Fidelity Southern Corporation, holding company for Fidelity Bank, reported financial results for the quarter and year ended December 31, 2016.

KEY RESULTS

• Net income of $15.1 million and $38.8 million, or $0.57 and $1.50 per diluted share, for the quarter and year

• Total revenue increased to $85.4 million, or 7.8%, and $290.6 million, or 18.8%, for the quarter and year

• Total deposits of $3.6 billion increased by $91.7 million, or 2.6%, during the quarter and $451.1 million, or 14.2%, in 2016

• Loans serviced for others of $9.2 billion grew by $280.5 million, or 3.1%, during the quarter and $1.2 billion, or 14.6%, in 2016

• Tangible book value increased to $13.26, or 3.8%, during the quarter and 4.7% in 2016

Fidelity's President, Palmer Proctor, said, "Our strong fourth quarter and year-end results reflect our continued focus on growth and profitability. The integration of Bank of Georgia, Peachtree City, GA, and American Enterprise Bank, Jacksonville, FL, will provide meaningful presence and relationships in these respective growth markets.

"Organic growth remains our focus. Additional emphasis on systems and efficiencies will provide capacity for continued growth and activity.

"Our team and bank are well positioned to leverage market opportunities and talent."

Fidelity's Chairman, Jim Miller, added, "Indeed, 2016 was very good and mortgage certainly did its part. It was a year of consolidating and one of planning for growth in 2017 and beyond for our Commercial and Trust areas especially, while doing so efficiently. Shareholder value and customer service are our guidestars. We are optimistic!"

BALANCE SHEET

Total assets of $4.4 billion at December 31, 2016, represented a slight decrease of $5.9 million, or 0.1%, compared to September 30, 2016, and an increase of $540.6 million, or 14.0%, compared to December 31, 2015, primarily due to steady loan production during 2016, supplemented by loans added in the AEB acquisition completed in March 2016. Total deposits increased by $91.7 million, or 2.6%, compared to September 30, 2016, and $451.1 million, or 14.2%, compared to December 31, 2015. Short-term borrowings fluctuated with the changes in loans and deposits, decreasing by $109.3 million, or 31.0%, during the quarter, and increasing by $33.6 million, or 16.0%, for the year.

Loans

Total loans held for investment of $3.3 billion at December 31, 2016, represented a slight decrease of $30.0 million, or 0.9%, compared to September 30, 2016, and an increase of $405.3 million, or 14.0%, compared to December 31, 2015. An increase in the level of indirect auto loans designated as held for sale of $50.0 million at December 31, 2016, offset strong loan production for the quarter as average loans increased by $56.6 million, or 1.5%, during the quarter. The Bank continues to generate new business as well as leveraging its expansion through acquisitions.

Loan Servicing Rights

Gross servicing rights increased by $17.3 million, or 21.1%, during the quarter and $14.4 million, or 16.9%, during 2016. Sales of residential mortgage, SBA, and indirect auto loans continued to generate servicing rights. In addition, $13.1 million in net MSR impairment recovery was recorded during the quarter, an increase of $12.7 million compared to the recovery recorded in the prior quarter. The impairment recovery occurred as estimated future prepayment speeds decreased significantly due to an increase in interest rates over the fourth quarter.

Deposits

Total deposits at December 31, 2016, of $3.6 billion increased by $91.7 million, or 2.6%, during the quarter and by $451.1 million, or 14.2%, compared to December 31, 2015. For the quarter, increases in all categories of interest bearing deposits were partially offset by a slight decrease in noninterest bearing deposits due to normal fluctuations leading up to year end. Demand deposits continued to grow throughout the footprint, resulting in an increase in average interest bearing demand deposits of $28.7 million, or 2.5%, for the quarter.

During 2016, money market and demand deposits increased by $352.2 million, or 19.3%, including $133.1 million from the AEB acquisition, as the Bank continued its deposit marketing program, increasing the number of demand deposit accounts.

Borrowings

Short-term borrowings decreased by $109.3 million, or 31.0%, during the quarter and by $33.6 million, or 16.0%, during 2016, 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 $15.1 million for the quarter and $38.8 million for the year, an increase of $8.3 million, or 122.3%, and a slight decrease of $369,000, or 0.9%, as compared to the same periods in the prior year, respectively. The primary driver of the increase in net income for the quarter was an additional $18.7 million of noninterest income from mortgage banking activities and a reduction in expenses incurred related to acquisitions as the AEB acquisition was completed in the third quarter of 2016. For the year, mortgage banking activities accounted for $16.0 million of the increase, which was partially offset by an increase in the provision for loan losses of $4.0 million. The year over year increase in average earning assets of $782.2 million, or 25.1%, over the past twelve months, contributed an additional $28.0 million, or 27.8%, in net interest income, while noninterest income from indirect lending activities decreased by $3.9 million, or 20.8%, due to the volume of loan sales, and other noninterest income decreased by $3.3 million, or 56.1%, mainly due to lower gains on ORE sales in 2016. Noninterest expense increased by $38.1 million, or 23.4%.

On a linked-quarter basis, net income increased by $2.6 million, or 20.4%, as total revenue increased by $6.2 million, or 7.8%, partially offset by a slight increase in the provision for loan losses of $367,000, and by an increase of $2.0 million, or 3.8%, in noninterest expense.

Interest Income

Interest income was $38.3 million and $149.3 million, for the quarter and year ended December 31, 2016, an increase of $5.2 million and $32.6 million, or 15.9% and 28.0%, as compared to the same periods in the prior year. Average loans for the quarter increased by $588.8 million, or 18.5%, as compared to the same quarter a year ago, and increased by $718.6 million, or 24.8%, year over year, which was the primary reason for the increase in interest income.

Interest income for the quarter saw a 3 basis point decrease in the yield on loans to 3.90%, as compared to the same period a year ago. Discount accretion on acquired loans contributed 4 basis points to the loan yield for the quarter as compared to a de minimis amount in the prior year. Excluding the discount accreted on acquired loans, the yield on loans for the quarter decreased by 7 basis points. Year over year, interest income saw a 12 basis point increase in yield on loans to 3.98%. Discount accretion on acquired loans contributed 17 basis points to the loan yield for 2016, as compared to 3 basis points in the prior year, or a change of 14 basis points, due to higher resolution of problem assets and loan payoffs during 2016. The remainder of the changes in loan yields for the quarter and year were attributable to a combination of fluctuations in prepayment penalties on commercial loans and dealer reserve amortization on indirect loans combined with slightly lower contractual loan yields as new loans, on average, have been originated at lower yields over the previous twelve months.

On a linked-quarter basis, interest income decreased by $1.6 million, or 4.0%. The decrease in interest income was also driven by a decrease in the yield on loans of 22 basis points, primarily driven by higher discount accretion on acquired loans during the third quarter due to resolution of problem assets and loan payoffs, as compared to discount accretion in the fourth quarter. Excluding the discount accreted on acquired loans, the yield on loans was down by 7 basis points to 3.82%.

Interest Expense

Interest expense was $5.4 million and $20.4 million, for the quarter and year ended December 31, 2016, an increase of $455,000 and $4.6 million, or 9.3% and 29.4%, as compared to the same periods in 2015, as a combination of organic growth and deposits added through recent acquisitions resulted in a year over year increase of $198.2 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 3 basis points as compared to the same quarter a year ago.

On a linked-quarter basis, interest expense increased by $217,000, or 4.2%, due to slight increases in the rate paid and average interest-bearing liabilities.

Net Interest Margin

The net interest margin was 3.25% for the quarter, compared to 3.23% for the same period in 2015. Net interest income (tax equivalent) rose to $33.1 million for the quarter, or an increase of 17.0%, as compared to $28.3 million for the same period in 2015.

The increase in the net interest margin of 2 basis points occurred primarily due to lower rates paid on interest bearing deposits as compared to the same quarter in the prior year. The primary reason was a decrease of 3 basis points for rates paid on time deposits during the quarter.

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 $585.5 million, or 16.9%, 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 due to the decrease in interest costs noted above.

On a linked-quarter basis, the net interest margin decreased by 20 basis points, primarily as a result of normalizing accretion of purchase discounts on acquired loans which was elevated in the previous quarter.

Provision for Loan Losses

The provision for loan losses was $2.5 million and $8.2 million, for the quarter and year ended December 31, 2016, a decrease of $612,000 and an increase of $3.9 million, as compared to the same periods in 2015. The primary reason for the increase in the provision was the increase in net charge-offs for the quarter and year, primarily in the indirect auto loan portfolio. In addition, the provision for loan losses increased during 2016 to reflect changes in qualitative factors and asset quality trends, resulting in an increase in the allowance for losses to total loans of 3 basis points during 2016.

On a linked-quarter basis, the provision for loan losses increased by $367,000, as net charge-offs increased compared to the previous quarter, mostly due to seasonal fluctuations, mainly in the level of net charge-offs of indirect loans.

Noninterest Income

Noninterest income was $47.1 million for the quarter, an increase of $18.5 million, or 64.4%, as compared to the same period in 2015. The quarterly increase is primarily due to a net increase in noninterest income from mortgage banking activities of $18.7 million, or 99.2%, as compared to the same period in 2015. Noninterest income was $141.3 million in 2016, an increase of $13.4 million, or 10.5%, compared to the prior year, also primarily due to an increase in noninterest income from mortgage banking activities of $16.0 million, or 18.7%, partially offset by a decrease in noninterest income from indirect lending activities of $3.9 million, or 20.8%.

Mortgage production income was $23.2 million for the quarter, a $4.8 million, or 26.4%, increase over the same period in 2015. Mortgage production income was $97.3 million in 2016, an increase of $14.2 million, or 17.1%, from the same period in 2015, due to increased loan originations and sales.

Mortgage servicing revenue increased by $711,000, or 16.2%, for the quarter and by $3.3 million, or 20.6%, for the year, as compared to the same periods in 2015, due to increased loan originations and sales, as the portfolio of mortgage loans serviced for others increased from $6.7 billion to $7.8 billion, or 17.1%, year over year.

As noted earlier, the increase in market interest rates resulted in a net recovery of MSR impairment of $13.1 million during the quarter as compared to net MSR impairment of $1.0 million for the same period in 2015. A net MSR recovery of $372,000 was recorded in 2016 compared to a net impairment of $3.1 million for 2015.

On a linked quarter basis, noninterest income increased by $7.8 million, or 19.9%, largely due to a net increase in income from mortgage banking activities of $7.4 million, or 24.5%. The increase was largely driven by a $12.7 million swing in MSR impairment as a net recovery of MSR impairment was recorded during the quarter, offset by lower market gains, net of $5.9 million recorded in the previous quarter. This increase was partially offset by a decrease in net marketing gains due to a decrease in mortgage production of $71.3 million to $756.9 million for the quarter as compared to mortgage production for the previous quarter.

Noninterest Expense

Noninterest expense was $54.2 million for the quarter, an increase of $10.9 million, or 25.3%, as compared to the same period in 2015, mostly due to increased expenses associated with organic growth as well as recent acquisitions. Increases were noted in salaries and employee benefits, commissions, and other noninterest expense, as discussed below.

Salaries and employee benefits increased by $5.2 million, or 25.4%, for the quarter, as compared to the same period in 2015. The approximate growth in the FTE count of 106 or 9.0%, at December 31, 2016, as compared to December 31, 2015, primarily due to recent acquisitions, drove the majority of the increase in salaries. Also included in the increase is $636,000 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 $3.4 million, or 55.5%, for the quarter due to increases in mortgage loan production. Mortgage loan production increased by $189.0 million, or 33.3%, to $756.9 million for the quarter, as compared to the same period in 2015.

Other noninterest expense increased by $2.2 million, or 20.6%, for the quarter. The majority of this increase occurred due to increases in amounts for writedowns and carrying costs on ORE as well as services provided by third party vendors.

On a linked-quarter basis, total noninterest expense increased by $2.0 million, or 3.8%, for the quarter. Increases in salaries and employee benefits accounted for approximately $1.6 million of the increase. Occupancy expense increased by $299,000, or 6.5%, as additional amounts for hardware and software maintenance costs were incurred.