Fidelity Southern Corporation ("Fidelity" or the "Company") (NASDAQ: LION), holding company for Fidelity Bank (the "Bank"), today reported net income of $9.9 million, or $0.36 per diluted share, for the fourth quarter of 2018, compared with $12.7 million, or $0.47 per diluted share, for the third quarter of 2018, and with $12.4 million or $0.46 per diluted share for the fourth quarter of 2017. For the year to date ended December 31, 2018, the Company reported net income of $43.8 million, or $1.61 per diluted share, compared with $39.8 million, or $1.49 per diluted share, for the same period in 2017.

Fidelity's Chairman, Jim Miller, and President Palmer Proctor noted, "Our team is doing a great job of implementing our balance sheet transformation that contributed to our net interest margin expansion during a period where many in the industry are experiencing the opposite. We are working diligently to ensure our announced merger with Ameris Bancorp will be smooth and successful. Our organization is very excited about the $16 billion regional bank we are building that will position us as a premier banking franchise in the Southeast."

BALANCE SHEET

Total assets decreased by $78.3 million, or 1.6%, during the quarter, to $4.7 billion at December 31, 2018, primarily due to a decrease of $153.5 million in total loans. This decrease was primarily due to a  decrease in loans held for sale of $132.0 million, as well as a decrease of $21.5 million in loans held for investment. The decrease in loans held for sale was primarily in mortgage loans, which decreased $102.7 million, as seasonal production decreased.  Other assets also decreased by $3.0 million.

 Offsetting these decreases, investments increased by $42.2 million as the Bank continues to increase its investments available-for-sale portfolio as part of its strategy to reposition the balance sheet to higher yielding assets. Cash balances also increased by $29.6 million for the quarter. Loan servicing assets also increased  by $3.4 million.

Total assets grew by $156.9 million, or 3.4%, to $4.7 billion at December 31, 2018, compared to $4.6 billion at December 31, 2017. Primary drivers for the year over year growth were an increase in cash of $26.0 million and an increase in investments available-for-sale of $131.5 million as the Bank repositioned its balance sheet to higher yielding investments over the year.

Loans

Total loans, including loans held for sale, decreased during the quarter by $153.5 million, or 3.8%, to $3.9 billion at December 31, 2018. This reduction was primarily due to a decrease in loans held for sale of $132.0 million, primarily mortgage loans held for sale, which accounted for $102.7 million of the decrease.

Total loans decreased by $13.9 million, or 0.4%, compared to December 31, 2017, as loans held for sale decreased by $118.5 million, offset by an increase in loans held for investment of $104.5 million. Loans held for sale decreased due to lower sales of mortgage loans and indirect auto loans. The growth in loans was primarily in commercial and mortgage loans, while average indirect auto loans for the quarter decreased by $70.2 million.

Asset Quality

Asset quality remained strong as nonperforming assets, excluding the guaranteed portion of government loans and acquired loans ("adjusted NPA's", a non-GAAP measure), increased slightly during the quarter by $62,000. Credit quality trend performance remains consistent and strong as net charge-offs were 0.08% of average loans for the quarter.

Compared to 2017, the provision for loan losses for the year increased by $1.2 million, or 29.1%, mainly due to increases in commercial loan balances.

Fair Value Adjustments

Loan servicing rights increased by $3.4 million, or 2.9%, during the quarter to $120.4 million at December 31, 2018, compared to $117.0 million at September 30, 2018. MSRs, the primary component of loan servicing rights, contributed the majority of the change, increasing by 4.2% to $111.4 million at December 31, 2018.

At December 31, 2018, fair value adjustments recorded on the balance sheet for loans held for sale, interest rate lock commitments ("IRLCs"), and hedge items were $8.8 million, a $3.0 million, or 25.8% decrease, from September 30, 2018. The gross pipeline of interest rate lock commitments was $63.4 million lower at quarter end, compared to September 30, 2018, due to slower seasonal production.

Deposits

Core deposits decreased by $86.6 million during the quarter to $3.1 billion with seasonal decreases in all categories. Noninterest bearing deposits decreased by 2.8% as escrow deposits decreased seasonally as escrow balances were paid down during the quarter. Also, the escrow accounts for mortgage servicing rights sold in the previous quarter were transferred to the purchaser. This decrease was offset by an increase in time deposits of $18.2 million during the quarter, mainly due to a increase of $29.6 million in brokered deposits, resulting in a decrease in total deposits of $68.4 million, or 1.7%.

Year over year, deposits grew by $114.4 million or 3.0%, primarily due to growth in non-interest bearing demand deposits and money market accounts.

INCOME STATEMENT

Net Income

Net income was $9.9 million, or a $2.8 million decrease over the previous quarter, primarily due to  a decrease in noninterest income of $2.6 million. Other noninterest income decreased by $2.8 million mainly due to a $2.6 million death benefit received from cash surrender value life insurance policies during the previous quarter. Net income was $2.5 million lower compared to the same quarter a year ago, primarily due to a $4.4 million increase in income tax expense.

Net income year to date was $43.8 million, or a $4.0 million increase compared to same period in the prior year. The increase was primarily driven by higher net interest income of $14.3 million, higher noninterest income of $3.9 million, offset by higher noninterest expense of $14.4 million, primarily salaries and employee benefits and commissions.

Interest Income

Interest income of $48.3 million was higher by $1.4 million, compared to the prior quarter, driven by moderate increases in loan, investment and Fed Funds income. Although average loans decreased by $105.5 million for the quarter, $70.2 million of this was due to a decrease in lower yielding indirect loans, which were partially replaced in the portfolio mix with higher yielding commercial and SBA loans. An increase in average investment securities of $57.5 million and an increase in average Fed Funds and bank deposit balances of $33.7 million also contributed to higher interest income. The yield on total average interest-bearing assets also increased 14 basis points from the previous quarter.

As compared to the same period in the prior year, interest income increased by $6.6 million as average loans increased by $172.7 million and the yield on total average interest-bearing assets increased by 35 basis points, as market interest rates rose year over year.

Interest income was $181.4 million for the year, an increase of $23.5 million compared to the same period in the prior year, primarily due to an increase of 21 basis points in the yield on loans and an increase of $324.7 million in average loans.

Interest Expense

Interest expense of $8.7 million increased slightly by $588,000, or 7.2%, for the quarter as average FHLB borrowings increased by $8.8 million. As compared to the fourth quarter of the prior year, interest expense increased by $2.9 million. Rising market rates paid on money market deposits and CD's drove the increase, as well as increased volume and rates for short term borrowings.

Year to date, interest expense increased by $9.2 million, or 40.3%, compared to previous year, as market rates and deposit balances increased over the past twelve months.

Net Interest Margin

The net interest margin was 3.54% for the quarter compared to 3.45% in the previous quarter, an increase of 9 basis points. Loan coupon yields, excluding fees, SBA discount accretion, and accretable yields, increased faster than deposit and borrowing costs during the quarter.

The yield on total average interest-bearing liabilities increased by only 9 basis points while the yield on total average interest-earning assets increased by 14 basis points from 4.18% to 4.32%. Average loans decreased by $105.5 million, of which $70.2 million was a decrease in lower yielding indirect auto loans. Higher yielding investment securities increased by $57.5 millionas the Bank's strategy to reposition its balance sheet continues to occur.

Average total interest-bearing liabilities decreased by $24.2 million, average deposits decreased by $33.1 million, offset by an increase in average borrowings of $8.8 million in order to help fund loan production.

As compared to the same period a year ago, the net interest margin for the quarter increased by 12 basis points to 3.54% from 3.42%, primarily due to a 35 basis point increase in the yield on total average interest-earning assets of $4.4 billion, offset by an increase of 35 basis points in the yield on total average interest-bearing liabilities of $3.1 billion. Average earning assets increased by $271.6 million, primarily due to an increase in average loans over the year. Average interest-bearing liabilities increased by $117.8 million, primarily driven by an increase in average borrowings of $146.7 million, offset by a decrease in average interest-bearing deposits of $29.0 million.

Noninterest Income

On a linked-quarter basis, noninterest income decreased by $2.6 million, or 7.7%, largely due to a decrease in other noninterest income of $2.8 million, primarily due to the $2.6 million death benefit received from life insurance policies during the previous quarter. Mortgage banking activities decreased by $1.9 million, or 8.1%, as gross mortgage revenue decreased by $2.8 million and mortgage production also decreased by $121.6 million. These decreases were offset by an increase in SBA lending activities of $2.5 million, mainly due to a large SBA loan sale in December, as well as an increase in SBA loan closings during the quarter.

Compared to the same period a year ago, noninterest income for the quarter increased by $2.2 million, primarily due to a $2.9 million increase in SBA banking activities, as SBA loan sales were higher in the current quarter as discussed above.

Year to date, noninterest income increased by $3.9 million as all sources of noninterest income increased, except for indirect lending activities, which decreased by $7.3 million, as indirect loan sales and production decreased significantly during the year.

Noninterest Expense

On a linked-quarter basis, total noninterest expense increased by $528,000, or 0.9%, mainly due to  an increase in other expenses of $2.4 million, of which $1.2 million were merger related expenses. This increase was offset by a decrease in commissions expense of $1.7 million from lower mortgage loan originations for the quarter.

Compared to the prior year quarter, noninterest expense of $56.1 increased by $3.2 million, or 6.1%. Salaries and employee benefits increased by $3.2 million, or 12.4%, compared to the same quarter in 2017, primarily due to $2.6 million of merger related expenses.

Year to date, total noninterest expense increased $14.4 million compared to the previous year, of which $10.2 million was due to an increase in salaries and benefits. Salaries increased by $3.8 million, partially due to a $2.7 million increase in employee incentives due to performance and related to the balance sheet strategies implemented earlier in the year, and from a comparison perspective, no executive incentives were paid in 2017. Other expense increased by $2.8 million, of which $1.2 million was merger related expenses.

Income Taxes

On a linked-quarter basis, income tax expense remained relatively flat. The effective tax rate increased to 28% from 23% due to a $2.6 million tax-free death benefit received from life insurance policies in the previous quarter.

Year to date income tax expense decreased by $1.5 million as the effective tax rate decreased from 28% to 24% primarily as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, which 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.