Atlantic Capital Bancshares, Inc. - Quarter Report: 2017 September (Form 10-Q)

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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, 2017



¨	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, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨		Accelerated filer	ý
Non-accelerated filer	¨	(Do not check if a smaller reporting company)
			Smaller reporting company	¨
			Emerging growth company	ý

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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: 25,728,186 shares outstanding as of November 1, 2017

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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, 2017 and December 31, 2016	1

	Consolidated Statements of Income - Three and Nine Months ended September 30, 2017 and 2016	2

	Consolidated Statements of Comprehensive Income - Three and Nine Months ended September 30, 2017 and 2016	3

	Consolidated Statements of Shareholders’ Equity - Nine Months ended September 30, 2017 and 2016	4

	Consolidated Statements of Cash Flows - Nine Months ended September 30, 2017 and 2016	5

	Notes to Unaudited Consolidated Financial Statements	7

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56

Item 4.	Controls and Procedures	56

PART II.	OTHER INFORMATION	57

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	57

EXHIBIT INDEX		58

SIGNATURES		59

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PART I - FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

Atlantic Capital Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets



	September 30, 2017			December 31, 2016
(in thousands, except share data)	(unaudited)			December 31, 2016
ASSETS
Cash and due from banks	$	35,504		$	36,790
Interest-bearing deposits in banks	40,558			118,039
Other short-term investments	5,189			10,896
Cash and cash equivalents	81,251			165,725
Securities available-for-sale	447,005			347,705
Other investments	35,818			23,806
Loans held for sale	3,274			35,219
Loans held for investment	1,905,432			1,981,330
Less: allowance for loan losses	(18,870		)	(20,595		)
Loans held for investment, net	1,886,562			1,960,735
Branch premises held for sale	—			2,995
Premises and equipment, net	11,747			11,958
Bank owned life insurance	63,284			62,160
Goodwill and intangible assets, net	27,945			29,567
Other real estate owned	1,494			1,872
Other assets	80,032			85,801
Total assets	$	2,638,412		$	2,727,543



LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand	$	599,292		$	643,471
Interest-bearing checking	270,740			264,062
Savings	30,131			27,932
Money market	865,238			912,493
Time	144,250			157,810
Brokered deposits	193,994			200,223
Total deposits	2,103,645			2,205,991
Deposits to be assumed in branch sale	—			31,589
Federal Home Loan Bank borrowings	125,000			110,000
Long-term debt	49,493			49,366
Other liabilities	35,520			26,939
Total liabilities	2,313,658			2,423,885
SHAREHOLDERS’ EQUITY
Preferred Stock, no par value – 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017 and December 31, 2016	—			—
Common stock, no par value – 100,000,000 shares authorized; 25,716,418 and 25,093,135 shares issued and outstanding as of September 30, 2017, and December 31, 2016, respectively	298,469			292,747
Retained earnings	28,147			16,536
Accumulated other comprehensive (loss) income	(1,862		)	(5,625		)
Total shareholders’ equity	324,754			303,658
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,638,412		$	2,727,543

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)	2017			2016		2017			2016
INTEREST INCOME
Loans, including fees	$	21,491		$	20,511	$	62,846		$	60,418
Investment securities – available-for-sale	2,298			1,293		6,671			4,221
Interest and dividends on other interest-earning assets	562			491		1,617			1,271
Total interest income	24,351			22,295		71,134			65,910
INTEREST EXPENSE
Interest on deposits	2,693			1,956		7,221			5,470
Interest on Federal Home Loan Bank advances	459			133		1,213			324
Interest on federal funds purchased and securities sold under agreements to repurchase	84			37		196			191
Interest on long-term debt	824			815		2,471			2,457
Other	—			—		—			38
Total interest expense	4,060			2,941		11,101			8,480
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES	20,291			19,354		60,033			57,430
Provision for loan losses	322			463		2,936			1,608
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	19,969			18,891		57,097			55,822
NONINTEREST INCOME
Service charges	1,247			1,270		3,870			4,160
(Loss) gain on sales of securities available-for-sale	(80		)	—		(80		)	44
Gain on sales of other assets	44			71		788			150
Mortgage income	320			632		965			1,418
Trust income	437			361		1,332			1,061
Derivatives income	(3		)	69		62			232
Bank owned life insurance	384			424		1,146			1,215
SBA lending activities	888			959		3,286			3,043
TriNet lending activities	20			—		60			1,144
Gains on sale of branches	—			—		302			3,885
Other noninterest income	220			216		890			950
Total noninterest income	3,477			4,002		12,621			17,302
NONINTEREST EXPENSE
Salaries and employee benefits	10,409			10,059		32,077			31,034
Occupancy	1,129			1,235		3,433			3,609
Equipment and software	776			862		2,577			2,272
Professional services	1,595			442		3,472			1,950
Postage, printing and supplies	63			61		226			389
Communications and data processing	982			617		3,038			2,227
Marketing and business development	272			269		721			853
FDIC premiums	308			415		754			1,306
Merger and conversion costs	—			579		304			2,538
Amortization of intangibles	391			520		1,286			1,950
Foreclosed property/problem asset expense	7			39		117			198
Other noninterest expense	1,572			2,198		4,866			6,179
Total noninterest expense	17,504			17,296		52,871			54,505
INCOME BEFORE PROVISION FOR INCOME TAXES	5,942			5,597		16,847			18,619
Provision for income taxes	1,890			1,889		5,236			6,833
NET INCOME	$	4,052		$	3,708	$	11,611		$	11,786
NET INCOME PER SHARE:
Net income per share – basic	$	0.16		$	0.15	$	0.45		$	0.48
Net income per share – diluted	$	0.16		$	0.15	$	0.45		$	0.47

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)	2017			2016			2017			2016
Net income	$	4,052		$	3,708		$	11,611		$	11,786
Other comprehensive income
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period, net of tax of $272, ($329), $2,450, and $2,354, respectively	434			(524		)	3,916			3,771
Reclassification adjustment for losses (gains) included in net income net of tax of $31, $0, $31, and ($17), respectively	49			—			49			(27		)
Unrealized gains on available-for-sale securities, net of tax	483			(524		)	3,965			3,744
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges, net of tax of ($46), ($169), ($125), and $301, respectively	(75		)	(269		)	(202		)	473
Changes from cash flow hedges	(75		)	(269		)	(202		)	473
Other comprehensive income, net of tax	408			(793		)	3,763			4,217
Comprehensive income	$	4,460		$	2,915		$	15,374		$	16,003

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)			Total
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
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



Balance - December 31, 2016	25,093,135	$	292,747	$	16,536	$	(5,625	)	$	303,658
Comprehensive income:
Net Income	—	—		11,611		—			11,611
Change in unrealized gains on investment securities available-for-sale, net	—	—		—		3,965			3,965
Change in unrealized gains (losses) on cash flow hedges	—	—		—		(202		)	(202		)
Total comprehensive income									15,374
Issuance of restricted stock	101,791	—		—		—			—
Issuance of common stock for option exercises	459,693	3,172		—		—			3,172
Issuance of common stock for long-term incentive plan	61,799	1,209		—		—			1,209
Restricted stock activity	—	869		—		—			869
Stock-based compensation	—	472		—		—			472
Balance - September 30, 2017	25,716,418	$	298,469	$	28,147	$	(1,862	)	$	324,754

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)	2017			2016
OPERATING ACTIVITIES
Net income	$	11,611		$	11,786
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses	2,936			1,608
Depreciation, amortization, and accretion	4,088			4,550
Amortization of restricted stock compensation	869			378
Stock option compensation	472			638
Loss (gain) on sales of available-for-sale securities	80			(44		)
Loss on disposition of premises and equipment, net	347			—
Net gains on sales of other real estate owned	(267		)	(114		)
Gain on sale of tax credit	(426		)	—
Net increase in cash value of bank owned life insurance	(1,124		)	(1,167		)
Gain on bank owned life insurance	—			(27		)
Net gains on sale of branches	(302		)	(3,885		)
Origination of servicing assets	(749		)	(1,295		)
Proceeds from sales of SBA loans	34,448			41,890
Net gains on sale of SBA loans	(2,367		)	(2,743		)
Proceeds from sales of TriNet loans	—			97,039
Net gains on sale of TriNet loans	—			(1,144		)
Changes in operating assets and liabilities -
Net change in loans held for sale	7,587			(47,019		)
Net increase in other assets	(4,115		)	(8,929		)
Net increase (decrease) in accrued expenses and other liabilities	9,454			(2,237		)
Net cash provided by operating activities	62,542			89,285
INVESTING ACTIVITIES
Activity in securities available-for-sale:
Prepayments	35,271			32,438
Maturities and calls	5,190			26,932
Sales	1,813			65,103
Purchases	(139,465		)	(117,950		)
Net decrease (increase) in loans held for investment	38,720			(294,337		)
Purchases of Federal Home Loan Bank stock, net	(721		)	(8,569		)
Purchases of Federal Reserve Bank stock, net	(91		)	(3,055		)
Proceeds from bank owned life insurance benefits	—			36
Proceeds from sales of other real estate	1,081			1,814
Net cash received (paid) for branch divestiture	5,379			(140,295		)
Purchases of premises and equipment, net	(1,353		)	(467		)
Net cash used in investing activities	(54,176		)	(438,350		)

See Accompanying Notes to Consolidated Financial Statements

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	Nine Months Ended
	September 30,
(in thousands)	2017			2016
FINANCING ACTIVITIES
Net change in deposits	(111,371		)	116,885
Proceeds from Federal Home Loan Bank advances	1,404,000			915,000
Repayments of Federal Home Loan Bank advances	(1,389,000		)	(745,000		)
Proceeds from exercise of stock options	3,531			2,767
Net cash (used in) provided by financing activities	(92,840		)	289,652
NET CHANGE IN CASH AND CASH EQUIVALENTS	(84,474		)	(59,413		)
CASH AND CASH EQUIVALENTS – beginning of period	165,725			202,885
CASH AND CASH EQUIVALENTS – end of period	$	81,251		$	143,472

	Nine Months Ended
	September 30,
	2017			2016
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest paid	$	12,270		$	9,386
Income taxes paid	$	840		$	3,462

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” or the “Company”) 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.

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 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12 - “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.” The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. Atlantic Capital plans to adopt ASU 2017-12 on January 1, 2018. The guidance requires a modified retrospective transition method resulting in the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. Atlantic Capital does not expect adoption to have a material impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09 - “Compensation - Stock Compensation (Topic 718): Scope and Modification Accounting.” The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with Topic 718. The amendments will be effective for interim and annual reporting periods beginning after December 15, 2017. This ASU is not expected to have a material impact on Atlantic Capital’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This guidance shortens the premium amortization period for certain callable debt securities by requiring amortization to the earliest call date. The standard is effective for public companies for annual and interim periods beginning after December 15, 2020. The adoption of this update is not expected to have a material impact on Atlantic Capital’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which intends to simplify goodwill impairment testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The update instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied prospectively and is effective for the Company on January 1, 2020. Early adoption is permitted. Atlantic Capital does not expect the new guidance to have a material impact on its financial condition or results of operation.

In August 2016, the 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

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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 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 ASU 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 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. ASU 2016-09 became effective for the Company on January 1, 2017 and did not have a material effect on its financial position or results of operations.

In February 2016, the FASB issued ASU 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 significance and other effects of adoption on the consolidated financial statements and related disclosures.

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 ASU 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 core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public companies, this guidance is effective for annual and interim periods beginning after December 15, 2017. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, this ASU will not have a material impact on net interest income and securities gains. Atlantic Capital completed an initial evaluation of the impact to other revenue streams such as service charges and trust income, and believes the most significant changes will be related to disclosures.

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NOTE 3 – ACQUISITIONS AND DIVESTITURES

On October 31, 2015, Atlantic Capital completed the acquisition of First Security Group, Inc. (“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 $0 and $304,000 for the three and nine months ended September 30, 2017, respectively, and $579,000 and $2.5 million for the three and nine months ended September 30, 2016, 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.

Divestiture of Branches

On December 17, 2015, Atlantic Capital Bank, N.A. (the “Bank”) entered into two separate definitive agreements to sell seven branches in the 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.

On December 9, 2016, Atlantic Capital entered into a definitive agreement to sell one branch in Cleveland, Tennessee, to SmartBank. The sale closed in the second quarter of 2017, and resulted in a net gain of $302,000 as well as a reduction of approximately $21.9 million in deposits and approximately $27.3 million in loans and other assets. The gross gain of $533,000 was reduced by an impairment of $337,000 in core deposit intangibles, which was offset by a $106,000 reversal in time deposit premium. There were also $38,000 of expenses associated with the divestiture included in noninterest expense in the second quarter of 2017.

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NOTE 4 – BALANCE SHEET OFFSETTING

Atlantic Capital enters into reverse repurchase agreements in order to invest short-term funds. Atlantic Capital enters into repurchase agreements for short-term financing 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, 2017 and December 31, 2016. While these agreements are typically over-collateralized, U.S. GAAP requires disclosures in this table to limit the amount of such collateral to the amount of the related recognized asset or liability for each counterparty.



(in thousands)							Gross Amounts not Offset in the Balance Sheet
September 30, 2017	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	$	5,189	$	—	$	5,189	$	(5,189	)	$	—		$	—
Derivatives	3,993		—		3,993		—			—			3,993
Total	$	9,182	$	—	$	9,182	$	(5,189	)	$	—		$	3,993
							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	4,184		—		4,184		(2,868		)	(1,316		)	—
Total	$	4,184	$	—	$	4,184	$	(2,868	)	$	(1,316	)	$	—

							Gross Amounts not Offset in the Balance Sheet
December 31, 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	$	10,896	$	—	$	10,896	$	(10,896	)	$	—		$	—
Derivatives	4,310		—		4,310		—			—			4,310
Total	$	15,206	$	—	$	15,206	$	(10,896	)	$	—		$	4,310
							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	4,131		—		4,131		(1,818		)	(2,313		)	—
Total	$	4,131	$	—	$	4,131	$	(1,818	)	$	(2,313	)	$	—

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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, 2017 and December 31, 2016.



Available-For-Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2017
Debt securities—
U.S. Government agencies	$	34,961	$	108	$	(286	)	$	34,783
U.S. states and political divisions	96,813		339		(3,373		)	93,779
Trust preferred securities	4,747		—		(72		)	4,675
Corporate debt securities	16,700		115		(659		)	16,156
Residential mortgage-backed securities	296,978		3,147		(2,513		)	297,612
Total	$	450,199	$	3,709	$	(6,903	)	$	447,005

December 31, 2016
Debt securities—
U.S. Government agencies	$	21,485	$	24	$	(357	)	$	21,152
U.S. states and political divisions	96,908		141		(6,877		)	90,172
Trust preferred securities	4,727		—		(202		)	4,525
Corporate debt securities	19,928		72		(769		)	19,231
Residential mortgage-backed securities	214,297		2,689		(4,361		)	212,625
Total	$	357,345	$	2,926	$	(12,566	)	$	347,705

The following table presents the amortized cost and fair value of debt securities by contractual maturity at September 30, 2017. 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	$	625	$	625
Over 1 year through 5 years	25,696		25,507
5 years to 10 years	53,041		52,506
Over 10 years	73,859		70,755
	153,221		149,393
Residential mortgage-backed securities	296,978		297,612
Total	$	450,199	$	447,005

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The following table summarizes available-for-sale securities in an unrealized loss position as of September 30, 2017 and December 31, 2016.



	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, 2017
U.S. Government agencies	$	22,309	$	(221	)	2,582		$	(65	)	$	24,891	$	(286	)
U.S. states and political divisions	39,864		(1,038		)	36,070		(2,335		)	75,934		(3,373		)
Trust preferred securities	—		—			4,675		(72		)	4,675		(72		)
Corporate debt securities	3,501		(41		)	5,895		(618		)	9,396		(659		)
Residential mortgage-backed securities	77,392		(759		)	89,130		(1,754		)	166,522		(2,513		)
Totals	$	143,066	$	(2,059	)	$	138,352	$	(4,844	)	$	281,418	$	(6,903	)
December 31, 2016
U.S. Government agencies	$	12,250	$	(263	)	$	2,881	$	(94	)	$	15,131	$	(357	)
U.S. states and political divisions	87,511		(6,877		)	—		—			87,511		(6,877		)
Trust preferred securities	—		—			4,525		(202		)	4,525		(202		)
Corporate debt securities	7,886		(769		)	—		—			7,886		(769		)
Residential mortgage-backed securities	151,406		(3,231		)	32,550		(1,130		)	183,956		(4,361		)
Totals	$	259,053	$	(11,140	)	$	39,956	$	(1,426	)	$	299,009	$	(12,566	)

At September 30, 2017, there were 245 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, 2017 and December 31, 2016 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, 2017 or 2016.

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, 2017 and 2016.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
	(in thousands)
Proceeds from sales	$	1,813		$	—	$	1,813		$	65,103
Gross realized gains	—			—		—			449
Gross realized losses	(80		)	—		(80		)	(405		)
Net gains on sales of securities	$	(80	)	$	—	$	(80	)	$	44

Investment securities with a carrying value of $100.0 million and $104.9 million were pledged to secure public funds and other borrowings at September 30, 2017 and December 31, 2016, respectively.

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NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio as of September 30, 2017 and December 31, 2016, is summarized below.



	September 30, 2017			December 31, 2016
	(in thousands)
Loans held for sale
Branch loans held for sale	$	—		$	30,917
Other loans held for sale	3,274			4,302
Total loans held for sale	$	3,274		$	35,219

Loans held for investment
Commercial loans:
Commercial and industrial	$	562,426		$	531,061
Commercial real estate	944,854			858,778
Construction and land	132,080			219,352
Mortgage warehouse participations	41,551			147,519
Total commercial loans	1,680,911			1,756,710
Residential:
Residential mortgages	101,976			101,921
Home equity	78,773			77,358
Total residential loans	180,749			179,279
Consumer	31,750			27,338
Other	16,106			21,565
Total loans	1,909,516			1,984,892
Less net deferred fees and other unearned income	(4,084		)	(3,562		)
Less allowance for loan losses	(18,870		)	(20,595		)
Loans held for investment, net	$	1,886,562		$	1,960,735

At September 30, 2017 and December 31, 2016, loans with a carrying value of $473.5 million and $474.8 million, respectively, were pledged as collateral to secure FHLB advances and the Federal Reserve discount window.

At September 30, 2017, the carrying value and outstanding balance of Purchased Credit Impaired (“PCI”) loans accounted for under ASC 310-30 was $12.1 million and $14.6 million, respectively. At December 31, 2016, the carrying value and outstanding balance of PCI loans accounted for under ASC 310-30 was $15.3 million and $18.7 million, respectively. The following table presents changes in the value of the accretable yield for acquired loans accounted for under ASC 310-30.



	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	(in thousands)
Balance at beginning of period	$	3,130		$	1,826		$	3,467		$	2,369
Additions due to acquisitions	—			—			—			—
Accretion	(427		)	(341		)	(1,206		)	(884		)
Reclassification of nonaccretable discount due to change in expected cash flows	(202		)	2,404			142			2,404
Other changes, net	281			295			379			295
Balance at end of period	$	2,782		$	4,184		$	2,782		$	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, 2017, the remaining accretable fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $3.1 million compared to $3.9 million at December 31, 2016.

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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, 2017 and 2016.



	2017												2016
Three Months Ended September 30,	Commercial			Residential			Consumer			Total			Commercial			Residential			Consumer			Total
	(in thousands)
Allowance for loan losses:
Beginning balance	$	20,692		$	860		$	318		$	21,870		$	16,469		$	1,389		$	519		$	18,377
Provision for loan losses	273			55			(6		)	322			409			64			(10		)	463
Loans charged-off	(3,308		)	(31		)	(7		)	(3,346		)	(287		)	(9		)	(65		)	(361		)
Recoveries	16			—			8			24			34			7			14			55
Total ending allowance balance	$	17,673		$	884		$	313		$	18,870		$	16,625		$	1,451		$	458		$	18,534

	2017												2016
Nine Months Ended September 30,	Commercial			Residential			Consumer			Total			Commercial			Residential			Consumer			Total
	(in thousands)
Allowance for loan losses:
Beginning balance	$	18,717		$	1,418		$	460		$	20,595		$	16,537		$	1,981		$	387		$	18,905
Provision for loan losses	3,152			(451		)	235			2,936			1,934			(503		)	177			1,608
Loans charged-off	(4,221		)	(85		)	(396		)	(4,702		)	(1,897		)	(34		)	(249		)	(2,180		)
Recoveries	25			2			14			41			51			7			143			201
Total ending allowance balance	$	17,673		$	884		$	313		$	18,870		$	16,625		$	1,451		$	458		$	18,534

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 troubled debt restructurings (“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 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.

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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, 2017 or December 31, 2016, 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.

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, 2017 and December 31, 2016.



September 30, 2017	Commercial		Residential		Consumer		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	490	$	—	$	—	$	490
Collectively evaluated for impairment	17,102		884		311		18,297
PCI	81		—		2		83
Total ending allowance balance	$	17,673	$	884	$	313	$	18,870

Loans:
Loans individually evaluated for impairment	$	9,049	$	719	$	—	$	9,768
Loans collectively evaluated for impairment	1,662,299		177,511		47,848		1,887,658
PCI	9,563		2,519		8		12,090
Total ending loans balance	$	1,680,911	$	180,749	$	47,856	$	1,909,516

December 31, 2016	Commercial		Residential		Consumer		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	2,626	$	58	$	—	$	2,684
Collectively evaluated for impairment	16,018		1,360		459		17,837
PCI	73		—		1		74
Total ending allowance balance	$	18,717	$	1,418	$	460	$	20,595

Loans:
Loans individually evaluated for impairment	$	13,687	$	398	$	—	$	14,085
Loans collectively evaluated for impairment	1,732,324		174,338		48,892		1,955,554
PCI	10,699		4,543		11		15,253
Total ending loans balance	$	1,756,710	$	179,279	$	48,903	$	1,984,892

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The following tables present information on Atlantic Capital’s impaired loans for the three and nine months ended September 30, 2017 and 2016:



	For the Three Months Ended September 30,
	2017										2016
	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	$	2,424	$	2,361	$	—	$	2,287	$	14	$	3,118	$	3,057	$	—	$	3,028	$	40
Commercial real estate	1,946		1,783		—		1,889		—		—		—		—		—		—
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	236		190		—		191		—		—		—		—		—		—
Home equity	529		529		—		531		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	5,135	$	4,863	$	—	$	4,898	$	14	$	3,118	$	3,057	$	—	$	3,028	$	40
Impaired loans with an allowance recorded:
Commercial and industrial	$	4,333	$	4,333	$	356	$	4,375	$	49	$	4,461	$	4,461	$	481	$	4,461	$	—
Commercial real estate	572		572		134		576		6		1,132		1,132		205		1,132		—
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	—		—		—		—		—		406		406		65		406		—
Home equity	—		—		—		—		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	4,905	$	4,905	$	490	$	4,951	$	55	$	5,999	$	5,999	$	751	$	5,999	$	—
Total impaired loans	$	10,040	$	9,768	$	490	$	9,849	$	69	$	9,117	$	9,056	$	751	$	9,027	$	40

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	For the Nine Months Ended September 30,
	2017										2016
	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	$	2,424	$	2,361	$	—	$	2,717	$	42	$	3,118	$	3,057	$	—	$	2,960	$	112
Commercial real estate	1,946		1,783		—		1,925		1		—		—		—		—		—
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	236		190		—		221		—		—		—		—		—		—
Home equity	529		529		—		264		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	5,135	$	4,863	$	—	$	5,127	$	43	$	3,118	$	3,057	$	—	$	2,960	$	112
Impaired loans with an allowance recorded:
Commercial and industrial	$	4,333	$	4,333	$	356	$	4,454	$	149	$	4,461	$	4,461	$	481	$	4,461	$	—
Commercial real estate	572		572		134		581		19		1,132		1,132		205		1,132		—
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	—		—		—		—		—		406		406		65		406		—
Home equity	—		—		—		—		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	4,905	$	4,905	$	490	$	5,035	$	168	$	5,999	$	5,999	$	751	$	5,999	$	—
Total impaired loans	$	10,040	$	9,768	$	490	$	10,162	$	211	$	9,117	$	9,056	$	751	$	8,959	$	112

Atlantic Capital evaluates loans in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors. TDRs 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, 2017 and December 31, 2016, the Company had a recorded investment in TDRs of $7.1 million and $6.6 million, respectively. The Company had commitments to lend additional funds of $34,000 and $387,000 on loans modified as TDRs, as of September 30, 2017 and December 31, 2016, respectively. During the three months ended September 30, 2017, a large Commercial and Industrial borrower was sold. As a part of the deficiency agreement, part of the credit relationship was restructured. The restructure included a charge off and the reclassification of the remaining balance to a TDR of $980,000. Additionally, during the nine months ended September 30, 2017, the modification of terms for one Home Equity loan included a short term extension of the maturity date. During

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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. There were no subsequent defaults on prior TDRs.

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 Company 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, 2017 and December 31, 2016, 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, 2017
Commercial and industrial	$	515,388	$	13,362	$	27,179	$	996	$	5	$	556,930
Commercial real estate	925,588		9,730		4,037		133		1,631		941,119
Construction and land	127,005		4,721		—		22		—		131,748
Residential mortgages	97,685		1,365		714		248		328		100,340
Home equity	76,685		41		469		695		—		77,890
Mortgage warehouse	41,551		—		—		—		—		41,551
Consumer/Other	47,594		60		194		—		—		47,848
Total loans, excluding PCI loans	$	1,831,496	$	29,279	$	32,593	$	2,094	$	1,964	$	1,897,426
Commercial and industrial	$	—	$	4,781	$	715	$	—	$	—	$	5,496
Commercial real estate	3,091		233		295		—		116		3,735
Construction and land	298		7		27		—		—		332
Residential mortgages	396		540		700		—		—		1,636
Home equity	105		475		303		—		—		883
Mortgage warehouse	—		—		—		—		—		—
Consumer/Other	1		1		6		—		—		8
Total PCI loans	$	3,891	$	6,037	$	2,046	$	—	$	116	$	12,090



	Pass		Special Mention		Substandard Accruing		Substandard Nonaccruing		Doubtful		Total
	(in thousands)
December 31, 2016
Commercial and industrial	$	494,617	$	3,160	$	26,399	$	3	$	471	$	524,650
Commercial real estate	843,924		5,513		5,571		—		—		855,008
Construction and land	213,981		4,789		64		—		—		218,834
Residential mortgages	97,660		586		747		147		—		99,140
Home equity	75,031		168		397		—		—		75,596
Mortgage warehouse	147,519		—		—		—		—		147,519
Consumer/Other	48,680		190		22		—		—		48,892
Total loans, excluding PCI loans	$	1,921,412	$	14,406	$	33,200	$	150	$	471	$	1,969,639
Commercial and industrial	$	4,650	$	299	$	614	$	—	$	848	$	6,411
Commercial real estate	477		240		2,716		—		337		3,770
Construction and land	229		8		281		—		—		518
Residential mortgages	59		1,232		1,016		—		474		2,781
Home equity	364		834		564		—		—		1,762
Mortgage warehouse	—		—		—		—		—		—
Consumer/Other	1		—		10		—		—		11
Total PCI loans	$	5,780	$	2,613	$	5,201	$	—	$	1,659	$	15,253

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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, 2017 and December 31, 2016 by class of loans.



	As of September 30, 2017
	Accruing Current		Accruing 30-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccruing		PCI Loans		Total
	(in thousands)
Loans by Classification
Commercial and industrial	$	548,425	$	7,379	$	125	$	1,001	$	5,496	$	562,426
Commercial real estate	936,836		2,519		—		1,764		3,735		944,854
Construction and land	131,328		398		—		22		332		132,080
Residential mortgages	98,308		1,258		198		576		1,636		101,976
Home equity	76,951		244		—		695		883		78,773
Mortgage warehouse	41,551		—		—		—		—		41,551
Consumer	47,676		—		172		—		8		47,856
Total Loans	$	1,881,075	$	11,798	$	495	$	4,058	$	12,090	$	1,909,516



	As of December 31, 2016
	Accruing Current		Accruing 30-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccruing		PCI Loans		Total
	(in thousands)
Loans by Classification
Commercial and industrial	$	520,908	$	3,079	$	189	$	474	$	6,411	$	531,061
Commercial real estate	852,626		2,382		—		—		3,770		858,778
Construction and land	218,290		544		—		—		518		219,352
Residential mortgages	97,901		664		428		147		2,781		101,921
Home equity	74,420		884		292		—		1,762		77,358
Mortgage warehouse	147,519		—		—		—		—		147,519
Consumer	48,558		249		85		—		11		48,903
Total Loans	$	1,960,222	$	7,802	$	994	$	621	$	15,253	$	1,984,892

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NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill and other intangible assets as of September 30, 2017 and December 31, 2016 is summarized below:



	September 30,			December 31,
	2017			2016
	(in thousands)
Core deposit intangible	$	9,544		$	9,544
Less: accumulated amortization	(4,257		)	(2,971		)
Less: impairment related to divested branches	(2,286		)	(1,949		)
Core deposit intangible, net	3,001			4,624
Servicing assets, net	3,185			3,184
Total other intangibles, net	6,186			7,808
Goodwill	21,759			21,759
Total goodwill and other intangible assets, net	$	27,945		$	29,567

During the nine months ended September 30, 2017 and 2016, Atlantic Capital recorded measurement period adjustments that decreased goodwill by $0 and $1.6 million, respectively. The adjustments reduced the TriNet servicing asset, increased the book value of securities available-for-sale, and increased the deferred tax asset.

There were no goodwill impairment charges recorded in the three and nine months ended September 30, 2017 and 2016. The following table presents activity for goodwill and other intangible assets:



	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	Goodwill			Core Deposit Intangible			Total			Goodwill			Core Deposit Intangible			Total
	(in thousands)
2017
Balance, beginning of period	$	21,759		$	3,392		$	25,151		$	21,759		$	4,624		$	26,383
Amortization	—			(391		)	(391		)	—			(1,286		)	(1,286		)
Impairment, due to branch divestiture	—			—			—			—			(337		)	(337		)
Balance, end of period	$	21,759		$	3,001		$	24,760		$	21,759		$	3,001		$	24,760

2016
Balance, beginning of period	$	22,446		$	5,639		$	28,085		$	23,352		$	9,018		$	32,370
Amortization	—			(520		)	(520		)	—			(1,950		)	(1,950		)
Impairment, due to branch divestiture	—			—			—			—			(1,949		)	(1,949		)
Measurement period adjustments	(687		)	—			(687		)	(1,593		)	—			(1,593		)
Balance, end of period	$	21,759		$	5,119		$	26,878		$	21,759		$	5,119		$	26,878

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NOTE 8 – SERVICING ASSETS

SBA Servicing Assets

SBA servicing assets are initially recorded at fair value. Subsequently, Atlantic Capital accounts for SBA servicing assets using the amortization method and they are included in other assets. As of September 30, 2017 and December 31, 2016, the balance of SBA loans sold and serviced by Atlantic Capital totaled $126.0 million and $107.0 million, respectively.

Changes in the balance of servicing assets for the three and nine months ended September 30, 2017 and 2016 are presented in the following table.



	Three months ended September 30,						Nine months ended September 30,
SBA Loan Servicing Assets	2017			2016			2017			2016
	(in thousands)
Beginning carrying value, net	$	2,564		$	2,117		$	2,359		$	1,687
Additions	157			328			750			889
Amortization	(221		)	(125		)	(609		)	(256		)
Impairment	—			—			—			—
Ending carrying value	$	2,500		$	2,320		$	2,500		$	2,320

At September 30, 2017 and 2016, the sensitivity of the fair value of the SBA loan servicing assets to immediate changes in key economic assumptions are presented in the table below.



Sensitivity of the SBA Servicing Assets	September 30, 2017				December 31, 2016
	(dollars in thousands)
Fair value of retained servicing assets	$	2,771			$	2,474
Weighted average life	6.62 years				6.52 years
Prepayment speed:	7.66			%	7.67			%
Decline in fair value due to a 10% adverse change	$	(108	)		$	(89	)
Decline in fair value due to a 20% adverse change	$	(183	)		$	(151	)
Weighted average discount rate	12.56			%	12.27			%
Decline in fair value due to a 100 bps adverse change	$	(117	)		$	(97	)
Decline in fair value due to a 200 bps adverse change	$	(200	)		$	(168	)

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.

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TriNet Servicing Assets

Changes in the balance of TriNet servicing assets for the three and nine months ended September 30, 2017 and 2016 are presented in the following table.



	Three months ended September 30,						Nine months ended September 30,
TriNet Servicing Assets	2017			2016			2017			2016
	(in thousands)
Beginning carrying value, net	$	731		$	1,471		$	825		$	1,175
Additions	—			—			—			406
Amortization	(46		)	(47		)	(140		)	(157		)
Impairment	—			(551		)	—			(551		)
Ending carrying value	$	685		$	873		$	685		$	873

At September 30, 2017, the sensitivity of the fair value of the TriNet servicing assets to immediate changes in key economic assumptions are presented in the table below.



Sensitivity of the TriNet Servicing Assets	September 30, 2017				December 31, 2016
	(dollars in thousands)
Fair value of retained servicing assets	$	761			$	840
Weighted average life	8.25 years				8.47 years
Prepayment speed:	5.00			%	5.00			%
Decline in fair value due to a 10% adverse change	$	(11	)		$	(12	)
Decline in fair value due to a 20% adverse change	$	(22	)		$	(24	)
Weighted average discount rate	8.00			%	8.00			%
Decline in fair value due to a 100 bps adverse change	$	(21	)		$	(25	)
Decline in fair value due to a 200 bps adverse change	$	(41	)		$	(49	)

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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, 2017									September 30, 2017
	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	$	(3,690	)	$	1,420		$	(2,270	)	$	(9,144	)	$	3,519		$	(5,625	)
Unrealized net gains (losses) on investment securities available-for-sale	706			(272		)	434			6,366			(2,450		)	3,916
Reclassification adjustment for net realized losses on investment securities available-for-sale	80			(31		)	49			80			(31		)	49
Unrealized net gains (losses) on derivatives	(121		)	46			(75		)	(327		)	125			(202		)
Accumulated other comprehensive income (loss) end of period	$	(3,025	)	$	1,163		$	(1,862	)	$	(3,025	)	$	1,163		$	(1,862	)



	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 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

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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, 2017 and 2016.



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
(in thousands, except share and per share amounts)
Net income available to common shareholders	$	4,052	$	3,708	$	11,611	$	11,786
Weighted average shares outstanding
Basic ⁽¹⁾	25,699,179		24,891,822		25,548,646		24,674,953
Effect of dilutive securities:
Stock options and warrants	191,600		368,458		251,205		431,297
Diluted	25,890,779		25,260,280		25,799,851		25,106,250
Income per common share:
Basic	$	0.16	$	0.15	$	0.45	$	0.48
Diluted	$	0.16	$	0.15	$	0.45	$	0.47
⁽¹⁾Unvested restricted shares are participating securities and included in basic share calculations.

Stock options and warrants outstanding of 550 at September 30, 2017 and 162,428 at September 30, 2016 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.

At September 30, 2017, 25,716,418 shares of common stock were issued and outstanding. At December 31, 2016, 25,093,135 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 2017 or 2016. 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.

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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, 2017, 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, 2017 and December 31, 2016, Atlantic Capital had interest rate swaps designated as cash flow hedges with an aggregate notional amount of $75.0 million and $50.0 million, respectively.

No hedge ineffectiveness gains or losses were recognized on active cash flow hedges for the three and nine months ended September 30, 2017 and 2016. 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 $237,000 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, 2017 and December 31, 2016, Atlantic Capital had interest rate swaps related to this program with an aggregate notional amount of $139.1 million and $140.7 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, First Security 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, 2017 and December 31, 2016, Atlantic Capital had minimum collateral posting thresholds with certain of its derivative counterparties and posted collateral of $9.5 million and $16.3 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, 2017 and December 31, 2016, Atlantic Capital had credit risk participation agreements with a notional amount of $15.6 million and $4.5 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, 2017 and December 31, 2016:



Derivatives designated as hedging instruments under ASC 815

(in thousands)		September 30, 2017				December 31, 2016
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	$	186

Cash flow hedge of LIBOR based loans	Other liabilities	$	75,000	$	56	$	—	$	—

Derivatives not designated as hedging instruments under ASC 815

(in thousands)		September 30, 2017				December 31, 2016
Interest Rate Products	Balance Sheet Location	Notional Amount		Fair Value		Notional Amount		Fair Value
Customer swap positions	Other assets	$	69,543	$	1,168	$	70,352	$	1,364
Zero premium collar	Other assets	95,688		2,825		98,697		2,760
		$	165,231	$	3,993	$	169,049	$	4,124

Dealer offsets to customer swap positions	Other liabilities	$	69,543	$	1,214	$	70,352	$	1,371
Credit risk participation	Other liabilities	15,556		6		4,460		—
Dealer offset to zero premium collar	Other liabilities	95,688		2,908		98,697		2,760
		$	180,787	$	4,128	$	173,509	$	4,131

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, 2017 and 2016:



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)
	2017			2016			Location	2017		2016		2017			2016		Location	2017		2016
Interest rate swaps	$	(75	)	$	(269	)	Interest income	$	84	$	177	$	(202	)	$	473	Interest income	$	331	$	546

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NOTE 12 – OTHER BORROWINGS AND LONG TERM DEBT

Federal Home Loan Bank borrowings as of September 30, 2017 and December 31, 2016 are as follows:



	September 30, 2017					December 31, 2016
	Balance		Interest Rate			Balance		Interest Rate
	(in thousands)					(in thousands)
FHLB short-term borrowings:					FHLB short-term borrowings:
Fixed rate advance maturing October 3, 2017	40,000		1.16	%	Fixed rate advance maturing January 17, 2017	40,000		0.64	%
Fixed rate advance maturing October 11, 2017	40,000		1.15	%	Fixed rate advance maturing January 24, 2017	40,000		0.61	%
Fixed rate advance maturing October 13, 2017	45,000		1.16	%	Fixed rate advance maturing January 30, 2017	30,000		0.62	%
Total	$	125,000			Total	$	110,000

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, 2017		December 31, 2016
	(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		507		634
Subordinated debt, net	$	49,493	$	49,366

All subordinated debt outstanding at September 30, 2017 matures after more than five years.

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, 2017, approximately 3,825,000 additional awards were available to be 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, 2017, no warrants were outstanding for the purchase of common stock. As of December 31, 2016, warrants for 363,000 shares 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 were exercisable for a period of ten years following the issuance.

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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. The table below summarizes the assumptions used to calculate the fair value of options granted/modified during 2017:



	2017
Risk‑free interest rate	1.00-1.99%
Expected term in years	.25-8
Expected stock price volatility	23.2-25.3%
Dividend yield	—	%

The following table represents stock option and warrant activity for the nine months ended September 30, 2017:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, December 31, 2016	1,485,704		$	11.69
Granted	30,400		12.39
Exercised	(718,912	)	10.53
Forfeited	(32,846	)	12.28
Expired	(635	)	126.22
Outstanding, September 30, 2017	763,711		$	12.64	5.77	$	4,348

Exercisable, September 30, 2017	518,336		$	11.73	4.77	$	3,466

Atlantic Capital recognized compensation expense relating to stock options of $191,000 and $472,000 for the three and nine months ended September 30, 2017, respectively, and $192,000 and $638,000 for the three and nine months ended September 30, 2016, respectively. 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, 2017:



	Shares		Weighted Average Grant-Date Fair Value
Outstanding, December 31, 2016	259,165		$	13.70
Granted	110,293		17.85
Vested	(64,637	)	12.73
Forfeited	(36,674	)	14.88
Outstanding, September 30, 2017	268,147		$	15.47

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 and nine months ended September 30, 2017, compensation expense of $396,000 and $869,000, respectively, was recognized related to restricted stock awards. For the three and nine months ended September 30, 2016, compensation expense of $71,000 and $527,000, respectively, was recognized related to restricted stock awards.

As of September 30, 2017, there was $3.0 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 3.11 years.

During the three months ended September 30, 2017, the Company modified options for 30,400 shares and 10,628 restricted stock awards to four individuals. The modifications allowed for the immediate vesting of the awards upon termination of service. The total incremental cost resulting from the modifications was $14,000 for the three and nine months ended September 30, 2017.

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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, goodwill, intangible assets, loans held for sale, impaired loans and other real estate owned at fair value on a nonrecurring basis if necessary.

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, 2017. 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 approach used to estimate exposures to counterparties is also used by Atlantic Capital to estimate its own credit risk on derivative liability positions.

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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, 2017 and December 31, 2016.



	Fair Value Measurements at
	September 30, 2017 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	$	—	$	34,783	$	—	$	34,783
U.S. states and political subdivisions	—		93,779		—		93,779
Trust preferred securities	—		4,675		—		4,675
Corporate debt securities	—		16,156		—		16,156
Mortgage-backed securities	—		297,612		—		297,612
Total securities available-for-sale	$	—	$	447,005	$	—	$	447,005
Interest rate derivative assets	$	—	$	3,993	$	—	$	3,993
Interest rate derivative liabilities	$	—	$	4,184	$	—	$	4,184



	Fair Value Measurements at
	December 31, 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	$	—	$	21,152	$	—	$	21,152
U.S. states and political subdivisions	—		90,172		—		90,172
Trust preferred securities	—		4,525		—		4,525
Corporate debt securities	—		19,231		—		19,231
Mortgage-backed securities	—		212,625		—		212,625
Total securities available-for-sale	$	—	$	347,705	$	—	$	347,705
Interest rate derivative assets	$	—	$	4,310	$	—	$	4,310
Interest rate derivative liabilities	$	—	$	4,131	$	—	$	4,131

For the nine months ended September 30, 2017 and 2016, there was not a change in the methods and significant assumptions used to estimate fair value.

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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, 2017 and December 31, 2016.



September 30, 2017		Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Total
	(in thousands)
Impaired Loans		$	—	$	—	$	2,970	$	2,970



December 31, 2016		Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Total
	(in thousands)
Impaired Loans		$	—	$	—	$	7,248	$	7,248

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, 2017 and December 31, 2016.



	Fair Value Measurements at
	September 30, 2017 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	$	35,504	$	35,504	$	—	$	—
Interest bearing deposits in banks	40,558		40,558		—		—
Other short-term investments	5,189		5,189		—		—
Total securities available-for-sale	447,005		—		447,005		—
FHLB stock	7,788		—		—		7,788
Federal Reserve Bank stock	9,781		—		—		9,781
Loans held for investment, net	1,886,562		—		—		1,927,726
Loans held for sale	3,274		—		3,274		—
Derivative assets	3,993		—		3,993		—
Financial liabilities
Deposits	$	2,103,645	$	—	$	2,019,911	$	—
Subordinated debt	49,493		—		49,871		—
FHLB advances	125,000		—		125,007		—
Derivative financial instruments	4,184		—		4,184		—



	Fair Value Measurements at
	December 31, 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	$	36,790	$	36,790	$	—	$	—
Interest-bearing deposits in other banks	118,039		118,039		—		—
Other short-term investments	10,896		10,896		—		—
Total securities available-for-sale	347,705		—		347,705		—
FHLB stock	7,067		—		—		7,067
Federal Reserve Bank stock	9,690		—		—		9,690
Loans held for investment, net	1,960,735		—		—		1,939,895
Loans held for sale	35,219		—		35,219		—
Derivative assets	4,310		—		4,310		—
Financial liabilities
Deposits	$	2,205,991	$	—	$	2,144,196	$	—
Deposits to be assumed in branch sale	31,589		—		31,589		—
Subordinated debt	49,366		—		48,971		—
FHLB advances	110,000		—		109,946		—
Derivative financial instruments	4,131		—		4,131		—

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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, 2017 and December 31, 2016 was as follows:



	September 30, 2017		December 31, 2016
	(in thousands)
Financial Instruments whose contract amount represents credit risk:
Commitments to extend credit	$	686,685	$	617,432
Standby letters of credit	13,677		16,625
	$	700,362	$	634,057

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.

NOTE 16 – SUBSEQUENT EVENTS

On October 25, 2017, Atlantic Capital entered into a Separation Agreement with D. Michael Kramer in connection with the resignation from his position as President and Chief Operating Officer of the Company.

The Separation Agreement provides for benefits to and imposes obligations upon Mr. Kramer. Specifically, Mr. Kramer is entitled to receive the following payments and benefits under the Separation Agreement:


•	all accrued but unpaid base salary through December 22, 2017;


•	a cash payment of $407,265, which represents one (1) times his base salary;


•	a cash payment of $183,269, which represents one (1) times his target bonus opportunity, under the Company’s Executive Officer Short Term Incentive Plan (the “STI Plan”) for 2017;


•	a cash payment of $150,000, which represents the pro-rata portion of his STI Plan bonus opportunity deemed earned for 2017;


•	a cash payment of $612,883, which represents accrued awards deemed earned under the Company’s Long Term Incentive Plan;


•	acceleration of 14,000 shares of unvested restricted stock and 120,680 unvested options and extension of the post-termination exercise period for options; and


•	reimbursement of COBRA premiums for 12 months following termination, so long as he is not entitled to obtain insurance from a subsequent employer.

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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 of 1933, as amended, 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;


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


•	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 potential impact of any legal, regulatory and policy changes affecting financial institutions and the economies in which we conduct operations as a result of the new presidential administration;


•	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 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;


•	cyber-security incidents, including data security breaches or computer viruses;


•	increased costs associated with operating as a public company;


•	increased competitive pressure due to consolidation in the financial services industry; or

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•	other risks and factors identified in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 14, 2017 (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 the Notes to Consolidated Financial Statements within Atlantic Capital’s Annual Report on Form 10-K.

Non-GAAP Financial Measures.

This Form 10-Q contains non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. Atlantic Capital management uses non-GAAP financial measures, including: (i) taxable equivalent interest income; (ii) taxable equivalent net interest income; (iii) taxable equivalent net interest margin; (iv) net interest income after provision for loan losses-taxable equivalent; (v) income before income taxes-taxable equivalent; and (vi) income tax expense-taxable equivalent. Management uses these non-GAAP financial measures because it believes they provide a greater understanding of ongoing performance and operations, enhance comparability with prior periods, and provide 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 assessing the performance or financial condition of the Company. A reconciliation of these non-GAAP financial measures to GAAP financial measures is included in Table 1.

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EXECUTIVE OVERVIEW AND EARNINGS SUMMARY

Atlantic Capital reported net income of $4.1 million for the third quarter of 2017 compared to net income of $3.7 million for the third quarter of 2016. Diluted income per common share was $.16 for the third quarter of 2017 compared to diluted income per common share of $.15 for the third quarter of 2016.

For the nine months ended September 30, 2017, Atlantic Capital reported net income of $11.6 million compared to net income of $11.8 million for the first nine months ended September 30, 2016. Diluted income per common share was $.45 for the nine months ended September 30, 2017 compared to $.47 for the same period in 2016.

The increase in net income for the three months ended September 30, 2017, compared to the same period in 2016, was primarily the result of a $1.1 million, or 6%, increase in net interest income after provision for loan losses, offset by a decrease of $525,000 in noninterest income.

For the nine months ended September 30, 2017 compared to the first nine months of 2016, the decrease in net income was primarily attributable to a $4.7 million, or 27%, decrease in noninterest income and a $1.3 million, or 83%, increase in loan loss provision. The decrease in noninterest income compared to 2016 was primarily due to the $3.9 million gain on sale of branches in the second quarter of 2016 and a $1.1 million, or 95%, decrease in TriNet lending activities. This was offset by a $2.6 million, or 5%, increase in net interest income before provision for loan losses and a $1.6 million, or 3%, reduction in noninterest expense.

Taxable equivalent net interest income was $20.5 million for the third quarter of 2017, compared to $19.5 million for the third quarter of 2016. Taxable equivalent net interest margin increased to 3.26% for the three months ended September 30, 2017 from 3.12% for the three months ended September 30, 2016. For the nine months ended September 30, 2017, taxable equivalent net interest income was $60.7 million compared to $57.7 million for the same period of 2016. Taxable equivalent net interest margin increased to 3.24% for the nine months ended September 30, 2017 from 3.11% for the nine months ended September 30, 2016. The margin increase for the three and nine months ended September 30, 2017 compared to the prior year was due to increased investment in non-taxable investment securities and increases in the Fed Funds rate.

Provision for loan losses for the quarter ended September 30, 2017 totaled $322,000, a decrease of $141,000 from the quarter ended September 30, 2016. The lower provision for the three months ended September 30, 2017 was primarily related to a decline in loan growth. For the nine months ended September 30, 2017, Atlantic Capital’s provision for loan losses was $2.9 million compared to a provision of $1.6 million for the first nine months of 2016. The increase was primarily related to an additional $1.0 million specific reserve that was recorded in the second quarter of 2017 as a result of the downgrade of a large loan relationship to nonperforming.

Noninterest income decreased $525,000, or 13%, to $3.5 million from the third quarter of 2016. The decrease was primarily due to a $312,000, or 49%, decrease in mortgage income which was attributable to higher interest rates and lower demand. For the first nine months of 2017, noninterest income decreased $4.7 million, or 27%, to $12.6 million. The decrease was primarily due to a $3.9 million gain on the sale of seven branches in the second quarter of 2016 as well as a $1.1 million, or 95%, decrease in gains on the sale of TriNet loans and a $453,000, or 32%, decrease in mortgage income.

For the third quarter of 2017, noninterest expense increased $208,000, or 1%, compared to the third quarter of 2016. The most significant component of the increase was professional services due to expenses related to the public offering of common stock by a selling stockholder completed during the third quarter of 2017. Noninterest expense totaled $52.9 million for the nine months ended September 30, 2017, compared to $54.5 million for the same period in 2016. The most significant component of the decrease for the nine month period was a $2.2 million, or 88%, reduction in merger and conversion costs due to the substantial completion of the integration of FSGBank, N.A. (“FSGBank”) into Atlantic Capital Bank N.A. (the “Bank”) in 2016.

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

	2017									2016						For the nine months ended September 30,
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			2017			2016
INCOME SUMMARY
Interest income	$	24,566		$	24,545		$	22,716		$	22,530		$	22,428		$	71,827		$	66,171
Interest expense	4,060			3,833			3,208			3,029			2,941			11,101			8,480
Net interest income	20,506			20,712			19,508			19,501			19,487			60,726			57,691
Provision for loan losses	322			1,980			634			2,208			463			2,936			1,608
Net interest income after provision for loan losses	20,184			18,732			18,874			17,293			19,024			57,790			56,083
Noninterest income	3,477			5,287			3,857			4,430			4,002			12,621			17,302
Noninterest expense	17,504			17,623			17,744			18,775			17,296			52,871			54,505
Income before income taxes	6,157			6,396			4,987			2,948			5,730			17,540			18,880
Income tax expense	2,105			2,067			1,757			1,339			2,022			5,929			7,094
Net income	$	4,052		$	4,329		$	3,230		$	1,609		$	3,708		$	11,611		$	11,786

PER SHARE DATA
Basic earnings per share	$	0.16		$	0.17		$	0.13		$	0.06		$	0.15		$	0.45		$	0.48
Diluted earnings per share	0.16			0.17			0.13			0.06			0.15			0.45			0.47

PERFORMANCE MEASURES
Return on average equity	4.96		%	5.48		%	4.19		%	2.09		%	4.84		%	4.91		%	5.25		%
Return on average assets	0.60			0.63			0.48			0.24			0.55			0.57			0.58
Taxable equivalent net interest margin	3.26			3.26			3.20			3.11			3.12			3.24			3.11
Efficiency ratio	73.65			68.37			76.78			79.19			74.05			72.77			75.92
Equity to assets	12.31			11.82			11.10			11.13			11.17			12.31			11.17

ASSET QUALITY
Allowance for loan losses to loans	0.99		%	1.11		%	1.05		%	1.04		%	0.92		%	0.99		%	0.92		%
Net charge-offs	$	3,322		$	49		$	1,290		$	147		$	306		$	4,661		$	1,979
Net charge-offs to average loans⁽¹⁾	0.68		%	0.01		%	0.26		%	0.03		%	0.06		%	0.32		%	0.13		%
NPAs to total assets	0.23			0.52			0.21			0.13			0.09			0.23			0.09

AVERAGE BALANCES
Total loans	$	1,934,505		$	1,962,374		$	1,949,385		$	2,036,995		$	2,003,180		$	1,948,700		$	1,965,092
Investment securities	455,868			455,090			419,335			349,762			335,880			443,565			372,208
Total assets	2,701,387			2,762,389			2,694,715			2,722,444			2,717,996			2,719,519			2,704,670
Deposits	2,121,263			2,158,675			2,111,992			2,094,885			2,163,569			2,130,677			2,164,477
Shareholders’ equity	323,832			316,825			308,261			308,588			306,642			316,361			299,048
Number of common shares - basic	25,699,179			25,621,910			25,320,690			25,027,304			24,891,822			25,548,646			24,674,953
Number of common shares - diluted	25,890,779			25,831,281			25,672,286			25,407,728			25,260,280			25,799,851			25,106,250

⁽¹⁾ Annualized.

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

	2017									2016						For the nine months ended September 30,
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			2017			2016
AT PERIOD END
Total loans	$	1,908,706		$	1,963,835		$	1,930,965		$	2,016,549		$	2,054,702		$	1,908,706		$	2,054,702
Investment securities	447,005			450,273			456,942			347,705			348,484			447,005			348,484
Total assets	2,638,412			2,702,575			2,802,078			2,727,543			2,761,244			2,638,412			2,761,244
Deposits	2,103,645			2,113,954			2,203,039			2,237,580			2,188,856			2,103,645			2,188,856
Shareholders’ equity	324,754			319,435			310,967			303,658			308,463			324,754			308,463
Number of common shares outstanding	25,716,418			25,654,521			25,535,013			25,093,135			24,950,099			25,716,418			24,950,099

Non-GAAP Performance Measures Reconciliation
(in thousands)
	2017									2016						For the nine months ended September 30,
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			2017			2016
Taxable equivalent interest income reconciliation
Interest income - GAAP	$	24,351		$	24,322		$	22,461		$	22,307		$	22,295		$	71,134		$	65,910
Taxable equivalent adjustment	215			223			255			223			133			693			261
Interest income - taxable equivalent	$	24,566		$	24,545		$	22,716		$	22,530		$	22,428		$	71,827		$	66,171

Taxable equivalent net interest income reconciliation
Net interest income - GAAP	$	20,291		$	20,489		$	19,253		$	19,278		$	19,354		$	60,033		$	57,430
Taxable equivalent adjustment	215			223			255			223			133			693			261
Net interest income - taxable equivalent	$	20,506		$	20,712		$	19,508		$	19,501		$	19,487		$	60,726		$	57,691

Taxable equivalent net interest income after provision for loan losses reconciliation
Net interest income after provision for loan losses - GAAP	$	19,969		$	18,509		$	18,619		$	17,070		$	18,891		$	57,097		$	55,822
Taxable equivalent adjustment	215			223			255			223			133			693			261
Net interest income after provision for loan losses - taxable equivalent	$	20,184		$	18,732		$	18,874		$	17,293		$	19,024		$	57,790		$	56,083

Taxable equivalent income before income taxes reconciliation
Income (loss) before income taxes - GAAP	$	5,942		$	6,173		$	4,732		$	2,725		$	5,597		$	16,847		$	18,619
Taxable equivalent adjustment	215			223			255			223			133			693			261
Income before income taxes - taxable equivalent	$	6,157		$	6,396		$	4,987		$	2,948		$	5,730		$	17,540		$	18,880

Taxable equivalent income tax expense reconciliation
Income tax expense - GAAP	$	1,890		$	1,844		$	1,502		$	1,116		$	1,889		$	5,236		$	6,833
Taxable equivalent adjustment	215			223			255			223			133			693			261
Income tax expense - taxable equivalent	$	2,105		$	2,067		$	1,757		$	1,339		$	2,022		$	5,929		$	7,094

Taxable equivalent net interest margin reconciliation
Net interest margin - GAAP	3.23		%	3.23		%	3.16		%	3.07		%	3.10		%	3.21		%	3.10		%
Impact of taxable equivalent adjustment	0.03			0.03			0.04			0.04			0.02			0.03			0.01
Net interest margin - taxable equivalent	3.26		%	3.26		%	3.20		%	3.11		%	3.12		%	3.24		%	3.11		%

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RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Taxable equivalent net interest income for the third quarter of 2017 totaled $20.5 million, a $1.0 million, or 5%, increase compared to the third quarter of 2016. This increase was primarily driven by a $2.1 million, or 10%, increase in taxable equivalent interest income. The change in taxable equivalent net interest income primarily resulted from the following:


•	a $1.1 million, or 76%, increase to $2.5 million in taxable equivalent interest income on investment securities, resulting from a $120.0 million, or 36%, increase in average balance, due primarily to the increased investment in non-taxable investment securities; and


•	a $980,000, or 5%, increase in interest income on loans, resulting from increases in the Fed Funds rate.

Interest expense for the three months ended September 30, 2017 totaled $4.1 million, a $1.1 million, or 38%, increase from the same period of 2016. The rate paid on interest bearing liabilities increased 30 basis points from the third quarter of 2016 to the third quarter of 2017, driven by an increase in interest rates on deposits and other borrowings. Average interest-bearing deposits were lower mainly due to the branch sale in the second quarter of 2017 and a reduction in brokered deposits. In addition, premium amortization of acquired time deposits reduced interest expense during the third quarter of 2017 in the amount of $75,000, compared to $170,000 in the third quarter of 2016.

Taxable equivalent net interest income for the nine months ended September 30, 2017 totaled $60.7 million, a $3.0 million, or 5%, increase compared to the same period in 2016. This increase was primarily driven by a $5.7 million, or 9%, increase in taxable equivalent interest income. The interest income increase primarily resulted from the following:


•	a $2.9 million, or 64%, increase to $7.4 million in tax equivalent interest income on investment securities, resulting from a $71.4 million, or 19%, increase in average balance, due primarily to the increased investment in non-taxable investment securities; and


•	a $2.4 million, or 4%, increase in interest income on loans, resulting from increases in the Fed Funds rate.

Interest expense for the nine months ended September 30, 2017 totaled $11.1 million, a $2.6 million, or 31%, increase from the same period of 2016, primarily due to a $1.8 million, or 32%, increase in interest paid on deposits. The rate paid on interest bearing liabilities increased 23 basis points from the first nine months of 2016 to the same period of 2017, driven by an increase in interest rates on deposits and other borrowings. In addition, premium amortization of acquired time deposits reduced interest expense during the first nine months of 2017 in the amount of $280,000, as compared to $712,000 in the same period of 2016.

Taxable equivalent net interest margin increased to 3.26% from 3.12% for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Taxable equivalent net interest margin for the nine months ended September 30, 2017 increased to 3.24% compared to 3.11% for the nine months ended September 30, 2016. The primary reasons for the increase in taxable equivalent net interest margin for the three and nine month periods were the higher level of investment in non-taxable investment securities and higher interest rates on loans resulting from Fed Funds rate increases.

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,
	2017						2016
	Average Balance		Interest Income/Expense		Tax Equivalent Yield/Rate		Average Balance		Interest Income/Expense		Tax Equivalent Yield/Rate
Assets
Interest bearing deposits in other banks	$	69,839	$	216	1.23	%	$	109,883	$	158	0.57	%
Other short-term investments	13,830		67		1.92		18,741		60		1.27
Investment securities:
Taxable investment securities	373,087		1,812		1.93		283,303		1,033		1.45
Non-taxable investment securities⁽¹⁾	82,781		701		3.36		52,577		393		2.97
Total investment securities	455,868		2,513		2.19		335,880		1,426		1.69
Total loans	1,934,505		21,491		4.41		2,003,180		20,511		4.07
FHLB and FRB stock	18,494		279		5.99		17,192		273		6.32
Total interest-earning assets	2,492,536		24,566		3.91		2,484,876		22,428		3.59
Non-earning assets	208,851						233,120
Total assets	$	2,701,387					$	2,717,996
Liabilities
Interest bearing deposits:
NOW, money market, and savings	1,192,664		1,886		0.63		1,236,828		1,338		0.43
Time deposits	143,862		292		0.81		175,135		241		0.55
Brokered deposits	156,708		515		1.30		196,598		377		0.76
Total interest-bearing deposits	1,493,234		2,693		0.72		1,608,561		1,956		0.48
Other borrowings	179,808		543		1.20		157,957		170		0.43
Long-term debt	49,465		824		6.61		49,296		815		6.58
Total interest-bearing liabilities	1,722,507		4,060		0.94		1,815,814		2,941		0.64
Demand deposits	628,029						555,008
Other liabilities	27,019						40,532
Shareholders’ equity	323,832						306,642
Total liabilities and shareholders’ equity	$	2,701,387					$	2,717,996
Net interest spread					2.97	%					2.95	%
Net interest income and net interest margin⁽²⁾			$	20,506	3.26	%			$	19,487	3.12	%

⁽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,
	2017						2016
	Average Balance		Interest Income/Expense		Tax Equivalent Yield/Rate		Average Balance		Interest Income/Expense		Tax Equivalent Yield/Rate
Assets
Interest bearing deposits in other banks	$	76,079	$	614	1.08	%	$	100,279	$	481	0.64	%
Other short-term investments	16,198		231		1.91		24,120		244		1.35
Investment securities:
Taxable investment securities	362,080		5,197		1.92		337,263		3,714		1.47
Non-taxable investment securities⁽¹⁾	81,485		2,167		3.56		34,945		768		2.94
Total investment securities	443,565		7,364		2.22		372,208		4,482		1.61
Total loans	1,948,700		62,846		4.31		1,965,092		60,418		4.11
FHLB and FRB stock	19,147		772		5.39		13,825		546		5.28
Total interest-earning assets	2,503,689		71,827		3.84		2,475,524		66,171		3.57
Non-earning assets	215,830						229,146
Total assets	$	2,719,519					$	2,704,670
Liabilities
Interest bearing deposits:
NOW, money market, and savings	1,171,369		4,842		0.55		1,182,520		3,646		0.41
Time deposits	152,190		833		0.73		221,937		654		0.39
Brokered deposits	182,195		1,546		1.13		210,803		1,170		0.74
Total interest-bearing deposits	1,505,754		7,221		0.64		1,615,260		5,470		0.45
Other borrowings	196,352		1,409		0.96		156,148		553		0.47
Long-term debt	49,423		2,471		6.68		49,254		2,457		6.66
Total interest-bearing liabilities	1,751,529		11,101		0.85		1,820,662		8,480		0.62
Demand deposits	624,923						549,217
Other liabilities	26,706						35,743
Shareholders’ equity	316,361						299,048
Total liabilities and shareholders’ equity	$	2,719,519					$	2,704,670
Net interest spread					2.99	%					2.95	%
Net interest income and net interest margin⁽²⁾			$	60,726	3.24	%			$	57,691	3.11	%

⁽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 taxable equivalent net interest income for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.



Table 3 - Changes in Taxable Equivalent Net Interest Income
(dollars in thousands)
	Three Months Ended September 30, 2017 Compared to 2016 Increase (decrease) Due to Changes in:								Nine Months Ended September 30, 2017 Compared to 2016 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	$	(124	)	$	182		$	58	$	(195	)	$	328	$	133
Other short-term investments	(24		)	31			7		(113		)	100		(13		)
Investment securities:
Taxable investment securities	436			343			779		356			1,127		1,483
Non-taxable investment securities	256			52			308		1,238			161		1,399
Total investment securities	692			395			1,087		1,594			1,288		2,882
Total loans	(763		)	1,743			980		(529		)	2,957		2,428
FHLB and FRB stock	20			(14		)	6		215			11		226
Total interest-earning assets	(199		)	2,337			2,138		972			4,684		5,656
Interest bearing liabilities
Interest bearing deposits:
NOW, money market, and savings	(70		)	618			548		(46		)	1,242		1,196
Time deposits	(63		)	114			51		(382		)	561		179
Brokered deposits	(131		)	269			138		(243		)	619		376
Total interest-bearing deposits	(264		)	1,001			737		(671		)	2,422		1,751
Total borrowings	66			307			373		288			568		856
Total long-term debt	3			6			9		8			6		14
Total interest-bearing liabilities	(195		)	1,314			1,119		(375		)	2,996		2,621
Change in net interest income	$	(4	)	$	1,023		$	1,019	$	1,347		$	1,688	$	3,035

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, 2017, the provision for loan losses was $322,000, a decrease of $141,000, or 30%, compared to the three months ended September 30, 2016. For the nine months ended September 30, 2017, the provision for loan losses was $2.9 million, an increase of $1.3 million, or 83%, compared to the nine months ended September 30, 2016.

The lower provision for the three months ended September 30, 2017 was primarily related to a reduction in loan growth. The higher provision for the nine months ended September 30, 2017 was primarily related to the downgrade of a $7.7 million loan relationship to nonperforming in the second quarter of 2017 and an additional $1.0 million specific reserve related to this downgrade. A $3.3 million charge-off was recorded in the third quarter of 2017 for this relationship. At September 30, 2017, nonperforming loans totaled $4.6 million compared to $790,000 at September 30, 2016. Net loan charge-offs were .68% and .32%, respectively, of average loans (annualized) for the three and nine months ended September 30, 2017 compared to .06% and .13%, respectively, for the three and nine months ended September 30, 2016. The allowance for loan losses to total loans at September 30, 2017 was 0.99%, compared to .92% at September 30, 2016.

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Noninterest Income

Noninterest income for the three and nine months ended September 30, 2017 was $3.5 million and $12.6 million, respectively, a decrease of $525,000, or 13%, compared to the third quarter of 2016, and a decrease of $4.7 million, or 27%, from the nine months ended September 30, 2016. 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
	2017			2016		$			%			2017			2016		$			%
Service charges	$	1,247		$	1,270	$	(23	)	(2	)	%	$	3,870		$	4,160	$	(290	)	(7	)	%
Securities gains, net	(80		)	—		(80		)	—			(80		)	44		(124		)	(282	)
Gain on sales of other assets	44			71		(27		)	(38	)		788			150		638			425
Mortgage income	320			632		(312		)	(49	)		965			1,418		(453		)	(32	)
Trust income	437			361		76			21			1,332			1,061		271			26
Derivatives income (loss)	(3		)	69		(72		)	(104	)		62			232		(170		)	(73	)
Bank owned life insurance	384			424		(40		)	(9	)		1,146			1,215		(69		)	(6	)
SBA lending activities	888			959		(71		)	(7	)		3,286			3,043		243			8
TriNet lending activities	20			—		20			—			60			1,144		(1,084		)	(95	)
Gains on sale of branches	—			—		—			—			302			3,885		(3,583		)	(92	)
Other noninterest income	220			216		4			2			890			950		(60		)	(6	)
Total noninterest income	$	3,477		$	4,002	$	(525	)	(13	)	%	$	12,621		$	17,302	$	(4,681	)	(27	)	%

Service charges for the three and nine months ended September 30, 2017 decreased $23,000, or 2%, and $290,000, or 7%, respectively, from the same periods in 2016. The decrease was primarily due to the reduction of retail customer activity from the sale of seven legacy FSGBank branches in the second quarter of 2016 and one branch in the second quarter of 2017.

Gain on sales of other assets for the first nine months of 2017 increased $638,000, or 425% from the same period in 2016 due to a $240,000 gain on sale of other real estate and a $426,000 gain on the sale of a tax credit investment during the second quarter of 2017. Mortgage income for the three and nine months ended September 30, 2017 decreased $312,000, or 49%, and $453,000, or 32%, respectively, from the same periods in 2016 due to higher interest rates and lower demand. Trust income for the three and nine months ended September 30, 2017 increased $76,000, or 21%, and $271,000, or 26%, respectively, from the same periods in 2016 due to an increase in managed assets.

Income from SBA lending activities for the third quarter of 2017 decreased $71,000, or 7%, from the same period in 2016, due to a lower level of loan sales. During the three months ended September 30, 2017 and 2016, guaranteed portions of 14 and 16 SBA loans with principal balances of $11.8 million and $18.5 million, respectively, were sold in the secondary market. Income from SBA lending activities for the first nine months of 2017 increased $243,000, or 8%, from the same period in 2016, due to a higher level of loan sales earlier in 2017. During the nine months ended September 30, 2017 and 2016, guaranteed portions of 35 and 36 SBA loans with principal balances of $48.7 million and $48.5 million, respectively, were sold in the secondary market. During the three and nine months ended September 30, 2016, the TriNet lending division contributed $0 and $1.1 million, respectively, 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 30, 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
	2017		2016		$			%			2017		2016		$			%
Salaries and employee benefits	$	10,409	$	10,059	$	350		3		%	$	32,077	$	31,034	$	1,043		3		%
Occupancy	1,129		1,235		(106		)	(9	)		3,433		3,609		(176		)	(5	)
Equipment and software	776		862		(86		)	(10	)		2,577		2,272		305			13
Professional services	1,595		442		1,153			261			3,472		1,950		1,522			78
Postage, printing and supplies	63		61		2			3			226		389		(163		)	(42	)
Communications and data processing	982		617		365			59			3,038		2,227		811			36
Marketing and business development	272		269		3			1			721		853		(132		)	(15	)
FDIC premiums	308		415		(107		)	(26	)		754		1,306		(552		)	(42	)
Merger and conversion costs	—		579		(579		)	(100	)		304		2,538		(2,234		)	(88	)
Amortization of intangibles	391		520		(129		)	(25	)		1,286		1,950		(664		)	(34	)
Foreclosed property/problem asset expense	7		39		(32		)	(82	)		117		198		(81		)	(41	)
Other noninterest expense	1,572		2,198		(626		)	(28	)		4,866		6,179		(1,313		)	(21	)
Total noninterest expense	$	17,504	$	17,296	$	208		1		%	$	52,871	$	54,505	$	(1,634	)	(3	)	%

Noninterest expense for the third quarter of 2017 was $17.5 million, an increase of $208,000, or 1%, from the third quarter of 2016. For the nine months ended September 30, 2017, noninterest expense totaled $52.9 million, a decrease of $1.6 million, or 3%, from the same period in 2016. The decrease from the prior periods mostly reflects lower merger and conversion costs related to the acquisition of First Security.

Salaries and employee benefits expense for the three months ended September 30, 2017 totaled $10.4 million, an increase of $350,000, or 3%, from the same period in 2016. For the first nine months of 2017, salaries and employee benefits totaled $32.1 million, an increase of $1.0 million, or 3%, from the first nine months of 2016. The increase was primarily attributable to a higher headcount. Full time equivalent headcount totaled 343 at September 30, 2017, compared to 328 at September 30, 2016, an increase of 15 positions, mainly due to increased staffing needs of the Bank and the opening of the Charlotte office.

Occupancy costs were $1.1 million for the third quarter of 2017, a decrease of $106,000, or 9%, compared to the third quarter of 2016. For the nine months ended September 30, 2017, occupancy costs were $3.4 million, a decrease of $176,000, or 5%, from the first nine months of 2016. The decrease was due to the divestiture of seven branches in the second quarter of 2016 and one branch in the second quarter of 2017.

Equipment and software costs were $776,000 for the third quarter of 2017, a decrease of $86,000, or 10%, compared to the third quarter of 2016. For the nine months ended September 30, 2017, equipment and software costs were $2.6 million, an increase of $305,000, or 13%, from the first nine months of 2016. The decrease in the third quarter of 2017 was due to lower ATM managed services costs and depreciation. The increase for the nine months ended September 30, 2017 was due to higher maintenance contracts and an increase in ATM managed services costs due to higher payments made in the first and second quarters of 2017.

Professional services costs were $1.6 million for the third quarter of 2017, an increase of $1.2 million, or 261%, compared to the third quarter of 2016. For the nine months ended September 30, 2017, professional services costs were $3.5 million, an increase of $1.5 million, or 78%, from the first nine months of 2016. The increase was due to higher accounting and legal fees related to the public offering of Atlantic Capital stock to a selling stockholder during the third quarter of 2017.

Communications and data processing costs were $982,000 for the third quarter of 2017, an increase of $365,000, or 59%, compared to the third quarter of 2016. For the nine months ended September 30, 2017, communications and data processing costs were $3.0 million, an increase of $811,000, or 36%, from the first nine months of 2016. In 2016, core processing expenses were reduced by vendor credits.

Merger and conversion costs were $0 for the third quarter of 2017, a decrease of $579,000, or 100%, compared to the third quarter of 2016. For the nine months ended September 30, 2017, merger and conversion costs were $304,000, a decrease of $2.2 million, or 88%, from the first nine months of 2016. Merger expenses include professional fees, severance, rebranding and data conversion costs related to the acquisition of First Security.

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Amortization of intangibles includes the amortization of core deposit intangible related to the acquisition of First Security and totaled $391,000 and $1.3 million for the three and nine months ended September 30, 2017, respectively, and $520,000 and $2.0 million for the three and nine months ended September 30, 2016, respectively. The decrease in 2017 was mainly due to the write-off of core deposit intangibles related to the seven branches divested during the second quarter of 2016 and one branch divested during the second quarter of 2017.

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 three and nine months ended September 30, 2017 was $1.9 million and $5.2 million, respectively, as compared with $1.9 million and $6.8 million for the same periods in 2016. The effective tax rate (as a percentage of pre-tax earnings) was 31.8% and 31.1%, respectively, for the three and nine months ended September 30, 2017 compared to 33.8% and 36.7%, respectively, for the same periods in 2016. The decrease in the effective tax rate for the three and nine months ended September 30, 2017 was driven mainly by the decrease in non-deductible merger expenses in 2017 compared to 2016, excess benefit related to stock compensation in 2017 compared to 2016, and the increase in non-taxable income on municipal securities purchased throughout the latter half of 2016 and beginning of 2017.

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, 2017 and 2016, 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, 2017 and 2016, Atlantic Capital had a deferred tax asset valuation allowance totaling $9.2 million and $9.0 million, respectively, 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.

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FINANCIAL CONDITION

Total assets at September 30, 2017 and December 31, 2016 were $2.64 billion and $2.73 billion, respectively. Average total assets for the third quarter of 2017 were $2.70 billion, compared to $2.72 billion in the third quarter of 2016.

Loans

At September 30, 2017, total loans decreased $108.0 million, or 5%, to $1.91 billion compared to $2.02 billion at December 31, 2016, primarily due to the sale of $30.9 million in loans in connection with the Cleveland branch sale, as well as a decrease of $106.0 million in mortgage warehouse participations, resulting from a decrease in commitments and the market effect of increases in the Fed Funds rate. Table 6 provides additional information regarding Atlantic Capital’s loan portfolio.



Table 6 - Loans
(dollars in thousands)
	September 30, 2017			% of Total Loans		December 31, 2016			% of Total Loans

Loans held for sale
Branch loans held for sale	$	—				$	30,917
Other loans held for sale	3,274					4,302
Total loans held for sale	$	3,274				$	35,219

Loans held for investment
Commercial loans:
Commercial and industrial	$	562,426		30	%	$	531,061		27	%
Commercial real estate:
Owner occupied	348,447			18		352,523			18
Non-owner occupied	596,407			31		506,255			26
Construction and land	132,080			7		219,352			11
Mortgage warehouse participations	41,551			2		147,519			7
Total commercial loans	1,680,911			88		1,756,710			89

Residential:
Residential mortgages	101,976			5		101,921			5
Home equity	78,773			4		77,358			4
Total residential loans	180,749			9		179,279			9

Consumer	31,750			2		27,338			1
Other	16,106			1		21,565			1
	1,909,516					1,984,892
Less net deferred fees and other unearned income	(4,084		)			(3,562		)
Total loans held for investment	1,905,432					1,981,330

Total loans	$	1,908,706				$	2,016,549

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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 totaling $1.1 million were not classified as nonaccrual at September 30, 2017 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, is being recognized on all PCI loans.

At September 30, 2017, Atlantic Capital’s nonperforming assets totaled $6.0 million, or 0.23% of assets, compared to $3.5 million, or 0.13% of assets, at December 31, 2016. The increase was primarily due to the Bank placing two loan relationships totaling $2.4 million on nonaccrual status.

Nonaccrual loans totaled $4.1 million and $621,000 as of September 30, 2017 and December 31, 2016, respectively. The increase was primarily due to the Bank placing two loan relationships totaling $2.4 million on nonaccrual status. Loans past due 90 days and still accruing totaled $495,000 at September 30, 2017 compared to $994,000 at December 31, 2016. Table 7 provides details on nonperforming assets and other risk elements.



Table 7 - Nonperforming assets
(dollars in thousands)

	September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016
Nonaccrual loans	$	4,058		$	11,909		$	3,212		$	621		$	28
Loans past due 90 days and still accruing	495			391			771			994			762
Total nonperforming loans* (NPLs)	4,553			12,300			3,983			1,615			790
Other real estate owned	1,494			1,819			1,869			1,872			1,727
Total nonperforming assets (NPAs)	$	6,047		$	14,119		$	5,852		$	3,487		$	2,517
NPLs as a percentage of total loans	0.24		%	0.63		%	0.21		%	0.08		%	0.04		%
NPAs as a percentage of total assets	0.23			0.52			0.21			0.13			0.09

*Nonperforming loans exclude those loans which are PCI 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.

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Table 8 - Troubled Debt Restructurings
(dollars in thousands)
	September 30, 2017		December 31, 2016
Accruing TDRs	$	5,612	$	6,602
Nonaccruing TDRs	1,508		—
Total TDRs	$	7,120	$	6,602

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 $61.9 million and $47.6 million, respectively, as of September 30, 2017 and December 31, 2016. 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.

Allowance for Loan Losses

At September 30, 2017, the allowance for loan losses totaled $18.9 million, or 0.99% of loans, compared to $20.6 million, or 1.04% of loans, at December 31, 2016. The decrease in the allowance was primarily related to the $3.3 million charge-off of a loan relationship and the reversal of the specific reserve.

Net charge-offs for the third quarter of 2017 and 2016 were $3.3 million and $306,000, respectively. For the nine months ended September 30, 2017, net charge-offs totaled $4.7 million compared to $2.0 million for the same period in 2016. 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)
	2017												2016
	Third				Second				First				Fourth				Third
	Quarter				Quarter				Quarter				Quarter				Quarter
Balance at beginning of period	$	21,870			$	19,939			$	20,595			$	18,534			$	18,377
Provision for loan losses	314				2,048				565				2,134				463
Provision for PCI loan losses	8				(68		)		69				74				—
Loans charged-off:
Commercial and industrial	(3,292		)		—				(781		)		—				(61		)
Commercial real estate	(16		)		—				(132		)		24				(226		)
Residential mortgages	—				—				(46		)		—				—
Home equity	(31		)		(8		)		—				—				(9		)
Consumer	(7		)		(57		)		(332		)		(158		)		(60		)
Other	—				—				—				—				(5		)
Total loans charged-off	(3,346		)		(65		)		(1,291		)		(134		)		(361		)
Recoveries on loans previously charged-off:
Commercial and industrial	1				7				—				—				2
Commercial real estate	—				2				—				(15		)		20
Construction and land	15				—				—				—				12
Residential mortgages	—				1				—				—				5
Home equity	—				1				—				—				2
Consumer	8				5				1				2				12
Other	—				—				—				—				2
Total recoveries	24				16				1				(13		)		55
Net charge-offs	$	(3,322	)		$	(49	)		$	(1,290	)		$	(147	)		$	(306	)
Balance at period end	$	18,870			$	21,870			$	19,939			$	20,595			$	18,534

Net charge-offs (annualized) to average loans	0.68			%	0.01			%	0.26			%	0.03			%	0.06			%
Allowance for loan losses to total loans	0.99				1.11				1.05				1.04				0.92

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Investment Securities

Investment securities available-for-sale totaled $447.0 million at September 30, 2017, compared to $347.7 million at December 31, 2016. Atlantic Capital purchased $121.4 million in available-for-sale securities during the first quarter of 2017, as a response to the decrease in mortgage warehouse participations. 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, 2017, investment securities available-for-sale had a net unrealized loss of $3.2 million, compared to a net unrealized loss of $9.6 million as of December 31, 2016. 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, 2017.

Changes in the amount of Atlantic Capital’s available-for-sale 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 to decline and uses proceeds from maturing or sold securities to fund loan demand. Details of investment securities at September 30, 2017 and December 31, 2016 are provided in Table 10.



Table 10 - Securities
(dollars in thousands)
	September 30, 2017				December 31, 2016
Available for Sale Securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Government agencies	$	34,961	$	34,783	$	21,485	$	21,152
U.S. states and political divisions	96,813		93,779		96,908		90,172
Trust preferred securities	4,747		4,675		4,727		4,525
Corporate debt securities	16,700		16,156		19,928		19,231
Residential mortgage-backed securities	296,978		297,612		214,297		212,625
Total	$	450,199	$	447,005	$	357,345	$	347,705

The effective duration of Atlantic Capital’s securities at September 30, 2017 was 4.76 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, 2017 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

At September 30, 2017, total deposits were $2.10 billion, a decrease of $133.9 million, or 6%, from December 31, 2016. Noninterest-bearing demand deposits decreased $44.2 million, or 7%, and deposits to be assumed in branch sale decreased $31.6 million, or 100%, from December 31, 2016 to September 30, 2017.

Total average deposits for the quarter ended September 30, 2017 were $2.12 billion, a decrease of $42.3 million, or 2%, from the same period in 2016. Average noninterest-bearing demand deposits increased $73.0 million, or 13%, and average brokered deposits decreased $39.9 million, or 20%, from the quarter ended September 30, 2016 to the same period in 2017. Table 11 provides additional information regarding deposits during the past five quarters.



Table 11 - Deposits
(dollars in thousands)

Period End Deposits

	September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016			Linked Quarter Change			Year Over Year Change

DDA	$	599,292		$	612,744		$	606,386		$	643,471		$	557,783		$	(13,452	)	$	41,509
NOW	270,740			250,254			259,760			264,062			260,531			20,486			10,209
Savings	30,131			30,170			30,756			27,932			29,658			(39		)	473
Money Market	865,238			882,824			916,390			912,493			974,072			(17,586		)	(108,834		)
Time	144,250			142,915			150,867			157,810			172,348			1,335			(28,098		)
Brokered	193,994			195,047			209,385			200,223			194,464			(1,053		)	(470		)
Deposits to be assumed in branch sale	—			—			29,495			31,589			—			—			—
Total Deposits	$	2,103,645		$	2,113,954		$	2,203,039		$	2,237,580		$	2,188,856		$	(10,309	)	$	(85,211	)

Payments Clients	$	239,079		$	250,104		$	321,899		$	347,833		$	212,049		$	(11,025	)	$	27,030

Average Deposits⁽¹⁾

	2017									2016						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	$	628,029		$	626,330		$	620,325		$	591,166		$	555,008		$	1,699		$	73,021
NOW	291,810			293,160			290,862			253,187			282,701			(1,350		)	9,109
Savings	30,236			30,468			30,306			29,741			30,692			(232		)	(456		)
Money Market	870,618			860,116			815,920			853,281			923,435			10,502			(52,817		)
Time	143,862			149,898			163,021			169,677			175,135			(6,036		)	(31,273		)
Brokered	156,708			198,703			191,558			197,833			196,598			(41,995		)	(39,890		)
Total Deposits	$	2,121,263		$	2,158,675		$	2,111,992		$	2,094,885		$	2,163,569		$	(37,412	)	$	(42,306	)

Payments Clients	$	209,851		$	244,157		$	273,630		$	211,000		$	184,895		$	(34,306	)	$	24,956

Noninterest bearing deposits as a percentage of average deposits	29.6		%	29.0		%	29.4		%	28.2		%	25.7		%
Cost of deposits	0.50		%	0.46		%	0.39		%	0.37		%	0.36		%

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

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Short-Term Borrowings

There were no securities sold under repurchase agreements with commercial checking customers or balances of federal funds purchased as of September 30, 2017 or December 31, 2016.

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, 2017 and December 31, 2016, Atlantic Capital had FHLB advances of $125.0 million and $110.0 million, respectively. The balance of FHLB borrowings increased due to an increase in short-term funding needs.

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, 2017.

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, 2017, management believes that Atlantic Capital had sufficient on-balance sheet liquidity to meet its funding needs.

At September 30, 2017, Atlantic Capital had access to $375.0 million in unsecured borrowings and $695.2 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, 2017 was $324.8 million, an increase of $21.1 million, or 7%, from December 31, 2016. 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.

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. Tables 12 and 13 provide additional information regarding regulatory capital requirements and Atlantic Capital’s capital levels.

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Table 12 - Capital Ratios
(dollars in thousands)
	Consolidated						Bank						Regulatory Guidelines
	September 30, 2017			December 31, 2016			September 30, 2017			December 31, 2016			Minimum		Well capitalized		Minimum Capital plus capital conservation buffer 2019
Risk based ratios:
Common equity tier 1 capital	11.3		%	10.3		%	12.8		%	11.8		%	4.5	%	6.5	%	7.0	%
Tier 1 Capital	11.3			10.3			12.8			11.8			6.0		8.0		8.5
Total capital	14.3			13.3			13.7			12.7			8.0		10.0		10.5
Leverage ratio	9.9			9.1			11.2			10.4			4.0		5.0		N/A

Common equity tier 1 capital	$	261,389		$	241,313		$	296,437		$	276,778
Tier 1 capital	261,389			241,313			296,437			276,778
Total capital	330,596			311,954			316,151			298,053

Risk weighted assets	2,313,663			2,343,622			2,313,329			2,344,387
Quarterly average total assets for leverage ratio	2,635,760			2,654,473			2,641,320			2,654,473

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 11.3% at September 30, 2017, exceeding the fully phased-in minimum of 7.0%, which includes the 2.5% minimum capital 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
(dollars in thousands)

	September 30, 2017
Tier 1 capital	$	261,389
Less: restricted core capital	—
Tier 1 common equity	$	261,389

Risk-adjusted assets	$	2,313,663
Tier 1 common equity ratio	11.3		%

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, 2017, Atlantic Capital had issued commitments to extend credit of approximately $686.7 million and standby letters of credit of approximately $13.7 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

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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, 2017 compared to December 31, 2016.

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 industry, collateral type and product. Atlantic Capital has implemented policies and procedures designed 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.

Market Risk Management

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, 2017, indicates that, over a 12-month period, net interest income is estimated to increase by 13.74% 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 client 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.

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Table 14 provides the impact on net interest income resulting from various interest rate scenarios as of September 30, 2017 and December 31, 2016.



Table 14 - Net Interest Income Sensitivity Simulation Analysis

	Estimated change in net interest income
Change in interest rate (basis point)	September 30, 2017			December 31, 2016
-100	(9.44	)	%	(8.59	)	%
+100	6.70			8.20
+200	13.74			16.39
+300	20.50			20.34

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, 2017, the MVE calculated with a 200-basis point shock up in rates decreased by (1.41)% from the base case MVE value. Table 15 presents the MVE profile as of September 30, 2017 and December 31, 2016.



Table 15 - Market Value of Equity Modeling Analysis

	Estimated % change in MVE
Change in interest rate (basis point)	September 30, 2017			December 31, 2016
-100	(1.09	)	%	0.90		%
+100	(0.22	)		(2.39	)
+200	(1.41	)		(4.52	)
+300	(3.22	)		(5.94	)

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 the Company’s 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, 2017, 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, 2017.

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, 2017 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, 2016, 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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EXHIBIT INDEX



3.1	Amended and Restated Articles of Incorporation of Atlantic Capital Bancshares, Inc., which is incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-4 (file no. 333-204855), initially filed with the Securities and Exchange Commission on June 10, 2015
3.2	Amended and Restated Bylaws of Atlantic Capital Bancshares, Inc., which is incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (file no. 001-37615), filed with the Securities and Exchange Commission on January 19, 2017
10.1	Separation Agreement, dated October 25, 2017, by and among Atlantic Capital Bancshares, Inc., Atlantic Capital Bank, N.A. and D. Michael Kramer, which is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (file no. 001-37615), filed with the Securities and Exchange Commission on October 26, 2017.*
10.2	Atlantic Capital Bancshares, Inc. 2017 Change in Control Plan.*
10.3	Atlantic Capital Bank Severance Plan.*
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, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016; (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016; (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016; (iv) the Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2017 and 2016; (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (vi) the Notes to the Unaudited Consolidated Financial Statements

* Management contract or compensatory plan or arrangement.

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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 9, 2017