Fidelity Southern Corporation, holding company for Fidelity Bank, reported net income of $6.5 million for the first quarter of 2013 compared to $5.4 million for the fourth quarter of 2012 and $5.3 million for the first quarter of 2012. After accounting for the preferred dividend, basic and diluted earnings per share for the first quarter of 2013 were $0.38 and $0.33, respectively, which compared to basic and diluted earnings per share of $0.31 and $0.27 in the fourth quarter of 2012 and $0.31 and $0.28 in the first quarter of 2012, respectively.

Fidelity's Chairman, Jim Miller, said, "The Company's core operating earnings, including indirect automobile lending and home mortgages, continue strong and provide us with a strong competitive foundation in what is still a challenging market made more so by an artificially low interest rate environment. Our focus on the Golden Rule still anchors our efforts."

ASSET QUALITY

The following table provides a summary of the allowance for loan losses for the non-covered loan and covered loan portfolios as of March 31, 2013:

The following table provides a comparison of the activity affecting the allowance for loan loss:The majority of loans and other real estate acquired in the FDIC-assisted transactions are covered under 80% loss sharing agreements with the FDIC, which are classified as covered loans. Loans that do not fall into the covered loan category are considered to be non-covered. Covered loans have the protection against losses reimbursable by the FDIC whereas non-covered loans do not have that same protection.

Net charge-offs increased $1.2 million for the first three months of 2013 to $3.7 million compared to $2.4 million for the same period of 2012 primarily due to the default and charge-off of one commercial loan during the first quarter of 2013. For the first three months of 2013, the ratio of net-charge offs to average loans outstanding was 0.86% compared to 0.59% for the same period of 2012. Non-covered provision expense decreased $300,000 for the first three months of 2013 to $3.5 million compared to $3.8 million for the same period of 2012 primarily as a result of improvement in the outstanding classified loan portfolio.The decrease in provision expense for the first quarter of 2013 compared to the fourth quarter of 2012 was primarily due to a reduction in charge-offs and improved credit quality indicators.

The allowance for loan losses at March 31, 2013 was $33.9 million, or 1.95% of total loans, compared to an allowance of $34.0 million, or 2.01% of total loans, at December 31, 2012, and $29.3 million, or 1.84% of total loans, at March 31, 2012.

The following table presents certain credit quality metrics of the Bank's loan portfolio, inclusive and exclusive of covered loans. Nonperforming assets include nonaccrual loans, net repossessions and other real estate ("ORE"). Classified assets include loans having a risk rating of substandard or worse, both accrual and nonaccrual, net repossessions and other real estate.

CAPITALORE, net of reserves, decreased $805,000 to $39.0 million at March 31, 2013, compared to $39.8 million at December 31, 2012 primarily due to $1.2 million in write-downs for the first quarter of 2013. During the first quarter of 2013, $6.0 million of ORE assets were sold while $6.7 million were added to ORE. Excluding covered assets, ORE sales were $3.8 million and additions were $5.9 million for the quarter.

The following table details the Company's and Bank's capital position at March 31, 2013 and December 31, 2012: 

Total deposits of $2.058 billion at March 31, 2013 have increased from $1.868 billion as of March 31, 2012, due primarily to the acquisition of Security Exchange Bank in the second quarter of 2012 and the Bank's continued efforts to aggressively pursue core deposits. Total deposits, at March 31, 2013, decreased $9.8 million from December 31, 2012 due to a $15.1 million decrease in brokered deposits partially offset by a $5.3 million increase in retail deposits.DEPOSITS

NET INTEREST MARGIN

Net interest margin in the first quarter of 2013 was 3.77%, a 9 basis point decrease from the same quarter a year ago and a 14 basis point increase from the fourth quarter 2012. Excluding covered loans and the accretion of the loan discount, the net interest margin was 3.50% for the first quarter of 2013 compared to 3.56% for the fourth quarter of 2012. The increase in net interest margin from the fourth quarter 2012 was primarily the result of cash flow revaluations for acquired loans during each period that showed an increase in expected cash flows that is recognized as an adjustment to the yield. Offsetting the lower yields on assets was the high volume of loan originations which resulted in an increase in net interest income for the first quarter of 2013 of $1.4 million, or 7.2%, when compared to the first quarter of 2012 and an increase of $837,000, or 4.1%, when compared to the fourth quarter of 2012.

INTEREST INCOME

Total interest income for the first quarter of 2013 increased $713,000, or 2.9%, to $25.0 million compared to $24.3 million for the first quarter of 2012. Average interest-earning assets for the first quarter of 2013 increased $218.2 million, or 10.6%, somewhat offset by a 41 basis point a decrease in the yield on average interest-earning assets due primarily to the Bank offering competitive rates on loans and deposits. In a linked-quarter comparison, interest income increased $708,000 primarily due to an increase in loan income as the yield on average interest-earning assets increased 20 basis points.

INTEREST EXPENSE

Interest expense for the first quarter of 2013 decreased $707,000, or 15.3%, compared to the same period in 2012 due to a 22 basis point decrease in the cost of interest-bearing liabilities somewhat offset by an increase in average interest-bearing liabilities of $139.1 million, or 8.0%. Also contributing to the decrease is a decrease of $272,000 in subordinated debt expense for the respective periods due to one of the Company's notes being converted from a fixed rate of 6.62% to a lower floating rate as of September 30, 2012. The Bank's shift in deposit mix toward noninterest-bearing accounts, which made up 18.7% of total deposits at March 31, 2013 compared to 14.0% at March 31, 2012, contributed to the reduction in the cost of funds. On a linked-quarter basis, interest expense decreased $129,000, or 3.2%.

NONINTEREST INCOME

On a year over year basis, noninterest income increased $7.3 million, or 41.5%, to $25.0 million for the quarter ended March 31, 2013, compared to $17.7 million in the first quarter of 2012. The increase in noninterest income was the result of a $5.7 million, or 47.3%, increase in mortgage banking activities and an increase in SBA lending of $231,000 over the respective periods. Income from mortgage banking activities increased due to a 76% increase in the March 31, 2013 pipeline to over $582 million compared to $331 million a year ago. Total funded loan volume for the quarter of $652.0 million representing a 62% increase compared to the same period a year ago. The current quarter mortgage banking income includes a $1.6 million mortgage servicing rights impairment recovery compared to $702,000 for the fourth quarter of 2012 and $1.1 million for the first quarter of 2012.

The FDIC indemnification asset is originally recorded based on a discounted amount expected to be received from the FDIC for their share of losses on covered loans. The original difference between the full amount and the discounted amount is expected to be recorded as indemnification income over the life of the contract with the FDIC. For the first three months of 2013, indemnification income was $138,000 compared to $171,000 for the same period in 2012.

NONINTEREST EXPENSE

Noninterest expense for the first quarter of 2013 increased $7.2 million, or 28.2%, to $32.6 million compared to $25.4 million for the same period in 2012. The increase was driven by a $5.8 million increase in salaries and employee benefits expense due to higher commission expense related to the increased mortgage banking volume, expansion of our mortgage banking footprint, as well as increased number of employees due to organic growth and acquisitions.