ArrowMark Financial Corp.
Q2 2015 Earnings Call Transcript

Published: 14 Aug 2015

[Operator:]

Welcome to the StoneCastle Financial Corporation’s Second Quarter 2015 Investor Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Thank you, Rachel, you may now begin.

[Rachel Schatten:]

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 June 30, 2015. The company undertakes no duty to update any forward-looking statement made herein. All forward-looking statements speak only as of today, August 13, 2015. Thank you. Now, I will turn the call over to StoneCastle Financial’s Chairman and Chief Executive Officer, Josh Siegel.

[Joshua Siegel:]

Thank you, Rachel. Good afternoon, everyone, and welcome to StoneCastle Financial’s second 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 briefly on the company’s intra-quarter SEC filing. As always, Pat, will follow with details on our financial results. I am pleased to report that in the second quarter, we delivered increases in four key measurements

[Patrick Farrell:]

Thank you, Josh. I believe the detailed presentation of the components, which we have followed in the past, has helped many of you understand the value of the company. So I will continue to take some extra time to discuss our quarterly results. The net asset value at June 30 was $22.05. The NAV for StoneCastle Financial was affected by four components

[Joshua Siegel:]

Thank you, Pat. We appreciate you taking time to be with us on this call. Now, operator, we would like to open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Greg Mason with KBW. Please proceed with your questions.

[Greg Mason:]

Great. Good afternoon, everyone. Thanks for taking my questions. Josh, on the potential pool securitization, is that something that StoneCastle is putting together, or are you buying an equity tranche in a third party managed pool?

[Joshua Siegel:]

Good question. So Citigroup is the investment leading the transaction. The expectation, if it gets done, is that StoneCastle Financial would be the investor – StoneCastle Financial would be the investor in the preferred stock of that vehicle. StoneCastle Financial will not be the manager of it, will not have any active control over it. And it is being contemplating currently as a static portfolio.

[Greg Mason:]

Okay, great. And to do this first one, do you need any additional equity capital to complete this first one, or do you have enough available capital on hand to be able to consummate it?

[Joshua Siegel:]

We believe we have enough on hand, and have securities that we’ve been and continue to sell in the market to generate the amount we would need to close that transaction.

[Greg Mason:]

Perfect. Okay, great. And then in the press release, you talked about $24 million in 4 investments, and then you highlight three of them for about $17 million. What would be the last one that looks to be about an $8 million investment in size?

[Joshua Siegel:]

That was one of our short-term holdings PFS, which we’ve – sort of our cash equivalent we’ve done for the previous quarters. We don’t tend to break that one out, because it’s not a core long-term holding.

[Greg Mason:]

Got it. Okay, great. And then of those three that you announced, all three of them are debt. Is there an active thought of moving towards debt versus preferred, or any commentary around debt versus preferreds going forward?

[Joshua Siegel:]

No, it’s more reactive than proactive, but that’s a good question. Since the Small Bank Holding Company Policy Act went into effect; what was it now? four months ago, five months ago; there’s definitely been increased interest from banks out there to utilize the subject market. So that seems to just be the flavor of the quarter. We are still working on a few preferred transactions that are in the queue and in diligence. So it’s not an active choice, it’s really reacting to what the bank demand is.

[Greg Mason:]

Okay, great. And then with the shareholder approvement of May of switching to the Delaware trust, can you talk about what the savings and kind of the timing of those savings could be with that change?

[Joshua Siegel:]

Sure. Well, one thing is, we went for shareholder vote, and we actually didn’t get enough votes to put a true. It wasn’t we didn’t get enough yeses. We just didn’t get enough votes. So we did actually – we never did convert. That said, I’ll let Pat speak to them. And, Pat has actually done a fantastic job of actually cutting those taxes anyway really crawling through the Delaware rule, when we found there are some interesting exemptions for the company of our type. Pat, maybe just take a second and…

[Patrick Farrell:]

Yes. Well, initially, you may recall that in the past we – the fee applicable to us is about $180,000 a year, turns out there is an exception for investment companies there. So our fee is not going to be $180,000. It would be more or like $90,000 a year. So going forward, that’s what we’re looking to approve for. Quite frankly, we had accrued a little bit extra from last year when we were able to get a retroactive reduction in our fee for last year. So we will not be accruing anything additional this year, and so far, late this year or beginning of next year.

[Greg Mason:]

Okay. That’s great. And then one last thing with the investment income, you had a nice jump up this quarter. Were there any one-time items, any prepayment knowledge, or anything that artificially boosted that investment income this quarter, the interest income?

[Joshua Siegel:]

No, not the interest income. The pay-down from the MMCapS definitely was part – pretty substantial part of the capital gains, but no, not on the income side, that’s reasonably the predictable income.

[Greg Mason:]

Okay. Great. Thanks, guys. I appreciate it.

[Joshua Siegel:]

It’s based on June 30, yes.

[Greg Mason:]

Yes, okay. Great. Thanks.

[Operator:]

Thank you. And our next question comes from the line of Devin Ryan with JMP Securities. [Operator Instructions] Please proceed with your question.

[Joshua Siegel:]

Hello?

[Devin Ryan:]

Yes. Hi, can you hear me?

[Joshua Siegel:]

Yes. I can hear you, Devin.

[Devin Ryan:]

Yeah, hey, how it’s going? Yes, just quickly on the dividend and just love some maybe updated thoughts, great to see the dividend coverage this quarter. So I’m not sure if you’re ready to kind of share this yet, but how should we think about the timeframe and maybe appetite to raise the dividend, this is hopefully, the investment income continues to increase as more capital deployed from here?

[Joshua Siegel:]

That’s a fair question you ask. I want to have a good answer for you, because it’s clearly the board’s decision each quarter. But kind of like here we say, what I can definitely tell you about the interest rate forward curve, is that, its’ wrong. Hope it never actually follows. As we had said over many quarters and people were so focused on where our dividend was relative to our earnings. When we adjusted it last quarter, and we had said, and people rightly asked, well, should we view that as the future, is that really where it’s going to be. And we said, whenever we’re sort of making adjustments, it’s going to be wrong, because we’re constantly growing the company, right. We’re continuing to ramp and deploy. So, our view at the time wasn’t we’re going to constantly adjusted every quarter, who is going to make an adjustment that we thought would be safe for a while. Clearly, this quarter we exceeded that by $0.3 million. So this is kind of our base level. Whether in the future the board decides to increase it or do a special, we don’t know yet. But we remain focused as we only said on generating more and more income, our goal is $0.50 a share. It doesn’t mean we’re going to get there, but we’re trying. And credit quality, we’re not going to bend on. So we’re just going to keep working towards the goal.

[Devin Ryan:]

Okay. That’s very helpful. I appreciate the color. And with respect to maybe the investing backdrop, we’ve seen credits spreads broadly lining up recently, and obviously, as you highlighted, given the makeup of your portfolio. You’re not seeing or expecting any deterioration, but in terms of pricing and maybe on the private side, the wider spreads creating better return opportunities or maybe changing the mix in terms of the view of where you want to be invested.

[Joshua Siegel:]

That’s a good question. What’s always been attractive to us about the community bank space, kind of the non-market traded, they were cheap to begin with. I mean, that’s my personal view, they were cheap to begin with. So they’re not trading as like an OAS spread over a benchmark. So finally, they’re very, very wide. In fact, at the discount that we’re currently trading on in the market, and we were sort of looking at this, and if we can a do non-deal road show at some point, it will help people understand it better. It’s something like some of the 1,000 over the curve for the credits we have at the current share price at StoneCastle Financial. For 75%, just will be credit. I find that to be ludicrous. So the value that’s there, it has been there, it’s not trading up and down a tick. Our pricing has remained, as you see from the deals we closed last quarter, it really hasn’t changed very much. We’re still in the high eights. So we don’t have any view that it’s going to widen or tighten for these smaller banks anytime soon. So it’s sort of steady as it goes.

[Devin Ryan:]

Okay. Good to hear. And then, still getting through the filing, but if I look at the $186 million of investments, I’m not sure if you can, maybe give a flavor of how much or what percentage you would consider to be placeholders at this time. And really what your return would be, if you exclude the placeholders?

[Joshua Siegel:]

Well, can’t give a view of what the earnings would be. I mean, clearly, I know you’ve got a great model and you can get a sense of – if you put a placeholder in for X amount of dollars to be rotated. We have sort of earmarked at the moment that if this pool were to happen, it could be $40 million to $60 million needed for that piece. So that’s probably a fair number for you to think about what we would rotate out of the portfolio.

[Devin Ryan:]

Got it. Okay, great. That’s helpful. And then just lastly for me the limited partnership with, I believe, Priam Capital, what exactly, is that’s $1million on the statement here?

[Joshua Siegel:]

Sure. That’s actually a great question for a really, really cool deal. Years before, believe it or not, StoneCastle Financial wasn’t even launched; we were involved in trying to help restructure 1st Mariner, then in Baltimore. And that deal, believe it or not, finally got done by the lead party, an institutional investor Priam, but got done after we launched StoneCastle Financial. So, we arrange [ph] with Priam is kind of a favor for helping pull that yield together for them to let us do an un-promoted investment into the 1st Mariner transaction. So it’s technically an investment in the single purpose private equity fund that owns 1st Mariner, but we don’t pay any fees to Priam.

[Devin Ryan:]

Got it. Okay, great. That’s it for me. Thanks for taking my questions.

[Joshua Siegel:]

Of course.

[Operator:]

Thank you. Our next question comes from the line of Dan Nicholas [ph] with WD Baird. Please proceed with your question.

[Unidentified Analyst:]

Great. Thanks, guys. Josh, just kind of following up on your high-level thoughts on the community banking space, I know the M&A environment has been, or the potential for M&A has been a big part of – part of your thesis on liking the space. Just hoping you could update us on kind of what you are seeing and hearing out there among community bank’s put buyers and sellers, what you’re hearing and kind of feeling right now?

[Joshua Siegel:]

Well, I’m feeling like people are still getting older. So that doesn’t mean [ph] you’re going to drive the M&A wave. It hasn’t changed, the buzz is still out there that you have board meetings with an aging management team and boards across this country, and they’re coming more and more to the conclusion going alone even though – without losing money, they’re making money. But they’re just – they can’t really grow, they can’t find new common shareholders to invest. We’ve had a few of them take us up on investments. That’s part of the drive here. It’s that, if they do want to stay independent, they can do it through either preferred or sub-debt rather than common equity at least to some extent. They can use a huge amount of their balance sheet or further capital structure for that. But I do think the trend is going to continue. You’re going to see a lot of small-on-small mergers going on. I mean, what the final number of banks is, who knows. But I do think it’s 100s or 1000, 2,000 banks less over the next five to ten years. It’s going to be a fair amount of consolidation.

[Unidentified Analyst:]

Okay. Thanks. I think all – rest of my questions were asked and answered. Thanks, guys.

[Joshua Siegel:]

Alright.

[Operator:]

Thank you. There are no other questioners in the queue at this time. I would now like to turn the call back over to management for any closing comments.

[Joshua Siegel:]

Sure, well. As always, we appreciate your continued support to StoneCastle Financial. And we look forward to seeing you on the next call in November. Everyone, enjoy the rest of the summer.

[Operator:]

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And we thank all of you for your participation.