Q4 2020 StoneCastle Financial Corp Earnings Call

Welcome to zone Castle's Financial Corp, Q4, 'twenty and 'twenty Investor Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.

Pat.

As a reminder, this conference is being recorded now I would like to turn this call over to MS. Julie Morocco, and Investor Relations of Stone Castle financial. Thank you you may begin.

Before we begin this conference call I'd like to remind everyone that certain statements made during the call maybe 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 rig.

Risks discussed from time to time, and the company's filings with the SEC, including annual and semi annual reports of the company.

Don't Castle financial has based on the forward looking statements included in this presentation on information available to US as of December 31st 2020. The company undertakes no duty to update any forward looking statement made there in.

All forward looking statements speak only as of today March 1st 'twenty 'twenty, one and now I will turn the call over to Sanjay both life.

Thank you Julie.

Good afternoon, and welcome to Stone Castle, Financial's fourth quarter and Investor call for 2020.

Along with Julie George and me today is Pat Farrell our CFO.

During today's presentation I will briefly comment on the banking industry and credit markets before commenting on the company.

And then I will provide stone castle financials quarterly results and portfolio review.

And Pat will provide you with greater detail on our financial results before we open the call for questions.

And John Roll the fourth quarter of 'twenty and 'twenty continued the trend of large money center banks and community banks reporting better than expected earnings.

Furthermore, we believe banks will continued to be well capitalized.

For the most part banks have adequate reserves and anticipation of any corporate default from continued economic uncertainty.

The most obvious concerns continue to be the industry sectors, most affected by the pandemic.

And hospitality retail and transportation and some parts of energy.

I want to remind our shareholders that the bank investments and stone castle financials portfolio.

Underlying loans diversified by industry sectors.

Also community banks within the portfolio, primarily service their local markets and our real estate, such as multifamily owner occupied residential and C&I and other small businesses that have held up well during the past year.

During the fourth quarter, we saw relatively strong performance, but most of the companies community banks.

<unk> sequential growth and net income with fairly stable to upward trending tier one capital ratios.

The issuance of new Triple P loans help community banks, partially mitigate increases and loan loss reserves with some banks, partially reversing these increases during the fourth quarter.

To date, a majority of the company's underlying can meet community banks.

On a reported their fourth quarter results.

And with median net income up 16, 8% versus the third quarter.

In addition, these banks reported average tier one capital ratios of 12, 3% flat from Q3.

Yeah.

Finally, our underlying community banks reported a fourth quarter change and reserves, which were up 15 basis points to 137 per cent.

And general loan books were flat from the prior quarter.

We also saw a strong performance and the regulatory capital sector during the fourth quarter.

And this sector the Companys regulatory capital investments performed extremely well.

With several investments either paying down at par.

Our continuing to amortize ahead of schedule.

For the most part the amortizing assets were purchased at attractive discounts and during the market dislocation and Q2.

As expected the regulatory capital investments proved to be resilient during 'twenty and 'twenty.

For the first half of 'twenty, 'twenty, one and our outlook for the banking industry remains cautiously optimistic.

We are encouraged by the efforts towards additional government stimulus and other agency programs designed to help the consumer and small business.

It is likely that these programs will be distributed through the banks similar to the first round of Triple T.

Now, let me comment on the credit markets.

And the fourth quarter the free.

Federal Reserve's signal that U S interest rates will remain low for the foreseeable future.

Recent policy considerations and some reported economic indicators.

And fueling talks of inflation and the credit markets.

Both the U S election through today.

We have seen the yield curve steepened for the 10 year Treasury.

We believe this is due to the factors already mentioned.

Along with the perception.

That COVID-19 vaccinations and the stimulus package may result in better economic conditions and the second half of the year.

Regarding impending inflationary pressures, we believe during an upward trend and rates banks should benefit from higher net interest margin on NIM.

Which would positively impact earnings.

Next I'll cover our origination pipeline during the quarter.

And Q4, the primary markets continue to be active in both regulatory capital and coming to your banking securities.

And regulatory capital Securities primary issuance during the fourth quarter was approximately $3 5 billion.

Which is consistent with the seasonal spike and activity during prior years.

The full year issuance was approximately $9 billion and our expectation for 'twenty and 'twenty one remains optimistic.

We also believe the secondary markets will continue to be a source for regulatory capital investments.

Canadian banking originations and the prior year market continued to be relatively strong.

And Q4 coming to your banks raised approximately $2 $6 billion down from $3 1 billion and Q3.

Banks were generally able to issue sub debt and a four to six per cent range similar to the third quarter.

The continuation of attractive interest rate should allow these banks to issue sub debt at a historically low rates into the foreseeable future.

Now onto strong cash flow financials results for the quarter.

We are pleased to report that net investment income for the fourth quarter was approximately $3 $1 million or <unk> 46 per share and.

And increase of four cents per share from the prior quarter or up 11%.

The fourth quarter net investment income and had a positive impact from other income of approximately <unk> <unk> per share, which Pat will discuss further and his comments.

At the end of the fourth quarter the value of the investment portfolio was $178 4 million.

Versus $147 million at the end of the third quarter.

And increase of 21 per cent.

Primarily due to the new investments made during the quarter.

The net asset value at the end of the fourth quarter was $21.44 per share.

Up 55 cents or nearly 5% from the prior quarter.

Including the reinvestment of dividends.

Now, let me turn to the portfolio review.

During the fourth quarter, the company invested a total of $42 $5 million and seven investments including.

Including $37 5 million and six regulatory capital transactions and $5 million and one community bank preferred stock.

The seven new investments contributed a weighted average coupon of 10%.

On a weighted average yield to maturity of approximately 10, 4% to the portfolio.

A majority of the securities were purchased and the primary and market at par.

Yields on these new assets remain accretive to our earnings.

Since the transition over to stone castle Aramark as a new adviser.

The company has made $99 3 million of and investments, which exceeded the last two years combined in terms of gross investment activity.

During the fourth quarter of 'twenty and 'twenty.

The company received proceeds of $12 $2 million from full calls on to investments.

Proceeds of $7 million from the sale of one investment.

And received partial pay downs of $3 $7 million from foreign investments for a total of $22 9 million and proceeds.

And the first quarter of 'twenty and 'twenty, one we continue to make new investments and we'll share more details when we report on our first quarter results.

At quarter, and the estimated annualized effective yield generated by the investment portfolio.

<unk> cash and cash equivalents.

Approximately $9 six 5%.

This portfolio yield has held stable above 9% for 16 consecutive quarters or four years running.

Our investment team has positioned the portfolio for the most advantageous risk adjusted returns available to us and banking related assets with a long term view on creating shareholder value.

Yeah.

A full schedule of and investments can be found on our website.

Before I turn the call over to Pat.

Close my remarks by reflecting on my first year as chairman and CEO of Stone Castle financial.

Yeah.

And with just about this time last year that shareholders approve stone castle Aramark as an investment advisor.

And the current investment team began advising on the assets of stone Castle financial.

As always we have continually emphasized matching risk.

Rowing assets, enhancing the dividend and increasing the value of the company.

As mentioned previously and aggregate.

Cash flow Aramark reported total new investments of $99 3 million and assets. Despite the.

Utility other credit markets and.

And the competition for yield oriented assets.

The board of directors declared a five special dividend, which.

Which enhanced the regular cash dividend and offered investors a year and 2020 dividend yield of just over 8%.

The net asset value of the company grew from reported March 31.

Q1 pandemic related LOE of $19.

To $21 and 44 per share reported a year at.

Pat will report on the annual performance of AAV.

But I, particularly want to point out.

This metric and this speaks to the team's ability to navigate volatile markets and produce solid performance during a challenging year.

Yeah.

I also want to point out to our investors and.

And the breadth and the scope of the personnel, who work with management on stone castle financials, and investment portfolio and and operations.

It has been significantly expanded with the transition to stone castle and remark and the Aramark platform.

The depth of our expertise and banking related assets across Aramark platform offers a significant and intangible advantage to the company and to our shareholders.

I want to acknowledge my colleagues for their hard work and I want to thank you our shareholders for their steadfast support you have shown the company over the last year.

It is much appreciate it.

I am excited for what the future holds for stone castle financial and the opportunities to grow the portfolio.

And I want to turn the call over to Pat.

Thank you Sanjay as I do each quarter I will present, the financial results by going through the components of the company's quarterly results and detail.

The net asset value at December 31 was $21 44 per share up 55 cents.

Or four 8% from the prior quarter, including reinvestment of dividends.

Now onto the breakdown of the components.

And it is comprised of four components net investment income realized capital gains and losses, the change and value of the portfolio's investments and lastly distributions paid during the period.

Let's review these components.

Gross income for the quarter was $4 7 million or <unk> 71 per share net.

Net operating expenses for the quarter were $1 6 million or <unk> 25 per share, resulting in net investment income for the quarter of $3 1 million or <unk> 46 per share.

This compares to $2 8 million reported and the prior quarter up <unk> <unk> per share.

I would like to note and the fourth quarter <unk> per share of net investment income represents non recurring income related to the reimbursement of certain expenses and connection with the transition just on castle Aramark.

Realized capital gains and losses and the quarter is the second component affecting the change in and the net.

Realized capital gains from investments were approximately 312000 or approximately five cents per share.

Realized losses due to foreign currency transactions were approximately $1 6 million or 25 per share.

The third component changes and unrealized appreciation or depreciation of the portfolio relates to how the value of the entire investment portfolio has changed from the previous quarter and two the current quarter and for.

For the fourth quarter the change in net unrealized appreciation on investments and foreign currency transactions.

It was $5 4 million or <unk> 81 per share and unrealized depreciation on options written of 620000 or <unk> <unk> per share.

I want to point out that gains and losses from foreign currency hedging activities did not impact our net income.

Yeah.

The fourth component affecting the change and net asset value is distributions.

<unk> cash distribution for the quarter was <unk> 38 per share along with the special cash dividend of <unk> <unk> per share for a total distribution of <unk> 43 per share, which was paid on January 6th to shareholders of record on December 21.

In summary, we began the quarter with a net asset value of $20 and 89 per share.

During the quarter, we generated net income of $3 1 million.

Net realized capital losses of approximately $1 3 million and the unrealized value of the portfolio increased by $4 8 million.

Okay.

The sum of these components offset by distribution of 43 per share resulted in a net asset value of $21 44 per share at December 31.

Which was up 55.

Or four 8% from the prior quarter, including the reinvestment of dividends.

The 2020 annual performance of net asset value was down 39 per share from $21 83.

It's a $21.44 a share.

Sanjay mentioned the recovery of Nev throughout 2020.

From the March 31st LOE of $19 to $21 44 at year, and we believe speaks to the quality of the underlying credits and the portfolio.

Turning to the valuations for our portfolio holdings is worth noting that the vast majority of the portfolio continues to be independently marked from broker dealer quotes.

For the quarter, approximately 85% of the portfolio prices or marks reflect a minimum of two quotations or actual closing exchange prices.

These quotations represent an independent third party assessment of the current value of the portfolio.

This should provide a greater degree of confidence and the companys underlying value versus other publicly traded closed end funds and bdcs, whose portfolios are comprised of assets debt.

And do not have readily available market quotations and therefore self mark many of the assets and their portfolios.

At quarter and the company had total assets of $188 4 million consisting of total investments of $178 4 million and cash interest and dividends receivable and prepaid assets totaling approximately $10 million.

Our dividend yield at the end of the quarter was approximately eight 2%.

Now, let me update you on the balance of our credit facility.

On December 31, the company had $43 million drawn from the facility or 23% of total assets.

Leaving $19 million available to draw.

Based on regulated investment company rules, we may only borrow up to 33, 3% of our total assets.

Now I want to turn the call back over to Sanjay for closing remarks.

Thank you Pat now operator, I'd like to open up the call for questions.

At this time, we'll be conducting a question and answer session. If you would like to ask the question. Please press star one on your telephone keypad a confirmation from will indicate your line is simple question queue. You May press Star two if you would like Joe will be a question from Nick you for participants using speaker equipment.

And it may be necessary for you to pick up your handset before pressing on Starkey one moment, while we poll for questions.

Our first question comes from the line of Chris O'connell with Crazy W. You May proceed with your question.

Good evening.

Good evening.

So just wanted to start off with the portfolio yield I know you guys mentioned it and the corridor are coming in and around 965 I was just wondering if you had with the average yield was for the fourth quarter.

Pat do you want and take that.

Sure.

I believe we noted that in the press release 965 was the number for the quarter.

Yes.

Okay, Great and then it sounds like the investments you made during the quarter were coming on and around.

10, 4% yield and.

Was there any change in that and in terms of book the investments, we're coming on and fall.

During the quarter and.

Yeah.

You mean for Q1.

Yes, you guys had mentioned that our fall following the end of the quarter and.

You had made some additional investments I think around third clean $5 million or so and just wondering if theres any change and that yields versus what was on coming during the fourth quarter.

Those are also strong also in the nines and I believe we may have a couple of turns on there as well.

Okay.

Okay.

Okay great.

And.

And then.

And so I'm, assuming it's safe to say that new and all new investments are coming coming out and kind of consistent to that level and kind of consist until you know what you guys are gearing towards last quarter and the high <unk> range.

And as far as the <unk>.

And and the growth and.

The back half of the year, especially on the fourth quarter was really strong.

And congratulations there.

But I was wondering going forward demand, obviously fallen quarter and also seemed strong and is.

Is it safe to say that given where the sub debt issues that you guys mentioned and the four to six range for community Bank yields.

And in general.

Community banks, you know are kind of flush with liquidity right now.

Following some of the fed actions and 2020 and.

Is it safe to say that the alternative investments will be kind of leading the first half 'twenty, one and demand at least as far as you see now.

Yeah, So Chris.

That's that's all and Ah.

That should be a fairly accurate.

And you know Youre right.

So on your bank sub debt is in a 4% to 6% range and we are seeing a slowdown on issuance there to begin with here and the new year.

And you know if there is any portfolio churn you should expect.

You know a disproportionate amount of that.

Liquidity being deployed and regulatory capital investments.

Yeah.

Q1, Q2 at least.

Great and then.

As far as the demand for overall.

Alternative capital investments is that kind of remained strong so far in 'twenty and 'twenty one.

What do you mean by demand for Dominion.

Are you guys seeing you guys.

And you're going to see strong growth and the first half of the year.

Oh, Okay got it yeah, so just to talk.

<unk> talked about this on our previous calls.

Regulatory capital issuance is a bit seasonal and usually Q4 is our strongest quarter and then Q1 kind of lags that right.

And what we have seen during Q1 is the seasonal adjustment to that however in the secondary market and regulatory capital have been fairly active.

And so from that perspective, we are seeing in a sufficient amount of investments that we.

And need to take a look at and so between the primary market and the secondhand market in Q1.

It's a healthy amount of all investments again, like I said, do analyze and and and make a decision on.

Got it and just given you know where we are in the quarter a little bit further and then we typically are.

For this call and update.

Is it safe to say also with your comments around the Red Kap and investments.

And being seasonally a little bit lower and the first quarter debt.

The first quarter kind of net support and investment portfolio growth.

Is it going to be too much stronger than what was already indicated and the press release or do you guys have kind of a late pipeline that's coming through on the back half of the score.

Yeah. So obviously I can't give you specific details on what's going on in Q1.

As mentioned in my previous comments, we did make additional purchases during the first quarter.

And like I said, you know, we you know it.

And it's been fairly active quarter, both on a primary and <unk>.

Secondary markets.

And but having said that you know you obviously see some some investments repay.

And the timing of that is not always a known quantity but.

I'll just kind of mentioned that we had been active buying.

Buying new investments here during the first quarter.

Got it thanks, that's all and I'll step out of the queue. Thank you.

Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to our CEO for closing remarks.

Okay.

Well. Thank you operator again, thank you for your support through a challenging 2020.

Please do stay safe and healthy and I'm looking forward to the time when we can all meet in person again. So thank you Goodnight and speak with you all soon.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.

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