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Atlantic Capital Bancshares, Inc. (ACBI)
Q4Â 2019 Earnings Call
Jan 31, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Atlantic Capital Bank, Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. I'd now like to turn the conference over to Ashley Carson, Executive Vice President, Corporate and Community Affairs. Please go ahead.
Ashley C. Carson -- Executive Vice President Corporate and Community Affairs Executive
Thank you, Raghav, and thank you all for joining us for our fourth quarter 2019 earnings call. With me today to discuss our results are Doug Williams, Chief Executive Officer, Patrick Oakes, Chief Financial Officer, Gray Fleming, Chief Risk Officer; and Kurt Shreiner, President of Corporate Financial Services. As a reminder, the Atlantic Capital earnings release is available in the Investor Relations section of our website.
I wish to caution you that we will be making forward-looking statements during this call and that actual results may differ materially. We encourage you to review the disclaimer in the earnings release dealing with forward-looking information. This disclaimer applies equally to statements made in this call. In addition, some discussions may include references to non-GAAP financial measures. Information about those measures including reconciliation to GAAP measures may be found in our SEC filings and in our earnings release.
And with that, I will turn the call over to our CEO of Atlantic Capital, Doug Williams.
Douglas L. Williams -- President and Chief Executive Officer
Thank you, Ashley and good morning. For the fourth quarter of 2019 and for all of 2019, Atlantic Capital reported strong growth in earnings per share, average core deposits and average loans, while maintaining sound credit quality and a fortress balance sheet. We began 2020 with strong momentum in all of our businesses. Building an attractive and distinctive culture as a competitive weapon is a key priority at Atlantic Capital. And we were pleased to report in 2019 that our Company was recognized by the American Banker as a Best Bank to Work For and by the Atlanta Business Chronicle as the Best Place to Work.
Two key elements of this purpose and performance-driven culture, client-focused teamwork and risk management expertise are foundational to our results. As you've seen from the earnings release, Atlantic Capital reported net income from continuing operations of $7.1 million or $0.32 per diluted share of the fourth quarter of 2019 and net income from continuing operations of $28.2 million or $1.20 per diluted share for all of 2019.
Average loans from continuing operations grew at a 12.5% annualized pace in the fourth quarter and increased 10.6% from 2018. Average deposits from continuing operations were up 40% annualized in the fourth quarter and grew 21% year-over-year. Non-interest-bearing deposits were 33.5% of total deposits at year-end, and average balances were up 50% annualized in the fourth quarter and increased 20% for the year.
This strong loan and deposit growth from new and expanded client relationships is the direct product of a Company aligned for the common purpose of fueling client prosperity with thoughtful and tailored credit and treasury management solutions and reliable service delivery.
Atlantic Capital's credit quality continues to be among the best in banking. Net charge-offs to average loans were 7 basis points for the quarter and 11 basis points for the full year. Non-performing assets to total assets were 26 basis points at year-end. Our strong capital position enabled us to repurchase 452,000 shares in the fourth quarter for $8.1 million and 4.5 million shares or approximately 17% of total shares since November of 2018 for $79 million.
Now Pat Oakes is going to review the financials with you in more detail.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Thanks, Doug, and good morning everyone. The net interest margin for the fourth quarter was 3.38%, a 14 basis point decline from the 3.52% margin in the third quarter. The decline was larger than anticipated and primarily the result of an increase in liquidity due to the strong deposit growth in the quarter. This change in mix lowered the NIM by approximately 9 basis points. As expected, loan yields decreased 23 basis points to 4.95% during the fourth quarter and I think we have now seen most of the impact from last year's decrease in the Fed funds rate. I'm particularly pleased with our progress in reducing the cost of deposits during the fourth quarter.
The cost of interest-bearing deposits decreased 22 basis points during the quarter to 1.36% as the bank has done a good job of working with our customers to reduce rates where possible. Our overall cost of deposits decreased 16 basis points to 90 basis points. These trends combined with solid growth in DDA were able to offset a significant part of the pressure from the loan side.
Given I'm pleased with our progress in reducing rates, we will continue to look for opportunities to further decrease deposit costs in the first quarter of 2020. Considering all this, I expect our NIM to increase in the first quarter from the 3.38% we reported in our fourth quarter. In addition to drop in our cost of funding, it was also nice to see another quarter of strong deposit growth, even if the fourth quarter numbers were inflated as a result of typical year end seasonality.
As a reminder, due to the volatility with our deposit balances, it's important to focus on quarterly average balances rather than period end balances. The fourth quarter was a good example with period end growth of $645 million compared to average growth of $197 million. I estimate approximately half of our -- half of the average deposit growth in the quarter was due to the run-up in year-end deposits that have already left the bank in the first quarter.
As we have seen in some previous years, I would not be surprised to see deposits down slightly in the first quarter while continuing to see strong year-over-year growth. One of our goals for 2019 was to improve our liquidity and replace some of the funding we lost as part of the branch sale and I think we can say we were successful. The fourth quarter average deposit growth also included an increase of $80 million in non-interest-bearing deposits from strong growth across many, most of our lines of business, particularly our payments business.
Period end loan growth in the fourth quarter were $37 million, that included a $9 million reduction in mortgage warehouse loans as we moved to exit that business in the first quarter. Multifamily loans increased $38 million in the quarter primarily due to $28 million in construction loans that moved to permanent financing, not a change in lending focus. Non-interest income in the fourth quarter totaled $2.7 million. This included another strong quarter for service charge income driven by continued strong growth in our payments business. We expect this momentum to continue and should be a nice source of revenue growth in 2020.
SBA income decreased in the fourth quarter as a result of less gain on sale income due to fewer loan sales. SBA loan production remains solid and I expect the gain income in the first quarter to be similar to what we experienced in earlier quarters of 2019. Finally, let me briefly touch on a few items that caused the increase in expenses in the fourth quarter.
Salaries and benefits increased from the impact of support staff hires along with an increase in our incentive accrual. The increase in data processing expense included the impact from growth in our payments business along with approximately $125,000 in one-time expenses.
Now, I'll turn it back over to Doug.
Douglas L. Williams -- President and Chief Executive Officer
Thank you, Patrick. The strong momentum began the year and substantial opportunity from Atlanta market growth and dislocation and from burgeoning prospects in the national high volume payments in fintech arena, Atlantic Capital will be sharply focused on number one, accelerating growth in existing to new client relationships in our Atlanta businesses and number two, growing deposits and service charge income from expanding to new payments in fintech relationships and alliances in 2020.
While uncertainties abound, data indicate that the US economy is firming and begins 2020 on sound footing, the Atlanta economy is diverse and growing at a vigorous pace. In particular, expected population growth in the Atlanta region over the next three years will be the second highest among the largest ten MSAs in the US.
Atlanta is a popular destination for corporate relocations and new business creation has been strong. There are over 221,000 businesses in the MSA and more than 24,000 of those have revenues between $1 million and $500 million, which is our primary target market segment. [Indecipherable] of course, are well aware of the dis-allocation [Phonetic] from M&A activity involving Atlanta area banks over the last couple of years, particularly the merger of BB&T and SunTrust to create Truist. We expect an historic opportunity to reorder a competitive landscape, add bankers and clients and accelerate our growth.
As you know, we added 12 new producing bankers in 2019 and we expect them to become productive this year. We will also continue to opportunistically add bankers over the course of 2020. Atlanta is America's Payments Hub with an estimated 70% of all domestic payments flowing through Atlanta. Atlantic Capital is building a rapidly growing payments and fintech banking business based on our treasury management expertise and a reliable transaction processing capability.
We grew ACH payments volumes over 50% in 2019 and see opportunity to expand deposit balances and non-interest income at a robust pace as we add new payments relationships and form alliances with payments oriented fintech companies. We expect sustained loan and deposit growth in the 10% to 12% range in 2020 and more growth in non-interest income -- non-interest bearing demand deposits. Assuming stable monetary policy without reductions in the federal funds rate, the net interest margin should stabilize in the first quarter.
We have considerable capital management flexibility. With over $6 million remaining under our $85 million repurchase program authorized in November of 2018, we anticipate undertaking further capital management actions when that program is completed. You'll remember that our $50 million, 6.25% subordinated holding Company notes are callable in September. Refinancing those notes in whole or part, along with an additional share repurchase program or a regular dividend will be considered later in the first quarter.
In sum, we're pleased with our progress in 2019 and expect continued progress in 2020. Now we're ready to attempt to answer any questions you may have.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And today's first question comes from Jennifer Demba of SunTrust. Please go ahead.
Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst
Thank you. Good morning.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Good morning, Jennifer.
Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst
Doug, you said you are interested in more hiring this year if the opportunities arise. I think you said you hired what, a dozen people last year. I mean, would you anticipate maybe getting to half that this year or do you have any sense based on what your pipeline is right now?
Douglas L. Williams -- President and Chief Executive Officer
We are actively in the market recruiting and I would be surprised if we hired as many as we did in 2019. But we're opportunistic if we see good bankers that fit with us, we'll be quick to hire them. We have fewer than that budgeted for 2020, but I've told all our people don't be constrained by the budget, if you find good people we'll hire them and benefit from the business they bring over.
Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst
Okay. And Pat, could you talk about the seasonal adjustment what we're looking for this quarter rather?
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Yeah, so there won't be a material change to retained earnings with the day one mark. And then going forward with CECL, we'll probably see a small decrease in our allowance going forward the first quarter.
Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst
Okay, thank you.
Operator
[Operator Instructions]. Today's next question comes from Steve Comery of G. Research. Please go ahead.
Steve Comery -- G.research -- Analyst
Hey guys, good morning.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Good morning, Steve.
Steve Comery -- G.research -- Analyst
Hey, I wanted to ask about the deposits balance, Pat, you kind of mentioned that you've seen a decent amount of the growth. You said about half of the growth had already run off through the first quarter and then after that you mentioned the non-interest growth that's coming from growth in business.
Should I interpret that as, meaning the most of the run-off has come in the other categories or how should I think about that?
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Yeah, I would think so, it's going to come more in money market probably than it will in DDA. You may see a little bit of run-off in DDA, but I think most would come in money market.
Steve Comery -- G.research -- Analyst
Okay, that's good. Thank you. And then secondly on sort of the hires about what Jennifer was asking about, maybe if you could help us think about like sort of what the payback period is for that and how long it kind of takes new bankers you bring on to hit the ground running and start producing loans?
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Yeah. In terms of sort of breakeven, we would expect that in six to 12 months and we would expect them to begin to become profitable in terms of producing some payback in the 12 to 18-month timeframe.
Steve Comery -- G.research -- Analyst
Okay, good. And then maybe one more from me. Doug, you talked about some of the capital actions,
Douglas L. Williams -- President and Chief Executive Officer
Right.
Steve Comery -- G.research -- Analyst
You guys are considering maybe a regular dividend or further repurchases, how do you think about that kind of the push and pull between the two options and like sort of -- does the stock's valuation play a role there and how do you think about that?
Douglas L. Williams -- President and Chief Executive Officer
Yeah. Valuation certainly plays a role and there's a third element in there too, and that's the -- what we do about the subordinated notes and we could obviously redeem those, we could refinance them in whole or part or we could theoretically will [Phonetic] do a larger issuance. So we've got all those levers to play with, and we're cognizant of the target capital levels we have for total risk-based capital and Tier-1 capital at both the holding Company in the bank level as we do that.
So, we've got a number of variables to play with. Between the two that you mentioned, regular dividend and share repurchase, we generally see a share repurchase program as being a more efficient use of capital in a regular dividend. But that could change at certain share price levels. So we're keeping that all in front of us at this point and we'll make decisions closer to the time when we have to make those decisions regarding the subordinated notes.
Steve Comery -- G.research -- Analyst
Okay, very good. That's all from me.
Operator
And our next question today comes from Christopher Marinac of Janney Montgomery Scott. Please go ahead.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Thanks, good morning. Pat, just wanted to drill down on the non-recurring expenses that were mentioned, is there anything meaningful, there?
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
I think what [Phonetic] I highlighted a few things right, salary and benefits, maybe a little bit with a -- little bit higher incentive accrual in the data processing side, there were some one-time expenses in that category. Non-interest expense may have had a little bit around the franchise tax, but that's really it.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Okay. So in terms of the absolute number on some of those one-time adjustments that -- they're just relatively small.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
It's a few hundred thousand dollars probably, yeah.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Okay. A few hundred thousand. Okay. That's what I wanted to get at. Great. And then when we look at the overall deposits coming in from Q4 into Q1, did seasonality kind of work against you or worked toward you? And then we're just curious kind of how you look at kind of net new clients coming in on your both demand deposits as well as just store deposits in general.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Let me make sure I understand your question, Chris. Seasonality does play a role in the fourth quarter and we begin to see some -- some run-off in the first and second quarters and then sort of buildup in the third and fourth quarter. So there is some seasonality in the deposit build pattern, if you will. But underlying that is good core deposit growth, good core client growth throughout the year. And so, we really think rather than looking quarter to quarter at what happens with respect to deposit balances, you really need to look at year-over-year comparisons. And as you have seen those are -- those are quite strong and have been for a sustained period of time.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Right. I was getting at that too. I see that change in average that you had put in the press release, which I think was good. So again as we get into first and second quarter, the seasonality is what it is, but the year-over-year comparison should still be quite positive like they just worked.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Yeah. The average growth will be slower in the first quarter and then it builds up throughout the year from there, but year-over-year, you should see continued strong growth.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Okay. And then one final thing up. You may have mentioned this and I just missed it. Is there a basis point impact to kind of the excess deposits and liquidity, the quarter, does that I'm sure that's part of the margin curve.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
On the margin yeah, yeah -- I've said in my prepared remarks about 9 basis points.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
So it's 9, great. Should that be narrower, do you think and any thoughts about how quickly that goes [Indecipherable].
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
So that's 9, third quarter versus fourth quarter, right. So, we'd expect to hopefully to get most of that back in the first quarter. And that's why you might see a slight pickup in the margin in the first quarter.
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Got it. Thanks for repeating that Pat. I appreciate it.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Absolutely.
Operator
And our next question today comes from Stephen Scouten of Piper Sandler. Please go ahead.
Stephen Scouten -- Piper Sandler -- Analyst
Hey, thanks guys. Hey, quick clarification there, Pat that 9 basis point impact, is that just on -- that's not on the NIM in cumulative [Phonetic] is that or is that -- can you specify that?
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Yeah. That was the negative impact of all that excess cash, all the excess deposit growth sitting in cash in the fourth quarter. So as those deposits leave and we lower our cash balances, you'll see a pickup in the NIM.
Stephen Scouten -- Piper Sandler -- Analyst
[Speech Overlap] That's 9 basis points in total on the NIM?
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Yes.
Stephen Scouten -- Piper Sandler -- Analyst
Okay, great.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
And let me just say something that the deposit run-off that we'll see in the first quarter. That's really a function of the seasonal pattern we talked about. That business will come back and it's -- we'll see a lot of this business come back at the end of 2020. So it's -- it's not one time, it's not temporary, it's just seasonal.
Stephen Scouten -- Piper Sandler -- Analyst
Sure. That's great. And you guys had a good -- a little pop here in multifamily lending, it looked like, can you talk a little bit about maybe where specifically that came from, if that's Atlanta or if that's more diverse than just in Atlanta. And then maybe how you're thinking about that business today because over the last couple of years, I feel like that was a line of business people were shying away from a little bit. But I haven't really seen any of those fears materialize in actual issue. So curious to how you're thinking about it and where that growth came from?
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
So I think the growth in Multifamily was $38 million for the quarter, $28 million of that was migration from construction to multifamily as those loans switched from construction loans to mini perm loans. So, most of it is just reclassification. We continue to have a generally defensive posture with respect to multifamily commitments. We are very selective. We haven't really changed our posture there at all, other -- as you point out a lot of the fears about multifamily have yet to be realized or materialized at this point.
Stephen Scouten -- Piper Sandler -- Analyst
Okay, perfect. And then just kind of thinking about the competitive landscape for you all here in Atlanta, and with your customer base, obviously got one large regional kind of announcing an entry into this market. We had another larger MOE that sort of tangentially affects this market. So I'm kind of curious how you guys are thinking about your position in the marketplace and how you compete effectively against some of these new entrants in [Phonetic] a bigger continual focus on the Atlanta MSA?
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Yeah. Clearly, this new competitors that are coming into the market see the same things we do in terms of the magnitude of the opportunity. We welcome them to Atlanta and we expect to have good solid competition with them over time, but we think we have a long lead over all of them, particularly in the C&I and commercial segments generally. We have a very strong team that's very effective in the marketplace.
As you've seen, we've had good loan and deposit growth from this market for a sustained period of time and we like our competitive position.
Stephen Scouten -- Piper Sandler -- Analyst
Great, thanks. Appreciate the color, guys.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Yes, sir.
Douglas L. Williams -- President and Chief Executive Officer
Thank you.
Operator
And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
All right, thank you very much, Raghav. We appreciate you all dialing-in this morning. We are pleased with our progress in 2019. We expect continued progress in 2020 and we look forward to giving you more good reports as the year goes on. Please call us today, next week, if you have any more questions, we look forward to talking with you. Thank you very much.
Operator
[Operator Closing Remarks].
Duration: 24 minutes
Call participants:
Ashley C. Carson -- Executive Vice President Corporate and Community Affairs Executive
Douglas L. Williams -- President and Chief Executive Officer
Patrick T. Oakes -- Executive Vice President, Chief Financial Officer, Secretary, and Treasurer
Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst
Steve Comery -- G.research -- Analyst
Christopher Marinac -- Janney Montgomery Scott -- Analyst
Stephen Scouten -- Piper Sandler -- Analyst
