KBRA Affirms Ratings for FineMark Holdings, Inc.
28 Jun 2024 | New York
KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Fort Myers, Florida based FineMark Holdings, Inc. (OTCQX: FNBT). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, FineMark National Bank & Trust ("the bank"). The Outlook for all long-term ratings is revised to Stable from Negative.
The ratings and Stable Outlook are underpinned by the bank’s strong regulatory capital ratios, anchored by a relatively low credit risk balance sheet (about 60% of total assets consists of high-quality investment securities and residential loans). In addition, the bank's various capital levels were bolstered by the company’s recent $30 million preferred equity capital raise, of which $28 million was downstreamed to the bank in the form of common equity. While the issuance strengthened the bank’s regulatory capital ratios, including the CET1 ratio, KBRA is mindful that common equity double leverage at the BHC increased to 116%. (Click here to view KBRA’s comment.)
The Outlook revision to Stable is further supported by the increased clarity surrounding NIM performance, in addition to management’s demonstrated commitment to maintain regulatory capital ratios. Since the Fed commenced its monetary tightening policy regime in 2022, earnings have been under pressure, such that bottom line profitability is tracking well below rated peers. The bank’s NIM, however, appears to have stabilized in the current range and management projects gradual improvement in a higher-for-longer interest rate environment, supported by sizable internal cashflow from the investment portfolio primarily, and the loan portfolio secondarily, which would be reinvested at much higher rates.
While KBRA recognizes that the earnings outlook is in the trajectory for improvement, the risk of further earnings erosion remains tied to higher short-term rates, principally because of the large base of sweep deposits (25% of total deposits) that are effectively indexed to overnight interest rates. However, KBRA also acknowledges management’s recent proactive actions in putting $260 million (or around 30%) of sweep deposits under rate cap at 6%, as well as $200 million notional of interest rate swaps, partially mitigating the downside risk.
The ratings also continue to be supported by the revenue diversification contribution from the bank’s substantial trust business.
On-balance sheet liquidity increased meaningfully, with cash & cash equivalents currently amounting to 10% of total assets (likely to be maintained at the current level in the near-term), which, combined with total investment securities (25% of total assets), cover around 1.3x of total uninsured deposits ($1.1 billion, or 36% of total deposits).
To access rating and relevant documents, click here.
Click here to view the report.