Fidelity Southern Corporation Reports Earnings For Second Quarter Of $8.9 Million

ATLANTA, July 20, 2017 /PRNewswire/ -- Fidelity Southern Corporation ("Fidelity" or the "Company") (NASDAQ: LION), holding company for Fidelity Bank (the "Bank"), today reported financial results for the quarter ended June 30, 2017.

HIGHLIGHTS:

• Net income of $8.9 million, or $0.33 per diluted share, an increase of $2.2 million, year over year, and decreased $1.6 million, as compared to the previous quarter
• Total revenues of $74.6 million, an increase of $7.9 million, year over year, and a decrease of $378,000 as compared to the prior quarter
• Net interest income of $33.7 million grew by $1.9 million and $1.5 million, year over year, and compared to the prior quarter
• Noninterest income of $35.1 million grew by $5.1 million, year over year, and decreased by $2.3 million compared to the prior quarter
• Book value per common share of $14.21 grew by $1.04 and $0.12, year over year, and compared to the prior quarter
• Total assets of $4.6 billion increased by $78.2 million, or 1.7%, during the quarter
• Total loans of $3.7 billion increased by $10.8 million, or 0.3%, during the quarter
• Total deposits of $3.9 billion increased by $144.7 million, or 3.9%, during the quarter
• Loans serviced for others of $9.9 billion grew by $323.0 million, or 3.4%, during the quarter

Fidelity's Chairman and CEO, Jim Miller, said, "We are pleased to see continued topline revenue growth generated by our ability to grow earning assets while operating basically in a flat curve environment. In 2017, we launched a number of project initiatives. Substantial investments were made in building out our Wealth Management sales force, mortgage expansion in Florida, and putting in place the talent, back office operations, and technology infrastructure that will enable us to be a much larger bank. Consequently though, efficiencies and sales will follow. It is worth noting that the flat commercial lending market and long-term loan structures have been difficult for us as we are fundamentally conservative and steer away from speculative real estate and what we call give-away interest rates. Nevertheless, we continue to focus our full attention on lending to businesses. We want our balance sheet to be more diversified.

We plan for further interest rate increases and expect the economy to become stronger despite overbuilding in the apartment market."

Fidelity's President, Palmer Proctor, added, "The project initiatives and revenue expansion investments that we have implemented will allow us to be more nimble and efficient as we enhance our technology and operating capacity. This in turn will help us provide more organic growth in existing and new markets, provide the capability for more strategic acquisitions, and most importantly, provide long-term shareholder value."

BALANCE SHEET
Total assets of $4.6 billion at June 30, 2017, represent an increase of $78.2 million, or 1.7%, compared to March 31, 2017. The increase in total assets for the quarter was primarily driven by a net increase in cash and cash equivalents of $75.6 million, provided by the increase in total deposits of $144.7 million, or 3.9%. The excess cash from deposit marketing campaigns was used to pay off $75.0 million in FHLB advances during the quarter.

Loans
Total loans of $3.7 billion at June 30, 2017, increased by $10.8 million, or 0.3%, as compared to March 31, 2017. During the quarter, loans held for investment decreased by $22.8 million, or 0.7%, to $3.3 billion. Consistent with industry trends influenced by rising interest rates, loan production has slowed in the indirect automobile and commercial portfolios. The Bank continues to generate organic new business, evidenced by average loan balances increasing by $17.8 million, as compared to March 31, 2017, as well as leveraging its expansion into new markets, as shown through solid production in the residential mortgage and HELOC portfolios. Loans held for sale grew by $33.6 million, or 9.3%, during the quarter to $394.7 million, primarily due to seasonally higher mortgage originations for the quarter as the peak summer homebuying season started.

Asset Quality
Credit quality of the loan portfolio continued to improve during the quarter. Non-performing assets decreased by $3.5 million, or 5.8%, as compared to March 31, 2017. The ORE and repossessions balance of $11.2 million decreased by $1.8 million, or 13.7%, during the quarter and is now at the lowest level in over 10 years. Delinquent loan balances, were down from the prior linked-quarter, and are near historic lows.

On a linked-quarter basis, the provision for loan losses decreased by $1.4 million, as net charge-offs decreased by $586,000 compared to the previous quarter. Annualized net charge-offs improved to 0.09% from 0.16% of total loans as compared to the prior quarter as successful collection and recovery efforts drove net recoveries in the commercial and construction portfolios.

Year over year, the provision for loan losses of $750,000 recorded for the quarter represented a decrease of $2.4 million compared to the same quarter a year ago. The primary reason for the lower provision for loan losses was overall improved credit quality and lower net loan charge-offs for the quarter, led primarily by recoveries in the construction and commercial portfolios.

Fair Value Adjustments
Loan servicing rights increased during the quarter by $3.2 million, or 3.0%, to $108.2 million. Mortgage servicing rights (MSRs), the primary component of loan servicing rights, contributed the majority of the change, increasing by $3.4 million, slightly offset by the change in indirect and SBA loan servicing rights for the quarter.

The increase in MSRs was primarily driven by increased sales of mortgage loans with servicing retained to $573.8 million for the quarter, an increase of $76.9 million, or 15.5%, in comparison to the prior linked-quarter. This increase was partially offset by a slight increase in impairment during the quarter as a result of higher early prepayments and lower mortgage rates. Early prepayments were higher for the quarter, primarily due to sales and purchases of new homes. Slightly lower mortgage rates also contributed to payoffs for refinances during the quarter.

The current estimated fair market value of the MSR was $97.8 million at June 30, 2017, an excess of $3.0 million over the net carrying value recorded. If interest rates trend upward, the fair market value would theoretically increase with a corresponding decrease in early prepayment expectations and some portion of the cumulative impairment recorded may be recovered. However, the value of the MSR is highly dependent on current market rates so any interest rate volatility could significantly impact the value of the asset and the recorded impairment, either positively or negatively.

Fair value gains on the portfolio of mortgage loans held for sale, interest rate lock commitments (IRLCs) and hedge items was $13.9 million at June 30, 2017, an increase of $2.4 million, or 20.3%, during the quarter. The increase was primarily attributable to the increase in mortgage loans held for sale as the gross pipeline of locked loans to be sold decreased slightly by quarter end as summer home buying began to taper. Since the Bank hedges its mortgage pipeline and held for sale portfolio, the volatility of these items due to interest rate movements collectively should be minimal.

Deposits
Total deposits increased by $144.7 million, or 3.9%, during the quarter to $3.9 billion. The majority of this increase occurred in the demand and money market category which increased by $114.1 million, or 8.6%, including $55.3 million in the Florida branches. Florida deposits now comprise 20.3% of total deposits. The remainder of the increase was driven by an increase in noninterest bearing demand deposits which rose by $77.6 million, or 7.7%, to end the quarter at $1.1 billion. Core deposit balances continue to grow. The increase in core deposits was partially offset by decreases of $45.1 million and $1.9 million, in the savings and time deposit categories, respectively.

INCOME STATEMENT
Net Income
On a linked-quarter basis, net income was $1.6 million, or 15.5%, lower. Net interest income increased by $1.5 million due to an increase in total interest-earning assets, and provision for loan losses was lower by $1.4 million due to improved credit quality.  These increases were offset by a decrease of $2.3 million in noninterest income, primarily created by lower gains on loan sales and a non-recurring gain recorded in the previous quarter, and an increase of $4.0 million in noninterest expense stemming from increased salaries and benefits, commission costs due to the increase in mortgage production, and professional and other services, as further described below.

As compared to the same quarter a year ago, net income increased by $2.2 million, or 33.8%, to $8.9 million. The increased earnings was primarily the result of higher earning assets that contributed to an additional $1.9 million in net interest income, $7.7 million in noninterest income from mortgage banking activities, and $2.4 million less in provision for loan losses due to improved credit quality from a year ago. These increases in earnings were partially offset by changes in noninterest expense of $6.4 million due to increased salaries and benefits, commissions from higher production, and professional and other services.

Interest Income
On a linked-quarter basis, interest income increased by $1.9 million, or 5.1%, primarily driven by an increase of 10 basis points in the yield on loans and growth in average loans of $17.8 million. Additionally, the interest income from excess fed funds sold and interest-bearing deposits with banks increased by $497,000, or 141.6%, for the quarter. The planned change in mix of interest-earning assets occurred due to a relatively larger increase in cash held in bank deposits during the quarter as compared to other higher-yielding interest-earning assets. Excess cash from the money market deposit campaign will be used to pay off short-term borrowings in future quarters.

Interest income of $39.6 million for the quarter increased by $2.8 million, or 7.5%, as compared to the same period in the prior year. This increase was primarily driven by an increase of average loans of $145.1 million, or 4.0%. Also contributing to the year over year increase in interest income was an increase of 9 basis points in the yield on loans, primarily in the commercial and construction loan portfolios due to three increases of 25 basis points in the prime rate over the past twelve months, including an increase effective June 15, 2017 which will be fully reflected in the third quarter.

Interest Expense
On a linked-quarter basis, interest expense increased by $424,000, or 7.8%, primarily due to an increase in average interest-bearing deposits of $87.8 million, or 3.2%. The Bank continued its deposit marketing campaign, primarily in the Florida markets, which has been focused on attracting money market deposits. In addition, the rate paid increased by 4 basis points as compared to the prior linked-quarter as a result of the impact of the three 25 basis point increases in the prime rate over the past six months, including an increase effective June 15, 2017, which will be fully reflected in the third quarter.

Interest expense for the quarter of $5.8 million reflects an increase of $869,000, or 17.5%, as compared to the same quarter a year ago, primarily due to an increase in interest expense on deposits. As a result, average interest-bearing deposits for the quarter increased by $232.1 million, or 9.1%, as the Bank's deposit marketing campaign continued. Also contributing to the year over year increase in interest expense was an increase of 5 basis points in the rate paid on interest-bearing deposits. Other short-term borrowings also experienced an increase in the rate paid for the quarter, which was 32 basis points higher as a result of the impact of the three 25 basis point increases in the prime rate in the past twelve months previously mentioned.

Net Interest Margin
On a linked-quarter basis, net interest income (tax equivalent) grew by $1.5 million, or 4.6%, to $33.8 million, primarily as the result of an increase of $163.4 million, or 4.0%, in average earning assets, partially offset by an increase of $85.9 million, or 2.8%, in interest-bearing liabilities and an increase of 3 basis points in the cost of funds.

In comparison to the prior linked-quarter, the net interest margin for the quarter decreased by 1 basis point to 3.20%, primarily due to an increase of 3 basis points in the rate paid on interest-bearing liabilities, partially offset by the benefit of higher average noninterest-bearing demand deposits which grew by $66.7 million, or 6.9%.

As compared to the same period a year ago, net interest income (tax equivalent) rose by $1.9 million to $33.8 million, or an increase of 5.9%, for the quarter, primarily due to a year over year increase of $354.0 million, or 9.1%, in average earning assets. This increase was partially offset by an increase in interest expense as average interest-bearing deposits grew by $232.1 million, or 9.1%, and the rate paid increased by 5 basis points.

The net interest margin was 3.20% for the quarter, a decrease of 10 basis points, as compared to 3.30% for the same period in 2016. The growth in lower-yielding other earning assets, mainly cash held in bank deposits, contributed to the decrease in the net interest margin, partially offset by steady growth in loan yields of 9 basis points. The decrease in the net interest margin was also driven by the higher cost of funds for the quarter, primarily resulting from an increase in the rate paid on interest-bearing deposits of 5 basis points.

Noninterest Income
On a linked-quarter basis, noninterest income decreased by $2.3 million, or 6.2%, largely due to a net decrease in other noninterest income of $1.6 million, or 109.5%, as a change in insurance providers resulted in a non-recurring gain of $1.0 million recorded in the previous quarter. Decreases were also noted in indirect lending activities of $786,000, or 17.8%, and SBA lending activities of $1.1 million, or 62.5%, as lower volume of loans sold resulted in lower gains on loan sales in both portfolios. As compared to the prior linked-quarter, indirect loan sales decreased by $40.4 million, or 26.6%, and SBA loan sales decreased by $4.4 million, or 45.7%. Mortgage banking activities was positively impacted by an increase of $1.1 million, or 4.2%, in gains on sale and fees stemming from increased mortgage production of $247.4 million, or 44.7%, and consistent product margins.

Noninterest income for the quarter of $35.1 million increased by $5.1 million, or 17.0%, as compared to the same period a year ago, primarily due to a net increase in noninterest income from mortgage banking activities of $7.7 million, or 39.8%. The stability of market interest rates over the year resulted in a smaller net MSR impairment of $636,000 for the quarter as compared to net MSR impairment of $8.6 million for the same period a year ago, driving $7.9 million of the year over year change in noninterest income from mortgage banking activities.

Partially offsetting the year over year increase in noninterest income from mortgage banking activities was a decrease of $1.1 million, or 23.9%, in noninterest income from indirect lending activities and a decrease of $1.2 million, or 64.0%, in noninterest income from SBA lending activities, primarily due to a year over year decrease in gains on loan sales. As compared to the same quarter a year ago, indirect loan sales decreased by $144.2 million, or 36.6%, and SBA loan sales decreased by $7.7 million, or 44.4%, respectively.

Noninterest Expense
On a linked-quarter basis, noninterest expense increased by $4.0 million, or 7.9%. Commissions expense increased by $1.9 million, or 25.2%, primarily due to higher mortgage loan production and to a lesser degree, due to guaranteed commissions paid to new mortgage originators in expansion markets executed late in the first quarter. Salaries and employee benefits grew by $414,000, or 1.6%, for the prior linked-quarter, mainly due to new hires in the mortgage and Wealth Management divisions. Professional and other services expense was $1.0 million, or, 24.2%, higher due to higher expenses paid to outside third parties, primarily for ongoing projects to build the operating infrastructure, gather data to comply with new and existing regulations, and compliance with new accounting standards.

Noninterest expense for the quarter of $54.6 million increased by $6.4 million, or 13.4%, as compared to the same period a year ago, mostly due to increased expenses associated with organic growth, primarily in the mortgage and Wealth Management divisions. Salaries and employee benefits and commissions increased by $3.3 million, or 10.3%, mainly due to an increase in the FTE count of approximately 120, or 9.5%, year over year and 59, or 4.5%, during the quarter. Occupancy expense increased by $687,000, or 17.1%, for the quarter, mainly due to increases in rental and property tax expenses as new mortgage production offices were established in Florida.

Professional and other services expense increased by $1.5 million, or 40.3%, for the quarter, mostly due to an increase in expenses paid to outside third parties as previously mentioned in the discussion of the linked-quarter results.

Other noninterest expense increased by $1.0 million, or 11.6%, for the quarter, mainly due to increases in operating costs as a result of the year over year growth in locations, customers and transactions.

ABOUT FIDELITY SOUTHERN CORPORATION
Fidelity Southern Corporation, through its operating subsidiaries, Fidelity Bank and LionMark Insurance Company, provides banking services and Wealth Management services and credit-related insurance products through branches in Georgia and Florida, and an insurance office in Atlanta, Georgia. SBA, indirect automobile, and mortgage loans are provided throughout the South and parts of the Midwest. For additional information about Fidelity's products and services, please visit the web site at www.FidelitySouthern.com.

This news release contains forward-looking statements, as defined by Federal Securities Laws, including statements about financial outlook and business environment. These statements are provided to assist in the understanding of future financial performance and such performance involves risks and uncertainties that may cause actual results to differ materially from those in such statements. Any such statements are based on current expectations and involve a number of risks and uncertainties. For a discussion of factors that may cause such forward-looking statements to differ materially from actual results, please refer to the section entitled "Forward Looking Statements" from Fidelity Southern Corporation's 2016 Annual Report filed on Form 10-K with the Securities and Exchange Commission. Additional information and other factors that could affect future financial results are included in Fidelity's filings with the Securities and Exchange Commission.