Finemark Holdings Inc

During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation. You should keep in mind that any forward-looking statements made by the company speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving. The company's ability to accurately project results or predict the effects of future plans or strategies, or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results, and our actual results and performance could differ from those set forth in our forward-looking statements. And you are cautioned not to place undue reliance on such forward-looking statements. Good morning, everyone, and thank you for joining us for the fourth quarter and full year 2022 earnings call. I will send things over in just a moment to our chairman and CEO, Joe Caddy, but first I'd like to share the format for the morning. You as an attendee are muted and your video is off for this call. However, we will take questions after the presentations. Here's how that will work. At the bottom of your screen, you should see it could be to the right of your screen. You should see a hand raised. So if you have a question after the presentation, click on that. Once I see that you have a question, I will send you a request to unmute. Once you click on that, you'll be unmuted and you will be able to go forth with your question. We will also provide a copy of this presentation on our investor relations page of our website at findmarkbank.com. With that, I will now send it over to our CEO and Chairman Joe Caddy. Joe.

Thank you, Jessica. Good morning. And thank you for joining the call today. And also thank you for your continued commitment to the success of Finemark. I'm Joe Caddy, as Jessica mentioned. I'm joined by Brian Eagleson, our chief financial officer, and Bob Paramore, the president of the company. We haven't ever had an earnings call before, so it's unusual for us. But we thought given the current interest rate environment and how that's affected our bank, coupled with this is only the second time in the history of the company that we would have reported year over year decline in earnings. So we thought we would walk our investors through what's taken place and what we're expecting for 2023. Having said that, we continue to have pristine asset quality, and we have experienced significant growth in all areas of the company in 2022, and we continue to see that and expect that going forward into 2023. With that, I'm going to turn it over to Brian Eagleston to walk through some of the numbers. Thanks, Joe.

On the screen is just our just our consolidated financial highlights and on here i'm just going to go through a few things some of the big things obviously that changed one big things obviously our cash. Cash position dropped by over 240 million for the year and we'll go through some of the details as for why and as Joe mentioned our net income. Our net income for the year to date was 22.3 million compared to 25 million in 2021. And then on a quarter to date, it was 3.1 million compared to 7 million last year. And the big, obviously the big reason is you can see our net interest margin. That's the biggest driver. It is on a year to date basis is 2.11. On a quarter to date basis, it's 1.90%. And if you look at last year, We were pretty much flat last year at 2.24 on both the quarter and year-to-date numbers. So what happened? What is the reason? Obviously, the Federal Reserve, they raised rates over 300 basis points between March and the end of the third quarter. And then another 125 basis points in the fourth quarter. So, you know, the Fed started off a little bit late. They just did 25 basis points, the first one in March. So they kind of lulled us a little bit. And then all of a sudden they changed rates considerably. So one of the things that there's some things we'll talk about shortly, but one of the things is there's a lag in terms of our repricing of our loan portfolio. 25% of our loans are what we call floating. So they change as primary or federal reserve, whatever the fed funds rate, it's basically prime. Whenever that changes, they change pretty much in lock and step. There's some that are on a slight delay, but mostly they change. And then 43% of our loans are either 3-1, 5-1, or 7-1 arms. And those obviously reset on those particular intervals. So after three years or whatnot. The other big things that happened during the year, as rates started to rise in the short end of the curve, we saw $370 million of our deposits moving into our trust side and getting invested into treasuries. The bulk of that actually happened in the fourth quarter. So we saw 200 million dollars in deposits go in the fourth quarter of 2022. And so what we did, obviously, the other downside is we had to borrow from the Federal Reserve and we borrowed at then Fed funds rates, which obviously went up during this the fourth quarter. Now, just to touch base on some of the things, you know, the key are tier one leverage ratio remains strong. We're at 9.36% and all the other capital ratios are well above or exceed the minimums by the regulators. So we're capitalized, we're as strong as ever. Our loan composition has remained relatively consistent. So, you know, we've got a very conservative balance sheet. We're predominantly residential lender, obviously. We did see a little uptick in our commercial real estate, but that's owner-occupied. We went down and drilled into it, and that's all just owner-occupied properties that we financed. So it's obviously in the lesser risk area of commercial real estate. The other part we saw, obviously our loans continue to grow. We saw a 12% increase or $234 million growth in our loans year over year. And that compares considerably better than what we did in 2021, where we only saw 146 million in growth. So we're still going strong and hopefully that'll continue obviously. Some of the other key things are non-interest expense. One thing that comes in alignment, a non-interest expense increased. Obviously, it went up by 15% and it went up by 17% in 2021. But one of the key things that we saw was the actual relative dollar amount was exactly the same in terms of increase year over year on both those years. We're right in line with what we're doing, obviously, and the predominant reason for those increases was 2. Well, 2 of the big ones are salaries and benefits and then occupancy expense in 2022. we added 28 new associates. going from 232 to 260 people here at the end of the year. And then one, this is a very tight labor market. So we proactively looked at everybody's salary to do an alignment to what the market is paying. And to a lot of the people we identified that we needed to increase their salaries. So that's also part of what increased them. And then in 2022, we opened two new offices and expanded three of our existing locations. So that was what really brought up our occupancy expense, as I mentioned before. So those are kind of the highlights of what happened in 2022 in terms of some of the key things. There's some more slides that we have here that will go through some things more in depth. Um, but, uh, that's what I have for now. Um, can you go to the next slide?

Yeah, um, I'm going to touch on this slide and Brian mentioned about our funding costs in 2022. So, 1 of our significant funding sources is what we define as a trust money market account. It's a sweep account. So, um. Money that we manage for our clients, the cash sweeps every night into a bank account. The other option that our clients have is the Goldman Sachs money market account. And so when interest rates were at zero, we were paying 10 basis points on that. So very, very low cost of funding for the bank and a premium on what clients would have earned had they been in the Goldman Sachs account. As Brian already mentioned, we saw rates increase significantly, as did everybody in 2022. But we went from paying 10 basis points to over 400 basis points in December. The increase in that expense, that actually accounted, and it's on the slide, accounted for 85% of our deposit interest expense. in the fourth quarter, where we realized most of that. Now, that's something that we really can't control. And as disadvantaged as we have been in 2022, in the rising rate environment, we believe that we will be equally advantaged once the Federal Reserve begins to lower rates. Brian also touched on the $370 million of deposits that we moved from the bank into the investment area of our company. And that was something that we did proactively with our clients. We thought it was the right thing to do. However, if we were paying 20 or 30 basis points on those deposits, those rates then increased to the overnight borrowing rate from the Federal Reserve. And that billion dollars there, that's really the crux of the increase in our interest expense for the year. And so that's something that we're dealing with and we're trying to work through. We just would have never expected that rates would have risen as quickly as they did and at the level that they did in such a short period of time. So, Brian?

So this next slide is appropriately titled Unprecedented Rise in Interest Rates. And it really, if you look at it historically, it's really, it's a telltale when you see 2022 in terms of the slope of that curve compared to the prior raises by the Federal Reserve. So as we mentioned before, some of the key facets, Finemark has 25% floating rates. Only 25% of our loans repriced right away, whereas the rest of them do over a lag or a short period of time, which would have been fine if we were something in the prior years. But Joe mentioned the trust money market. That's one of the biggest things there. The other key part, obviously, everything that we're producing in terms of our loans are much higher now and have been for several months or quarters relative to the rates that we charge. So we're seeing that start to increase. Our interest income is growing quite quickly now. But again, it's hard to keep up with the Federal Reserve that has gone so aggressively. On here, one of the other key parts we have is just to talk about our non-trust accounts. So you'll see here, this is what we refer to as our core deposits, which trust money market is also part of it, but excluding that. And you can see one of the key facets is we had a 1% beta, which is really good in terms of the change in rates. So this has not been the problem. Our clients understand. And as Joe mentioned, we were proactive on the ones that you know, had large balances and wanted to get a higher yield that we moved them over into the trust area. So there's still, obviously still our clients and some of them had trust accounts with just, you know, managing their assets a little bit. And then, um, we did see growth, you know, you see the growth in terms of our deposits on average, $392 million. Um, but on, on an end year over year ending balances was only a plus 84 and that, is accounted for obviously by the money that we moved, the 370 million we moved from the bank into the trust. That's really some of the key parts here on our deposit base. Where do we go? What are our steps now? In 2023, we're going to see approximately $175 million come back to us from our securities portfolio. And so we're going to be applying that towards our, our borrowing, you know, the money that we've borrowed from either the federal or the home loan bank. um or you know and also as we're going to see our core deposits growing considerably too hopefully in 2023 um and we're going to use both of those things obviously to fund our our loan production which is probably kind of coming pretty good the things that aren't in their control you know what's the federal reserve going to do and they've got a meeting coming up The end of this month, the beginning of February, they'll come out on February. And the Federal Reserve, we can't tell exactly what they're going to do. They've kind of said it's going to be 25 basis point increase, but who knows. And then one more in March, but that's what we know of. But again, that's something that's outside of our control. And then I'll turn it over to Joe. Yeah, thank you.

So Finemark has been a growth story since its inception. And you can see on the slide, and I'm not going to read all of the details, but in 2022, we continued to significantly increase the number of families that we are doing business with. 12% increase year over year. As Brian mentioned earlier, 12% net unrounding, 12% net loan growth. while not compromising our asset quality at all. Deposit growth that was substantial, while the net was not quite as much as the average because of, again, moving money from the bank into the trust area. But albeit, we believe that that was the right thing to do for our clients. And we believe also that as rates start to decline, we'll see that money come back into the bank. We had asset management growth from existing clients and new clients of over $700 million. And that resulted in $3.9 million of new annualized trust fees, which was a record year for us. We opened two new offices, one in South Naples, one in Jupiter. Both of those offices are off to a great start. Our sports management division continues to hit through the cycle. We added 20 new professional athletes. Many of you would know many of those names if we were to disclose them. We also added 13 new client servicing individuals out of, I believe we hired 28 people for the year last year. So we believe in 2022, despite the rise in rates and what that did to our funding costs, that every other area of the company continues to thrive. As we enter into 2023, we're going to continue, as always, to invest in our people, which are the hallmark of the company. The service levels that we provide are what differentiate us from everybody else, coupled with developing deep long-term relationships that are very genuine and sincere. We've also made a $1.5 to $1.7 million commitment in new technology, both that will provide advancements and enhancements to our client experience, as well as our associates and make their jobs easier. As we look at our budget for 2023, we've budgeted two 25 basis point increases in rates, one in February 1 and then the second in March. We've budgeted that the equity markets would remain flat from a fee standpoint. We're also budgeting pretty significant growth in every area. So loans, deposits, and assets under management, coupled with our trust fees, we are watching expenses without compromising our business model. And we believe that we will be well positioned as we come out of this rising rate environment and come out of what is either currently recession or will be recession. Finally, we're off to a great start in January. So far for January and February, we're bringing in an excess of $140 million in new assets to be managed. And that offsets with just under $800,000 in new annualized fees that correspond with that. From a loan standpoint, we believe our net loan growth for the month of January will be right around $50 million, subject to any paydowns that we're not aware of that could take place this month. So again, we believe that our story is solid and strong. It happens because of our people. They're just exemplary, and we're proud of all of them. And hopefully you believe that the company will continue to perform well. And with that, we'll open it up to any questions if there are any.

Joe, thank you. And like you mentioned at the beginning of this, this is the first time we've done a WebEx where we're actually taking live questions. And I realized once we started speaking, a lot of people are calling in versus logging in. through a computer or your phone. And so I just want to let you know if you have a question, because you won't be able to ask questions from the call-in basis. If you have a question that isn't answered today, you can call or email our investor relations email at investorrelations at finemarkbank.com. And we'll make sure that someone will answer any questions you have. However, it is time now if anyone who is able to ask a question, if you want to go ahead and raise your hand And so far, I'm not seeing any. So let's just give it a minute to see if anybody has a question. I am not seeing any. Let me make sure I'm doing it right. Yes, I'm doing it correctly. Joe, I don't see that we have any questions right now.

Okay. Can everybody hear me?

Yes.

So again, thank you for taking your time. If anybody does have questions that they would like to talk to with a one-on-one basis, feel free to call us and we can talk through anything that you might like to know that you feel we didn't cover. But again, thank you for your commitment to the company. As investors, we really appreciate you.