Read FineMark’s 3rd Quarter Shareholder’s Letter from the President, Joseph R. Catti.
DEAR VALUED SHAREHOLDERS,
FineMark Holdings, Inc. (OTCQX: FNBT), the parent company of FineMark National Bank & Trust, today announced third quarter 2019 net income of $4.5 million, or $0.50 per diluted share, compared to net income of $3.5 million, or $0.39 per diluted share, reported for the third quarter of 2018.
FineMark continues to experience steady organic growth in loans, deposits and assets under management and administration. In particular, FineMark’s trust and investment business continues to be a source of growth.
FineMark’s Board of Directors and executive management team are satisfied with the growth and continued profitability of the company, given the current economic environment. We remain committed to expanding relationships with existing clients, adding new clients through referrals and building FineMark’s presence steadily and opportunistically.
THIRD QUARTER FINANCIAL HIGHLIGHTS
FineMark’s assets totaled $2.1 billion as of September 30, 2019, compared to $1.8 billion a year earlier. This 18%increase is a robust pace in an industry that typically sees assets grow at a 4% to 8% annual clip. Quarterly pre-tax operating income increased 32% to $6.0 million year-over-year, driven largely by the continued growth of our trust and investment business. In the third quarter, FineMark added $173.9 million of net new client assets. The increase in assets is a result of new clients and existing clients expanding their relationship.
Highlights of third quarter 2019 performance on a year-over-year basis include:
- Trust and investment fees increased 13% to $5.0 million, representing 29% of total revenue
- Assets under management and administration increased 14% to $4.2 billion
- Loans, net of allowance, increased 11% to $1.5 billion
- Net interest income increased 3% to $11.4 million
NET INTEREST INCOME AND MARGIN
Despite a very challenging interest rate environment in which FineMark’s cost of funds has increased at a faster pace than our yield on earning assets, quarterly net interest income actually increased 3% year-over-year. To take advantage of low interest rates, FineMark increased its mid term borrowing from the Federal Home Loan Bank in the third quarter. This decreases our interest-rate sensitivity going forward.
Cost of funds has increased as a result of the bank increasing rates paid to our depositors over the last twelve months. The margin compression between short-term and long-term rates is a headwind for “liability sensitive” banks such as FineMark. As a result, the bank’s quarterly net interest margin was 2.34% as of September 30, 2019, compared with 2.63% a year ago and 2.48% three months ago. The bank’s quarterly cost of funds increased over the past year, from 1.10% to 1.55%. Meanwhile, the yield on earning assets increased during that span, from 3.67% to 3.81%.
NON-INTEREST INCOME
As mentioned previously, one important aspect of FineMark’s growth has been the impressive expansion of the trust and investment business, which is measured by assets under management and administration. This figure grew to $4.2 billion as of September 30, 2019, compared with $3.7 billion at the same time last year, a 14% increase. As a result, non-interest income, which is predominantly generated from trust fees increased 11% year-over-year to $5.6 million in the third quarter.
The growth of the trust and investment business is a result of our commitment to providing advice and services tailored to our clients’ unique needs. This approach continues to resonate with our clients, allowing us to expand and further develop existing relationships, while also fostering new relationships. Over the last 12 months, we have experienced net client asset inflows of $487.4 million, reflecting the growing momentum of our trust and investment teams across the country. Net investment appreciation and income totaled $71.5 million in the third quarter of 2019, a period of mixed performance and increased volatility in global equity markets.
NON-INTEREST EXPENSE
The growth of FineMark’s trust and investment business has necessitated increased expenses to maintain the bank’s high levels of client service. Non-interest expense totaled $11.8 million in the third quarter of 2019, a 4% year-over-year increase. Much of the increase can be attributed to the need to hire additional associates to support growth, along with a continued focus on investing in cybersecurity and our technology infrastructure.
CREDIT QUALITY
Since its founding in 2007, FineMark has been committed to maintaining the bank’s high credit standards through a relationship-based approach to lending. FineMark conducts its underwriting based on an in-depth understanding of each borrower’s needs and financial situation. As a result, the bank has experienced very low defaults on loans across market cycles.
In the third quarter, the overall credit quality of the bank’s loan portfolio remained strong, with low levels of classified loans relative to capital and total assets. As of September 30, 2019, classified loans—loans that may potentially default—totaled $2.64 million, or just 1.27% of total capital and reserves. Management believes there is a very low probability of any losses associated with these loans. This amount compares favorably to the industry average of 15.70%. The allowance for loan losses was $15.4 million, or 1.05% of the total loans outstanding as of September 30, 2019. Management continues to believe that this level of reserve is sufficient to support the bank’s loan portfolio risk.
CAPITAL
All of the bank’s capital ratios continue to be in excess of regulatory requirements for “well-capitalized” banks. The bank’s Tier 1 leverage capital ratio was 9.54% as of September 30, 2019, up from 9.51% for the third quarter of 2018. In the third quarter, FineMark transferred $4.5 million from the holding company’s balance sheet to the bank to solidify the bank’s already strong capital ratios. Additionally, FineMark Holdings has just under $7.0 million of capital to support future growth.
THIRD QUARTER 2019 COMPANY HIGHLIGHTS
OTCQX®
Shares of FineMark Holdings, Inc. (OTCQX: FNBT), the parent company of FineMark National Bank & Trust, began trading on the OTCQX market in January 2019. OTC Markets Group operates the OTCQX and enables investors to more easily trade privately held stock through the broker of their choice. Shares traded in a narrow range of $24.75 to $25.75 per share throughout the third quarter and closed at $25.10 per share on September 30, 2019. Book value per share ended the third quarter at $19.81, a 13% increase relative to the third quarter of 2018. This can be attributed to increased earnings and appreciation of the bank’s bond portfolio due to the decline in interest rates.
PROGRESS OF NEW BUILDING
As noted in previous quarterly letters, we are in the process of constructing a 60,000 square foot building which will combine the bank’s operations center with our existing Fort Myers location. The new building will be approximately half a mile from our current Fort Myers location. Demolition at the new site was completed in the third quarter, and construction of the new building is expected to begin in October 2019, with a projected completion date of November 2020.
On behalf of our entire team, we thank you for supporting our vision: To make a positive impact on the families, individuals and communities we serve while being good stewards of FineMark’s resources. Your support and commitment are instrumental to FineMark’s continued success.
Kind regards,
Joseph R. Catti
President & CEO
Click to download a PDF version of the 3rd Quarter Shareholder’s Letter.
