred to as UDAAP.
Anti-Terrorism and Anti-Money Laundering Reporting
Under the BSA, financial institutions are required to monitor and report unusual or suspicious account activity that might signify money laundering, tax evasion or other criminal activities, as well as transactions involving the transfer or withdrawal of amounts in excess of prescribed limits. The BSA is sometimes referred to as an AML law. Several AML statutes, including provisions in Title III of the USA PATRIOT Act of 2001, have been enacted to amend the BSA. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with financial institutions and foreign customers. Under the USA PATRIOT Act, financial institutions are also required to establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:
the development of internal policies, procedures, and controls;
the collection of information regarding, and the verification of the identity of, customers opening new accounts;
ongoing customer due diligence;
the designation of a compliance officer;
an ongoing employee training program; and
an independent audit function to test the programs.
In addition, under the USA PATRIOT Act, the U.S. Department of the Treasury, has adopted rules addressing a number of related issues, including increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to violate the privacy provisions of the GLBA that are discussed below. Finally, under the regulations of OFAC, we are required to monitor and block transactions with certain “specially designated nationals” who OFAC has determined pose a risk to U.S. national security.
Response to COVID-19
As the pandemic affected all areas of economic and social life, we responded with measures to protect the health of our community, customers and employees. We implemented work-from-home initiatives for employees when possible and ceased non-essential business related travel.
Additionally, we have taken the following steps to assist customers during these challenging times, consistent with sound banking practice:
funding loans for business borrowers through the PPP with $192.2 million outstanding as of December 31, 2020;
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evaluating business segments in our market areas to identify areas of need and focusing our assessment and management of portfolio risk;
communicating with customers to assess developing credit situations and needs assessment; and
offering payment deferrals to existing customers with a streamlined loan modification process when appropriate.
Annual Disclosure Statement
This Annual Report on Form 10-K also serves as the annual disclosure statement of Atlantic Capital pursuant to Part 350 of the FDIC’s rules and regulations. This statement has not been reviewed or confirmed for accuracy or relevance by the FDIC.
ITEM 1A. RISK FACTORS
Risks Related to the Company and its Banking Operations
The COVID-19 pandemic has resulted in significant global economic downturn which has adversely affected, and is expected to continue to adversely affect, our business and results of operations, and the future impacts of the COVID-19 pandemic on the global economy and our business, results of operations, liquidity and financial condition remain uncertain.
The COVID-19 pandemic has created significant disruptions to the economy and continues to cause economic disruption both worldwide and in the markets we operate, as well as a destabilization effect on financial markets. The ultimate impacts of the COVID-19 pandemic are uncertain and could have a material adverse effect on our business, financial condition, liquidity and results of operations. Our business is dependent upon the ability of our customers to conduct banking and other financial transactions, including the payment of loan obligations. The COVID-19 pandemic has and continues to disrupt the business, activities, and operations of our customers, which may cause a decline in demand for our products and services which may, in turn, result in a significant decrease in our business, negatively impacting our liquidity position and financial results.
In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including implementing work-from-home initiatives for employees when possible and ceasing non-essential business-related travel. These actions in response to the COVID-19 pandemic, and similar actions by our vendors and business partners, have not materially impaired our ability to support our employees, conduct our business and serve our customers, but there is no assurance that these actions will be sufficient to successfully mitigate the risks presented by COVID-19 or that our ability to operate will not be materially affected going forward. We cannot predict the level of disruption which will occur going forward to our employee’s ability to provide customer support and service. Similarly, if any of our vendors or business partners become unable to continue to provide their products and services, which we rely upon to maintain our day-to-day operations, our ability to serve our customers could be impacted.
The extent of these impacts will depend on future developments, including among others, governmental, regulatory and private sector actions and responses, new information that may emerge concerning the severity of COVID-19, and actions taken to contain or prevent further spread, each of which are highly uncertain and cannot be predicted. Moreover, although multiple COVID-19 vaccines have received regulatory approval and currently are being distributed to certain at-risk populations, it is too early to know how quickly these vaccines can be distributed to the broader population and how effective they will be in mitigating the adverse social and economic effects of the pandemic. Further, variant strains of the COVID-19 virus have appeared, further complicating efforts of the medical community and federal, state and local governments in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.
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We are subject to risks associated with geographic and customer concentration in our lending operations, which could negatively impact our asset quality.
A majority our loan portfolio involves borrowers or collateral located in the Atlanta metropolitan area, and our business strategy is to continue to focus on commercial customers located in the Atlanta metropolitan area. Our relatively small geographic footprint limits our ability to diversify macro-economic risk, so we are less able to spread the risk of unfavorable local economic conditions than larger financial institutions. Accordingly, in the event of adverse changes affecting the Atlanta market generally, or affecting Atlanta to a greater degree than a broader regional or national market as a whole, we will be exposed to risks related to increases in loan delinquencies among Atlanta-based borrowers, increases in problem assets and foreclosures, decreases in the demand for our products and services, decreases in the value of collateral for loans, especially real estate, located in Atlanta, and related decreases in customers’ borrowing power. In addition, because of our commercial lending focus, we may be dependent on a smaller number of larger loan relationships, in which case our credit quality would be impacted by of one or more large individual credit exposures. changes in the Atlanta market or impacting large loan relationships could require us to record increased allowance for loan , loans or on and sell collateral. Even an increased allowance may be to cover loan , the terms of loans may contain terms less to us, borrowers under loans may continue to be , and we may not be to sell collateral on terms, any of which would cause us to credit . In addition, a significant increase in classified assets or credit could result in our regulators imposing restrictions on our operations, which could limit our ability to execute our business strategy. Any of these occurrences would have a material effect on our financial condition and results of operations.
We are subject to risks associated with customer concentration in our deposit base, which could negatively impact our liquidity.
Our strategy involves continued solicitation of and reliance on larger deposits from our business customers. Accordingly, a significant deterioration of financial condition of relatively few of our depositors could cause those depositors to maintain lower balances, which would have an adverse impact on the Bank’s liquidity and profitability. As a result, we may be required to raise interest rates on deposits in an effort to attract deposits and thus incur increased interest expense, or to seek liquidity funding from borrowings or other sources on terms less favorable than current deposit rates. Any of these occurrences could have a material adverse impact on our operating results and financial condition.
A key focus of our strategy is originating commercial real estate and commercial and industrial loans. Because our loan portfolio consists largely of these types of loans, our portfolio carries a higher degree of risk than would a portfolio with larger amounts of other types of loans. These loans involve credit risks that could adversely affect our financial condition and results of operations.
We offer commercial real estate and commercial and industrial loans, and as of December 31, 2020, we had $909.1million of commercial real estate loans and $952.8 million of commercial and industrial loans outstanding, representing 40% and 42%, respectively, of our total loan portfolio. These types of loans have historically driven the growth in our loan portfolio, and we intend to continue our lending efforts for commercial real estate and commercial and industrial products.
Commercial real estate and commercial and industrial loans may present a greater risk of non-payment by a borrower than other types of loans. They typically involve larger loan balances and are particularly sensitive to economic conditions. Unlike residential mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the cash flow of the related commercial venture. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger average size of a commercial loan in comparison to other loans such as residential loans, as well as the collateral which is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition and results of operations. In addition, commercial loan customers often have the ability to fund current interest payments through additional borrowings, and as a result the actual credit risk associated with these customers may be worse than anticipated. In addition, some of our commercial borrowers have more than one loan outstanding with us, which means that an development with respect to one loan or one credit relationship can us to significantly risk of . In the case of commercial
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and industrial loans, collateral often consists of accounts receivable, inventory and equipment, which may not yield substantial recovery of principal losses incurred, and is susceptible to deterioration or other loss in advance of liquidation of such collateral. These loans may lack standardized terms and may include a balloon payment feature. The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions and prevailing interest rates.
We offer land acquisition and development and construction loans for builders and developers, and as of December 31, 2020, we had $145.6 million in such loans outstanding, representing 6% of total loans outstanding. Similar to commercial and industrial and commercial real estate loans, land acquisition and development and construction loans are riskier than other types of loans. The primary credit risks associated with land acquisition and development and construction lending are underwriting and project risks. Project risks include cost overruns, borrower credit risk, project completion risk, general contractor credit risk, and environmental and other hazard risks. Market risks are risks associated with rental or sale of the completed projects. They include affordability risk, which means the risk that borrowers cannot obtain affordable financing or that renters cannot afford rents at the projects, product design risk, and risks posed by competing projects.
Because of the risks associated with commercial real estate, commercial and industrial and acquisition and development and construction loans, we may experience higher rates of default than a portfolio more heavily weighted towards smaller or residential mortgage loans. Losses in our commercial real estate, commercial and industrial, or construction and land loan portfolio could exceed our reserves, which would adversely impact our capital and earnings.
Lending to small businesses, franchisees and high-growth businesses may expose us to additional risks not present in lending to larger business customers.
We focus on lending to small businesses, including franchise businesses and customers in certain high-growth industries. Small business customers generally have fewer financial resources and are more vulnerable to declines in economic conditions than larger, better capitalized businesses with longer operating histories. Businesses in high-growth industries such as financial technology require ongoing capital to support their growth, invest in product development, and attract and retain highly skilled employees. These businesses may not generate income sufficient to provide that capital, and may not be able to raise required levels of capital, which may result in them increasing debt financing. Franchisee borrowers may incur greater costs than other small businesses as a result of complying with operational or other requirements imposed by franchisors, and may not have the ability to respond to local market forces to the same extent as independently operated small businesses or larger businesses. Franchisees in the retail industry are susceptible to changes in labor costs and generally do not have significant amounts of collateral to secure loans. In addition, the success of franchise businesses is highly dependent on the reputation of the franchisor compared to the franchisor’s competitors. Franchisors may not provide financial support to franchisees, so franchise businesses may be more to in the local or national economy than larger businesses supported by a parent organization. Conversely, where franchisors do provide financial support, events impacting the franchisor globally or nationally will impact otherwise individual franchisees. In addition, franchisors may grant a number of franchise licenses that exceeds market demand for their products or services in a particular geographic area, and may franchise license of franchisees for performance or other reasons. The occurrence of any of these or other events impacting our franchise and high-growth business customers could have a material effect on our results of operations.
SBA lending is an important part of our business. Our SBA lending program is dependent on the federal government and our status as an SBA Preferred Lender, and we face risks associated with originating and selling SBA loans.
Our SBA lending program is dependent upon the policies and oversight of the U.S. federal government. As an approved participant in the SBA Preferred Lender’s Program (an “SBA Preferred Lender”), we enable our clients to obtain SBA loans more efficiently. The SBA periodically reviews our lending operations to assess, among other things, whether we comply with program rules and whether we exhibit prudent risk management. If the SBA were to identify weakness in our procedures or our risk management policies, the SBA may request corrective actions or impose enforcement actions, including revocation of our SBA Preferred Lender status. In addition, the federal government may make changes to the SBA program, including but not limited to changes to the level of guarantee provided by the federal government on SBA loans, changes to program specific rules impacting eligibility under the guarantee program, limits on fees lenders may
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impose, and changes to the program amounts authorized by Congress or funding for the SBA program. In addition, any default by the federal government on its obligations or any prolonged government shutdown could impede our ability to originate SBA loans, sell such loans in the secondary market, or collect under SBA loan guarantees. We cannot predict the effects of these changes on our business and profitability.
We generally sell the guaranteed portion of loans that we originate under the SBA’s 7(a) Loan Program in the secondary market and retain the servicing rights to the loans that we sell. These sales result in premium income for us at the time of sale and create a stream of future servicing income. For any of the reasons noted above, we may be unable to continue originating these loans or selling them in the secondary market, and premiums may decline due to economic and competitive factors. In addition, we incur credit risk on the non-guaranteed portion of these loans, and if a customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which we originated, funded or serviced the loan, the SBA may seek recovery of the principal loss related to the deficiency from us. Claims of this sort could materially and affect our results of operations.
We have originated a significant number of loans under the Small Business Administration’s Paycheck Protection Program, which may result in a large number of such loans remaining on our consolidated balance sheets at a very low yield for an extended period of time.
The SBA PPP, originally established under the CARES Act and extended under the Economic Aid Act, authorizes financial institutions to make federally-guaranteed loans to qualifying small businesses and non-profit organizations. These loans carry an interest rate of 1% per annum and a maturity of two years for loans originated prior to June 5, 2020 and five years for loans originated on or after June 5, 2020.
Under the SBA’s PPP, such loans may be forgiven if the borrowers meet certain requirements with respect to their employees and payroll and the use of the loan proceeds. The initial phase of the PPP was extended multiple times by Congress and eventually expired on August 8, 2020. On January 11, 2021, the SBA reopened the PPP for First Draw PPP loans to small businesses and non-profit organizations that did not receive a loan through the initial PPP phase. Further, on January 13, 2021, the SBA reopened the PPP for Second Draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. At least $25 billion has been set aside for Second Draw PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low or moderate income neighborhoods. Generally speaking, business with more than 300 employees and/or less than a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020 are not eligible for Second Draw loans. Further, maximum loan amounts have been increased for accommodation and food service businesses.
As of December 31, 2020, we had PPP loans with outstanding balances of $192.2 million. Due to the short timeframe between the passing of the CARES Act and the beginning of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP. Because of this, the loans under this program may present potential fraud risk, increasing the risk that loan forgiveness may not be obtained by the borrowers and that the guarantee by SBA may not be honored. Additionally, because the loan forgiveness requires the borrower to meet certain criteria for the use of the proceeds after the loan is originated, there is a risk the borrowers may not qualify for the loan forgiveness due to the borrower’s conduct after the loan origination. Further, although the SBA has recently streamlined the loan forgiveness process for loans $50,000 or less, it has taken longer than initially anticipated for the SBA to finalize the forgiveness processes. On January 19, 2021, the SBA increased the streamlined loan forgiveness process to loans $150,000 or less. Thus, absent regulatory relief, extended forbearance waiting times due to SBA-related delays are likely. These factors may result in us having to hold a significant amount of these low-yield loans on our books for a significant period of time. Additionally, the PPP loans are not secured by an interest in a borrower's assets or otherwise backed by personal guarantees. We will continue to face increased operational demands and pressures as we monitor and service our book of PPP loans, process applications for loan forgiveness and pursue recourse under the SBA guarantees and borrowers for PPP loan .
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Our growing deposit and processing focused business may expose us to additional risks not associated with the provision of core banking products and services.
One of our areas of strategic focus is investing in the growth of our deposit and processing focused business, particularly financial technology, payment processing and treasury management services. Because some of our products and services are delivered to customers through selective partnerships with financial technology companies, developments that negatively impact our partners will indirectly impact us. These industries are subject to rapid technological advancements, including the development of enhanced products and services by our competitors, which include both established financial institutions and newer specialized service providers; internalization of certain functions by our customers; and the development of industry-wide solutions and standards, which may render any product or service obsolete and which will require us and our partners to continually refine our product and services offerings. The competitive landscape for our customers and partners in these industries changes rapidly due to consolidation and changes in relationships between companies providing complimentary services. Moreover, the needs and preferences of our customers will change as their businesses evolve and as they adopt new and more varied technology for business uses. We are committed to growing this aspect of our business; however, unforeseen increases in transaction volume resulting from industry consolidation, changes in the competitive landscape for our customers and other changes in our customers’ businesses could result in growth that we are to manage effectively. In addition, the regulations and standards applicable to these industries are evolving, and new regulations or standards may impact the or utility of the products and services we offer, or require us to invest additional resources to adapt our products and services to be compliant with those regulations and standards. In particular, customers in certain industries, such as payment processing, pose heightened compliance risks with respect to anti-money and similar regulations and regulations related to information security. The by us or our partners to anticipate or respond to changes in these industries, comply with applicable regulations, or protect customer information could result in our customers responding to the products and services that we offer, reputational , of competitive , increased expenses associated with lawsuits and remediation efforts, or the imposition by our regulators of or restrictions on our ability to conduct these businesses, any of which would have a material effect on our results of operations.
Regulatory changes related to widely used reference interest rates could adversely affect our revenue, expenses, the value of our loans and other financial instruments, and our interest rate risk .
LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. Although alternative reference rates have been proposed, the scope of acceptance of any such reference rate and the impact on calculated rates, pricing and the ability to manage risk, including through derivatives, remain uncertain. We have a significant number of floating rate obligations, loans, deposits, derivatives and other financial instruments that are directly or indirectly dependent on LIBOR. If LIBOR ceases to exist, if the methods of calculating LIBOR change from current methods or if we are required to utilize alternative reference rates, interest rates on, and revenue and expenses associated with, those financial instruments may be adversely affected. Additionally, timing differences and different definitions of any new benchmark could create mismatches which would negatively impact interest income, interest rate risk management and liquidity.
On November 30, 2020 the administrator of LIBOR announced it will consult on its intention to cease publication of the one-week and two-month settings immediately following the LIBOR publication on December 31, 2021, and the remaining U.S. dollar LIBOR settings immediately following the LIBOR publication on June 30, 2023. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of market participants convened by the FRB, the Alternative Reference Rate Committee, has selected SOFR as its recommended alternative to U.S. dollar LIBOR.
The U.S. federal banking agencies issued a statement in November 2020 encouraging banks to transition away from U.S. dollar LIBOR as soon as practicable and to stop entering into new contracts that use U.S. dollar LIBOR by December 31, 2021. SOFR or other alternative reference rates may perform differently than LIBOR in response to changing market conditions. For example, SOFR could experience greater decreases during times of economic stress, which could require us to lend at lower rates at times when our borrowing costs are increasing.
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Our management of the transition from LIBOR may prompt changes in accounting treatment, risk and pricing models, valuation tools, hedging strategy and product design and offerings, all of which could cause us to incur significant expense. Reliance on “fallback” provisions also could result in customer uncertainty and disputes regarding how variable rates should be calculated, and negotiations with customers and counterparties regarding the calculation of interest will cause us to incur significant expense. If we are unable to successfully negotiate calculations, amend loans on terms that are satisfactory to our customers, or are unable to adequately hedge risks related to certain customers, we could experience a loss of customers and reputational damage. Any of these risks, and our failure to adequately manage the transition from LIBOR generally, could have a material adverse impact on our financial condition and results of operations.
An economic downturn in the commercial loan market, the commercial real estate industry, and/or in our markets generally could adversely affect our financial condition, results of operations or cash flows.
If the communities in which the Bank operates do not grow, or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. The economic disruption caused by the COVID-19 pandemic has resulted in an increase in delinquencies and loans on non-accrual status across all of our loan portfolios, particularly our commercial loan portfolio and commercial real estate portfolio, as certain industries have been particularly hard-hit by the COVID-19 pandemic, which has adversely affected the ability of many of our borrowers to repay their loans. As of December 31, 2020, our commercial loan portfolio includes $204.7 of outstanding balances, representing 9% of total loans, to borrowers in key industries which may see elevated risk as a result of the current economic conditions due to the COVID-19 pandemic.
An economic recession over a prolonged period or other economic problems in our market areas could have a material adverse impact on the quality of the loan portfolio and the demand for our products and services. Future adverse changes in the economies in our market areas may have a material adverse effect on our financial condition, results of operations or cash flows. Further, the banking industry is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond our control. If market conditions deteriorate, our non-performing assets may increase and we may need to take valuation adjustments on our loan portfolios and real estate owned.
Our allowance for loan losses may not be adequate to cover actual losses, and we may be required to materially increase our allowance, which may adversely affect our capital, financial condition and results of operations.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expenses that represents management’s best estimate of expected credit losses within the existing portfolio of loans. The allowance for loan losses and our methodology for calculating the allowance are fully described in Note 1 to our consolidated financial statements for the year ended December 31, 2020 under “Allowance for Loan Losses,” and in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Allowance for Loan Losses” section. In general, an increase in the allowance for loan losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our capital, financial condition and results of operations.
The allowance, in the judgment of management, is established to reserve for estimated loan losses and risks inherent in the loan portfolio. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on judgments that are different than those of management. As we are continually adjusting our loan portfolio and underwriting standards to reflect current market conditions, we can provide no assurance that our methodology will not change, which could result in a charge to earnings.
We continually reassess the creditworthiness of our borrowers and the sufficiency of our allowance for loan losses as part of the Bank’s credit functions. Any significant amount of additional non-performing assets, loan charge-offs, increases in the provision for loan losses or any inability by us to realize the full value of underlying collateral in the event of a loan
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default, will negatively affect our business, financial condition, and results of operations. Our allowance for loan losses may not be sufficient to cover future credit losses.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.
From time to time, the FASB and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings. In addition, management is required to use certain assumptions and estimates in preparing our financial statements, including determining the fair value of certain assets and liabilities, among other items. Incorrect assumptions or estimates may have a material adverse effect on our financial condition and results of operations.
For example, the FASB’s CECL accounting standard became effective on January 1, 2020 and substantially changed the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations. The standard removes the existing “probable” threshold in GAAP for recognizing credit losses and instead requires companies to reflect their estimate of credit losses over the life of the financial assets. Companies must consider all relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts.
In March 2020, the federal banking agencies released an interim final rule, subsequently adopted as a final rule in August 2020, which allows an addback to regulatory capital for the impacts of CECL for a two-year period and at the end of the two years the impact is then phased in over the following three years. Under the rule, during 2020 and 2021, the adjustment to CET1 capital reflects the change in retained earnings upon initial adoption of CECL on January 1, 2020, plus 25% of the increase in the allowance for credit losses since January 1, 2020. Then beginning January 2022, the impact is phased in over the following three years. We did not elect to apply this phase-in.
The adoption of CECL may also impact our ongoing earnings, perhaps materially, due in part to changes in loan portfolio composition, changes in credit metrics, and changes in the macroeconomic forecast. Our ability to accurately forecast the future economic environment could result in volatility in the provision as a result of the new accounting standard. See Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements of this Annual Report on Form 10-K for disclosure on the impact to the allowance at adoption.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to customers, we may assume that a customer’s audited financial statements conform to GAAP, and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our earnings and our financial condition could be negatively impacted to the extent the information furnished to us by and on behalf of borrowers is not correct or complete or is noncompliant with GAAP.
Changes in the policies of monetary authorities and other government action could materially adversely affect our profitability .
The Bank’s results of operations are affected by policies of the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets and the economic and political situations in certain parts of the world, we cannot predict with certainty possible future changes in interest rates, deposit levels, loan demand or our business and earnings. Furthermore, the actions of the U.S. government and other governments in responding to
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terrorist attacks or events in these or other regions may result in currency fluctuations, exchange controls, market disruption and other adverse effects.
Fluctuations in interest rates could reduce our profitability .
Our earnings are significantly dependent on our net interest income, as we realize income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We are unable to predict future fluctuations in interest rates, which are affected by many factors, including inflation, economic growth, employment rates, fiscal and monetary policy and disorder and instability in domestic and foreign financial markets. Our net interest income is affected not only by the level and direction of interest rates, but also by the shape of the yield curve and relationships between interest sensitive instruments and key interest driver rates, as well as balance sheet growth, customer loan and deposit preferences and the timing of changes in these variables. Our net interest income also may decline based on our exposure to a difference in short-term and long-term interest rates. A relatively high cost for securing deposits, combined with lower interest rates that can be charged on customer loans, will place downward pressure on our net interest income. Our asset-liability management strategy may not be effective in preventing changes in interest rates from having a material adverse effect on our business, financial condition and results of operations.
We are subject to risks in the event of certain borrower defaults, which could have an adverse impact on our liquidity position and results of operations .
We may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of certain borrower defaults, which could adversely affect our liquidity position, results of operations, and financial condition. Prior to the exit of our mortgage banking business in connection with the Branch Sale, when we sold mortgage loans, we were required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which the loans were originated. In the event of a breach of any of the representations and warranties related to a loan sold, we could be liable for damages to the investor up to and including a “make whole” demand that involves, at the investor’s option, either reimbursing the investor for actual losses incurred on the loan or repurchasing the loan in full. Our maximum exposure to credit loss in the event of a make whole loan repurchase claim would be the unpaid principal balance of the loan to be repurchased along with any premium paid by the investor when the loan was purchased and other collection cost reimbursements. If repurchase demands increase, our liquidity position, results of operations, and financial condition could be affected.
Atlantic Capital may need to rely on the financial markets to provide needed capital .
Our common stock is listed and traded on The NASDAQ Global Select Market under the symbol “ACBI”. Although we anticipate that our capital resources will be adequate for the foreseeable future to meet our capital requirements, at times we may depend on the liquidity of the Nasdaq market to raise equity capital. If the market should fail to operate, or if conditions in the capital markets are adverse, we may be constrained in raising capital. Downgrades in the opinions of the analysts that follow us may cause our stock price to fall and significantly limit our ability to access the markets for additional capital requirements. Should these risks materialize, our ability to further expand our operations through internal growth or acquisition may be limited.
Negative publicity about financial institutions, generally, or about the Company or the Bank, specifically, could damage our reputation and adversely impact our liquidity, business operations or financial results .
Reputation risk, or the risk to our business from negative publicity, is inherent in our business. Negative publicity can result from the actual or alleged conduct of financial institutions, generally, or our Company or the Bank, specifically, in any number of activities, including leasing and lending practices, corporate governance, and actions taken by government regulators in response to those activities. Negative publicity can adversely affect our ability to keep and attract customers and can expose us to litigation and regulatory action, any of which could negatively affect our liquidity, business operations or financial results.
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Certain changes in interest rates, inflation, deflation or the financial markets could affect demand for our products and our results of operations and cash flows .
Loan originations, and potentially loan revenues, could be materially adversely impacted by sharply rising interest rates. Conversely, sharply falling rates could increase prepayments within our securities portfolio and fixed rate loans lowering interest earnings. An unanticipated increase in inflation could cause our operating costs related to salaries and benefits, technology and supplies to increase at a faster pace than revenues.
The fair market value of our securities portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations.
Interest rate increases often result in larger payment requirements for our borrowers, which increase the potential for default and could result in a decrease in the demand for loans. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates. In addition, in a low interest rate environment, loan customers often pursue long-term fixed rate credits, which could adversely affect our earnings and net interest margin if rates increase. Changes in interest rates also can affect the value of our loans and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to increases in nonperforming assets, charge-offs and delinquencies, further increases to the allowance for loan losses, and a reduction of income recognized, among others, which could have a material adverse effect on our results of operations and cash flows.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition .
Liquidity is essential to the orderly function of our business. An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could negatively impact our access to liquidity sources include a decrease in the level of our business activity as a result of an economic downturn in the markets in which our loans are concentrated, adverse regulatory action against us, or our inability to attract and retain deposits. Our ability to borrow could be impaired by factors that are not specific to us or our region, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry.
We face strong competition from larger, more established competitors that may inhibit our ability to compete. The Atlanta market area has experienced consolidation and disruption that may increase competition from both existing competitors and new market entrants.
The banking business is highly competitive, and we experience strong competition from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other financial institutions, which operate in our primary market areas and elsewhere.
We compete with these institutions in attracting deposits and making loans. In addition, we primarily have to attract our customer base from other existing financial institutions and from new residents. We also compete with these institutions in recruiting employees who are critical to our success. Many of our competitors are well-established and much larger financial institutions. Many of our competitors have fewer regulatory constraints and may have lower cost structures. We may face a competitive disadvantage as a result of our smaller size and relative lack of geographic diversification.
The Atlanta market area has experienced significant consolidation and disruption in recent periods. This could result in increased competition as both established institutions and new market entrants position themselves to attract new customers and quality employees. Because we operate exclusively in the Atlanta metropolitan market and surrounding areas, increases in competition in our market area will impact us to a greater degree than if we were more geographically
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diversified. In addition, because we focus on small and medium sized commercial enterprises, increases in competition for those types of customers will impact us to a greater degree than if we were focused on providing banking services to larger more established business customers engaged in a broader range of commercial endeavors. Finally, because we are not as large as some of our current and potential competitors, we may not be able to successfully compete with other institutions in our market in attracting and retaining the numbers of employees with the skill sets or business relationships necessary to support our planned growth.
Unpredicta ble economic conditions, public health emergencies, political crises, extreme weather conditions, natural disasters, or other catastrophic events may have a material adverse effect on our financial performance.
Certain events that are beyond our control, such as an overall economic downturn, public health emergency (such as the coronavirus pandemic), terrorist attack, political crisis, economic policies (such as trade restrictions, trade agreements and tariffs), extreme weather, or natural disaster, whether occurring in our markets or globally, could adversely impact our customers and therefore our operations and profitability. For example, our construction and development borrowers could be impacted by shortages or price increases of building materials, our commercial and industrial borrowers could be impacted by reduced demand for their products or by interruptions in global, national or regional supply chains critical to their operations, and our local retail borrowers could be impacted by reduced foot traffic. In addition, our partners who provide certain services related to our financial technology, payment processing and treasury management services may have national or global operations that expose them to the impact of such events occurring outside of our market area. Any impact on our customers or our partners could result in in delivery of our services, reduced demand for our products and services, increased loan , in the value of collateral, and decreases in the levels and duration of customer deposits. Furthermore, because our customers and the collateral securing our loans are concentrated in the Atlanta metropolitan area, any event that is specific to Atlanta or the southeastern United States, or that has a disparate impact on our market areas, may affect us and our to a degree than our more geographically diversified competitors. The impact of any of these events on our customers or on us directly would affect our financial condition and results of operations.
The soundness of other financial institutions with which we do business could adversely affect us .
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, including counterparties in the financial industry, such as commercial banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions will expose us to credit risk in the event of default of a counterparty or client. In addition, this credit risk may be exacerbated when the collateral we hold cannot be realized upon liquidation or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such would not materially and affect our results of operations.
Environmental liability associated with lending activities could result in losses .
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances are discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit the use of properties that we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.
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Our loan policies requiring certain due diligence of high risk industries and properties may not be effective in reducing the risks of environmental liability resulting from non-performing loan and/or foreclosed property.
We may not be able to retain, attract and motivate qualified individuals .
Our success depends on our ability to retain, attract and motivate qualified individuals in key positions throughout the organization. Competition for qualified individuals in most activities in which we are engaged can be intense, and we may not be able to hire or retain the people we want and/or need. Although we have entered into employment agreements with certain key employees, and have incentive compensation plans aimed, in part, at long-term employee retention, the unexpected loss of services of one or more of our key personnel could still occur, and such events may have a material adverse impact on our business because of the loss of the employee’s skills, knowledge of our market, and years of industry experience and the difficulty of promptly finding qualified replacement personnel. If we are unable to retain, attract and motivate qualified individuals in key positions, our business and results of operations could be adversely affected.
A failure in or breach of our operational or security systems, or those of our third party service providers, including as a result of cyber-attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, or damage our reputation .
As a financial institution, our operations rely heavily on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our Internet banking system, treasury management products, check and document imaging, remote deposit capture systems, general ledger, deposit, loan and other systems.
There has been an increase in the number and sophistication of criminal cyber-security attacks against companies where customer and other sensitive information has been compromised. The financial services industry has experienced an increase in the number and severity of cyber-attacks, including efforts to hack or breach security measures in order to access, obtain or misuse information, misappropriate financial assets, corrupt or destroy data, disrupt operations, or install viruses, “ransomware” or other malware. Although we devote significant resources to maintaining the integrity of our systems, we are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. The protective policies and procedures we currently have in place or which we implement in the future may not be sufficient as the nature and sophistication of such continue to evolve. We may be required to expend significant additional resources in the future to modify and our protective measures.
In addition, our business operations rely on third party vendors to provide services such as exchanges, clearing houses or other financial intermediaries, data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. Such parties could also be the source of an attack on, or breach of, our operational systems. The cyber-security, information and operational risks that our third party service providers face may be different than the risks we face, and we do not directly control any of such service providers’ information security operations, including the efforts that they may take to mitigate risks or the level of cyber/privacy liability insurance that they may carry. Any caused or experienced by these third parties, including cyber-attacks and security , could affect our ability to deliver products and services to our customers and otherwise conduct our business. Furthermore, our vendors could also be sources of operational and information security risk to us, including from or of their own systems or capacity constraints. Replacing these third party vendors could also create significant and expense.
Any failures, interruptions or security breaches in our information systems, or the systems operated by our third party service providers, could damage our reputation, result in a loss of customer business, impair our ability to provide our services or maintain availability of our systems to customers, result in a violation of privacy or other laws, subject us to regulatory enforcement or other actions, or expose us to remediation costs, increased insurance premiums, civil litigation,
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fines, penalties or losses not covered by insurance. Any of these events could have a material adverse effect on our financial condition or results of operations.
Our business is dependent on technology, and an inability to invest in technological improvements or obtain reliable technology and technological support may adversely affect our business, financial condition and results of operations .
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. We depend in part upon our ability to address the needs of our customers by using technology to provide products and services that satisfy their operational needs. Many of our competitors have substantially greater resources to invest in technological improvements and third-party support. There can be no assurance that we will effectively implement new technology-driven products and services or successfully market these products and services to our customers. We also rely on our computer systems. For example, we rely on our computer systems to accurately track and record our assets and liabilities. If our computer systems become unreliable, fail or experience a breach of security, our ability to maintain accurate financial records may be impaired, which could materially affect our business, financial condition and results of operations.
The value of our goodwill and other intangible assets may decline in the future.
As of December 31, 2020, we had $22.7 million of goodwill and other intangible assets. A significant decline in our financial condition, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock may necessitate taking charges in the future related to the impairment of our goodwill and other intangible assets. If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our financial condition and results of operations.
The Bank faces risks related to the adoption of future legislation and potential changes in federal agency leadership, policies, and priorities.
The level of regulatory scrutiny that we are subject to may fluctuate over time, based on numerous factors, including as a result of the new U.S. presidential administration and Democratic majority in Congress. The prospects for the enactment of banking reform legislation under the new Congress are unclear at this time. The turnover of the presidential administration has produced, and likely will continue to produce, certain changes in the leadership and senior staffs of the federal banking agencies, the CFPB, the Commodity Futures Trading Commission, the SEC, and the Treasury Department. In addition, the Federal Reserve and the FDIC Board of Directors may experience significant turnover within the next year to two years. These changes could impact the rulemaking, supervision, examination and enforcement priorities and policies of the agencies.
As Congress, state legislatures, and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes, our business could be affected in substantial and unpredictable ways. Material changes in regulation and requirements imposed on financial institutions, such as the Dodd-Frank Act and the Basel III Capital Rules, could result in additional costs, impose more stringent capital, liquidity and leverage requirements, limit the types of financial services and products we may offer and increase the ability of non-bank financial services providers to offer competing financial services and products, among other things. Such changes could result in new regulatory obligations which could prove difficult, expensive or competitively impractical to comply with if not equally imposed upon non-bank financial services providers with whom we compete.
As a participating lender in the SBA’s PPP, we are dependent on the federal government’s continuation and support of the program and on our compliance with their requirements.
Federal and state governments have enacted laws intending to stimulate the economy in light of the business and market disruptions related to COVID-19, including the SBA’s PPP. We participated as a lender in the PPP, providing $234 million in loans to over 800 customers. As of December 31, 2020, we had PPP loans with outstanding balances of $192.2 million.
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We understand that PPP loans are fully guaranteed by the SBA and believe the majority of these loans will be forgiven. However, there can be no assurance that the borrowers will use or have used the funds appropriately or will have satisfied the staffing or payment requirements to qualify for forgiveness in whole or in part. Any portion of the loan that is not forgiven must be repaid by the borrower. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, which may or may not be related to an ambiguity in the laws, rules or guidance regarding operation of the PPP, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if we have already been paid under the guaranty, seek recovery from us of any loss related to the deficiency.
Due to the short timeframe between the passing of the CARES Act and the beginning of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP. Several other large banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both customers and non-customers that approached the Bank regarding PPP loans and our PPP process. Any such litigation filed against the Company or the Bank may be costly, regardless of the outcome, and result in significant financial liability or adversely affect our reputation. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.
We could be subject to adverse changes in tax laws, regulations and interpretations or challenges to our tax positions .
From time to time, changes in tax laws or regulations may be proposed or enacted that could adversely affect our overall tax liability. For example, the Tax Cuts and Jobs Act of 2017, which was enacted on December 22, 2017, represented a significant overhaul of the U.S. federal tax code. This tax legislation, and additional rules and regulations that have been promulgated since then, significantly changed the federal income tax landscape. Although, the legislation reduced the U.S. statutory corporate tax rate to 21% and made other changes that have favorably impacted our overall U.S. federal tax liability, it also included a number of provisions that have and will continue to negatively impact our overall U.S. federal tax liability, including, but not limited to, the limitation or elimination of various deductions or credits (including for interest expense and for performance-based compensation under Section 162(m), the imposition of taxes on certain cross-border payments or transfers, the changing of the timing of the recognition of certain income and deductions or their character, and the limitation of asset basis under certain circumstances). The legislation also made significant changes to the tax rules applicable to insurance companies and other entities with which we do business. Additional guidance is expected to continue to be issued by the Internal Revenue Service, the Department of Treasury, or other governing bodies that may significantly differ from our interpretation of the law, which may result in a material effect on our business, cash flow, results of operations or financial conditions. Additionally, there is no assurance that the current or anticipated benefits of the Tax Cuts and Jobs Act of 2017 will be realized in future periods. Any tax benefits could be repealed as a result of future political or regulatory actions, including as a result of changes proposed by the new U.S. presidential administration. There can be no assurance that changes in tax laws or regulations, both within the U.S. and the other jurisdictions in which we operate, will not materially and affect our tax rate, tax payments, financial condition and results of operations. Similarly, changes in tax laws and regulations that impact our customers and counterparties or the economy generally may also impact our financial condition and results of operations.
In addition, tax laws and regulations are complex and subject to varying interpretations, and any significant failure to comply with applicable tax laws and regulations in all relevant jurisdictions could give rise to substantial penalties and liabilities. Any changes in enacted tax laws (such as the recent U.S. tax legislation), rules or regulatory or judicial interpretations; any adverse outcome in connection with tax audits in any jurisdiction; or any change in the pronouncements relating to accounting for income taxes could materially and adversely impact our effective tax rate, tax payments, business, operating results and financial condition.
We are subject to regulation by various federal and state entities .
We are subject to the regulations of the SEC, the OCC, the Federal Reserve, and the FDIC. New regulations issued by these agencies may adversely affect our ability to carry on our business activities. We are subject to various federal and state laws and certain changes in these laws and regulations may adversely affect our operations. Noncompliance with certain of these regulations may impact our business plans, including our ability to branch, offer certain products or execute
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existing or planned business strategies or could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, and damage to our reputation and brand. Such regulation includes various privacy, information security and data protection laws, including requirements concerning security breach notification, and anti-money laundering and anti-terrorism financing laws and regulations.
For example, certain of our business is subject to the GLBA and implementing regulations and guidance. Among other things, the GLBA:
imposes certain limitations on the ability of financial institutions to share consumers’ nonpublic personal information with nonaffiliated third parties;
requires that financial institutions provide certain disclosures to consumers about their information collection, sharing and security practices and affords customers the right to “opt out” of the institution’s disclosure of their personal financial information to nonaffiliated third parties (with certain exceptions); and
requires financial institutions to develop, implement and maintain a written comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities, and the sensitivity of customer information processed by the financial institution as well as plans for responding to data security breaches.
Moreover, various United States federal regulatory agencies, states and foreign jurisdictions have enacted data security breach notification requirements with varying levels of individual, consumer, regulatory and/or law enforcement notification in certain circumstances in the event of a security breach.
We also maintain an enterprise-wide program designed to enable us to comply with applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the USA PATRIOT ACT. This program includes policies, procedures, processes and other internal controls designed to identify, monitor, manage and mitigate the risk of money laundering or terrorist financing posed by our products, services, customers and geographic locale. These controls include procedures and processes to detect and report suspicious transactions, perform customer due diligence, respond to requests from law enforcement, and meet all recordkeeping and reporting requirements related to particular transactions involving currency or monetary.
Compliance with current or future regulations to which we are subject, including but not limited to regulations related to privacy, information security and data protection laws and anti-money laundering and anti-terrorism financing, could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could materially and adversely affect our profitability. Changing regulations could also increase our costs of compliance and business operations and could reduce income from certain business initiatives, or, if we fail to comply, result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, and damage to our reputation and brand.
We are also subject to the accounting rules and regulations of the SEC and the FASB. Changes in accounting rules could materially adversely affect the reported financial statements or our results of operations and may also require extraordinary efforts or additional costs to implement. Any of these laws or regulations may be modified or changed from time to time, and we cannot be assured that such modifications or changes will not adversely affect us.
Regulators periodically examine our business and we may be required to remediate adverse examination findings .
The Federal Reserve and the OCC periodically examine our business, including our compliance with laws and regulations, and we may become subject to other regulatory agency examinations in the future. If, as a result of an examination, a federal banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may require us to take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth by preventing us from acquiring other financial institutions or limiting our ability to expand our business by engaging in new activities, to change the asset composition of our portfolio or balance sheet, to
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assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Ownership of Our Common Stock
Limited trading in our common stock may impact the ability of shareholders to sell their shares and the price of our common stock .
Trading activity in our common stock may be limited. If an active market for our common stock is not sustained, the market price of our common stock may be adversely impacted. This may make it difficult for our shareholders to sell their shares at a favorable price or to sell their shares at all. In addition, any negative impact on the price or liquidity of our common stock may impair our ability to raise capital to continue to fund our operations by offering and selling additional shares and our ability to use our common stock as consideration in future acquisitions.
We are no longer an “emerging growth company” and are therefore subject to the auditor attestation requirement in the assessment of our internal controls over financial reporting and certain other increased disclosure and governance requirements.
As of January 1, 2021, we lost our status as an “emerging growth company,” as defined in the JOBS Act. As a result, we are no longer able to take advantage of certain exemptions from various reporting requirements. Therefore, we are now subject to certain requirements that apply to other public companies that did not previously apply to us, due to our previous status as an emerging growth company. These requirements include:
compliance with the auditor attestation requirement in the assessment of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act;
compliance with any new rules that may be adopted by the Public Company Accounting Oversight Board;
compliance with any new or revised financial accounting standards applicable to public companies without an extended transition period;
full disclosure regarding executive compensation required of larger public companies; and
compliance with the requirement of holding a nonbinding advisory vote on executive compensation and obtaining shareholder approval of any golden parachute payments not previously approved.
Failure to comply with these requirements could subject us to enforcement actions by the SEC, divert management’s attention, damage our reputation, and adversely affect our business, results of operations, or financial condition. In particular, if our independent registered public accounting firm is not able to render the required attestation, it could result in a loss of investor confidence in the accuracy, reliability, and completeness of our financial reports. With the loss of “emerging growth company” status, we expect to incur significant costs as a result of complying with additional compliance and reporting requirements, and our management and other personnel will need to devote a substantial amount of time to ensure that we comply with additional reporting requirements. Such initiatives and requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Any changes we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.
Our stock repurchase program may not enhance long-term stockholder value and stock repurchases, if any, could increase the volatility of the price of our common stock and will diminish our cash reserves.
In March 2020, our Board of Directors authorized a stock repurchase program pursuant to which the Company may purchase up to $25 million of its issued and outstanding common stock and terminated the previous program, which was substantially completed in the first quarter of 2020. During the year ended December 31, 2020, the Company repurchased $23.5 million, or 1,643,124 shares of common stock, of which 1,338,858 shares totaling $17.7 million were purchased under the new stock buyback program. The timing and actual number of shares repurchased depend on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements, available cash, and other
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market conditions. The program may be suspended or discontinued at any time without prior notice. Repurchases pursuant to our stock repurchase program could affect our stock price and increase its volatility. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, repurchases under our stock repurchase program will diminish our cash reserves, which impacts our ability to pursue possible future strategic opportunities and acquisitions, support our operations, invest in securities and pay dividends and could result in lower overall returns on our cash balances. Stock repurchases may not enhance shareholder value because the market price of our common stock may decline below the levels at which we repurchased shares of stock, and short-term stock price fluctuations could reduce the program’s effectiveness.
A number of factors could cause the price of our common stock to be volatile or to decline .
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
● actual or anticipated quarterly fluctuations in our operating results and financial condition;
● changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other financial institutions;
● failure to meet analysts’ revenue or earnings estimates;
● speculation in the press or investment community;
● strategic actions by us or our competitors, such as acquisitions or restructurings;
● actions by institutional shareholders;
● fluctuations in the stock price and operating results of our competitors;
● general market conditions and, in particular, developments related to market conditions for the financial services industry;
● proposed or adopted regulatory changes or developments;
● anticipated or pending investigations, proceedings or litigation that involve or affect us or the financial services industry; or
● domestic and international economic factors unrelated to our performance.
The holders of our subordinated notes have rights that are senior to those of our shareholders .
As of December 31, 2020, we had $75.0 million of subordinated notes outstanding. The subordinated notes are senior to shares of our common stock. As a result, we must make payments on the subordinated notes before any dividends can be paid on our common stock and, in the event of bankruptcy, dissolution, or liquidation, the holders of the subordinated notes must be satisfied before any distributions can be made to the holders of the common stock. Our ability to pay future distributions depends upon the earnings of the Bank and the issuance of dividends from the Bank to the Company, which may be inadequate to service the obligations.
We may borrow funds or issue additional debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock .
In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by all or up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, preferred stock, common stock, or securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt and preferred securities would receive a distribution of our available assets before distributions to the holders of our common stock. Because our decision to incur debt and issue securities in our future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate with certainty the amount, timing or nature of our future offerings and debt financings. Further, market conditions could require us to accept less favorable
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terms for the issuance of our securities in the future. In addition, the borrowing of funds or the issuance of debt would increase our leverage and decrease our liquidity, and the issuance of additional equity securities would dilute the interests of our existing shareholders.
Our ability to pay dividends to our shareholders is limited .
Our primary source of cash is dividends we receive from the Bank. Therefore, our ability to pay dividends to our shareholders depends on the Bank’s ability to pay dividends to us. Atlantic Capital has not historically paid dividends to shareholders and did not pay dividends in 2020, 2019 and 2018. Additionally, banks and bank holding companies are subject to significant regulatory restrictions on the payment of cash dividends. Our future dividend policy will depend on our earnings, capital requirements, financial condition, regulatory requirements and other factors that the boards of directors of the Company and the Bank consider relevant.
We may not be able to raise additional capital on terms favorable to us or at all .
In the future, should we need additional capital to support our business, expand our operations or maintain our minimum capital requirements, we may not be able to raise additional funds. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance at that time. We cannot provide assurance that such financing will be available to us on acceptable terms or at all. If we borrow money to provide capital to the Bank, we must obtain prior regulatory approvals, and we may not be able to pay this debt and could default. We cannot provide assurance that funds will be available to us on favorable terms or at all.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The executive office of Atlantic Capital Bancshares, Inc. and the headquarters of Atlantic Capital Bank, are located at 945 East Paces Ferry Road NE, Suite 1600, Atlanta, Fulton County, Georgia. This property is leased. Atlantic Capital provides services or performs operational functions at 5 additional locations, all of which are leased. These offices are located in Cobb County, Fulton County and Athens-Clarke County, Georgia, and Hamilton County, Tennessee.
We believe that our banking offices are in good condition and are suitable to our needs. We are not aware of any environmental problems with the properties that we lease that would be material, either individually, or in the aggregate, to our operations or financial condition.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in routine litigation and various legal proceedings related to the Company’s operations. Currently, there is no pending litigation or proceedings that management believes will have a material adverse effect, either individually or in the aggregate, on the Company’s business, financial condition and results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the Nasdaq trading under the symbol “ACBI.”
Holders
At February 22, 2021, there were 406 record shareholders. We estimate the number of beneficial shareholders to be much higher as many of our shares are held by brokers or dealers for their customers in street name.
Dividend Policy
Historically, we have not paid dividends.
The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our Board. Additionally, banks and bank holding companies are subject to significant regulatory restrictions on the payment of cash dividends. Our future dividend policy will depend on our earnings, capital requirements, financial condition, regulatory requirements and other factors that the boards of directors of the Company and the Bank consider relevant. See “Item 1 – Business - Supervision and Regulation - Payment of Dividends” above for regulatory restrictions which limit our ability to pay dividends.
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Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on Atlantic Capital’s common stock against the cumulative total return on the Nasdaq Stock Market (U.S. Companies) Index, the KBW NASDAQ Bank Index and the KBW NASDAQ Regional Bank Index, commencing November 2, 2015 (when our shares began trading) and ending on December 31, 2020.
Issuer Repurchases of Equity Securities
During the first quarter of 2020, the Company completed the $85.0 million stock repurchase program authorized by the Board of Directors on November 14, 2018. On March 4, 2020, the Board of Directors authorized a new stock repurchase program pursuant to which the Company may purchase up to $25 million of its issued and outstanding common stock. The timing and amounts of any repurchases will depend on certain factors, including but not limited to market conditions and prices, available funds and alternative uses of capital. The stock repurchase program may be carried out through openmarket purchases, block trades, negotiated private transactions and pursuant to a trading plan that will be adopted in
accordance with Rule 10b-18 or Rule 10b5-1 under the Securities Exchange Act of 1934. Any repurchased shares will constitute authorized but unissued shares. During the year ended December 31, 2020, the Company repurchased 1,643,142 shares totaling $23.5 million, of which 1,338,858 shares totaling $17.7 million were purchased under the new stock buyback program with the remaining shares purchased under the previous program. The Company initially paused repurchases in March 2020 as part of its holding company liquidity planning in response to the pandemic and resumed repurchases in August 2020.
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During the year ended December 31, 2020, the Company repurchased $23.5 million, or 1,643,124 shares of common stock. The following table presents information with respect to repurchases of our common shares during the periods indicated:
Approximate
Total Number of
Dollar Value of
Shares Purchased
Shares that May
Total Number of
as Part of Publicly
Yet be Purchased
Shares
Average Price
Announced Plans
Under the Plans or
Period
Purchased
Paid per Share
or Programs
Programs (1)
October 1 - 31, 2020
November 1 - 30, 2020
December 1 - 31, 2020
Total
Represents the maximum dollar amount of shares available for repurchase in the $25 million share repurchase program announced March 4, 2020, expiring March 4, 2022.
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ITEM 6. SELECTED FINANCIAL DATA
ATLANTIC CAPITAL BANCSHARES, INC.
For the Year Ended December 31,
(in thousands, except share and per share data)
INCOME SUMMARY (1)
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income from continuing operations before income taxes
Income tax expense
Net income (loss) from continuing operations
Income from discontinued operations, net of tax
Net income (loss)
PER SHARE DATA
Diluted earnings (loss) per share - continuing operations
Diluted earnings per share - discontinued operations
Diluted earnings (loss) per share
Book value per share
Dividends declared
PERFORMANCE MEASURES
Return on average equity
Return on average assets
Taxable equivalent net interest margin - continuing operations
Taxable equivalent net interest margin excluding PPP loans
Efficiency ratio - continuing operations
Average loans to average deposits
CAPITAL
Average equity to average assets
Leverage ratio
Total risk based capital ratio
SHARES OUTSTANDING
Number of common shares outstanding - basic
Number of common shares outstanding - diluted
Average number of common shares - basic
Average number of common shares - diluted
ASSET QUALITY
Allowance for credit losses on loans to loans held for investment (2)
Net charge-offs to average loans
Non-performing assets to total assets
AVERAGE BALANCES
Total loans
Investment securities
Total assets
Deposits
Shareholders’ equity
AT PERIOD END
Total loans
Investment securities
Total assets
Deposits
Shareholders’ equity
On April 5, 2019, Atlantic Capital completed the sale to FirstBank of its Tennessee and northwest Georgia banking operations, including 14 branches and the mortgage business. The mortgage business and branches sold to FirstBank are reported as discontinued operations.
The December 31, 2018 and 2019 ratios are calculated on a continuing operations basis. Prior period ratios have not been retrospectively adjusted for the impact of discontinued operations.
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Non-GAAP Financial Measures
Statements included in this annual report include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. Our management uses non-GAAP financial measures, including: (i) taxable equivalent interest income; (ii) taxable equivalent net interest income; (iii) loan yield excluding PPP loans; (iv) taxable equivalent net interest margin; (v) taxable equivalent net interest margin excluding PPP loans; (vi) taxable equivalent income tax expense; (vii) allowance for credit losses to loans held for investment excluding PPP loans; (viii) operating net income; (ix) operating diluted earnings per share; (x) earnings before provision for credit losses and income taxes; and (xi) interest income on investment securities.
Management believes that non-GAAP financial measures provide a greater understanding of ongoing performance and operations, and enhance comparability with prior periods. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as determined in accordance with GAAP, and investors should consider our performance and financial condition as reported under GAAP and all other relevant information when assessing our performance or financial condition. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP. Non-GAAP financial measures may not be comparable to non-GAAP financial measures presented by other companies.
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Non-GAAP Performance Measures Reconciliation
For the Year Ended December 31,
(in thousands, except per share data)
Operating net income reconciliation
Net income (loss) - GAAP
Merger related expenses, net of income tax
Divestiture expenses, net of income tax
Gain on sale of branches, net of income tax
Revaluation of net deferred tax asset
Operating net income
Operating diluted earnings per share reconciliation
Diluted earnings (loss) per share - GAAP
Merger related expenses
Net gain on sale of branches
Revaluation of net deferred tax asset
Diluted earnings per share - operating
Interest income on investment securities reconciliation
Interest income on investment securities - GAAP
Taxable equivalent adjustment
Interest income on investment securities - taxable equivalent
Taxable equivalent interest income reconciliation
Interest income - GAAP
Taxable equivalent adjustment
Interest income - taxable equivalent
Loan yield excluding PPP loans - continuing operations
Loan yield - GAAP - continuing operations
Impact of PPP loans
Loan yield excluding PPP loans - continuing operations
Taxable equivalent net interest income reconciliation - continuing operations
Net interest income - GAAP
Taxable equivalent adjustment
Net interest income - taxable equivalent - continuing operations
Taxable equivalent net interest margin reconciliation - continuing operations
Net interest margin - GAAP - continuing operations
Impact of taxable equivalent adjustment
Net interest margin - taxable equivalent - continuing operations
Taxable equivalent net interest margin excluding PPP loans reconciliation
Net interest margin - GAAP
Impact of PPP loans
Net interest margin - taxable equivalent excluding PPP loans
Taxable equivalent income tax expense reconciliation
Income tax expense - GAAP
Taxable equivalent adjustment
Income tax expense
Earnings before provision for credit losses and income taxes
Net income from continuing operations before provision for income taxes
Provision for credit losses
Earnings from continuing operations before provision for credit losses and income taxes
Allowance for credit losses to loans held for investment reconciliation
Total loans held for investment
PPP loans
Total loans held for investment excluding PPP loans
Allowance for credit losses to loans held for investment
Allowance for credit losses to loans held for investment excluding PPP loans
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ATLANTIC CAPITAL BANCSHARES, INC.
(in thousands, except share and per share data)
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
INCOME SUMMARY (1)
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income from continuing operations before income taxes
Income tax expense
Net income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income
PER SHARE DATA
Diluted earnings per share - continuing operations
Diluted earnings (loss) per share - discontinued operations
Diluted earnings per share
PERFORMANCE MEASURES
Return on average equity
Return on average assets
Taxable equivalent net interest margin - continuing operations
Taxable equivalent net interest margin - excluding PPP loans
Efficiency ratio - continuing operations
Average loans to average deposits
CAPITAL
Average equity to average assets
Leverage ratio
Total risk based capital ratio
SHARES OUTSTANDING
Number of common shares - basic
Number of common shares - diluted
Average number of common shares - basic
Average number of common shares - diluted
ASSET QUALITY
Allowance for credit losses to loans held for investment
Net charge-offs to average loans (2)
NPAs to total assets
AVERAGE BALANCES
Total loans
Investment securities
Total assets
Deposits
Shareholders’ equity
AT PERIOD END
Loans and loans held for sale
Investment securities
Total assets
Deposits
Shareholders’ equity
On April 5, 2019, the Bank sold its Tennessee and northwest Georgia banking operations, including 14 branches and the mortgage business. The mortgage business and branches sold to FirstBank are reported as discontinued operations.
Annualized.
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Non-GAAP Performance Measures Reconciliation
(in thousands, except per share data)
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Interest income on investment securities reconciliation
Interest income on investment securities - GAAP
Taxable equivalent adjustment
Interest income on investment securities - taxable equivalent
Taxable equivalent interest income reconciliation
Interest income - GAAP
Taxable equivalent adjustment
Interest income - taxable equivalent
Loan yield excluding PPP loans
Loan yield - GAAP
Impact of PPP loans
Loan yield excluding PPP loans
Taxable equivalent net interest income reconciliation - continuing operations
Net interest income - GAAP
Taxable equivalent adjustment
Net interest income - taxable equivalent - continuing operations
Taxable equivalent net interest margin reconciliation - continuing operations
Net interest margin - GAAP
Impact of taxable equivalent adjustment
Net interest margin - taxable equivalent - continuing operations
Taxable equivalent net interest margin excluding PPP loans reconciliation - continuing operations
Net interest margin - GAAP
Impact of PPP loans
Net interest margin - taxable equivalent excluding PPP loans
Taxable equivalent income tax expense reconciliation
Income tax expense - GAAP
Taxable equivalent adjustment
Income tax expense
Earnings before provision for credit losses and income taxes
Net income from continuing operations before provision for income taxes
Provision for credit losses
Earnings from continuing operations before provision for credit losses and income taxes
Allowance for credit losses to loans held for investment reconciliation
Total loans held for investment
PPP loans
Total loans held for investment excluding PPP loans
Allowance for credit losses to loans held for investment
Allowance for credit losses to loans held for investment excluding PPP loans
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of section 27A of the Securities Act and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
The following risks, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
our strategic decision to focus on the greater Atlanta market may not positively impact our financial condition in the expected timeframe, or at all;
costs associated with our growth and hiring initiatives in the Atlanta market area;
risks associated with geographic concentration, borrower concentration and concentration in commercial real estate and commercial and industrial loans;
our strategic decision to increase our focus on SBA and franchise lending may expose us to additional risks associated with these types of lending, including industry concentration risks, our ability to sell the guaranteed portion of SBA loans, the impact of negative economic conditions on small businesses’ ability to repay the non-guaranteed portions of SBA loans, and changes to applicable federal regulations;
risks associated with our ability to manage the planned growth of our payment processing business, including changing regulations, security risks, and unforeseen increases in transaction volume resulting from changes in our customers’ businesses and changes in the competitive landscape for payment processing;
changes in asset quality and credit risk;
the cost and availability of capital;
customer acceptance of our products and services;
customer borrowing, repayment, investment and deposit practices;
the introduction, withdrawal, success and timing of business initiatives;
the impact, extent, and timing of technological changes;
severe catastrophic events in our geographic area;
a weakening of the economies in which we conduct operations may adversely affect our operating results;
the U.S. legal and regulatory framework could adversely affect the operating results of the Company;
the interest rate environment may compress margins and adversely affect net interest income;
our ability to anticipate or respond to interest rate changes correctly and manage interest rate risk presented through unanticipated changes in our interest rate risk position and/or short- and long-term interest rates;
changes in trade, monetary and fiscal policies of various governmental bodies and central banks could affect the economic environment in which we operate;
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our ability to determine accurate values of certain assets and liabilities;
adverse developments in securities, public debt, and capital markets, including changes in market liquidity and volatility;
unanticipated changes in our liquidity position, including but not limited to our ability to enter the financial markets to manage and respond to any changes to our liquidity position;
the impact of the transition from LIBOR and our ability to adequately manage such transition;
adequacy of our risk management program;
increased competitive pressure due to consolidation in the financial services industry;
risks related to security breaches, cybersecurity attacks, and other significant disruptions in our information technology systems; and
other risks and factors identified in this Annual Report on Form 10-K under the heading “Risk Factors.”
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MD&A is presented to assist in understanding the financial condition and results of operations of Atlantic Capital Bancshares, Inc. and its subsidiaries. As such, this MD&A should be read in conjunction with the audited consolidated financial statements and related notes included in this Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Unless otherwise noted, when we refer to “Atlantic Capital,” “the Company,” “we,” “our,” and “us” in this report, we are referring to the consolidated financial position and consolidated results of operations for Atlantic Capital Bancshares, Inc.
EXECUTIVE OVERVIEW AND EARNINGS SUMMARY
We reported net income from continuing operations of $22.5 million for the year ended December 31, 2020 compared to $28.2 million for the year ended December 31, 2019 and $28.1 million for the year ended December 31, 2018. Diluted income per common share from continuing operations was $1.05, $1.20 and $1.07 for the years ended 2020, 2019 and 2018, respectively.
Net interest income before provision for credit losses from continuing operations increased $6.1 million, or 8%, from 2019 to 2020, primarily due to a $13.0 million, or 52%, decrease in interest expense from continuing operations, partially offset by a $6.9 million, or 6%, decrease in interest income from continuing operations. Net interest income before provision for credit losses from continuing operations increased $4.6 million, or 6%, from 2018 to 2019, primarily due to a $12.9 million, or 16%, increase in interest and fee income on loans, partially offset by an increase in interest expense of $7.9 million, or 63%, related to interest on deposits.
Taxable equivalent net interest income from continuing operations was $88.5 million for 2020, compared to $81.3 million for 2019. Taxable equivalent net interest margin from continuing operations decreased to 3.16% for the year ended December 31, 2020, from 3.58% for 2019. The margin decrease was primarily due to lower rates on loans resulting from federal funds rate decreases during 2019 and 2020.
Taxable equivalent net interest income from continuing operations was $81.3 million for 2019, compared to $76.6 million for 2018. Taxable equivalent net interest margin from continuing operations increased to 3.58% for the year ended December 31, 2019, from 3.50% for 2018. The margin increase was primarily due to increases in loan yields and a higher average federal funds rate during the first half of 2019.
The CARES Act and applicable extensions provide relief to borrowers, including the opportunity to defer loan payments while not negatively affecting their credit standing, and also provide funding opportunities for small businesses under the PPP from approved SBA lenders. For commercial and consumer customers, we have provided a host of relief options,
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including payment deferrals (including maturity extensions), loan covenant waivers and low interest rate loan products. The Bank funded approximately $234 million of PPP loans during 2020, of which $192.2 million remained outstanding at December 31, 2020.
Provision for credit losses from continuing operations for the year ended December 31, 2020 totaled $17.4 million, an increase of $14.7 million from the year ended December 31, 2019, primarily as a response to the expected impact from the economic slowdown from COVID-19. For the years ended December 31, 2018 to 2019, provision expense increased by $766,000, or 39%, from $1.9 million to $2.7 million, due to higher net charge-offs and specific reserve impairments.
Noninterest income from continuing operations decreased $440,000, or 4%, to $10.3 million for the year ended December 31, 2020 from the year ended December 31, 2019. This was primarily due to a decrease of $1.1 million in SBA lending activities from continuing operations and decreases in gains on the sale of investment securities of $930,000; partially offset by an increase in service charges from continuing operations of $1.3 million and a change of $579,000 in derivatives income (loss) from continuing operations.
Noninterest income from continuing operations increased $678,000, or 7%, to $10.7 million for the year ended December 31, 2019 from the year ended December 31, 2018. This was primarily due to an increase in gains on sales of securities of $2.8 million; largely resulting from the $1.9 million loss in the fourth quarter of 2018 on the sale of $63 million in investment securities. The proceeds from the securities sale were used to help fund the cash payout for the Branch Sale that closed in the second quarter of 2019. Additionally, SBA lending activities increased $572,000 from 2018 to 2019. These increases were partially offset by a $1.7 million net gain on the sale of Southeastern Trust Company in 2018 and the resulting loss of trust income of $1.0 million from the prior year.
For the year ended December 31, 2020, noninterest expense from continuing operations decreased $449,000, or 1%, compared to 2019. This was mainly driven by a decrease in travel, meals and entertainment expense from continuing operations of $452,000, or 67%, as a result of limitations from COVID-19 on non-essential business travel and an overall decrease in customer-related meals and entertainment expense. Salaries and employee benefits expense from continuing operations also decreased 308,000, or 1%, from 2019 to 2020, primarily as a result of a decrease in incentives and SBA commissions. Marketing and business development decreased $328,000, or 39%, from 2019 to 2020, reflecting our efforts to reduce expenses in the uncertain environment surrounding COVID-19. Partially offsetting these decreases from 2019 to 2020 were increases in FDIC assessments from continuing operations of $412,000 due to small bank assessment credits issued in 2019 and fully utilized in 2020; increases in occupancy expense from continuing operations of $295,000, or 10%, resulting from higher leasehold improvement depreciation; and increases in equipment and software expense from continuing operations of $234,000, or 8%, due to investments in software to support the growth in our fintech partnerships.
Noninterest expense from continuing operations totaled $53.1 million for the year ended December 31, 2019, compared to $50.0 million in 2018, an increase of $3.1 million, or 6%. This increase was mainly driven by higher salary and employee benefits expense from continuing operations of $34.5 million, up $2.8 million, or 9%, from December 31, 2018, which was primarily the result of the full impact of new hires in 2019 and higher incentive and medical insurance expense. Communications and data processing expense from continuing operations increased $523,000, or 20%, from 2018 to 2019 due to a higher volume of transactions in the payments business, as well as non-recurring charges related to vendor negotiations and contract terminations. Partially offsetting this increase was a decline in FDIC premium expense from continuing operations of $345,000, or 61%, compared to 2018 due to the FDIC assessment credit received in 2019.
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CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. Our financial position and results of operations are affected by management’s application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our consolidated financial position and/or consolidated results of operations. The more critical accounting and reporting policies include our accounting for the allowance for credit losses, fair value measurements, and income tax related items. Significant accounting policies are discussed in Note 1 - Accounting Policies and Basis of Presentation to the consolidated financial statements.
The following is a summary of our critical accounting policies that are material to the consolidated financial statements and are highly dependent on estimates and assumptions.
Allowance for credit losses.
On January 1, 2020, we adopted CECL, which replaces the incurred loss methodology with an expected loss methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases.
Allowance for Credit Losses on Held-to-Maturity Securities
Management measures expected credit losses on held-to-maturity securities by individual security. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers credit ratings and historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
The held-to-maturity portfolio consists entirely of municipal securities. Securities are generally rated A or higher. Securities are analyzed individually to establish a current expected credit loss CECL mark.
Allowance for Credit Losses on Available-for-Sale Securities
For available-for-sale securities in an unrealized loss position, management first assesses whether it intends to sell, or more likely than not will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit , limited by the amount that the fair value is less than the amortized cost basis. Any that has not been recorded through an allowance for credit is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities is not included in the estimate of credit losses.
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Allowance for Credit Losses on Loans
The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed and recoveries are credited to the allowance when received. We may also account for expected recoveries should information of an anticipated recovery become available. In the case of actual or expected recoveries, amounts may not exceed the aggregate of amounts previously charged off.
Management utilizes relevant available information, from internal and external sources, relating to past events, current conditions, historical loss experience, and reasonable and supportable forecasts. The lookback period in the analysis includes historical data from June 2015 to present. Adjustments to historical loss information are made when management determines historical data are not likely reflective of the current portfolio such as limited data sets or lack of default or loss history. Management may selectively apply external market data to subjectively adjust our own loss history including index or peer data. Accrued interest receivable was excluded from the estimate of credit losses for loans except for accrued interest receivable on loans with deferrals.
Collective Assessment
The allowance for credit losses on loans is measured on a collective cohort basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by call report code and then risk grade grouping. Risk grade is grouped within each call code by pass, special mention, substandard, and doubtful. Other loan types are separated into their own cohorts due to specific risk characteristics for that pool of loans. Examples include CD-secured fintech loans, SBA purchased loans, PPP loans and TriNet loans.
We have elected a cash flow methodology with PD and LGD for all call code cohorts and TriNet. CD-secured fintech loans, PPP loans and SBA purchased loans are measured with zero risk due to cash collateral and full guaranty, respectively.
The PD calculation looks at the historical loan portfolio at particular points in time (each month during the lookback period) to determine the probability that loans in a certain cohort will default over the next 12 month period. A default is defined as a loan that has moved to past due 90 days and greater, nonaccrual status, or experienced a charge-off during the period. In cohorts where our historical data are insufficient due to less than 20 loans on average in the pool or zero defaults, management uses index PDs in place of our historical PDs. Additionally, management reviews all other cohorts to determine if index PDs should be used outside of these criteria.
The LGD calculation looks at actual losses (net charge-offs) experienced over the entire lookback period for each cohort of loans. The aggregate loss amount is divided by the exposure at default to determine an LGD rate. All defaults (nonaccrual, charge-off, or greater than 90 days past due) occurring during the lookback period are included in the denominator, whether a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event (i.e. nonaccrual or charge-off). Due to very limited charge-off history, management uses index LGDs in place of our historical LGDs.
We utilize reasonable and supportable forecasts of future economic conditions when estimating the allowance for credit losses on loans. The calculation includes a 12-month PD forecast based on our regression model comparing peer nonperforming loan ratios to the national unemployment rate and the most recently published Wall Street Journal survey of economists’ forecast. After the forecast period, PD rates revert on a straight-line basis to long-term average rates over a 12-month period.
We recognize that all significant factors that affect the collectability of the loan portfolio must be considered to determine the estimated credit losses as of the evaluation date. Furthermore, the collective assessment methodology, in and of itself and even when selectively adjusted by comparison to market and peer data, does not provide a sufficient basis to determine the estimated credit losses. We adjust the modeled historical losses by a qualitative and environmental factor to incorporate all significant risks to form a sufficient basis to estimate the credit losses.
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Individual Assessment
Loans classified as Nonaccrual, TDR, or Reasonably Expected TDR will be reviewed quarterly for potential individual assessment. Any loan classified as a Nonaccrual or TDR that is not determined to need individual assessment will be evaluated collectively within its respective cohort. All Reasonably Expected TDR loans will be evaluated individually to account for expected modifications in loan terms.
Where the primary and/or expected source of repayment of a specific loan is believed to be the future liquidation of available collateral, impairment will generally be measured based upon expected future collateral proceeds, net of disposition expenses including sales commissions as well as other costs potentially necessary to sell the asset(s) (i.e. past due taxes, liens, etc.) Estimates of future collateral proceeds will be based upon available appraisals, reference to recent valuations of comparable properties, use of consultants or other professionals with relevant market and/or property-specific knowledge, and any other sources of information believed appropriate by management under the specific circumstances. When appraisals are ordered to support the impairment analysis of an impaired loan, the appraisal is reviewed by Atlantic Capital’s internal appraisal reviewer or a qualified third party reviewer.
Where the primary and/or expected source of repayment of a specific loan is believed to be the receipt of principal and interest payments from the borrower and/or the refinancing of the loan by another creditor, impairment will generally be measured based upon the present value of expected proceeds discounted at the contractual interest rate. Expected refinancing proceeds may be estimated from review of term sheets actually received by the borrower from other creditors and/or from our knowledge of terms generally available from other banks, asset-based lenders, factoring companies and institutional lenders (Government Sponsored Entities, insurance companies, etc.)
Determining the Contractual Term
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by us. Prepayment assumptions will be determined by analysis of historical behavior by loan cohort.
Troubled Debt Restructurings
A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. Any loan that is being considered for modification and expected to result in a TDR is identified as a Reasonably Expected TDR. Reasonably Expected TDRs are assessed in the CECL calculation utilizing their expected modified terms. The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows when a rate modification has occurred.
Allowance for Credit Losses on Unfunded Commitments
We estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The allowance for credit losses on unfunded commitments is adjusted through a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate utilizes the same factors and assumptions as the allowance for credit losses on loans and is applied at the same collective cohort level .
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Fair value measurements.
Our impaired loans and foreclosed assets may be measured and carried at fair value, the determination of which requires management to make assumptions, estimates and judgments. See “Note 18 - Fair Value Measurements” to the consolidated financial statements for additional disclosures regarding the fair value of our assets and liabilities.
When a loan is considered individually impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. In addition, foreclosed assets are carried at the lower of cost, fair value, less cost to sell, or listed selling price less cost to sell, following foreclosure. Fair value is defined by GAAP as “the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.” GAAP further defines an “orderly transaction” as “a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets. It is not a forced transaction (for example, a forced liquidation or distress sale).” Although management believes its processes for determining the value of impaired loans and foreclosed properties are appropriate and allow us to arrive at a fair value, the processes require management judgment and assumptions and the value of such assets at the time they are revalued or may be significantly different from management’s determination of fair value. In addition, because of subjectivity in fair value determinations, there may be grounds for differences in opinions, which may result in between management and our regulators, which could cause us to change our judgments about fair value.
The fair values for available-for-sale securities are generally based upon quoted market prices or observable market prices for similar instruments. We utilize a third-party pricing service to assist with determining the fair value of our securities portfolio. The pricing service uses observable inputs when available including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment by management. For debt securities available for sale, we review our securities portfolio for impairment and determine if impairment is related to credit loss or non-credit loss. In making the assessment of whether a loss is from credit or other factors, management considers the extent to which fair value is less than amortized cost, and adverse conditions related to the security, among other factors. If this assessment indicates that a credit exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows is less than the amortized cost basis, a credit exists and an allowance is created, limited by the amount that the fair value is less than the amortized cost basis.
Atlantic Capital uses derivatives primarily to manage interest rate risk. The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and pricing models that are primarily sensitive to observable market data.
Income Taxes.
We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies by jurisdiction and entity in making this assessment.
Regulatory risk-based capital rules limit the amount of deferred tax assets that a bank or bank holding company can include in Tier 1 capital. Generally, deferred tax assets that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances and net of deferred tax liabilities, are excluded from CET1 and Tier 1 capital. Deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, net of related
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valuation allowances and net of deferred tax liabilities, that exceed certain thresholds are excluded from CET1 and Tier 1 capital.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
Taxable equivalent net interest income from continuing operations for the year ended December 31, 2020 totaled $88.5 million, a $7.1 million, or 9%, increase from 2019. This increase was primarily driven by a decrease of $13.0 million, or 52%, in interest expense from continuing operations compared to the same period in 2019, partially offset by a decrease of $5.8 million, or 5%, in taxable equivalent interest income from continuing operations. The change in taxable equivalent interest income from continuing operations primarily resulted from a $7.4 million, or 8%, decrease in interest income on loans, resulting from decreases in the federal funds rate, partially offset by an increase in average loan balances. Interest income on loans from continuing operations included $4.6 million in PPP loan income for the twelve months ended December 31, 2020. The yield on loans from continuing operations decreased by 120 basis points to 4.06% for the year ended December 31, 2020 compared to the same period in 2019. However, the increase in average loan balances helped to mitigate the declines in yield.
Interest expense from continuing operations for the year ended December 31, 2020 totaled $12.0 million, a $13.0 million, or 52%, decrease from 2019, primarily due to a $12.6 million, or 62%, decrease in interest paid on deposits. The rate paid on deposits from continuing operations decreased 121 basis points driven by a decrease in interest rates on deposits and other borrowings.
Taxable equivalent net interest margin from continuing operations decreased to 3.16% from 3.58% for the year ended December 31, 2020 compared to the year ended December 31, 2019. The primary reason for the decrease in taxable equivalent net interest margin for 2020 compared to 2019 was lower interest rates on loans resulting from federal funds rate decreases during 2019 and 2020 .
The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented. Loan fees are included in interest income on loans.
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Table 1 - Average Balance Sheets and Net Interest Analysis (1)
(Dollars in thousands; taxable equivalent)
Year ended December 31,
Interest
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
Average
Income/
Yield/
Balance
Expense
Rate
Balance
Expense
Rate
Balance
Expense
Rate
Assets
Interest bearing deposits in other banks
Other short-term investments
Investment securities:
Taxable investment securities
Non-taxable investment securities (2)
Total investment securities
Loans - continuing operations
FHLB and FRB stock
Total interest-earning assets - continuing operations
Loans held for sale – discontinued
operations
Total interest-earning assets
Non-earning assets
Total assets
Liabilities
Interest bearing deposits:
NOW, money market, and savings
Time deposits
Brokered deposits
Total interest-bearing deposits
Total borrowings
Total long-term debt
Total interest-bearing liabilities - continuing operations
Interest-bearing liabilities – discontinued
operations
Total interest-bearing liabilities
Demand deposits
Demand deposits - discontinued operations
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest spread – continuing
operations
Net interest income and net interest
margin - continuing operations (3)
Net interest income and net interest
margin (3)
On April 5, 2019, we sold our Tennessee and northwest Georgia banking operations, including 14 branches and the mortgage business. The banking business and branches that were sold to FirstBank are reported as discontinued operations. Discontinued operations have been reported retrospectively for all prior periods presented.
Interest income on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 21% for the years ended December 31, 2020, 2019 and 2018, reflecting the statutory federal income tax rates.
Taxable equivalent net interest income divided by total interest-earning assets using the appropriate day count convention based on the type of interest-earning asset. For a reconciliation of Non-GAAP financial measures, see “Item 6 - Selected Financial Data - Non-GAAP Performance Measures Reconciliation.”
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The following table shows the relative effect on taxable equivalent net interest income for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category .
Table 2 - Changes in Net Interest Income
(in thousands)
2020 Compared to 2019
2019 Compared to 2018
Increase (decrease) Due to Changes in:
Increase (decrease) Due to Changes in:
Total
Total
Volume
Yield/Rate
Change
Volume
Yield/Rate
Change
Interest earning assets
Interest bearing deposits in other banks
Other short-term investments
Investment securities:
Taxable investment securities
Non-taxable investment securities (1)
Total investment securities
Loans - continuing operations
FHLB and FRB stock
Total interest-earning assets – continuing
operations
Loans held for sale - discontinued operations
Total interest-earning assets
Interest bearing liabilities
Interest bearing deposits:
NOW, money market, and savings
Time deposits
Brokered deposits
Total interest-bearing deposits
Total borrowings
Total long-term debt
Total interest-bearing liabilities–continuing
operations
Interest-bearing liabilities – discontinued
operations
Total interest-bearing liabilities
Change in net interest income-continuing
operations
Change in net interest income
Interest income on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 21% for the years ended December 31, 2020, 2019 and 2018, reflecting the statutory federal income tax rates.
Provision for Credit Losses
Management considers a number of factors in determining the required level of the allowance for credit losses and the provision required to achieve what is believed to be appropriate reserve level, including historical loss experience, loan growth, credit risk rating trends, nonperforming loan levels, delinquencies, loan portfolio concentrations, economic forecasts, and market trends. The provision for credit losses represents management’s determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for credit losses at a level that it considered adequate in relation to the estimated lifetime losses expected in the loan portfolio.
The provision for credit losses was $17.4 million in 2020, an increase of $14.7 million, compared to 2019, The provision increased primarily as a response to the expected impact from the economic slowdown from COVID-19. Due to the adoption of ASC 326 on January 1, 2020, management now incorporates reasonable and supportable forecasts into its
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calculation of expected credit losses. An example of this forecasting element includes changes in unemployment rates used by management in the CECL forecasts, which could result in changes to the allowance for credit losses .
At December 31, 2020, nonperforming loans totaled $4.9 million compared to $7.3 million at December 31, 2019. Net charge-offs were 0.11%, 0.11%, and 0.02% of average loans for the years ended December 31, 2020, 2019, and 2018, respectively. The allowance for credit losses to total loans at December 31, 2020 was 1.55%, compared to 0.99% at December 31, 2019.
Noninterest Income
Noninterest income decreased $35.7 million, or 78%, to $10.3 million in 2020, compared to $46.0 million in 2019. The decrease was primarily the result of a decrease in noninterest income from discontinued operations of $35.3 million in connection with our Branch Sale that occurred in 2019. Noninterest income from continuing operations decreased $440,000, or 4%, for the year ended December 31, 2020 compared to the same period in 2019. For the year ended 2018, noninterest income was $13.4 million. The following table presents the components of noninterest income.
Table 3 - Noninterest Income
(in thousands)
Year ended December 31,
Change
Service charges
(Loss) gain on sales of securities
(Loss) gain on sales of other assets
Trust income
Derivatives income (loss)
Bank owned life insurance
SBA lending activities
Gain on sale of trust business
Other noninterest income
Total noninterest income - continuing operations
Noninterest income - discontinued operations
Noninterest income
Service charges from continuing operations for the year ended December 31, 2020 increased $1.3 million, or 36%, from 2019. The increase was primarily due to continued growth in our payments and fintech businesses, resulting in higher fee income.
Securities gains/(losses) for the year ended December 31, 2020 decreased $930,000 from a gain of $907,000 in 2019 to a loss of $23,000 in 2020 primarily as a result of the balance sheet realignment in 2019 due to the Branch Sale. In the fourth quarter of 2018, we recorded a loss of $1.9 million on the sale of $63 million in investment securities to help fund the cash owed to the buyer at the closing of the Branch Sale.
(Loss) gain on sales of other assets for the year ended December 31, 2020 was a loss of $146,000 compared to a gain of $127,000 for the same period in 2019. The loss in 2020 was the result of the sale of other real estate owned properties.
Derivatives income (loss) for the year ended December 31, 2020 was a gain of $257,000 compared to a loss of $322,000 for 2019. The $579,000 increase in income was due to changes in the derivatives credit valuation adjustment.
Income from SBA lending activities for the year ended December 31, 2020 decreased $1.1 million, or 26%, compared to 2019 due to lower SBA origination volume and a decrease in loan premiums . During the years ended December 31, 2020 and 2019, guaranteed portions of loans with principal balances of $42.7 million and $62.9 million, respectively, were sold in the secondary market.
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Noninterest Expense
Noninterest expense was $52.7 million for the year ended December 31, 2020 compared to $62.8 million in 2019, and $69.9 million in 2018. The decreases were primarily the result of decreases in noninterest expense from discontinued operations totaling $9.7 million and $10.3 million in 2020 and 2019, respectively, in connection with the Branch Sale that occurred in 2019. The following table presents the components of noninterest expense.
Table 4 - Noninterest Expense
(in thousands)
Year ended December 31,
Change
Salaries and employee benefits
Occupancy
Equipment and software
Professional services
Communications and data processing
Marketing and business development
Travel, meals and entertainment
FDIC premiums
Other noninterest expense
Total noninterest expense - continuing operations
Noninterest expense - discontinued operations
Noninterest expense
Salaries and employee benefits expense from continuing operations for the year ended December 31, 2020 was $34.2 million, a decrease of $308,000, or 1%, from 2019. The decrease was primarily attributable to a decrease in incentives and SBA commissions. Full time equivalent headcount totaled 201 at December 31, 2020 compared to 204 at December 31, 2019 a net decrease of three positions.
Occupancy expense from continuing operations was $3.2 million for the year ended December 31, 2020, an increase of $295,000, or 10%, from 2019. The increase was driven by the expansion of our corporate offices and the relocation of our operations center.
Equipment and software expense from continuing operations increased $234,000, or 8%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was due to investments in software to support the growth in our payments and fintech businesses.
Professional services from continuing operations decreased by $163,000, or 6%, for the year ended December 31, 2020 compared to 2019, which was primarily due to lower consultant fees.
Marketing and business development expense from continuing operations totaled $517,000 for the year ended December 31, 2020, a decrease of $328,000, or 39%, compared to the year ended December 31, 2019. The decrease reflected our efforts to reduce expenses in the uncertain environment surrounding COVID-19.
For the year ended December 31, 2020, travel, meals and entertainment expense from continuing operations decreased $452,000, or 67%, compared to the same period in 2019. The decline was due to limitations from COVID-19 on non-essential business travel and an overall decrease in customer-related meals and entertainment expense.
FDIC premiums expense from continuing operations was $629,000 for the year ended December 31, 2020, an increase of $412,000 from 2019. This increase in FDIC premiums expense was due to small bank assessment credits issued in 2019 that were fully utilized in the third quarter of 2020 .
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Income Taxes
We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. Periodically, we evaluate our income tax positions based on current tax law and positions taken by various tax auditors within the jurisdictions where we are required to file income tax returns.
Income tax expense was $4.6 million in 2020, compared to income tax expense of $7.6 million in 2019 and $6.3 million in 2018. The effective tax rate (as a percentage of pre-tax earnings) for 2020, 2019, and 2018 was 17.0%, 21.3%, and 18.4%, respectively. The decrease in income tax expense in the current year was the result of lower pretax earnings in 2020, combined with a lower effective tax rate. The lower effective tax rate for 2020 was driven by an increase in non-taxable securities income from municipal bonds .
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis including operating losses and tax credit carryforwards. Net deferred tax assets (deferred tax assets net of deferred tax liabilities and valuation allowance) are reported in the consolidated balance sheet as a component of total assets.
ASC Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all evidence with more weight given to evidence that can be objectively verified. Each quarter, management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results.
Based on all evidence considered, as of December 31, 2020 and 2019, management concluded that it was more likely than not that the net deferred tax asset would be realized, except as outlined in the following discussion. At both December 31, 2020 and 2019, we recorded a deferred tax asset valuation allowance totaling $6.7 million on certain net operating loss carryforwards due to the fact that certain tax attributes are subject to an annual limitation as a result of the acquisition of First Security, which constituted a change of ownership as defined under Internal Revenue Code Section 382. Management expects to generate future taxable income and believes this will allow for full utilization of our remaining net operating loss carryforwards within the statutory carryforward periods.
Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of income tax computed by applying the statutory federal income tax rate to income before income taxes, can be found in Note 14 - Income Taxes to the consolidated financial statements.
FINANCIAL CONDITION
Total assets at December 31, 2020 and December 31, 2019 were $3.62 billion and $2.91 billion, respectively. Average total assets for 2020 were $2.98 billion, compared to $2.59 billion for 2019. The increase in average total assets was primarily due to increases in loan growth, which included $234 million in SBA PPP loans funded during the second quarter of 2020 decreasing to $192.2 million at December 31, 2020 due to the forgiveness of PPP loans during the fourth quarter of 2020. In addition, consumer loans increased due to growth in a partnership with a fintech firm that offers CD-secured consumer loans to its customers.
Loans
At December 31, 2020, total loans held for investment increased $362.0 million, or 19.5%, compared to December 31, 2019, primarily due to increases of $247.7 million, or 35.1%, in commercial and industrial loans and $138.3 million in consumer loans. The increase in commercial and industrial loans resulted from the funding of $234 million of PPP loans during the second quarter of 2020 and the increase in consumer loans was due to the growth in a partnership with a fintech firm that offers CD-secured loans to its customers. This growth was p artially offset by a decrease in commercial real estate non-owner occupied loans of $23.0 million, or 4.1%. Details of loans at December 31, 2020, 2019, 2018, 2017, and 2016 are provided in Table 5.
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Table 5 - Loans
(in thousands)
December 31,
Loans held for sale
Branch loans held for sale
Loans held for sale - discontinued operations
Loans held for sale - continuing operations
Total loans held for sale
Loans held for investment
Commercial loans:
Commercial and industrial
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Mortgage warehouse loans
Total commercial loans
Residential:
Residential mortgages
Home equity
Total residential loans
Consumer
Other
Loans held for investment, gross
Less net deferred fees and other unearned income
Less allowance for loan losses
Loans held for investment, net
Total loans
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The following table sets forth the maturity distribution of loans as of December 31, 2020.
Table 6 - Loan Maturity Distribution and Interest Rate Sensitivity
(in thousands)
Within
One to
After
One Year
Five Years
Five Years
Total
Loans held for investment:
Commercial and industrial
Commercial real estate
Construction and land
Residential mortgages
Home equity
Consumer
Other
Total loans held for investment
Loans maturing with:
Fixed interest rates
Floating or adjustable rates
Total loans held for investment
Nonperforming Assets
Nonperforming assets include nonaccrual loans, accruing loans past due 90 days or more, and other real estate owned. Loans are considered to be past due when payment is not received from the borrower by the contractually specified due date. Interest accruals on loans are discontinued when interest or principal has been in default 90 days or more, unless the loan is secured by collateral that is sufficient to repay the debt in full and the loan is in the process of collection. When a loan is placed on nonaccrual status, interest accrued and not paid in the current accounting period is reversed against current period income. Interest accrued and not paid in prior periods, if significant, is reversed against the allowance for credit losses.
Income on such loans is subsequently recognized on a cash basis as long as the future collection of principal is deemed probable or after all principal payments are received. Commercial loans are placed back on accrual status after sustained performance of timely and current principal and interest payments and it is probable that all remaining amounts due, both principal and interest, are fully collectible according to the terms of the loan agreement. Residential loans and consumer loans are generally placed back on accrual status when they are no longer past due.
At December 31, 2020, our nonperforming assets totaled $4.9 million, or 0.13% of assets, compared to $7.6 million, or 0.26% of assets, at December 31, 2019. The decrease was primarily due to the foreclosure and/or sale of seven other real estate owned properties during 2020.
Nonaccrual loans totaled $3.8 million and $7.2 million as of December 31, 2020 and 2019, respectively. Loans past due 90 days and still accruing totaled $1.1 million at December 31, 2020 compared to $85,000 at December 31, 2019. The gross additional interest revenue that would have been earned if the loans classified as nonaccrual had performed in accordance with the original terms in 2020, 2019, and 2018 is immaterial. Table 7 provides details on nonperforming assets and other risk elements at December 31, 2020, 2019, 2018, 2017, and 2016.
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Table 7 - Nonperforming assets
(Dollars in thousands)
December 31,
Nonaccrual loans
Loans past due 90 days and still accruing
Total nonperforming loans (1) (NPLs)
Other real estate owned
Total nonperforming assets (NPAs)
NPLs as a percentage of total loans
NPAs as a percentage of total assets
Nonperforming loans as of December 31, 2017 and 2016 exclude those loans which are PCI loans. As of December 31, 2018, PCI loans were designated as held for sale in the Branch Sale. As a result, nonperforming loans held for sale which were previously designated as PCI loans are included in total nonperforming loans as of December 31, 2018.
Troubled Debt Restructurings
TDRs are made to provide relief to customers experiencing liquidity challenges or other circumstances that could affect their ability to meet their debt obligations. Typical modifications include interest rate reductions, term extensions and other concessions intended to minimize losses. Nonperforming TDRs are not accruing interest and are included as nonperforming assets within nonaccrual loans. TDRs, which are accruing interest based on the restructured terms, are considered performing. The following table summarizes TDRs at December 31, 2020, 2019, 2018, 2017, and 2016.
Table 8 - Troubled Debt Restructurings
(in thousands)
December 31,
Accruing TDRs
Nonaccruing TDRs
Total TDRs
The gross additional interest income that would have been earned in 2020 had performing TDRs performed in accordance with the original terms is immaterial.
Certain borrowers may be unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, loan customers may apply for a deferral of payments, or portions thereof. In the absence of other intervening factors, such short-term modifications made in good faith are not categorized as TDRs, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral).
Potential Problem Loans
Management identifies and maintains a list of potential problem loans. These are loans that are internally risk graded special mention or below but which are not included in nonaccrual status and are not past due 90 days or more. A loan is added to the potential problem list when management becomes aware of information about possible credit problems of the borrower which raises serious doubts as to the ability of such borrower to comply with the current loan repayment terms. Potential problem loans totaled $172.7 million and $76.3 million as of December 31, 2020 and December 31, 2019, respectively. As a percentage of total loans, potential problem loans were 7.7% and 4.1% as of December 31, 2020 and 2019, respectively. The increase was primarily related to downgrades resulting from COVID-19. As a number of potential problem loans are real estate secured, management closely tracks the current values of real estate collateral when assessing the collectability of these loans.
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Allowance for Credit Losses on Loans and Unfunded Commitments
On January 1, 2020, we adopted ASC 326, which resulted in a day one reduction of $854,000 to the allowance for credit losses on loans offset by an increase of $1.3 million to the allowance for credit losses on unfunded commitments. The allowance for credit losses on loans totaled $18.5 million as of December 31, 2019, was reduced by $854,000 due to ASC 326 adoption, was increased by $16.5 million related to twelve months of 2020 provision, and ended the year December 31, 2020 at $31.8 million. The allowance for credit losses on unfunded commitments totaled $892,000 at December 31, 2019, was increased by $1.3 million due to ASC 326 adoption, was increased by $961,000 million related to twelve months of 2020 provision, and ended the year December 31, 2020 at $3.1 million. At December 31, 2020, the combined allowance for credit losses on loans and unfunded commitments was $34.9 million, compared to $19.4 million at December 31, 2019.
The allowance for credit losses was 1.55% of total loans held for investment at December 31, 2020, compared to 1.04% at December 31, 2019. The allowance for credit losses to loans held for investment excluding PPP loans was 1.70% as of December 31, 2020. The increase from December 31, 2019 reflects the impact of COVID-19 on the economic forecast used in the estimation of expected credit losses as well as credit grade downgrades driven by COVID-19.
The base case economic forecast used for the December 31, 2020 calculation was published in early December. Management applied an economic and business conditions qualitative adjustment to the allowance by incorporating an alternative forecast scenario. The alternative forecast scenario was derived from economic conditions experienced during 2008 and 2009, which included a significant recession. Other qualitative adjustments applied by management during the year ended December 31, 2020 related to the nature and volume of loans, credit concentrations, and competition.
Net charge-offs during 2020 and 2019 were $2.4 million and $2.0 million, respectively. The increase related primarily to net charge-offs of one relationship during 2020 . Table 9 provides details concerning the allowance for credit losses during the past five years.
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Table 9 - Allowance for Credit Losses on Loans
(Dollars in thousands)
December 31,
Allowance for credit losses on loans at beginning of period
Adoption of ASU 2016-13
Provision for loan losses
Provision for loan losses (negative provision) - discontinued operations
Provision for PCI loan losses
Charge-offs:
Commercial and industrial
Commercial real estate
Construction and land
Residential mortgages
Home equity
Consumer
Other
Total charge-offs
Recoveries:
Commercial and industrial
Commercial real estate
Construction and land
Residential mortgages
Home equity
Consumer
Other
Total recoveries
Net charge-offs
Allowance for credit losses on loans at end of period
Allowance for unfunded commitments
Balance at beginning of period
Adoption of ASU 2016-13
Provision for unfunded commitments
Balance at period end
Total allowance for credit losses - loans and unfunded commitments
Provision for credit losses under CECL
Provision for loan losses
Provision for securities held to maturity credit losses
Provision for unfunded commitments (1)
Total provision for credit losses
Ratios
Allowance for loan losses to loans held for investment
Allowance for credit losses to loans held for investment
Allowance for credit losses to loans held for investment excluding PPP
loans
Net charge-offs to average loans
Non-performing loans as a percentage of total loans
Non-performing assets as a percentage of total assets
Average loans
Loans held for investment at end of period
Prior to the adoption of ASU 2016-13, the provision for unfunded commitments was included in other expense for the years ended December 31, 2019, 2018, 2017 and 2016.
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Table 10 - Allocation of Allowance for Loan Losses
(Dollars in thousands)
December 31,
Percent
Percent
Percent
Percent
Percent
Allowance
of loans
Allowance
of loans
Allowance
of loans
Allowance
of loans
Allowance
of loans
for loan
to total
for loan
to total
for loan
to total
for loan
to total
for loan
to total
losses
loans
losses
loans
losses
loans
losses
loans
losses
loans
Allowance for loan losses allocated to:
Commercial and industrial
Commercial real estate
Construction and land
Mortgage warehouse loans
Residential mortgages
Home equity
Consumer
Total allowance for loan
losses
Investment Securities
Investment securities available-for-sale totaled $335.4 million at December 31, 2020 compared to $282.5 million at December 31, 2019. Held-to-maturity securities totaled $200.2 million at December 31, 2020 compared to $117.0 million at December 31, 2019. Available-for-sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. Held-to-maturity securities are carried at amortized cost. As of December 31, 2020, investment securities available-for-sale had a net unrealized gain of $9.0 million compared to a net unrealized gain of $3.2 million as of December 31, 2019. Market changes in interest rates and credit spreads will result in temporary unrealized gains or losses as the market price of securities fluctuate. Management evaluated all available-for-sale securities in an unrealized loss position at December 31, 2020 and December 31, 2019, and concluded no impairment existed at the balance sheet dates.
Changes in the amount of our investment securities portfolio result primarily from balance sheet trends including loans, deposit balances, and short-term borrowings. When inflows arising from the management of deposits and short-term borrowings exceed loan demand, we invest excess funds in the securities portfolio or in short-term investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow interest-bearing balances with other banks to decline and use proceeds from maturing securities to fund loan demand. During 2020, we purchased $88.6 million in securities available-for-sale and $83.6 million in held-to-maturity municipal securities to extend the duration of the securities portfolio as well as to reduce the asset sensitivity of the balance sheet.
Details of investment securities at December 31, 2020 and December 31, 2019 are provided in Table 11.
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Table 11 - Investment Securities
(in thousands)
December 31, 2020
December 31, 2019
Carrying
Carrying
Available-for-Sale Securities
Value
Fair Value
Value
Fair Value
U.S. states and political divisions
Trust preferred securities
Corporate debt securities
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total available-for-sale
Held-to-Maturity Securities
U.S. states and political divisions
Less: allowance for credit losses on securities held-to-maturity
Total held-to-maturity
Total securities
The effective duration of our securities at December 31, 2020 was 6.09 years compared to 6.97 years at December 31, 2019.
The following table presents the contractual maturity of investment securities by maturity date and average yields based on amortized cost. The composition and maturity/repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs.
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Table 12 - Investment Securities
(Dollars in thousands)
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Average
Amortized
Average
Average
cost
Fair Value
Maturity
Yield (1)
cost
Fair Value
Maturity
Yield (1)
U.S. states and political subdivisions
1 to 5 years
5 to 10 years
More than 10 years
Trust preferred securities
5 to 10 years
Corporate debt securities
Within 1 year
1 to 5 years
5 to 10 years
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total
Weighted average yields are not presented in this table on a fully taxable equivalent basis.
Goodwill and Other Intangible Assets
Our core deposit intangible representing the value of the acquired deposit base, is an amortizing intangible asset that is required to be tested for impairment only when events or circumstances indicate that impairment may exist. This core deposit intangible was fully amortized in the second quarter of 2019 as a result of the Branch Sale.
Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. We evaluate our goodwill annually as of October 1, or more frequently if necessary, to determine if any impairment exists. Factors that management considers in this assessment includes macroeconomic conditions, industry and market considerations, our overall financial performance and changes in the composition or carrying amount of net assets. Due to the impact of recent events related to COVID-19, including challenges from declines in market conditions, we performed an interim impairment test as of May 31, 2020 and an impairment test in connection with our annual goodwill assessment as of October 1, 2020 and concluded that our carrying value was not in excess of its fair value on either date. We considered the impact of COVID-19 on these factors as of December 31, 2020 and will continue to monitor triggering events related to the pandemic between annual impairment assessments.
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Deposits
At December 31, 2020, total deposits were $3.2 billion, an increase of $662.5 million, or 27%, since December 31, 2019. Interest-bearing checking deposits increased $386.9 million while non-interest bearing demand deposits increased $209.1 million, or 25%, from December 31, 2019 to December 31, 2020. Time deposits also increased from December 31, 2019 to December 31, 2020 by $196.9 million due to the growth in the partnership with a fintech firm that offers CD-secured loans to its customers in order to build credit and/or improve their credit score. Brokered deposits increased by $12.6 million, or 15%. These increases were partially offset by decreases in savings and money market deposits of $143.1 million, or 12% during the same period.
Total average deposits from continuing operations for the year ended December 31, 2020 were $2.5 billion, an increase of $698.4 million, or 39%, from 2019. For the year ended December 31, 2020 compared to 2019, average noninterest-bearing demand deposits from continuing operations increased $250.6 million, or 42%, and average savings and money market deposits from continuing operations increased $153.0 million, or 18%. Average time deposits less than $250,000 increased from 2019 to 2020 due to the growth in the partnership with a fintech firm that offers CD-secured loans to its customers in order to build credit and/or improve their credit score.
Table 13 provides the average deposit balances as a percentage of total deposits for December 31, 2020, 2019, and 2018.
Table 13 - Average Deposits
(Dollars in thousands)
December 31,
total
total
total
Non-interest bearing demand deposits
Interest-bearing demand deposits
Savings and money market deposits
Time deposits less than $250,000
Time deposits $250,000 or greater
Brokered deposits
Deposits from continuing operations
Deposits from discontinued operations
Total deposits
The following table sets forth the scheduled maturities of time deposits of $250,000 and greater as of December 31, 2020. There were no brokered time deposits as of December 31, 2020.
Table 14 - Maturities of Time Deposits of $250,000 or More
(in thousands)
December 31, 2020
Time deposits maturing in:
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Short-Term Borrowings
There were no outstanding balances of federal funds purchased at December 31, 2020 and December 31, 2019.
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As a member of the FHLB, we have the ability to acquire short and long-term advances through a blanket agreement secured by our unencumbered qualifying 1-4 family first mortgage loans and by pledging investment securities or individual, qualified loans, subject to approval of the FHLB. At December 31, 2020 and 2019, we had no FHLB advances outstanding.
Long-Term Debt
On August 20, 2020, we issued 5.50% fixed-to-floating rate subordinated notes (the “Notes”) totaling $75 million in aggregate principal amount and callable at par plus accrued but unpaid interest on September 1, 2025. The Notes are due September 1, 2030 and bear a fixed rate of interest of 5.50% per year until September 1, 2025. From September 1, 2025 to the maturity date, the interest rate will be a floating rate equal to the three-month SOFR plus 536.3 basis points. The Notes were priced at 100% of their par value and qualify as Tier 2 regulatory capital.
On September 30, 2020, we redeemed its $50 million 6.25% fixed-to-floating rate subordinated notes due 2025, previously issued on September 28, 2015. The approximately one month overlap of the issuance and redemption of the old and new subordinated debt resulted in $521,000 in additional interest expense during the third quarter of 2020.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Risk Management
Liquidity risk is the risk that an institution will be unable to generate or obtain sufficient funding, at a reasonable cost, to meet operational cash needs and to take advantage of revenue producing opportunities as they arise. Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, operational, legal, and reputation risks that can affect an institution’s liquidity risk profile. Liquidity management involves maintaining our ability to meet the daily cash flow requirements of our customers, both depositors and borrowers.
We utilize various measures to monitor and control liquidity risk across three different types of liquidity:
tactical liquidity measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon;
structural liquidity measures the amount by which illiquid assets are supported by long-term funding; and
contingent liquidity utilizes cash flow stress testing across four crisis scenarios to determine the adequacy of our liquidity.
We aim to maintain a diverse mix of existing and potential liquidity sources to support the liquidity management function. At its core is a reliance on the customer deposit book, due to the low cost it offers. Other sources of liquidity include asset-based liquidity in the form of cash and unencumbered securities, as well as access to wholesale funding from external counterparties, primarily advances from the FHLB of Atlanta, federal funds lines and other borrowing facilities. We aim to avoid funding concentrations by diversifying external secured and unsecured funding with respect to maturities, counterparties and nature. At December 31, 2020, management believed that we had sufficient liquidity to meet our funding needs.
At December 31, 2020, we had access to $530.0 million in unsecured borrowings and $727.1 million in secured borrowings through various sources, including FHLB advances and access to federal funds. We also have the ability to attract more deposits by increasing rates.
We had $192.2 million in PPP loans outstanding as of December 31, 2020. The loans were funded from existing sources and will reduce available liquidity until the loans are forgiven or purchased by the SBA or third parties.
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Shareholders’ Equity and Capital Adequacy
Shareholders’ equity at December 31, 2020 was $338.6 million, an increase of $12.1 million, or 4%, from December 31, 2019. Net income of $22.5 million for the year ended December 31, 2020 and an increase of $9.9 million in accumulated other comprehensive income were offset by $23.5 million in repurchases of 1,643,124 shares of common stock during 2020. The Bank paid intercompany dividends totaling $12.5 million to Atlantic Capital during 2020 to fund the repurchases. Atlantic Capital and the Bank are required to meet minimum capital requirements imposed by regulatory authorities. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements.
Tables 15 and 16 provide additional information regarding regulatory capital requirements and Atlantic Capital’s and the Bank’s capital levels. Accumulated other comprehensive income, which includes unrealized gains and losses on securities available-for-sale and unrealized gains and losses on derivatives qualifying as cash flow hedges, is excluded in the calculation of regulatory capital ratios .
Table 15 - Capital Ratios
(Dollars in thousands)
Regulatory Guidelines
Minimum Capital
Consolidated
Bank
Plus Capital
December 31,
December 31,
December 31,
December 31,
Well
Conservation Buffer
Minimum
Capitalized
Risk based ratios:
Common equity tier 1 capital
Tier 1 Capital
Total capital
Leverage ratio
Common equity tier 1 capital
Tier 1 capital
Total capital
Risk weighted assets
Quarterly average total assets for leverage ratio
As of December 31, 2020, Atlantic Capital and the Bank remained “well-capitalized” under regulatory guidelines. See “Item 1. Business–Supervision and Regulation–Capital Adequacy” above for additional information.
Table 16 - Tier 1 Common Equity Under Basel III
(Dollars in thousands)
December 31, 2020
Tier 1 capital
Less: restricted core capital
Tier 1 common equity
Risk-adjusted assets
Tier 1 common equity ratio
Off-Balance Sheet Arrangements
We make contractual commitments to extend credit and issues standby letters of credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to customers at predetermined interest rates
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for a specified period of time. In addition to commitments to extend credit, we also issues standby letters of credit which are assurances to a third party that it will not suffer a loss if the customer fails to meet a contractual obligation to the third party. At December 31, 2020, we had issued commitments to extend credit of approximately $813.8 million and standby letters of credit of approximately $16.1 million through various types of commercial lending arrangements.
Based on historical experience, many of the commitments and letters of credit will expire unfunded, although customers may draw down on loans or lines of credit to fund business operations as a result of the COVID-19 pandemic at higher levels than we have previously experienced. Through our various sources of liquidity, we believe we will be able to fund these obligations as they arise. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
Contractual Obligations
There have been no significant changes in our contractual obligations during the year ended December 31, 2020 as compared to the year ended December 31, 2019. Table 17 sets forth certain information about contractual cash obligations as of December 31, 2020.
Table 17 - Contractual Obligations
(in thousands)
Payments Due by Period at December 31, 2020
More than 5
Less than 1 year
1 ‑ 3 years
3 ‑ 5 years
years
Total
Time deposits
Deposits without a stated maturity
Operating lease obligations
Long-term debt
Total contractual cash obligations
RISK MANAGEMENT
Effective risk management is critical to our success. The Dodd-Frank Act requires that bank holding companies with total assets in excess of $10 billion establish an enterprise-wide risk committee consisting of members of its board of directors. Although we do not have total assets in excess of $10 billion, the Audit Committee and the Audit and Risk Committee of the Bank’s board of directors provide oversight of enterprise-wide risk management activities. These committees review our activities in identifying, measuring, and mitigating existing and emerging risks (including credit, liquidity, interest-rate, compliance, market, operational, strategic, financial and reputational risks.) The committee monitors management’s execution of risk management practices in accordance with the board of directors’ risk appetite, reviews supervisory examination reports together with management’s response to such examinations and discusses legal matters that may have a material impact on the financial statements or our compliance policies. With guidance from and oversight by the Audit Committee and the Bank’s Audit and Risk Committee, management continually refines and enhances its risk management policies and procedures to maintain effective risk management programs and processes.
Credit Risk
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases, investment securities and derivative instruments. Our independent loan review function conducts risk reviews and analyses of loans to help assure compliance with credit policies and to monitor asset quality trends. The risk reviews include portfolio analysis by industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain adequate allowances for loan losses that are inherent in the loan portfolio.
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Liquidity Risk
Liquidity risk is the risk that we will be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain adequate funding or that we cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions. Consequently, we closely monitor our cash position, on-balance sheet liquidity and availability of outside funding sources to ensure these are adequate to ensure we can meet all our obligations and regulatory expectations.
Interest Rate Risk
Interest rate risk results principally from assets and liabilities maturing or repricing at different points in time, from assets and liabilities repricing at the same point in time but in different amounts and from short-term and long-term interest rates changing in different magnitudes. Market interest rates also have an impact on the interest rate and repricing characteristics of loans that are originated as well as the rate characteristics of interest-bearing liabilities.
We assess interest rate risk by forecasting net interest income under various interest rate scenarios and comparing those results to forecasted net interest income assuming stable rates. With rates rising, the estimated increase in net interest income is primarily due to the short-term repricing characteristics of the loan portfolio, combined with a favorable funding mix. Our loan portfolio consists of approximately half floating rate loans and half fixed rate loans. Our core client deposits are likely to allow us to lag short term interbank rate indices when pricing deposits. Transaction accounts comprise a significant amount of our total deposits.
Compliance Risk
Compliance risk is the risk to current or anticipated earnings or capital arising from violations of laws, rules or regulations, or from non-conformity with prescribed practices, internal policies and procedures or ethical standards. This risk exposes us to fines, civil monetary penalties, payment of damages and the voiding of contracts. Compliance risk can result in diminished reputation, reduced enterprise value, limited business opportunities and decreased expansion potential.
A unit within our Enterprise Risk Management division executes an annual compliance monitoring schedule that is risk-based. Our Internal Audit unit also conducts reviews that include compliance. Results of these monitoring and Internal Audit activities are reported to management as well as the Board of Directors. Any issues encountered are tracked to adequate solution and reported. Compliance and other risk management is integrated within our business units as a first line of defense, with compliance monitoring being a second line and Internal Audit being a third line of defense. Our operations are also reviewed by an external accounting firm and are subject to examination by federal banking agencies.
Market Risk
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. The structure of our loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk.
Operational Risk
Operational risk is the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes, people and systems or from external events. It includes legal risk, which is the risk of loss arising from defective transactions, litigation or claims made, or the failure to adequately protect company-owned assets. An operational loss occurs when an event results in a loss or reserve originating from operational risk.
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We have developed and employ measures that guide business functions in identifying, measuring, responding to, monitoring and reporting on possible operational losses to the organization. This drives internal risk conversations and enables us to clearly and transparently communicate to external stakeholders the level of potential operational risk we face, both presently and in the future, and our position on managing it to acceptable levels.
Strategic and Reputation Risk
Strategic risk is the risk of financial loss, diminished stakeholder confidence, or negative impact to human capital resulting from ineffective strategy setting and execution, adverse business decisions, or lack of responsiveness to changes in the banking industry and operating environment. We are committed to fulfilling our overall strategic objectives by selecting business strategies and operating businesses in a manner consistent with achieving profitability/earnings growth and maintaining strong confidence and trust with our key stakeholders.
Reputation risk is the risk to current or anticipated earnings, capital, enterprise value, our brand, and public confidence arising from negative publicity or public opinion, whether real or perceived, regarding our business practices, products, services, transactions, or other activities undertaken by us, our representatives, or our partners. A negative reputation may impair our relationships with clients, associates, communities or shareholders, and it is often a residual risk that arises when other risks are not managed properly.
We produce and regularly update a strategic plan as a guide to our operations. That plan is presented to and approved by the Board of Directors. Management also produces annual financial plans that are consistent with our strategic objectives. Financial results versus plan are presented to and discussed with the Board of Directors regularly.
Customer complaints and legal actions taken against us can be valuable indicators of reputation risk. We track and monitor customer complaints through their resolution and make regular reports to the Board of Directors. We also track legal actions in process against us and report their status regularly to the Board of Directors. Our management of compliance risk, as outlined in the Compliance Risk section above, is also valuable to managing reputation risk.
Table 18 provides the impact on net interest income resulting from various interest rate shock scenarios as of December 31, 2020 and 2019.
Table 18 - Net Interest Income Sensitivity Simulation Analysis
Estimated change in net interest income
Change in interest rate (basis point)
December 31, 2020
December 31, 2019
Increases in year-end deposits, mainly in noninterest-bearing demand and interest-bearing checking, led to temporarily high cash balances at December 31, 2020. This contributed to the increase in asset sensitivity as compared to December 31, 2019.
We also utilize MVE as a tool in measuring and managing interest rate risk. Long-term interest rate risk exposure is measured using the MVE sensitivity analysis to study the impact of long-term cash flows on capital.
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Table 19 presents the MVE profile as of December 31, 2020 and December 31, 2019.
Table 19 - Market Value of Equity Modeling Analysis
Estimated % change in MVE
Change in interest rate (basis point)
December 31, 2020
December 31, 2019
We may utilize interest rate swaps, floors, collars or other derivative financial instruments in an attempt to manage our overall sensitivity to changes in interest rates.
Impact of Inflation and Changing Prices
The primary impact of inflation on our operations is reflected in increasing operating costs and non-interest expense. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, changes in interest rates have a more significant impact on our performance than do changes in the general rate of inflation and changes in prices. Interest rate changes do not necessarily move in the same direction, nor have the same magnitude, as changes in the prices of goods and services. Although not as critical to the banking industry as many other industries, inflationary factors may have some impact on our ability to grow, total assets, earnings and capital levels. We do not expect inflation to be a significant factor in our financial results in the near future.
