Fidelity Southern Corporation, holding company for Fidelity Bank, reported net income of $6.1 million, or $0.22 per diluted share, for the first quarter of 2019, compared with $9.9 million, or $0.36 per diluted share, for the fourth quarter of 2018, and $11.8 million or $0.43 per diluted share for the first quarter of 2018.

FIRST QUARTER 2019 HIGHLIGHTS:

The integrated planning process with Ameris Bancorp continues to proceed as expected.

Although net interest income decreased by $1.4 million compared to the previous quarter, net interest margin improved by 2 basis points.

Mortgage banking activities are down from the fourth quarter 2018 primarily due to a pre-tax mortgage servicing rights ("MSRs") impairment of $4.8 million as market rates have declined. This impairment had an effect of $0.14 per diluted share.

Noninterest expense is below the fourth quarter by $2.6 million due to lower salaries and benefits, lower commissions as mortgage production decreased, and a reduction in other operating expenses due to merger related costs recorded in the fourth quarter.

BALANCE SHEET

Total assets increased by $56.1 million, or 1.2%, during the quarter to $4.8 billion at March 31, 2019, primarily due to an increase in investments of $33.7 million and an increase in loans held for sale of $24.4 million.  The increase in loans held for sale was primarily in mortgage loans, which increased $26.9 million, as seasonal production began to increase. The Bank continues to increase its available-for-sale investments portfolio as part of its strategy to reposition the balance sheet to higher yielding assets. Other assets also increased by $18.4 million, mainly due to the right of use lease asset of $15.5 million recorded during the quarter as a result of the implementation of the new lease standard.

Loans

Total loans increased by $15.7 million, or 0.4%, compared to December 31, 2018, as loans held for sale increased by $24.4 million, offset by an overall decrease in loans held for investment of $8.7 million. Loan growth in loans held for investment was experienced in all loan categories, excluding indirect auto, specifically in commercial, SBA and construction of $76.3 million and $31.3 million in mortgage. These increases were offset by a reduction of $114.5 million in indirect loans.

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), remained flat during the quarter. Credit quality trend performance remains consistent and strong as net charge-offs were 0.10% of average loans for the quarter.

Fair Value Adjustments

Loan servicing rights decreased by $3.7 million, or 3.0%, during the quarter to $116.7 million at March 31, 2019, compared to $120.4 million at December 31, 2018. Mortgage servicing rights ("MSRs"), the primary component of loan servicing rights, contributed the majority of the change, decreasing by 2.7% to $108.4 million at March 31, 2019. The current estimated fair market value of MSRs was $113.6 million at March 31, 2019.

At March 31, 2019, fair value adjustments recorded on the balance sheet for loans held for sale, interest rate lock commitments ("IRLCs"), and hedge items were $12.4 million, a $3.7 million, or 42.1% increase, from December 31, 2018. The gross pipeline of interest rate lock commitments was $132.0 million higher at quarter end, compared to December 31, 2018, due to an increase in seasonal production.

Deposits

Core deposits decreased by $19.3 million during the quarter to $3.0 billion with decreases in money market and savings of $30.6 million and noninterest bearing demand deposits of $11.4 million, offset by increases in interest-bearing demand deposits of $22.7 million. The decrease in core deposits was offset by an increase in time deposits of $20.2 million during the quarter, mainly due to an increase of $30.0 million in brokered deposits, resulting in an increase in total deposits of $955,000, or 0.02%.

INCOME STATEMENT

Net Income

Net income was $6.1 million, or a $3.8 million decrease over the previous quarter, primarily due to  a decrease in noninterest income of $7.1 million driven by MSRs impairment of $4.8 million during the quarter. Net income was $5.7 million lower compared to the same quarter a year ago, due to a $13.2 million decrease in noninterest income, primarily mortgage banking activities, offset by an increase in net interest income of $3.4 million, a decrease in noninterest expense of $1.3 million and a decrease in income tax expense of $1.7 million.

Interest Income

Interest income of $47.0 million was lower by $1.2 million, compared to the prior quarter, driven by a decrease in loan income of $1.4 million. Average loan balances decreased by $105.5 million for the quarter, $86.3 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. Average mortgage loans also decreased by $35.0 million for the quarter. These decreases were offset by an increase in average investment securities of $40.6 million and in the average balances of commercial, SBA and construction loans. The yield on total average interest-bearing assets also increased 7 basis points from the previous quarter.

Interest Expense

Interest expense of $8.9 million increased slightly by $186,000, or 2.1%, for the quarter, primarily due to a 6 basis points increase in deposit costs although average balances for total interest-bearing deposits decreased by $24.5 million. As compared to the first quarter of the prior year, interest expense increased by $2.1 million, or 31.0%. Rising market rates paid on money market deposits and CD's drove the increase.

Net Interest Margin

The net interest margin was 3.56% for the quarter compared to 3.54% in the previous quarter, a slight  increase of 2 basis points. The yield on total average interest-bearing liabilities increased by only 6 basis points while the yield on total average interest-earning assets increased by 7 basis points from 4.32% to 4.39%. Average loans decreased by $105.5 million, of which $86.3 million was a decrease in lower yielding indirect auto loans. Higher yielding investment securities increased by $40.6 million as the Bank's strategy to reposition its balance sheet continues to occur.

Average total interest-bearing liabilities decreased by $41.3 million as average deposits decreased by $24.5 million and average borrowings decreased by $16.8 million.

As compared to the same period a year ago, the net interest margin for the quarter increased by 27 basis points to 3.56% from 3.29%, primarily due to a 46 basis point increase in the yield on total average interest-earning assets of $4.4 billion, offset by an increase of 29 basis points in the yield on total average interest-bearing liabilities of $3.0 billion. Average earning assets increased by $62.7 million, primarily due to an increase in average investment securities over the year, offset by a decrease in average loans, primarily indirect auto loans. Average interest-bearing liabilities decreased by $42.9 million, primarily driven by a decrease in average borrowings of $74.4 million, offset by an increase in average interest-bearing deposits of $31.4 million.

Noninterest Income

On a linked-quarter basis, noninterest income decreased by $7.1 million, or 23.0%, largely due to a decrease of $4.9 million, or 22.6%, in mortgage banking activities, primarily due to the previously mentioned MSRs impairment of $4.8 million for the quarter.  SBA lending activities also decreased by $2.1 million as gains on SBA sales were seasonally lower for the quarter due to lower sales.

Compared to the same period a year ago, noninterest income for the quarter decreased by $13.2 million, primarily due to a decrease in mortgage banking activities stemming from a change in MSRs impairment of $9.4 million.

Noninterest Expense

On a linked-quarter basis, total noninterest expense decreased by $2.6 million, or 4.7%, mainly due to  a decrease in other expenses of $1.5 million, of which $1.2 million were merger related expenses, from the previous quarter. Salaries and employee benefits also decreased by $1.1 million, or 3.9%. Compared to the prior year quarter, noninterest expense of $53.5 million decreased slightly by $1.3 million, or 2.3%. Lower commissions accounted for  $534,000 of the decrease due to lower mortgage production in the current quarter compared to the first quarter of 2018.

Income Taxes

On a linked-quarter basis, income tax expense decreased by $2.3 million, primarily due to a decrease of $6.1 million in pre-tax income during the quarter. The effective tax rate also decreased to 20.4% from 28.0%. Compared to the first quarter of 2018, income tax expense decreased by $1.7 million.

OTHER NEWS

On March 15, 2019, Fidelity opened a new branch in Macon, GA, which brings the total number of retail branches to 70.

On May 6, 2019, Fidelity will hold a special shareholders meeting to vote on a proposal to approve the merger with Ameris Bancorp previously announced in December 2018.