ArrowMark Financial Corp (BANX) 2014 Q3 法說會逐字稿

Welcome to the StoneCastle Financial Corp. Q3 2014 investor conference call. (Operator Instructions). As a reminder, this conference is being recorded.

Now I would like to turn the call over to Rachel Schatten, General Counsel of StoneCastle Financial.

Before I begin this conference call. We'd like to remind the audience that certain statements made during the call may be considered forward-looking statements based on current management expectations that involve substantial risks and uncertainties. Actual results may differ materially from the results stated in or implied by these forward-looking statements. This would depend on numerous factors such as changes in securities or financial markets or general economic conditions, the volume of sales and purchases of shares of common stock, the continuation of investment advisory, administrative and service contracts and other risks discussed from time to time in the Company's filings with the SEC including annual and semiannual reports of the Company.

StoneCastle Financial has based the forward-looking statements included in this presentation on information available to us as of September 30, 2014. The Company undertakes no duty to update any forward-looking statement made herein. All forward-looking statements speak only as of today, November 13, 2014.

Thank you. Now I will turn the call over to StoneCastle Financial's Chairman and Chief Executive Officer, Josh Siegel.

Thank you, Rachel. Good afternoon, everyone, and welcome to StoneCastle Financial's third-quarter 2014 investor call. In addition to Rachel joining me today are George Shilowitz, President, and Pat Farrell, Chief Financial Officer.

On the call today I will update you on StoneCastle Financial's recent registration statement and successful capital raise, provide highlights on our investment activity and pipeline and comment on our quarterly results. Pat will follow me with additional details on our financial results as well as a brief update on our credit facility.

Consistent with our last few quarterly calls, I want to begin with a very brief overview of StoneCastle. We have deep expertise and a long history of investing in community banks. We developed StoneCastle as a new source of capital for community banks that have relatively few options in the capital markets despite the fact that they have exhibited financial resilience through most economic cycles.

The Company offers investors what we believe to be a unique opportunity to participate in the community banking industry and earn current cash flow from preferred stock or debt which should provide solid returns over time along with the potential for capital appreciation. Because of our unique insight into this industry, we believe that we are well-positioned to take advantage of an ongoing community bank consolidation by providing permanent capital as well as liquidity to banks that meet our rigorous investment criteria. Later in my discussion I will give you an example of an investment we made in a bank that was based on our belief that it was undervalued.

Since our initial public offering late last year, our strategic priority has been to diligently deploy the capital entrusted to us. I am pleased to say that we have successfully invested the proceeds and at the end of the third quarter reported an investment portfolio totaling $131.4 million. I am also pleased to announce that on November 7, StoneCastle raised an additional $36.8 million gross, $35 million net proceeds representing an additional 1.6 million shares.

I would also like to note that within the N-2 filing, StoneCastle Asset Management agreed to waive its management fees on the new capital raised through August 2015 subject to certain provisions. A final prospectus for the follow-on offering is available through our underwriters which was led by Keefe, Bruyette & Woods.

We decided to raise additional capital primarily to allow us to make larger investments as requested by many of our target banks. This position sized limit also expands the universe of target banks that have a larger capital need than we could previously service. Let me explain further.

Because we elect to be treated as a RIC, we must comply with certain requirements under subchapter M of the IRS code and as a registered management Company under the Investment Company Act. One of the RIC requirements is a diversification asset test. Prior to the recent capital raise, sometimes the test results restricted the size of deals we could do which became a hurdle in certain investment discussions. With the new capital raise, we can consider more deals that require larger initial investment amounts which we believe will enhance the appeal of our offerings and satisfy the needs of a broader range of qualified community banks.

Now let me turn to the investment activity during the quarter. Investment highlights this quarter included a $3.1 million fixed-rate debt issued by Preferred Term Securities, $3.3 million of fixed rate cumulative perpetual preferred stock issued by National Bancshares and in addition, we also acquired $11.3 million of fixed rate cumulative perpetual preferred securities yielding between 6% and 7% which I will explain in a moment we intend to hold for the short-term.

However subsequent to the end of the third quarter, we acquired approximately $10 million of securities which are expected to yield 9% to 10% on our cost basis. I will share more details on these transactions on our next call next quarter.

Many of our portfolio investments this quarter were in more liquid securities to be held for the short-term and to be ultimately redeployed as we continue to source and carefully evaluate investment positions into higher-yielding long-term investments. By contrast while BDCs typically experience more frequent portfolio turnover of one to two years, the duration of our intended long-term investments can range from five to 10 years or longer. Given StoneCastle's long investment holding period, it is therefore important for us to be patient and rigorous with each and every potential long-term investment. We believe the investment process we've developed is essential to the execution of this strategy.

In some quarters like this one we may complete few or even possibly no long-term investments. When that is the case we will actively deploy our available capital into what we believe are more liquid higher quality securities.

As I mentioned earlier, I want to share an example of a recent transaction that the investment committee evaluated and approved. Let me remind you that we have a four-person investment committee with nearly 80 years of combined investment experience in banking. The committee identified Ohio as one of several markets with a high number of community banks which could be right for consolidation. We identified NB&T Financial Group Inc., the financial holding company for the National Bank and Trust Company as a potential target. Founded in 1859, NB&T operates 22 branches in Southwest Ohio with approximately $650 million in total assets, $387 million in net loans and about $561 million in total deposits. Our analysis concluded that NB&T had been a high quality consistent performer through many economic cycles and was paying a common dividend yield of approximately 6%. Yet due to its smaller size and thinly traded stock, we believed the franchise was undervalued in the public markets. Based on our analysis of the company and the quality of the market's underlying the bank's footprint, we believed there was strong potential that NB&T's high quality deposit base would be attractive to potential acquirers.

Beginning in the second quarter we began accumulating NB&T's common stock. And consistent with our investment thesis in early August, NB&T announced its sale to Peoples Bancorp of Ohio. While we accumulated only a small position at NB&T, the investment resulted in a realized capital gain of $171,000 representing a 46% return on capital or a 1.5 times multiple on our investment. While this had a relatively small impact on our overall quarterly results, it represents the type of capital appreciation investment we seek. This transaction also represents a good example of how we holistically examine banks, their markets and other factors to form an investment thesis.

Now let me highlight the current investment pipeline. We continue to actively engage in due diligence with a significant number of banks and add to the pipeline of prospective investment candidates. I have been particularly impressed by the quality and size of the deals being sourced by our growing roster of third-party relationships including advisors, several state bank trade associations and other industry relationships. As we expected, the awareness of StoneCastle Financial among small and regional investment banking advisors that cater to community banks is growing and we expect an increasing number of referrals from this channel over time.

Recall we look at the pipeline in two ways, the roster of pending closings and a broader list of pipeline prospects. The pending closings mentioned in our previous call included several banks that ultimately did not meet our investment criteria as we delved deeper into due diligence and several banks that delayed their transactions. Our disciplined approach to due diligence and our commitment to credit quality resulted in the investment committee's decision not to proceed forward on a few of these potential investments and as a result as I mentioned earlier, more of our available capital was invested in more liquid securities held for the short-term.

We remain confident that our pipeline of pending and prospective deals will continue to grow and result in solid long-term investments.

Now I would like to highlight some of this quarter's financial results. Our gross investment income for the quarter of approximately $2.75 million was 25% higher than the second quarter. The investment income from deployed capital will continue to grow as we redeployed the more liquid securities into long-term high-yielding assets. During the quarter, we invested $17.7 million including $6.9 million in nine new positions. A full quarterly report of portfolio holdings can be found in our N-Q filed with the SEC.

For the third quarter, approximately $5.9 million of our holdings were called for redemption by their issuers at par resulting in a realized gain of $155,000. These gains along with other sales resulted in total realized net capital gains of approximately $323,000.

Pat will have more details on the NAV as well as the financial results for the Company so I would now like to turn the call over to Pat to review those results.

Thank you, Josh. First I would like to walk through the income items for the third quarter.

StoneCastle Financial had a gross income of $2,754,127 and total operating expenses for the third quarter of $1,248,724 resulting in net investment income of $1,469,403 or $0.31 per share.

Let me highlight a few expense items. First, investment advisory fees. For the third quarter investment advisory fees totaled $538,841 or approximately $0.11 per share. Fees related to the exclusive arrangement with the ABA were $126,027 or $0.03 per share. As I've mentioned in prior calls, these fees will total $500,000 annually.

The increase in net assets resulting from operations for the period was $1,242,813 or $0.27 per share. This was comprised of the following three items. Net investment income of $1,469,403, realized capital gains of $323,207, and a net decrease in unrealized appreciation on investments of $549,797.

Moving on to changes in the net asset value per share for the period, at the end of the third quarter, the net asset value was $22.08 per share, a decline of $0.23 per share from June 30. This change in net asset value was due to three components; net investment income of $0.31 per share, net realized and unrealized loss on investments of $0.04 per share, and finally, the cash dividend distribution of $0.50 per share paid to shareholders of record on September 12.

Finally, let me review our credit facility from Texas Capital Bank. Of the committed $45 million revolving credit facility, $38 million has been drawn and invested as of the end of the third quarter. According to our unregulated investment Company rules, we may borrow only up to 33.3% of our total assets. Our current leverage is 26.7%.

Now I would like to turn it back over to Josh.

Thank you, Pat, and thank you to everyone for listening especially our new investors.

StoneCastle Financial will continue to be managed with a long-term view making investments that will generate significant cash flows over a long investment period and I especially want to thank you, our shareholders, for your continued support of our Company.

Now, operator, we'd like to open up the call for questions.

(Operator Instructions). Greg Mason, KBW.

Great, thank you, good afternoon, gentlemen. Could you talk a little bit about the yields on the new investments this quarter as well as the yields that you're seeing on the pipeline of new opportunities?

Sure. So the yields haven't really changed much. They still range from on the low-end the mid-8%s to on the high-end couple of things slightly over 10% probably most of them though between 8% and 9%. Hasn't really changed pricing wise in the last year. So that tends to be the range and really consistent with last call and the call before the upfront fees the banks are paying tender range in that 2% to 3% range. Most of them 3% although sometimes we do have to share that with the agent who is referring that in but that's typically been the pricing. We haven't seen a whole lot of change in that pricing.

All right. And then if we think about the capital from the equity raise plus leverage capacity on that you've got about $50 million of new capital available to you. You obviously talked about the pipeline is robust but what is your view in terms of timing of deploying that capital?

Well it's hard to say for sure. We're working as quickly as we can to process. We have a few signed deals that we're processing. No guarantee they get closed but the banks have executed and we do expect more behind that but to give you an exact date on when that would happen it's hard to say. We'd like to be hope we get it done sooner than later but we're going to work as hard as we can to get it deployed.

Do you think just for context as we think about the deployment of the IPO capital took almost a year now to get it deployed, are you considering that type of six to nine month time frame or would you expect it to be faster for this capital?

It's hard to say. I mean the IPO capital plus leverage was fully deployed midsummer. We've been sort of just rebalancing as we've had some calls and some of the more liquid into more permanent things into the fall so I would not assume it's going to be longer than the IPO. I imagine it should be shorter just because we have raised fewer dollars in this raise, south of $40 million, and we've had a year of developing a clientele list of deals that we intend to close. We've only turned down a few as we mentioned on the call that didn't make our credit standard. We haven't really lost deals to anyone else. A lot of the deals are just still in the works.

We had a call for example with a bank today who is still in negotiation with the bank they are going to merge with. We are just waiting for that deal to get signed and then they want to get the deal done. So we can't really speed those along but what we're doing it is continually building this roster of transactions to close when they come to fruition which probably is not a shock to a lot of the investment bankers who cover the banks out there that deals are all in the talks and they are getting done as they get done. But what's really encouraging to us is the number of calls we're getting to fund a portion of those deals. That keeps increasing.

Great and then one last question on the unrealized depreciation this quarter I'm sure some of it was a reversal for the gains but could you break out what was the reversal versus what was actual depreciation in the quarter and maybe what caused some of that?

This is Pat. It was really kind of a general across the board; we had a general decline or a decrease in our appreciation or an increase in our depreciation over across the board. There weren't any significant one-liners that accounted for that. On the gain side, we had mentioned that the NB&T of about $171,000 in gains, we had also sold some pretzels for about $178,000 in gains so really the two of those plus some other small sales made up the $323,000 in realized gains for the quarter.

Okay, great. Thanks, guys.

(Operator Instructions). Ben Chittenden, Oppenheimer.

Thanks guys and good afternoon. If you could talk a little bit more about some of the delays you mentioned in the pipeline. I mean it sounds like some of it's just coming on the regulatory side from getting deals approved but did any of it have to do with commitment level caps that you mentioned that now that they are gone some of those could accelerate closings in the fourth quarter?

The commitment level cap that we had and again just to explain on that, it's really the IRS rule it's not an SEC rule that we can have 50% of our portfolio has to be in 5% or smaller position sizes and the other 50% can be as big as tow positions of 25% each. So we kind of ran out of excess capacity for above 5% position sizes.

So I can't say that that had us lose deals but our being unable to get those larger transactions done forced some of those banks to have to find the balance of capital elsewhere and unfortunately for them a lot of folks can't act as quickly as we do because they typically have to go round up local dollars. So that sort of delayed. There are deals which we can't give out specifics but as we mentioned, we closed a couple of deals right after the quarter ended and Q4 is looking quite strong and these aren't deals that came up in the last month, these are deals that have been working since the summer. So this is the Q3 pipeline that has drifted into Q4 and now we can actually take larger positions. In fact we're looking at a number of positions if they were to close that could be $10 million, $13 million or $15 million. So the position size makes a difference and the delay in these transactions is part regulatory, part the banks having to complete the full capital structure because as you can imagine a bank can't rely entirely on preferred stock for its Tier 1 capital. It needs a mix of common and preferred if the raise is significant. So for some of these, it does require them to get another leg of their capital raise done before they can complete the transaction.

Okay, that's really helpful. And then just more of a bigger picture question I mean obviously the markets have kind of pushed out their expectations for when rates are going to rise. Are you noticing from the bank managements you've talked to that they are baking that expectation in and is that leading to any of them throwing in the towel and saying okay, net interest income is not going to rise for little bit longer. I'd rather just do an M&A deal now and maybe that's collapsing the bid ask (technical difficulty).

So anecdotally I would say nine out of 10 community commercial bankers didn't agree that the Fed was going to raise rates anytime soon. They have been reasonably resolved as we hear when we're out among those banks when we were at the ABA conventions hearing discussions and panels about this, they are pretty well set that rates are not rising anytime soon and are sort of well it's an overused term but hunkering down for an extended period of low rates. Of course they could all be wrong.

What you're not seeing is you are not seeing banks which we did see at the beginning of this year as we're coming to the end banks are shortening their securities portfolios and the duration there. They are not lengthening. We had see more negative gap trends. We're not seeing that accelerate. So I think banks are recognizing okay in the short-term our ROEs aren't going to change very much and I believe -- and don't quote me on this -- but I think I just saw the recent stats that the average ROE of banks under $10 billion in the country last quarter was around 9% and change which was up from high 8%s the previous quarter. So I think that what they are really doing is rationalizing cost.

We have seen a step up in the number of loans that these banks are putting on. They are increasing the pace of loan deployment pretty broadly. We see that both from our direct capital side but also StoneCastle Partners cash management business where we've had a lot of reverse inquiries from banks asking for more deposits which typically is only because they have loans to fund.

So long answer, I do think the view is rates will stay low for an extended period of time which could be even longer than the Fed and of course we'll see how accurate the Fed's prediction of itself comes out.

Sure, no, definitely. Well thank you. That's it for me.

(Operator Instructions). We have no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Thank you, operator. Well thank you everyone for participating. Of course, this is not the only opportunity to ask us questions. Please don't hesitate to call us directly. We're available any time to answer your questions about what's going on of course we have to be subject to Rule FD but other than that, we want to make sure that we're as transparent as we can be with you.

Have a wonderful evening and thank you for listening in to our call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.