Atlantic Capital Bancshares, Inc. - Quarter Report: 2018 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, 2018



¨	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.)

945 East Paces Ferry Road NE, Suite 1600, Atlanta, Georgia	30326
(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 every Interactive Data File required to be submitted 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 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	¨
		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: 26,107,896 shares outstanding as of October 31, 2018

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Atlantic Capital Bancshares, Inc.

Form 10-Q

INDEX



		Page No.
PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements (Unaudited)	1

	Consolidated Balance Sheets - September 30, 2018 and December 31, 2017	1

	Consolidated Statements of Income - Three and Nine Months ended September 30, 2018 and 2017	2

	Consolidated Statements of Comprehensive Income - Three and Nine Months ended September 30, 2018 and 2017	3

	Consolidated Statements of Shareholders’ Equity - Nine Months ended September 30, 2018 and 2017	4

	Consolidated Statements of Cash Flows - Nine Months ended September 30, 2018 and 2017	5

	Notes to Unaudited Consolidated Financial Statements	6

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	57

PART II.	OTHER INFORMATION	58

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

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

Item 3.	Defaults Upon Senior Securities	58

Item 4.	Mine Safety Disclosures	58

Item 5.	Other Information	58

Item 6.	Exhibits	59

SIGNATURES		60

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PART I - FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

Atlantic Capital Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets



	September 30, 2018			December 31, 2017
(in thousands, except share data)	(unaudited)			December 31, 2017
ASSETS
Cash and due from banks	$	28,007		$	38,086
Interest-bearing deposits in banks	140,682			281,247
Other short-term investments	20,898			10,681
Cash and cash equivalents	189,587			330,014
Securities available-for-sale	465,756			449,117
Other investments	33,021			32,174
Loans held for sale	1,886			1,487
Loans held for investment	2,038,434			1,933,839
Less: Allowance for loan losses	(20,443		)	(19,344		)
Loans held for investment, net	2,017,991			1,914,495
Premises and equipment, net	17,371			12,054
Bank owned life insurance	64,769			63,667
Goodwill and intangible assets, net	26,557			27,633
Other real estate owned	968			1,215
Other assets	64,815			59,565
Total assets	$	2,882,721		$	2,891,421



LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	653,816		$	732,442
Interest-bearing checking	486,456			306,331
Savings	27,192			26,573
Money market	977,552			1,117,891
Time	155,689			138,612
Brokered deposits	79,119			128,816
Total deposits	2,379,824			2,450,665
Federal funds purchased and securities sold under agreements to repurchase	8,904			—
Federal Home Loan Bank borrowings	83,000			45,000
Long-term debt	49,662			49,535
Other liabilities	41,094			37,796
Total liabilities	2,562,484			2,582,996
SHAREHOLDERS’ EQUITY
Preferred Stock, no par value – 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2018 and December 31, 2017	—			—
Common stock, no par value – 100,000,000 shares authorized; 26,103,666 and 25,712,909 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively	305,300			299,474
Retained earnings	33,357			12,810
Accumulated other comprehensive (loss) income	(18,420		)	(3,859		)
Total shareholders’ equity	320,237			308,425
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,882,721		$	2,891,421

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)	2018		2017			2018			2017
INTEREST INCOME
Loans, including fees	$	24,619	$	21,491		$	71,073		$	62,846
Investment securities available-for-sale	2,789		2,298			8,068			6,671
Interest and dividends on other interest-earning assets	1,111		562			2,706			1,617
Total interest income	28,519		24,351			81,847			71,134
INTEREST EXPENSE
Interest on deposits	4,403		2,693			11,098			7,221
Interest on Federal Home Loan Bank advances	637		459			1,912			1,213
Interest on federal funds purchased and securities sold under agreements to repurchase	92		84			267			196
Interest on long-term debt	824		824			2,476			2,471
Total interest expense	5,956		4,060			15,753			11,101
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES	22,563		20,291			66,094			60,033
Provision for loan losses	845		322			1,444			2,936
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	21,718		19,969			64,650			57,097
NONINTEREST INCOME
Service charges	1,278		1,247			3,778			3,870
(Loss) gain on sales of securities available-for-sale	—		(80		)	(2		)	(80		)
Gain (loss) on sales of other assets	58		44			(154		)	788
Mortgage income	315		320			982			965
Trust income	—		437			1,025			1,332
Derivatives income	20		(3		)	154			62
Bank owned life insurance	379		384			1,126			1,146
SBA lending activities	882		888			3,181			3,286
Gains on sale of branches	—		—			—			302
Gain on sale of trust business	—		—			1,681			—
Other noninterest income	134		240			609			950
Total noninterest income	3,066		3,477			12,380			12,621
NONINTEREST EXPENSE
Salaries and employee benefits	10,152		10,409			33,150			32,077
Occupancy	1,288		1,129			3,854			3,433
Equipment and software	964		776			2,655			2,577
Professional services	803		1,595			2,595			3,472
Postage, printing and supplies	75		63			194			226
Communications and data processing	947		982			2,993			3,038
Marketing and business development	281		272			662			721
FDIC premiums	208		308			552			754
Merger and conversion costs	—		—			—			304
Amortization of intangibles	296		391			958			1,286
Foreclosed property/problem asset expense	12		7			296			117
Other noninterest expense	1,569		1,572			4,439			4,866
Total noninterest expense	16,595		17,504			52,348			52,871
INCOME BEFORE PROVISION FOR INCOME TAXES	8,189		5,942			24,682			16,847
Provision for income taxes	1,676		1,890			4,980			5,236
NET INCOME	$	6,513	$	4,052		$	19,702		$	11,611
NET INCOME PER SHARE:
Net income per share – basic	$	0.25	$	0.16		$	0.76		$	0.45
Net income per share – diluted	$	0.25	$	0.16		$	0.75		$	0.45

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)	2018			2017			2018			2017
Net income	$	6,513		$	4,052		$	19,702		$	11,611
Other comprehensive income
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period, net of tax of ($1,041), $272, ($3,775), and $2,450, respectively	(3,119		)	434			(11,322		)	3,916
Reclassification adjustment for losses (gains) included in net income net of tax of $0, $31, $1, and $31, respectively	—			49			1			49
Unrealized gains (losses) on available-for-sale securities, net of tax	(3,119		)	483			(11,321		)	3,965
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges, net of tax of ($145), ($46), ($799), and ($125), respectively	(434		)	(75		)	(2,396		)	(202		)
Changes from cash flow hedges	(434		)	(75		)	(2,396		)	(202		)
Other comprehensive income (loss), net of tax	(3,553		)	408			(13,717		)	3,763
Comprehensive income	$	2,960		$	4,460		$	5,985		$	15,374

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, 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 option compensation	—	472		—		—			472
Balance - September 30, 2017	25,716,418	$	298,469	$	28,147	$	(1,862	)	$	324,754



Balance - December 31, 2017	25,712,909	$	299,474	$	12,810	$	(3,859	)	$	308,425
Comprehensive income:
Net Income	—	—		19,702		—			19,702
Reclassification of tax effects from AOCI	—	—		844		(844		)	—
Change in unrealized gains (losses) on investment securities available-for-sale, net	—	—		—		(11,321		)	(11,321		)
Change in unrealized gains (losses) on cash flow hedges	—	—		—		(2,396		)	(2,396		)
Total comprehensive income									5,985
Change in accounting principle - Revenue Recognition	—	—		1		—			1
Net issuance of restricted stock	66,686	—		—		—			—
Issuance of common stock for option exercises	285,230	4,003		—		—			4,003
Issuance of common stock for long-term incentive plan	38,841	687		—		—			687
Restricted stock activity	—	832		—		—			832
Stock option compensation	—	168		—		—			168
Performance share compensation	—	136		—		—			136
Balance - September 30, 2018	26,103,666	$	305,300	$	33,357	$	(18,420	)	$	320,237

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)	2018			2017
OPERATING ACTIVITIES
Net income	$	19,702		$	11,611
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses	1,444			2,936
Depreciation, amortization, and accretion	3,508			4,088
Amortization of restricted stock and performance share compensation	968			869
Stock option compensation	168			472
Loss (gain) on sales of available-for-sale securities	2			80
Loss on disposition of premises and equipment, net	214			347
Net write downs and losses (gains) on sales of other real estate owned	222			(267		)
Small Business Investment Company (SBIC) impairment	228			—
Gain on sale of tax credit	—			(426		)
Net increase in cash value of bank owned life insurance	(1,102		)	(1,124		)
Net gains on sale of branches	—			(302		)
Net gain on sale of trust business	(1,681		)	—
Origination of servicing assets	(739		)	(749		)
Proceeds from sales of SBA loans	46,924			34,448
Net gains on sale of SBA loans	(2,578		)	(2,367		)
Changes in operating assets and liabilities -
Net change in loans held for sale	(399		)	7,587
Net (increase) decrease in other assets	581			(4,115		)
Net decrease in accrued expenses and other liabilities	3,893			9,454
Net cash provided by operating activities	71,355			62,542
INVESTING ACTIVITIES
Activity in securities available-for-sale:
Prepayments	37,854			35,271
Maturities and calls	215			5,190
Sales	24			1,813
Purchases	(71,942		)	(139,465		)
Net change in loans held for investment	(149,347		)	38,720
(Purchases) proceeds of Federal Home Loan Bank stock, net	(1,762		)	(721		)
(Purchases) proceeds of Federal Reserve Bank stock, net	(50		)	(91		)
Proceeds from sales of other real estate	402			1,081
Net cash received (paid) for branch divestiture	—			5,379
(Purchases) of premises and equipment, net	(7,242		)	(1,353		)
Net cash (used in) investing activities	(191,848		)	(54,176		)
FINANCING ACTIVITIES
Net change in deposits	(70,841		)	(111,371		)
Net change in short-term borrowings	8,904			—
Proceeds from Federal Home Loan Bank advances	1,203,100			1,404,000
Repayments of Federal Home Loan Bank advances	(1,165,100		)	(1,389,000		)
Proceeds from exercise of stock options	4,003			3,531
Net cash (used in) financing activities	(19,934		)	(92,840		)
NET CHANGE IN CASH AND CASH EQUIVALENTS	(140,427		)	(84,474		)
CASH AND CASH EQUIVALENTS – beginning of period	330,014			165,725
CASH AND CASH EQUIVALENTS – end of period	$	189,587		$	81,251

	Nine Months Ended
	September 30,
SUPPLEMENTAL SCHEDULE OF CASH FLOWS	2018			2017
Interest paid	$	14,817		$	12,270
Income taxes paid	155			840

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, Atlantic Capital Bank, N.A. (the “Bank”), 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

Recently Adopted Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The guidance gives entities the option to reclassify into retained earnings tax effects related to items in accumulated other comprehensive income (“OCI”) that were stranded in accumulated OCI as a result of tax reform. It is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption in any period is permitted and Atlantic Capital adopted ASU 2018-02 as of January 1, 2018. The adoption of this update resulted in a reclassification of approximately $844,000 between accumulated OCI and retained earnings, and a net impact of zero to total shareholders’ equity.

In August 2017, the FASB issued 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 adopted ASU 2017-12 as of 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. Adoption did not have a material impact on Atlantic Capital’s 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 were effective for interim and annual reporting periods beginning after December 15, 2017. This ASU did not have a material impact on Atlantic Capital’s consolidated financial statements.

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 were effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. This ASU did not have a material impact on the Company’s consolidated financial statements.

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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 accounted 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 requires that public business entities base their fair value disclosures for financial instruments that are not measured at fair value in the financial statements on the exit price notion. For public entities, this update was effective for fiscal years beginning after December 15, 2017. The adoption of this update did not have a material impact on Atlantic Capital’s consolidated financial statements, however Atlantic Capital changed the disclosure of financial instruments not measured at fair value to reflect the exit price notion.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” 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 was effective for annual and interim periods beginning after December 15, 2017. Atlantic Capital completed its review of the impact of ASU 2014-09 on components of non-interest income and did not find any significant changes to its methodology of recognizing revenue. Revenue streams impacted by the ASU included service charges, trust income, sales of financed other real estate, and check printing revenue. The Company recorded a cumulative effect adjustment to first quarter 2018 opening retained earnings in an amount less than $2,000, and included newly applicable revenue disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 31, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for new disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The adoption will not have a material effect on the Company’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 operations.

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 15, 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. The Company has established a CECL working group with the expertise needed to implement the guidance. Members of the working group have developed a project task plan and timeline and are also attending conferences and meetings with audit firms, bank regulators and other banks to keep current on evolving interpretations of the guidance. The Company is implementing a software package supported by a third-party vendor to automate the calculation of the allowance for loan losses under the new methodology. 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.

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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. Upon adoption, Atlantic Capital expects to report higher assets and liabilities as a result of including leases on the consolidated balance sheet. The Company does not expect the new guidance to have a material impact on the consolidated statement of income or the consolidated statement of shareholders’ equity.

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NOTE 3 – ACQUISITIONS AND DIVESTITURES

Sale of Southeastern Trust Company (“SETCO”)

On December 14, 2017, the Bank entered into an agreement with The Banc Group, LLC to sell its trust business, a division of the Bank known as Southeastern Trust Company (“SETCO”), for approximately $1.7 million. The Banc Group, LLC, which subsequently changed its name to Southeastern Trust Company, LLC, is controlled by a former director and Chief Operating Officer of the Company. The sale of SETCO closed on June 1, 2018 and Atlantic Capital recorded a gain of $1.7 million during the second quarter, which was net of goodwill impairment in the amount of $69,000.

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, 2018 and December 31, 2017. 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, 2018	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	$	20,898	$	—	$	20,898	$	(20,898	)	$	—		$	—
Derivatives	4,572		—		4,572		—			—			4,572
Total	$	25,470	$	—	$	25,470	$	(20,898	)	$	—		$	4,572
							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	$	8,904	$	—	$	8,904	$	(10,828	)	$	—		$	—
Derivatives	8,552		—		8,552		(7,226		)	(1,326		)	—
Total	$	17,456	$	—	$	17,456	$	(18,054	)	$	(1,326	)	$	—

							Gross Amounts not Offset in the Balance Sheet
December 31, 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	$	10,681	$	—	$	10,681	$	(10,681	)	$	—		$	—
Derivatives	3,018		—		3,018		—			—			3,018
Total	$	13,699	$	—	$	13,699	$	(10,681	)	$	—		$	3,018
							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	4,023		—		4,023		(2,705		)	(1,318		)	—
Total	$	4,023	$	—	$	4,023	$	(2,705	)	$	(1,318	)	$	—

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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, 2018 and December 31, 2017.



Available-For-Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2018
Debt securities—
U.S. Government agencies	$	36,708	$	—	$	(1,263	)	$	35,445
U.S. states and political divisions	91,656		2		(8,993		)	82,665
Trust preferred securities	4,774		—		(149		)	4,625
Corporate debt securities	12,879		—		(510		)	12,369
Residential mortgage-backed securities	340,417		2,427		(12,192		)	330,652
Total	$	486,434	$	2,429	$	(23,107	)	$	465,756

December 31, 2017
Debt securities—
U.S. Government agencies	$	34,699	$	11	$	(599	)	$	34,111
U.S. states and political divisions	92,169		237		(2,405		)	90,001
Trust preferred securities	4,754		—		(104		)	4,650
Corporate debt securities	12,948		60		(386		)	12,622
Residential mortgage-backed securities	310,129		2,423		(4,819		)	307,733
Total	$	454,699	$	2,731	$	(8,313	)	$	449,117

The following table presents the amortized cost and fair value of debt securities by contractual maturity at September 30, 2018. 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	$	246	$	245
Over 1 year through 5 years	30,299		29,151
5 years to 10 years	47,062		45,326
Over 10 years	68,410		60,382
	146,017		135,104
Residential mortgage-backed securities	340,417		330,652
Total	$	486,434	$	465,756

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The following table summarizes available-for-sale securities in an unrealized loss position as of September 30, 2018 and December 31, 2017.



	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, 2018
U.S. Government agencies	$	11,983	$	(310	)	$	23,462	$	(952	)	$	35,445	$	(1,262	)
U.S. states and political divisions	22,182		(1,301		)	59,978		(7,693		)	82,160		(8,994		)
Trust preferred securities	4,625		(149		)	—		—			4,625		(149		)
Corporate debt securities	7,446		(141		)	4,922		(369		)	12,368		(510		)
Residential mortgage-backed securities	133,239		(3,224		)	184,247		(8,968		)	317,486		(12,192		)
Totals	$	179,475	$	(5,125	)	$	272,609	$	(17,982	)	$	452,084	$	(23,107	)
December 31, 2017
U.S. Government agencies	$	22,148	$	(348	)	$	9,145	$	(251	)	$	31,293	$	(599	)
U.S. states and political divisions	14,009		(183		)	58,744		(2,222		)	72,753		(2,405		)
Trust preferred securities	—		—			4,650		(104		)	4,650		(104		)
Corporate debt securities	2,989		(27		)	2,970		(359		)	5,959		(386		)
Residential mortgage-backed securities	155,637		(1,344		)	126,580		(3,475		)	282,217		(4,819		)
Totals	$	194,783	$	(1,902	)	$	202,089	$	(6,411	)	$	396,872	$	(8,313	)

At September 30, 2018, there were 337 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, 2018 and December 31, 2017 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 internal and external analyst reviews. No impairment charges on securities available-for-sale were recognized during the three or nine months ended September 30, 2018 or 2017.

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, 2018 and 2017.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018			2017
	(in thousands)
Proceeds from sales	$	—	$	1,813		$	24		$	1,813
Gross realized gains	—		—			—			—
Gross realized losses	—		(80		)	(2		)	(80		)
Net losses on sales of securities	$	—	$	(80	)	$	(2	)	$	(80	)

Investment securities with a carrying value of $70.6 million and $93.9 million were pledged to secure public funds and other borrowings at September 30, 2018 and December 31, 2017, respectively.

As of September 30, 2018, Atlantic Capital had investments with a carrying value of $4.1 million in Small Business Investment Companies (“SBICs”) where Atlantic Capital is the limited partner. During the second quarter of 2018, and cumulatively for the nine months ended September 30, 2018, the Company recorded impairment in the amount of $228,000 on these SBICs. The impairment resulted from deterioration in the credit quality of one of the SBICs and their inability to pay distributions until their financial position improves. There have been no upward adjustments, cumulatively or year-to-date, on these investments.

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NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio as of September 30, 2018 and December 31, 2017, is summarized below.



	September 30, 2018			December 31, 2017
	(in thousands)
Loans held for sale
Other loans held for sale	$	1,886		$	1,487
Total loans held for sale	$	1,886		$	1,487

Loans held for investment
Commercial loans:
Commercial and industrial	$	648,349		$	615,359
Commercial real estate	974,054			940,415
Construction and land	159,781			115,495
Mortgage warehouse participations	27,838			39,981
Total commercial loans	1,810,022			1,711,250
Residential:
Residential mortgages	109,522			104,484
Home equity	66,847			76,244
Total residential loans	176,369			180,728
Consumer	33,540			29,393
Other	21,399			16,278
Total loans	2,041,330			1,937,649
Less net deferred fees and other unearned income	(2,896		)	(3,810		)
Less allowance for loan losses	(20,443		)	(19,344		)
Loans held for investment, net	$	2,017,991		$	1,914,495

At September 30, 2018 and December 31, 2017, loans with a carrying value of $720.5 million and $667.2 million, respectively, were pledged as collateral to secure Federal Home Loan Bank of Atlanta (“FHLB”) advances and the Federal Reserve discount window.

At September 30, 2018, the carrying value and outstanding balance of Purchased Credit Impaired (“PCI”) loans accounted for under ASC 310-30 was $6.3 million and $8.3 million, respectively. At December 31, 2017, the carrying value and outstanding balance of PCI loans accounted for under ASC 310-30 was $11.8 million and $14.1 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, 2018			September 30, 2017			September 30, 2018			September 30, 2017
	(in thousands)
Balance at beginning of period	$	2,456		$	3,130		$	2,316		$	3,467
Accretion	(299		)	(427		)	(898		)	(1,206		)
Reclassification of nonaccretable discount due to change in expected cash flows	180			(202		)	473			142
Other changes, net	96			281			542			379
Balance at end of period	$	2,433		$	2,782		$	2,433		$	2,782

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, 2018, the remaining accretable fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $2.2 million compared to $2.8 million at December 31, 2017.

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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, 2018 and 2017.



	2018												2017
Three Months Ended September 30,	Commercial			Residential			Consumer			Total			Commercial			Residential			Consumer			Total
	(in thousands)
Allowance for loan losses:
Beginning balance	$	18,491		$	811		$	281		$	19,583		$	20,692		$	860		$	318		$	21,870
Provision for loan losses	761			109			(25		)	845			273			55			(6		)	322
Loans charged-off	—			—			—			—			(3,308		)	(31		)	(7		)	(3,346		)
Recoveries	—			—			15			15			16			—			8			24
Total ending allowance balance	$	19,252		$	920		$	271		$	20,443		$	17,673		$	884		$	313		$	18,870

	2018												2017
Nine Months Ended September 30,	Commercial			Residential			Consumer			Total			Commercial			Residential			Consumer			Total
	(in thousands)
Allowance for loan losses:
Beginning balance	$	18,267		$	802		$	275		$	19,344		$	18,717		$	1,418		$	460		$	20,595
Provision for loan losses	1,115			348			(19		)	1,444			3,152			(451		)	235			2,936
Loans charged-off	(176		)	(230		)	(13		)	(419		)	(4,221		)	(85		)	(396		)	(4,702		)
Recoveries	46			—			28			74			25			2			14			41
Total ending allowance balance	$	19,252		$	920		$	271		$	20,443		$	17,673		$	884		$	313		$	18,870

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. Quarterly, management evaluates these factors 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 or granted an economic 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, 2018 or December 31, 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 (accretable yield), is being recognized on all acquired loans 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, 2018 and December 31, 2017.



September 30, 2018	Commercial		Residential		Consumer		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	257	$	—	$	—	$	257
Collectively evaluated for impairment	18,995		827		271		20,093
PCI	—		93		—		93
Total ending allowance balance	$	19,252	$	920	$	271	$	20,443

Loans:
Loans individually evaluated for impairment	$	10,633	$	192	$	—	$	10,825
Loans collectively evaluated for impairment	1,795,176		174,093		54,929		2,024,198
PCI	4,213		2,084		10		6,307
Total ending loans balance	$	1,810,022	$	176,369	$	54,939	$	2,041,330

December 31, 2017	Commercial		Residential		Consumer		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	306	$	—	$	—	$	306
Collectively evaluated for impairment	17,918		800		275		18,993
PCI	43		2		—		45
Total ending allowance balance	$	18,267	$	802	$	275	$	19,344

Loans:
Loans individually evaluated for impairment	$	6,886	$	186	$	—	$	7,072
Loans collectively evaluated for impairment	1,694,948		178,204		45,671		1,918,823
PCI	9,416		2,338		—		11,754
Total ending loans balance	$	1,711,250	$	180,728	$	45,671	$	1,937,649

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The following table presents information on Atlantic Capital’s impaired loans for the three and nine months ended September 30, 2018 and 2017:



	For the Three Months Ended September 30,
	2018										2017
	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	$	4,455	$	4,455	$	—	$	4,488	$	57	$	2,424	$	2,361	$	—	$	2,287	$	14
Commercial real estate	1,725		1,562		—		1,569		—		1,946		1,783		—		1,889		—
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	237		192		—		201		1		236		190		—		191		—
Home equity	—		—		—		—		—		529		529		—		531		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	6,417	$	6,209	$	—	$	6,258	$	58	$	5,135	$	4,863	$	—	$	4,898	$	14
Impaired loans with an allowance recorded:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	4,333	$	4,333	$	356	$	4,375	$	49
Commercial real estate	4,616		4,616		257		4,616		—		572		572		134		576		6
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	—		—		—		—		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	4,616	$	4,616	$	257	$	4,616	$	—	$	4,905	$	4,905	$	490	$	4,951	$	55
Total impaired loans	$	11,033	$	10,825	$	257	$	10,874	$	58	$	10,040	$	9,768	$	490	$	9,849	$	69

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	For the Nine Months Ended September 30,
	2018										2017
	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	$	4,455	$	4,455	$	—	$	4,584	$	173	$	2,424	$	2,361	$	—	$	2,717	$	42
Commercial real estate	1,725		1,562		—		1,577		—		1,946		1,783		—		1,925		1
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	237		192		—		203		2		236		190		—		221		—
Home equity	—		—		—		—		—		529		529		—		264		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	6,417	$	6,209	$	—	$	6,364	$	175	$	5,135	$	4,863	$	—	$	5,127	$	43
Impaired loans with an allowance recorded:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	4,333	$	4,333	$	356	$	4,454	$	149
Commercial real estate	4,616		4,616		257		4,616		—		572		572		134		581		19
Construction and land	—		—		—		—		—		—		—		—		—		—
Residential mortgages	—		—		—		—		—		—		—		—		—		—
Home equity	—		—		—		—		—		—		—		—		—		—
Mortgage warehouse	—		—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—		—
Total	$	4,616	$	4,616	$	257	$	4,616	$	—	$	4,905	$	4,905	$	490	$	5,035	$	168
Total impaired loans	$	11,033	$	10,825	$	257	$	10,980	$	175	$	10,040	$	9,768	$	490	$	10,162	$	211

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, 2018 and December 31, 2017, the Company had a recorded investment in TDRs of $9.1 million and $5.3 million, respectively. The Company had commitments to lend additional funds of $18,000 and $26,000 on loans modified as TDRs, as of September 30, 2018 and December 31, 2017, respectively. During the three months ended September 30, 2018, the Company extended the interest-only repayment period on a large commercial and industrial loan, resulting in its reclassification to a TDR. 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

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a short term extension of the maturity date. There were no subsequent defaults on prior TDRs during the three and nine month periods ended September 30, 2018 and 2017.

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 and 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, 2018 and December 31, 2017, 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		Total
	(in thousands)
September 30, 2018
Commercial and industrial	$	622,599	$	3,157	$	21,221	$	318	$	—	$	647,295
Commercial real estate	952,182		2,079		15,327		—		1,562		971,150
Construction and land	159,505		21		—		—		—		159,526
Residential mortgages	105,232		1,178		859		315		289		107,873
Home equity	66,002		—		353		57		—		66,412
Mortgage warehouse	27,838		—		—		—		—		27,838
Consumer/Other	54,677		19		58		175		—		54,929
Total loans, excluding PCI loans	$	1,988,035	$	6,454	$	37,818	$	865	$	1,851	$	2,035,023
Commercial and industrial	$	—	$	—	$	1,054	$	—	$	—	$	1,054
Commercial real estate	2,370		427		—		—		107		2,904
Construction and land	243		5		7		—		—		255
Residential mortgages	631		325		693		—		—		1,649
Home equity	195		74		166		—		—		435
Mortgage warehouse	—		—		—		—		—		—
Consumer/Other	—		—		10		—		—		10
Total PCI loans	$	3,439	$	831	$	1,930	$	—	$	107	$	6,307



	Pass		Special Mention		Substandard Accruing		Substandard Nonaccruing		Doubtful		Total
	(in thousands)
December 31, 2017
Commercial and industrial	$	572,942	$	15,643	$	21,332	$	16	$	2	$	609,935
Commercial real estate	919,939		6,227		8,906		—		1,592		936,664
Construction and land	115,255		—		—		—		—		115,255
Residential mortgages	100,342		1,075		753		398		321		102,889
Home equity	74,841		64		310		285		—		75,500
Mortgage warehouse	39,981		—		—		—		—		39,981
Consumer/Other	45,422		57		192		—		—		45,671
Total loans, excluding PCI loans	$	1,868,722	$	23,066	$	31,493	$	699	$	1,915	$	1,925,895
Commercial and industrial	$	—	$	3,881	$	1,543	$	—	$	—	$	5,424
Commercial real estate	3,151		212		276		—		112		3,751
Construction and land	222		7		11		—		—		240
Residential mortgages	428		493		674		—		—		1,595
Home equity	34		354		356		—		—		744
Mortgage warehouse	—		—		—		—		—		—
Consumer/Other	—		—		—		—		—		—
Total PCI loans	$	3,835	$	4,947	$	2,860	$	—	$	112	$	11,754

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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, 2018 and December 31, 2017 by class of loans.



	As of September 30, 2018
	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	$	646,461	$	516	$	—	$	318	$	1,054	$	648,349
Commercial real estate	969,116		472		—		1,562		2,904		974,054
Construction and land	159,518		8		—		—		255		159,781
Residential mortgages	106,343		926		—		604		1,649		109,522
Home equity	66,131		224		—		57		435		66,847
Mortgage warehouse	27,838		—		—		—		—		27,838
Consumer	54,747		7		—		175		10		54,939
Total Loans	$	2,030,154	$	2,153	$	—	$	2,716	$	6,307	$	2,041,330



	As of December 31, 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	$	606,677	$	3,239	$	—	$	19	$	5,424	$	615,359
Commercial real estate	932,916		2,156		—		1,592		3,751		940,415
Construction and land	114,988		267		—		—		240		115,495
Residential mortgages	100,402		1,470		298		719		1,595		104,484
Home equity	75,081		135		—		284		744		76,244
Mortgage warehouse	39,981		—		—		—		—		39,981
Consumer	45,599		72		—		—		—		45,671
Total Loans	$	1,915,644	$	7,339	$	298	$	2,614	$	11,754	$	1,937,649

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NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill and other intangible assets as of September 30, 2018 and December 31, 2017 is summarized below:



	September 30,			December 31,
	2018			2017
	(in thousands)
Core deposit intangible	$	9,544		$	9,544
Less: accumulated amortization	(5,582		)	(4,624		)
Less: impairment related to divested branches	(2,286		)	(2,286		)
Core deposit intangible, net	1,676			2,634
Servicing assets, net	3,191			3,240
Total other intangibles, net	4,867			5,874
Goodwill	21,690			21,759
Total goodwill and other intangible assets, net	$	26,557		$	27,633

Goodwill impairment in the amount of $69,000 related to the sale of the trust business was recorded during the second quarter of 2018. There were no goodwill impairment charges recorded in the three months ended September 30, 2018 or the three and nine months ended September 30, 2017. 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)
2018
Balance, beginning of period	$	21,690	$	1,972		$	23,662		$	21,759		$	2,634		$	24,393
Amortization	—		(296		)	(296		)	—			(958		)	(958		)
Impairment, due to trust business sale	—		—			—			(69		)	—			(69		)
Balance, end of period	$	21,690	$	1,676		$	23,366		$	21,690		$	1,676		$	23,366

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

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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, 2018 and December 31, 2017, the balance of SBA loans sold and serviced by Atlantic Capital totaled $152.2 million and $135.8 million, respectively.

Changes in the balance of servicing assets for the three and nine months ended September 30, 2018 and 2017 are presented in the following table.



	Three months ended September 30,						Nine months ended September 30,
SBA Loan Servicing Assets	2018			2017			2018			2017
	(in thousands)
Beginning carrying value, net	$	2,827		$	2,564		$	2,635		$	2,359
Additions	120			157			739			750
Amortization	(239		)	(221		)	(666		)	(609		)
Impairment	—			—			—			—
Ending carrying value	$	2,708		$	2,500		$	2,708		$	2,500

At September 30, 2018 and December 31, 2017, 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, 2018				December 31, 2017
	(dollars in thousands)
Fair value of retained servicing assets	$	2,731			$	2,865
Weighted average life	5.10 years				6.22 years
Prepayment speed:	11.06			%	8.64			%
Decline in fair value due to a 10% adverse change	$	(123	)		$	(103	)
Decline in fair value due to a 20% adverse change	$	(214	)		$	(181	)
Weighted average discount rate	15.72			%	13.01			%
Decline in fair value due to a 100 bps adverse change	$	(99	)		$	(103	)
Decline in fair value due to a 200 bps adverse change	$	(167	)		$	(180	)

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, 2018 and 2017 are presented in the following table.



	Three months ended September 30,						Nine months ended September 30,
TriNet Servicing Assets	2018			2017			2018			2017
	(in thousands)
Beginning carrying value, net	$	523		$	731		$	605		$	825
Additions	—			—			—			—
Amortization	(40		)	(46		)	(122		)	(140		)
Impairment	—			—			—			—
Ending carrying value	$	483		$	685		$	483		$	685

At September 30, 2018 and December 31, 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, 2018				December 31, 2017
	(dollars in thousands)
Fair value of retained servicing assets	$	565			$	697
Weighted average life	7.34 years				7.37 years
Prepayment speed:	5.00			%	5.00			%
Decline in fair value due to a 10% adverse change	$	(8	)		$	(10	)
Decline in fair value due to a 20% adverse change	$	(15	)		$	(20	)
Weighted average discount rate	8.00			%	8.00			%
Decline in fair value due to a 100 bps adverse change	$	(14	)		$	(19	)
Decline in fair value due to a 200 bps adverse change	$	(27	)		$	(37	)

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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, 2018								September 30, 2018
	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	$	(19,825	)	$	4,958	$	(14,867	)	$	(6,274	)	$	2,415		$	(3,859	)
Reclassification of tax effects from AOCI	—			—		—			—			(844		)	(844		)
Unrealized net gains (losses) on investment securities available-for-sale	(4,160		)	1,041		(3,119		)	(15,097		)	3,775			(11,322		)
Reclassification adjustment for net realized losses on investment securities available-for-sale	—			—		—			2			(1		)	1
Unrealized net gains (losses) on derivatives	(579		)	145		(434		)	(3,195		)	799			(2,396		)
Accumulated other comprehensive income (loss) end of period	$	(24,564	)	$	6,144	$	(18,420	)	$	(24,564	)	$	6,144		$	(18,420	)



	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	)

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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, 2018 and 2017.



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
(in thousands, except share and per share amounts)
Net income available to common shareholders	$	6,513	$	4,052	$	19,702	$	11,611
Weighted average shares outstanding
Basic ⁽¹⁾	26,103,397		25,699,179		25,956,336		25,548,646
Effect of dilutive securities:
Stock options, warrants and performance share awards	151,375		191,600		178,319		251,205
Diluted	26,254,772		25,890,779		26,134,655		25,799,851
Income per common share:
Basic	$	0.25	$	0.16	$	0.76	$	0.45
Diluted	$	0.25	$	0.16	$	0.75	$	0.45
⁽¹⁾Unvested restricted shares are participating securities and included in basic share calculations.

Stock options outstanding of 244 at September 30, 2018 and 550 at September 30, 2017 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 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, 2018, 26,103,666 shares of common stock were issued and outstanding. At December 31, 2017, 25,712,909 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 2018 or 2017. 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 these objectives, Atlantic Capital primarily uses interest rate swaps as part of its interest rate risk management strategy.

Cash Flow Hedges

At September 30, 2018, 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, 2018 and December 31, 2017, Atlantic Capital had interest rate swaps designated as cash flow hedges with aggregate notional amounts of $100.0 million, respectively.

No hedge ineffectiveness gains or losses were recognized on active cash flow hedges for the three and nine months ended September 30, 2018 and 2017. 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 $461,000 will be reclassified as a decrease 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 customers desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. 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, 2018 and December 31, 2017, Atlantic Capital had interest rate swaps related to this program with an aggregate notional amount of $111.0 million and $142.3 million, respectively.

Atlantic Capital acquired a loan level hedging program, which First Security Group, Inc. (“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. Quarterly, 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, 2018 and December 31, 2017, Atlantic Capital had minimum collateral posting thresholds with certain of its derivative counterparties and posted collateral of $9.1 million and $8.8 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, 2018 and December 31, 2017, Atlantic Capital had credit risk participation agreements with a notional amount of $10.0 million and $14.8 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, 2018 and December 31, 2017:



Derivatives designated as hedging instruments under ASC 815

(in thousands)		September 30, 2018				December 31, 2017
Interest Rate Products	Balance Sheet Location	Notional Amount		Fair Value		Notional Amount		Fair Value
Cash flow hedge of LIBOR based loans	Other liabilities	$	100,000	$	3,998	$	100,000	$	887

Derivatives not designated as hedging instruments under ASC 815

(in thousands)		September 30, 2018				December 31, 2017
Interest Rate Products	Balance Sheet Location	Notional Amount		Fair Value		Notional Amount		Fair Value
Customer swap positions	Other assets	$	55,483	$	1,650	$	71,160	$	946
Zero premium collar	Other assets	91,534		2,922		94,953		2,072
		$	147,017	$	4,572	$	166,113	$	3,018

Dealer offsets to customer swap positions	Other liabilities	$	55,483	$	1,631	$	71,160	$	975
Credit risk participation	Other liabilities	10,001		1		14,807		4
Dealer offset to zero premium collar	Other liabilities	91,534		2,922		94,953		2,157
		$	157,018	$	4,554	$	180,920	$	3,136

The following table presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017.



Derivatives not designated as hedging instruments under ASC 815

(in thousands)	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative					Amount of Gain or (Loss) Recognized in Income on Derivative
		Three Months Ended September 30,					Nine Months Ended September 30,
		2018		2017			2018		2017
Interest rate products	Other income / (expense)	$	10	$	(3	)	$	132	$	(121	)
Other contracts	Other income / (expense)	—		—			4		(6		)
Total		$	10	$	(3	)	$	136	$	(127	)

Fee income	Other income / (expense)	$	10	$	—		$	18	$	189

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, 2018 and 2017:



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)
	2018			2017			Location	2018			2017		2018			2017			Location	2018		2017
Interest rate swaps	$	(598	)	$	(75	)	Interest income	$	(18	)	$	84	$	(3,093	)	$	(202	)	Interest income	$	103	$	331

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NOTE 12 – OTHER BORROWINGS AND LONG TERM DEBT

Federal Home Loan Bank borrowings as of September 30, 2018 and December 31, 2017 are as follows:



	September 30, 2018					December 31, 2017
	Balance		Interest Rate			Balance		Interest Rate
	(in thousands)					(in thousands)
FHLB short-term borrowings:					FHLB short-term borrowings:
Fixed rate advance maturing October 1, 2018	$	30,000	2.09	%	Fixed rate advance maturing January 16, 2018	$	45,000	1.40	%
Fixed rate advance maturing October 2, 2018	53,000		2.09	%
Total	$	83,000			Total	$	45,000

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, 2018		December 31, 2017
	(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		338		465
Subordinated debt, net	$	49,662	$	49,535

All subordinated debt outstanding at September 30, 2018 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 Company’s 2015 Stock Incentive Plan (as amended and restated effective May 16, 2018), 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, 2018, approximately 3,515,000 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, 2018 and December 31, 2017, no warrants were outstanding for the purchase of common stock.

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The Company estimates the fair value of its options awards using the Black-Scholes option pricing model. The risk-free rate for periods within the contractual life of the option 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 the nine months ended September 30, 2018 and 2017:



	For the nine months ended September 30,
	2018		2017
Risk‑free interest rate	1.66	%	1.00-1.99%
Expected term in years	0.25		0.25-8
Expected stock price volatility	24.2	%	23.2-25.3%
Dividend yield	—	%	—	%

The following table represents stock option activity for the nine months ended September 30, 2018:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2017	757,711		$	12.66
Granted/modified⁽¹⁾	15,000		14.64
Exercised	(300,616	)	13.32
Forfeited⁽¹⁾	(19,935	)	14.08
Expired	(306	)	105.97
Outstanding, September 30, 2018	451,854		$	11.97	4.25	$	2,185

Exercisable, September 30, 2018	371,974		$	11.39	3.63	$	2,022

⁽¹⁾During the nine months ended September 30, 2018, the Company modified options for 15,000 shares. The modifications are included as shares granted/modified and as shares forfeited in this table.

Atlantic Capital recognized compensation expense relating to stock options of $70,000 and $167,000 for the three and nine months ended September 30, 2018, respectively, and $191,000 and $472,000 for the three and nine months ended September 30, 2017, 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. In April 2018, the Company granted performance share awards to members of executive management under Atlantic Capital’s Long Term Incentive Plan (“LTIP”). The Company also granted restricted stock awards to certain employees in 2018 under the 2015 Stock Incentive Plan.

The following table represents restricted stock and performance share award activity for the nine months ended September 30, 2018:



	Shares		Weighted Average Grant-Date Fair Value
Outstanding, December 31, 2017	239,468		$	15.69
Granted/modified⁽¹⁾	135,757		19.89
Exercised	(59,300	)	15.16
Forfeited⁽¹⁾	(30,888	)	15.97
Outstanding, September 30, 2018	285,037		$	17.78

⁽¹⁾During the nine months ended September 30, 2018, the Company modified 6,869 restricted stock awards. The modifications are included as shares granted/modified and as shares forfeited in this table.

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Compensation expense for restricted stock is based on the fair value of restricted stock awards at the time of grant, which is equal to the value of Atlantic Capital’s common stock on the date of grant. Compensation expense for performance share awards are based on the fair value of certain market conditions and the achievement of performance conditions. The value of restricted stock and performance share grants that are expected to vest is amortized into expense over the vesting period. For the three months ended September 30, 2018 and 2017, compensation expense of $444,000 and $396,000, respectively, was recognized related to restricted stock and performance share awards. For the nine months ended September 30, 2018 and 2017, compensation expense of $1.3 million and $869,000, respectively, was recognized related to restricted stock and performance share awards.

As of September 30, 2018, there was $2.9 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 2.53 years.

During the nine months ended September 30, 2018, the Company modified options for 15,000 shares and 6,869 restricted stock awards to two individuals. The modifications allowed for the immediate vesting of the awards upon termination of service. The total incremental cost resulting from the modifications was $111,000 for the nine months ended September 30, 2018.

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, SBIC investments, 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, 2018 and 2017.

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 current level of interest rates, the likelihood of default by Atlantic Capital and its counterparties, total exposure and remaining maturities in determining the appropriate fair

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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.

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, 2018 and December 31, 2017.



	Fair Value Measurements at
	September 30, 2018 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	$	—	$	35,445	$	—	$	35,445
U.S. states and political subdivisions	—		82,665		—		82,665
Trust preferred securities	—		4,625		—		4,625
Corporate debt securities	—		12,369		—		12,369
Mortgage-backed securities	—		330,652		—		330,652
Total securities available-for-sale	$	—	$	465,756	$	—	$	465,756
Interest rate derivative assets	$	—	$	4,572	$	—	$	4,572
Interest rate derivative liabilities	$	—	$	8,552	$	—	$	8,552



	Fair Value Measurements at
	December 31, 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	$	—	$	34,111	$	—	$	34,111
U.S. states and political subdivisions	—		90,001		—		90,001
Trust preferred securities	—		4,650		—		4,650
Corporate debt securities	—		12,622		—		12,622
Mortgage-backed securities	—		307,733		—		307,733
Total securities available-for-sale	$	—	$	449,117	$	—	$	449,117
Interest rate derivative assets	$	—	$	3,018	$	—	$	3,018
Interest rate derivative liabilities	$	—	$	4,023	$	—	$	4,023

For the nine months ended September 30, 2018 and 2017, 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, 2018 and December 31, 2017.



September 30, 2018	Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Total
	(in thousands)
Impaired Loans	$	—	$	—	$	1,588	$	1,588



December 31, 2017	Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Total
	(in thousands)
Impaired Loans	$	—	$	—	$	2,199	$	2,199

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 loans held for investment, fair value is measured using the exit price notion. 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, 2018 and December 31, 2017.



	Fair Value Measurements at
	September 30, 2018 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	$	28,007	$	28,007	$	—	$	—
Interest bearing deposits in banks	140,682		140,682		—		—
Other short-term investments	20,898		20,898		—		—
Total securities available-for-sale	465,756		—		465,756		—
FHLB stock	6,150		—		—		6,150
Federal Reserve Bank stock	9,842		—		—		9,842
Loans held for investment, net	2,017,991		—		—		1,963,794
Loans held for sale	1,886		—		1,886		—
Derivative assets	4,572		—		4,572		—
Financial liabilities
Deposits	$	2,379,824	$	—	$	2,208,910	$	—
Federal funds purchased and securities sold under agreements to repurchase	8,904		8,904		—		—
Subordinated debt	49,662		—		48,995		—
FHLB advances	83,000		—		83,011		—
Derivative financial instruments	8,552		—		8,552		—



	Fair Value Measurements at
	December 31, 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	$	38,086	$	38,086	$	—	$	—
Interest-bearing deposits in other banks	281,247		281,247		—		—
Other short-term investments	10,681		10,681		—		—
Total securities available-for-sale	449,117		—		449,117		—
FHLB stock	4,388		—		—		4,388
Federal Reserve Bank stock	9,792		—		—		9,792
Loans held for investment, net	1,914,495		—		—		1,955,705
Loans held for sale	1,487		—		1,487		—
Derivative assets	3,018		—		3,018		—
Financial liabilities
Deposits	$	2,450,665	$	—	$	2,411,810	$	—
Subordinated debt	49,535		—		49,888		—
FHLB advances	45,000		—		45,057		—
Derivative financial instruments	4,023		—		4,023		—

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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, 2018 and December 31, 2017 was as follows:



	September 30, 2018		December 31, 2017
	(in thousands)
Financial Instruments whose contract amount represents credit risk:
Commitments to extend credit	$	717,847	$	689,753
Standby letters of credit	13,006		10,958
	$	730,853	$	700,711

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 – REVENUE RECOGNITION

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 2, Accounting Standards Updates and Recently Adopted Standards, the implementation of the new standard did not result in any significant changes to the Company’s methodology of recognizing revenue; as such, the Company recorded a cumulative effect adjustment to first quarter 2018 opening retained earnings in an amount less than $2,000. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with financial guarantees and derivatives are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts and trust and asset management income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams within the scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges represent general service fees for monthly account maintenance and activity, or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed, such as a wire transfer or ATM withdrawal. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. The following table presents service charges by type of service provided for the three and nine months ended September 30, 2018 and 2017:

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	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2018		2017		2018		2017
	(in thousands)
Deposit account analysis fees and charges	$	654	$	551	$	1,860	$	1,567
ATM fees	276		370		863		1,182
NSF fees	177		176		541		625
Wire fees	110		88		302		266
Foreign Exchange Fees	54		50		186		186
Other	7		12		26		44
	$	1,278	$	1,247	$	3,778	$	3,870

Trust and Asset Management

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. During the second quarter of 2018, Atlantic Capital sold its trust business, Southeastern Trust Company. The following table presents trust income by type of service provided for the three and nine months ended September 30, 2018 and 2017:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2018		2017		2018		2017
	(in thousands)
Personal trust and agency accounts	$	—	$	259	$	616	$	728
Employee benefit and retirement-related trust and agency accounts	—		58		120		166
Investment management and investment advisory agency accounts	—		89		217		263
Custody and safekeeping accounts	—		12		26		43
Other	—		19		46		132
	$	—	$	437	$	1,025	$	1,332

Other

Other noninterest income consists of other recurring revenue streams such as check printing income, safety deposit box rental fees, and other miscellaneous revenue streams. Check printing income is recognized ratably over the contract period as the Company satisfies its performance obligation to sell a specific number of check packages. Safe deposit box rental fees are charged to the customer annually and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2018 and December 31, 2017, the Company did not have any significant contract balances.

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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:


•	changes in our business strategy implemented following the integration with First Security Group, Inc. (“First Security”) may result in the expected benefits of the acquisition not being fully realized;


•	costs associated with, and fluctuations in income resulting from, strategic decisions with respect to particular markets, locations or lines of business;


•	loss of income from our trust business, and potential loss of customers, 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, particularly new deposit products;


•	customer borrowing, repayment, investment and deposit practices;


•	the introduction, withdrawal, success and timing of business initiatives;


•	the impact, extent, and timing of technological changes;


•	severe catastrophic events in our geographic area;


•	a weakening of the economies in which we conduct operations may adversely affect our operating results;


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


•	changes in 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 or respond to interest rate changes correctly and manage interest rate risk presented through unanticipated changes in our interest rate risk position and/or short- and long-term interest rates;


•	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;


•	increased competitive pressure due to consolidation in the financial services industry, particularly the entry of larger financial institutions in our geographic markets;

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•	our ability to recruit and retain talented executive officers, and key employees and their customer and community relationships;


•	risks related to security breaches, cybersecurity attacks and other significant disruptions in our information technology systems, including attacks focused on the financial industry, may result in costs and liabilities related to compromised personal information of our customers;


•	the effect of changes in tax law, such as the effect of the Tax Cuts and Jobs Act that was enacted on December 22, 2017; and


•	other risks and factors identified in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 15, 2018 (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 $6.5 million for the third quarter of 2018 compared to net income of $4.1 million for the third quarter of 2017. Diluted income per common share was $0.25 for the third quarter of 2018 compared to diluted income per common share of $0.16 for the third quarter of 2017.

For the nine months ended September 30, 2018, Atlantic Capital reported net income of $19.7 million. This compared to net income $11.6 million for the nine months ended September 30, 2017. Diluted income per common share was $0.75 for the nine months ended September 30, 2018 compared to $0.45 for the same period in 2017.

The increase in net income for the three months ended September 30, 2018, compared to the same period in 2017, was primarily attributable to a $2.3 million, or 11%, increase in net interest income before provision for loan losses.

For the nine months ended September 30, 2018 compared to the first nine months of 2017, the increase in net income was primarily attributable to a $6.1 million, or 10%, increase in net interest income before provision for loan losses, a $1.5 million, or 51%, decrease in loan loss provision, and a $1.7 million gain on the sale of Southeastern Trust Company.

Taxable equivalent net interest income was $22.7 million for the third quarter of 2018, compared to $20.5 million for the third quarter of 2017. Taxable equivalent net interest margin increased to 3.47% for the three months ended September 30, 2018 from 3.26% for the three months ended September 30, 2017. For the nine months ended September 30, 2018, taxable equivalent net interest income was $66.4 million compared to $60.7 million for the same period of 2017. Taxable equivalent net interest margin increased to 3.50% for the nine months ended September 30, 2018 from 3.24% for the nine months ended September 30, 2017. The margin increase for the three and nine months ended September 30, 2018 compared to the prior year was due to increases in the Fed Funds rate.

Provision for loan losses for the quarter ended September 30, 2018 totaled $845,000, an increase of $523,000 from the quarter ended September 30, 2017. The increase was primarily related to an increase in loan balances. For the nine months ended September 30, 2018, Atlantic Capital’s provision for loan losses was $1.4 million compared to a provision of $2.9 million for the first nine months of 2017. The decrease was primarily due to a lower level of net charge-offs for the nine months ended September 30, 2018 compared to the first nine months of 2017.

Noninterest income decreased $411,000, or 12%, to $3.1 million from the third quarter of 2017. The decrease was primarily due to a $437,000, or 100%, decrease in trust income due to the sale of the trust business in the second quarter of 2018.

For the first nine months of 2018, noninterest income decreased $241,000, or 2%, to $12.4 million. The decrease was primarily due to a $942,000 decrease in gains on sales of other assets, a $307,000 decrease in trust income, and a $302,000 decrease in gains on sale of branches. These decreases were offset by a $1.7 million net gain on the sale of Southeastern Trust Company in 2018. For the first nine months of 2017, gains on sales of other assets included a $240,000 gain on sale of other real estate owned and a $426,000 gain on the sale of a tax credit investment.

For the third quarter of 2018, noninterest expense decreased $909,000, or 5%, to $16.6 million compared to the third quarter of 2017. The most significant component of the decrease was a $792,000, or 50%, decrease in professional services primarily related to a reduction in legal fees.

Noninterest expense totaled $52.3 million for the nine months ended September 30, 2018, compared to $52.9 million for the same period in 2017. The most significant components of the decrease were an $877,000, or 25%, decrease in professional services and a $304,000 decrease in merger expenses related to the rebranding of the legacy First Security branches during the second quarter of 2017. These decreases were offset by a $1.1 million, or 3%, increase in salary and employee benefits primarily related to severance expense, as well as a $421,000, or 12%, increase in occupancy expense due to the move of the Atlanta headquarters.

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

	2018											2017							For the nine months ended September 30,
	Third Quarter				Second Quarter				First Quarter			Fourth Quarter				Third Quarter			2018			2017
INCOME SUMMARY
Interest income	$	28,616			$	27,444			$	26,085		$	25,350			$	24,566		$	82,145		$	71,827
Interest expense	5,956				5,332				4,465			4,028				4,060			15,753			11,101
Net interest income	22,660				22,112				21,620			21,322				20,506			66,392			60,726
Provision for loan losses	845				(173		)		772			282				322			1,444			2,936
Net interest income after provision for loan losses	21,815				22,285				20,848			21,040				20,184			64,948			57,790
Noninterest income	3,066				5,331				3,983			3,568				3,477			12,380			12,621
Noninterest expense	16,595				17,361				18,392			20,594				17,504			52,348			52,871
Income before income taxes	8,286				10,255				6,439			4,014				6,157			24,980			17,540
Income tax expense	1,773				2,104				1,401			19,351				2,105			5,278			5,929
Net income (loss)	$	6,513			$	8,151			$	5,038		$	(15,337	)		$	4,052		$	19,702		$	11,611

PER SHARE DATA
Basic earnings per share	$	0.25			$	0.31			$	0.20		$	(0.60	)		$	0.16		$	0.76		$	0.45
Diluted earnings per share	0.25				0.31				0.19			(0.60		)		0.16			0.75			0.45

PERFORMANCE MEASURES
Return on average equity	8.07			%	10.46			%	6.66		%	(18.66		)	%	4.96		%	8.41		%	4.91		%
Return on average assets	0.92				1.20				0.76			(2.24		)		0.60			0.96			0.57
Taxable equivalent net interest margin	3.47				3.54				3.51			3.39				3.26			3.50			3.24
Efficiency ratio	64.75				67.65				72.13			83.45				73.65			68.17			72.77
Equity to assets	11.11				11.77				11.29			10.67				12.31			11.11			12.31

ASSET QUALITY
Allowance for loan losses to loans	1.00			%	1.01			%	1.01		%	1.00			%	0.99		%	1.00		%	0.99		%
Net charge-offs	$	(15	)		$	129			$	231		$	(192	)		$	3,322		$	345		$	4,661
Net charge-offs to average loans⁽¹⁾	(0.00		)	%	0.03			%	0.05		%	(0.04		)	%	0.68		%	0.02		%	0.32		%
NPAs to total assets	0.13				0.14				0.13			0.14				0.23			0.13			0.23

AVERAGE BALANCES
Total loans	$	1,963,817			$	1,927,063			$	1,938,953		$	1,898,745			$	1,934,505		$	1,943,369		$	1,948,700
Investment securities	461,348				454,634				453,917			460,269				455,868			456,660			443,565
Total assets	2,805,740				2,718,071				2,704,822			2,720,070				2,701,387			2,743,247			2,719,519
Deposits	2,254,072				2,135,825				2,153,885			2,194,849				2,121,263			2,181,628			2,130,677
Shareholders’ equity	320,090				312,543				306,821			326,059				323,832			313,200			316,361
Number of common shares - basic	26,103,397				26,010,914				25,750,824			25,723,548				25,699,179			25,956,336			25,548,646
Number of common shares - diluted	26,254,772				26,200,026				25,945,773			25,888,064				25,890,779			26,134,655			25,799,851

AT PERIOD END
Total loans	$	2,040,320			$	1,935,923			$	1,960,256		$	1,935,326			$	1,908,706		$	2,040,320		$	1,908,706
Investment securities	465,756				453,968				458,730			449,117				447,005			465,756			447,005
Total assets	2,882,721				2,690,674				2,718,665			2,891,421				2,638,412			2,882,721			2,638,412
Deposits	2,379,824				2,066,587				2,096,300			2,450,665				2,103,645			2,379,824			2,103,645
Shareholders’ equity	320,237				316,770				307,059			308,425				324,754			320,237			324,754
Number of common shares outstanding	26,103,666				26,102,217				25,772,208			25,712,909				25,716,418			26,103,666			25,716,418

⁽¹⁾ Annualized.

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Non-GAAP Performance Measures Reconciliation
(dollars in thousands)
	2018									2017						For the nine months ended September 30,
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			2018			2017
Taxable equivalent interest income reconciliation
Interest income - GAAP	$	28,519		$	27,346		$	25,982		$	25,137		$	24,351		$	81,847		$	71,134
Taxable equivalent adjustment	97			98			103			213			215			298			693
Interest income - taxable equivalent	$	28,616		$	27,444		$	26,085		$	25,350		$	24,566		$	82,145		$	71,827

Taxable equivalent net interest income reconciliation
Net interest income - GAAP	$	22,563		$	22,014		$	21,517		$	21,109		$	20,291		$	66,094		$	60,033
Taxable equivalent adjustment	97			98			103			213			215			298			693
Net interest income - taxable equivalent	$	22,660		$	22,112		$	21,620		$	21,322		$	20,506		$	66,392		$	60,726

Taxable equivalent net interest income after provision for loan losses reconciliation
Net interest income after provision for loan losses - GAAP	$	21,718		$	22,187		$	20,745		$	20,827		$	19,969		$	64,650		$	57,097
Taxable equivalent adjustment	97			98			103			213			215			298			693
Net interest income after provision for loan losses - taxable equivalent	$	21,815		$	22,285		$	20,848		$	21,040		$	20,184		$	64,948		$	57,790

Taxable equivalent income before income taxes reconciliation
Income before income taxes - GAAP	$	8,189		$	10,157		$	6,336		$	3,801		$	5,942		$	24,682		$	16,847
Taxable equivalent adjustment	97			98			103			213			215			298			693
Income before income taxes - taxable equivalent	$	8,286		$	10,255		$	6,439		$	4,014		$	6,157		$	24,980		$	17,540

Taxable equivalent income tax expense reconciliation
Income tax expense - GAAP	$	1,676		$	2,006		$	1,298		$	19,138		$	1,890		$	4,980		$	5,236
Taxable equivalent adjustment	97			98			103			213			215			298			693
Income tax expense - taxable equivalent	$	1,773		$	2,104		$	1,401		$	19,351		$	2,105		$	5,278		$	5,929

Taxable equivalent net interest margin reconciliation
Net interest margin - GAAP	3.45		%	3.52		%	3.49		%	3.35		%	3.23		%	3.49		%	3.21		%
Impact of taxable equivalent adjustment	0.02			0.02			0.02			0.04			0.03			0.01			0.03
Net interest margin - taxable equivalent	3.47		%	3.54		%	3.51		%	3.39		%	3.26		%	3.50		%	3.24		%

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RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Taxable equivalent net interest income for the third quarter of 2018 totaled $22.7 million, a $2.2 million, or 11%, increase compared to the third quarter of 2017. This increase was primarily driven by a $4.1 million, or 16%, increase in taxable equivalent interest income. The change in taxable equivalent interest income primarily resulted from the following:


•	a $3.1 million, or 15%, increase in interest income on loans, resulting from increases in the Fed Funds rate and an increase in average loan balances; and


•	a $373,000, or 15%, increase to $2.9 million in taxable equivalent interest income on investment securities, resulting from a 29 basis point increase in the yield on investment securities; and


•	a $431,000 increase to $647,000 in interest income on deposits in other banks, resulting from increases in the Fed Funds rate.

Interest expense for the three months ended September 30, 2018 totaled $6.0 million, a $1.9 million, or 47%, increase from the same period of 2017. The rate paid on interest bearing liabilities increased 41 basis points from the third quarter of 2017 to the third quarter of 2018, 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 third quarter of 2018 in the amount of $52,000, compared to $75,000 in the third quarter of 2017.

Taxable equivalent net interest income for the nine months ended September 30, 2018 totaled $66.4 million, a $5.7 million, or 9%, increase compared to the same period in 2017. This increase was primarily driven by a $10.3 million, or 14%, increase in taxable equivalent interest income. The interest income increase primarily resulted from the following:


•	an $8.2 million, or 13%, increase in interest income on loans, resulting from increases in the Fed Funds rate and an increase in average loan balances; and


•	a $1.0 million, or 14%, increase to $8.4 million in tax equivalent interest income on investment securities, resulting from a 23 basis point increase in the yield on investment securities; and


•	a $992,000 increase to $1.6 million in interest income on deposits in other banks, resulting from increases in the Fed Funds rate.

Interest expense for the nine months ended September 30, 2018 totaled $15.8 million, a $4.7 million, or 42%, increase from the same period of 2017, primarily due to a $3.9 million, or 54%, increase in interest paid on deposits. The rate paid on interest bearing liabilities increased 36 basis points from the first nine months of 2017 to the same period of 2018, 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 2018 in the amount of $174,000, as compared to $280,000 in the same period of 2017.

Taxable equivalent net interest margin increased to 3.47% for the three months ended September 30, 2018 compared to 3.26% for the three months ended September 30, 2017. Taxable equivalent net interest margin for the nine months ended September 30, 2018 increased to 3.50% compared to 3.24% for the nine months ended September 30, 2017. The primary reason for the increase in taxable equivalent net interest margin for the three and nine month periods was 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,
	2018						2017
	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	$	128,248	$	647	2.00	%	$	69,839	$	216	1.23	%
Other short-term investments	21,985		157		2.83		13,830		67		1.92
Investment securities:
Taxable investment securities	385,834		2,315		2.38		373,087		1,812		1.93
Non-taxable investment securities⁽¹⁾	75,514		571		3.00		82,781		701		3.36
Total investment securities	461,348		2,886		2.48		455,868		2,513		2.19
Total loans	1,963,817		24,619		4.97		1,934,505		21,491		4.41
FHLB and FRB stock	17,624		307		6.91		18,494		279		5.99
Total interest-earning assets	2,593,022		28,616		4.38		2,492,536		24,566		3.91
Non-earning assets	212,718						208,851
Total assets	$	2,805,740					$	2,701,387
Liabilities
Interest bearing deposits:
NOW, money market, and savings	1,333,701		3,491		1.04		1,192,664		1,886		0.63
Time deposits	154,507		551		1.41		143,862		292		0.81
Brokered deposits	67,937		361		2.11		156,708		515		1.30
Total interest-bearing deposits	1,556,145		4,403		1.12		1,493,234		2,693		0.72
Other borrowings	143,148		729		2.02		179,808		543		1.20
Long-term debt	49,634		824		6.59		49,465		824		6.61
Total interest-bearing liabilities	1,748,927		5,956		1.35		1,722,507		4,060		0.94
Demand deposits	697,927						628,029
Other liabilities	38,796						27,019
Shareholders’ equity	320,090						323,832
Total liabilities and shareholders’ equity	$	2,805,740					$	2,701,387
Net interest spread					3.03	%					2.97	%
Net interest income and net interest margin (taxable equivalent)⁽²⁾			$	22,660	3.47	%			$	20,506	3.26	%

⁽¹⁾ Interest revenue on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 21% for the three months ended September 30, 2018 and 35% for the three months ended September 30, 2017, reflecting the statutory federal income tax rates.
⁽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,
	2018						2017
	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	$	101,502	$	1,606	2.12	%	$	76,079	$	614	1.08	%
Other short-term investments	13,907		284		2.73		16,198		231		1.91
Investment securities:
Taxable investment securities	380,002		6,643		2.34		362,080		5,197		1.92
Non-taxable investment securities⁽¹⁾	76,658		1,723		3.01		81,485		2,167		3.56
Total investment securities	456,660		8,366		2.45		443,565		7,364		2.22
Total loans	1,943,369		71,073		4.89		1,948,700		62,846		4.31
FHLB and FRB stock	18,291		816		5.96		19,147		772		5.39
Total interest-earning assets	2,533,729		82,145		4.33		2,503,689		71,827		3.84
Non-earning assets	209,518						215,830
Total assets	$	2,743,247					$	2,719,519
Liabilities
Interest bearing deposits:
NOW, money market, and savings	1,296,370		8,637		0.89		1,171,369		4,842		0.55
Time deposits	147,531		1,249		1.13		152,190		833		0.73
Brokered deposits	80,920		1,212		2.00		182,195		1,546		1.13
Total interest-bearing deposits	1,524,821		11,098		0.97		1,505,754		7,221		0.64
Other borrowings	161,892		2,179		1.80		196,352		1,409		0.96
Long-term debt	49,592		2,476		6.68		49,423		2,471		6.68
Total interest-bearing liabilities	1,736,305		15,753		1.21		1,751,529		11,101		0.85
Demand deposits	656,807						624,923
Other liabilities	36,935						26,706
Shareholders’ equity	313,200						316,361
Total liabilities and shareholders’ equity	$	2,743,247					$	2,719,519
Net interest spread					3.12	%					2.99	%
Net interest income and net interest margin (taxable equivalent)⁽²⁾			$	66,392	3.50	%			$	60,726	3.24	%

⁽¹⁾ Interest revenue on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 21% for the nine months ended September 30, 2018 and 35% for the nine months ended September 30, 2017, reflecting the statutory federal income tax rates.
⁽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, 2018 Compared to 2017 Increase (decrease) Due to Changes in:									Nine Months Ended September 30, 2018 Compared to 2017 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	$	295		$	136		$	431		$	402		$	590		$	992
Other short-term investments	58			32			90			(47		)	100			53
Investment securities:
Taxable investment securities	76			427			503			313			1,133			1,446
Non-taxable investment securities	(55		)	(75		)	(130		)	(108		)	(336		)	(444		)
Total investment securities	21			352			373			205			797			1,002
Total loans	367			2,761			3,128			(195		)	8,422			8,227
FHLB and FRB stock	(15		)	43			28			(38		)	82			44
Total interest-earning assets	726			3,324			4,050			327			9,991			10,318
Interest bearing liabilities
Interest bearing deposits:
NOW, money market, and savings	369			1,236			1,605			833			2,962			3,795
Time deposits	38			221			259			(39		)	455			416
Brokered deposits	(472		)	318			(154		)	(1,517		)	1,183			(334		)
Total interest-bearing deposits	(65		)	1,775			1,710			(723		)	4,600			3,877
Total borrowings	(187		)	373			186			(464		)	1,234			770
Total long-term debt	3			(3		)	—			8			(3		)	5
Total interest-bearing liabilities	(249		)	2,145			1,896			(1,179		)	5,831			4,652
Change in net interest income	$	975		$	1,179		$	2,154		$	1,506		$	4,160		$	5,666

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, 2018, the provision for loan losses was $845,000, an increase of $523,000 compared to the three months ended September 30, 2017. For the nine months ended September 30, 2018, the provision for loan losses was $1.4 million, a decrease of $1.5 million, or 51%, compared to the nine months ended September 30, 2017.

The higher provision for the three months ended September 30, 2018 was primarily related to an increase in balances subject to the general reserve. The lower provision for the nine months ended September 30, 2018 was primarily related to a decrease in charge-offs in 2018. At September 30, 2018, nonperforming loans totaled $2.7 million compared to $4.6 million at September 30, 2017. Net loan charge-offs were 0% and 0.02%, respectively, of average loans (annualized) for the three and nine months ended September 30, 2018 compared to 0.68% and 0.32%, respectively, for the three and nine months ended September 30, 2017. The allowance for loan losses to total loans at September 30, 2018 was 1.00%, compared to 0.99% at September 30, 2017.

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Noninterest Income

Noninterest income for the three and nine months ended September 30, 2018 was $3.1 million and $12.4 million, respectively, a decrease of $411,000, or 12%, compared to the third quarter of 2017, and a decrease of $241,000, or 2%, from the nine months ended September 30, 2017. 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
	2018		2017			$			%			2018			2017			$			%
Service charges	$	1,278	$	1,247		$	31		2		%	$	3,778		$	3,870		$	(92	)	(2	)	%
Securities gains, net	—		(80		)	80			(100	)		(2		)	(80		)	78			(98	)
Gain (loss) on sales of other assets	58		44			14			32			(154		)	788			(942		)	(120	)
Mortgage income	315		320			(5		)	(2	)		982			965			17			2
Trust income	—		437			(437		)	(100	)		1,025			1,332			(307		)	(23	)
Derivatives income (loss)	20		(3		)	23			767			154			62			92			148
Bank owned life insurance	379		384			(5		)	(1	)		1,126			1,146			(20		)	(2	)
SBA lending activities	882		888			(6		)	(1	)		3,181			3,286			(105		)	(3	)
Gains on sale of branches	—		—			—			—			—			302			(302		)	(100	)
Gain on sale of trust business	—		—			—			—			1,681			—			1,681			—
Other noninterest income	134		240			(106		)	(44	)		609			950			(341		)	(36	)
Total noninterest income	$	3,066	$	3,477		$	(411	)	(12	)	%	$	12,380		$	12,621		$	(241	)	(2	)	%

Service charges for the three months ended September 30, 2018 totaled $1.3 million, an increase of $31,000, or 2%, from the same period in 2017. For the nine months ended September 30, 2018, service charges totaled $3.8 million, a decrease of $92,000, or 2%, from the first nine months of 2017. The decrease for the first nine months of 2018 compared to the same period in 2017 was primarily due to lower ATM fees.

Gain on sales of other assets for the nine months ended September 30, 2018 decreased $942,000 from the same period in 2017 due to a $302,000, or 83%, decrease in net gains on sales of other real estate owned and a $426,000 gain on the sale of a tax credit investment during the second quarter of 2017. In addition, the company recorded a loss on disposition of fixed assets totaling $170,000 in the second quarter of 2018 related to the relocation of its Atlanta headquarters. Trust income for the third quarter and first nine months of 2018 decreased $437,000, or 100%, and $307,000, or 23%, respectively, due to the sale of the trust business in the second quarter of 2018.

Derivative income for the third quarter of 2018 increased $23,000 from the same period in 2017. For the nine months ended September 30, 2018, derivative income increased $92,000, or 148%, from the same period in 2017 due to an increase in credit valuation adjustment income of $253,000, which was offset by a $171,000, or 90%, decrease in interest rate swap fee income.

Income from SBA lending activities for the third quarter of 2018 decreased $6,000, or 1%, from the same period in 2017, due to lower premiums received. During the three months ended September 30, 2018 and 2017, guaranteed portions of 8 and 13 SBA loans totaling $11.4 million and $6.5 million, respectively, were sold in the secondary market. Income from SBA lending activities for the first nine months of 2018 decreased $105,000, or 3%, from the same period in 2017, due to lower premiums received. During the nine months ended September 30, 2018 and 2017, guaranteed portions of 44 and 34 SBA loans with principal balances of $43.0 million and $35.2 million, respectively, were sold in the secondary market.

Atlantic Capital sold one branch in Cleveland, Tennessee in the second quarter of 2017. The sale 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. During the second quarter of 2018, Atlantic Capital closed on the sale of the trust business, and recorded a net gain of $1.7 million.

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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
	2018		2017		$			%			2018		2017		$			%
Salaries and employee benefits	$	10,152	$	10,409	$	(257	)	(2	)	%	$	33,150	$	32,077	$	1,073		3		%
Occupancy	1,288		1,129		159			14			3,854		3,433		421			12
Equipment and software	964		776		188			24			2,655		2,577		78			3
Professional services	803		1,595		(792		)	(50	)		2,595		3,472		(877		)	(25	)
Postage, printing and supplies	75		63		12			19			194		226		(32		)	(14	)
Communications and data processing	947		982		(35		)	(4	)		2,993		3,038		(45		)	(1	)
Marketing and business development	281		272		9			3			662		721		(59		)	(8	)
FDIC premiums	208		308		(100		)	(32	)		552		754		(202		)	(27	)
Merger and conversion costs	—		—		—			—			—		304		(304		)	(100	)
Amortization of intangibles	296		391		(95		)	(24	)		958		1,286		(328		)	(26	)
Foreclosed property/problem asset expense	12		7		5			71			296		117		179			153
Other noninterest expense	1,569		1,572		(3		)	—			4,439		4,866		(427		)	(9	)
Total noninterest expense	$	16,595	$	17,504	$	(909	)	(5	)	%	$	52,348	$	52,871	$	(523	)	(1	)	%

Noninterest expense for the third quarter of 2018 was $16.6 million, a decrease of $909,000, or 5%, from the third quarter of 2017. For the nine months ended September 30, 2018, noninterest expense totaled $52.3 million, a decrease of $523,000, or 1%, from the same period in 2017.

Salaries and employee benefits expense for the three months ended September 30, 2018 totaled $10.2 million, a decrease of $257,000, or 2%, from the same period in 2017. For the first nine months of 2018, salaries and employee benefits totaled $33.2 million, an increase of $1.1 million, or 3%, from the first nine months of 2017. The increase for the nine months ended September 30, 2018, was primarily attributable to severance expense of $1.1 million in the first quarter of 2018. Full time equivalent headcount totaled 334 at September 30, 2018, compared to 343 at September 30, 2017, a decrease of 9 positions, primarily due to a reduction in support staff.

Occupancy costs were $1.3 million for the third quarter of 2018, an increase of $159,000, or 14%, compared to the third quarter of 2017. For the nine months ended September 30, 2018, occupancy costs were $3.9 million, an increase of $421,000, or 12%, from the first nine months of 2017. The increase for the nine months ended September 30, 2018, was the result of higher rent expense due to the overlap of leases and their expenses from the relocation of the Atlanta headquarters.

Equipment and software costs were $964,000 for the third quarter of 2018, an increase of $188,000, or 24%, compared to the third quarter of 2017. For the nine months ended September 30, 2018, equipment and software costs were $2.7 million, an increase of $78,000, or 3%, from the first nine months of 2017. The increase for both periods was the result of higher depreciation expense from the Bank’s new headquarters and additional investment in software licenses.

Professional services costs were $803,000 for the third quarter of 2018, a decrease of $792,000, or 50%, compared to the third quarter of 2017. For the nine months ended September 30, 2018, professional services costs were $2.6 million, a decrease of $877,000, or 25%, from the first nine months of 2017. The decrease was primarily due to higher legal and accounting fees paid in 2017 related to a secondary offering of shares by certain institutional shareholders.

Communications and data processing costs were $947,000 for the third quarter of 2018, a decrease of $35,000, or 4%, compared to the third quarter of 2017. For the nine months ended September 30, 2018, communications and data processing costs were $3.0 million, a decrease of $45,000, or 1%, from the first nine months of 2017. The decrease for both periods was due to elevated expenses in the prior period from the reissuance of cards with EMV technology.

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FDIC premiums were $208,000 for the third quarter of 2018, a decrease of $100,000, or 32%, compared to the third quarter of 2017. For the nine months ended September 30, 2018, FDIC premiums were $552,000, a decrease of $202,000, or 27%, from the first nine months of 2017. The decrease for the three and nine months ended September 30, 2018 was due to a lower assessment rate.

Amortization of intangibles includes the amortization of core deposit intangible related to the acquisition of First Security and totaled $296,000 and $958,000 for the three and nine months ended September 30, 2018, respectively, and $391,000 and $1.3 million for the three and nine months ended September 30, 2017, respectively. The decrease in 2018 was partly due to the write-off of core deposit intangibles related to one branch divested during the second quarter of 2017.

For the nine months ended September 30, 2018, foreclosed property expense was $296,000, an increase of $179,000, or 153%, from the first nine months of 2017. The increase was due to the revaluation and subsequent write-down of an existing other real estate owned property in the first quarter of 2018.

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, 2018 was $1.7 million and $5.0 million, respectively, as compared with $1.9 million and $5.2 million for the same periods in 2017. The effective tax rate (as a percentage of pre-tax earnings) was 20.5% and 20.2%, respectively, for the three and nine months ended September 30, 2018 compared to 31.8% and 31.1%, respectively, for the same periods in 2017. The decrease in the effective tax rate for the three and nine months ended September 30, 2018 was due to the tax reform legislation signed into law in December 2017 that lowered the Federal corporate rate to 21%.

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. As of September 30, 2018, no remeasurement adjustments have been recorded as a result of the revaluation of deferred tax balances for the impact of the tax reform legislation. The Company will continue to monitor and record any applicable adjustments in the period the amounts are determined.

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, 2018 and 2017, 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, 2018 and 2017, Atlantic Capital recorded a deferred tax asset valuation allowance totaling $8.5 million and $9.2 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 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, 2018 and December 31, 2017 were $2.88 billion and $2.89 billion, respectively. Average total assets for the third quarter of 2018 were $2.81 billion, compared to $2.70 billion in the third quarter of 2017.

Loans

At September 30, 2018, total loans increased $105.0 million, or 5%, to $2.04 billion compared to $1.94 billion at December 31, 2017, primarily due to a $44.3 million, or 38%, increase in construction and land loans, a $43.8 million, or 13%, increase in owner occupied commercial real estate loans, and a $33.0 million, or 5%, increase in commercial and industrial loans. Table 6 provides additional information regarding Atlantic Capital’s loan portfolio.



Table 6 - Loans
(dollars in thousands)
	September 30, 2018			% of Total Loans		December 31, 2017			% of Total Loans
Loans held for sale
Other loans held for sale	$	1,886				$	1,487
Total loans held for sale	$	1,886				$	1,487

Loans held for investment
Commercial loans:
Commercial and industrial	$	648,349		32	%	$	615,359		32	%
Commercial real estate:
Owner occupied	390,563			19		346,746			18
Non-owner occupied	583,491			29		593,669			30
Construction and land	159,781			8		115,495			6
Mortgage warehouse participations	27,838			1		39,981			2
Total commercial loans	1,810,022			89		1,711,250			88

Residential:
Residential mortgages	109,522			5		104,484			5
Home equity	66,847			3		76,244			4
Total residential loans	176,369			8		180,728			9

Consumer	33,540			2		29,393			2
Other	21,399			1		16,278			1
	2,041,330					1,937,649
Less net deferred fees and other unearned income	(2,896		)			(3,810		)
Total loans held for investment	2,038,434					1,933,839

Total loans	$	2,040,320				$	1,935,326

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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 were not classified as nonaccrual at September 30, 2018 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, 2018, Atlantic Capital’s nonperforming assets totaled $3.7 million, or 0.13% of total assets, compared to $4.1 million, or 0.14% of total assets, at December 31, 2017. The decrease was primarily due to a loan relationship totaling $298,000 which was past due 90 days and still accruing as of December 31, 2017 but became current in the first quarter of 2018.

Nonaccrual loans totaled $2.7 million and $2.6 million as of September 30, 2018 and December 31, 2017, respectively. Loans past due 90 days and still accruing totaled $0 at September 30, 2018 compared to $298,000 at December 31, 2017. Table 7 provides details on nonperforming assets and other risk elements.



Table 7 - Nonperforming assets
(dollars in thousands)

	September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017
Nonaccrual loans	$	2,716		$	2,404		$	2,466		$	2,614		$	4,058
Loans past due 90 days and still accruing	—			2			35			298			495
Total nonperforming loans* (NPLs)	2,716			2,406			2,501			2,912			4,553
Other real estate owned	968			1,288			927			1,215			1,494
Total nonperforming assets (NPAs)	$	3,684		$	3,694		$	3,428		$	4,127		$	6,047
NPLs as a percentage of total loans	0.13		%	0.12		%	0.13		%	0.15		%	0.24		%
NPAs as a percentage of total assets	0.13			0.14			0.13			0.14			0.23

*Nonperforming loans exclude those loans which are PCI loans

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Troubled Debt Restructurings

Troubled Debt Restructurings (“TDRs”) are selectively made to provide relief to customers experiencing liquidity challenges or other circumstances that could affect their ability to meet their debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs are not accruing interest and are included as nonperforming assets within nonaccrual loans. TDRs which are accruing interest based on the restructured terms are considered performing. Table 8 summarizes TDRs.



Table 8 - Troubled Debt Restructurings
(dollars in thousands)
	September 30, 2018		December 31, 2017
Accruing TDRs	$	9,097	$	5,323
Nonaccruing TDRs	—		—
Total TDRs	$	9,097	$	5,323

The increase in TDRs was due to the Company extending the interest-only repayment period on a large commercial and industrial loan, resulting in its reclassification to a TDR.

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 doubts as to the ability of such borrower to comply with the current loan repayment terms. Potential problem loans totaled $44.3 million and $54.6 million, respectively, as of September 30, 2018 and December 31, 2017. Management closely tracks the financial performance of the borrower and the current values of collateral when assessing the collectability of these loans.

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Allowance for Loan Losses

At September 30, 2018, the allowance for loan losses totaled $20.4 million, or 1.00% of loans, compared to $19.3 million, or 1.00% of loans, at December 31, 2017. The increase in the allowance was primarily related to an increase in loans collectively evaluated for impairment.

Net charge-offs for the three months ended September 30, 2018 and 2017 were ($15,000) and $3.3 million, respectively. Net charge-offs for the nine months ended September 30, 2018 and 2017 were $345,000 and $4.7 million, respectively. 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)
	2018												2017
	Third				Second				First				Fourth				Third
	Quarter				Quarter				Quarter				Quarter				Quarter
Balance at beginning of period	$	19,583			$	19,885			$	19,344			$	18,870			$	21,870
Provision for loan losses	758				(173		)		811				312				314
Provision for PCI loan losses	87				—				(39		)		(30		)		8
Loans charged-off:
Commercial and industrial	—				—				(126		)		—				(3,292		)
Commercial real estate	—				(50		)		—				—				—
Construction and land	—				—				—				—				(16		)
Residential mortgages	—				—				(70		)		—				—
Home equity	—				(102		)		(58		)		—				(31		)
Consumer	—				(10		)		(3		)		(13		)		(7		)
Other	—				—				—				—				—
Total loans charged-off	—				(162		)		(257		)		(13		)		(3,346		)
Recoveries on loans previously charged-off:
Commercial and industrial	—				—				19				192				1
Commercial real estate	—				28				—				—				—
Construction and land	—				—				—				1				15
Residential mortgages	—				—				—				—				—
Home equity	—				—				—				—				—
Consumer	15				5				7				12				8
Other	—				—				—				—				—
Total recoveries	15				33				26				205				24
Net charge-offs	$	15			$	(129	)		$	(231	)		$	192			$	(3,322	)
Balance at period end	$	20,443			$	19,583			$	19,885			$	19,344			$	18,870

Net charge-offs (annualized) to average loans	(0.00		)	%	0.03			%	0.05			%	(0.04		)	%	0.68			%
Allowance for loan losses to loans held for investment	1.00				1.01				1.01				1.00				0.99

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Investment Securities

Investment securities available-for-sale totaled $465.8 million at September 30, 2018, compared to $449.1 million at December 31, 2017. 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, 2018, investment securities available-for-sale had a net unrealized loss of $20.7 million, compared to a net unrealized loss of $5.6 million as of December 31, 2017. 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, 2018.

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, 2018 and December 31, 2017 are provided in Table 10.



Table 10 - Securities
(dollars in thousands)
	September 30, 2018				December 31, 2017
Available-For-Sale Securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Government agencies	$	36,708	$	35,445	$	34,699	$	34,111
U.S. states and political divisions	91,656		82,665		92,169		90,001
Trust preferred securities	4,774		4,625		4,754		4,650
Corporate debt securities	12,879		12,369		12,948		12,622
Residential mortgage-backed securities	340,417		330,652		310,129		307,733
Total	$	486,434	$	465,756	$	454,699	$	449,117

The effective duration of Atlantic Capital’s securities at September 30, 2018 was 5.10 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, 2018 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. Goodwill impairment in the amount of $69,000 related to the sale of the trust business was recorded during the second quarter of 2018.

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LIQUIDITY AND CAPITAL RESOURCES

Deposits

At September 30, 2018, total deposits were $2.38 billion, a decrease of $70.8 million, or 3%, from December 31, 2017. Noninterest-bearing demand deposits decreased $78.6 million, or 11%, and money market deposits decreased $140.3 million, or 13%, from December 31, 2017 to September 30, 2018. The decrease was the result of seasonal volatility and a large increase in temporary deposits during the quarter ended December 31, 2017.

Total average deposits for the quarter ended September 30, 2018 were $2.25 billion, an increase of $132.8 million, or 6%, from the same period in 2017. Average noninterest-bearing demand deposits increased $69.9 million, or 11%, average interest-bearing demand deposits increased $97.8 million, or 34%, and average brokered deposits decreased $88.8 million, or 57%, for the quarter ended September 30, 2018 from 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, 2018			June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017			Year To Date Change			Year Over Year Change
DDA	$	653,816		$	595,867		$	599,838		$	732,442		$	599,292		$	(78,626	)	$	54,524
NOW	486,456			332,481			302,636			306,331			270,740			180,125			215,716
Savings	27,192			27,559			29,407			26,573			30,131			619			(2,939		)
Money Market	977,552			865,913			911,449			1,117,891			865,238			(140,339		)	112,314
Time	155,689			152,111			140,594			138,612			144,250			17,077			11,439
Brokered	79,119			92,656			112,376			128,816			193,994			(49,697		)	(114,875		)
Total Deposits	$	2,379,824		$	2,066,587		$	2,096,300		$	2,450,665		$	2,103,645		$	(70,841	)	$	276,179

Payments Clients	$	258,320		$	251,748		$	311,943		$	405,873		$	239,079		$	(147,553	)	$	19,241

Average Deposits

	2018									2017						Third Quarter 2018 to Fourth Quarter 2017 Change			Third Quarter 2018 to Third Quarter 2017 Change
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Third Quarter 2018 to Fourth Quarter 2017 Change			Third Quarter 2018 to Third Quarter 2017 Change
DDA	$	697,927		$	633,113		$	638,730		$	649,218		$	628,029		$	48,709		$	69,898
NOW	389,649			364,362			329,171			338,741			291,810			50,908			97,839
Savings	27,257			28,239			29,609			29,851			30,236			(2,594		)	(2,979		)
Money Market	916,795			861,552			898,800			907,524			870,618			9,271			46,177
Time	154,507			148,134			139,788			140,921			143,862			13,586			10,645
Brokered	67,937			100,425			117,787			128,594			156,708			(60,657		)	(88,771		)
Total Deposits	$	2,254,072		$	2,135,825		$	2,153,885		$	2,194,849		$	2,121,263		$	119,880		$	132,809

Payments Clients	$	227,029		$	219,016		$	256,794		$	234,558		$	209,851		$	(7,529	)	$	17,178

Noninterest bearing deposits as a percentage of average deposits	31.0		%	29.6		%	29.7		%	29.6		%	29.6		%
Cost of deposits	0.77		%	0.69		%	0.57		%	0.52		%	0.50		%

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Short-Term Borrowings

At September 30, 2018 and December 31, 2017, there were no balances of federal funds purchased. There were securities sold under repurchase agreements with commercial checking customers totaling $8.9 million and $0 as of September 30, 2018 and December 31, 2017, respectively.

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, 2018 and December 31, 2017, Atlantic Capital had FHLB advances of $83.0 million and $45.0 million, respectively. 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 were outstanding at September 30, 2018.

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, 2018, management believed that Atlantic Capital had sufficient on-balance sheet liquidity to meet its funding needs.

At September 30, 2018, Atlantic Capital had access to $440.0 million in unsecured borrowings and $722.1 million in secured borrowings through various sources, including FHLB advances and access to federal funds. 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, 2018 was $320.2 million, an increase of $11.8 million, or 4%, from December 31, 2017. 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 and the Bank’s capital levels. Accumulated other comprehensive income, which includes unrealized gains and losses on securities available-for-sale and unrealized gains and losses on derivatives qualifying as cash flow hedges, is excluded in the calculation of regulatory capital ratios.

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Table 12 - Capital Ratios
(dollars in thousands)
	Consolidated						Bank						Regulatory Guidelines
	September 30, 2018			December 31, 2017			September 30, 2018			December 31, 2017			Minimum		Well capitalized		Minimum Capital plus capital conservation buffer 2019
Risk based ratios:
Common equity tier 1 capital	11.8		%	11.2		%	13.2		%	12.7		%	4.5	%	6.5	%	7.0	%
Tier 1 Capital	11.8			11.2			13.2			12.7			6.0		8.0		8.5
Total capital	14.7			14.1			14.1			13.6			8.0		10.0		10.5
Leverage ratio	10.7			9.7			11.7			11.1			4.0		5.0		N/A

Common equity tier 1 capital	$	288,988		$	259,865		$	323,804		$	295,629
Tier 1 capital	288,988			259,865			323,804			295,629
Total capital	359,952			329,641			345,106			315,870

Risk weighted assets	2,452,772			2,330,574			2,452,501			2,330,171
Quarterly average total assets for leverage ratio	2,693,578			2,667,652			2,773,257			2,675,228

As of September 30, 2018, Atlantic Capital continued to exceed minimum capital standards and the Bank remained “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 11.8% at September 30, 2018, 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, 2018
Tier 1 capital	$	288,988
Less: restricted core capital	—
Tier 1 common equity	$	288,988

Risk-adjusted assets	$	2,452,772
Tier 1 common equity ratio	11.8		%

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, 2018, Atlantic Capital had issued commitments to extend credit of approximately $717.8 million and standby letters of credit of approximately $13.0 million through various types of commercial lending arrangements.

Based on historical experience, many of the commitments and letters of credit will expire unfunded. Through its various sources of liquidity, Atlantic Capital believes it will be able to fund these obligations as they arise. Atlantic Capital evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is

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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, 2018 compared to December 31, 2017.

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 board of directors’ risk appetite, reviews supervisory examination reports together with management’s response to such examinations, monitors internal risk management reports and responses, 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 manages credit risk closely by having appropriate policies and procedures for the types of loans we make. To ensure that lending policies and procedures are followed, Atlantic Capital has an independent credit review function that 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. Since interest rate risk is by far the most significant element of Atlantic Capital’s market risk, we rely on the risk management methods noted below for interest rate risk to manage market risk.

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.

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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, 2018, indicates that, over a 12-month period, net interest income is estimated to increase by 16.40% 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.

Table 14 provides the impact on net interest income resulting from various interest rate scenarios as of September 30, 2018 and December 31, 2017.



Table 14 - Net Interest Income Sensitivity Simulation Analysis

	Estimated change in net interest income
Change in interest rate (basis point)	September 30, 2018			December 31, 2017
-200	(18.54	)	%	(15.61	)	%
-100	(8.42	)		(10.68	)
+100	8.62			7.68
+200	16.40			15.64
+300	24.02			23.30

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, 2018, the MVE calculated with a 200-basis point shock up in rates increased by 1.70% from the base case MVE value. Table 15 presents the MVE profile as of September 30, 2018 and December 31, 2017.



Table 15 - Market Value of Equity Modeling Analysis

	Estimated % change in MVE
Change in interest rate (basis point)	September 30, 2018			December 31, 2017
-200	(7.76	)	%	(3.79	)	%
-100	(3.54	)		(3.09	)
+100	1.25			1.31
+200	1.70			1.38
+300	1.61			0.59

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, 2018, 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, 2018.

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, 2018 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, from time to time, 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 or regulatory 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, 2017, 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.

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ITEM 6.	EXHIBITS



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 September 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
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, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017; (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017; (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017; (iv) the Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2018 and 2017; (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017; and (vi) the Notes to the Unaudited Consolidated Financial Statements

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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
	President and 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 8, 2018