Q1 2021 StoneCastle Financial Corp Earnings Call
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Welcome to the Stone Castle Financial Corp, Q1, 2021 of Investor Conference call. At this time, all participants are in a listen only mode.
Net answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please.
The press Star zero on your telephone keypad now.
Now I would like to turn the call over to Julian Morocco, Investor Relations of Stone Castle financial. Please go ahead.
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.
It 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.
Don't care for financial is based on the forward looking statements included in this presentation on the information available to US as of March 31, 2021. The company undertakes no duty to update any forward looking statements made herein and all forward looking statements speak only as of today may 13th 2021.
Now I will turn the call over to Sanjay for always life.
Yes.
Thank you Julie.
Good afternoon, and welcome to stone castle of financials first quarter Investor call for 2021.
Along with Julie here with me today is Pat Farrell our CFO.
During today's presentation I will briefly comment on the banking industry and the credit markets before commenting on the company.
Then I will provide strong cash flow financials quarterly results and portfolio review.
And Pat will provide you with greater detail on our financial results before we open up the call for questions.
In general the first quarter of 2021.
Had large money center banks and community banks reporting better than expected earnings.
Furthermore.
The industry research continues to show the banks are well capitalized and should benefit from an expansion of the economy.
The FDIC also reported that in the fourth quarter of 2020.
Net income increased 9% across all banking institutions.
For community banks that number was higher at the reported 21% net income growth.
During the same period net.
Net charge off rates across all banks fell nearly 20%.
I also want to point out that in the fourth quarter Bank equity capital increased by one 9% versus the previous quarter.
We have seen this trend continue during the first quarter.
The majority of the company's portfolio of community banks have reported the first quarter results.
Don Castle's community the bank's portfolio reported net income and deposit growth of <unk>.
Seven point of 1% and for 6% sequentially during the quarter.
62% and 23% on a year or of your basis.
They also reported average tier one capital ratios at 13, 3%.
Which is up slightly from Q4.
Also.
Stone Castle community Bank portfolio.
Reported a fourth quarter change from the reserves up one 2%.
In addition loan book growth was up 2% from the prior quarter.
During the first quarter. We also saw strong performance in the money Center Bank regulatory capital space.
The company's regulatory capital investments performed extremely well.
Several of the investments, we're either paying down at par.
Our continuing to amortize ahead of schedule.
So in some of these investments were purchased at a discount.
I would also like to point out that regulatory capital yields remained 25 to 50 basis points higher than pre COVID-19 levels.
Despite the most other credit mark of deals tightening.
Now, let me comment on the credit markets.
The stimulus packages issued during the height of the COVID-19 crisis.
Including the proposed infrastructure Bill.
Among other factors have led to heightened inflation fears.
This has contributed to the U S 10 year treasury of widening from 93 basis points.
Two of approximately a 160 basis points. Despite the federal reserve signaling that U S interest rates will remain low for the foreseeable future.
But this uncertainty the markets may be volatile on the perception of rising rates.
Through the second half of 2021.
Okay.
Regarding impending inflationary pressures.
We believe during an upward trend in rates.
The banking sector stands to benefit from higher net interest margin or NIM.
Which would positively impact bank earnings.
Also on expanding economy should lead to businesses needing more capital for growth.
Part of which will be funded from bank loans.
Okay.
This increased bank lending should result in loan book growth, thus positively impacting bank earnings.
In addition, an expanding economy should also lead to a decrease in loan default probabilities.
This combination of positive fundamentals.
Along with resulting growth in bank earnings should meaningfully decrease.
The risk premium related to the banking sector overall.
Therefore, the stone castle financials underlying investment portfolio will.
It will be positioned to reap the benefits of these constructive trends.
In addition of rising rate environment should benefit stone castles portfolio.
Since over 70 per cent of the portfolio today is in floating rate securities.
Next I will cover the origination pipeline.
In the first quarter regional and community banks.
Do you need to be active issuing approximately $1 1 billion of.
Of subordinated debt in the primary markets, which was basically flat from Q1 of 2020.
And the money Center bank regulatory capital market.
Primary issuance during the first quarter was approximately $800 million.
In line with historical activity in the first quarter.
And down slightly from the seasonally strong fourth quarter.
Of note during the first quarter, there was a regulatory capital issuance from a well known U S Regional bank.
If possible start to a new trend.
But when the Aramark took over as advisor to stone Castle for Nashville.
We believe there might be opportunities for expansion of regulatory capital issuance in the United States across regional and community banks.
We believe a recent regulatory capital security issuance by a regional bank may prompt other non money center banks to do the same.
In the press release the.
The bank stated that the decision to enter this market was to proactively optimized for the balance sheet and.
And taken the innovative approach to capital and risk management.
The benefit they are company clue.
Clients and the shareholders.
Yeah.
The stone castle financials long term relationships and expertise in the regional and community Bank space.
We may be in a unique position to take advantage of this expansion across the entire banking industry under the Aramark platform.
Now on to storm castle of financials results for the first quarter.
We are pleased to report that net investment income for the first quarter was approximately $2 $6 million or <unk> 40 per share.
At the end of the first quarter the value of the investment portfolio was $178 million flat sequentially.
The net asset value at the end of the first quarter was $21.62 per share.
Up 18th.
Per share from the prior quarter.
Now, let me turn to the portfolio review.
During the first quarter the company invested a total of $17 $5 million and six regulatory capital investments.
The six new investments positively contributed to the portfolio.
The weighted average coupon of nine 5%.
And the weighted average yield to maturity of approximately eight 6%.
The majority of the Securities were purchased in the secondary market this past quarter.
Yields on these new assets remain accretive to the investment portfolio.
During the first quarter of 2021. The company also received proceeds of $9 million from maturing securities and pay downs.
At quarter end.
The estimated annualized effective yield.
Generated by the invested portfolio.
Excluding cash and cash equivalents.
Was approximately 935%.
This portfolio of yield has held stable.
Above 9% for 17 consecutive quarters of over four years running.
Our investment team is positioning the portfolio for the most advantageous the risk adjusted returns available in the banking related assets.
With the long term view of creating shareholder value.
A full schedule of investments can be found on our website.
Before I turn the call over to Pat.
I wanted to point out that of stone castle for National.
We believe we are at the beginning of a new credit cycle that will position our company with significant incremental value.
We have an economy that is reopening with increased probability of rising rates.
This new cycle has the potential to positively enhance the entire banking industries financial performance, which should further reduce the risk profile of stone castles investment portfolio in.
In short the fundamentals are in our favor.
Yeah.
Within the investment portfolio, we have always been focused on capital preservation and optimizing risk adjusted returns.
Today, we believe the risk premium on the underlying portfolio will continue to decrease.
Thus offering investors of stone castle financial exceptional returns.
Given the nearly seven 5% dividend yield while delivering a portfolio of debt is majority investment grade.
The second half of 2015.
Earned our exceeded our 30 eights on dividend.
Providing consistent performance for our shareholders.
Today, the company still offers nearly 500 basis points of incremental yield versus other banking related income oriented vehicles.
All of the while we continued to deliver consistent and stable investment income.
The stable and growing NAV.
And a consistent annualized portfolio yield of over 9%.
We believe the company's stock whether for an equity or of fixed income strategy is offering significant value to the shareholders.
Now I want to turn the call over to Pat.
Thank you Sanjay as.
As I do each quarter I will present, the financial results by going through the components of the company's quarterly results in detail.
The net asset value at March 31 was $21 62 per share up 18 from the prior quarter.
Now onto the breakdown of the NAV components.
<unk> is comprised of four components net investment income realized capital gains and losses the change in value of the portfolio of investments and lastly distributions paid during the period.
Let's review of these components.
Gross income for the quarter was $4 1 million or <unk> 63 per share.
Net operating expenses for the quarter for $1 5 million or <unk> <unk> per share, resulting in net investment income through the quarter of $2 6 million or <unk> 40 per share.
As a reminder, in Q4, we had <unk> <unk> per share of non recurring income related to the reimbursement of certain expenses in connection with the transition to our market.
And this is the case every quarter the timing of calls Paydowns and option assignments, if any impact the income generation of the company.
Realized capital gains and losses in the quarter is the second component affecting the change in EBIT.
The net realized capital gains from investments were approximately $91000 or one penny per share.
Realized gains due to foreign currency transactions were approximately $1 8 million for 28 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.
For the first quarter of the change in net unrealized depreciation on investments and foreign currency transactions was approximately $860000 for 13 per share.
I want to point out the gains and losses from foreign currency hedging activities do not impact on net income.
The fourth component affecting the change in net asset value is distributions the.
The regular cash distribution for the quarter was 38 per share which was paid on March 25th to.
<unk> to shareholders of record on March 18th.
In summary, we began the quarter with a net asset value of $21 44 per share.
During the quarter, we generated net income of $2 6 million net.
Net realized capital gains of approximately $1 9 million and the unrealized value of the portfolio decreased by $860000.
The sum of these components reduced by the distribution of 38 per share resulted in a net asset value of $21 62 per share.
At March 31.
Which was up 18 from the prior quarter.
Turning to the valuations for our portfolio holdings. It is worth noting that the vast majority of the portfolio continues to be independently marked.
For the quarter, approximately 88% of the portfolio of prices of remarks reflect the 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 in the companys underlying value versus other publicly traded closed end funds and bdcs, whose portfolio are comprised of assets that do not have readily available market quotations and therefore self mark many of the assets in their portfolios.
At quarter end of the company had total assets of $182 5 million.
Listing of total investments of $178 million in cash.
Cash interest dividends receivable and prepaid assets totaling approximately $4 5 million.
Our dividend yield at the end of the quarter was approximately 8%.
Now, let me update you on the balance of our credit facility.
On March 31, the company had $39 million drawn from the facility, where 21 percentage of total assets.
Moving $23 million available for 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.
We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q.
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For participants using speaker equipment and made the necessary to pick up your handset before pressing the star keys.
Our first question comes from Chris <unk>.
<unk> with <unk>. Please go ahead.
Hi, good evening guys.
Hello, There Hey, Chris Caldwell.
Hi.
Thanks, and the same.
So I just wanted to start off.
With the.
Portfolio yield this quarter.
Kim Dang, I guess, a little bit more than that.
Was expecting given.
The shift over the past couple of quarters toward.
On the regulatory capital investments.
Typically higher yielding.
Is walk walk through some of the dynamics there.
Maybe based on what you are putting on.
On the books now where you can see that yield the kind of stabilizing going forward.
So on Jason I'll take that.
Sure you can start I'll add if I Miss anything.
Yes, that's fine.
Yes. This quarter, we had one of the big Securities that came off with the maturity of young partners.
It was earning of.
10, 5% yield for us so that was a big piece of that came off.
Also how the number of Paydowns.
That also came through on securities that were earning in the.
<unk> the high nines.
We did put on a number of securities.
Some of the summit 12, 10 tonne, but we did have a couple of that were in the.
Mid sevens.
Or low sevens, so it's just a function of.
During this period of what we happen to put on.
Overall in terms of the income, which as you know it's timing of.
When securities our call they're sold at the end of last quarter, we had a number of securities that debt were called the right at the end of December so.
So it takes a little time to take it put a lot of money to work.
So on J, you want to add on.
Yeah, I mean, the only thing I'd add Chris is.
When I look at our pipeline.
It is still holding on to some fairly healthy healthy coupons. So no. Thanks.
The nines low 10 type of spread over a base rate right.
And.
Over the last year, you've probably seen some of.
From some of the active trading to Ws.
We're trying to optimize the portfolio.
But.
I've heard of venture I'd say going forward.
Our pipeline looks pretty good in terms of what kind.
The asset spreads.
Got it.
On.
The the the.
The low seven deals that you were mentioning was that all of those be rolling off this past quarter was for being put on.
We had of mix, we actually had.
Our residents came off the 750.
And we had a.
Let's see we've had a opel two came on at the 738 so just.
It's really just the mix.
I mentioned, we did we've put on 6 million $6 5 million that was earning between 10 and 12.
Okay got it.
So is it fair day.
Characterize the yield is kind of financing somewhere around.
The $9 50 range or kind of similar to what somewhere between this quarter on last quarter going forward all else equal.
I would yeah, I would say so.
Oh, great Okay great.
And then just looking at the outlook here.
I appreciate your comments on the overall environment.
The <unk>.
Central for first of all of them ramped up from from the U S.
Based on the regulatory capital Securities going forward.
And no debt.
Given the seasonality dynamics of <unk> little bit stronger.
On those investments in <unk> is usually a little bit of a laggard.
On the.
The first month of show.
No.
If you triple that seems to be.
Some pretty good.
Origination volumes to kick off <unk>.
Is the overall pipeline holding up to what you guys have already put on in the in the second quarter and do you think of kind of continue at that pace as you move through the rest of the quarter.
Yes, so the short answer is yes.
We saw even during the the.
First of all of them have just taken the step back for <unk> was a bit of a slow start just because it seems like this year of people got took their time coming back to the desk I'm, assuming it's all about being a COVID-19 COVID-19 fatigue.
But however.
Early part of February the markets kicked in pretty nicely and it was really on the the secondary side right because of new deal ramp up of primary issuance.
GAAP the structure et cetera, so it takes a bit of time.
Fortunately the secondary market of active and then from there we have seen a pretty healthy mix as of today between kind of what we're seeing in the primary market and we are seeing in the secondhand market and.
Howard.
In our guide that it's going forward for.
For the balance of this quarter and early part of next quarter, you'll probably see the same mix in terms of new issuers to the secondary.
Okay.
There are no further questions I would like to turn the floor over to management for closing comments.
Yes, Stacy I will just probably give another few seconds here to see if there's any other questions coming through.
Yes, I think we have Chris back Chris O'connell.
Hi, yes.
So the <unk>.
Follow up a little bit.
Kind of of the kind of a small item but.
I.
I was just wondering what the dynamics for around the other fee line like miscellaneous fees.
It seems like it dropped off.
One of the lower levels.
<unk> seen recently and maybe even some of the drivers around that.
Sure. The the other income was that a reimbursed and last quarter was the reimbursements that we have related to the transition for our remarks that we had of reimbursement that came out of last quarter was a onetime item.
Okay, I mean, it seems like the run rate even prior to last quarter loans.
Close to kind of.
So really double.
Where it came in this quarter is this kind of the new run rate for that line item or was there anything else kind of dragging that.
No.
This will be the new run rate for there.
Okay.
Okay got it.
And the and then in terms of.
Just maybe a little basic over the review.
Could you just walk me through again.
Just exactly what the.
Foreign hedging strategy is.
That.
Runs through.
<unk>.
You get the financial statements each quarter.
Sure so each of the what we do on a quarterly on a monthly basis is the.
Of the Pms will.
Look at the amount of securities that are in euros.
Pounds of whatever currency, we have in the half and then hedge that for the months at the end of the month of closeout that position.
And as a result, you'll see this quarter, we had some big gains there.
181 9 million.
And currency gains this quarter on the other side of that then is that the portfolio of securities some of them.
The white go the other way so the value of those decrease then that's the.
All of the purpose for doing the hedge all of those strength all of those transactions flow through on the income statement on the statement of operations separately.
And those are all well laid out.
There so the 1 million $6 75 for.
The realized gain loss on the contracts and then translation of et cetera, but everything flows through separately separate line items there.
Is that helpful.
Yeah, absolutely and so those are alright, those are being fully hedged is that correct yes.
Got it.
Okay. That's it.
I'm all set on step out of the queue for now thank you.
Okay.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Okay.
With that thank you operator.
And to everyone. We look forward to meeting you soon and.
Please enjoy the start of summer here soon.
Have a great evening.
Thank you.
This concludes today's teleconference. You may disconnect. Your lines of this time and thank you for your participation.
Okay.
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