ArrowMark Financial Corp (BANX) 2015 Q1 法說會逐字稿

Greetings and welcome to the StoneCastle first-quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Rachel Schatten, General Counsel for StoneCastle. Thank you Ms. Schatten, you may begin.

Good afternoon. 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 March 31, 2015. The Company undertakes no duty to update any forward-looking statement made herein. All forward-looking statements speak only as of today, April 30, 2015. 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 first-quarter 2015 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 highlight StoneCastle Financial's quarterly results, review the current portfolio and comment on the Company's long-term-oriented strategy. Pat will follow with specific details on our financial results.

So this past quarter, our financial results showed solid progress. The Company reported gross investment income of $3.2 million or $0.50 per share, our sixth consecutive quarterly increase. Expenses were reported at $1.37 million, down 19% from the fourth quarter. Pat will provide more details on expenses later in the call. Net investment income was $1.9 million or $0.29 per share, up 47% from the prior period, reflecting a full quarter of investment income from capital deployed late in the fourth quarter.

The Company also realized capital gains in the portfolio of approximately $943,000 or $0.14 per share of which approximately about $226,000 was due to call notices in the quarter. The balance of the gains came from opportunistic portfolio sales. As we have stated, the Company will continue to focus on providing current income in the portfolio, but also take capital gains where it tactically makes sense. Total distributable ordinary income consisting of net investment income and capital gains amounted to approximately $2.8 million or $0.43 per share.

In closing out the financial highlights, I am pleased to report that net asset value ended the quarter at $21.90, an increase of $0.04 from last quarter. Now let me spend a few minutes on capital deployment and the investment portfolio. In the quarter, the Company deployed $55.2 million in 17 investments. Although we continue to make investments that meet our criteria, our net deploying of assets was again offset by call notices.

During the quarter, we experienced redemptions of $20.6 million, 92% of which were TARP securities. At present, TARP investments represent $50.8 million of our assets. The higher-than-expected level of redemptions from TARP has masked the fact that we have been consistently deploying capital since our IPO. Therefore, given that TARP securities represent an ever smaller portion of our portfolio, further redemptions should have less impact on our pace of asset deployment. Further, and an important point worth reiterating, is the fact that nearly all new originations are structured with five-year call protection, reducing the near-term risk of redemptions.

Moving on to a brief overview of our portfolio investments, on March 31, the Company had total assets of $186.2 million. Of those assets, 90% were securities investments with a fair market value of $167.3 million, consisting of 45% preferred securities, 30% trust-preferred securities, 21% debt and senior term loans and lastly equities of approximately 4%. The balance of the Company's total assets is invested in cash and other assets. A detailed schedule of investments can be found in today's NQ filing.

I would like to take a moment to reiterate our core strategy and the market environment in which we find ourselves. While we have made steady progress in executing our investment strategy, deploying over $250 million in assets since inception, the pace of our portfolio's uninvested assets has been slower than we anticipated due to several factors. First, as noted earlier, redemptions of TARP securities have been higher than expected, reducing continuous deployment of our total assets. We expect this redemption issue to decline as we move forward.

Second, the timeframe for banks to obtain internal and regulatory approvals for capital transactions has been longer than we expected and much longer than we experienced in the past decade. Most material bank transactions such as mergers, acquisitions or capital issuances require regulatory approval. We do not foresee this timeframe issue changing significantly anytime soon.

In the near term, the slower deployment of uninvested assets has extended the timeframe for the Company to reach a level of recurring net investment income that will cover the current quarterly distribution level of $0.50 per share. This is a topic the Board will discuss further at the May 19 Board meeting. While the pace of growth may be somewhat frustrating, it hasn't changed our long-term view of the business or our investment approach. We remain focused on credit quality first and foremost with asset deployment and growth second. We firmly believe that credit quality will differentiate us from investment vehicles that go deeper into the credit spectrum and utilize higher amounts of leverage.

We believe that investors may be looking at closed-end investment management companies with too broad a brush and not comparing apples to apples. While there are a number of investment vehicles that provide current income and are focused on yield, investors may not fully recognize the wide variances in credit quality among them. Currently, StoneCastle is frequently compared to BDCs that typically focus on investing in single B or lower-rated debt. In contrast to BDCs, more than 75% of StoneCastle's investments are BBB or higher equivalent credit quality as measured by Kroll Ratings.

Further, StoneCastle utilizes significantly less leverage than BDCs. In our view, vehicles more comparable in credit quality to StoneCastle are the investment-grade bond and preferred stock funds, which today are trading at yields generally between 3% and 6%. We believe that StoneCastle Financial, even at its current level of our current net investment income, represents an attractive investment alternative for investors while we continue working towards our originally stated goal for net investment income. StoneCastle Financial continues to take a long-term view toward creating shareholder value for present and future investors. Now I want to turn the call over to Pat Farrell to discuss the financial results in greater detail.

Thank you, Josh. As in the last call, I will take some extra time today to discuss our quarterly results in detail and specifically discuss the various components of the financials. The net asset value at March 31 was $21.90. The net asset value for StoneCastle Financial is affected by four components -- net investment income, realized gains and losses, the change in unrealized appreciation or depreciation of the portfolio and finally, distributions paid during the period.

So let me walk through these components. Net investment income for the quarter was $1,858,317.00, or $0.29 per share. Net investment income reflects gross income from dividends and interest received from our portfolio investments minus operating expenses. Gross income for the first quarter was $3,223,384.00, or $0.50 per share. The Company's operating expenses are comprised of various expenses such as advisory fees, interest expense related to our use of leverage, custody and administration fees, legal fees, ABA fees and other expenses. Operating expenses for the quarter were $1,365,067.00 or $0.21 per share, down 19% or $325,133.00 from the fourth quarter. In last quarter's call, I mentioned we experienced increases in certain expenses that were non-recurring such as certain professional fees and printing expense. We believe first-quarter expenses represent a more normalized quarterly expense run rate.

Secondly, the realized gains and losses reflect securities which were sold or called during the quarter. For the first quarter, this amounted to a gain of $942,849 or approximately $0.14 per share.

The third component, changes in unrealized appreciation or depreciation of the portfolio, relates to how the value of the entire investment portfolio has changed from the previous quarter-end to the current quarter-end. Each quarter, the portfolio is valued by market quotations, broker quotes and other valuation sources. For the first quarter, the value of the portfolio increased $732,212. This amounts to an increase in the net asset value of $0.11 per share for the quarter.

The fourth component affecting the net asset value was distributions. The declared cash distribution for the quarter was $0.50 per share, paid on March 30, 2015 to shareholders of record on March 20, 2015. To recap, we began the quarter with a net asset value of $21.86. During the quarter, we generated net income of $1,858,317, unrealized appreciation of $737,212 and realized gains of $942,849. The sum of these components offset by the dividend distribution resulted in an increase in net asset value of $0.04 for the quarter resulting in a period-end net asset value of $21.90 per share.

Now let me update you on a credit facility syndicate led by Texas Capital Bank. As of March 31, the Company had drawn $33 million of the facility. In accordance with the current regulated investment company rules, we may only borrow up to 33.3% of our total assets. Our leverage percentage at the end of the quarter was 18%. Now I'd like to turn it back over to Josh.

Thank you, Pat and thank you to everyone for listening. I want to thank you for your continued support of StoneCastle Financial. Now, operator, we would like to open up the call for questions.

Thank you. (Operator Instructions). Greg Mason, KBW.

Good afternoon, guys. First, can you talk about why the decision to sell the $16 million of preferred term securities? It's a pretty high yielding asset and I know you guys have been wanting to grow your assets, so why voluntarily sell that paper off?

Well, we do like that security and we saw an opportunity -- we thought that it had gotten to a point that was fairly valued. We did sell it and we found that there were credits in that securitization that we liked and we had the opportunity to buy those credits.

You turned around and used that capital to buy credits out of the securitization?

We don't want to go into great detail. We still see an opportunity to pursue assets in that transaction and so we would rather not go into the detail. There's still more opportunity to purchase. But we did not give up a lot of income.

Okay. And can you talk a little bit, Josh, there's been a couple SNL articles talking about you are putting together kind of a pool of assets where StoneCastle is going to hold the equity and I think raising $300 million -- can you just talk about what is going on there and how that strategic venture could impact BANX?

Sure. So I think we mentioned in our last call that we were working on a few strategic alternatives to be able to generate more value for investors. One of the challenges that the structure of StoneCastle Financial faces is limitation on leverage relative to BDCs or other vehicles. And given our specific background in understanding how to finance bank capital efficiently, we are working on the transaction. As I said last time, no guarantee that the strategic opportunities work, but we're working on trying to find a way to attract a larger universe of banks that might otherwise not be willing to pay 8.5%, 9%, but will pay a lower rate, but be able to finance that for term very efficiently to create paper that would be significantly higher yields than we can attract directly onto our balance sheet, if it works. So the goal here is to bring a larger universe of banks that we otherwise might not be able to be price competitive on and turn it into an asset, if everything were to work, that could be a double-digit rate of return on the piece that we hold.

In terms of -- do you have any ideas in terms of timing and size and the investment size for BANX?

It's too early to tell. All good questions. We were hoping to do something in the spring. We didn't get it done as easily as we would. We're now targeting summer, but it's very much a project in the works. So I don't know what the size would ultimately be. It likely would not be larger than $300 million. It definitely wouldn't be as small as $100 million, so that's kind of the range. But that's just one of our strategic initiatives. We have a few others as well of ways that we can try to increase the returns to investors and attract a very high quality bank portfolio.

Okay. And then one last question. If I -- just looking on your press release and what you talked about, invested $55 million. You sold $16 million and received repayments of $20.6 million. Looks like about $36 million of repayments, yet $55 million of new investments, almost $20 million of portfolio growth, but it looks like the portfolio actually shrank by $3 million. I'm just having trouble reconciling the investments repayments relative to the size of the portfolio shrinking by about $3 million.

Sure. There are some securities that we have been able to extract gains from during the period through inter-quarter purchases and sales. For strategic reasons, I'd rather not go into our trading strategy, but that's the part that's making up the difference you're not accounting for is during the period purchases and sales that we were able to profit from.

Okay. So is it more appropriate to just assume the portfolio going from $170 million to $167 million? That's really what we're looking at in terms of net deployment of capital, negative $3 million in the quarter?

That's about correct.

Okay, great. Thanks, guys. Appreciate it.

(Operator Instructions). Dan Nicholas, Robert W. Baird.

Thanks, guys. Good afternoon. Just looking at the origination fees for the quarter, based on the originations, the $55 million would have expected a little bit higher origination fees. Just wonder if you could kind of update us with what you are seeing in the market in terms of origination fees and if there's anything out of the ordinary this quarter that I might not be thinking about?

So from the $55 million, that is new investments, but I wouldn't term it new originations. So originations, we did a number of deals in the quarter. It was a minority portion of the $55 million, so you can't take the roughly $15,000 of origination fees over the $55 million and say that's the market. The deals we're doing that are new originations still range anywhere from 1 point to 3 points upfront, but there were a number of purchases of secondary securities or group transactions where we weren't driving the deal, but part of the deal, so there weren't upfront fees that we were able to capture there. So the $55 million again is the total deployments during the quarter, but that's not all new way investments.

Got it. Okay, that makes sense. And just kind of broadly looking at the portfolio now, you mentioned I think about 42% preferred, 30% troughs give or take and then on down the line. How are you all thinking about where you might ultimately like the mix of the portfolio to shake out, or is that something you kind of think about, or is it just opportunistic as we go?

It's more opportunistic. I wish we had the choice of what securities we get to do with which banks, but it's usually the other way around. It's whatever structure is appropriate for that particular bank and what they are trying to achieve. One of the dynamics that has changed in the past year was Kroll Ratings about a little over a year ago starting to rate banks over $1 billion, only over $1 billion in assets and give them, if they are healthy, investment grade BBB ratings. That took -- it was a very small piece of the 6500 bank universe. Maybe it's about 8% of that universe who we might have been able to price up in the mid-8s to 9s. Now they are able to go to the capital markets and do deals for maybe banks near $10 billion could be high 5s and banks near $1 billion or $2 billion maybe it's in the mid-6s or 7s. So that took a piece of the universe away.

But also at the same time, not more than maybe four weeks ago, the Fed Reserve enacted the new Small Bank Holding Company Policy Statement, which, on the flipside of that though, the positive side, is now banks between $500 million and $1 billion of assets, they are now subject to the Small Bank Holding Company Policy Statement, meaning they can use a greater percentage of debt in their holding company structure, which now creates opportunity that doesn't fit the Kroll definition of $1 billion plus but gives us possibly -- I think the count was 600, 616 banks between $500 million in assets and $1 billion as at least the potential addressable universe of banks that could use more debt.

So we probably lost a comparable number that now can price tighter than we'd like because of Kroll, but the flipside is we've gained a theoretical 600-ish institutions that could fit. So from the preferred stock standpoint, we're still talking to a number of banks who need and want preferred stock either at the bank level or holding company level that are above $1 billion, but we've also had an increase in the number of banks between $500 million and $1 billion who are looking for debt.

I'll add one other point on the -- while there are more banks looking for it, Josh mentioned earlier that there is some headwinds with regulators in terms of approvals. One thing that is appealing though about the debt is it is much easier actually to get approval for that versus preferred transactions.

Interesting. Okay; all right, that's helpful. Thanks, guys.

(Operator Instructions). There are no further questions in the queue. I would like to hand the call back over to management for closing comments.

Thank you very much, everyone, for participating on the call today. We're keeping busy with work and working on the transactions and look forward to speaking to you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.