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 or “the company”). 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 Negative from Stable.

Key Credit Considerations

The Outlook revision to Negative is primarily a function of the bank's interest rate risk position, which in this period of rapidly escalating funding costs, both deposit and non-deposit, has weighed substantially on the net interest margin (NIM) and overall profitability. In 2018-2019, the immediate periods prior to the onset of historically low interest rates, and the two ensuing years, risk-adjusted earnings performance was solid and generally in line with rated peers. Since the Federal Reserve commenced its monetary tightening policy regime in 2022, earnings pressure has developed, such that risk-adjusted profitability (return on risk-weighted assets) is trending significantly below the rated peer average. This performance is primarily tied to the interest rate risk imbalance that emanated from certain elements of the loan portfolio (that includes adjustable rate mortgages) and sizeable, but low yielding (and low credit risk) investment securities portfolio, coupled with the sharp increase in the cost of a large portion of the deposit base and a higher reliance on wholesale borrowings. The outlook for earnings is uncertain as a result of the interest rate risk exposure and could deteriorate further in light of the prospect for continued elevated funding costs, based on the forward curve for short-term interest rates and the competitive deposit repricing dynamics across the banking industry.

The ratings affirmation is supported by the current and historically strong regulatory capital position as evidenced by the CET1 ratio, which has been maintained at levels well in excess of the rated peer average. Regulatory capital, adjusted for unrealized mark-to-market losses on the aggregated securities portfolio, would remain well in excess of the peer comparison; this provides the bank with some financial flexibility to navigate the current interest rate environment. Positively, KBRA recognizes that the company does not pay a common stock dividend and share repurchases have been historically de minimis. In addition, there is modest double leverage at the BHC or parent company and the company has retired a portion of the outstanding subordinated debt.

While deposit funding has become increasingly competitive, both in terms of availability and cost, the bank's access to contingent sources of funding in addition to cash flow from the investment securities portfolio appear adequate to meet unexpected deposit outflows. Given the magnitude of the investment securities portfolio, on-balance sheet coverage of uninsured deposits is substantial.

Rating Sensitivities

Given the Negative Outlook, an upgrade in ratings in the intermediate term is unlikely. The ratings would most likely be lowered by one level during the next 12 - 18 months if i) pre-provision, pre-tax earnings have not begun to stabilize and bottom line earnings performance, as measured by RoRWA (net income/risk-weighted assets), is not likely to return to a level more consistent with the rated peer group; and ii) regulatory capital measures are not maintained meaningfully in excess of the rated peer group averages, as has been the case historically.

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Methodologies

Financial Institutions: Bank & Bank Holding Company Global Rating Methodology

ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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