Fidelity Southern Corporation Reports Earnings For First Quarter Of $11.8 Million

Asset Quality
Asset quality remained strong, although nonperforming assets increased during the quarter, excluding the guaranteed portion of government loans ("adjusted NPA's") and acquired loans. Adjusted NPA's, a non-GAAP measure, increased by $4.5 million during the quarter. The increase was mainly due to two large commercial real estate loans added to nonaccrual during the quarter. The provision for loan losses increased by $2.1 million, mainly due to the growth of our commercial loan portfolio and several NPA-related specific reserves. Net charge-offs continued to trend low at 0.1% of average loans for the quarter.

Fair Value Adjustments
Loan servicing rights increased by $6.9 million, or 6.2%, during the quarter, to $119.6 million at March 31, 2018, compared to $112.6 million at December 31, 2017. MSRs, the primary component of loan servicing rights, contributed the majority of the change, increasing by 7.2%, to $107.9 million at March 31, 2018, as an increase in market interest rates drove the impairment recovery of $4.5 million for the quarter.  MSRs also increased due to mortgage loan sales with servicing retained of $431.6 million for the quarter. The current estimated fair market value of MSRs was $113.2 million at March 31, 2018.

At March 31, 2018, fair value adjustments recorded on the balance sheet for loans held for sale, interest rate lock commitments ("IRLCs"), and hedge items were $12.7 million, a $2.3 million, or 22.8% increase, from December 31, 2017 due to growth in both loans held for sale (as previously discussed) and the gross pipeline of IRLCs.

Deposits
Core deposit growth was strong for the quarter as demand, money market and savings deposits grew by $78.1 million, or 2.65%, to $3.0 billion.  Money market account promotions continued and new deposit accounts from commercial loan relationships began to fund.  Three new branches recently opened in Georgia and Florida also contributed to deposit growth in the first quarter.

The enhanced core deposit base has allowed the Bank to be more relationship-oriented in its approach to time deposits and non-core brokered CD's.  Time deposits decreased by $44.9 million during the quarter, primarily due to the run off in brokered deposits of  $40.0 million, resulting in a net increase in deposits of $33.2 million, or 0.86%. 

INCOME STATEMENT

Net Income
Net income was $11.8 million, or $0.7 million less than the previous quarter, primarily due to the one-time income tax benefit of $4.9 million recorded in the previous quarter to revalue the deferred tax liability at December 31, 2017.  The deferred tax liability was revalued as a result of the reduction of the federal corporate income tax rate from 35% to 21% following the enactment of the Tax Cuts and Jobs Act on December 22, 2017. 

Pre-tax income was $3.2 million higher than the previous quarter, primarily due to higher noninterest income driven by the previously noted MSRs impairment recovery of $4.5 million, partially offset by a decrease in net interest income of $1.1 million as higher-cost short term borrowings increased relative to deposits to finance higher loan production in the first quarter.   Noninterest expense also increased by $1.8 million due to increased salaries and benefits.

Net income was $1.2 million higher compared to the same quarter a year ago, primarily due to a decrease of $3.1 million in income tax expense from the change in the federal tax rate as discussed above.  Pre-tax income was $1.9 million lower for the quarter. Higher net interest income of $2.5 million was the result of an increase of 13 basis points in loan yields and growth in average loans of $259.1 million, which was offset by $4.2 million  in higher noninterest expense primarily salaries and benefits. The increase in loan yield was partially driven by a relatively larger increase in higher yielding commercial loans and the three increases to the fed funds rate in 2017 of 75 basis points in total.                 

Interest Income
Interest income of $41.6 million was flat compared to the prior quarter.  An increase in average loans of $144.9 million drove higher interest income which was offset by loan yields that decreased by 8 basis points. Excluding the variance of 6 basis points in accretable yield, the yield decreased by 2 basis points for the quarter. Interest income on loans for the previous quarter included $1.2 million in accretable yield earned on the purchased credit impaired ("PCI") loan portfolio, compared to $569,000 in the current quarter.

As compared to the same period in the prior year, interest income increased by $3.9 million, or 10.4%, as the yield on loans increased by 13 basis points, primarily in the commercial, construction, and mortgage loan portfolios, mainly due to the increases in the prime rate of 75 basis points during 2017.

Interest Expense
Interest expense of $6.8 million increased by $1.0 million, or 17.6%, for the quarter, primarily due to increased higher-cost short term borrowings as previously discussed and a 5 basis point increase in deposit cost, due  primarily to CD special pricing increases and new Florida and Georgia promotional money market products and rates. The yield paid on short-term borrowings increased 134 basis points due to the significant use of FHLB borrowings during the quarter which carry higher rates.

As compared to the same period in the prior year, interest expense increased by $1.4 million, or 25.6%.

Net Interest Margin
The net interest margin was 3.29% for the quarter compared to 3.42% in the previous quarter, a decrease of 13 basis points, primarily due to the higher interest income in the previous quarter in the PCI loan portfolio as noted above.  The yield on total average earning assets also decreased from 3.97% to 3.93%. Average loans increased by $144.9 million with an 8 basis point decrease in yield, primarily due to decreases in yield on commercial and SBA loans. Excluding the variance of 6 basis points in accretable yield, the yield decreased by 2 basis points for the quarter.

Average interest-bearing liabilities increased by $119.5 million, primarily driven by the increase in borrowings for the quarter of $204.3 million to fund loan growth.  This increase was offset by a decrease in average interest-bearing deposits of $84.8 million for the quarter.

As compared to the same period a year ago, the net interest margin for the quarter increased by 8 basis points to 3.29% from 3.21%, primarily due to a 13 basis point increase in the yield on average loans of $4.0 billion, offset by an increase of 18 basis points in the yield on total interest-bearing liabilities of $3.1 billion. Average earning assets increased by $207.5 million, primarily due to an increase in average loans over the year. Average interest-bearing liabilities increased by $16.4 million, primarily driven by an increase in average interest-bearing deposits of $26.1 million, offset by a decrease in average borrowings of $9.7 million. Year over year, the deposit marketing campaigns in Florida have successfully increased average deposits and new commercial deposit relationships.

Noninterest Income
On a linked-quarter basis, noninterest income increased by $8.2 million, or 28.5%, largely due to a net increase in income from mortgage banking activities of $7.6 million, or 36.5%, including a $6.0 million recovery on the valuation of MSR and a $3.5 million gain from the fair value adjustment related to mortgage loans held for sale, pipeline of interest rate lock commitments, and related hedge items.

Compared to the same period a year ago, noninterest income for the quarter of $37.1 million decreased by $237,000, or 0.6%, primarily due to a net decrease in income from indirect lending activities of $2.3 million, due to a decrease in loan sales over the year as investor demand declined. This decrease was offset by an increase in mortgage banking activities of $2.7 million, or 10.4%, stemming from a change in MSRs impairment/recovery of $2.6 million.

Noninterest Expense
On a linked-quarter basis, total noninterest expense increased due to an increase in salaries and employee benefits expense and loan related expenses. The increase in salaries and benefits of $1.8 million resulted from a normal increase in payroll taxes in the first quarter, as well as an increase in headcount, mainly from new mortgage loan originators and staffing to support three new retail branches recently opened.  Also, employee incentives and bonuses were lower in the fourth quarter of 2017 due to the decision not to award annual cash incentive bonuses to executives for 2017.  Loan related expenses for the quarter were $930,000 higher due to increases in mortgage and commercial loan activity. These increases were offset by a decrease in commissions of $941,000.

Compared to the first quarter of 2017, noninterest expense of $54.7 million increased by $4.2 million, or 8.2%.  Salaries and employee benefits expense increased by $2.1 million, or 8.4%, due primarily to an increase in headcount of 107, or 8.1%, in the mortgage and retail areas as previously discussed.  Equity incentives granted in June 2017 which were tied to 2016 performance also increased salaries and benefits expense for the quarter.  Occupancy expense increased by $769,000, or 18.5%, due to higher building rental expense as normal rent escalations occurred, as well as higher expenses paid for software maintenance. Professional and other services also increased by $731,000, or 18.0%, primarily due to higher expenses related to our continued investment in technology and back office operations to support our growth.

Income Taxes
The Tax Cuts and Jobs Act enacted on December 22, 2017 included, among other things, a reduction in the federal corporate income tax rate from 35% to 21% from the beginning of the tax year 2018 going forward.

On a linked-quarter basis, as well as compared to the same quarter in prior year, our effective tax rate decreased from 37.8% to 22.7% primarily the result of the federal tax rate change discussed above. Excluding the benefit of employee stock option exercises and other tax adjustments, the effective tax rate for the quarter would have been 24.0%.

OTHER NEWS
Fidelity continued its retail branch expansion during the quarter with the opening of the Hartley Bridge Road branch in Macon, Georgia on January 25, 2018, and the Covington, Georgia branch on March 30, 2018. Fidelity has received regulatory approval to open one additional branch in Sugar Hill, Georgia which it expects to open in Q2 2018, which will bring the total number of retail branches to 69.

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. Indirect auto and mortgage loans are provided throughout the South while SBA loans are originated nationwide. For additional information about Fidelity's products and services, please visit the website at www.FidelitySouthern.com.

NON-GAAP FINANCIAL MEASURES
This release contains certain non-GAAP financial measures. The "GAAP TO NON-GAAP RATIO RECONCILIATION" tables included below reconcile GAAP to non-GAAP ratios. The non-GAAP ratios contain financial information determined by methods other than in accordance with GAAP. Management uses these "non-GAAP" financial measures in its analysis of the Company's performance. Management believes that presentation of these non-GAAP financial measures provides useful supplemental information that allows better comparability with prior periods, as well as with peers in the industry and provides a greater understanding of the asset quality of the Company's loan portfolio exclusive of the indirect auto, government-guaranteed and acquired loan portfolios. 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 2017 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.

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(UNAUDITED)
	As of or for the Quarter Ended
($ in thousands, except per share data)	March 31,  2018				December 31,  2017				March 31,  2017
INCOME STATEMENT DATA:
Interest income	$	41,562			$	41,653			$	37,642
Interest expense	6,794				5,779				5,408
Net interest income	34,768				35,874				32,234
Provision for loan losses	2,130				—				2,100
Noninterest income	37,133				28,888				37,370
Noninterest expense	54,742				52,910				50,572
Net income before income taxes	15,029				11,852				16,932
Income tax expense (benefit)	3,262				(591)				6,405
Net income	11,767				12,443				10,527
PERFORMANCE:
Earnings per common share - basic	$	0.44			$	0.46			$	0.40
Earnings per common share - diluted	0.43				0.46				0.40
Total revenues	78,695				70,541				75,012
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