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Section 1: 8-K/A (8-K/A)

Document
Ameris Bancorp (the “Company”) filed a Current Report on Form 8-K on July 1, 2019 (the “Original Report”) to report, among other things, the completion of its previously announced merger (the “Merger”) with Fidelity Southern Corporation (“Fidelity”). This Amendment No. 1 to the Original Report (this “Amendment No. 1”) amends and restates in its entirety Item 9.01 of the Original Report to include the consolidated financial statements of Fidelity pursuant to Item 9.01(a) of Form 8-K and the unaudited pro forma combined condensed financial information pursuant to Item 9.01(b) of Form 8-K that were excluded from the Original Report. This Amendment No. 1 makes no other amendments to the Original Report. true0000351569 0000351569 2019-06-27 2019-06-27
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K/A
(Amendment No. 1)

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported):
June 27, 2019

Ameris Bancorp
(Exact Name of Registrant as Specified in Charter)


Georgia
001-13901
58-1456434
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
 (IRS Employer Identification No.)
    
310 First Street, S.E.
 
Moultrie,
Georgia
31768
(Address of Principal Executive Offices)
(Zip Code)


Registrant’s telephone number, including area code:
(229)
890-1111

 
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
ABCB
Nasdaq Global Select Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨




Explanatory Note

Ameris Bancorp (the “Company”) filed a Current Report on Form 8-K on July 1, 2019 (the “Original Report”) to report, among other things, the completion of its previously announced merger (the “Merger”) with Fidelity Southern Corporation (“Fidelity”). This Amendment No. 1 to the Original Report (this “Amendment No. 1”) amends and restates in its entirety Item 9.01 of the Original Report to include the consolidated financial statements of Fidelity pursuant to Item 9.01(a) of Form 8-K and the unaudited pro forma combined condensed financial information pursuant to Item 9.01(b) of Form 8-K that were excluded from the Original Report. This Amendment No. 1 makes no other amendments to the Original Report.

Item 9.01    Financial Statements and Exhibits.

(a)    Financial statements of businesses acquired.

Attached hereto as Exhibits 99.2 and 99.3 are the audited financial statements of Fidelity and the unaudited quarterly financial statements of Fidelity, respectively, as required by this Item 9.01(a). Such financial statements are incorporated by reference into this Item 9.01(a).

(b)    Pro forma financial information.

Attached hereto as Exhibit 99.4 is the unaudited pro forma combined condensed financial information reflecting the Merger as required by this Item 9.01(b). Such financial information is incorporated by reference into this Item 9.01(b).

(d)    Exhibits.

Agreement and Plan of Merger, dated as of December 17, 2018, by and between Ameris Bancorp and Fidelity Southern Corporation (incorporated by reference to Exhibit 2.1 to Ameris Bancorp’s Current Report on Form 8-K filed on December 17, 2018).
Bylaws of Ameris Bancorp, as amended and restated through July 1, 2019.*
Indenture between Ameris Bancorp (as successor to Fidelity Southern Corporation) and U.S. Bank National Association, dated as of June 26, 2003.*
First Supplemental Indenture, among Ameris Bancorp, Fidelity Southern Corporation and U.S. Bank National Association, dated as of July 1, 2019.*
Form of Floating Rate Junior Subordinated Deferrable Interest Debentures due 2033 (included as Exhibit A to the Indenture filed herewith as Exhibit 4.1).*
Indenture between Ameris Bancorp (as successor to Fidelity Southern Corporation) and Wilmington Trust Company, dated as of March 17, 2005.*
First Supplemental Indenture, among Ameris Bancorp, Fidelity Southern Corporation and Wilmington Trust Company, dated as of July 1, 2019.*
Form of Floating Rate Junior Subordinated Deferrable Interest Debentures due 2035 (included as Exhibit A to the Indenture filed herewith as Exhibit 4.4).*
Indenture between Ameris Bancorp (as successor to Fidelity Southern Corporation) and Wilmington Trust Company, dated as of August 20, 2007.*
First Supplemental Indenture, among Ameris Bancorp, Fidelity Southern Corporation and Wilmington Trust Company, dated as of July 1, 2019.*
Form of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures due 2037 (included as Exhibit A to the Indenture filed herewith as Exhibit 4.7).*
Consent of Ernst & Young LLP
Press release, dated July 1, 2019.*
Audited Consolidated Financial Statements of Fidelity Southern Corporation and Subsidiaries for the years ended December 31, 2018 and 2017
Unaudited Consolidated Financial Statements of Fidelity Southern Corporation and Subsidiaries as of and for the three and six months ended June 30, 2019 and 2018.
Unaudited Pro Forma Combined Condensed Financial Information reflecting the Merger.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*Previously filed with the Original Report.



SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
AMERIS BANCORP
By:
/s/ Nicole S. Stokes
 
Nicole S. Stokes
 
Executive Vice President and Chief Financial Officer


Date: September 12, 2019



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Section 2: EX-23.1 (EXHIBIT 23.1)

Exhibit


Consent of Independent Registered Public Accounting Firm

We consent to use of our reports dated March 13, 2019, with respect to the consolidated financial statements of Fidelity Southern Corporation and Subsidiaries, and the effectiveness of internal control over financial reporting of Fidelity Southern Corporation and Subsidiaries, included in the Form 8-K/A of Ameris Bancorp.

/s/ Ernst & Young LLP

Atlanta, Georgia

September 12, 2019




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Section 3: EX-99.2 (EXHIBIT 99.2)

Document


 






399627484_image0.jpg
Fidelity Southern Corporation and Subsidiaries

Consolidated Financial Statements
December 31, 2018 and 2017






Management's Report on Internal Control over Financial Reporting


Management of Fidelity Southern Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Management has assessed the effectiveness of internal control over financial reporting using the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework).
The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the testing performed using the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework), management of the Company believes that the company's internal control over financial reporting was effective as of December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FIDELITY SOUTHERN CORPORATION
 
 
 
 
 
 
 
 
 
 
 
by
 
/s/ JAMES B. MILLER, JR.
 
 
 
 
 
 
James B. Miller, Jr.
 
 
 
 
 
 
Chief Executive Officer and Chairman of the Board
 
 
 
 
 
 
 
 
 
 
 
by
 
/s/ CHARLES D. CHRISTY
 
 
 
 
Charles D. Christy
 
 
 
 
 
 
Chief Financial Officer

March 13, 2019





Report of Ernst & Young LLP, Independent Registered Public Accounting Firm


To the Shareholders and the Board of Directors of Fidelity Southern Corporation

Opinion on Internal Control over Financial Reporting

We have audited Fidelity Southern Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Fidelity Southern Corporation and subsidiaries’ (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated March 13, 2019 expressed an unqualified opinion thereon.    

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ Ernst & Young LLP

Atlanta, Georgia
March 13, 2019





Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Fidelity Southern Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Fidelity Southern Corporation and subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
  
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 13, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



/s/ Ernst & Young LLP
We have served as the Company's auditor since 1995.
Atlanta, Georgia
March 13, 2019





FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
 
 
2018
 
2017
($ in thousands)
 
 
 
 
Assets
 
 
 
 
Cash and due from banks
 
$
36,615

 
$
33,874

Interest-bearing deposits with banks
 
171,151

 
104,032

Federal funds sold
 
4,527

 
48,396

Cash and cash equivalents
 
212,293

 
186,302

Investment securities available-for-sale
 
251,602

 
120,121

Investment securities held-to-maturity (fair value of $19,410 and $21,685, respectively)
 
20,126

 
21,689

Loans held-for-sale (includes loans at fair value of $225,342 and $269,140, respectively)
 
239,302

 
357,755

Loans
 
3,685,478

 
3,580,966

Allowance for loan losses
 
(31,151
)
 
(29,772
)
Loans, net of allowance for loan losses
 
3,654,327

 
3,551,194

Premises and equipment, net
 
93,699

 
88,463

Other real estate, net
 
8,290

 
7,621

Bank owned life insurance
 
71,510

 
71,883

Servicing rights, net
 
120,390

 
112,615

Other assets
 
62,257

 
59,215

Total assets
 
$
4,733,796

 
$
4,576,858

Liabilities
 
 
 
 
Deposits
 
 
 
 
Noninterest-bearing demand deposits
 
$
1,214,534

 
$
1,125,598

Interest-bearing deposits
 
2,767,044

 
2,741,602

Total deposits
 
3,981,578

 
3,867,200

Short-term borrowings
 
139,760

 
150,580

Subordinated debt, net
 
120,707

 
120,587

Other liabilities
 
45,510

 
36,859

Total liabilities
 
4,287,555

 
4,175,226

Shareholders' equity
 
 
 
 
Preferred stock, no par value. Authorized 10,000,000 shares; no shares issued and outstanding
 

 

Common stock, no par value. Authorized 50,000,000 shares; issued and outstanding 27,279,729 and 27,019,201, respectively
 
230,841

 
217,555

Accumulated other comprehensive income, net of tax
 
985

 
383

Retained earnings
 
214,415

 
183,694

Total shareholders’ equity
 
446,241

 
401,632

Total liabilities and shareholders’ equity
 
$
4,733,796

 
$
4,576,858

See accompanying notes to consolidated financial statements.





FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Years Ended December 31,
($ in thousands, except per share data)
 
2018
 
2017
 
2016
Interest income:
 
 
 
 
 
 
Loans, including fees
 
$
172,673

 
$
150,998

 
$
143,605

Investment securities:
 
 
 
 
 
 
Taxable interest income
 
5,991

 
4,269

 
4,941

Nontaxable interest income
 
326

 
135

 
292

Other
 
2,455

 
2,576

 
445

Total interest income
 
181,445

 
157,978

 
149,283

Interest expense:
 
 
 
 
 
 
Deposits
 
20,849

 
15,722

 
13,194

Short-term borrowings
 
4,530

 
928

 
1,424

Subordinated debt
 
6,521

 
6,080

 
5,830

Total interest expense
 
31,900

 
22,730

 
20,448

Net interest income
 
149,545

 
135,248

 
128,835

Provision for loan losses
 
5,521

 
4,275

 
8,231

Net interest income after provision for loan losses
 
144,024

 
130,973

 
120,604

Noninterest income:
 
 
 
 
 
 
Service charges on deposit accounts
 
6,427

 
6,019

 
5,941

Other fees and charges
 
9,522

 
8,402

 
7,664

Mortgage banking activities
 
103,077

 
98,797

 
101,577

Indirect lending activities
 
5,227

 
12,533

 
14,900

SBA lending activities
 
6,728

 
4,540

 
5,659

Bank owned life insurance
 
4,178

 
1,670

 
2,374

Securities gains
 

 

 
578

Trust and wealth management fees
 
2,283

 
1,288

 
628

Other
 
1,409

 
1,703

 
2,004

Total noninterest income
 
138,851

 
134,952

 
141,325

Noninterest expense:
 
 
 
 
 
 
Salaries and employee benefits
 
113,522

 
103,366

 
96,684

Commissions
 
36,129

 
34,573

 
33,907

Occupancy
 
18,810

 
18,164

 
17,890

Professional and other services
 
17,570

 
18,343

 
15,224

Other
 
39,261

 
36,424

 
37,315

Total noninterest expense
 
225,292

 
210,870

 
201,020

Income before income tax expense
 
57,583

 
55,055

 
60,909

Income tax expense
 
13,760

 
15,259

 
22,143

Net income
 
$
43,823

 
$
39,796

 
$
38,766

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Basic
 
$
1.61

 
$
1.50

 
$
1.52

Diluted
 
$
1.61

 
$
1.49

 
$
1.50

 
 
 
 
 
 
 
Net income
 
$
43,823

 
$
39,796

 
$
38,766

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Change in net unrealized gains/(losses) on available-for-sale securities, net of tax benefit of $174, ($189), and ($303)
 
522

 
(309
)
 
(494
)
Adjustment for net (gains)/losses included in net income, net of tax (expense)/benefit of $0, $0, and ($220)
 

 

 
(358
)
Total other comprehensive income (loss), net of tax
 
522

 
(309
)
 
(852
)
Comprehensive income
 
$
44,345

 
$
39,487

 
$
37,914

See accompanying notes to consolidated financial statements.





FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
 
Common Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
Net of Tax
 
Retained
Earnings
 
Total
(in thousands)
 
Shares
 
Amount
 
Balance at December 31, 2015
 
23,141

 
$
169,848

 
$
1,544

 
$
130,067

 
$
301,459

Net income
 
 
 
 
 
 
 
38,766

 
38,766

Other comprehensive loss, net of tax
 
 
 
 
 
(852
)
 
 
 
(852
)
Comprehensive income
 
 
 
 
 
 
 
 
 
37,914

Common stock issued for AEB acquisition
 
1,470

 
22,727

 

 

 
22,727

Common stock issued under various employee plans, net
 
707

 
10,049

 

 

 
10,049

Stock issuance pursuant to exercise of Warrant
 
1,000

 
2,685

 

 

 
2,685

Cash dividends paid
 

 

 

 
(12,187
)
 
(12,187
)
Balance at December 31, 2016
 
26,318

 
$
205,309

 
$
692

 
$
156,646

 
$
362,647

Net income
 
 
 
 
 
 
 
39,796

 
39,796

Other comprehensive loss, net of tax
 
 
 
 
 
(309
)
 
 
 
(309
)
Comprehensive income
 
 
 
 
 
 
 
 
 
39,487

Common stock issued under various employee plans, net
 
701

 
12,246

 

 

 
12,246

Cash dividends paid
 

 

 

 
(12,748
)
 
(12,748
)
Balance at December 31, 2017
 
27,019

 
$
217,555

 
$
383

 
$
183,694

 
$
401,632

Net income
 
 
 
 
 
 
 
43,823

 
43,823

Adoption of ASU 2018-02
 
 
 
 
 
80

 
(80
)
 

Other comprehensive income, net of tax
 
 
 
 
 
522

 
 
 
522

Comprehensive income
 
 
 
 
 
 
 
 
 
44,345

Common stock issued under various employee plans, net
 
261

 
13,286

 

 

 
13,286

Cash dividends paid
 

 

 

 
(13,022
)
 
(13,022
)
Balance at December 31, 2018
 
27,280

 
$
230,841

 
$
985

 
$
214,415

 
$
446,241


See accompanying notes to consolidated financial statements.





FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Years Ended December 31,
(in thousands)
 
2018
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
43,823

 
$
39,796

 
$
38,766

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
Provision for loan losses
 
5,521

 
4,275

 
8,231

Depreciation and amortization of premises and equipment
 
4,405

 
4,412

 
4,952

Amortization of FDIC indemnification asset, net
 
4

 
1,159

 
1,321

Accretion of purchase discounts or premiums, net
 
(1,959
)
 
(2,814
)
 
(676
)
Other amortization
 
739

 
1,321

 
1,411

Impairment of other real estate
 
524

 
1,058

 
1,090

Amortization and impairment of servicing rights, net
 
13,782

 
19,806

 
19,527

Share-based compensation expense
 
8,111

 
4,624

 
3,544

Postretirement benefits, net
 
2,472

 
2,018

 
15

Net loss on investment securities called or sold
 

 

 
(578
)
Gains on loan sales, including origination of servicing rights
 
(79,615
)
 
(86,941
)
 
(97,525
)
Net gain on sales of other real estate
 
(24
)
 
(659
)
 
(859
)
Net income on bank owned life insurance
 
(4,189
)
 
(1,732
)
 
(1,853
)
Net change in deferred income tax, net of acquisitions
 
3,592

 
2,233

 
8,010

Net change in fair value of loans held-for-sale
 
2,053

 
(1,426
)
 
86

Originations of loans held-for-sale
 
(2,830,679
)
 
(2,960,006
)
 
(3,455,029
)
Proceeds from sales of loans held-for-sale
 
2,996,785

 
3,122,820

 
3,452,655

Net payments (paid to) received from FDIC under loss-share agreements
 
(888
)
 
487

 
(92
)
(Decrease) increase in other assets, net of acquisitions
 
(1,129
)
 
4,611

 
(1,969
)
Increase (decrease) in other liabilities, net of acquisitions
 
3,104

 
159

 
(10,535
)
Net cash provided by (used in) operating activities
 
166,432

 
155,201

 
(29,508
)
Cash flows from investing activities:
 
 
 
 
 
 
Purchases of investment securities available-for-sale
 
(150,941
)
 

 
(12,391
)
Maturities, calls and repayment of investment securities available-for-sale
 
19,511

 
22,536

 
41,668

Purchases of investment securities held-to-maturity
 

 
(7,000
)
 
(3,929
)
Maturities, calls and repayment of investment securities held-to-maturity
 
1,472

 
1,798

 
1,661

Purchases of FHLB stock
 
(17,383
)
 
(11,993
)
 
(14,008
)
Redemption of FHLB stock
 
17,212

 
15,937

 
11,050

Net increase in loans, net of loans acquired
 
(113,934
)
 
(282,213
)
 
(270,119
)
Proceeds from the sale of mortgage servicing rights
 
12,186

 

 

Proceeds from bank owned life insurance
 
4,562

 

 
847

Purchase of bank owned life insurance
 

 

 
(2,500
)
Proceeds from sales of other real estate
 
804

 
8,921

 
11,561

Purchases of premises and equipment, net of acquisitions
 
(9,641
)
 
(5,305
)
 
(6,529
)
Cash received in excess of cash paid for acquisitions
 

 

 
37,609

Net cash used in investing activities
 
(236,152
)
 
(257,319
)
 
(205,080
)





FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
 
 
Years Ended December 31,
(in thousands)
 
2018
 
2017
 
2016
Cash flows from financing activities:
 
 
 
 
 
 
Net increase in noninterest-bearing deposits, net of acquisitions
 
88,936

 
160,698

 
113,756

Net increase in interest-bearing deposits, net of acquisitions
 
25,442

 
75,908

 
153,644

Net (decrease) increase in other short-term borrowings
 
(10,820
)
 
7,229

 
(26,379
)
Proceeds from FHLB advances
 
2,895,000

 
475,000

 
1,325,000

Repayments of FHLB advances
 
(2,895,000
)
 
(575,000
)
 
(1,265,000
)
Repurchase of common stock
 
(4,469
)
 
(1,673
)
 
(821
)
Proceeds from the issuance of common stock, net
 
9,644

 
9,295

 
10,153

Cash dividends paid on common stock
 
(13,022
)
 
(12,748
)
 
(12,187
)
Net cash provided by financing activities
 
95,711

 
138,709

 
298,166

Net increase in cash and cash equivalents
 
25,991

 
36,591

 
63,578

Cash and cash equivalents, beginning of year
 
186,302

 
149,711

 
86,133

Cash and cash equivalents, end of year
 
$
212,293

 
$
186,302

 
$
149,711

 
 
Years Ended December 31,
(in thousands)
 
2018
 
2017
 
2016
Supplemental cash flow information and non-cash disclosures:
 
 
 
 
 
 
Cash paid during the year for:
 
 
 
 
 
 
Interest on deposits and borrowings
 
$
31,379

 
$
22,335

 
$
20,031

Income taxes
 
9,681

 
10,888

 
17,895

Acquisitions:
 
 
 
 
 
 
Assets acquired
 

 

 
167,366

Liabilities assumed
 

 

 
186,030

Common stock issued
 

 

 
22,727

Transfers from loans held-for-sale to loans held for investment
 
5,032

 
5,905

 
4,573

Transfers of loans to other real estate
 
1,973

 
2,127

 
7,120

See accompanying notes to consolidated financial statements.






FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
1. Summary of Significant Accounting Policies
Nature of Operations
Fidelity Southern Corporation (“FSC” or “Fidelity”) is a bank holding company headquartered in Atlanta, Georgia. Fidelity conducts operations primarily through Fidelity Bank, a state chartered wholly-owned subsidiary (the “Bank”), and LionMark Insurance Company (“LionMark”), an insurance agency offering consumer credit related insurance products. The “Company” or “our,” as used herein, includes FSC and its consolidated subsidiaries, unless the context requires otherwise.
The Bank provides a full range of financial products and services for retail customers and small to medium-sized businesses, primarily spanning the metropolitan Atlanta and Jacksonville, Orlando, Tallahassee and Sarasota-Bradenton, Florida market and online at www.LionBank.com. We also conduct indirect automobile lending in Georgia and Florida and residential mortgage lending activities in the South and parts of the Midwest, while Small Business Administration ("SBA") loans are originated nationwide. The Bank attracts deposits from individuals and businesses and uses these deposits and borrowed funds to originate commercial, residential mortgage, construction and installment loans, of which a portion are sold with servicing retained by the Bank. The Bank also offers Wealth Management services to individuals; as well as cash management services, remote deposit services and international trade services for businesses. Through its marketing partners, the Bank offers merchant services for businesses and credit cards for both individuals and businesses.
The Company principally operates in one business segment, which is community banking.
Proposed Merger with Ameris Bancorp
On December 17, 2018, Fidelity entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ameris Bancorp ("Ameris"). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, FSC will merge with and into Ameris (the “Merger”), in an all-stock transaction, with Ameris surviving the Merger. Immediately following the Merger, the Bank will merge (the “Bank Merger”) with and into Ameris’s wholly owned bank subsidiary, Ameris Bank. Ameris Bank will be the surviving entity in the Bank Merger. The Merger Agreement was unanimously approved by the board of directors of each of Fidelity and Ameris. The transaction is expected to close in the second quarter 2019. The closing of the transactions contemplated by the Merger Agreement is subject to the approval of FSC's shareholders, regulators, and certain other customary closing conditions.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, Fidelity’s shareholders will have the right to receive 0.80 shares (the “Exchange Ratio”) of common stock, par value $1.00 per share, of Ameris for each share of common stock, no par value per share, of Fidelity that they hold, together with cash in lieu of fractional shares.
The Merger Agreement provides certain termination rights for both Fidelity and Ameris and further provides that a termination fee of $29.0 million will be payable by Fidelity upon termination of the Merger Agreement under certain circumstances.
Basis of Consolidation
The consolidated financial statements have been prepared in conformity with U. S. generally accepted accounting principles (“GAAP”) followed within the financial services industry. The consolidated financial statements include the accounts of Fidelity and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. All normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial statements have been included. Certain amounts previously reported have been reclassified to conform to the current presentation. Such reclassifications had no effect on prior year net income or shareholders’ equity.
The Company also has three unconsolidated subsidiaries, as of December 31, 2018, that were established prior to 2018 for the purpose of issuing trust preferred securities. The equity investments are reported as other assets and dividends are included as other noninterest income. The obligations are reported as subordinated debt, with related interest expense reported as interest on subordinated debt.






Use of Estimates
In preparing the consolidated financial statements, management makes estimates and assumptions based on available information that affect the reported amounts of assets and liabilities as of the balance sheet dates, revenues and expenses for the periods reported and the disclosures provided. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the calculations of, amortization of, and the potential impairment of capitalized servicing rights, the valuation of loans held-for-sale and certain derivatives, the valuation of real estate or other assets acquired in connection with foreclosures or in satisfaction of loans, estimates used for fair value acquisition accounting, and valuation of deferred income taxes. In addition, the actual lives of certain amortizable assets and income items are estimates subject to change.
The determination of the appropriateness of the allowance for loan losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the valuation of
capitalized servicing rights and loans held-for-sale; estimated losses on real estate or other assets acquired in connection with foreclosure; and fair value acquisition accounting, management obtains independent valuations. In evaluating the Company’s deferred tax position, management considers the level of future revenues and its capacity to fully utilize the current levels of deferred tax assets.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash items in process of collection, interest-bearing deposits with banks, and federal funds sold. Interest-bearing deposits with other financial institutions have maturities less than 90 days and are carried at cost. Federal funds sold are generally purchased and sold for one-day periods, but may, from time to time, have longer terms.
Investment Securities
The Company’s investment securities are classified as either available-for-sale or held-to-maturity. Held-to-maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities are classified as available-for-sale. The Company does not engage in trading activity.
Available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at cost, adjusted for the amortization of premiums or accretion of discounts. Unrealized gains and losses, net of related tax effect, on available-for-sale securities are excluded from income and are reported in other comprehensive income, net of tax. The amortization of premiums and accretion of discounts are recognized in interest income over the life of the related investment securities as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities sold are included in income on the trade date and are derived using the specific identification method for determining the cost of securities sold.
If the fair value of a security is less than its amortized cost basis as of the balance sheet date, management must determine if the security has an other than temporary impairment (“OTTI”) loss. In estimating OTTI losses, the Company considers, (i) whether it has decided to sell the security, (ii) whether it is more likely than not that the Company will have to sell the security before its market value recovers, and (iii) whether the present value of expected cash flows is sufficient to recover the entire amortized cost basis. When assessing the security’s expected cash flows, the Company considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost and (ii) the financial condition and near-term prospects of the issuer.
Loans held-for-sale
Loans held-for-sale include the majority of originated residential mortgage loans, certain Small Business Administration (“SBA”) loans, and a pool of indirect automobile loans, which the Company has the intent and ability to sell. The Company has elected to account for residential mortgage loans held-for-sale under the fair value option (“FVO”). The fair value of committed residential mortgage loans held-for-sale is determined by outstanding commitments from investors and the fair value of uncommitted loans is based on current delivery prices in the secondary mortgage market.
Origination fees and costs are recognized in earnings at the time of origination for residential mortgage loans held-for-sale. Adjustments to unrealized gains and losses resulting from changes to fair value are included in noninterest income from mortgage banking activities in the Consolidated Statements of Comprehensive Income.
The SBA and indirect automobile loans held-for-sale are recorded at the lower of cost or fair value. Any loans subsequently transferred to the held for investment portfolio are transferred at the lower of cost or fair value at that time. For SBA loans, fair value is determined on an individual loan basis and is primarily based on loan performance and available market information. For indirect automobile loans, the fair value is determined based on evaluating the estimated market value of the pool being accumulated





for sale based on available market information. Origination fees and costs for SBA and indirect automobile loans held-for-sale are capitalized as part of the basis of the loan and are included in the calculation of realized gains and losses upon sale.
Gains and losses on the sales of residential mortgage, SBA and indirect loans are recognized at the settlement date, based on the difference between the net sales proceeds, including the estimated value associated with servicing assets or liabilities, and the net carrying value of the loans sold and are classified in the Consolidated Statements of Comprehensive Income as noninterest income from mortgage banking activities, SBA lending activities, and indirect lending activities, respectively.
Loans and Interest Income
Loans that management has the intent and ability to hold for the foreseeable future are reported at principal balance and include net deferred amounts. Net deferred amounts are comprised of deferred loan fees, net of certain origination costs; and indirect dealer reserves. Acquired non-purchased credit impaired loans are initially recorded at their acquisition date fair value. Interest income is recognized in the Consolidated Statements of Comprehensive Income as it is earned, using the effective yield interest method on the daily principal balance. Net deferred amounts including acquisition date premium or discount are recognized as part of interest income over the contractual lives of the underlying loans using the effective interest method. Remaining unamortized fees and costs are charged or credited to income when loans are prepaid.
Past due status is based on the contractual terms of the underlying loan agreement. Generally, the accrual of interest income is discontinued when a loan becomes 90 days past due. A loan may be placed on nonaccrual status sooner if reasonable doubt exists as to the full, timely collection of principal or interest. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed against current period interest income. Subsequent interest collected on nonaccrual loans is recorded as a principal reduction. Nonaccrual loans are returned to accrual status when all contractually due principal and interest amounts are brought current and the future payments are reasonably assured.
Loans identified as nonaccrual are potentially impaired loans. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired loans, provided that management expects to collect all amounts due. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
In addition, troubled debt restructurings (“TDRs”) occur when a borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service the loan under the potential modified loan terms. The types of concessions granted are generally interest rate reductions or term extensions. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual status before it is determined to be a TDR, then the loan remains on nonaccrual status. TDRs may be returned to accrual status if there has been at least a six-month sustained period of repayment performance by the borrower. Interest income recognition on impaired loans is dependent on nonaccrual status. All originated loans whose terms have been modified in a TDR are considered impaired. Impairment is determined through the Company’s normal loan administration and review functions. Impaired loans are evaluated based on the present value of expected future cash flows discounted at each loan's original effective interest rate, or at the loan's observable market price, or the fair value of the collateral, if the loan is collateral-dependent. When it has been determined that a loan cannot be collected in whole or in part, the uncollectable portion is charged off against the allowance for loan losses.
The Company has chosen to exercise its buy-back option and repurchased certain delinquent loans under the Government National Mortgage Association ("GNMA") optional repurchase program, which are accounted for in nonaccrual status as loans held for investment. GNMA is a government agency that guarantees certain mortgage backed securities where the collateral is mortgages originated through government insurance programs such as FHA and VA; it does not buy or sell mortgages, or issue securitizations.  The Company’s loss exposure on these loans is mitigated by the government guarantee in whole or in part. The GNMA optional repurchase program allows financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer's option and without GNMA's prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan, less the principal payments advanced prior to the buyback. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When the Company is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet, regardless of whether the Company intends to exercise the buy-back option.
The Company has extended loans to certain officers and directors. The Company does not believe these loans involve more than the normal risk of collectability or present other unfavorable features when originated. None of the related party loans were classified as nonaccrual, past due, restructured, or potential problem loans at December 31, 2018, or 2017.





Allowance for Loan Losses
The allowance for loan losses (“ALL”) is a valuation allowance for probable incurred credit losses. The ALL is maintained at a level which, in management’s opinion, is appropriate to absorb credit losses inherent in the loan portfolio as of the balance sheet date.
The Company delineates between loans accounted for under the contractual yield method, primarily originated or legacy loans, and loans accounted for as purchased credit impaired loans. Further, the Company attributes portions of the ALL to loans that it evaluates individually, and to groups of loans and loan commitments that it evaluates collectively. The entire allowance attributable to loans accounted for under the contractual yield method is available to absorb all losses inherent within that loan portfolio.
The Company utilizes a historical analysis of the Company’s loan portfolio to validate the overall appropriateness of the ALL on at least a quarterly basis. In addition to these objective criteria, the Company subjectively assesses the appropriateness of the ALL with consideration given to current economic conditions, changes to loan policies, the volume and type of lending, composition of the portfolio, the level of classified and criticized loans, seasoning of the loan portfolio, payment status and other factors. The ALL is adjusted through provisions for loan losses charged to operations. Loan losses are charged against the ALL when management believes the uncollectibility of a loan, in whole or in part, is confirmed. Subsequent recoveries, if any, are credited to the ALL.
The ALL for originated loans consists of specific, general, and unallocated components. The specific component is established to the extent that the estimated value of an impaired loan is less than the recorded investment. The Company uses several sources of information to estimate collateral value such as appraisals, broker price opinions, recent sales of foreclosed properties and other relevant market information supplemented by the Company’s internal evaluation. The value estimate assumes an orderly disposition of the property, including costs to sell. The general component covers non-impaired loans and is established for loans grouped into pools based on similar characteristics. General allowance factors are calculated for each pool of loans based on historical loss experience, current economic trends, changes in internal risk ratings, current underwriting standards, and other qualitative factors that management believes might impact the estimated losses in each pool. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The unallocated component of the allowance reflects a margin for the imprecision inherent in estimates of the range of the probable credit losses.
The ALL for acquired loans is evaluated at each reporting date subsequent to acquisition. For acquired performing loans, an allowance is determined for each loan pool using a methodology similar to that described above for originated loans and then compared to the remaining fair value discount for that pool. For purchased credit impaired loans, estimated cash flows expected to be collected are re-evaluated at each reporting date for each loan pool. These evaluations require the continued use and updating of key assumptions and estimates such as default rates, loss severity given default, and prepayment speed assumptions, similar to those used for the initial fair value estimate. Management judgment must be applied in developing these assumptions. Decreases in cash flows expected to be collected for purchased credit impaired loans is generally recognized by recording an allowance for loan losses. Subsequent increases in cash flows result in a reversal of the allowance for loan losses to the extent of prior charges, or in the prospective recognition of interest income. Purchased credit impaired loans are not reported with impaired loans or troubled debt restructurings, even if they would otherwise qualify for such treatment.
The appropriateness of the ALL is evaluated on at least a quarterly basis using an established process determined by management and the Credit Review Department. Nonperforming commercial and construction loans with outstanding balances exceeding $50,000, as well as certain other performing loans with greater than normal credit risks, are individually reviewed to determine the level of allowance required to be specifically allocated to these loans. For the general component of the ALL, the loan portfolio is segregated by type of loan, evaluated for exposure to risks, and allocated a loss percentage factor for each homogeneous portfolio. While allocations of the ALL may be made for specific loans, the entire ALL is available for any loan that, in management’s judgment, should be charged off.
The Company believes that the ALL is appropriate as of the balance sheet date. The ALL evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the ALL may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, conduct periodic reviews and may require additions to the ALL based on their judgment about information available to them at the time of their examination.
In addition, the Company has established a reserve for outstanding loan commitments and letters of credit that is not included in the ALL. This reserve is included in other liabilities on the Consolidated Balance Sheets with changes reported as part of other noninterest expense, not included in the provision for loan losses, in the Consolidated Statements of Comprehensive Income.






Premises and Equipment
Land is recorded at cost. Office equipment, furnishings, and buildings, including leasehold improvements, are recorded at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over an estimated useful life of 20 to 39 years for buildings and three to 15 years for furniture and equipment. Leasehold improvements to premises and equipment under operating leases are amortized using the straight-line method over the remaining lease term or estimated useful life, whichever is shorter. Branch renovation and expansion projects in process are included in buildings and improvements and are depreciated beginning with the date the projects are completed. Maintenance and repairs and minor replacements are charged to expense when incurred. Gains and losses on routine dispositions are reflected in earnings.
Valuation of Goodwill, Intangible Assets and Other Purchase Accounting Adjustments
The Company accounts for its acquisitions as business combinations which requires the use of the acquisition method of accounting. Under this method, the Company is required to record the assets acquired, including identified intangible assets, and liabilities assumed, at their respective fair values at the acquisition date, which in many instances involves using estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. The determination of the useful lives of intangible assets such as core deposit intangible is subjective, as is the amortization method for such intangible assets. Core deposit intangibles are amortized over their estimated useful lives, ranging up to 10 years.
Business combinations may also result in recording goodwill. Goodwill and other intangible assets with an indefinite useful life are reviewed and tested at least annually for impairment or more often if events or changes in circumstances indicate that the carrying amount may exceed fair value.
Other Real Estate
Other Real Estate (“ORE”) represents property acquired through acquisition, foreclosure or deed in lieu of foreclosure in satisfaction of loans. ORE is initially reported at the lower of cost or fair value, less estimated selling costs. Fair value is normally determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. At the time of foreclosure or initial possession of collateral, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the ALL. After the transfer to ORE, the fair value less estimated selling costs becomes the new cost basis for the ORE. Costs to complete houses foreclosed during construction are capitalized.
The Company reviews the fair value of ORE on a quarterly basis. Subsequent changes in value are recorded as part of other noninterest expense in the Consolidated Statements of Comprehensive Income. In assessing fair value, management considers circumstances such as change in economic conditions since the last appraisal, stale appraisals or imprecision and subjectivity in the appraisal process. Generally, a new appraisal is received at least annually on each ORE property. Gains or losses on sales of ORE are recorded in other noninterest income and operating costs after acquisition are recorded in other noninterest expense on the Consolidated Statements of Comprehensive Income.
Bank Owned Life Insurance
Bank owned life insurance (“BOLI”) is long-term life insurance on the lives of certain current and former employees where the insurance policy benefits and ownership are retained by the Company. BOLI is recorded at its cash surrender value on the Consolidated Balance Sheets. Changes in the cash surrender value and gains from the death benefit are recorded in noninterest income on the Consolidated Statements of Comprehensive Income. The cash value accumulation on BOLI is permanently tax deferred if the policy is held to the insured person's death and certain other conditions are met.
Certain Transfers of Financial Assets and Servicing Rights
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
The Company sells certain residential mortgage loans, indirect automobile loans, and SBA loans to third parties. All such transfers are accounted for as sales since the Company does not engage in securitization activities with respect to such loans. Gains or losses upon sale, in addition to servicing fees, are recorded as part of noninterest income from mortgage banking activities, indirect lending activities, and SBA lending activities, as applicable, in the Consolidated Statements of Comprehensive Income. Servicing fees are based on a contractual percentage of the outstanding loan principal balance and are recorded as income when earned. In calculating the gain on the sale of SBA loans, the Company’s investment in the loan is allocated among the unguaranteed portion of the loan retained, the servicing asset on the amount retained, and the guaranteed portion of the loan sold, based on the relative fair market value of each portion. The gain on the sold portion of the loan is recognized based on the difference between the sale proceeds and the allocated investment in the portion sold. The difference between the portion retained (i.e., the participating





interest) and its relative fair value at the date of sale based on the cash premium bid is recorded as a loan discount and accreted into interest income using the interest method. If the transferred guaranteed portion of an SBA loan does not meet the definition of a participating interest, the transfer of the guaranteed portion is accounted for as a secured borrowing, rather than a sale.
While the Company may retain a portion of certain sold SBA and indirect automobile loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities. When the Company sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities. The Company is not required to provide additional financial support to any of these entities and has not provided any support it was not obligated to provide.
When the contractually specified servicing fees on loans sold with servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized. When the expected income to a servicer for performing loan servicing is not expected to adequately compensate a servicer, a capitalized servicing liability is recognized. Servicing assets and servicing liabilities are initially recorded on the Consolidated Balance Sheets at fair value with the income statement effect recorded in gains on sales of loans. In evaluating its servicing rights and estimating the fair value of the underlying loan pools based on the present value of net future cash flows, management uses a number of assumptions and estimates including: prepayment speeds, discount rates commensurate with the risks involved, potential credit losses, and comparable assumptions used by market participants to value and bid servicing rights available for sale in the market. These assumptions and estimates are corroborated by values received from an independent third party.
Servicing rights are subsequently measured using the amortization method which requires servicing rights to be amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing fee income, net of amortization of servicing rights, is reported as part of noninterest income from mortgage banking activities, indirect lending activities, and SBA lending activities, as applicable, in the Consolidated Statements of Comprehensive Income. Servicing rights are tested for impairment on at least a quarterly basis. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. When the carrying value exceeds the fair value, impairment is recognized through a valuation allowance which reduces servicing rights on the Consolidated Balance Sheets and reduces noninterest income from mortgage banking activities, indirect lending activities, and SBA lending activities, as applicable, in the Consolidated Statements of Comprehensive Income.
Derivative Financial Instruments
The Company maintains a risk management program to manage interest rate risk and pricing risk associated with its mortgage banking activities which includes the use of forward contracts and other derivatives as a normal part of its mortgage banking activities. The Company enters into these derivative contracts to economically hedge risks associated with overall price risk related to interest rate lock commitments (“IRLCs”) and mortgage loans held-for-sale for which the fair value option has been elected. Forward sales commitments are contracts for the delayed delivery or net settlement of the underlying instrument, such as a mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. These hedges are used to preserve the Company’s position relative to future sales of mortgage loans to third parties in an effort to minimize the volatility of the expected gain on sale from changes in interest rates and the associated pricing changes.
Derivatives expose the Company to credit risk. In the event the counterparty fails to perform, the credit risk at that time would be equal to the net derivative asset position, if any, for that counterparty. The Company minimizes the credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically. Most counterparties are government sponsored enterprises.
Derivatives are carried at fair value in the Consolidated Balance Sheets in other assets or other liabilities with changes included in noninterest income from mortgage banking activities. Fair value changes occur as a result of interest rate movements as well as changes in the value of the associated servicing. The Company’s derivative contracts are not subject to master netting arrangements.
Acquired Loans and FDIC Indemnification Asset
Acquired loans are recorded at fair value in accordance with the fair value methodology consistent with the exit price concept. Credit risk assumptions and any resulting credit discounts are included in the determination of fair value. As a result, an allowance for credit losses is not recorded at the acquisition date. The determination of fair value includes estimates related to discount rates, expected prepayments and the amount and timing of undiscounted expected principal, interest, and other cash flows.
The Company reports its acquired loans separately as purchased credit impaired (“PCI”) or non-purchased credit impaired. Acquired loans with evidence of credit quality deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be PCI loans. At the time of acquisition, loans are accounted for individually or aggregated into loan pools with similar risk characteristics, which include: whether the loan is performing according to contractual





terms at the time of acquisition; the loan type based on regulatory reporting guidelines for mortgage, consumer, or commercial loans; the nature of collateral; the interest rate type, whether fixed or variable; and the loan payment type, primarily whether the loan is amortizing or interest-only.
The Company uses certain loan information for each of these pools, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average term to re-price (if a variable rate loan), weighted average margin, and weighted average interest rate, to estimate the expected cash flows. For PCI loans, expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of future cash flows is reasonably estimable. For purchased loans that were not deemed PCI as of acquisition date, the difference between the fair value and unpaid principal balance of the loan at acquisition referred to as a purchase premium or purchase discount, is amortized or accreted to interest income over the estimated life of the loans using a method that approximates the interest method.
Subsequent to acquisition, the Company projects the acquired loans’ cash flows at least quarterly for each PCI loan and/or loan pool. Increases in estimated cash flows above those expected at acquisition are recognized on a prospective basis as interest income over the remaining life of the loan or loan pool. Decreases in expected cash flows subsequent to acquisition result in recognition of a provision for loan losses. PCI loans are placed on nonaccrual status when the Company cannot reasonably estimate cash flows on a loan or loan pool.
Certain loans and ORE acquired in past FDIC-assisted transactions (collectively referred to as “covered assets”) are covered by Loss Share Agreements (“Loss Share Agreements”) between the Bank and the FDIC, which affords the Bank significant protection against future losses. Under the Loss Share Agreements, the Bank recorded a receivable from the FDIC equal to the reimbursable portion of the estimated losses on the covered assets. The receivable (“FDIC indemnification asset”) is measured separately from the covered assets as it is not contractually embedded in the covered assets and not transferable with the covered assets should a decision be made to dispose of them.
The fair value of the FDIC indemnification asset was estimated at the acquisition date using projected cash flows related to the Loss Share Agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the expected FDIC reimbursements. These amounts do not include reimbursable amounts related to future covered expenditures. The Company partially offsets any recorded provision for loan losses related to covered loans by recording an increase in the FDIC indemnification asset based on the expected decrease in the cash flow of covered loans. An increase in cash flows on covered loans results in a decrease in the FDIC indemnification asset, which is recognized in the future as negative accretion through other noninterest income on the Consolidated Statements of Comprehensive Income over the shorter of the remaining life of the FDIC indemnification asset or the underlying loans. The Company incurs expenses related to the covered assets, which are reimbursable as incurred under the Loss Share Agreements and are included in quarterly claims made to the FDIC.
The Loss Share Agreements also include “clawback” provisions. The clawback provisions require the Company to make payments to the FDIC to the extent that specified cumulative loss floors are not met. Improvement in the performance of covered assets in excess of current expectations, particularly in regard to improvements in recoveries and/or reduced losses, through expiration of the recovery periods could result in reduced levels of cumulative losses that trigger the clawback provisions within any or all of the applicable loss share agreements.
On June 27, 2018, the Bank entered into an agreement with the FDIC to terminate the loss share agreements entered into with the FDIC in 2011 and 2012. Fidelity made a cash payment of approximately $632,000 to the FDIC as consideration for the early termination of the agreements. As a result, at December 31, 2018 there were no loans covered by Loss Share Agreements.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are recovered or settled. The effect on deferred tax assets and liabilities of a subsequent change in tax rates is recognized in the provision for income taxes for the period that includes the enactment date.
In assessing the realization of the net deferred tax asset, management considers whether it is more likely than not that some portion or all of the net deferred tax asset will not be realized. A valuation allowance is recognized for a net deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies by jurisdiction and entity in making this assessment.






A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. For financial accounting purposes, interest and penalties accrued, if any, are classified as other expense in the Consolidated Statements of Comprehensive Income.
Tax Cuts and Jobs Act
Public Law No. 115-97, known as the Tax Cuts and Jobs Act (the "Tax Act"), was enacted on December 22, 2017 and reduced the U.S. Federal corporate tax rate from 35% to 21% effective January 1, 2018. Additionally, on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for provisions of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period were to be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information available and current interpretation of the provisions of the Tax Act, the Company completed the remeasurement of its net deferred tax liability at December 31, 2017 which reduced income tax expense by $4.9 million for the fourth quarter of 2017. No further material adjustments have been recorded related to the remeasurement of the Company's net deferred tax liability balance as a result of the Tax Act. During 2018, the Company completed its accounting under SAB 118.
Deposits
Deposits from related parties held by the Company through the Bank amounted to $100.4 million, and $61.8 million at December 31, 2018, and 2017, respectively.
Share-Based Compensation
The Company permits the grant of stock options, stock appreciation rights, restricted stock, and other incentive awards and uses the fair value method of recognizing expense for share-based compensation. Compensation cost is measured at the grant date based on the value of the award and is recognized on a straight-line basis over the vesting period. For additional information on the Company’s share-based compensation plans, see Note 13, “Employee Benefits.”
Earnings Per Common Share (EPS)
Basic EPS is computed by dividing net income available to common equity by the weighted average number of common shares outstanding during the period. All outstanding unvested restricted shares are considered participating securities for this calculation. Diluted EPS includes the dilutive effect of additional potential common shares issuable under contracts (e.g., options, warrants). Potentially dilutive shares are determined using the treasury stock method.
Fair Value
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company reports the fair value of its financial assets and liabilities based on three levels of the fair value hierarchy as described below:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly, or indirectly;
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Revenue Recognition
In the ordinary course of business, the Company recognizes revenue as services are rendered, or as the transactions occur, and as the collectability is reasonably assured. For the Company's revenue recognition accounting policies, see Note 21. Revenue Recognition.
Recently Adopted Accounting Pronouncements
In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SAB 118). This ASU was effective upon issuance. The adoption of this ASU did not have a significant impact on the Company's Consolidated Financial Statements.






In February 2018, the FASB issued ASU No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2018-03"). This guidance amended ASU No. 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”) on recognizing and measuring financial instruments to clarify certain aspects of the guidance originally issued in January 2016. The adoption of this Update effective January 1, 2018 did not have a significant impact on the Company's Consolidated Financial Statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” ("ASU 2018-02"), that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act that passed U.S. Congress in December 2017. The Company elected to early adopt this guidance effective January 1, 2018. The adoption of ASU 2018-02 resulted in a reclassification of stranded tax effects of $80,000 from accumulated other comprehensive income (loss) to retained earnings.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” (“ASU 2017-09”) that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” (“ASU 2017-07”) that will change how employers who sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”) which simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and is required to be applied prospectively, with early adoption permitted for any impairment tests performed on testing dates after January 1, 2017. The early adoption of this ASU in the fourth quarter of 2017 did not have a significant impact on the Company’s Consolidated Financial Statements.
In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers.” ASU 2016-20 updates the new revenue standard by clarifying issues that had arisen from ASU No. 2014-09 but does not change the core principle of the new standard. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” which deferred the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”) by one year to annual reporting periods beginning after December 15, 2017, and interim reporting periods therein. The FASB had previously issued ASU 2014-09 in May 2014. The Company adopted the guidance on January 1, 2018 utilizing the modified retrospective approach. The Company did not record a cumulative effect adjustment to opening retained earnings as the adoption of ASU 2014-09 did not have a significant impact on the Company's Consolidated Financial Statements. The Company also completed its evaluation of the expanded disclosure requirements for disaggregation of revenue and other information regarding material contracts and began presenting the required disclosures in its Consolidated Financial Statements for the quarter ended March 31, 2018. See Note 21. Revenue Recognition for more information.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” (“ASU 2016-18”). The ASU was to be applied retrospectively beginning in fiscal year 2018, including interim periods therein with early adoption permitted, including adoption in an interim period, with retrospective application. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” (“ASU 2016-15”) intended to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The adoption of this ASU effective January 1, 2018 did not have a significant impact on the Company’s Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” as part of its simplification initiative. This ASU affected all entities that issue share-based payment awards to their employees. Effective January 1, 2016, the Company elected early adoption of ASU 2016-09. As a result of adoption, the Company recognized a $556,000 tax benefit during the year ended December 31, 2016. As part of this adoption, the Company did not adjust prior periods. The Company has elected to record compensation cost based on the number of actual forfeited awards. The adoption of this guidance did not have a significant impact on our Consolidated Financial Statements.






In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The Company adopted this ASU effective January 1, 2018. The adoption of this ASU did not have a significant impact on the Company’s Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820), which changes the fair value measurement disclosure requirements of ASC 820. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein with early adoption permitted for any eliminated or modified disclosures upon issuance of this ASU. The adoption of this ASU is not expected to have a significant impact on the Company's Consolidated Financial Statements.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” (“ASU 2017-12”) that is intended to improve and simplify rules relevant to hedge accounting. This ASU refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. ASU 2017-12 is intended to improve transparency and accounting through a focus on: (1) measurement and hedging strategies; (2) presentation and disclosure; and (3) easing the administrative burden that hedge accounting can create for an entity. Entities will (a) measure the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged; (b) consider only how changes in the benchmark interest rate affect a decision to settle a pre-payable instrument before its scheduled maturity when calculating the fair value of the hedged item; and (c) measure the fair value of the hedged item using the benchmark rate component of the contracted coupon cash flows determined at inception. The amendments in this ASU are effective on January 1, 2019 for public business entities. The adoption of this ASU did not have a significant impact on the Company’s Consolidated Financial Statements based on its current hedging strategies.
In March 2017, the FASB issued ASU No. 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” (“ASU 2017-08”) that amends the amortization period for certain purchased callable debt securities held at a premium. The guidance is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. These amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. In addition, in the period of adoption, disclosures should be provided about a change in accounting principle. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13 which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) securities. For AFS securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. All other things being equal, higher credit losses will result in lower regulatory capital ratios for the Company. The ASU also simplifies the accounting model for purchased credit-impaired securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application for all organizations will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company has established a working group which includes representatives from various internal departments with the expertise needed to implement the guidance. The working group has assigned key tasks to complete and established a timeline to be followed. The team is meeting regularly to review progress on the assigned tasks and to share current information on industry practices. Members of the working group are also attending conferences and meetings with peer banks to keep current on evolving interpretations of the guidance. As part of its implementation plan, the Company has allocated staff and put resources in place to evaluate the appropriate model options and is collecting, reviewing, and validating historical loan data for use in these models. The Company is implementing a software package supported by a third-party vendor to automate the calculation of the allowance for loan losses under the new methodology. Management is continuing to evaluate the impact that the guidance will have on the Company’s Consolidated Financial Statements and its regulatory capital ratios through its effective date.





In February 2016, the FASB issued ASU No. 2016-02, "Leases". Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new lease standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company elected both transition options. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company elected certain relief options offered in ASU 2016-02 including the package of practical expedients, including the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company has several lease agreements, such as branches and mortgage offices, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. The new guidance will require these lease agreements to be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s evaluation indicates the provisions of ASU No. 2016-02 will impact the Company’s consolidated statements of condition, along with the Company’s regulatory capital ratios. The new guidance did not have a material impact on the Company’s consolidated statements of income. The Company has implemented a new software supported by a third-party vendor to help automate the calculation of the right of use asset and the corresponding lease liability. In January 2019, the Company recorded a right-of-use asset and related lease liabilities of approximately $17 million and $19 million, respectively, as a result of the new lease standard.
Other accounting pronouncements that have recently been issued by the FASB or other standard-settings bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
2. Business Combinations
The Company accounts for its acquisitions as business combinations. As such, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the acquisition date. Determining the fair value of assets and liabilities, particularly illiquid assets and liabilities, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair value. Purchase price allocations on completed acquisitions may be modified through the measurement period which cannot exceed one year from the acquisition date. If the Company recognizes adjustments to provisional amounts that are identified during the measurement period, the adjustments will be reported in the period in which the amounts are determined. Fair value adjustments based on updated estimates could materially affect the goodwill, if any, recorded on the acquisition. The Company may incur losses on the acquired loans that are materially different from losses originally projected in the fair value estimate. Acquisition-related costs are expensed as incurred.
The acquisition of American Enterprise Bankshares, Inc., (“AEB”), in March 2016 resulted in the recording of $5.2 million in goodwill. For the annual goodwill impairment evaluation, management bypassed the qualitative assessment for each respective reporting unit and performed Step 1 of the goodwill impairment test. Step 1 of the goodwill impairment test requires the Company to compare the fair value of its reporting unit with its carrying amount, including goodwill. Accordingly, the Company determined the fair value of its reporting unit and compared the fair value to the reporting unit’s carrying amount. The Company determined that its reporting unit’s fair value exceeded its carrying amount; therefore, the Company concluded its goodwill was not impaired.
The effects of the acquired assets and liabilities have been included in the consolidated financial statements since their respective acquisition date. Pro forma results have not been disclosed as those amounts are not significant to the consolidated financial statements.
American Enterprise Bankshares, Inc.
On March 1, 2016, the Company acquired AEB, the holding company for American Enterprise Bank of Florida, a Jacksonville, Florida-based community bank. The Company acquired all of the outstanding common stock of the former AEB shareholders, including common shares issued upon conversion of subordinated debentures prior to the acquisition. Total consideration of $22.8 million was issued in the transaction. AEB merged with and into the Company and American Enterprise Bank of Florida merged with and into Fidelity Bank. With this acquisition, the Company expanded and strengthened its retail branch footprint by adding two branches in the Jacksonville, Florida area. The Company projects cost savings will be recognized in future period as the conversion and integration activities related to the acquisition were completed in July 2016.





AEB shareholders received 0.299 shares of Fidelity common stock for each share of AEB common stock, as well as a cash payment for any fractional shares, resulting in the issuance of 1,470,068 shares of Fidelity common stock. All unexercised AEB stock options at the closing date were settled for cash at the volume weighted average price of Fidelity common stock (“VWAP”) as defined in the merger agreement between AEB and Fidelity.
The following table represents the fair value at March 1, 2016 of assets and liabilities acquired in the acquisition of AEB:
(in thousands)
 
Assets
 
Cash and cash equivalents
$
36,259

Investment securities
4,556

Loans
147,304

Premises and equipment
7,145

Other real estate
809

Core deposit intangible
1,310

Deferred tax asset
5,877

Other assets
365

Fair value of assets acquired
$
203,625

 
 
Liabilities
 
Deposits
 
Noninterest-bearing demand deposits
$
64,366

Interest-bearing deposits
117,458

Total deposits
181,824

Other liabilities
4,206

Fair value of liabilities assumed
$
186,030

The following table summarizes the total consideration paid in the AEB acquisition:
($ in thousands)
 
Number of Shares
 
Amount
Equity consideration
 
 
 
 
Common stock issued
 
1,470,068

 
$
22,727

Total equity consideration
 
 
 
22,727

 
 
 
 
 
Non-equity consideration
 
 
 
 
Cash
 
 
 
32

Total consideration paid
 
 
 
22,759

 
 
 
 
 
Fair value of net assets assumed
 
 
 
17,595

Goodwill
 
 
 
$
5,164

FDIC Indemnification Asset
Certain loans and other real estate acquired in the past FDIC-assisted acquisitions of Decatur First Bank and Security Exchange Bank were covered by Loss Share Agreements between the Bank and the FDIC which affords the Bank significant protection against future losses. Under the Loss Share Agreements, the FDIC has agreed to reimburse the Bank for 80% of all losses incurred in connection with those covered assets for a period of five years for non-single family loans and other real estate and 80% of all losses incurred in connection with covered single family loans for a period of 10 years.
Effective December 31, 2017, the Decatur First Bank non-single family Loss Share Agreement between the Bank and the FDIC expired and losses on non-single family loans and other real estate assets covered under this agreement are no longer eligible to be claimed after filing the fourth quarter of 2016 loss share certificate with the FDIC. Claims for losses on covered Decatur First Bank single family loans continued to be eligible for reimbursement under the single family Loss Share Agreement between the Bank and the FDIC until 2021; provided, however, that the Bank and the FDIC terminated this agreement in June 2018, as discussed above.





Effective June 30, 2017, the Security Exchange Bank non-single family Loss Share Agreement between the Bank and the FDIC expired and losses on non-single family loans and other real estate assets covered under this agreement are no longer eligible to be claimed after filing the second quarter of 2017 loss share certificate with the FDIC. There were no single family loans included in the Loss Share Agreement for Security Exchange Bank.
Because the FDIC will reimburse the Company for 80% of losses incurred on the covered assets during the recovery period, the FDIC Indemnification asset was recorded at fair value at the acquisition date. The FDIC indemnification asset is adjusted quarterly based on changes in expected losses and remittances received. New loans made after the date of the transactions are not covered by the provisions of the Loss Share Agreements.
On June 27, 2018, the Bank entered into an agreement with the FDIC to terminate the loss share agreements entered into with the FDIC. Fidelity made a payment of approximately $632,000, which had been accrued for as of December 31, 2017, to the FDIC as consideration for the early termination of the agreements. As a result, as of December 31, 2018, there were no loans covered by Loss Share Agreements.
A summary of activity for the FDIC indemnification asset, included in other assets in the accompanying Consolidated Balance Sheets, follows:
 
 
For the Year Ended
(in thousands)
 
December 31, 2018
 
December 31, 2017
Beginning balance
 
$
4

 
$
1,555

Amortization, net
 
(4
)
 
(1,280
)
Accretion income
 

 
121

Additional estimated covered losses
 

 
94

Claim payments received from the FDIC
 

 
(486
)
Ending balance
 
$

 
$
4

3. Regulatory Matters
FSC is regulated by the Board of Governors of the Federal Reserve Board and is subject to the securities registration and public reporting regulations of the SEC. The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Georgia Department of Banking and Finance.
The Bank must comply with regulatory capital requirements established by the regulators. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These capital standards require us to maintain minimum ratios of “Tier 1” capital to total risk-weighted assets and total capital to risk-weighted assets of 6.00% and 8.00%, respectively. Tier 1 capital is comprised of total shareholders’ equity calculated in accordance with generally accepted accounting principles, excluding accumulated other comprehensive income, less intangible assets and disallowed portions of our loan servicing rights, and total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our qualifying subordinated debt, as well as the allowable portion of the allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in FDIC regulations.
In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital to quarterly average total assets of 4.00%. The Bank is also subject to a Common Equity Tier 1 (“CET1”) capital to total risk-weighted assets ratio of 4.50%. CET1 Capital is comprised of Tier 1 capital less amounts attributable to qualifying non-cumulative perpetual preferred stock and minority interests in consolidated subsidiaries.
Beginning January 1, 2016, minimum capital ratios are subject to a capital conservation buffer. In order to avoid limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers, the Bank must hold a capital conservation buffer above its minimum risk-based capital requirements. This capital conservation buffer is calculated as the lowest of the differences between the actual CET1 ratio, Tier 1 Risk-Based Capital Ratio, and Total Risk-Based Capital Ratio and the corresponding minimum ratios. At December 31, 2016, the required minimum capital conservation buffer was 0.625% and will increase in subsequent years by 0.625% until it is fully phased in on January 1, 2019 at 2.50%. At December 31, 2018, the capital conservation buffers of FSC and the Bank were 5.04% and 5.22%, respectively.






The following tables set forth the capital requirements for the Bank under FDIC regulations and the Bank’s capital ratios at December 31, 2018, and 2017:
Fidelity Bank
 
December 31, 2018
 
December 31, 2017
($ in thousands)
 
Amount
 
Percent
 
Amount
 
Percent
Common Equity Tier 1 Capital:
 
 
 
 
 
 
 
 
Actual
 
$
396,577

 
9.72
%
 
$
355,580

 
8.78
%
Minimum
 
183,600

 
4.50
%
 
182,245

 
4.50
%
Tier 1 Capital:
 
 
 
 
 
 
 
 
Actual
 
$
412,577

 
10.11
%
 
$
371,407

 
9.17
%
Minimum
 
244,853

 
6.00
%
 
243,014

 
6.00
%
Total Risk-Based Capital:
 
 
 
 
 
 
 
 
Actual
 
$
529,784

 
12.98
%
 
$
487,149

 
12.03
%
Minimum
 
326,523

 
8.00
%
 
323,956

 
8.00
%
Tier 1 Capital Leverage Ratio:
 
 
 
 
 
 
 
 
Actual
 
 
 
8.72
%
 
 
 
8.34
%
Minimum
 
 
 
4.00
%
 
 
 
4.00
%
The Company is not subject to the provisions of prompt corrective action. The FRB, as the primary regulator of FSC, has established minimum capital requirements as a function of its oversight of bank holding companies.
The following tables depict FSC’s capital ratios at December 31, 2018, and 2017, in relation to the minimum capital ratios established by the regulations of the FRB:
Fidelity Southern Corporation
 
December 31, 2018
 
December 31, 2017
($ in thousands)
 
Amount
 
Percent
 
Amount
 
Percent
Common Equity Tier 1 Capital:
 
 
 
 
 
 
 
 
Actual
 
$
388,975

 
9.54
%
 
$
349,133

 
8.86
%
Minimum
 
183,479

 
4.50
%
 
177,225

 
4.50
%
Tier 1 Capital:
 
 
 
 
 
 
 
 
Actual
 
$
433,975

 
10.64
%
 
$
393,818

 
10.00
%
Minimum
 
244,723

 
6.00
%
 
236,291

 
6.00
%
Total Risk-Based Capital:
 
 
 
 
 
 
 
 
Actual
 
$
539,789

 
13.24
%
 
$
498,166

 
12.65
%
Minimum
 
326,156

 
8.00
%
 
315,071

 
8.00
%
Tier 1 Capital Leverage Ratio:
 
 
 
 
 
 
 
 
Actual
 
 
 
9.18
%
 
 
 
8.85
%
Minimum
 
 
 
4.00
%
 
 
 
4.00
%
Generally, dividends that may be paid by the Bank to FSC are subject to certain regulatory limitations. In particular, under Georgia banking law applicable to Georgia state chartered commercial banks such as the Bank, the approval of the GDBF will be required if the total of all dividends declared in any calendar year by the Bank exceeds 50% of the Bank’s net profits for the prior year or if certain other provisions relating to classified assets and capital adequacy are not met. FSC invested no capital in the Bank during 2018 or 2017 in the form of capital infusions. In 2018, the Bank paid dividends of $9.3 million to FSC and no dividends were paid by LionMark to FSC. In 2017, the Bank and LionMark paid dividends of $9.0 million and $1.5 million, respectively, to FSC.
Also, under current Federal regulations, the Bank is limited in the amount it may loan to its non-bank affiliates, including FSC. As of December 31, 2018, and 2017, there were no loans outstanding from the Bank to FSC.
4. Investment Securities
Management’s primary objective in managing the investment securities portfolio includes maintaining a portfolio of high quality investments with competitive returns while providing for pledging and liquidity needs within overall asset and liability management parameters. The Company is required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. As such, management regularly evaluates the investment portfolio for cash flows, the level of loan production,





current interest rate risk strategies and the potential future direction of market interest rate changes. Individual investment securities differ in terms of default, interest rate, liquidity, and expected rate of return risk.
The following table summarizes the amortized cost and fair value of investment securities and the related gross unrealized gains and losses at December 31, 2018, and 2017:
 
 
December 31, 2018
(in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
Obligations of U.S. Government sponsored enterprises
 
$
22,145

 
$
53

 
$
(240
)
 
$
21,958

Municipal securities
 
9,824

 
278

 
(39
)
 
10,063

SBA pool securities
 
11,036

 

 
(298
)
 
10,738

Residential mortgage-backed securities
 
185,464

 
2,270

 
(256
)
 
187,478

Commercial mortgage-backed securities
 
21,929

 

 
(564
)
 
21,365

Total available-for-sale
 
$
250,398

 
$
2,601

 
$
(1,397
)
 
$
251,602

 
 
 
 
 
 
 
 
 
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Municipal securities
 
$
8,504

 
$
8

 
$
(486
)
 
$
8,026

Residential mortgage-backed securities
 
7,719

 
48

 
(286
)
 
7,481

Commercial mortgage-backed securities
 
3,903

 

 

 
3,903

Total held-to-maturity
 
$
20,126

 
$
56

 
$
(772
)
 
$
19,410

 
 
December 31, 2017
(in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
Obligations of U.S. Government sponsored enterprises
 
$
22,182

 
$
141

 
$
(98
)
 
$
22,225

Municipal securities
 
9,318

 
340

 
(23
)
 
9,635

SBA pool securities
 
13,031

 
6

 
(127
)
 
12,910

Residential mortgage-backed securities
 
50,251

 
803

 
(76
)
 
50,978

Commercial mortgage-backed securities
 
24,721

 
6

 
(354
)
 
24,373

Total available-for-sale
 
$
119,503

 
$
1,296

 
$
(678
)
 
$
120,121

 
 
 
 
 
 
 
 
 
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Municipal securities
 
$
8,588

 
$
53

 
$

 
$
8,641

Residential mortgage-backed securities
 
9,100

 
99

 
(156
)
 
9,043

Commercial mortgage-backed securities
 
4,001

 

 

 
4,001

Total held-to-maturity
 
$
21,689

 
$
152

 
$
(156
)
 
$
21,685

The Company held 32 and 19 investment securities available-for-sale that were in an unrealized loss position at December 31, 2018 and 2017, respectively. There were seven and six investment securities held-to-maturity that were in an unrealized loss position at December 31, 2018, and 2017, respectively.






The following table reflects the gross unrealized losses and fair values of the investment securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
 
 
December 31, 2018
 
 
Less than 12 Months
 
12 Months or Longer
(in thousands)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
Obligations of U.S. Government sponsored enterprises
 
$
4,978

 
$
(24
)
 
$
14,841

 
$
(216
)
Municipal securities
 
532

 
(5
)
 
1,021

 
(34
)
SBA pool securities
 

 

 
10,738

 
(298
)
Residential mortgage-backed securities
 
32,556

 
(101
)
 
8,228

 
(155
)
Commercial mortgage-backed securities
 

 

 
21,365

 
(564
)
Total available-for-sale
 
$
38,066

 
$
(130
)
 
$
56,193

 
$
(1,267
)
 
 
 
 
 
 
 
 
 
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Municipal securities
 
$
6,431

 
$
(486
)
 
$

 
$

Residential mortgage-backed securities
 

 

 
6,492

 
(286
)
Total held-to-maturity
 
$
6,431

 
$
(486
)
 
$
6,492

 
$
(286
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
Less than 12 Months
 
12 Months or Longer
(in thousands)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
Obligations of U.S. Government sponsored enterprises
 
$
14,974

 
$
(98
)
 
$

 
$

Municipal securities
 

 

 
1,050

 
(23
)
SBA pool securities
 
3,285

 
(42
)
 
4,979

 
(85
)
Residential mortgage-backed securities
 
1,835

 
(8
)
 
5,383

 
(68
)
Commercial mortgage-backed securities
 
10,051

 
(89
)
 
12,360

 
(265
)
Total available-for-sale
 
$
30,145

 
$
(237
)
 
$
23,772

 
$
(441
)
 
 
 
 
 
 
 
 
 
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
$

 
$

 
$
7,652

 
$
(156
)
Total held-to-maturity
 
$

 
$

 
$
7,652

 
$
(156
)
At December 31, 2018, and 2017, the unrealized losses on investment securities related to market interest rate fluctuations since purchase and not credit losses. Management does not have the intent to sell the temporarily impaired securities and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost, which may be maturity. Accordingly, as of December 31, 2018, management has reviewed its portfolio for other-than-temporary-impairment and believes the impairment detailed in the table above is temporary. Therefore, no other-than-temporary impairment loss has been recognized in the Company’s Consolidated Statements of Comprehensive Income.






The amortized cost and fair value of investment securities at December 31, 2018 and 2017 are categorized in the following table by remaining contractual maturity. The amortized cost and fair value of securities not due at a single maturity (i.e., mortgage-backed securities) are shown separately and are calculated based on estimated average remaining life:
 
 
December 31, 2018
 
December 31, 2017
(in thousands)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
Obligations of U.S. Government sponsored enterprises
 
 
 
 
 
 
 
 
Due after one year through five years
 
$
21,142

 
$
20,919

 
$
21,179

 
$
21,160

Due after five years through ten years
 
1,003

 
1,039

 
1,003

 
1,065

Municipal securities
 
 
 
 
 
 
 
 
Due after one year through five years
 
1,055

 
1,021

 
1,503

 
1,488

Due after five years through ten years
 
2,435

 
2,539

 
2,753

 
2,877

Due after ten years
 
6,334

 
6,503

 
5,062

 
5,270

SBA pool securities
 
 
 
 
 
 
 
 
Due after five years through ten years
 
6,730

 
6,569

 
7,967

 
7,931

Due after ten years
 
4,306

 
4,169

 
5,064

 
4,979

Residential mortgage-backed securities
 
185,464

 
187,478

 
50,251

 
50,978

Commercial mortgage-backed securities
 
21,929

 
21,365

 
24,721

 
24,373

Total available-for-sale
 
$
250,398

 
$
251,602

 
$
119,503

 
$
120,121

 
 
 
 
 
 
 
 
 
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Municipal securities
 
 
 
 
 
 
 
 
Due after five years through ten years
 
$
1,588

 
$
1,595

 
$
1,588

 
$
1,641

Due after ten years
 
6,916

 
6,431

 
7,000

 
7,000

Residential mortgage-backed securities
 
7,719

 
7,481

 
9,100

 
9,043

Commercial mortgage-backed securities
 
3,903

 
3,903

 
4,001

 
4,001

Total held-to-maturity
 
$
20,126

 
$
19,410

 
$
21,689

 
$
21,685

For the investment securities available-for-sale called or sold during 2018 and 2017, there were no gross gains or losses. For the investment securities available-for-sale called or sold during 2016, gross gains totaled $578,000 and no gross losses.
There were no sales of, nor transfers from, investment securities held-to-maturity during 2018 or 2017. There were no transfers from investment securities available-for-sale to investment securities held-to-maturity in 2018 or 2017.
The following table summarizes the fair value of investment securities that were pledged as collateral at December 31, 2018 and 2017:
 
 
December 31,
(in thousands)
 
2018
 
2017
Public deposits
 
$
121,790

 
$
60,415

Securities sold under repurchase agreements
 
20,600

 
19,485

Total pledged securities
 
$
142,390

 
$
79,900






5. Loans Held-for-Sale
Residential mortgage loans held-for-sale are carried at fair value and SBA and indirect automobile loans held-for-sale are carried at the lower of cost or fair value. The following table summarizes loans held-for-sale at December 31, 2018 and 2017:
 
 
December 31,
(in thousands)
 
2018
 
2017
Residential mortgage loans at fair value
 
$
225,342

 
$
269,140

SBA
 
13,960

 
13,615

Indirect automobile
 

 
75,000

Total loans held-for-sale
 
$
239,302

 
$
357,755

During 2018 and 2017, the Company transferred $5.0 million and $5.9 million, respectively, to the held for investment residential mortgage portfolio.
The Company had residential mortgage loans held-for-sale with unpaid principal balances of $160.1 million and $154.2 million pledged to the FHLB at December 31, 2018 and 2017, respectively.
6. Loans
Loans outstanding, by class, are summarized in the following table at carrying value and include net unamortized costs of $29.7 million, and $35.9 million, at December 31, 2018, and 2017, respectively. Acquired loans represent previously acquired loans, which includes $2.3 million loans covered under Loss Share Agreements with the FDIC at December 31, 2017. No loans were covered under loss share agreements at December 31, 2018. Legacy loans represent existing portfolio loans originated by the Bank prior to each acquisition, additional loans originated subsequent to each acquisition and Government National Mortgage Association ("GNMA") optional repurchase loans (collectively, “legacy loans”).
 
 
December 31, 2018
 
 
Loans
 
Total
(in thousands)
 
Legacy
 
Acquired
 
Commercial
 
$
799,057

 
$
105,103

 
$
904,160

SBA
 
150,519

 
6,093

 
156,612

Total commercial loans
 
949,576

 
111,196

 
1,060,772

 
 
 
 
 
 
 
Construction
 
277,573

 
1,836

 
279,409

 
 
 
 
 
 
 
Indirect automobile
 
1,569,274

 

 
1,569,274

Installment loans and personal lines of credit
 
27,289

 
881

 
28,170

Total consumer loans
 
1,596,563

 
881

 
1,597,444

Residential mortgage
 
577,471

 
16,624

 
594,095

Home equity lines of credit
 
143,097

 
10,661

 
153,758

Total mortgage loans
 
720,568

 
27,285

 
747,853

Total loans
 
$
3,544,280

 
$
141,198

 
$
3,685,478






 
 
December 31, 2017
 
 
Loans
 
Total
(in thousands)
 
Legacy
 
Acquired
 
Commercial
 
$
675,544

 
$
135,655

 
$
811,199

SBA
 
133,186

 
8,022

 
141,208

Total commercial loans
 
808,730

 
143,677

 
952,407

 
 
 
 
 
 
 
Construction
 
243,112

 
5,205

 
248,317

 
 
 
 
 
 
 
Indirect automobile
 
1,716,156

 

 
1,716,156

Installment loans and personal lines of credit
 
24,158

 
1,837

 
25,995

Total consumer loans
 
1,740,314