Atlantic Capital Bancshares, Inc. - Quarter Report: 2016 September (Form 10-Q)

(1) Reflects core deposit intangible related to acquired deposits.

(2) Reflects the recognition of First Security’s deferred tax assets totaling approximately $50 million and approximately $9 million in deferred tax assets established as a result of other purchase accounting adjustments.

(3) Reflects approximately $5 million in deferred tax liabilities established as a result of purchase accounting adjustments.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________

FORM 10-Q

_______________________________________________

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NO. 001-37615

_________________________________________________

ATLANTIC CAPITAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in its Charter)

_________________________________________________



Georgia	20-5728270
(State of Incorporation)	(I.R.S. Employer Identification No.)

3280 Peachtree Road NE, Suite 1600 Atlanta, Georgia	30305
(Address of principal executive offices)	(Zip Code)



	(404) 995-6050
	(Registrant’s telephone number, including area code)
	Not Applicable
	(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	ý	Smaller reporting company	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, no par value: 25,020,196 shares outstanding as of November 1, 2016

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Atlantic Capital Bancshares, Inc. and Subsidiary

Form 10-Q

INDEX



		Page No.
PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements (Unaudited)	1

	Consolidated Balance Sheets - September 30, 2016 and December 31, 2015	1

	Consolidated Statements of Income - Three and Nine Months ended September 30, 2016 and 2015	2

	Consolidated Statements of Comprehensive Income - Three and Nine Months ended September 30, 2016 and 2015	3

	Consolidated Statements of Shareholders’ Equity - Nine Months ended September 30, 2016 and 2015	4

	Consolidated Statements of Cash Flows - Nine Months ended September 30, 2016 and 2015	5

	Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	57

PART II.	OTHER INFORMATION	58

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3.	Defaults Upon Senior Securities	58

Item 4.	Mine Safety Disclosures	58

Item 5.	Other Information	58

Item 6.	Exhibits	58

SIGNATURES		59

EXHIBIT INDEX		60

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PART I - FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

Atlantic Capital Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets



	September 30, 2016			December 31, 2015
(in thousands, except share data)	(unaudited)			December 31, 2015
ASSETS
Cash and due from banks	$	44,563		$	45,848
Interest-bearing deposits in banks	75,750			130,900
Other short-term investments	23,159			26,137
Cash and cash equivalents	143,472			202,885
Securities available-for-sale	348,484			346,221
Other investments	26,370			8,034
Loans held for sale	46,600			95,465
Loans held for investment	2,008,102			1,790,669
Less: allowance for loan losses	(18,534		)	(18,905		)
Loans, held for investment, net	1,989,568			1,771,764
Branch premises held for sale	5,201			7,200
Premises and equipment, net	15,213			23,145
Bank owned life insurance	61,766			60,608
Goodwill and intangible assets, net	30,071			35,232
Other real estate owned	1,727			1,982
Other assets	92,772			86,244
Total assets	$	2,761,244		$	2,638,780



LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand	$	557,783	$	544,561
Interest-bearing checking	260,531		232,868
Savings	29,658		28,922
Money market	974,072		875,441
Time	172,348		183,206
Brokered deposits	194,464		183,810
Deposits to be assumed in branch sale	—		213,410
Total deposits	2,188,856		2,262,218
Federal funds purchased and securities sold under agreements to repurchase	—		11,931
Federal Home Loan Bank borrowings	170,000		—
Long-term debt	49,324		49,197
Other liabilities	44,601		27,442
Total liabilities	2,452,781		2,350,788
SHAREHOLDERS’ EQUITY
Preferred Stock, no par value – 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2016 and December 31, 2015	—		—
Common stock, no par value – 100,000,000 shares authorized; 24,950,099 and 24,425,546 shares issued and outstanding as of September 30, 2016, and December 31, 2015, respectively	290,835		286,367
Retained earnings	14,927		3,141
Accumulated other comprehensive income (loss)	2,701		(1,516		)
Total shareholders’ equity	308,463		287,992
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,761,244	$	2,638,780

See Accompanying Notes to Consolidated Financial Statements

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Atlantic Capital Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

(Unaudited)



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in thousands, except per share data)	2016		2015			2016		2015
INTEREST INCOME
Loans, including fees	$	20,511	$	9,423		$	60,418	$	27,874
Investment securities – available-for-sale	1,293		664			4,221		2,077
Interest and dividends on other interest-earning assets	491		247			1,271		776
Total interest income	22,295		10,334			65,910		30,727
INTEREST EXPENSE
Interest on deposits	1,956		751			5,470		2,262
Interest on Federal Home Loan Bank advances	133		52			324		283
Interest on federal funds purchased and securities sold under agreements to repurchase	37		20			191		69
Interest on long-term debt	815		17			2,457		17
Other	—		—			38		—
Total interest expense	2,941		840			8,480		2,631
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES	19,354		9,494			57,430		28,096
Provision for loan losses	463		(137		)	1,608		412
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	18,891		9,631			55,822		27,684
NONINTEREST INCOME
Service charges	1,270		521			4,160		1,348
Gain on sales of securities available-for-sale	—		10			44		10
Gain on sales of other assets	71		—			150		—
Mortgage income	632		—			1,418		—
Trust income	361		—			1,061		—
Derivatives income	69		67			232		215
Bank owned life insurance	424		227			1,215		1,794
SBA lending activities	959		745			3,043		2,006
Gains on sale of TriNet loans	—		—			1,144		—
Gains on sale of branches	—		—			3,885		—
Other noninterest income	216		159			950		566
Total noninterest income	4,002		1,729			17,302		5,939
NONINTEREST EXPENSE
Salaries and employee benefits	10,059		4,859			31,034		14,437
Occupancy	1,235		419			3,609		1,263
Equipment and software	862		243			2,272		687
Professional services	442		208			1,950		613
Postage, printing and supplies	61		21			389		63
Communications and data processing	617		313			2,227		986
Marketing and business development	269		90			853		213
FDIC premiums	415		161			1,306		516
Merger and conversion costs	579		718			2,538		1,982
Amortization of intangibles	520		—			1,950		—
Other noninterest expense	2,237		639			6,377		1,934
Total noninterest expense	17,296		7,671			54,505		22,694
INCOME BEFORE PROVISION FOR INCOME TAXES	5,597		3,689			18,619		10,929
Provision for income taxes	1,889		1,463			6,833		4,087
NET INCOME	$	3,708	$	2,226		$	11,786	$	6,842
NET INCOME PER SHARE:
Net income per share – basic	$	0.15	$	0.16		$	0.48	$	0.51
Net income per share – diluted	$	0.15	$	0.16		$	0.47	$	0.49

See Accompanying Notes to Consolidated Financial Statements

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Atlantic Capital Bancshares, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2016			2015			2016			2015
Net income	$	3,708		$	2,226		$	11,786		$	6,842
Other comprehensive income
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period, net of tax of $(329), $244, $2,354, and $91, respectively	(524		)	392			3,771			147
Reclassification adjustment for gains included in net income net of tax of $0, $4, $17, and $4, respectively	—			(6		)	(27		)	(6		)
Unrealized gains (losses) on available-for-sale securities, net of tax	(524		)	386			3,744			141
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges, net of tax of $(169), $324, $301, and $507, respectively	(269		)	523			473			816
Changes from cash flow hedges	(269		)	523			473			816
Other comprehensive income (loss), net of tax	(793		)	909			4,217			957
Comprehensive income	$	2,915		$	3,135		$	16,003		$	7,799

See Accompanying Notes to Consolidated Financial Statements

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Atlantic Capital Bancshares, Inc. and Subsidiary

Consolidated Statements of Shareholders’ Equity

(Unaudited)



	Common Stock					Accumulated Other Comprehensive Income (Loss)
(in thousands, except share data)	Shares	Amount		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance - December 31, 2014	13,497,118	$	136,335	$	4,460	$	609		$	(475	)	$	140,929
Comprehensive income:
Net Income	—	—		6,842		—			—			6,842
Change in unrealized gains (losses) on investment securities available-for-sale, net	—	—		—		141			—			141
Change in unrealized gains on cash flow hedges	—	—		—		816			—			816
Total comprehensive income												7,799
Acquisition of treasury stock	—	—		—		—			(707		)	(707		)
Issuance of restricted stock	62,091	—		—		—			—			—
Restricted stock activity	—	503		—		—			—			503
Issuance of common stock for long-term incentive plan	102,758	1,285		—		—			—			1,285
Stock-based compensation	—	—		—		—			—			—
Balance - September 30, 2015	13,661,967	$	138,123	$	11,302	$	1,566		$	(1,182	)	$	149,809



Balance - December 31, 2015	24,425,546	$	286,367	$	3,141	$	(1,516	)	$	—		$	287,992
Comprehensive income:
Net Income	—	—		11,786		—			—			11,786
Change in unrealized gains on investment securities available-for-sale, net	—	—		—		3,744			—			3,744
Change in unrealized gains on cash flow hedges	—	—		—		473			—			473
Total comprehensive income												16,003
Acquisition of treasury stock	—	—		—		—			—			—
Issuance of restricted stock	91,486	—		—		—			—			—
Issuance of common stock for option exercises	366,918	2,568		—		—			—			2,568
Issuance of common stock for long-term incentive plan	66,149	884		—		—			—			884
Restricted stock activity	—	378		—		—			—			378
Stock-based compensation	—	638		—		—			—			638
Balance - September 30, 2016	24,950,099	$	290,835	$	14,927	$	2,701		$	—		$	308,463

See Accompanying Notes to Consolidated Financial Statements

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Atlantic Capital Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)



	Nine Months Ended
	September 30,
(in thousands)	2016			2015
OPERATING ACTIVITIES
Net income	$	11,786		$	6,842
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses	1,608			412
Depreciation, amortization, and accretion	4,550			1,462
Amortization of restricted stock compensation	378			503
Stock option compensation	638			—
Gain on sales of available-for-sale securities	(44		)	(10		)
Net write downs and (gains) on sales of other real estate owned	(114		)	(86		)
Net increase in cash value of bank owned life insurance	(1,167		)	(682		)
Gain on bank owned life insurance	(27		)	(1,112		)
Net gains on sale of branches	(3,885		)	—
Changes in operating assets and liabilities -
Net change in loans held for sale	13,716			—
Net (increase) decrease in other assets	(10,224		)	(3,031		)
Net increase (decrease) in accrued expenses and other liabilities	(2,237		)	772
Net cash provided by operating activities	14,978			5,070
INVESTING ACTIVITIES
Activity in securities available-for-sale:
Prepayments	32,438			18,077
Maturities and calls	26,932			5,874
Sales	65,103			5,095
Purchases	(117,950		)	(23,285		)
Net increase in loans held for investment	(220,030		)	(6,695		)
(Purchases) proceeds of Federal Home Loan Bank stock, net	(8,569		)	642
(Purchases) proceeds of Federal Reserve Bank stock, net	(3,055		)	—
Proceeds from bank owned life insurance benefits	36			1,886
Proceeds from sales of other real estate	1,814			1,590
Net cash paid for branch divestiture	(140,295		)	—
Purchases of premises and equipment, net	(467		)	(242		)
Net cash used in investing activities	(364,043		)	2,942
FINANCING ACTIVITIES
Net change in deposits	116,885			22,763
Proceeds from Federal Home Loan Bank advances	915,000			638,000
Repayments of Federal Home Loan Bank advances	(745,000		)	(651,517		)
Issuance of subordinated debentures	—			50,000
Proceeds from exercise of stock options	2,767			—
Acquisition of treasury stock	—			(707		)
Net cash provided by financing activities	289,652			58,539
NET CHANGE IN CASH AND CASH EQUIVALENTS	(59,413		)	66,551
CASH AND CASH EQUIVALENTS – beginning of period	202,885			94,250
CASH AND CASH EQUIVALENTS – end of period	$	143,472		$	160,801

	Nine Months Ended
	September 30,
	2016			2015
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest paid	$	9,386		$	2,652
Income taxes paid	$	3,462		$	3,769

See Accompanying Notes to Consolidated Financial Statements

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ATLANTIC CAPITAL BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Presentation

The accounting and financial reporting policies of Atlantic Capital Bancshares, Inc. (“Atlantic Capital”) and its subsidiary conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. On October 31, 2015, Atlantic Capital completed its acquisition of First Security Group, Inc. and its subsidiary FSGBank, N.A. (together, “First Security”). In connection with the acquisition, Atlantic Capital’s subsidiary Atlantic Capital Bank, a Georgia chartered commercial bank merged with and into FSGBank, N.A, which subsequently changed its name to Atlantic Capital Bank, National Association (the “Bank”). The consolidated financial statements reflect the results of operations of Atlantic Capital and Atlantic Capital Bank, and the results of operations of First Security subsequent to the date of acquisition. In connection with the acquisition, Atlantic Capital issued approximately 8,790,193 shares of common stock as partial consideration to former shareholders of First Security, with the remaining consideration consisting of approximately $47.1 million in cash. See Note 3 to the Consolidated Financial Statements for additional information.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Atlantic Capital’s filing on Form 10-K. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. Certain prior period amounts have been reclassified to conform to the current year presentation.

NOTE 2 – ACCOUNTING STANDARDS UPDATES AND RECENTLY ADOPTED STANDARDS

In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. The amendments are effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. As this guidance only affects the classification within the statement of cash flows, this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public companies for annual periods beginning after December 13, 2019, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Atlantic Capital is in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements and disclosures.

In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 simplify several aspects of accounting for employee share-based payments including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some areas of the simplification apply only to nonpublic entities. The new guidance will require all income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest or are settled and additional paid in capital pools will be eliminated. The guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Companies will be required to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimating

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the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as currently required, through an accounting policy election. The guidance will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s income tax withholding obligation. The guidance requires an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption will be permitted in any interim or annual period for which financial statements have not yet been issued or have not been made available for issuance, however all of the guidance must be adopted in the same period. If early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period. The adoption of this guidance is not expected to have a material effect on Atlantic Capital’s financial position or results of operations.

In February 2016, the FASB issued Accounting Standards Update 2016-2, Leases. Under the new guidance, leases classified as operating leases under previous GAAP must be recorded on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Atlantic Capital is evaluating the impact of this update to Atlantic Capital’s financial position and results of operations.

In January 2016, the FASB issued ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The guidance in this update requires that equity investments (except those accounting for under the equity method of accounting) be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In addition, the guidance addresses various disclosure and presentation issues related to financial instruments. For public entities, this update is effective for fiscal years beginning after December 15, 2017 with early application permitted. The adoption of this update is not expected to have a material impact on Atlantic Capital’s consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers. This update is a joint project with the International Accounting Standards Board initiated to clarify the principles for recognizing revenue and to develop a common revenue standard that is meant to remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, provide more useful information to users of financial statements and simplify the preparation of financial statements. The guidance in this update supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and most industry-specific guidance throughout the Industry Topics of Codification. In August 2015, the FASB deferred the effective date of this ASU by one year. For public companies, it is effective for annual and interim periods beginning after December 15, 2017. Atlantic Capital is evaluating the impact of this update and does not believe it will have a significant impact to Atlantic Capital’s financial position or results of operations.

NOTE 3 – ACQUISITIONS AND DIVESTITURES

On October 31, 2015, Atlantic Capital completed the acquisition of First Security. First Security operated twenty-five branches in Georgia and Tennessee. In connection with the acquisition, Atlantic Capital acquired approximately $801.1 million of loans and assumed approximately $970.0 million of deposits.

Acquisition-related costs totaled $579,000 and $2.5 million for the three and nine months ended September 30, 2016, and $718,000 and $2.0 million for the three and nine months ended September 30, 2015, respectively, and were included in noninterest expense in the consolidated income statement. Acquisition related costs primarily include severance costs, professional services, data processing fees related to systems conversion and other noninterest expenses.

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A summary of assets received and liabilities assumed for First Security, as well as the associated fair value adjustments, are as follows:



	First Security Group, Inc. (As Reported)			Fair Value Adjustments			As recorded by Atlantic Capital
	(in thousands)

Fair value of assets acquired:
Cash and due from banks	$	26,721		$	—		$	26,721
Investment securities	199,104			3,748			202,852
Loans held for sale	44,452			—			44,452
Loans	812,196			(11,059		)	801,137
Less allowance for loan losses	(9,385		)	9,385			—
Loans, net	802,811			(1,674		)	801,137
Premises and equipment, net	29,246			(1,086		)	28,160
Other intangible assets ⁽¹⁾	—			9,544			9,544
Other real estate owned	2,493			(438		)	2,055
Other assets ⁽²⁾	47,559			58,709			106,268
Total assets acquired	$	1,152,386		$	68,803		$	1,221,189
Fair value of liabilities acquired:
Deposits:
Noninterest bearing demand	$	178,174		$	—		$	178,174
Interest bearing demand	121,063			—			121,063
Savings and money market	274,099			—			274,099
Time	253,673			2,233			255,906
Brokered	140,780			—			140,780
Total deposits	967,789			2,233			970,022
Federal funds purchased and securities sold under agreements to repurchase	12,739			—			12,739
Federal Home Loan Bank advances	72,890			—			72,890
Other borrowings	—			—			—
Other liabilities ⁽³⁾	10,942			6,840			17,782
Total liabilities acquired	1,064,360			9,073			1,073,433
Net assets acquired	$	88,026		$	59,730		$	147,756
Total consideration paid to First Security shareholders							171,108
Goodwill							$	23,352

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(in thousands)	Total Purchase Price Consideration

Aggregate Cash Consideration	$	47,098
Aggregate Stock Consideration	121,305
Estimated Value associated with converted stock awards	2,705
Total Purchase Price Consideration	$	171,108

During the third quarter of 2016, Atlantic Capital recorded measurement period adjustments that decreased goodwill by $687,000. The adjustments reduced the TriNet Servicing Asset as well as increased the Deferred Tax Asset. During the nine months ended September 30, 2016, measurement period adjustments to goodwill totaled $1.6 million.

Divestiture of Branches

On December 17, 2015, the Bank entered into two separate definitive agreements to sell seven branches in the Bank’s Tennessee market. The agreement with First Freedom Bank included the sale of three branches located in Algood, Cookeville and Gainesboro, Tennessee for a premium of 2.25% of deposits. The agreement with Athens Federal Community Bank, N.A. included the sale of four branches in Athens, Lenoir City, Madisonville and Sweetwater, Tennessee for a premium of 3.50% of deposits. Both transactions closed in the second quarter of 2016 and resulted in a combined gain of $3.9 million as well as a reduction of approximately $191.0 million in deposits, approximately $34.7 million in loans and approximately $8.6 million in other assets. The gain was somewhat reduced by an impairment of $2.0 million in core deposit intangibles, which was offset by a $344,000 reversal in time deposit premium. There were also $305,000 of expenses associated with the divestitures included in noninterest expense in the second quarter of 2016.

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NOTE 4 – BALANCE SHEET OFFSETTING

Atlantic Capital enters into reverse repurchase agreements in order to invest short-term funds and repurchase agreements for short-term liquidity needs.

The following table presents a summary of amounts outstanding under reverse repurchase agreements, repurchase agreements, and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of September 30, 2016 and December 31, 2015.



(in thousands)							Gross Amounts not Offset in the Balance Sheet
September 30, 2016	Gross Amounts of Recognized Assets		Gross Amounts Offset on the Balance Sheet		Net Asset Balance		Financial Instruments			Cash Collateral Received			Net Amount
Reverse repurchase agreements	$	16,074	$	—	$	16,074	$	(16,074	)	$	—		$	—
Derivatives	15,599		—		15,599		—			—			15,599
Total	$	31,673	$	—	$	31,673	$	(16,074	)	$	—		$	15,599
							Gross Amounts not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Balance Sheet		Net Liability Balance		Financial Instruments			Cash Collateral Pledged			Net Amount
Repurchase agreements	$	—	$	—	$	—	$	—		$	—		$	—
Derivatives	14,449		—		14,449		(14,992		)	(2,312		)	—
Total	$	14,449	$	—	$	14,449	$	(14,992	)	$	(2,312	)	$	—

							Gross Amounts not Offset in the Balance Sheet
December 31, 2015	Gross Amounts of Recognized Assets		Gross Amounts Offset on the Balance Sheet		Net Asset Balance		Financial Instruments			Cash Collateral Received			Net Amount
Reverse repurchase agreements	$	13,666	$	—	$	13,666	$	(13,666	)	$	—		$	—
Derivatives	6,554		—		6,554		—			—			6,554
Total	$	20,220	$	—	$	20,220	$	(13,666	)	$	—		$	6,554
							Gross Amounts not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset on the Balance Sheet		Net Liability Balance		Financial Instruments			Cash Collateral Pledged			Net Amount
Repurchase agreements	$	11,931	$	—	$	11,931	$	(14,744	)	$	—		$	—
Derivatives	6,163		—		6,163		(10,268		)	(3,240		)	—
Total	$	18,094	$	—	$	18,094	$	(25,012	)	$	(3,240	)	$	—

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NOTE 5 – SECURITIES

The following table presents the amortized cost, unrealized gains and losses, and fair value of securities available-for-sale at September 30, 2016 and December 31, 2015.



Available-For-Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2016
Debt securities—
U.S. Government agencies	$	21,806	$	237	$	(26	)	$	22,017
U.S. states and political divisions	82,879		854		(518		)	83,215
Trust preferred securities	4,720		—		(327		)	4,393
Corporate debt securities	20,004		324		(858		)	19,470
Residential mortgage-backed securities-agency	216,364		3,791		(766		)	219,389
Total	$	345,773	$	5,206	$	(2,495	)	$	348,484

December 31, 2015
Debt securities—
U.S. treasuries	$	4,952	$	3	$	(33	)	$	4,922
U.S. Government agencies	65,373		249		(770		)	64,852
U.S. states and political divisions	27,751		301		(262		)	27,790
Trust preferred securities	4,732		—		(457		)	4,275
Corporate debt securities	20,653		52		(188		)	20,517
Residential mortgage-backed securities-agency	226,142		1,019		(3,296		)	223,865
Total	$	349,603	$	1,624	$	(5,006	)	$	346,221

The following table presents the amortized cost and fair value of debt securities by contractual maturity at September 30, 2016. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Available-For-Sale
	Amortized Cost		Fair Value
	(in thousands)
Within 1 year	$	4,611	$	4,641
Over 1 year through 5 years	9,497		9,264
5 years to 10 years	44,085		44,372
Over 10 years	71,216		70,818
	129,409		129,095
Mortgage-backed residential securities	216,364		219,389
Total	$	345,773	$	348,484

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The following table summarizes available-for-sale securities in an unrealized loss position as of September 30, 2016 and December 31, 2015.



	Less than 12 months					12 months or greater					Totals
Available-For-Sale	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
September 30, 2016
U.S. Government agencies	$	—	$	—		3,036		$	(26	)	$	3,036	$	(26	)
U.S. states and political divisions	38,899		(518		)	—		—			38,899		(518		)
Trust preferred securities	—		—			4,394		(327		)	4,394		(327		)
Corporate debt securities	5,782		(858		)	—		—			5,782		(858		)
Residential mortgage-backed securities	92,442		(495		)	23,939		(271		)	116,381		(766		)
Totals	$	137,123	$	(1,871	)	$	31,369	$	(624	)	$	168,492	$	(2,495	)
December 31, 2015
U.S. treasuries	$	—	$	(33	)	$	—	$	—		$	—	$	(33	)
U.S. Government agencies	24,380		(526		)	22,218		(244		)	46,598		(770		)
U.S. states and political divisions	11,280		(249		)	2,248		(13		)	13,528		(262		)
Trust preferred securities	—		—			4,275		(457		)	4,275		(457		)
Corporate debt securities	15,168		(188		)	—		—			15,168		(188		)
Residential mortgage-backed securities	143,611		(2,634		)	40,152		(662		)	183,763		(3,296		)
Totals	$	194,439	$	(3,630	)	$	68,893	$	(1,376	)	$	263,332	$	(5,006	)

At September 30, 2016, there were 124 available-for-sale securities that were in an unrealized loss position. Atlantic Capital does not intend to sell and does not believe it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at September 30, 2016 and December 31, 2015 were attributable to changes in interest rates.

Management evaluates securities for other-than-temporary impairment on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three or nine months ended September 30, 2016 or 2015.

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three and nine months ended September 30, 2016 and 2015.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015
	(in thousands)
Proceeds from sales	$	—	$	5,095	$	65,103		$	5,095
Gross realized gains	—		10		449			10
Gross realized losses	—		—		(405		)	—
Net gains on sales of securities	$	—	$	10	$	44		$	10

Investment securities with a carrying value of $95.0 million and $39.3 million were pledged to secure borrowings at September 30, 2016 and December 31, 2015, respectively.

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NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio as of September 30, 2016 and December 31, 2015, is summarized below.



	September 30, 2016			December 31, 2015
	(in thousands)
Loans held for sale
TriNet loans held for sale	$	43,157		$	58,934
Branch loans held for sale	—			35,470
Other loans held for sale	3,443			1,061
Total loans held for sale	$	46,600		$	95,465

Loans held for investment
Commercial loans:
Commercial and industrial	$	533,632		$	467,083
Commercial real estate	863,283			846,413
Construction and land	213,336			166,358
Mortgage warehouse loans	171,251			84,350
Total commercial loans	1,781,502			1,564,204
Residential:
Residential mortgages	100,046			110,381
Home equity	78,952			80,738
Total residential loans	178,998			191,119
Consumer	30,453			30,451
Other	20,736			6,901
Total loans	2,011,689			1,792,675
Less net deferred fees and other unearned income	(3,587		)	(2,006		)
Less allowance for loan losses	(18,534		)	(18,905		)
Loans held for investment, net	$	1,989,568		$	1,771,764

At September 30, 2016 and December 31, 2015, loans with a carrying value of $531.8 million and $168.1 million, respectively, were pledged as collateral to secure FHLB advances and the Federal Reserve discount window.

At September 30, 2016 and December 31, 2015, the carrying value and outstanding balance of Purchased Credit Impaired (“PCI”) loans accounted for under ASC 310-30 was $17.2 million and $24.3 million, respectively. The following table presents changes in the value of the accretable yield for acquired loans accounted for under ASC 310-30.



	Three Months Ended			Nine Months Ended
	September 30, 2016			September 30, 2016
	(in thousands)
Balance at beginning of period	$	1,826		$	2,369
Additions due to acquisitions	—			—
Accretion	(341		)	(884		)
Reclassification of nonaccretable discount due to improvement in expected cash flows	2,404			2,404
Other changes, net	295			295
Balance at end of period	$	4,184		$	4,184

In addition to the accretable yield on PCI loans, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest income over the life of the loans. At September 30, 2016, the remaining accretable fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $4.2 million.

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The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period. It is comprised of specific reserves for impaired loans and a general allowance for pools of loans with similar characteristics not individually evaluated. The allowance is regularly evaluated for loan losses to maintain an adequate level to absorb probable current inherent losses in the loan portfolio. Factors contributing to the determination of the allowance include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. Most loan commitments rated substandard or worse are specifically reviewed for loss potential. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans.

The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2016 and 2015.



	2016												2015
Three Months Ended September 30,	Commercial			Residential			Consumer			Total			Commercial			Residential			Consumer			Total
	(in thousands)
Allowance for loan losses:
Beginning balance	$	16,469		$	1,389		$	519		$	18,377		$	11,365		$	398		$	222		$	11,985
Provision for loan losses	409			64			(10		)	463			(70		)	(65		)	(2		)	(137		)
Loans charged-off	(287		)	(9		)	(65		)	(361		)	—			—			—			—
Recoveries	34			7			14			55			14			—			—			14
Total ending allowance balance	$	16,625		$	1,451		$	458		$	18,534		$	11,309		$	333		$	220		$	11,862



	2016												2015
Nine Months Ended September 30,	Commercial			Residential			Consumer			Total			Commercial		Residential			Consumer		Total
	(in thousands)
Allowance for loan losses:
Beginning balance	$	16,537		$	1,981		$	387		$	18,905		$	10,967	$	347		$	107	$	11,421
Provision for loan losses	1,934			(503		)	177			1,608			313		(14		)	113		412
Loans charged-off	(1,897		)	(34		)	(249		)	(2,180		)	—		—			—		—
Recoveries	51			7			143			201			29		—			—		29
Total ending allowance balance	$	16,625		$	1,451		$	458		$	18,534		$	11,309	$	333		$	220	$	11,862

The general component of the allowance for loan losses is based on the incurred losses inherent in the portfolio. The loss factors are determined through the generation of probabilities of default (“PDs”) and losses given default (“LGDs”) for groups of similar loans with similar credit grades where Loss Rate = PD x LGD. The PDs and LGDs for the loan portfolio are calculated based on Atlantic Capital’s loss history as well as available market-based data. The loss factor for each pool of loans is adjusted based on Qualitative and Environmental factors to account for conditions in the current environment which management believes are likely to cause a difference between the calculated loss based on historical performance and the incurred loss in the existing portfolio. These factors include: changes in policies and procedures, changes in the economy, changes in nature or volume of the portfolio and in the terms of loans, changes in lending management, changes in past dues and credit migration, changes in the loan review system, changes in the value of collateral and concentration risk and changes in external factors, such as competition, legal and regulatory. On a quarterly basis, management evaluates these factors in order to determine an adjustment unique to Atlantic Capital and its market.

Charge-offs are recognized when the amount of the loss is quantifiable and timing is known. Collateral based loan charge-offs are measured based on the difference between the loan’s carrying value, including deferred fees, and the estimated net realizable value of the loan. When assessing property value for the purpose of determining a charge-off, a third-party appraisal or an independently derived internal evaluation is generally employed.

A loan is considered to be impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. A specific allowance is established for individually evaluated impaired loans as needed. Reserves on impaired loans are measured based on the present value

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of expected future cash flows discounted at the loan’s effective interest rate or the observable market price, or the fair value of the underlying collateral of the loan if the loan is collateral dependent.

Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. Atlantic Capital’s policy is to place loans on nonaccrual status, when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not both well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.

PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans accounted for under ASC 310-30 were not classified as nonaccrual at September 30, 2016 or December 31, 2015, as the carrying value of the respective loan or pool of loans’ cash flows were considered estimable and collection was probable. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows (accretable yield), is being recognized on all acquired loans being accounted for under ASC 310-30.

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The balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method is presented in the following table as of September 30, 2016 and December 31, 2015.



September 30, 2016	Commercial		Residential		Consumer		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	686	$	65	$	—	$	751
Collectively evaluated for impairment	15,939		1,386		458		17,783
PCI	—		—		—		—
Total ending allowance balance	$	16,625	$	1,451	$	458	$	18,534

Loans:
Loans individually evaluated for impairment	$	8,650	$	406	$	—	$	9,056
Loans collectively evaluated for impairment	1,760,717		173,501		51,178		1,985,396
PCI	12,135		5,091		11		17,237
Total ending loans balance	$	1,781,502	$	178,998	$	51,189	$	2,011,689

December 31, 2015	Commercial		Residential		Consumer		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	1,619	$	—	$	—	$	1,619
Collectively evaluated for impairment	14,918		1,981		387		17,286
PCI	—		—		—		—
Total ending allowance balance	$	16,537	$	1,981	$	387	$	18,905

Loans:
Loans individually evaluated for impairment	$	12,049	$	—	$	—	$	12,049
Loans collectively evaluated for impairment	1,534,507		184,447		37,323		1,756,277
PCI	17,648		6,672		29		24,349
Total ending loans balance	$	1,564,204	$	191,119	$	37,352	$	1,792,675

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The following tables present information on Atlantic Capital’s impaired loans for the three and nine months ended September 30, 2016 and 2015:



	For the Three Months Ended September 30,
	2016										2015
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Balance of Recorded Investment While Impaired		Interest Income Recognized During Impairment		Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Balance of Recorded Investment While Impaired		Interest Income Recognized During Impairment
	(in thousands)
Impaired loans with no related allowance recorded:
Commercial and industrial	$	3,118	$	3,057	$	—	$	3,028	$	40	$	—	$	—	$	—	$	—	$	—
Commercial real estate	—		—		—		—		—		1,659		1,659		—		1,659		14
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	—		—		—		—		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	3,118	$	3,057	$	—	$	3,028	$	40	$	1,659	$	1,659	$	—	$	1,659	$	14
Impaired loans with an allowance recorded:
Commercial and industrial	$	4,461	$	4,461	$	481	$	4,461	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate	1,132		1,132		205		1,132		—		4,912		4,912		693		4,890		34
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	406		406		65		406		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	5,999	$	5,999	$	751	$	5,999	$	—	$	4,912	$	4,912	$	693	$	4,890	$	34
Total impaired loans	$	9,117	$	9,056	$	751	$	9,027	$	40	$	6,571	$	6,571	$	693	$	6,549	$	48

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	For the Nine Months Ended September 30,
	2016										2015
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Balance of Recorded Investment While Impaired		Interest Income Recognized During Impairment		Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Balance of Recorded Investment While Impaired		Interest Income Recognized During Impairment
	(in thousands)
Impaired loans with no related allowance recorded:
Commercial and industrial	$	3,118	$	3,057	$	—	$	2,960	$	112	$	—	$	—	$	—	$	—	$	—
Commercial real estate	—		—		—		—		—		1,659		1,659		—		1,659		41
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	—		—		—		—		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	3,118	$	3,057	$	—	$	2,960	$	112	$	1,659	$	1,659	$	—	$	1,659	$	41
Impaired loans with an allowance recorded:
Commercial and industrial	$	4,461	$	4,461	$	481	$	4,461	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate	1,132		1,132		205		1,132		—		4,912		4,912		693		4,904		100
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	406		406		65		406		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	5,999	$	5,999	$	751	$	5,999	$	—	$	4,912	$	4,912	$	693	$	4,904	$	100
Total impaired loans	$	9,117	$	9,056	$	751	$	8,959	$	112	$	6,571	$	6,571	$	693	$	6,563	$	141

Atlantic Capital evaluates loans in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors. Troubled debt restructurings (“TDR”) are loans in which Atlantic Capital has modified the terms or granted an economic concession to a borrower who is experiencing financial difficulties. These modifications may include interest rate reductions, term extensions and other concessions intended to minimize losses.

As of September 30, 2016 and December 31, 2015, the Company had a recorded investment in TDRs of $7.8 million and $9.1 million, respectively. During the three and nine months ended September 30, 2016, the modification of terms for one Commercial and Industrial loan included an extension of the maturity date and related amortization period date of two years. The modification of terms for two Commercial Real Estate loans established an interest only payment period of six months. No loans modified as TDRs in the 12 months prior to September 30, 2016 have defaulted.

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The Company did not modify any new loans as a TDR during the three and nine months ended September 30, 2015. Loans, by portfolio class, modified as TDRs during the three and nine months ended September 30, 2016 are as follows (in thousands):



	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
September 30, 2016
Commercial and industrial	1	$	4,170	$	4,170
Commercial real estate	2	614		614
Total	3	$	4,784	$	4,784

Atlantic Capital individually rates loans based on internal credit risk ratings using numerous factors, including thorough analysis of historical and expected cash flows, consumer credit risk scores (FICO scores), rating agency information, LTV ratios, collateral, collection experience, and other internal metrics. Atlantic Capital uses a dual rating system. The likelihood of default of a credit transaction is graded in the Obligor Rating. The risk of loss given default is graded in the Facility Rating. The Obligor Rating is determined through credit analysis. Facility Ratings are used to describe the value to the Bank that the collateral represents. Facility Ratings are based on the collateral package or market expectations regarding the value or liquidity of the collateral. Ratings are generally reviewed at least annually or more frequently if there is a material change in creditworthiness. Exceptions to this policy may include well collateralized term loans and loans to individuals with limited exposure or complexity.

Atlantic Capital uses the following definitions for risk ratings:

Pass: Loans that are analyzed individually as part of the above described process and that do not meet the criteria of special mention, substandard or doubtful.

Special Mention: Loans classified as special mention have a potential weakness that requires management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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As of September 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows.



	Pass		Special Mention		Substandard Accruing		Substandard Nonaccruing		Doubtful Nonaccruing		Total
	(in thousands)
September 30, 2016
Commercial and industrial	$	501,594	$	13,695	$	12,796	$	16	$	—	$	528,101
Commercial real estate	849,851		6,166		1,193		—		—		857,210
Construction and land	207,977		4,828		—		—		—		212,805
Residential mortgages	96,460		—		394		12		—		96,866
Home equity	77,041		—		—		—		—		77,041
Mortgage warehouse	171,251		—		—		—		—		171,251
Consumer/Other	51,178		—		—		—		—		51,178
Total loans, excluding PCI loans	$	1,955,352	$	24,689	$	14,383	$	28	$	—	$	1,994,452
Commercial and industrial	$	3,565	$	1,222	$	397	$	—	$	347	$	5,531
Commercial real estate	490		362		4,627		—		594		6,073
Construction and land	—		254		277		—		—		531
Residential mortgages	99		1,363		1,718		—		—		3,180
Home equity	30		1,316		565		—		—		1,911
Mortgage warehouse	—		—		—		—		—		—
Consumer/Other	—		1		9		—		1		11
Total PCI loans	$	4,184	$	4,518	$	7,593	$	—	$	942	$	17,237



	Pass		Special Mention		Substandard Accruing		Substandard Nonaccruing		Doubtful Nonaccruing		Total
	(in thousands)
December 31, 2015
Commercial and industrial	$	450,523	$	2,507	$	2,707	$	3,235	$	—	$	458,972
Commercial real estate	826,339		5,411		1,659		4,449		—		837,858
Construction and land	161,226		4,150		—		—		—		165,376
Residential mortgages	105,948		—		200		—		—		106,148
Home equity	78,189		—		110		—		—		78,299
Mortgage warehouse	84,350		—		—		—		—		84,350
Consumer/Other	37,312		11		—		—		—		37,323
Total loans, excluding PCI loans	$	1,743,887	$	12,079	$	4,676	$	7,684	$	—	$	1,768,326
Commercial and industrial	$	—	$	5,142	$	2,786	$	183	$	—	$	8,111
Commercial real estate	1,063		850		5,465		1,177		—		8,555
Construction and land	27		354		601		—		—		982
Residential mortgages	—		1,929		2,053		251		—		4,233
Home equity	—		1,606		492		341		—		2,439
Mortgage warehouse	—		—		—		—		—		—
Consumer/Other	—		15		13		1		—		29
Total PCI loans	$	1,090	$	9,896	$	11,410	$	1,953	$	—	$	24,349

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Atlantic Capital monitors loans by past due status. The following table presents the aging of the recorded investment in past due loans as of September 30, 2016 and December 31, 2015 by class of loans.



	As of September 30, 2016
	Accruing Current		30-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccruing		PCI Loans		Total
	(in thousands)
Loans by Classification
Commercial and industrial	$	528,579	$	4,633	$	404	$	16	$	5,531	$	533,632
Commercial real estate	862,598		685		—		—		6,073		863,283
Construction and land	212,382		887		67		—		531		213,336
Residential mortgages	99,144		608		282		12		3,180		100,046
Home equity	77,574		1,378		—		—		1,911		78,952
Mortgage warehouse	171,251		—		—		—		—		171,251
Consumer	50,732		448		9		—		11		51,189
Total Loans	$	2,002,260	$	8,639	$	762	$	28	$	17,237	$	2,011,689



	As of December 31, 2015
	Accruing Current		30-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccruing		PCI Loans		Total
	(in thousands)
Loans by Classification
Commercial and industrial	$	455,647	$	—	$	90	$	3,235	$	8,111	$	467,083
Commercial real estate	832,845		—		564		4,449		8,555		846,413
Construction and land	165,376		—		—		—		982		166,358
Residential mortgages	106,042		106		—		—		4,233		110,381
Home equity	78,299		—		—		—		2,439		80,738
Mortgage warehouse	84,350		—		—		—		—		84,350
Consumer	37,082		30		123		88		29		37,352
Total Loans	$	1,759,641	$	136	$	777	$	7,772	$	24,349	$	1,792,675

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NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill and other intangible assets as of September 30, 2016 and December 31, 2015 is summarized below:



	September 30,			December 31,
	2016			2015
	(in thousands)
Core deposit intangible	$	9,544		$	9,544
Less: accumulated amortization	(2,477		)	(526		)
Less: impairment related to divested branches	(1,948		)	—
Core deposit intangible, net	5,119			9,018
Servicing assets, net	3,193			2,862
Total other intangibles, net	8,312			11,880
Goodwill	21,759			23,352
Total goodwill and other intangible assets, net	$	30,071		$	35,232

During the third quarter of 2016, Atlantic Capital recorded $551,000 of impairment to the TriNet servicing asset. A portion of this charge, totaling $390,000, was recorded as a measurement period adjustment to goodwill. The remaining $161,000 was recorded as a third quarter 2016 expense.

NOTE 8 – SERVICING RIGHTS

SBA Servicing Rights

SBA servicing rights are initially recorded at fair value. Subsequently, Atlantic Capital accounts for SBA servicing rights using the amortization method and they are included in other assets. As of September 30, 2016 and December 31, 2015, the balance of SBA loans sold and serviced by Atlantic Capital totaled $104.3 million and $65.9 million, respectively.

Changes in the balance of servicing assets for the three and nine months ended September 30, 2016 and 2015 are presented in the following table.



	Three months ended September 30,						Nine months ended September 30,
SBA Loan Servicing Rights	2016			2015			2016			2015
	(in thousands)
Beginning carrying value, net	$	2,117		$	1,055		$	1,687		$	782
Additions	328			243			889			603
Amortization	(125		)	(39		)	(256		)	(126		)
Impairment	—			—			—			—
Ending carrying value	$	2,320		$	1,259		$	2,320		$	1,259

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At September 30, 2016, the sensitivity of the fair value of the SBA loan servicing rights to immediate changes in key economic assumptions are presented in the table below.



Sensitivity of the SBA Servicing Asset	September 30, 2016
	(dollars in thousands)
Fair value of retained servicing assets	$	2,408
Weighted average life	6.60 years
Prepayment speed:	7.69			%
Decline in fair value due to a 10% adverse change	$	(78	)
Decline in fair value due to a 20% adverse change	$	(136	)
Weighted average discount rate	12.14			%
Decline in fair value due to a 100 bps adverse change	$	(87	)
Decline in fair value due to a 200 bps adverse change	$	(151	)

The above sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on valuation assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

TriNet Servicing Rights

Changes in the balance of TriNet servicing assets for the three and nine months ended September 30, 2016 and 2015 are presented in the following table.



	Three months ended September 30,					Nine months ended September 30,
TriNet Servicing Rights	2016			2015		2016			2015
	(in thousands)
Beginning carrying value, net	$	1,471		$	—	$	1,175		$	—
Additions	—			—		406			—
Amortization	(47		)	—		(157		)	—
Impairment	(551		)	—		(551		)	—
Ending carrying value	$	873		$	—	$	873		$	—

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At September 30, 2016, the sensitivity of the fair value of the TriNet servicing rights to immediate changes in key economic assumptions are presented in the table below.



Sensitivity of the TriNet Servicing Rights	September 30, 2016
	(dollars in thousands)
Fair value of retained servicing assets	$	873
Weighted average life	9.61 years
Prepayment speed:	5.00			%
Decline in fair value due to a 10% adverse change	$	(61	)
Decline in fair value due to a 20% adverse change	$	(73	)
Weighted average discount rate	8.00			%
Decline in fair value due to a 100 bps adverse change	$	(26	)
Decline in fair value due to a 200 bps adverse change	$	(50	)

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NOTE 9 – OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) for Atlantic Capital consists of changes in net unrealized gains and losses on investment securities available-for-sale and derivatives. The following tables present a summary of the changes in accumulated other comprehensive income (loss) balances for the applicable periods.



	For the Three Months Ended									For the Nine Months Ended
	September 30, 2016									September 30, 2016
	Pre-Tax Amount			Income Tax (Expense) Benefit			After-Tax Amount			Pre-Tax Amount			Income Tax (Expense) Benefit			After-Tax Amount
	(in thousands)
Accumulated other comprehensive income (loss) beginning of period	$	5,691		$	(2,197	)	$	3,494		$	(2,455	)	$	939		$	(1,516	)
Unrealized net gains (losses) on investment securities available-for-sale	(853		)	329			(524		)	6,125			(2,354		)	3,771
Reclassification adjustment for net realized gains (losses) on investment securities available-for-sale	—			—			—			(44		)	17			(27		)
Unrealized net gains (losses) on derivatives	(438		)	169			(269		)	774			(301		)	473
Accumulated other comprehensive income (loss) end of period	$	4,400		$	(1,699	)	$	2,701		$	4,400		$	(1,699	)	$	2,701



	For the Three Months Ended									For the Nine Months Ended
	September 30, 2015									September 30, 2015
	Pre-Tax Amount			Income Tax (Expense) Benefit			After-Tax Amount			Pre-Tax Amount			Income Tax (Expense) Benefit			After-Tax Amount
	(in thousands)
Accumulated other comprehensive income (loss) beginning of period	$	1,064		$	(407	)	$	657		$	986		$	(377	)	$	609
Unrealized net gains (losses) on investment securities available-for-sale	636			(244		)	392			238			(91		)	147
Reclassification adjustment for net realized gains on investment securities available-for-sale	(10		)	4			(6		)	(10		)	4			(6		)
Unrealized net gains (losses) on derivatives	847			(324		)	523			1,323			(507		)	816
Accumulated other comprehensive income (loss) end of period	$	2,537		$	(971	)	$	1,566		$	2,537		$	(971	)	$	1,566

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NOTE 10 – EARNINGS PER COMMON SHARE

Basic earnings per share amounts are computed by dividing net income by the weighted average number of shares of common stock outstanding.

Diluted earnings per share amounts are computed by dividing net income by the weighted average number of shares of common stock outstanding and the dilutive effects of the shares awarded under the stock option plan, based on the treasury stock method using an average fair market value of the stock during the respective periods.

The following table represents the earnings per share calculations for the three and nine months ended September 30, 2016 and 2015.



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
(in thousands, except per share amounts)
Net income available to common shareholders	$	3,708	$	2,226	$	11,786	$	6,842
Weighted average shares outstanding
Basic ⁽¹⁾	24,891,822		13,562,125		24,674,953		13,527,195
Effect of dilutive securities:
Stock options and warrants	368,458		342,270		431,297		339,117
Diluted	25,260,280		13,904,395		25,106,250		13,866,312
Income per common share:
Basic	$	0.15	$	0.16	$	0.48	$	0.51
Diluted	$	0.15	$	0.16	$	0.47	$	0.49
⁽¹⁾Unvested restricted shares are participating securities and included in basic share calculations.

Stock options and warrants outstanding of 162,428 at September 30, 2016 and 0 at September 30, 2015 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. These awards were considered anti-dilutive because the exercise price of the award was higher than the market value of the shares.

The Amended and Restated Articles of Incorporation of Atlantic Capital, which were approved by the Board of Directors on March 24, 2015 and by Atlantic Capital’s shareholders on May 21, 2015, authorize Atlantic Capital to issue 110,000,000 shares of capital stock, of which 10,000,000 shares are designated as preferred stock, no par value per share, and 100,000,000 shares are designated as common stock, no par value per share. Prior periods have been restated to reflect the change in the par value of the common stock from $1 to no par value.

At September 30, 2016, 24,950,099 shares of common stock were issued and outstanding. At December 31, 2015, 24,425,546 shares of common stock were issued and outstanding.

The primary source of funds available to Atlantic Capital is payments of dividends from the Bank. The Bank has not paid any dividends to Atlantic Capital in 2016 or 2015. Banking laws and other regulations limit the amount of dividends a bank subsidiary may pay without prior regulatory approval. Additionally, Atlantic Capital’s ability to pay dividends to its shareholders will depend on the ability of the Bank to pay dividends to Atlantic Capital. The Bank is subject to regulatory restrictions on the payment of cash dividends, which generally may be paid only from current earnings.

NOTE 11 – DERIVATIVES AND HEDGING

Risk Management

Atlantic Capital’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, Atlantic Capital primarily uses interest rate swaps as part of its interest rate risk management strategy.

Cash Flow Hedges

At September 30, 2016, Atlantic Capital’s interest rate swaps designated as cash flow hedges involve the payment of floating-rate amounts to a counterparty in exchange for receiving fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. At September 30, 2016 and December 31, 2015, Atlantic Capital had interest rate swaps designated as cash flow hedges with an aggregate notional amount of $50.0 million, respectively.

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No hedge ineffectiveness gains or losses were recognized on active cash flow hedges in 2016 or 2015. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Atlantic Capital expects that approximately $371,000 will be reclassified as an increase to loan interest income over the next twelve months related to these cash flow hedges.

Customer Swaps

Atlantic Capital also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of clients desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. In order to economically hedge the interest rate risk associated with offering this product, Atlantic Capital simultaneously enters into derivative contracts with third parties to offset the customer contracts, such that Atlantic Capital minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts reduce over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to clients.

Atlantic Capital’s derivative instruments are recorded at fair value in other assets and accrued interest receivable and other liabilities and accrued interest payable in the Consolidated Balance Sheets. The changes in the fair value of the derivative instruments are recognized in other noninterest income in the Consolidated Statements of Income. At September 30, 2016 and December 31, 2015, Atlantic Capital had interest rate swaps related to this program with an aggregate notional amount of $139.0 million and $137.1 million, respectively.

Atlantic Capital acquired a loan level hedging program, which First Security utilized to accommodate clients preferring a fixed rate loan. The loan documents include an addendum with a zero premium collar. The zero premium collar is a cap and a floor at the same interest rate, resulting in a fixed rate to the borrower. To hedge this embedded option the Bank entered into a dealer facing trade exactly mirroring the terms in the loan addendum.

Counterparty Credit Risk

As a result of its derivative contracts, Atlantic Capital is exposed to credit risk. Specifically approved counterparties and exposure limits are defined. On a quarterly basis, the customer derivative contracts and related counterparties are evaluated for credit risk and an adjustment is made to the contract’s fair value. This adjustment is recognized in the Consolidated Statements of Income.

Most derivative contracts with clients are secured by collateral. Additionally, in accordance with the interest rate agreements with derivatives dealers, Atlantic Capital may be required to post margin to these counterparties. At September 30, 2016 and December 31, 2015, Atlantic Capital had minimum collateral posting thresholds with certain of its derivative counterparties and posted collateral of $17.3 million and $13.5 million, respectively, against its obligations under these agreements. Cash collateral related to derivative contracts is recorded in other assets in the Consolidated Balance Sheets.

Atlantic Capital has master netting agreements with the derivatives dealers with which it does business, but reflects gross assets and liabilities on the Consolidated Balance Sheets.

In conjunction with the FASB’s fair value measurement guidance, management made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting arrangements on a net basis.

To accommodate clients, Atlantic Capital occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. This allows clients to execute an interest rate swap with one bank while allowing for distribution of the credit risk among participating members. Credit risk participation agreements arise when Atlantic Capital contracts with other financial institutions, as a guarantor, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. At September 30, 2016 and December 31, 2015, Atlantic Capital had credit risk participation agreements with a notional amount of $4.7 million and $22.4 million, respectively.

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The following table reflects the estimated fair value positions of derivative contracts and credit risk participation agreements as of September 30, 2016 and December 31, 2015:



Derivatives designated as hedging instruments under ASC 815

(in thousands)		September 30, 2016				December 31, 2015
Interest Rate Products	Balance Sheet Location	Notional Amount		Fair Value		Notional Amount		Fair Value
Cash flow hedge of LIBOR based loans	Other assets	$	50,000	$	1,351	$	50,000	$	474

Derivatives not designated as hedging instruments under ASC 815

(in thousands)		September 30, 2016				December 31, 2015
Interest Rate Products	Balance Sheet Location	Notional Amount		Fair Value		Notional Amount		Fair Value
Customer swap positions	Other assets	$	69,510	$	3,098	$	68,560	$	1,617
Zero premium collar	Other assets	99,399		11,150		101,407		4,463
		$	168,909	$	14,248	$	169,967	$	6,080

Dealer offsets to customer swap positions	Other liabilities	$	69,510	$	3,298	$	68,560	$	1,697
Credit risk participation	Other liabilities	4,680		1		22,447		3
Dealer offset to zero premium collar	Other liabilities	99,399		11,150		101,407		4,463
		$	173,589	$	14,449	$	192,414	$	6,163

The following table reflects the impact to the Consolidated Statements of Income related to derivative contracts for the three and nine months ended September 30, 2016 and 2015:



Derivatives in Cash Flow Hedging Relationships
	Three months ended September 30,										Nine months ended September 30,
(in thousands)	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)					Gain or (Loss) Reclassified from Accumulated OCI in Income (Effective Portion)					Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)				Gain or (Loss) Reclassified from Accumulated OCI in Income (Effective Portion)
	2016			2015		Location	2016		2015		2016		2015		Location	2016		2015
Interest rate swaps	$	(269	)	$	523	Interest income	$	177	$	214	$	473	$	816	Interest income	$	546	$	435

NOTE 12 – SUBORDINATED DEBT

On September 28, 2015, Atlantic Capital issued subordinated notes (the “Notes”) totaling $50.0 million in aggregate principal amount. The Notes are due September 30, 2025 and bear a fixed rate of interest of 6.25% per year until September 29, 2020. From September 30, 2020 to the maturity date, the interest rate will be a floating rate equal to the three-month LIBOR plus 468 basis points. The Notes were priced at 100% of their par value. The Notes qualify as Tier 2 regulatory capital.

Subordinated debt is summarized as follows.



	September 30, 2016		December 31, 2015
	(in thousands
Floating rate 10 year capital securities, with interest paid semi-annually at an annual fixed rate of 6.25% until September 30, 2020	$	50,000	$	50,000
Principal amount of subordinated debt	$	50,000	$	50,000
Less debt issuance costs		676		803
Subordinated debt, net	$	49,324	$	49,197

All subordinated debt outstanding at September 30, 2016 matures after more than five years.

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NOTE 13 – SHARE-BASED COMPENSATION

Atlantic Capital sponsors a stock incentive plan for the benefit of directors and employees. Under the 2015 Stock Incentive Plan, there were approximately 4,525,000 shares reserved for issuance to directors and employees. The Compensation Committee has the authority to grant the following: an incentive or nonqualified option; a restricted stock award (including a restricted stock award or a restricted unit award); a performance award (including a performance share award or a performance unit award); a phantom stock award; a dividend equivalent award; or any other award granted under the plan.

As of September 30, 2016, approximately 4,000,000 additional awards could be granted under the plan. Through September 30, 2016, incentive stock options, nonqualified stock options, restricted and non-restricted stock awards have been granted under the plan. Stock options are granted at a price which is no less than the fair market value of a share of Atlantic Capital common stock on the grant date. Stock options generally vest over three years and expire after ten years.

As of September 30, 2016 and December 31, 2015, warrants for 363,000 and 588,000 shares, respectively, were outstanding for the purchase of common stock at a price of $10.00 per warrant. The warrants were issued as of May 14, 2007, the date of issuance of common stock sold in the initial private placement, and are exercisable for a period of ten years following the issuance.

The Company estimates the fair value of its options and warrants awards using the Black-Scholes option pricing model. The risk-free rate for periods within the contractual life of the option and warrant is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options or warrants granted during the nine months ended September 30, 2016 and 2015.

The following table represents stock option and warrant activity for the nine months ended September 30, 2016:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, December 31, 2015	2,369,759		$	11.30
Exercised	(716,408	)	10.03
Forfeited	(7,836	)	10.76
Expired	(2,028	)	47.89
Outstanding, September 30, 2016	1,643,487		$	11.82	4.25	$	5,531

Exercisable, September 30, 2016	1,313,131		$	11.23	3.16	$	5,280

Atlantic Capital recognized compensation expense relating to stock options of $192,000 and $638,000 for the three and nine months ended September 30, 2016, respectively. No compensation expense related to stock options was recognized in the three and nine months ended September 30, 2015. Using the Black-Scholes pricing model, the amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period.

The following table represents restricted stock activity for the nine months ended September 30, 2016:



	Shares		Weighted Average Grant-Date Fair Value
Outstanding, December 31, 2015	217,658		$	13.07
Granted	91,486		14.20
Vested	(33,786	)	10.91
Forfeited	(18,386	)	14.24
Outstanding, September 30, 2016	256,972		$	13.67

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Compensation expense for restricted stock is based on the fair value of restricted stock awards at the time of grant, which is equal to the value of Atlantic Capital’s common stock on the date of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting period. For the three months ended September 30, 2016 and 2015, compensation expense of $71,000 and $189,000, respectively, was recognized related to restricted stock awards. For the nine months ended September 30, 2016 and 2015, compensation expense of $527,000 and $503,000, respectively, was recognized related to restricted stock awards.

As of September 30, 2016, there was $2.4 million of unrecognized compensation cost related to restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 3.13 years.

NOTE 14 – FAIR VALUE MEASUREMENTS

Atlantic Capital follows the guidance pursuant to ASC 820-10, Fair Value Measurements and Disclosures. This guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This issuance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. Atlantic Capital measures its investment securities and interest rate derivative assets and liabilities at fair value on a recurring basis. Fair value is used on a nonrecurring basis either when assets are evaluated for impairment or for disclosure purposes. Atlantic Capital measures its servicing assets, impaired loans and other real estate owned at fair value on a nonrecurring basis. The basis for accounting for other real estate owned is the lower of cost or fair value, less selling costs.

The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement and defines fair value as the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, this guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Atlantic Capital applied the following fair value hierarchy:

Level 1 – Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments or futures contracts.

Level 2 – Assets or liabilities valued based on observable market data for similar instruments.

Level 3 – Assets or liabilities for which significant valuation assumptions are not readily observable in the market, instruments valued based on the best available data, some of which is internally-developed, and risk premiums that a market participant would require.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement. There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the nine months ended September 30, 2015. There was one transfer between Level 2 and Level 3 and no transfers between Level 1 and Level 2 during the nine months ended September 30, 2016.

Atlantic Capital records investment securities available-for-sale at fair value on a recurring basis. Investment securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, Atlantic Capital obtains fair value measurements from an independent pricing service. In estimating the fair values for investment securities, Atlantic Capital believes that independent third-party market prices are the best evidence of an exit price. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the Treasury Department yield curve, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things.

Derivative instruments are primarily transacted as over-the-counter trades and priced with observable market assumptions. Ongoing measurements include observable market assumptions with appropriate valuation adjustments for liquidity and for credit risk of counterparties and Atlantic Capital’s own credit. For these instruments, Atlantic Capital obtains fair value measurements from an independent pricing service. The fair value measurements consider factors such as the likelihood of default by Atlantic Capital and its counterparties, total exposure and remaining maturities in determining the appropriate fair value adjustments to record. Generally, the expected loss of each client counterparty is estimated using Atlantic Capital’s internal risk rating system. For financial institution counterparties that are rated by national rating agencies, those ratings are used in determining the credit risk. This

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approach used to estimate exposures to counterparties is also used by Atlantic Capital to estimate its own credit risk on derivative liability positions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the assets that were measured at fair value on a recurring basis by level within the fair value hierarchy as reported in the Consolidated Balance Sheets at September 30, 2016 and December 31, 2015.



	Fair Value Measurements at
	September 30, 2016 Using:
	Quoted Prices in Active Markets for Identical Securities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Securities available-for-sale—
U.S. government agencies	$	—	$	22,017	$	—	$	22,017
U.S. states and political subdivisions	—		83,215		—		83,215
Trust preferred securities	—		4,393		—		4,393
Corporate debt securities	—		19,470		—		19,470
Mortgage-backed securities	—		219,389		—		219,389
Total securities available-for-sale	$	—	$	348,484	$	—	$	348,484
Interest rate derivative assets	$	—	$	15,599	$	—	$	15,599
Interest rate derivative liabilities	$	—	$	14,449	$	—	$	14,449



	Fair Value Measurements at
	December 31, 2015 Using:
	Quoted Prices in Active Markets for Identical Securities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Securities available-for-sale—
U.S. treasuries	$	—	$	4,922	$	—	$	4,922
U.S. government agencies	—		64,852		—		64,852
U.S. states and political subdivisions	—		27,790		—		27,790
Trust preferred securities	—		4,275		—		4,275
Corporate debt securities	—		20,517		—		20,517
Mortgage-backed securities	—		221,451		2,414		223,865
Total securities available-for-sale	$	—	$	343,807	$	2,414	$	346,221
Interest rate derivative assets	$	—	$	6,554	$	—	$	6,554
Interest rate derivative liabilities	$	—	$	6,163	$	—	$	6,163

The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values:



	Securities Available-for-Sale
	(in thousands)
December 31, 2015	$	2,414
Change due to presence of observable market data	(2,414		)
September 30, 2016	$	—

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For the nine months ended September 30, 2016 and 2015, there was not a change in the methods and significant assumptions used to estimate fair value.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The following table presents the assets that were measured at fair value on a nonrecurring basis by level within the fair value hierarchy as reported in the Consolidated Balance Sheets at September 30, 2016 and December 31, 2015.



September 30, 2016		Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Total
	(in thousands)
Impaired Loans		$	—	$	—	$	5,998	$	5,998



December 31, 2015		Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Total
	(in thousands)
Impaired Loans		$	—	$	—	$	4,449	$	4,449

Level 3 loans consist of impaired loans which have been partially charged-off or have specific valuation allowances. The fair value of Level 3 assets is estimated based on the underlying collateral value. For loans which the cash proceeds from the sale of the underlying collateral is the expected source of repayment, the fair value of these loans was derived from internal estimates of the underlying collateral incorporating market data, including third party appraisals or evaluations, when available. Appraised values may be discounted based on management’s assessment of the level of inactivity in the real estate market and other markets for the underlying collateral, changes in market conditions from the time of the valuation, and other information that in management’s judgment may affect the value. Impaired loans are evaluated on at least a quarterly basis and adjusted accordingly.

Assets and Liabilities Not Measured at Fair Value

For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates the reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that Atlantic Capital would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

The short maturity of Atlantic Capital’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and due from banks, interest-bearing deposits in other banks, other short-term investments, and FHLB stock. The fair value of securities available-for-sale equals the balance sheet value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of Atlantic Capital’s entire holdings. Because no ready market exists for a significant portion of Atlantic Capital’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Off-balance sheet financial instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.

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The following table presents the estimated fair values of Atlantic Capital’s financial instruments at September 30, 2016 and December 31, 2015.



	Fair Value Measurements at
	September 30, 2016 Using:
	Carrying Value		Quoted Prices in Active markets for Identical Securities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial assets
Cash and due from banks	$	44,563	$	44,563	$	—	$	—
Interest bearing deposits in banks	75,750		75,750		—		—
Other short-term investments	23,159		23,159		—		—
Total securities available-for-sale	348,484		—		348,484		—
FHLB stock	9,617		—		—		9,617
Federal Reserve Bank stock	9,670		—		—		9,670
Loans held for investment, net	1,989,568		—		—		1,985,222
Derivative assets	15,599		—		15,599		—
Financial liabilities
Deposits	$	2,188,856	$	—	$	2,155,274	$	—
Federal funds purchased and securities sold under agreements to repurchase	—		—		—		—
Subordinated debt	49,324		—		49,324		—
FHLB advances	170,000		—		169,803		—
Derivative financial instruments	14,449		—		14,449		—



	Fair Value Measurements at
	December 31, 2015 Using:
	Carrying Value		Quoted Prices in Active markets for Identical Securities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial assets
Cash and due from banks	$	45,848	$	45,848	$	—	$	—
Interest-bearing deposits in other banks	130,900		130,900		—		—
Reverse repurchase agreements	13,666		13,666		—		—
Total securities available-for-sale	346,221		—		343,807		2,414
FHLB stock	8,034		—		—		8,034
Loans held for investment, net	1,771,764		—		—		1,752,796
Derivative assets	6,554		—		6,554		—
Financial liabilities
Deposits	$	2,048,808	$	—	$	2,018,898	$	—
Federal funds purchased and securities sold under agreements to repurchase	11,931		11,931		—		—
Subordinated debt	49,197		—		49,197		—
Derivative financial instruments	6,163		—		6,163		—

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NOTE 15 – COMMITMENTS AND CONTINGENCIES

Atlantic Capital is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, most of which are standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract amounts of these instruments reflect the extent of involvement Atlantic Capital has in particular classes of financial instruments.

Standby letters of credit are written conditional commitments issued by Atlantic Capital to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Most letters of credit expire in less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Atlantic Capital’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Atlantic Capital uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Atlantic Capital’s maximum exposure to credit risk for unfunded loan commitments and standby letters of credit at September 30, 2016 and December 31, 2015 was as follows:



	September 30, 2016		December 31, 2015

Commitments to extend credit	$	646,460	$	559,448
Standby letters of credit	13,855		10,502
	$	660,315	$	569,950

Atlantic Capital, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on Atlantic Capital’s financial position or results of operations.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q of Atlantic Capital Bancshares, Inc. (the “Company” or “Atlantic Capital”) 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 words or phrases 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:


•	the expected growth opportunities and cost savings from the acquisition of First Security Group, Inc. (“First Security”) may not be fully realized or may take longer to realize than expected;


•	revenues following the transaction with First Security and recent branch sales may be lower than expected as a result deposit attrition, increased operating costs, customer loss, and business disruption;


•	loss of income from our TriNet division following our planned exit of this business;


•	diversion of management time on integration related issues;


•	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, including those associated with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), could adversely affect the operating results of the combined company;


•	the interest rate environment may compress margins and adversely affect net interest income;


•	changes in trade, monetary, and fiscal policies of various governmental bodies and central banks could affect the economic environment in which we operate;


•	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;


•	our ability to anticipate 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;


•	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;


•	adequacy of our risk management program;

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•	increased costs associated with operating as a public company;


•	competition from other financial services companies could adversely affect operations; or


•	other risks and factors identified in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2016 (the “Annual Report”) in Part I, Item 1A under the heading “Risk Factors.”

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of Atlantic Capital are in accordance with GAAP and conform to general practices within the banking industry. Atlantic Capital’s 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 Atlantic Capital’s consolidated financial position and/or consolidated results of operations. The more critical accounting and reporting policies include Atlantic Capital’s accounting for the allowance for loan losses, fair value measurements, and income tax related items. Significant accounting policies are discussed in Note 1 of the consolidated financial statements within Atlantic Capital’s Annual Report on Form 10-K.

The following is a summary of Atlantic Capital’s critical accounting policies that are material to the consolidated financial statements and are highly dependent on estimates and assumptions.

Allowance for loan losses.

The allowance for loan losses (ALL) is management’s estimate of probable credit losses inherent in Atlantic Capital’s loan portfolio at the balance sheet date. Atlantic Capital determines the allowance for loan losses based on an ongoing estimation process. This estimation process is inherently subjective, as it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans and losses incurred as of the balance sheet date in Atlantic Capital’s loan portfolio. Those estimates may be susceptible to significant change. Increases to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

The allowance is the accumulation of various components that are calculated based on an independent estimation process. All components of the allowance for loan losses represent estimates based on data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends, peer analysis, recent loan loss experience, collateral type, loan volumes, seasoning of the loan portfolio, economic conditions, and the findings of internal credit quality assessments and results from external bank regulatory examinations.

While management uses the best information available to establish the allowance for loan losses, future adjustments may become necessary if conditions differ substantially from the assumptions used in making the estimates. In addition, regulatory examiners may require adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Such adjustments to original estimates, as necessary, are made and reflected in the financial results in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

Management continuously monitors and actively manages the credit quality of the entire loan portfolio and recognizes provision expense to maintain the allowance at an appropriate level. Specific allowances for impaired loans are determined by analyzing estimated cash flows discounted at a loan’s original rate or collateral values in situations where Atlantic Capital believes repayment is dependent on collateral liquidation.

Management considers the established ALL adequate to absorb losses that relate to loans outstanding at September 30, 2016, although future additions may be necessary based on changes in economic conditions, collateral values, erosion of the borrower’s access to liquidity and other factors. If the financial condition of borrowers were to deteriorate, resulting in an impairment of their ability to make payments, Atlantic Capital’s estimates would be updated and additions to the ALL may be required.

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Fair value measurements.

Atlantic Capital’s 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. At September 30, 2016, the percentage of total assets measured at fair value was 13%, which is primarily securities available-for-sale. See Note 14 “Fair Value Measurements” in 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 Atlantic Capital 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 divested 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 disagreements between management and Atlantic Capital’s regulators, disagreements which could cause Atlantic Capital to change its 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. Atlantic Capital utilizes a third-party pricing service to assist with determining the fair value of its 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. Atlantic Capital periodically reviews available-for-sale securities that are in an unrealized loss position to determine whether other-than-temporary impairment exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost-basis. The primary factors Atlantic Capital considers in determining whether impairment is other-than-temporary are long term expectations and recent experience regarding principal and interest payments, and Atlantic Capital’s ability and intent to hold the security until the amortized cost basis is recovered.

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 market observable data.

Income taxes.

Atlantic Capital recognizes 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.

Non-GAAP Financial Measures

This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP and should be read along with Table 1, which provides a reconciliation of non-GAAP financial measures to GAAP financial measures. Management uses the following non-GAAP financial measure in its analysis of Atlantic Capital’s performance: taxable equivalent net interest income. Management uses this non-GAAP financial measure because it believes it provides a greater understanding of ongoing performance and operations, enhances comparability with prior periods, and provides users of our financial information with a meaningful measure for assessing our financial results and credit trends. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as an alternative to any measure of performance or financial condition as determined in accordance with GAAP. In addition, non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures presented by other companies. Investors should consider Atlantic Capital’s performance and financial condition as reported under GAAP and all other relevant information when

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assessing the performance or financial condition of the Company. A reconciliation of this non-GAAP financial measure to GAAP financial measures is included in Table 1.

EXECUTIVE OVERVIEW AND EARNINGS SUMMARY

On October 31, 2015, Atlantic Capital completed the acquisition of First Security and its wholly-owned bank subsidiary FSGBank. The acquired entity’s results are included in Atlantic Capital’s consolidated results beginning on October 31, 2015, the acquisition date.

During the third quarter of 2016, Atlantic Capital made the decision to close the TriNet Lending division. Sales of additional TriNet loans are expected in the fourth quarter of 2016, or first quarter of 2017, resulting in additional fee income and a reduction in loan balances. A portion of the cost savings from the closure of the TriNet division will be reinvested into the SBA lending division.

Atlantic Capital also announced its intent to open a corporate banking office in Charlotte, North Carolina, as part of the ongoing effort to build capacity for growth in revenue and improvement in profitability

Atlantic Capital reported net income of $3.7 million for the third quarter of 2016. This compared to net income of $2.2 million for the third quarter of 2015. Diluted income per common share was $.15 for the third quarter of 2016 compared to diluted income per common share of $.16 for the third quarter of 2015.

For the nine months ended September 30, 2016, Atlantic Capital reported net income of $11.8 million. This compared to net income of $6.8 million for the first nine months ended September 30, 2015. Diluted income per common share was $.47 for the nine months ended September 30, 2016 compared to $.49 for the same period in 2015.

The increase in net income for the three months ended September 30, 2016, compared to the same period in 2015, is primarily the result of a $9.9 million increase in net interest income and a $3.9 million gain on the sale of seven branches, offset by a $5.2 million increase in salary and benefits expenses. The increases in interest income and salary and benefits expenses are related to the acquisition of First Security.

For the nine months ended September 30, 2016 compared to the first nine months of 2015, the increase in net income was primarily attributable to a $29.3 million, or 104%, increase in net interest income. In addition, noninterest income increased $11.4 million, or 191%, due to the $3.9 million gain on sale of branches, increased service charges, and higher trust and mortgage income due to the acquisition of First Security. This was offset by a $31.8 million, or 140%, increase in noninterest expense, resulting primarily from a $16.6 million increase in salary and benefits expenses and increases in other noninterest expenses related to the acquisition of First Security.

Taxable equivalent net interest income was $19.5 million for the third quarter of 2016, compared to $9.5 million for the third quarter of 2015. Taxable equivalent net interest margin increased to 3.12% for the three months ended September 30, 2016 from 2.93% for the three months ended September 30, 2015. For the nine months ended September 30, 2016, net interest income was $57.7 million compared to $28.1 million for the same period of 2015. Net interest margin increased to 3.11% for the nine months ended September 30, 2016 from 2.91% for the nine months ended September 30, 2015. The margin increases for the three and nine months ended September 30, 2016 compared to the prior year were primarily due to higher yields on loans and the increase in loan volume from First Security.

Provision for loan losses for the quarter ended September 30, 2016 totaled $463,000, an increase of $600,000 from the quarter ended September 30, 2015. The higher provision for the three months ended September 30, 2016 resulted from an increase in the general component of the allowance due to loan growth and an increase in reserves of $58,000 for specifically evaluated impaired credits. For the nine months ended September 30, 2016, Atlantic Capital’s provision for loan losses was $1.6 million compared to a provision of $412,000 for the first nine months of 2015. The increase was primarily due to the same factors resulting in the quarterly increase, namely the growth in loan balances due to the acquisition of First Security.

Noninterest income increased $2.3 million, or 131%, to $4.0 million from the third quarter of 2015. The increase was primarily due to a $749,000 increase in service charges. The addition of mortgage income and trust income from the acquisition of First Security also increased noninterest income by $993,000 compared to the quarter ended September 30, 2015. For the first nine months of 2016, noninterest income increased $11.4 million, or 191%, to $17.3 million. The increase was primarily due to the same factors resulting in the quarterly increase as well as the $3.9 million gain on the sale of seven branches and the $1.1 million in gains on the sale of TriNet loans.

For the third quarter of 2016, noninterest expense increased $9.6 million, or 125%, compared to the third quarter of 2015. Noninterest expense totaled $54.5 million for the nine months ended September 30, 2016, compared to $22.7 million for the same period in 2015. The most significant components of the increase for the quarterly and year-to-date periods were higher salary and benefit, occupancy, equipment and software, and data processing expenses related to the acquisition of First Security. The payment of incentives for new strategic hires during the three and nine months ended September 30, 2016 contributed to the increase in salary and benefit expense.

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Table 1 - Quarterly Selected Financial Data
(in thousands, except share and per share data; taxable equivalent)

	2016									2015								For the nine months ended September 30,
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter				Third Quarter				2016			2015
INCOME SUMMARY
Interest income	$	22,428		$	22,190		$	21,553		$	18,270			$	10,345			$	66,171		$	30,760
Interest expense	2,941			2,907			2,632			2,292				840				8,480			2,631
Net interest income	19,487			19,283			18,921			15,978				9,505				57,691			28,129
Provision (credit) for loan losses	463			777			368			7,623				(137		)		1,608			412
Net interest income after provision for loan losses	19,024			18,506			18,553			8,355				9,642				56,083			27,717
Noninterest income	4,002			8,880			4,420			3,460				1,729				17,302			5,939
Noninterest expense	17,296			18,943			18,266			23,239				7,671				54,505			22,694
Income (loss) before income taxes	5,730			8,443			4,707			(11,424		)		3,700				18,880			10,962
Income tax expense (benefit)	2,022			3,296			1,776			(3,263		)		1,474				7,094			4,120
Net income (loss)	$	3,708		$	5,147		$	2,931		$	(8,161	)		$	2,226			$	11,786		$	6,842

PER SHARE DATA
Basic earnings per share	$	0.15		$	0.21		$	0.12		$	(0.40	)		$	0.16			$	0.48		$	0.51
Diluted earnings per share	0.15			0.20			0.12			(0.40		)		0.16				0.47			0.49

PERFORMANCE MEASURES
Return on average equity	4.84		%	6.88		%	4.02		%	(13.22		)	%	6.08			%	5.25		%	6.3			%
Return on average assets	0.55			0.76			0.45			(1.45		)		0.66				0.58			0.67
Taxable equivalent net interest margin	3.12			3.12			3.26			3.13				2.93				3.11			2.91
Efficiency ratio	74.05			67.44			77.12			119.74				68.35				72.93			66.68
Equity to assets	11.17			10.83			10.81			10.91				10.53				11.17			10.91

ASSET QUALITY
Allowance for loan losses to loans	0.92		%	0.95		%	0.93		%	1.06			%	1.13			%	0.92		%	1.13			%
Net charge-offs	$	306		$	8		$	1,665		$	580			$	(14	)		$	1,979		$	(29	)
Net charge-offs to average loans⁽¹⁾	0.06		%	—		%	0.35		%	0.15			%	(0.01		)	%	0.13		%	—			%
NPAs to total assets	0.09			0.07			0.08			0.40				—				0.09			—

AVERAGE BALANCES
Total loans	$	2,003,180		$	2,000,685		$	1,881,749		$	1,583,280			$	1,052,785			$	1,965,092		$	1,051,878
Investment securities	335,880			358,439			357,728			255,312				134,016				372,208			135,961
Total assets	2,717,996			2,718,110			2,620,750			2,248,614				1,349,997				2,704,670			1,359,059
Deposits	2,163,569			2,135,292			2,155,683			1,886,292				1,101,434				2,164,477			1,100,402
Shareholders’ equity	306,642			299,170			291,806			246,842				146,430				299,048			144,816
Number of common shares - basic	24,891,822			24,644,755			24,485,900			20,494,895				13,562,125				24,674,953			13,527,195
Number of common shares - diluted	25,260,280			25,158,694			24,993,597			21,004,577				13,904,395				25,106,250			13,866,312

⁽¹⁾ Annualized.

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Table 1 - Quarterly Selected Financial Data (continued)
(in thousands, except share and per share data)

	2016						2015					For the nine months ended September 30,
	Third Quarter		Second Quarter		First Quarter		Fourth Quarter			Third Quarter		2016		2015
AT PERIOD END
Total loans	$	2,054,702	$	1,971,198	$	1,982,054	$	1,886,134		$	1,046,437	$	2,054,702	$	1,046,437
Investment securities	348,484		328,370		366,641		346,221			127,168		348,484		127,168
Total assets	2,761,244		2,807,822		2,726,888		2,638,780			1,381,698		2,761,244		1,381,698
Deposits	2,188,856		2,158,305		2,282,462		2,262,218			1,128,608		2,188,856		1,128,608
Shareholders’ equity	308,463		304,066		296,015		287,992			149,809		308,463		149,809
Number of common shares outstanding	24,950,099		24,750,163		24,569,823		24,425,546			13,562,125		24,950,099		13,562,125

Non-GAAP Performance Measures Reconciliation
(in thousands)
	2016						2015					For the nine months ended September 30,
	Third Quarter		Second Quarter		First Quarter		Fourth Quarter			Third Quarter		2016		2015
Interest income reconciliation
Interest income - GAAP	$	22,295	$	22,116	$	21,499	$	18,240		$	10,334	$	65,910	$	30,727
Taxable equivalent adjustment	133		74		54		30			11		261		33
Interest income - taxable equivalent	$	22,428	$	22,190	$	21,553	$	18,270		$	10,345	$	66,171	$	30,760

Net interest income reconciliation
Net interest income - GAAP	$	19,354	$	19,209	$	18,867	$	15,948		$	9,494	$	57,430	$	28,096
Taxable equivalent adjustment	133		74		54		30			11		261		33
Net interest income - taxable equivalent	$	19,487	$	19,283	$	18,921	$	15,978		$	9,505	$	57,691	$	28,129

Net interest income after provision for loan losses reconciliation
Net interest income after provision for loan losses - GAAP	$	18,891	$	18,432	$	18,499	$	8,325		$	9,631	$	55,822	$	27,684
Taxable equivalent adjustment	133		74		54		30			11		261		33
Net interest income after provision for loan losses - taxable equivalent	$	19,024	$	18,506	$	18,553	$	8,355		$	9,642	$	56,083	$	27,717

Income (loss) before income taxes reconciliation
Income (loss) before income taxes - GAAP	$	5,597	$	8,369	$	4,653	$	(11,454	)	$	3,689	$	18,619	$	10,929
Taxable equivalent adjustment	133		74		54		30			11		261		33
Income (loss) before income taxes - taxable equivalent	$	5,730	$	8,443	$	4,707	$	(11,424	)	$	3,700	$	18,880	$	10,962

Income tax expense (benefit) reconciliation
Income tax expense (benefit) - GAAP	$	1,889	$	3,222	$	1,722	$	(3,293	)	$	1,463	$	6,833	$	4,087
Taxable equivalent adjustment	133		74		54		30			11		261		33
Income tax expense (benefit) - taxable equivalent	$	2,022	$	3,296	$	1,776	$	(3,263	)	$	1,474	$	7,094	$	4,120

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RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Taxable equivalent net interest income for the third quarter of 2016 totaled $19.5 million, a $10.0 million, or 105%, increase compared to the third quarter of 2015. This increase was primarily driven by a $12.1 million, or 117%, increase in interest income. The interest income increase primarily resulted from the following:


•	an $11.1 million, or 118%, increase to $20.5 million in interest income on loans, resulting from a $950.4 million, or 90%, increase in average balance, due primarily to the addition of the First Security loan portfolio as well as organic loan growth; and


•	Net accretion income on acquired loans totaling $576,000.

The company recorded a $751,000 increase in tax equivalent interest income on investment securities due to the addition of the First Security portfolio. The increase resulted from a $201.9 million increase in the average balance of securities and was offset by a 33 basis point decline in the yield.

Interest expense for the three months ended September 30, 2016 totaled $2.9 million, a $2.1 million, or 250%, increase from the same period of 2015. The rate paid on interest bearing liabilities increased 26 basis points from the third quarter of 2015 to the third quarter of 2016, driven by an increase in the balance of long-term debt to $49.3 million in 2016, compared to zero in 2015. In addition, premium amortization of acquired time deposits reduced interest expense during the third quarter of 2016 in the amount of $170,000.

Taxable equivalent net interest income for the nine months ended September 30, 2016 totaled $57.7 million, a $29.6 million, or 105%, increase compared to the same period in 2015. This increase was primarily driven by a $35.4, or 115%, increase in interest income. The interest income increase primarily resulted from the following:


•	a $32.5 million, or 117%, increase to $60.4 million in interest income on loans, resulting from a $913.2 million, or 87%, increase in average balance, due primarily to the addition of the First Security loan portfolio as well as organic loan growth; and


•	Net accretion income on acquired loans totaling $2.0 million.

Interest expense for the nine months ended September 30, 2016 totaled $8.5 million, a $5.8 million, or 222%, increase from the same period of 2015, primarily due to a $2.5 million increase in interest paid on long-term debt. The rate paid on interest bearing liabilities increased 23 basis points from the first nine months of 2015 to the same period of 2016, driven by an increase in the balance of long-term debt to approximately $49.3 million in 2016, compared to zero in 2015. In addition, premium amortization of acquired time deposits reduced interest expense during the first nine months of 2016 in the amount of $712,000.

Taxable equivalent net interest margin increased to 3.12% from 2.93% for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. Taxable equivalent net interest margin increased to 3.11% compared to 2.91% for the nine months ended September 30, 2016 compared to the same period in 2015. The primary reason for the increase in taxable equivalent net interest margin quarter-over-quarter and for the first nine months of 2016 compared to 2015 was the increase in loan volume and the higher yield earned on the First Security loan portfolio. Net accretion income on the acquired loans discount totaled $576,000 and $2.0 million for the three and nine months ended September 30, 2016, and also contributed to the increase in taxable equivalent net interest margin.

Overall funding costs remained relatively stable from 2015 to 2016 although the long-term debt issued in September of 2015 added a relatively high cost funding source to the balance sheet.

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 2 - Average Balance Sheets and Net Interest Analysis
(Dollars in thousands; taxable equivalent)
	Three months ended September 30,
	2016						2015
	Average Balance		Interest Income/Expense		Yield/Rate		Average Balance		Interest Income/Expense		Yield/Rate
Assets
Interest bearing deposits in other banks	$	109,883	$	158	0.57	%	$	51,076	$	29	0.23	%
Other short-term investments	18,741		60		1.27	%	43,786		166		1.52	%
Investment securities:
Taxable investment securities	283,303		1,033		1.45	%	131,732		644		1.94	%
Non-taxable investment securities⁽¹⁾	52,577		393		2.97	%	2,284		31		5.44	%
Total investment securities	335,880		1,426		1.69	%	134,016		675		2.02	%
Total loans	2,003,180		20,511		4.07	%	1,052,785		9,423		3.59	%
FHLB and FRB stock	17,192		273		6.32	%	4,584		52		4.48	%
Total interest-earning assets	2,484,876		22,428		3.59	%	1,286,247		10,345		3.19	%
Non-earning assets	233,120						63,750
Total assets	$	2,717,996					$	1,349,997
Liabilities
Interest bearing deposits:
NOW, money market, and savings	1,236,828		1,338		0.43	%	661,265		646		0.39	%
Time deposits	175,135		241		0.55	%	15,756		15		0.37	%
Brokered deposits	196,598		377		0.76	%	98,939		90		0.36	%
Total interest-bearing deposits	1,608,561		1,956		0.48	%	775,960		751		0.38	%
Other borrowings	157,957		170		0.43	%	94,031		89		0.38	%
Long-term debt	49,296		815		6.58	%	—		—		—	%
Total interest-bearing liabilities	1,815,814		2,941		0.64	%	869,991		840		0.38	%
Demand deposits	555,008						325,474
Other liabilities	40,532						8,102
Shareholders’ equity	306,642						146,430
Total liabilities and shareholders’ equity	$	2,717,996					$	1,349,997
Net interest spread					2.95	%					2.81	%
Net interest income and net interest margin⁽²⁾			$	19,487	3.12	%			$	9,505	2.93	%

⁽¹⁾ Interest revenue on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 35%, reflecting the statutory federal income tax rate.
⁽²⁾ 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.

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Table 2 - Average Balance Sheets and Net Interest Analysis (continued)
(Dollars in thousands; taxable equivalent)
	Nine months ended September 30,
	2016						2015
	Average Balance		Interest Income/Expense		Yield/Rate		Average Balance		Interest Income/Expense		Yield/Rate
Assets
Interest bearing deposits in other banks	$	100,279	$	481	0.64	%	$	46,376	$	87	0.25	%
Other short-term investments	24,120		244		1.35	%	54,843		547		1.33	%
Investment securities:
Taxable investment securities	337,263		3,714		1.47	%	133,641		2,016		2.02	%
Non-taxable investment securities⁽¹⁾	34,945		768		2.94	%	2,320		94		5.42	%
Total investment securities	372,208		4,482		1.61	%	135,961		2,110		2.07	%
Total loans	1,965,092		60,418		4.11	%	1,051,878		27,874		3.54	%
FHLB and FRB stock	13,825		546		5.28	%	4,599		142		4.13	%
Total interest-earning assets	2,475,524		66,171		3.57	%	1,293,657		30,760		3.18	%
Non-earning assets	229,146						65,402
Total assets	$	2,704,670					$	1,359,059
Liabilities
Interest bearing deposits:
NOW, money market, and savings	1,182,520		3,646		0.41	%	655,641		1,890		0.39	%
Time deposits	221,937		654		0.39	%	16,094		46		0.38	%
Brokered deposits	210,803		1,170		0.74	%	120,676		326		0.36	%
Total interest-bearing deposits	1,615,260		5,470		0.45	%	792,411		2,262		0.38	%
Other borrowings	156,148		553		0.47	%	104,861		369		0.47	%
Long-term debt	49,254		2,457		6.66	%	—		—		—	%
Total interest-bearing liabilities	1,820,662		8,480		0.62	%	897,272		2,631		0.39	%
Demand deposits	549,217						307,991
Other liabilities	35,743						8,980
Shareholders’ equity	299,048						144,816
Total liabilities and shareholders’ equity	$	2,704,670					$	1,359,059
Net interest spread					2.95	%					2.79	%
Net interest income and net interest margin⁽²⁾			$	57,691	3.11	%			$	28,129	2.91	%

⁽¹⁾ Interest revenue on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 35%, reflecting the statutory federal income tax rate.
⁽²⁾ 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.

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The following table shows the relative effect on 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 3 - Changes in Net Interest Income
(Dollars in thousands)
	Three Months Ended September 30, 2016 Compared to 2015 Increase (decrease) Due to Changes in:									Nine Months Ended September 30, 2016 Compared to 2015 Increase (decrease) Due to Changes in:
	Volume			Yield/Rate			Total Change			Volume			Yield/Rate			Total Change
Interest earning assets
Interest bearing deposits in other banks	$	85		$	44		$	129		$	258		$	136		$	394
Other short-term investments	(79		)	(27		)	(106		)	(310		)	7			(303		)
Investment securities:
Taxable investment securities	550			(161		)	389			2,245			(547		)	1,698
Non-taxable investment securities	376			(14		)	362			717			(43		)	674
Total investment securities	926			(175		)	751			2,962			(590		)	2,372
Total loans	9,800			1,288			11,088			28,099			4,445			32,544
FHLB and FRB stock	200			21			221			364			40			404
Total interest-earning assets	10,932			1,151			12,083			31,373			4,038			35,411
Interest bearing liabilities
Interest bearing deposits:
NOW, money market, and savings	628			64			692			1,626			130			1,756
Time deposits	219			7			226			607			1			608
Internet and brokered deposits	188			99			287			501			343			844
Total interest-bearing deposits	1,035			170			1,205			2,734			474			3,208
Total borrowings	70			11			81			182			2			184
Total long-term debt	815			—			815			2,457			—			2,457
Total interest-bearing liabilities	1,920			181			2,101			5,373			476			5,849
Change in net interest income	$	9,012		$	970		$	9,982		$	26,000		$	3,562		$	29,562

Provision for Loan Losses

Management considers a number of factors in determining the required level of the allowance for loan 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 and economic and market trends. The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that it considered adequate in relation to the estimated losses inherent in the loan portfolio.

For the three months ended September 30, 2016, the provision for loan losses was $463,000, an increase of $600,000, or 438%, compared to the three months ended September 30, 2015. For the nine months ended September 30, 2016, the provision for loan losses was $1.6 million, an increase of $1.2 million, or 290%, compared to the nine months ended September 30, 2015.

The higher provision for the three and nine months ended September 30, 2016 resulted from an increase in the general component of the allowance due to loan growth from the acquisition and an increase in reserves of $58,000 for specifically evaluated impaired credits. At September 30, 2016, nonperforming loans totaled $792,000 compared to $0 at September 30, 2015. Net loan charge-offs were 0.06% and 0.13%, respectively, of average loans (annualized) for the three and nine months ended September 30, 2016 compared to 0.00% and 0.00%, respectively, for the three and nine months ended September 30, 2015. The allowance for loan losses to total loans at September 30, 2016 was 0.92%, compared to 1.13% at September 30, 2015.

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Noninterest Income

Noninterest income for the three and nine months ended September 30, 2016 was $4.0 million and $17.3 million, respectively, an increase of $2.3 million, or 131%, compared to the third quarter of 2015, and an increase of $11.4 million, or 191%, from the nine months ended September 30, 2015. The following table presents the components of noninterest income.



Table 4 - Noninterest Income
(Dollars in thousands)
	Three months ended September 30,				Change						Nine months ended September 30,				Change
	2016		2015		$			%			2016		2015		$			%
Service charges	$	1,270	$	521	$	749		144		%	$	4,160	$	1,348	$	2,812		209		%
Securities gains, net	—		10		(10		)	(100	)		44		10		34			340
Gain on sale of other assets	71		—		71			—			150		—		150			—
Mortgage income	632		—		632			—			1,418		—		1,418			—
Trust income	361		—		361			—			1,061		—		1,061			—
Derivatives income	69		67		2			3			232		215		17			8
Bank owned life insurance	424		227		197			87			1,215		1,794		(579		)	(32	)
SBA lending activities	959		745		214			29			3,043		2,006		1,037			52
Tri net activities	—		—		—			—			1,144		—		1,144			—
Gains on sale of branches	—		—		—			—			3,885		—		3,885			—
Other noninterest income	216		159		57			36			950		566		384			68
Total noninterest income	$	4,002	$	1,729	$	2,273		131		%	$	17,302	$	5,939	$	11,363		191		%

Service charges for the third quarter and first nine months of 2016 increased $749,000, or 144%, and $2.8 million, or 209%, respectively, from the same periods in 2015. The increase was primarily due to the addition of First Security deposits. Mortgage income and trust income for the third quarter and first nine months of 2016 increased from the third quarter and first nine months of 2015 due to these new lines of business acquired from First Security. Bank owned life insurance income for the first nine months of 2016 decreased $579,000, or 32%, from the same period in 2015 due to a $1.1 million non-recurring gain on bank-owned life insurance in the second quarter of 2015.

In addition, SBA lending activities for the third quarter and first nine months of 2016 increased $214,000, or 29%, and $1.0 million, or 52%, respectively, from the same periods in 2015, due to a higher level of loan sales. During the three months ended September 30, 2016 and 2015, guaranteed portions of 16 and 11 SBA loans with principal balances of $18.5 million and $13.2 million, respectively, were sold in the secondary market. During the nine months ended September 30, 2016 and 2015, guaranteed portions of 36 and 30 SBA loans with principal balances of $48.5 million and $32.4 million, respectively, were sold in the secondary market. During the nine months ended September 30, 2016, the TriNet lending division contributed $1.1 million in noninterest income from the sale of loans. During the third quarter of 2016, Atlantic Capital made the decision to close the TriNet Lending division.

On December 17, 2015, Atlantic Capital announced that it had entered into agreements for the sale of seven legacy FSGBank branches in Eastern Tennessee. The sale of four of the branches closed on April 1, 2016 and the sale of the remaining three branches closed on May 13, 2016. The branch sales resulted in a net gain of $3.9 million for the nine months ended September 31, 2016 and included the sale of approximately $191.0 million in deposits, $34.7 million in loans and $8.6 million in other assets. The net gain included the write-off of $2.0 million in core deposit intangibles. In addition, $305,000 in expenses related to the sales were recorded in noninterest expense.

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Noninterest Expense

The following table presents the components of noninterest expense.



Table 5 - Noninterest Expense
(Dollars in thousands)
	Three months ended September 30,				Change						Nine months ended September 30,				Change
	2016		2015		$			%			2016		2015		$		%
Salaries and employee benefits	$	10,059	$	4,859	$	5,200		107		%	$	31,034	$	14,437	$	16,597	115	%
Occupancy	1,235		419		816			195			3,609		1,263		2,346		186
Equipment and software	862		243		619			255			2,272		687		1,585		231
Professional services	442		208		234			113			1,950		613		1,337		218
Postage, printing and supplies	61		21		40			190			389		63		326		517
Communications and data processing	617		313		304			97			2,227		986		1,241		126
Marketing and business development	269		90		179			199			853		213		640		300
FDIC premiums	415		161		254			158			1,306		516		790		153
Merger and conversion costs	579		718		(139		)	(19	)		2,538		1,982		556		28
Amortization of intangibles	520		—		520			—			1,950		—		1,950		—
Other noninterest expense	2,237		639		1,598			250			6,377		1,934		4,443		230
Total noninterest expense	$	17,296	$	7,671	$	9,625		125		%	$	54,505	$	22,694	$	31,811	140	%

Noninterest expense for the third quarter of 2016 was $17.3 million, an increase of $9.6 million, or 125%, from the third quarter of 2015. For the nine months ended September 30, 2016, noninterest expense totaled $54.5 million, an increase of $31.8 million, or 140%, from the same period in 2015. The increase from the prior year mostly reflects higher salaries, employee benefits, occupancy, equipment and software and data processing expenses related to the acquisition of First Security.

Salaries and employee benefits expense for the three months ended September 30, 2016 totaled $10.1 million, an increase of $5.2 million, or 107%, from the same period in 2015. The increase was due to continued investment in new talent as well as additional staff from the First Security acquisition. For the first nine months of 2016, salaries and employee benefits of $31.0 million increased $16.6 million, or 115%, from the first nine months of 2015. Full time equivalent headcount totaled 328 at September 30, 2016, compared to 105 at September 30, 2015, an increase of 223 positions, mainly from the First Security acquisition.

Occupancy expense of $1.2 million for the third quarter of 2016 increased $816,000, or 195%, from the third quarter of 2015. For the nine months ended September 30, 2016, occupancy expenses were $3.6 million, an increase of $2.3 million, or 186%, from the first nine months of 2015. The increase was due to a higher number of locations due to the acquisition.

Equipment and software expense increased $619,000, or 255%, to $862,000 for the third quarter of 2016, compared to the third quarter of 2015. For the nine months ended September 30, 2016, equipment and software expense was $2.3 million, an increase of $1.6 million, or 231%, from the first nine months of 2015. The increase was attributable to the acquisition of First Security.

Professional services fees increased $234,000, or 113%, to $442,000 for the third quarter of 2016, compared to the third quarter of 2015. For the nine months ended September 30, 2016, professional services fees were $2.0 million, an increase of $1.3 million, or 218%, from the first nine months of 2015. The increase was primarily due to the addition of First Security as well as an overall higher cost associated with operating as a public company.

Communications and data processing expense was $617,000 for the three months ended September 30, 2016, an increase of $304,000, or 97%, from the three months ended September 30, 2015. For the nine months ended September 30, 2016, communications and data processing expenses were $2.2 million, an increase of $1.2 million, or 126%, from the first nine months of 2015. The increase was primarily attributable to the acquisition of First Security, which operated on separate core systems until the conversion to Atlantic Capital’s systems early in the third quarter of 2016.

Merger and conversion costs were $579,000 for the third quarter of 2016, a decrease of $139,000, or 19%, compared to the third quarter of 2015. For the nine months ended September 30, 2016, merger and conversion costs were $2.5 million, an increase of $556,000, or 28%, from the first nine months of 2015. Merger expenses include professional fees, severance and data conversion costs.

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Atlantic Capital expects merger-related costs to continue to decrease in future periods following completion of the integration of First Security’s operations.

Amortization of intangibles includes the amortization of core deposit intangible related to the acquisition of First Security and totaled $520,000 and $1.9 million for the three and nine months ended September 30, 2016.

Income Taxes

Atlantic Capital monitors and evaluates the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, Atlantic Capital evaluates its income tax positions based on current tax law and positions taken by various tax auditors within the jurisdictions where Atlantic Capital is required to file income tax returns.

The income tax provision for the third quarter and first nine months of 2016 was $1.9 million and $6.8 million, respectively, as compared with $1.5 million and $4.1 million, respectively, for the same periods in 2015. The effective tax rate (as a percentage of pre-tax earnings) was 33.8% and 36.7%, respectively, for each period of 2016 compared to 39.7% and 37.4%, respectively, for each period of 2015. The changes in the effective tax rates for the three and nine months ended September 30, 2016 were driven by the impact of non-deductible merger expenses and the increase in non-taxable income on municipal securities purchased throughout 2016.

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.

Accounting Standards Codification 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 positive and negative 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 September 30, 2016 and 2015, 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 September 30, 2016, Atlantic Capital had a deferred tax asset valuation allowance totaling $9.0 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 higher levels of future taxable income and believes this will allow for full utilization of Atlantic Capital’s remaining net operating loss carryforwards within the statutory carryforward periods.

FINANCIAL CONDITION

Total assets at September 30, 2016 and December 31, 2015 were $2.76 billion and $2.64 billion, respectively. Average total assets for the third quarter of 2016 were $2.72 billion, compared to $2.25 billion in the fourth quarter of 2015. The balances acquired from First Security were included in Atlantic Capital’s average balances subsequent to the acquisition date.

Loans

At September 30, 2016, total loans increased $168.6 million, or 9%, to $2.05 billion compared to $1.89 billion at December 31, 2015, primarily due to an increase of $86.9 million in the mortgage warehouse as well as a $66.5 million increase in commercial and industrial loans. Details of loans are provided in Table 6.

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Table 6 - Loans
(Dollars in thousands)
	September 30, 2016			% of Total Loans		December 31, 2015			% of Total Loans

Loans held for sale
TriNet loans held for sale	$	43,157				$	58,934
Branch loans held for sale	—					35,470
Other loans held for sale	3,443					1,061
Total loans held for sale	$	46,600				$	95,465

Loans held for investment
Commercial loans:
Commercial and industrial	$	533,632		27	%	$	467,083		26	%
Commercial real estate:
Owner occupied	337,277			17		320,656			18
Non-owner occupied	526,006			26		525,757			29
Construction and land	213,336			11		166,358			9
Mortgage warehouse loans	171,251			9		84,350			5
Total commercial loans	1,781,502			89		1,564,204			87

Residential:
Residential mortgages	100,046			5		110,381			6
Home equity	78,952			4		80,738			5
Total residential loans	178,998			9		191,119			11

Consumer	30,453			2		30,451			2
Other	20,736			1		6,901			—
	2,011,689					1,792,675
Less net deferred fees and other unearned income	(3,587		)			(2,006		)
Less allowance for loan losses	(18,534		)			(18,905		)
Loans held for investment, net	$	1,989,568				$	1,771,764

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 both 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 loan 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.

Purchased Credit Impaired (“PCI”) loans accounted for under ASC 310-30 are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered as performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments. PCI loans were not classified as nonaccrual at September 30, 2016 as the carrying value of the respective loan or pool of loans cash flows were

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considered estimable and collection was probable. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.

At September 30, 2016, Atlantic Capital’s nonperforming assets totaled $2.5 million, or 0.09% of assets, compared to $10.5 million, or 0.40% of assets, at December 31, 2015. The decrease was primarily due to the first quarter 2016 payoff and sale of $7.7 million in loans classified as nonperforming as of December 31, 2015.

Nonaccrual loans totaled $28,000 and $7.8 million as of September 30, 2016 and December 31, 2015, respectively. The decrease was primarily due to the payoff and sale of loans classified as nonaccrual at December 31, 2015. Loans past due 90 days and still accruing totaled $762,000 at September 30, 2016 compared to $777,000 at December 31, 2015. Table 7 provides details on nonperforming assets and other risk elements.



Table 7 - Nonperforming assets
(Dollars in thousands)
	2016								2015
	Third Quarter		Second Quarter			First Quarter			Fourth Quarter			Third Quarter
Nonaccrual loans	$	28	$	657		$	409		$	7,772		$	—
Loans past due 90 days and still accruing	762		265			157			777			—
Total nonperforming loans* (NPLs)	790		922			566			8,549			—
Other real estate owned	1,727		951			1,760			1,982			27
Total nonperforming assets (NPAs)	$	2,517	$	1,873		$	2,326		$	10,531		$	27
NPLs as a percentage of total loans	0.04		0.05		%	0.02		%	0.45		%	—		%
NPAs as a percentage of total assets	0.09		0.07			0.08			0.40			—

*Nonperforming loans exclude those loans which are purchased credit-impaired loans

Troubled Debt Restructurings

TDRs are selectively 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 short-term deferral of interest or modification of payment terms. 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. Table 8 summarizes TDRs.



Table 8 - Troubled Debt Restructurings
(Dollars in thousands)
	September 30, 2016		December 31, 2015
Accruing TDRs	$	7,780	$	4,616
Nonaccruing TDRs	—		4,449
Total TDRs	$	7,780	$	9,065

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 $39.1 million and $16.8 million, respectively, as of September 30, 2016 and December 31, 2015. 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 Loan Losses

At September 30, 2016, the allowance for loan losses totaled $18.5 million, or 0.92% of loans, compared to $18.9 million, or 1.06% of loans, at December 31, 2015. The decrease in the allowance was due to the payoff and sale of two relationships during the first quarter of 2016 that required specific reserves totaling $1.6 million at December 31, 2015.

Net charge-offs during the third quarter of 2016 and 2015 were $306,000 and $(14,000), respectively. For the nine months ended September 30, 2016, net charge-offs totaled $2.0 million compared to $(29,000) for the nine months ended September 30, 2015. Table 9 provides details concerning the allowance for loan losses during the past five quarters.



Table 9 - Allowance for Loan Losses (ALL)
(Dollars in thousands)
	2016												2015
	Third				Second				First				Fourth				Third
	Quarter				Quarter				Quarter				Quarter				Quarter
Balance at beginning of period	$	18,377			$	17,608			$	18,905			$	11,862			$	11,985
Provision for loan losses	463				777				368				7,623				(137		)
Loans charged-off:
Commercial and industrial	(61		)		(5		)		(1,465		)		—				—
Commercial real estate	(226		)		—				(140		)		(500		)		—
Residential mortgages	—				(2		)		—				—				—
Home equity	(9		)		(23		)		—				—				—
Consumer	(60		)		(38		)		(146		)		(128		)		—
Other	(5		)		—				—				—				—
Total loans charged-off	(361		)		(68		)		(1,751		)		(628		)		—
Recoveries on loans previously charged‑off:
Construction and land	12				—				15				—				14
Commercial and industrial	2				—				2				—				—
Commercial real estate	20				—				—				—				—
Residential mortgages	5				—				—				—				—
Home equity	2				—				—				—				—
Consumer	12				60				69				48				—
Other	2				—				—				—				—
Total recoveries	55				60				86				48				14
Net charge-offs	$	(306	)		$	(8	)		$	(1,665	)		$	(580	)		$	14
Balance at period end	$	18,534			$	18,377			$	17,608			$	18,905			$	11,862

Net charge-offs (annualized) to average loans	0.06			%	—			%	0.35			%	0.15			%	(0.01		)	%
Allowance for loan losses to total loans	0.92				0.95				0.93				1.06				1.13

Investment Securities

Investment securities available-for-sale totaled $348.5 million at September 30, 2016, compared to $346.2 million at December 31, 2015. 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. As of September 30, 2016, investment securities available-for-sale had a net unrealized gain of $2.7 million, compared to a net unrealized loss of $3.4 million as of December 31, 2015. Market changes in interest rates and credit spreads result in temporary unrealized losses as the market price of securities fluctuate. After evaluating the securities with unrealized losses, management concluded that no other than temporary impairment existed as of September 30, 2016.

Changes in the amount of Atlantic Capital’s investment securities portfolio result primarily from balance sheet trends including loans, deposit balances and short-term borrowings. When inflows arising from deposits and short-term borrowings exceed loan demand, Atlantic Capital invests excess funds in the securities portfolio or in short-term investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, Atlantic Capital allows interest-bearing balances with other banks

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to decline and uses proceeds from maturing or sold securities to fund loan demand. Details of investment securities at September 30, 2016 and December 31, 2015 are provided in Table 10.



Table 10 - Investment Securities
(dollars in thousands)
	September 30, 2016				December 31, 2015
Available for Sale Securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Treasuries	$	—	$	—	$	4,952	$	4,922
U.S. Government agencies	21,806		22,017		65,373		64,852
U.S. states and political divisions	82,879		83,215		27,751		27,790
Trust preferred securities	4,720		4,393		4,732		4,275
Corporate debt securities	20,004		19,470		20,653		20,517
Residential mortgage-backed securities-agency	216,364		219,389		226,142		223,865
Total	$	345,773	$	348,484	$	349,603	$	346,221

The effective duration of Atlantic Capital’s investment securities at September 30, 2016 was 4.05 years.

Goodwill and Other Intangible Assets

Atlantic Capital’s 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. There were no events or circumstances that led management to believe that any impairment existed at September 30, 2016 in Atlantic Capital’s other intangible assets.

Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. Atlantic Capital evaluates its goodwill annually, or more frequently if necessary, to determine if any impairment exists.

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LIQUIDITY AND CAPITAL RESOURCES

Deposits



Table 11 - Deposits
(dollars in thousands)

Period End Deposits

	2016									2015						Linked Quarter Change			Year Over Year Change
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Linked Quarter Change			Year Over Year Change

DDA	$	557,783		$	592,043		$	560,363		$	544,561		$	328,065		$	(34,260	)	$	229,718
NOW	260,531			231,091			215,176			232,868			135,350			29,440			125,181
Savings	29,658			30,839			29,788			28,922			321			(1,181		)	29,337
Money Market	974,072			913,094			862,120			875,441			550,879			60,978			423,193
Time	172,348			178,615			187,750			183,206			15,434			(6,267		)	156,914
Brokered	194,464			212,623			229,408			183,810			98,559			(18,159		)	95,905
Deposits to be assumed in branch sale	—			—			197,857			213,410			—			—			—
Total Deposits	$	2,188,856		$	2,158,305		$	2,282,462		$	2,262,218		$	1,128,608		$	30,551		$	1,060,248

Payments Clients	$	212,049		$	295,440		$	300,348		$	261,102		$	170,554		$	(83,391	)	$	41,495

Average Deposits⁽¹⁾

	2016									2015						Linked Quarter Change			Year Over Year Change
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Linked Quarter Change			Year Over Year Change

DDA	$	555,008		$	538,422		$	554,547		$	486,860		$	325,474		$	16,586		$	229,534
NOW	282,701			272,556			302,376			254,821			154,776			10,145			127,925
Savings	30,692			35,090			45,571			30,024			425			(4,398		)	30,267
Money Market	923,435			865,447			769,369			730,582			506,064			57,988			417,371
Time	175,135			203,679			267,330			184,257			15,756			(28,544		)	159,379
Brokered	196,598			220,098			216,490			199,748			98,939			(23,500		)	97,659
Total Deposits	$	2,163,569		$	2,135,292		$	2,155,683		$	1,886,292		$	1,101,434		$	28,277		$	1,062,135

Payments Clients	$	184,895		$	176,474		$	155,860		$	198,539		$	140,346		$	8,421		$	44,549

Noninterest bearing deposits as a percentage of average deposits	25.7		%	25.2		%	25.7		%	25.8		%	29.6		%
Cost of deposits	0.36		%	0.35		%	0.31		%	0.28		%	0.27		%

⁽¹⁾ Includes average balances of deposits to be assumed in branch sale.

At September 30, 2016, total deposits were $2.19 billion, a decrease of $73.4 million, or 3%, since December 31, 2015. Interest-bearing checking increased $27.7 million, or 12%, and money markets increased $98.6 million, or 11%, from December 31, 2015 to September 30, 2016. The decrease in deposits was due to the divestiture of seven legacy First Security branches, which closed during the second quarter of 2016. Approximately $191.0 million in deposits were sold as part of the divestitures.

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Short-Term Borrowings

At September 30, 2016, and December 31, 2015, securities sold under repurchase agreements with commercial checking customers totaled $0 and $11.9 million, respectively. There were no balances of federal funds purchased as of September 30, 2016 or December 31, 2015.

As a member of the Federal Home Loan Bank of Atlanta (“FHLB”), Atlantic Capital has 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 September 30, 2016 and December 31, 2015, Atlantic Capital had FHLB advances of $170.0 million and $0, respectively. The balance of FHLB borrowings increased due to the sale of deposits in the branch divestitures.

Long-Term Debt

During the third quarter of 2015, Atlantic Capital issued $50.0 million in fixed-to-floating rate subordinated notes due in 2025, all of which was outstanding at September 30, 2016.

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 Atlantic Capital’s ability to meet the daily cash flow requirements of Atlantic Capital’s customers, both depositors and borrowers.

Atlantic Capital utilizes 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 three crisis scenarios to determine the adequacy of Atlantic Capital’s liquidity.

Atlantic Capital aims 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. Atlantic Capital aims to avoid funding concentrations by diversifying external secured and unsecured funding with respect to maturities, counterparties and nature. At September 30, 2016, Atlantic Capital expected to maintain sufficient on-balance sheet liquidity to meet its funding needs.

At September 30, 2016, Atlantic Capital had access to $350.0 million in unsecured borrowings and $510.8 million in secured borrowings through various sources. Atlantic Capital also has the ability to attract more retail deposits by offering aggressively priced rates.

Shareholders’ Equity and Capital Adequacy

Shareholders’ equity at September 30, 2016 was $308.5 million, an increase of $20.5 million, or 7%, from December 31, 2015. 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. Excluding the change in the accumulated other comprehensive income, shareholders’ equity increased $16.3 million, or 6%, from December 31, 2015.

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 Atlantic Capital’s consolidated financial statements.

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Table 12 - Capital Ratios
(dollars in thousands)	Consolidated						Bank						Regulatory Guidelines
													Minimum				Well capitalized
	September 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015			Prior to January 1, 2015		Beginning January 1, 2015		Prior to January 1, 2015		Beginning January 1, 2015
Risk based ratios:
Common equity tier 1 capital	9.7		%	9.8		%	11.2		%	11.4		%	N/A	%	4.5	%	N/A	%	6.5	%
Tier 1 Capital	9.7			9.8			11.2			11.4			4.0		6.0		6.0		8.0
Total capital	12.5			12.9			11.9			12.3			8.0		8.0		10.0		10.0
Leverage ratio	8.9			9.9			10.2			11.6			4.0		4.0		5.0		5.0

Common equity tier 1 capital	$	235,939		$	215.812		$	271,744		$	251.727
Tier 1 capital	235,939			215,812			271,744			251,727
Total capital	304,477			284,663			290,958			271,312

Risk weighted assets	2,436,626			2,200,478			2,435,100			2,200,387
Quarterly average total assets for leverage ratio	2,648,172			2,174,918			2,652,224			2,175,049

Atlantic Capital continues to exceed minimum capital standards and the Bank remains “well-capitalized” under regulatory guidelines.

In July 2013, bank regulatory agencies approved the Basel III capital guidelines, which are aimed at strengthening existing capital requirements for bank holding companies through a combination of higher minimum capital requirements, new capital conservation buffers and more conservative definitions of capital and balance sheet exposure. Atlantic Capital and the Bank became subject to the requirements of Basel III effective January 1, 2015, subject to a transition period for several aspects of the rule.

Under the revised rules, Atlantic Capital’s common equity tier 1 ratio was 9.7% at September 30, 2016, exceeding the fully phased-in minimum of 7.0%, which includes the 2.5% minimum conservation buffer. Management continues to monitor Basel III developments and remains committed to managing Atlantic Capital’s capital levels in a prudent manner.



Table 13 - Tier 1 Common Equity Under Basel III
(dollars in thousands)

	September 30, 2016
Tier 1 capital	$	235,939
Less: restricted core capital	—
Tier 1 common equity	$	235,939

Risk-adjusted assets	$	2,436,626
Tier 1 common equity ratio	9.7		%

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Table 14 discloses the minimum and well-capitalized requirements for the transitional period beginning during 2016 and the fully phased-in requirements that becomes effective during 2019.



Table 14 - Basel III Capital Requirements

	Basel III minimum requirement 2016		Basel III well capitalized 2016		Minimum Capital plus capital conservation buffer 2019
Common equity tier I to risk weighted assets	4.5	%	6.5	%	7.0	%
Tier 1 capital to risk weighted assets	6.0		8.0		8.5
Total capital ratio to risk weighted assets	8.0		10.0		10.5
Leverage ratio	4.0		5.0		N/A

Off-Balance Sheet Arrangements

Atlantic Capital makes 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 for a specified period of time. In addition to commitments to extend credit, Atlantic Capital 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 September 30, 2016, Atlantic Capital had issued commitments to extend credit of approximately $646.5 million and standby letters of credit of approximately $13.9 million through various types of commercial lending arrangements.

Based on historical experience, many of the commitments and letters of credit will expire unfunded. Through its various sources of liquidity, Atlantic Capital believes it will be able to fund these obligations as they arise. Atlantic Capital evaluates 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 Atlantic Capital’s 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 Atlantic Capital’s contractual obligations at September 30, 2016 compared to December 31, 2015.

RISK MANAGEMENT

Effective risk management is critical to Atlantic Capital’s 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 Atlantic Capital does not have total assets in excess of $10 billion, the Bank’s board of directors has an Audit and Risk Committee that, among other responsibilities, provides oversight of enterprise-wide risk management activities. The Audit and Risk Committee reviews the Bank’s activities in identifying, measuring and mitigating existing and emerging risks (including credit, liquidity, interest-rate, compliance, operational, strategic and reputational risks). The committee monitors management’s execution of risk management practices in accordance with the risk appetite of the Bank, 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 Atlantic Capital’s compliance policies. With guidance from and oversight by the 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 management

Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and investment securities. Atlantic Capital’s independent credit 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 geographic location, industry, collateral type and product. Atlantic Capital strives 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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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. Atlantic Capital’s market risk arises primarily from interest rate risk inherent in Atlantic Capital’s lending and deposit-taking activities. The structure of Atlantic Capital’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. Atlantic Capital does not maintain a trading account nor is Atlantic Capital subject to currency exchange risk or commodity price risk.

Interest rate risk management

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.

Atlantic Capital assesses 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. Atlantic Capital’s rate shock simulation, as of September 30, 2016, indicates that, over a 12-month period, net interest income is estimated to increase by 12.84% with rates rising 200-basis points. The increase in net interest income is primarily due to the short-term repricing characteristics of the loan portfolio, combined with a favorable funding mix. Atlantic Capital’s loan portfolio consists mainly of floating rate loans. Atlantic Capital’s core deposits are likely to allow Atlantic Capital to lag short term interbank rate indices when pricing deposits. Transaction accounts comprise a significant amount of Atlantic Capital’s total deposits.

Table 15 provides the impact on net interest income resulting from various interest rate scenarios as of September 30, 2016 and December 31, 2015.



Table 15 - Net Interest Income Sensitivity Simulation Analysis

	Estimated increase in net interest income
Change in interest rate (basis point)	September 30, 2016		December 31, 2015
+100	5.89	%	6.52	%
+200	12.84		14.00
+300	20.37		21.99

Atlantic Capital also utilizes the market value of equity (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. As of September 30, 2016, the MVE calculated with a 200-basis point shock up in rates decreased by 0.36% from the base case MVE value. Table 16 presents the MVE profile as of September 30, 2016 and December 31, 2015.



Table 16 - Market Value of Equity Modeling Analysis

	Estimated % change in MVE
Change in interest rate (basis point)	September 30, 2016			December 31, 2015
+100	(0.62	)	%	2.57	%
+200	(0.36	)		2.29
+300	(0.83	)		2.47

Atlantic Capital may utilize interest rate swaps, floors, collars or other derivative financial instruments in an attempt to manage Atlantic Capital’s overall sensitivity to changes in interest rates.

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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is included in Part I, Item 2 of this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Management.”


ITEM 4.	CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures as required under Rule 13a-15 promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2016, the Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2016.

No changes were made to the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

In the ordinary course of operations, Atlantic Capital and the Bank are defendants in various legal proceedings. Additionally, in the ordinary course of business, Atlantic Capital and the Bank are subject to regulatory examinations and investigations. Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter which would result in a material adverse change, either individually or in the aggregate, in the consolidated financial condition or results of operations of Atlantic Capital.


ITEM 1A.	RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the Company’s Annual Report on Form 10-K for the period ended December 31, 2015, under Part I, Item 1A “Risk Factors,” because these risk factors may affect the operations and financial results of the Company. Our evaluation of our risk factors has not changed materially since those discussed in the Annual Report. The risks described in the Annual Report are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.	OTHER INFORMATION

None.


ITEM 6.	EXHIBITS

The exhibits listed in the accompanying Exhibit Index are filed as part of this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.



	ATLANTIC CAPITAL BANCSHARES, INC.

	/s/ Douglas L. Williams
	Douglas L. Williams
	Chief Executive Officer (Principal Executive Officer)


	/s/ Patrick T. Oakes
	Patrick T. Oakes
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)




	Date: November 10, 2016

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EXHIBIT INDEX



3.1	Amended and Restated Articles of Incorporation of Atlantic Capital Bancshares, Inc.*
3.2	Amended and Restated Bylaws of Atlantic Capital Bancshares, Inc.*
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015; (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015; (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015; (iv) the Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2016 and 2015; (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015; and (vi) the Notes to the Unaudited Consolidated Financial Statements

* Incorporated by reference to Atlantic Capital’s Registration Statement on Form S-4 (file no. 333-204855), initially filed with the Securities and Exchange Commission on June 10, 2015.