Investment Thesis

Headquartered in Atlanta, Georgia, and with about $3 billion in assets, Atlantic Capital Bancshares, Inc. (ACBI) is a commercially focused bank with specialties in specialty corporate lending, private banking, and commercial real estate finance solutions. The company has the 13th largest deposit market share in the greater Atlanta MSA, just behind Cadence Bancorp (CADE), Renasant (RNST), and Bank OZK (OZK).

I am a little more constructive on the bank since the first quarter update. The exposure to economically sensitive loans has narrowed to 9% of total loans (from ~30%). To me, this means that potential realized losses could be lower than previously expected and roughly in line with other regional bank peers. The core net interest margin (NIM) remains under pressure but expense control should help profitability over the near term.

When weighing out the puts and takes, I am still neutral on the stock. This partially is due to ACBI’s valuation, which is roughly in line with its peer group. While I believe the company should be a beneficiary of competitive disruption in the Atlanta market, I think there are more pressing issues over the next few quarters.

When mixing in valuation relative to the riskier credit profile, I suggest potential shareholder remain on the sidelines, at least until the third quarter update in a few weeks.

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Revenue Outlook

In the second quarter, ACBI reported EPS from continuing operations of $0.09 versus consensus expectations of $0.13, relative to its $0.10 in the first quarter. The second quarter downside came primarily from elevated provisioning offset partially by higher revenue and lower expenses. The company’s pre-provision net revenue was $11.1 million, compared to $10.5 million in the first quarter and $9.7 million in the second quarter of last year.

In the second quarter, net interest income

Investment Thesis

Headquartered in Beverly Hills, California, PacWest Bancorp (PACW) is a $27 billion asset bank holding company for Pacific Western Bank. PacWest focuses on relationship-based commercial banking to small, middle market, and venture-backed businesses across the United States rather than your more typical retail community bank. That said, PAWC does provide traditional banking services to over 70 branches throughout California and one branch located in Durham, North Carolina. Its main executive offices are in Denver, Colorado. While the past few years have been relatively quiet, PACW has historically supplemented organic growth with strategic acquisitions, successfully completing almost thirty acquisitions since 2000.

When I review PACW, I find that it has built an attractive franchise with unique asset and deposit generating capabilities across many different commercial segments. Following significant balance sheet de-risking, I believe earnings are becoming less volatile with a more sustainable net interest margin (NIM). In addition, the strong profitability due to a lean operating cost structure has also enabled a sustained strong dividend payout ratio, even though it was lowered earlier this year.

While I do believe the company is on a more stable footing now, upside catalysts pretty limited, in my view. While the current valuation might seem enticing, the loan portfolio is pretty opaque and PACW does have a history of larger than average net charge-offs ((NCOs)).

Personally, I would recommend staying on the sidelines due to the possible credit problems. I am waiting until third quarter earnings to re-review the credit profile. That said, PACW does have a great earnings profile and should earn multiples more than its peer bank counterparts once interest rates work themselves higher again.

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Revenue Outlook Looks Strained

In the second quarter, the net interest income of $256 million was up just slightly relative to first quarter