Fidelity Southern Corporation Reports Earnings For Third Quarter Of $7.9 Million

ATLANTA, Oct. 19, 2017 /PRNewswire/ -- Fidelity Southern Corporation ("Fidelity" or the "Company") (NASDAQ: LION), holding company for Fidelity Bank (the "Bank"), today reported net income of $7.9 million, or $0.30 per diluted share for the quarter ended September 30, 2017, compared with $8.9 million, or $0.33 per diluted share, for the quarter ended June 30, 2017. For the year to date ended September 30, 2017, the Company reported net income of $27.4 million, or $1.03 per diluted share, compared with $23.7 million, or $0.92 per diluted share, for the same period in 2016.

Fidelity's Chairman, Jim Miller, said, "The results in the third quarter reflect the many challenges we and other bankers face while operating in a flat rate environment, slowing quality loan demand, accelerated competition from other banks, and the ongoing pressure to our indirect auto loan business. Although we believe the economy is improving, earnings in mortgage and indirect were impacted. For the rest of our traditional core bank, we remain focused and committed to implement changes to our operations and technology that will enable us to be more efficient and effective in our growth strategies. We will continue to invest to become less reliant on the non-margin businesses."

President Palmer Proctor, added, "Wealth Management will be at a positive run rate by year end. SBA is doing well and now has a national reach. Retail banking is doing especially well with lending to small businesses and in providing funding for lending in all areas. Branches will be opened in Tallahassee, Florida, and Macon and Covington, Georgia, in the near future. Taking a longer view and building diverse lines of business has made our company stronger."

RECENT EVENTS
In August 2017, Hurricane Harvey struck the state of Texas causing massive flooding in certain southern counties. Fidelity's indirect auto business has a number of customers that were impacted by the storm causing an immaterial uptick in auto delinquencies. In September 2017, Hurricane Irma struck the state of Florida, causing extensive structural/windstorm damage, and flooding that extended through Florida and Georgia. Fidelity has customers, employees, and operations that were affected by Irma's path, but we believe these events will not have a material impact on the Company's banking and mortgage operations in those markets.

BALANCE SHEET
Total assets of $4.5 billion at September 30, 2017, represent a decrease of $103.9 million, or 2.3%, compared to June 30, 2017. The decrease in total assets for the quarter was primarily driven by a decrease in cash and cash equivalents of $143.6 million, which was the result of paying off FHLB and brokered CD borrowings of $180.2 million, during the quarter. The decrease in cash and cash equivalents was partially offset by an increase in total loans of $23.2 million. Deposit growth remained strong during the quarter as total core deposits rose by $93.1 million, offset by a decrease in total time deposits of $54.5 million.

Loans
Total loans of $3.8 billion at September 30, 2017, increased by $23.2 million, or 0.6%, as compared to June 30, 2017. During the quarter, loans held for investment increased by $77.6 million, or 2.3%, to $3.4 billion. Total commercial, SBA, and construction loans were down by $14.6 million, or 1.2%, primarily due to payoffs in the commercial portfolio and a slowing of quality commercial and industrial loan demand.

Loans held for sale decreased by $54.4 million, or 13.8%, as reductions were seen in the residential mortgage and indirect auto categories.

Asset Quality
Asset quality continued to improve as evidenced by the reduction in non performing assets, excluding acquired loans and the guaranteed portion of SBA and GNMA loans ("adjusted NPA's"). For the past year, adjusted NPA's have decreased by $8.2 million, or 19.7%.

On a linked-quarter basis, the provision for loan losses increased by $675,000, as net charge-offs increased by $321,000. Gross charge-offs were flat while recoveries decreased, on a linked-quarter basis. Annualized net charge-offs remained relatively low at 0.13% of average loans.

Year over year, the provision for loan losses of $1.4 million recorded for the quarter represented a decrease of $693,000 compared to the same quarter a year ago. The primary reason for the lower provision for loan losses is the continued overall improvement in the Company's credit quality.

Fair Value Adjustments
Loan servicing rights increased during the quarter by $3.7 million, or 3.4%, to $111.9 million. Mortgage servicing rights ("MSRs"), the primary component of loan servicing rights, contributed the majority of the change, increasing by $4.3 million, slightly offset by the change in indirect auto and SBA loan servicing rights for the quarter.

The net increase in MSRs was primarily driven by increased sales of mortgage loans with servicing retained to $644.6 million for the quarter, an increase of $70.8 million, or 12.3%, in comparison to the prior linked-quarter. The increase due to new loan servicing rights capitalized during the quarter was partially offset by amortization of $3.6 million and a modest amount of impairment as a result of higher estimated prepayments.

The current estimated fair market value of the MSRs was $103.1 million at September 30, 2017, an excess of $4.1 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 MSRs 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 were $11.6 million at September 30, 2017, a decrease of $2.3 million, or 16.3%, during the quarter. The decrease was primarily attributable to the decreases in loans held for sale and gross pipeline of locked loans to be sold as we enter into the fall and winter months, historically a lower buying season. 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 continue to remain a foundational strength for the Company. Demand and money market deposits increased by $48.2 million, or 3.4%, during the quarter, including a $35.8 million increase in the Florida branches. Florida deposits now comprise 18.9% of total deposits and have increased in size by $148.4 million, or 24.9%, since December 2016. Noninterest-bearing demand deposits ended the quarter at a record level of $1.1 billion, an increase of $29.7 million from the previous quarter-end.

INCOME STATEMENT
Net income was $7.9 million, or $1.0 million less than the previous quarter. The decrease in earnings was primarily driven by a decrease in net interest income of $352,000 from lower earning assets, the aforementioned increase in provision for loan losses, lower noninterest income of $1.4 million, partially offset by lower noninterest expenses of $1.7 million. As compared to the same quarter a year ago, net income decreased by $4.6 million.

The decrease in earnings, as compared to the same quarter a year ago, was primarily driven by lower net interest income of $1.4 million, lower provision for loan losses of $693,000, lower noninterest income of $5.7 million, and higher noninterest expense of $670,000.

Net Interest Income
Interest income of $39.1 million for the quarter decreased by $473,000, or 1.2%, primarily driven by a decrease of 6 basis points in the yield on loans and a decrease in average loans of $10.1 million. Additionally, the interest income from excess fed funds sold and interest-bearing deposits with banks decreased by $45,000, or 5.3%, for the quarter as excess cash from the money market deposit campaign was used to pay off higher-yielding short-term borrowings.

As compared to the same period in the prior year, interest income decreased by $793,000, or 2.0%, as the yield on loans decreased by 15 basis points, primarily in the commercial, construction and mortgage loan portfolios, offset by an increase of 11 basis points in indirect auto loan yields.

Interest expense of $5.7 million, for the quarter, decreased by $121,000, or 2.1%, primarily due to the pay down of short-term borrowings. The borrowing expense decreased by $486,000, partially offset by an increase in interest-bearing deposit expenses of $272,000 from the Florida marketing campaign. As compared to the same period in the prior year, interest expense increased by $576,000, or 11.2%, as market rates on deposits increased as a result of the increases in the target fed funds rate over the past twelve months.

Net Interest Margin
On a linked-quarter basis, the net interest margin remained flat at 3.20%. The yield on total average earning assets remained flat at 3.75%, while the yield on total interest bearing liabilities increased slightly by 2 basis points to 0.77%. Average earning assets decreased by $98.9 million, primarily driven by the use of cash to pay down the short-term borrowings, and a reciprocal lowering of FHLB stock. Average interest-bearing liabilities decreased by $182.9 million, primarily driven by the $222.5 million decrease in other short-term borrowings, partially offset by an increase of $39.5 million in total interest-bearing deposits.

As compared to the same period a year ago, the net interest margin decreased by 27 basis points, from 3.47%, primarily due to a 23 basis point decrease in the yield on earning assets, while the yield on total interest-bearing liabilities increased by 8 basis points from 0.69%. Average earning assets increased by $149.7 million, primarily due to the increase in excess cash generated over the year by the increase in deposits. Average interest-bearing liabilities increased by $4.8 million, primarily driven by an increase in average interest-bearing deposits of $241.9 million and offset by a decrease in average borrowings of $237.2 million.

Noninterest Income
On a linked-quarter basis, noninterest income decreased by $1.4 million, or 4.0%, largely due to a net decrease in mortgage banking activities income of $1.9 million, or 7.1%, and a decrease in indirect lending activities income of $1.7 million, or 47.8%. Marketing gains and origination points and fees decreased during the quarter primarily due to lower mortgage production, which decreased $47.6 million and a lower pipeline of locked loans to be sold, which decreased by $95.1 million, or 26.4%. These factors were offset by higher loan sales which increased $42.5 million, or 6.2%. Due to the industry-wide weakening of the indirect auto loan sales market, the Company's indirect loan sales decreased by $124.9 million, or 82.2%, resulting in lower gain on sale of $811,000 and a decrease in capitalization of servicing rights of $838,000. The mortgage and indirect auto decreases were offset by increases of $779,000 in SBA lending activities, $263,000 in service charges and other fees, a $403,000 increase in gain on sale of ORE, a reduction of $649,000 in the amortization of the FDIC indemnification asset as commercial loss shares expired at June 30, 2017, and an increase in trust service fees of $86,000.

Compared to the same period a year ago, noninterest income for the quarter of $33.6 million decreased by $5.7 million, or 14.5%, primarily due to a net decrease in noninterest income from mortgage banking activities of $5.1 million, or 16.8%. Marketing gains decreased by $5.5 million compared to the third quarter of 2016 due to a decrease in the pipeline of locked loans of $129.3 million or 32.8% as well as the mix of loan production with more profitable refinances making up 33.3% of loan production in the third quarter of 2016 compared to 13.7% in the third quarter of 2017.

Noninterest Expense
On a linked-quarter basis, noninterest expense decreased by $1.7 million, or 3.1%, primarily due to a decrease in other noninterest expense of $1.4 million. The decrease in other noninterest expense was primarily due to a $1.0 million decrease in loan origination and credit report expenses related to mortgage loan production. Professional and other services expense were also lower by $448,000, or 8.9%, due to a decline in expenses paid to outside third parties. These decreases were offset by an increase in salaries, commissions and employee benefits of $339,000, or 1.0%, which was mainly due to an increase in $690,000 in deferred compensation expense, offset by a decrease in commissions of $140,000.

Compared to the same period a year ago, noninterest expense for the quarter of $52.8 million increased by $670,000, or 1.3% mostly due to increased expenses associated with organic growth, especially in the mortgage and Wealth Management divisions. Salaries, employee benefits and commissions increased by $1.9 million, or 5.6%, mainly due to an increase in the FTE count of approximately 103, or 8.1%, year over year. Professional and other services also increased by $551,000, or 13.6%, primarily due to increased expenses paid to outside third parties for infrastructure improvement projects and costs associated with new and existing regulations. These increases in noninterest expense were offset by decreases in other noninterest expense of $1.7 million, or 17.2%, and a decrease in occupancy expense of $89,000 or 1.9%. Other noninterest expense was lower by $842,000 due to lower loan origination and credit reports expenses associated with lower mortgage production noted above in the linked-quarter paragraph and lower ORE expense of $547,000 as the amount of ORE properties was significantly lower in the third quarter of 2017 compared to the third quarter of 2016.

OTHER NEWS
In October 2017, Fidelity announced plans to open three de novo branches, one in Tallahassee, Florida, one in Macon, Georgia, and one in Covington, Georgia. Fidelity believes these branches will be well positioned to generate new customers and opportunities in these markets.

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 auto, 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.

NON-GAAP FINANCIAL MEASURES
This release contains certain non-GAAP financial measures. Management believes that these non-GAAP financial measures allow better comparability with prior periods, as well as with peers in the industry who provide a similar presentation and provide a greater understanding of our ongoing operations. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other Companies.

SAFE HARBOR
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.