Read FineMark’s Fourth Quarter Shareholder’s Letter from the President, Joseph R. Catti.
DEAR VALUED SHAREHOLDERS,
On behalf of FineMark Holdings, Inc. – the Board of Directors, the executive management team and all of our dedicated associates – I am pleased to report on the company’s performance for the first quarter of 2020.
FineMark Holdings, Inc. (OTCQX: FNBT), the parent company of FineMark National Bank & Trust, today announced first quarter 2020 net income of $5.1 million, or $0.56 per diluted share, compared to net income of $3.0 million, or $0.33 per diluted share, reported for the first quarter of 2019.
COVID-19 RESPONSE AND IMPACT
We are living through a historic time as COVID-19 threatens our world, our nation and the communities in which we live and work. At FineMark, the health and safety of our associates and our clients is our utmost priority. I would like to begin this letter by sharing some of the steps we have taken to deal with the impact of this virus.
In January, we began closely monitoring the outbreak in China. In February, we initiated weekly, followed by daily pandemic meetings. We implemented enhanced sanitization practices and social distancing measures recommended by the CDC, and in line with our pandemic plan, which was most recently tested in December 2019. We purchased more than 100 laptops, and by March 31, half of our associates were working remotely, via a secure virtual network. Lobby access was limited in each of our offices to appointment only and banking hours were adjusted to limit the potential health risk. We waived surcharges for foreign ATMs and most banking fees for 90 days. During this challenging time, we strive to strike a balance between ensuring the safety of our associates and maintaining very high service levels for our clients.
When the U.S. Federal Reserve cut interest rates to near zero to offset the impact of the COVID-19 outbreak, FineMark responded by lowering the interest rate floor for client loans. Then on March 27, when the Paycheck Protection Program was announced, as part of the CARES Act, FineMark immediately applied to become a Small Business Administration lender. Within days, we were accepting applications from our clients, to help provide access to much needed funds to keep their businesses operational. We continue to proactively reach out to our clients to make sure we are helping them, however we can.
Despite disruptions caused by COVID-19, FineMark delivered remarkable financial performance in the first quarter. We were able to capitalize on market volatility by reducing our cost of funds and repositioning the bank’s debt securities portfolio. It is important to note, however, the full impact of COVID-19 on the bank’s performance, including factors such as loan modifications, will not be seen until subsequent quarters.
FIRST QUARTER FINANCIAL HIGHLIGHTS
FineMark’s assets totaled $2.5 billion as of March 31, 2020, compared to $1.9 billion a year earlier. This 28%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 to $6.7 million, a 70% year-over-year increase.
Highlights of first quarter 2020 performance on a year-over-year basis include:
- Strong earnings resulted in ROA of 0.92% and ROE of 11.11%, up from 0.64% and 7.48% respectively
- Trust and investment fees increased 20% to $5.1 million, representing 28% of total revenue
- Assets under management and administration increased 4%, despite a steep decline in equity markets in March
- Loans, net of allowance, increased 12% to $1.6 billion
- Deposits increased 16% to $1.8 billion
- Net interest income increased 12% to $12.6 million
Please refer to attached abbreviated financial statements here.
NET INTEREST INCOME AND MARGIN
The Federal Reserve lowered rates a total of 150 basis points in the first quarter to provide liquidity amid the escalating pandemic. FineMark reduced funding costs by lowering deposit rates and increasing its borrowing from the Federal Home Loan Bank, from both a current and future advances standpoint, decreasing interest-rate sensitivity going forward. At the end of March, FineMark lowered the interest rate floor on loans, allowing clients to benefit from the low-rate environment.
Quarterly net interest income increased 12% year-over-year. This improvement was driven largely by the decrease in the cost of funds to 1.26% as of March 31, 2020, from 1.40% a year earlier, coupled with the continued growth of the loan portfolio. The bank’s quarterly net interest margin was 2.39% as of March 31, 2020, compared with 2.52% a year ago and 2.41% three months ago. The yield on earning assets declined to 3.59%, from 3.85% a year earlier.
As rates declined, FineMark was able to reposition the debt securities portfolio generating $2.7 million in gains. This was a primary driver of FineMark’s strong first quarter performance. FineMark acquired bonds amid dislocations in municipal bond and credit markets resulting from the extreme market volatility.
One important aspect of FineMark’s growth continues to be the impressive expansion of our trust and investment business, which is measured by assets under management and administration. During the first quarter, FineMark added $166 million of client assets, which consisted primarily of existing clients adding funds to their portfolio, reinforcing their trust in FineMark’s associates. The inflows, however, were offset by $707 million in investment depreciation, net of income generated by the assets, as equity markets experienced a sharp decline as the COVID-19 pandemic spread. As of March 31, 2020, FineMark had $3.9 billion in assets under management and administration, up 4% on a year-over-year basis but down 12% from the previous quarter. Trust fees for the quarter totaled $5.1 million, up 20% on a year-over-year basis, but up less than 1% from the previous quarter.
The growth of FineMark’s overall business has necessitated increased expenses to maintain the bank’s high levels of client service. Non-interest expense totaled $13.0 million in the first quarter of 2020, a 10% year-over-year increase. This increase, which includes adding more associates and investing in technology to improve client service, is in line with the steady expansion FineMark has experienced over the past several years.
In the first 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 March 31, 2020, classified loans—loans that may potentially default—totaled $2.65 million, or just 1.17% 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 14.80%.
The allowance for loan losses was $17.0 million, up 15% from March 2019. In addition to increasing the allowance in line with the growth of the loan portfolio, management added $450 thousand in March to be proactive given the current economic climate. The allowance for loan losses was 1.06% of the total loans outstanding as of March 31, 2020. Management believes this level of reserve is sufficient to support the bank’s loan portfolio risk and will continue to monitor economic conditions closely to determine if additional provisions should be made.
FineMark’s management team is very pleased with the credit quality of the bank’s loan portfolio. Management believes our commitment to personally knowing our clients and working with them proactively, has, and will continue to, serve shareholders well.
CAPITAL AND LIQUIDITY
All of FineMark’s capital ratios continue to be in excess of regulatory requirements for “well-capitalized” banks. As of March 31, 2020, the bank’s tier 1 leverage ratio was 9.52%. As a best practice for ensuring strong liquidity, FineMark tested its lines of credit near the end of the first quarter, borrowing $100 million from the Federal Reserve and $10 million from a line of credit at the holding company level. Both lines were promptly repaid on April 1st.
PROGRESS OF NEW BUILDING
As noted in previous quarterly letters, FineMark is in the process of building a new office in Fort Myers, Florida, to support the bank’s growth and serve as a home for our expanding team. Since the COVID-19 pandemic escalated, FineMark has been working closely with the contractor to ensure the safety of workers is prioritized over meeting any construction deadlines. The contractor has assured FineMark that all appropriate safety measures recommended by the CDC are being implemented on the job site. Construction continues with a projected completion date of year-end 2020.
During this challenging time, we sincerely appreciate the trust our clients, and each of you, have placed in us and the commitment of our associates to making a positive impact on the individuals, families, and communities we serve while being good stewards of FineMark’s resources. We are committed to enhancing our staffing levels and supporting our associates during this time of uncertainty, and we are doing everything possible to mitigate the effects of the virus.
While the pandemic is both a medical issue and an economic issue, the health of our associates, clients and communities is most important. We are hopeful positive developments on the medical front will quickly translate to improving economic health. As we all work toward better days ahead, we will continue to be here to support you.
Joseph R. Catti
President & CEO