Loans and Allowance for Loan Losses | NOTE 6 – LOANS AND ALLOWANCE FOR CREDIT LOSSES The composition of the loan portfolio as of June 30, 2020 and December 31, 2019, is summarized below. June 30, 2020 December 31, 2019 (in thousands) Loans held for sale Loans held for sale 1,153 370 Total loans held for sale $ 1,153 $ 370 Loans held for investment Commercial loans: Commercial and industrial $ 973,818 $ 705,115 Commercial real estate 900,321 916,328 Construction and land 128,991 127,540 Mortgage warehouse participations — 13,941 Total commercial loans 2,003,130 1,762,924 Residential: Residential mortgages 32,327 31,315 Home equity 23,689 25,002 Total residential loans 56,016 56,317 Consumer 113,149 37,765 Other 22,160 19,552 Total loans 2,194,455 1,876,558 Less net deferred fees and other unearned income (9,761) (3,034) Less allowance for credit losses on loans (31,605) (18,535) Loans held for investment, net $ 2,153,089 $ 1,854,989 At June 30, 2020 and December 31, 2019, loans with a carrying value of $358.9 million and $729.6 million, respectively, were pledged as collateral to secure Federal Home Loan Bank of Atlanta (“FHLB”) advances and the Federal Reserve discount window. The fair value adjustments on purchased loans outside the scope of ASC 310-30 are accreted to interest income over the life of the loans. At June 30, 2020, the remaining accretable fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $313,000 compared to $279,000 at December 31, 2019. The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. It is comprised of specific allowance for individually assessed loans and a general allowance for loans that are collectively assessed in pools with similar risk characteristics. The allowance is regularly evaluated to maintain a level adequate to absorb expected losses inherent in the loan portfolio. Refer to Note 1, “Accounting Policies and Basis of Presentation” to the Consolidated Financial Statements for additional information. Accrued interest receivable totaled $9.3 million at June 30, 2020, was reported in Other Assets on the Consolidated Balance Sheets and was excluded from the estimate of credit losses for loans. The following table presents the balance and activity in the allowance for credit losses on loans by portfolio segment for the three months ended June 30, 2020 and 2019. For the Three Months Ended June 30, 2020 2019 Commercial Residential Consumer Total Commercial Residential Consumer Total (in thousands) Allowance for credit losses on loans Beginning balance, prior to adoption of ASC 326 $ 23,830 $ 415 $ 651 $ 24,896 $ 17,397 $ 447 $ 263 $ 18,107 Provision for loan losses 8,482 138 (398) 8,222 1,055 (283) (74) 698 Loans charged-off (1,479) (36) — (1,515) (635) — — (635) Recoveries 1 — 1 2 — — 16 16 Total ending allowance balance $ 30,834 $ 517 $ 254 $ 31,605 $ 17,817 $ 164 $ 205 $ 18,186 For the Six Months Ended June 30, 2020 2019 Commercial Residential Consumer Total Commercial Residential Consumer Total (in thousands) Allowance for credit losses on loans Beginning balance, prior to adoption of ASC 326 $ 18,203 $ 145 $ 187 $ 18,535 $ 17,322 $ 292 $ 237 $ 17,851 Impact of adopting ASC 326 (947) 8 85 (854) — — — — Provision for loan losses 15,134 524 (27) 15,631 1,662 (127) (23) 1,512 Loans charged-off (1,575) (161) — (1,736) (1,184) (9) (37) (1,230) Recoveries 19 1 9 29 17 8 28 53 Total ending allowance balance $ 30,834 $ 517 $ 254 $ 31,605 $ 17,817 $ 164 $ 205 $ 18,186 A charge-off is recognized when the amount of the loss is quantifiable and timing is known. A collateral based loan charge-off is 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. Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. Atlantic Capital’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not 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. Troubled Debt Restructurings TDRs are made to provide relief to customers experiencing liquidity challenges or other circumstances that could affect their ability to meet their debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Nonperforming TDRs do not accrue interest and are included as nonperforming assets (“NPAs”) within nonaccrual loans (“NPLs”). TDRs which are accruing interest based on the restructured terms are considered performing. As of June 30, 2020 and December 31, 2019, the Company had a recorded investment in TDRs of $14.6 million and $13.2 million, respectively. The Company allocated $793,000 in allowance for those loans at June 30, 2020 and had no commitments to lend additional funds on loans modified as TDRs as of June 30, 2020. The Company had commitments to lend additional funds of $4,000 on loans modified as TDRs as of December 31, 2019. Loans, by portfolio class, modified as TDRs during the three and six months ended June 30, 2020 and 2019 are as follows: Pre-Modification Post-Modification Outstanding Outstanding Number of Loans Recorded Investment Recorded Investment (in thousands) Three Months Ended June 30, 2020 Commercial and industrial — $ — $ — Total — $ — $ — Six Months Ended June 30, 2020 Commercial and industrial 1 $ 67 $ 67 Commercial real estate 1 1,945 1,945 Total 2 $ 2,012 $ 2,012 Three Months Ended June 30, 2019 Commercial and industrial 3 $ 382 $ 382 Total 3 $ 382 $ 382 Six Months Ended June 30, 2019 Commercial and industrial 6 $ 1,235 $ 1,235 Commercial real estate 2 926 926 Total 8 $ 2,161 $ 2,161 The Company did not forgive any principal on TDRs during the three and six months ended June 30, 2020 and 2019. During the three and six months ended June 30, 2020, two commercial loans totaling $320,000, which were previously modified as TDRs, had a payment default within twelve months following the modification. These TDRs that subsequently defaulted decreased the allowance for credit losses by $20,000 due to a paydown and did not result in any charge-offs during the three and six months ended June 30, 2020. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. Section 4013 “Temporary Relief From Troubled Debt Restructurings,” of the Coronavirus Aid, Relief, and Economic Security Act, passed by Congress and signed into law on March 27, 2020, allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. On April 7, 2020, the Federal Financial Institutions Examination Council provided additional guidance in its Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). This guidance received concurrence from the FASB and clarified that loan modifications made under the following criteria are generally not considered TDRs if: ● the modification is in response to the National Emergency; ● the borrower was current on payments at the time the modification program is implemented; and ● the modification is short-term (e.g., six months). 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 (Fair Isaac Corporation (FICO) scores), rating agency information, loan-to-value ratios, collateral, collection experience, and other internal metrics. The likelihood of default of a credit transaction is graded in the Obligor Rating and is determined through credit analysis. Ratings are generally reviewed at least annually or more frequently if there is a material change in creditworthiness. Exceptions to this policy may include loans with commitments less than $1 million, well-collateralized term loans and loans to individuals with limited exposure or complexity. Atlantic Capital uses the following definitions for risk ratings: Pass: Special Mention: Substandard: Doubtful: As of June 30, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows. Term Loans Amortized Cost Basis by Origination Year Revolving Loans Amortized 2020 2019 2018 2017 2016 Prior Cost Basis Total (in thousands) June 30, 2020 Commercial - commercial and industrial: Risk rating Pass $ 322,442 $ 160,555 $ 112,710 $ 50,353 $ 38,884 $ 18,496 $ 188,250 $ 891,690 Special mention — 5,405 23,277 1,519 — 349 30,546 61,096 Substandard — 1,929 4,943 2,214 1,059 6,505 4,344 20,994 Doubtful — 342 — — — (304) — 38 Total commercial - commercial and industrial $ 322,442 $ 168,231 $ 140,930 $ 54,086 $ 39,943 $ 25,046 $ 223,140 $ 973,818 Commercial - commercial real estate: Risk rating Pass $ 48,120 $ 169,996 $ 141,651 $ 106,354 $ 139,914 $ 228,636 $ 8,977 $ 843,648 Special mention — 2,879 5,521 1,099 10,533 4,221 — 24,253 Substandard — 11,532 1,591 3,003 — 16,244 50 32,420 Doubtful — — — — — — — — Total commercial - commercial real estate loans $ 48,120 $ 184,407 $ 148,763 $ 110,456 $ 150,447 $ 249,101 $ 9,027 $ 900,321 Commercial - construction and land: Risk rating Pass $ 34,958 $ 52,732 $ 24,113 $ — $ 4,407 $ 1,982 $ 1,845 $ 120,037 Special mention — 8,954 — — — — — 8,954 Substandard — — — — — — — — Doubtful — — — — — — — — Total commercial - construction and land loans $ 34,958 $ 61,686 $ 24,113 $ — $ 4,407 $ 1,982 $ 1,845 $ 128,991 Residential - mortgages: Risk rating Pass $ 2,972 $ 3,241 $ 15,687 $ 1,977 $ 5,256 $ 232 $ 227 $ 29,592 Special mention 697 — 862 768 — — — 2,327 Substandard — — 179 — 26 203 — 408 Doubtful — — — — — — — — Total residential - mortgage loans $ 3,669 $ 3,241 $ 16,728 $ 2,745 $ 5,282 $ 435 $ 227 $ 32,327 Residential - home equity: Risk rating Pass $ — $ — $ — $ — $ — $ — $ 23,689 $ 23,689 Special mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total residential - home equity loans $ — $ — $ — $ — $ — $ — $ 23,689 $ 23,689 Consumer: Risk rating Pass $ 250 $ 2,283 $ 53 $ 64 $ 70 $ 106,865 $ 3,564 $ 113,149 Special mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total consumer loans $ 250 $ 2,283 $ 53 $ 64 $ 70 $ 106,865 $ 3,564 $ 113,149 Consumer - other: Risk rating Pass $ — $ — $ 4,794 $ 2,112 $ 232 $ 784 $ 6,982 $ 14,904 Special mention — 6,798 — — — — — 6,798 Substandard — — — 458 — — — 458 Doubtful — — — — — — — — Total consumer - other loans $ — $ 6,798 $ 4,794 $ 2,570 $ 232 $ 784 $ 6,982 $ 22,160 Total: Pass $ 408,742 $ 388,807 $ 299,008 $ 160,860 $ 188,763 $ 356,995 $ 233,534 $ 2,036,709 Special Mention 697 24,036 29,660 3,386 10,533 4,570 30,546 103,428 Substandard — 13,461 6,713 5,675 1,085 22,952 4,394 54,280 Doubtful — 342 — — — (304) — 38 Total $ 409,439 $ 426,646 $ 335,381 $ 169,921 $ 200,381 $ 384,213 $ 268,474 $ 2,194,455 As of December 31, 2019, the risk category of loans by class of loans is as follows. Special Substandard Substandard Doubtful Pass Mention Accruing Nonaccruing Nonaccruing Total (in thousands) December 31, 2019 Commercial and industrial $ 648,895 $ 40,179 $ 10,051 $ 5,990 $ - $ 705,115 Commercial real estate 891,078 5,483 19,504 263 - 916,328 Construction and land 127,540 - - - - 127,540 Residential mortgages 30,941 - 119 151 104 31,315 Home equity 24,302 - - 700 - 25,002 Mortgage warehouse 13,941 - - - - 13,941 Consumer/Other 56,336 500 481 - - 57,317 Total Loans $ 1,793,033 $ 46,162 $ 30,155 $ 7,104 $ 104 $ 1,876,558 The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of June 30, 2020: Nonaccrual Nonaccrual Loans Past With No With Due Over Allowance for Allowance for Total 89 Days Credit Losses Credit Losses Nonaccrual Still Accruing Commercial loans: Commercial and industrial $ 3,177 $ 2,481 $ 5,658 $ — Commercial real estate 157 — 157 — Total commercial loans 3,334 2,481 5,815 — Residential mortgages 115 — 115 335 Total loans $ 3,449 $ 2,481 $ 5,930 $ 335 The gross additional interest income that would have been earned during the three and six months ended June 30, 2020 had performing TDRs performed in accordance with the original terms is immaterial. Atlantic Capital recognized interest income on nonaccrual loans of $51,000 and $82,000 during the three and six months ended June 30, 2020. During the three and six months ended June 30, 2019, Atlantic Capital recognized interest income on nonaccrual loans totaling $105,000 and $168,000, respectively. The following table presents the amortized cost basis of collateral dependent impaired loans by class of loans as of June 30, 2020: Real Business SBA Property Equipment Assets Guaranty-75% Total Commercial loans: Commercial and industrial $ 2,424 $ 544 $ 192 $ 1,476 $ 4,636 Commercial real estate 48 109 — — 157 Total commercial loans 2,472 653 192 1,476 4,793 Residential mortgages 115 — — — 115 Total loans $ 2,587 $ 653 $ 192 $ 1,476 $ 4,908 Atlantic Capital monitors loans by past due status. The following table presents the aging of the recorded investment in past due loans as of June 30, 2020 and December 31, 2019 by class of loans. As of June 30, 2020 30 - 59 60 - 89 Greater Than Days Days 89 Days Total Past Due Loans Not Past Due Past Due Past Due Nonaccruing and Nonaccruing Past Due Total (in thousands) Loans by Classification Commercial and industrial $ 828 $ 284 $ — $ 5,658 $ 6,770 $ 967,048 $ 973,818 Commercial real estate — 364 — 157 521 899,800 900,321 Construction and land — — — — — 128,991 128,991 Residential mortgages 2,063 — 335 115 2,513 29,814 32,327 Home equity — — — — — 23,689 23,689 Consumer 2,453 923 — — 3,376 131,933 135,309 Total Loans $ 5,344 $ 1,571 $ 335 $ 5,930 $ 13,180 $ 2,181,275 $ 2,194,455 As of December 31, 2019 30 - 59 60 - 89 Greater Than Days Days 89 Days Total Past Due Loans Not Past Due Past Due Past Due Nonaccruing and Nonaccruing Past Due Total (in thousands) Loans by Classification Commercial and industrial $ 4,069 $ 30 $ — $ 5,990 $ 10,089 $ 695,026 $ 705,115 Commercial real estate 1,194 — 85 262 1,541 914,787 916,328 Construction and land — — — — — 127,540 127,540 Residential mortgages 707 — — 256 963 30,352 31,315 Home equity — — — 700 700 24,302 25,002 Mortgage warehouse — — — — — 13,941 13,941 Consumer 136 — — — 136 57,181 57,317 Total Loans $ 6,106 $ 30 $ 85 $ 7,208 $ 13,429 $ 1,863,129 $ 1,876,558 The following table presents loans purchased and/or sold during the three and six months ended June 30, 2020 by portfolio class: Three Months Ended June 30, 2020 Commercial and Commercial Residential Industrial Real Estate Mortgages Total (in thousands) Repurchases of SBA participations $ - $ - $ - $ - SBA Sales 10,205 1,334 - 11,539 Total Loans $ 10,205 $ 1,334 $ — $ 11,539 Six Months Ended June 30, 2020 Commercial and Commercial Residential Industrial Real Estate Mortgages Total (in thousands) Repurchases of SBA participations $ - $ - $ - $ - SBA Sales 16,169 1,492 277 17,938 Total Loans $ 16,169 $ 1,492 $ 277 $ 17,938 |