Fidelity Southern Corporation, holding company for Fidelity Bank, reported net income of $12.5 million and earnings per diluted share of $0.48 for the quarter ended September 30, 2016.

KEY RESULTS

• Net income increased to $12.5 million, or 88.3%

• Total revenue increased to $79.2 million, or 18.6%

• Net interest margin increased to 3.46%, or 15 basis points

• Total assets increased to $4.4 billion, or 2.7%

• Loan portfolio increased to $3.8 billion, or 3.7%

• Loans serviced for others grew to $8.9 billion, or 2.6%

• Tangible book value increased to $12.78, or 1.4%

Fidelity's Chairman, Jim Miller, said, "Though time deposits went down other deposits continued to increase as we consolidated our more recently acquired branches with final system integration and upgrades to our internal systems.

"The opportunity to hire first rate bankers continues and we have been and will continue to strengthen our teams throughout Georgia and Florida as we work to take market share in both states, in line with our focus on profitability driven by our customer service."

BALANCE SHEET
Total assets grew to $4.4 billion at September 30, 2016, an increase of $113.7 million, or 2.7%, compared to June 30, 2016. The increase in total assets was driven by organic loan growth which resulted in an increase in loans for the quarter of $141.6 million, or 4.4%, with the increase in liabilities stemming from an increase in short-term borrowings of $136.8 million, or 63.4%.

Loans
Total loans held for investment grew to $3.3 billion at September 30, 2016, an increase of $141.6 million, or 4.4%, during the quarter as the Bank continues to generate new business and leverage its expansion through past acquisitions.

The majority of the increase in the portfolio during the quarter occurred in the consumer loan portfolio, primarily indirect automobile loans, which grew by $123.9 million, or 8.1%, during the quarter, as strong loan originations outpaced the volume of loan sales.

Total mortgage loans also had strong growth, mainly in the home equity line of credit portfolio which increased by $12.2 million, or 2.4%, during the quarter.

Loan Servicing Rights
Gross servicing rights increased by $3.2 million, or 4.1%, during the quarter as residential mortgage, SBA and indirect auto loan sales continued. MSR impairment charges booked during the first half of 2016 did not extend to the third quarter and as a result, $458,000 in net MSR impairment recovery was recorded during the quarter. The impairment recovery occurred as estimated future prepayment speeds stabilized during the quarter, and subsequently, the estimated remaining life of the servicing income on the underlying loans serviced for others extended slightly.

Deposits
Total deposits at September 30, 2016, of $3.5 billion decreased by $30.7 million, or 0.9%, during the quarter. Money market and interest-bearing demand deposits grew by $20.9 million during the quarter while fluctuations in noninterest bearing demand accounts and a slight decrease in time deposits resulted in the net decrease in deposits for the quarter.

For the quarter, demand deposits continued to grow throughout the footprint. 

Borrowings
Short-term borrowings increased by $136.8 million, or 63.4%, during the quarter, primarily as a result of fluctuations in short-term liquidity needs which the Bank manages through short-term FHLB advances and Fed funds purchased.

INCOME STATEMENT

Net Income
Net income was $12.5 million for the quarter, an increase of $3.3 million, or 35.8%, as compared to the same period in the prior year. The primary driver of the increase in net income was the year over year increase in average earning assets of $843.3 million, or 26.6%, over the past twelve months, primarily due to assets added through acquisition of $489.6 million, as well as organic loan growth.

Total revenue for the quarter increased by $19.0 million, or 31.6%, as compared to the same period in the prior year, improving operating leverage by outpacing the increase of $12.1 million, or 30.3% in noninterest expense.

On a linked-quarter basis, net income increased by $5.9 million, or 88.3%, as total revenue increased by $12.4 million, or 18.6%, provision for loan losses decreased by $1.0 million, and noninterest expense increased by $4.0 million, or 8.4%, representing an improvement in operating leverage.

Interest Income
Interest income was $39.9 million for the quarter, an increase of $10.3 million, or 34.8%, as compared to the same period in the prior year. Average loans for the quarter increased by $762.2 million, or 25.8%, as compared to the same quarter a year ago, which was the primary reason for the increase in interest income.

Interest income for the quarter also increased due to the increase in the yield on loans of 29 basis points to 4.12%, as compared to the same period a year ago, primarily due to purchase discounts accreted on loans added through acquisition during the past year. Excluding the discount accreted on acquired loans, the yield on loans decreased by 4 basis points for the quarter, as new loans were originated at lower yields over the previous twelve months.

On a linked-quarter basis, interest income increased by $3.1 million, or 8.4%. Average loans for the quarter increased by $127.4 million, or 3.5%, mainly in the consumer loan portfolio. The increase in interest income was also driven by an increase in the yield on loans of 17 basis points, primarily driven by higher discounts accreted on acquired loans during the quarter due to resolution of problem assets and loan payoffs. Excluding the discount accreted on acquired loans, the yield on loans was flat for the quarter at 3.79%.

Interest Expense
Interest expense was $5.1 million for the quarter, an increase of $675,000, or 15.1%, as compared to the same quarter in 2015, as a combination of organic growth and deposits added through recent acquisitions resulted in a year over year increase of $513.8 million in average interest-bearing deposits.

The increase in interest expense due to larger average deposit balances was offset by a decrease in the rate paid on interest-bearing accounts, primarily time deposits, which decreased by 8 basis points as compared to the same quarter a year ago.

On a linked-quarter basis, interest expense increased by $172,000, or 3.5%, due to slight increases in the rate paid and average interest-bearing liabilities.

Net Interest Margin
The net interest margin was 3.46% for the quarter, compared to 3.18% for the same period in 2015. Net interest income (tax equivalent) rose to $34.9 million for the quarter, or an increase of 37.6%, as compared to $25.3 million for the same period in 2015.

The increase in the net interest margin of 24 basis points occurred primarily due to higher yields on loans added through acquisition which reflect purchase discounts. The net interest margin also increased due to a decrease of 4 basis points in interest cost for the quarter as compared to the same period a year ago. Excluding the discount accreted on acquired loans, the net interest margin decreased by 3 basis points for the quarter, as new loans were originated at lower yields over the previous twelve months.

The increase in the level of net interest income (tax equivalent) for the quarter occurred primarily due to an increase in the level of average earning assets of $843.3 million, or 26.6%, due to a combination of organic growth and acquisitions over the past year. The remainder of the increase in net interest income for the quarter occurred as the loan yield increased and interest cost decreased for the reasons noted above.

On a linked-quarter basis, the net interest margin increased by 15 basis points, primarily due to higher yields on acquired loans which reflect higher discounts accreted on acquired loans during the quarter due to resolution of problem assets and loan payoffs as well as a reduction in rates paid on deposits. Excluding the accretable discount on acquired loans recorded during the quarter, the net interest margin increased by 4 basis points.

Provision for Loan Losses
The provision for loan losses was $2.1 million for the quarter, an increase of $790,000, as compared to the same period in 2015. Loans held for investment experienced organic growth of $141.6 million during the quarter while the trend in historical net charge-offs continues to be low.

On a linked-quarter basis, the provision for loan losses decreased by $1.0 million, as a result of a decrease of $2.5 million in net charge-offs compared to the previous quarter, partially offset by the provision required for loan growth during the quarter.

Noninterest Income
Noninterest income was $39.3 million for the quarter, an increase of $8.7 million, or 28.4%, as compared to the same period in 2015. The quarterly increase is primarily due to a net increase in income from mortgage banking activities of $9.3 million, or 44.7%.

Mortgage production income was $29.2 million in the third quarter of 2016, a $7.7 million, or 35.9%, increase over the same period in 2015. All components of mortgage production income, which includes marketing gains and origination points and fees, experienced increases. Higher marketing gains were driven primarily from increased production and by increased margins. Total mortgage production was $828.1 million in the third quarter, an increase of $124.5 million, or 17.7%, compared to the same period in the prior year.

Mortgage servicing revenue increased by $837,000, or 20.6%, for the quarter, as compared to the same period in 2015, as the portfolio of mortgage loans serviced for others increased from $6.4 billion to $7.5 billion, or 17.1%, year over year. As noted earlier, more stable mortgage rates resulted in a net recovery of MSR impairment during the quarter as compared to net MSR impairment of $2.2 million for the same period in 2015.

On a linked quarter basis, noninterest income increased by $9.4 million, or 31.2%, largely due to a net increase in income from mortgage banking activities of $10.8 million, or 56.0%. The increase was largely driven by a $9.0 million swing in MSR impairment as a net recovery of MSR impairment was recorded during the quarter. Marketing gains also increased as mortgage production grew to $828.1 million for the third quarter as compared to mortgage production of $815.1 million for the second quarter.

Noninterest Expense
Noninterest expense was $52.2 million for the quarter, an increase of $12.1 million, or 30.3%, as compared to the same period in 2015, mostly due to increased expenses associated with organic growth as well as recent acquisitions. Non-continuing acquisition costs of approximately $500,000 were included in noninterest expenses for the quarter as the AEB system conversion was completed in July.

Salaries and employee benefits increased by $6.4 million, or 36.1%, for the quarter. The approximate growth in the FTE count of 200, or 15%, at September 30, 2016 as compared to September 30, 2015, primarily due to recent acquisitions, drove the majority of the increase in salaries. Also included in the increase is $1.4 million of employer taxes and employee benefits, primarily resulting from an increase in both number of employees and the increased cost of employer-paid benefits, mainly medical premiums.

Commissions increased by $2.2 million, or 30.0%, for the quarter due to increases in mortgage loan production.

The increase in occupancy expense of $327,000, or 7.7%, for the quarter was primarily due to an increase in the number of branches, mainly from recent acquisitions.

Other noninterest expense increased by $2.9 million, or 30.6%, for the quarter. The majority of this increase occurred due to increases in amounts for services provided by third party vendors and writedowns of ORE.

On a linked-quarter basis, total noninterest expense increased by $4.0 million, or 8.4%, for the quarter. Increases in commissions and incentives included in salaries and employee benefits drove approximately $1.8 million of the increase as compared to the prior quarter. Occupancy expense increased by $584,000, or 14.5%, as amounts for hardware and software to complete the AEB system conversion were incurred. An increase of $1.0 million in ORE writedowns and administration expenses and an increase of $560,000 in amounts paid for services provided by third party vendors (including amounts paid to execute the AEB system conversion) also contributed to the increase in noninterest expense for the quarter.