Finally, a banking company has something good to say about the Treasury Department's Troubled Asset Relief Program.
Fidelity Southern Corp. in Atlanta, which had been sidelined by souring real estate loans, says its $48.2 million Tarp infusion allowed it to grow again.
"Despite the problems and the interpretations, the fact is that Tarp helped us," said James B. Miller Jr., Fidelity Southern's chairman and chief executive. "We had begun shrinking our bank dramatically. … Tarp was a stabilizer."
In recent weeks a number of banking companies have returned Tarp funds or expressed a desire to do so. Bankers have complained about restrictions on compensation and dividends, the potential for further government interference and a stigma associated with the recipients. Last week JPMorgan Chase & Co.'s chief executive, James Dimon, called Tarp "a scarlet letter."
Other critics have said the program has failed to stimulate lending by recipients.
But since it received its infusion in December, the $1.8 billion-asset Fidelity Southern has ramped up two lending lines where it had scaled back: home mortgages and indirect auto lending. The company has also continued to lend to builders, though more cautiously than in the past, to clear the glut of vacant lots it has repossessed.
Last week it posted a first-quarter net loss that was smaller than analysts had expected, as a result of fee income from the rejuvenated mortgage line and stronger-than-expected credit quality.
Fidelity Southern still faces significant challenges, both in its local area — arguably one of the country's hardest-hit real estate markets — and on its balance sheet. Nonperforming assets climbed 234% from a year earlier, to $123.5 million at the end of the first quarter, or 8.45% of total assets. Nearly three-quarters of the nonperformers were construction and development loans. In the company's first-quarter earnings release, it said it had 200 homes and 686 lots and land loans classified as nonperforming.
Miller said Fidelity Southern is slowly clearing that inventory. He also said the lots have the benefit of being in Atlanta's inner suburbs, which, though sluggish, are faring better than the outlying suburbs.
"Thank God we are closer in than other people," he said.
The residential construction and land acquisition and development portfolio decreased 4.7% from a quarter earlier, to $214.2 million on March 31. Though $16.8 million of construction loans were paid off in the first quarter, Fidelity Southern also originated $3.8 million of residential construction loans.
The catch is that the company is making the new loans only to those willing to build on the lots it is holding, whether the loan is for a single lot to an individual or for a handful of homes to a builder that has demonstrated the ability to move properties. "That is going to help us get through our inventory," Miller said.
Fidelity Southern lost $3.4 million last quarter, or 43 cents a share, beating the average estimate of analysts by 13 cents. A year earlier it had earned $1.1 million.
Analysts noted that nonperformers increased 7% from the fourth quarter, but they said the company may have hit the bottom.
"Credit may be showing signs of stabilization … but it's too early to be confident of a trend," Jennifer H. Demba, an analyst at SunTrust Robinson Humphrey, wrote in a research note published last week. Fidelity Southern "had a better quarter than expected but is still under severe credit pressure."
Aware of its deteriorating credit quality, early last year the company began scaling back where it could to preserve its capital ratios.
For instance, rather than writing $50 million a month of indirect auto loans, as it had done for the past few years, it started writing $10 million a month. It also closed indirect auto lending offices in Tennessee and Florida.
"We were going to do whatever we needed to do to ensure we had sufficient capital," Miller said. At the end of the first quarter, the company's Fidelity Bank had a total risk-based capital ratio of 12.5% and a leverage ratio of 9.27%. Both were high enough for the unit to be considered well capitalized.
But since it received the Tarp infusion, Miller said, the company has been carefully ratcheting the indirect auto line back up. Originations averaged $20 million a month in the first quarter, and Fidelity Southern has reopened one of the two Florida offices.
In January it ramped up a business it scaled back a decade ago: residential mortgages originated for sale into the secondary market. It hired 50 former loan officers, most of them former employees of Sunshine Mortgage Corp., a venerable Atlanta brokerage that closed its doors this year.
"About 10 years ago or so we really pulled back in doing mortgages, because we couldn't compete," Miller said. "Now that it is back to a more normal industry, we are back and getting into plain long-term mortgages."
In the first quarter Fidelity Southern's mortgage business generated $3.6 million of revenue, versus just $70,000 a year earlier. Though the company has not been the servicer on the mortgages it has sold so far, it plans to begin servicing next month.
Given the opportunities born out of the broken real estate market, such as the hirings from Sunshine, Miller said Fidelity Southern would like to continue to acquire — be it credits, deposits, talent, branches or even a failed bank from the Federal Deposit Insurance Corp.
He said the company has yet to jump at the eight banks that have failed in its market, because most of them lacked core deposits. Instead, Fidelity Southern is reaping the benefits of larger banks' woes through an inflow of deposits. Its savings accounts grew 21% from a year earlier, to $265 million at the end of the quarter. Noninterest deposits grew 8.5%, to $141.8 million.
"We are the biggest and strongest publicly traded community bank in Atlanta, and we are going to step up and fill the vacuum that is being left," Miller said.
Matthew Anderson, a partner at Foresight Analytics LLC, said that even though Fidelity Southern has strong capital ratios and its overall loan performance is generally good, its construction portfolio is in rougher shape, even when compared with other banking companies in its home market.
"The delinquency ratio of its construction portfolio is well above the nation and well above Atlanta," Anderson said.
According to Foresight's most recent numbers, 37% of Fidelity Southern's construction portfolio was delinquent at yearend; the rate was 16% for all Atlanta banks and 11.4% for all financial institutions nationwide.
"That's not a great place to be, but relative to their capital, they don't seem to be in the dangerous territory yet," Anderson said.
James Schutz, an analyst at Sterne, Agee & Leach Inc., said despite the loan problems he sees Fidelity Southern as one of the stronger banking companies in Atlanta, given its deposit mix and management team. Despite the heightened credit problems, the company will survive this down market, he predicted.
"They are well established and have been a good business," Schutz said. "At this point, do they come out at the end of the tunnel? I am guardedly optimistic."