ArrowMark Financial Corp (BANX) 2017 Q1 法說會逐字稿

Good afternoon. Before we begin this conference call, I'd like to remind everyone 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 semi-annual 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, 2017. The company undertakes no duty to update any forward-looking statements made herein. All forward-looking statements speak only as of today, May 4, 2017.

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

Thank you, Rachel. Good afternoon, and welcome to StoneCastle Financial's first quarter 2017 investor call. In addition to Rachel, joining me today is George Shilowitz, President; and Pat Farrell, our Chief Financial Officer.

I'd like to start the call today with a review of StoneCastle Financial's quarterly results and portfolio highlights, along with commentary on the company's relative value and strategic opportunities. Then, I will turn the call over to Pat, who will provide you with greater detail on our financial results before I open up the call for questions.

I'm pleased to report that StoneCastle's total earnings for the quarter were approximately $3 million, or $0.45 per share. This was comprised of net investment income of approximately $2.6 million, or $0.39 per share, and realized capital gains of approximately $391,000, or $0.06 per share. The company's net asset value per share was $21.32 as of March 31, up $0.10 from last quarter. Total assets were approximately $193 million, with 96% of total assets invested. The estimated annualized portfolio yield was 9.17%, up from 9.08% the prior quarter and up 19 basis points year-over-year.

During the quarter, StoneCastle Financial invested $3.8 million in Reliance Bancshares, adding to our current position. StoneCastle also sold a privately held equity investment, Pioneer Bancshares, for $1.9 million. We realized a capital gain of approximately $443,000, which equates to a return of 29% over the cost of this investment. The company also had 3 full calls that totaled $7 million and partial calls or pay downs totaling $5.5 million for the quarter. For details on the rest of the portfolio, the full schedule investments can be found in the company's SEC filings and on the company's website.

Now I'd like to comment on StoneCastle Financial's relative value in the context of the market. At quarter-end, StoneCastle's estimated annualized portfolio yield of 9.17% was 677 basis points over the 10-year treasury rate of 2.4%. In addition, our portfolio generated a 544 basis point premium over the Bank of America, U.S. Corporate BBB Effective Yield index as of March 31, which was yielding 3.73% at quarter end.

Looking at historical data, we found that credit spreads on banks versus similarly rated corporates are almost the widest they have been in over a decade. Arguably, the relative value of our stock price versus NAV is now even more pronounced with the recent run up in prices for bank equity investments. Over the past 4 months, we have seen bank stocks move up presumably, due to expectations of favorable future earnings. If this is truly the case, our bank credit spreads are presumably stronger and more stable; and in theory, our investment should be considered more valuable as well.

As I mentioned last quarter, several macro considerations are providing tailwinds for the sector, including regulations, interest rates and a continued consolidation of the industry. Further, the adoption of mobile technology has put small banks in a more level playing field with larger banks, all areas that will provide good growth prospects for the industry. For these reasons, we believe it is a great time to invest in community banks and StoneCastle is the only publicly traded investment company dedicated to investing in community banks.

On the topic of growth, our larger market cap had two positive consequences that we would like to discuss. First, we have a pipeline of attractive banks in which to invest and would like to have more cash to deploy. Second, we have had conversations with a number of institutional investors attracted to the stock, but are reluctant to invest due to our low share trading volumes. They are unable to accumulate meaningful positions without significantly moving the share price and they require increased liquidity.

We're actively exploring strategies that would allow the company to grow, while maintaining the integrity of the credit quality, safety and soundness of the portfolio. As good stewards of investor capital, we take into account a long-term view of our business and protecting shareholder value. One option is to try to close another accretive pool transaction to help fulfill pipeline investments. The other is to use our existing $150 million [ph] shelf registration in the short term for private placements of public stock at or above NAV.

Investors often ask about the execution of another pool transaction. As I've mentioned in the past, executing another transaction requires both originating enough banks in the short time period, while having receptive capital markets; or stated another way, the ability to execute has just as much to do with market timing as in our ability to source investments.

While this sounds like a lot of moving parts, we have successfully done this before. For any new investors on the call, our first pool was completed in October 2015 with 35 banks across 24 states. The company retained the preferred shares, investing $45.7 million ph , with an effective yield of 10.49% in an accretive transaction. An important point I want to make is that a pool allows us to obtain valuable 10-year fixed rate term financing. We will keep you apprised of StoneCastle's progress for a second similarly structured pool.

Related to a private offering of public stock, we encourage investors like family offices, financial advisors or institutions interested in the investment objective of StoneCastle to consider purchasing the company shares at or above NAV even today. For yield investors, the transaction should be a compelling way to establish a sizable position without affecting the market price of the stock. To put this into perspective, even at the March 31 NAV of $21.32, the StoneCastle investor would earn a current yield of approximately 7%. We believe, with the current NAV, there is upside embedded in the price of our stock, because even at $25 per share, an investor would still be earning 200 basis points over the aforementioned BofA BBB index.

In conclusion, we continue to explore all options available to us in the capital markets. These examples are not mutually exclusive and we believe we have the ability to execute on these opportunities over time.

Now, I want to turn the call over to Pat to discuss the financial results and provide details on the underlying value of the company.

Thank you, Josh. As I do each quarter, I will present the financials by going through the detailed components to help you understand the value of the company.

The net asset value at March 31 was $21.32 per share, up $0.10 per share from the last quarter. The change in NAV for StoneCastle is comprised of 4 components: net investment income; realized capital gains and losses; the change in value of the portfolios investments; and finally, distributions paid during the period. Let me walk through these components.

Total earnings for the quarter were approximately $3 million, or $0.45 per share. Earnings were comprised of net investment income for the quarter of $2.6 million, or $0.39 per share, and a realized capital gains of over $391,000, or $0.06 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 $4.5 million, or $0.69 per share, up over $305,000.

Now, I'd like to review the company's operating expenses, which are comprised of advisory fees, interest expense related to our use of leverage, ABA fees and various other expenses. Net operating expenses for the quarter were $1.9 million, or $0.30 per share, up approximately $255,000 from the prior quarter. This increase was primarily due to an increase in interest expense related to increasing LIBOR rates, as well as an increase in advisory fees related to the waiver in the previous quarter.

The second component affecting the change in NAV for the quarter is realized capital gains and losses. Net realized capital gains for the quarter were $391,496, or $0.06 per share. This was primarily the result of the sale of Pioneer Bancshares, Inc., a position the company held since 2014. This sale generated $1.9 million in proceeds and a gain of approximately $443,000, or 29.5% over the cost of the security.

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. For the first quarter, the unrealized appreciation of the portfolio increased by approximately $105,000, or $0.02 per share.

As I note each quarter, the vast majority of the portfolio continues to be independently marked from broker dealer quotes. For the quarter, over 98% [ph] of the portfolio prices or marks reflect a minimum of 2 quotations. These represent an independent third-party assessment of the current value of the portfolio, which is used to calculate the net asset value of the company each quarter. At quarter-end, closing stock price of StoneCastle Financial traded at a discount of approximately 5.5% less than the actual market value of the net assets of the company.

The fourth component affecting the change in net asset value is distributions. Cash distribution for the quarter was $0.37 per share, paid on March 29, 2017 to shareholders of record on March 22, 2017.

In summary, we began the quarter with a net asset value of $21.22 per share. During the quarter, we generated net income of $2.6 million, net realized capital gains of approximately $391,000, and the unrealized value of the portfolio investments increased by approximately $105,000. Some of these components offset by a distribution of $0.37 per share resulted in a net asset value of $21.32 per share at March 31.

At quarter-end, the company had total assets of $193.4 million, consisting of total investments of $186.2 million, cash of $3.6 million, and other assets of $3.5 million, which includes receivables and prepaid assets.

Now, let me update you on our credit facility. As of March 31, the company had $52.75 million drawn from the facility. In accordance with the 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 27.3%.

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

Thank you, Pat. Now, operator, we would like to open up the call for questions.

(Operator Instructions) Our first question comes from the line of Devin Ryan from JMP Securities.

This is Brian McKenna for Devin. First one for me, obviously we're still waiting to get the specifics of financial services regulatory reform, but are you seeing anything that would suggest smaller banks might need less capital than they currently have, which could impact their appetite to raise capital in the foreseeable future or vice versa anything that would drive an acceleration in the need for capital or maybe to qualify for an offering?

That's a great question. There is nothing that we're seeing on the horizon that's going to allow banks to have less capital. There's been mixed reception to Jeb Hensarling's view of banks actually increasing their capital to be exempt from certain Dodd-Frank requirements. So I don't know if that's going to go through or not, we'll see. If that were, then there's going to be a rush for more capital, but I don't see anything on the horizon either internationally nor domestic that would suggest lower capital standards even on the table.

Okay, got it. And then next, it appears that you're still not receiving dividends from the Chicago Shore investment as of March 31, but can you just provide us with an update on that investment and if there's any expectation for the dividend to resume in the foreseeable future?

Absolutely. So their Q1 financials were stable to last quarter. They made a small profit, their non-performings are about the same which were down last quarter. Capital ratios are slightly up. They're still not completely in line with their directives for capital ratios. So, I don't think it's going to happen in the immediate term, but we see nothing that gives us any cause for concern in degradation to the credit, it's stable to improving, which was second quarter in a row of profitability. So, we're still in a waiting mode and I'd be using a crystal ball if I were to forecast when they're going to come back online.

Sure. Okay, that makes sense. And then just finally here, last call, you mentioned one way of improving the yield of the portfolio was by negotiating the terms of your debt. Is this something you're still looking to do; and if so, where are you in the process?

Good question. We're actually quite far along in the process, but we haven't signed documents with the lender yet. We're quite close, we're hoping to have it for this call. I'd say, we have a very high confidence level that if you go through but there's no guarantee; and if so, we're not really at liberty at the moment to share. But if it goes through as it's been negotiated, it's going to be quite a meaningful savings each quarter in interest expense. So, we'll hopefully have something for everyone either by the next call or maybe even before if things go well.

(Operator Instructions) Next question comes from the line of Christopher Testa from National Securities.

I was just wondering how much in prepayment fees and OID acceleration was there in the quarter given the significant amount of securities called?

For prepayment fees, very little actually. Actually very little for the quarter. It's approximately maybe $20,000 [ph], very small.

Got it. So, what was the primary driver of revenue growth given the portfolio was mostly flat?

It was a full quarter of the investment we put on at the end of the fourth quarter, Baraboo, if you remember that. So, we closed and it's a very, very end of the year, so we had a full year. That was probably the single greatest driver. There are some other ones but that's the single greatest driver of the improvement in the portfolio yield.

Right. That was, if I recall correctly, be a 11% or so yield on the term loan?

That closed on December 28, so that's why it's such a large component for Q1.

Right. Okay, that makes sense. And just curious if you guys have seen any change in community banks, obviously the smaller ones being able to access public debt markets in order to raise capital, or if they're still kind of locked out from that and relying on specialists such as yourself?

No, nothing has changed on that horizon. Smaller banks, especially those that don't have a public rating from an NRSRO, they really don't have much access outside of folks like us. At the moment, it seems to be just us. There were some folks who were active alongside of us a year or 2 ago that we're not seeing in the market anymore. I see they have moved on to other things, they were more hedge fund like. So, it's really just us. We do have a decent pipeline. We are short on cash which, of course, is a challenge. You don't want to make lots of promises to banks of delivering capital if you don't have the capital to deliver. So we've been trying to balance the amount of outbound with the amount of cash. So, as we mentioned in the call, Chris, we are exploring ways of trying to raise the capital through a private placement of public stock for folks who have been trying to buy in, because I can't stress enough. Even at $23, $24, $25 a share, we're still hundreds of basis points wide to a comparable credit quality index of sort of triple BBB quality. So, we're just trying to find ways to grow the size of the company so we can satisfy the pipeline, diversify our exposure for investors.

Right, I agree. The biggest challenge seems to be just being capital constraint, which is just a result of where the public stock trades. And I'm just curious, is there any ability on your behalf to have some floating rate investments as well? I know that the main source of funding is the credit line, which floats, which obviously pressures our NII with rising rates. Just curious if that's a product that is possible to be offered whether it's better preferred.

Well, academically, of course, it could. The practical though, Chris, is the majority of the markets for either bank preferreds, which are less so common and sub debt is almost at least within the 5-year, first 5 years fixed rate. I don't [ph] think I've seen a floating rate sub debt in a decade. Now that said, that doesn't mean that we can't either buy an interest rate cap or look at the interest rate swap to take some of our credit facility entered into a fixed rate equivalent. So, those are things that we're exploring and we do from quarter-to-quarter.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for any closing comments.

Thank you, operator, and many thanks to you our shareholders for listening to the call, and we hope you have an enjoyable summer and look forward to speaking to you next quarter.

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