Q3 2021 StoneCastle Financial Corp Earnings Call

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Okay.

Welcome to the Stone Castle Financial Corp, Q3, 2021 Investor Conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

Should you need assistance during the conference call you may signal, an operator by pressing star zero.

Now I would like to turn the call over to Julie 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. 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 Companys filings with the SEC, including annual and Semiannual reports of the company don't.

Don't counsel financial has based the forward looking statements included in this presentation on information available to US as of September 30th 'twenty 'twenty. One the company undertakes no duty to update any forward looking statements made herein and all forward looking statements speak only as of today November 10th 2021.

In today's call Don Castle financials management will be providing prepared remarks and commencing with this call investors will have the opportunity to address their questions directly to investor Relations and management via phone and email through the contact information on our website, we will not have a formal Q&A. Following management's remarks, now I will turn.

The call over to Sanjay Bosley.

Okay.

Thank you Julien.

Good afternoon, and welcome just don't go to Nashville.

Third quarter Investor call for 2021.

All with Julien here with me today is perhaps Carl I'll CFO.

During todays presentation all.

Can you comment on the banking industry.

Its hard market before commenting on the company.

Then I will provide strong financials quarterly result.

Portfolio review.

We will provide you with greater detail on our financial results.

First of all with the banking industry.

<unk> continues to show improvement and financial performance.

And in fact during the third quarter.

Loan balances grew across the industry.

Looking at the banking industry as a whole.

Reported net increases in total loans.

Driven primarily by auto lending and credit cards.

We hope the loan growth trend will continue.

And we'll not only be accreted to bank earnings, but also it shouldn't be correlated to an increase in tier one capital ratios.

The community bank within the store portfolio.

There'll be well capitalized into the third quarter.

<unk> common equity tier one capital ratios reported at 13.09%.

Now, let me comment on the credit markets.

Last week.

And now that tapering will begin later this month through 2022.

With a continuous stance on the transitory nature of inflation.

Short term interest rates were held at current levels.

However.

The markets are beginning to factor in.

Interest rate increases.

Starting by mid 2022.

The 10 year U S treasury yield ticked up slightly in the third quarter.

At 1.52%.

After starting the year below 1%.

Corporate credit spreads were relatively stable in the third quarter.

Although the case in Q2.

As we have mentioned previously.

Rising interest rates should also be accretive to bank earnings.

All other things being constant.

Our horizon base rates should also be beneficial to the company.

Approximately 65% of our portfolio investments in the company are floating rate asset.

An increase in the base rate should result in increased earnings for the economy generally.

As we have discussed previously since that transition to Aramark, we have meaningfully increased the portfolio's exposure to floating rate assets.

Yeah.

I will cover our origination pipeline.

Primarily subordinated debt instrument by regional and community banks moderated raising.

Raising $1 5 billion in Q3 versus $2 5 billion in Q2.

Down 40%.

In Q3 primary issuance rate coupon average approximately three 5%.

Also down from Q2.

Given the meaningful compression in yields for our Canadian banks.

Remember that assets, we continue to find regulatory capital Securities issued by money Center banks much more attractive.

Risk adjusted basis.

In fact in Q3.

The regulatory capital relief market from money Center Bank.

Had a strong issuance of approximately $2 5 billion.

And $6 $5 billion year to date.

Transactions in the quarter reflected an expansion of the issuer base.

Given the strong pipeline and the Permian market for regulatory capital issuance from money Center banks, we were not very active in the secondary market.

It is important to note that we will be opportunistic in the secondary market as we have been in the prior years.

Now onto stone castle.

For the third quarter.

We are pleased to report that net investment income for the third quarter of 2021.

Approximately $2 8 million or <unk> 40 per share.

This quarter's financial performance.

Typically earnings per share is based upon an increased total share count.

Ultimately seven 5%.

Which was related to the recent registered direct offering.

I will give more details on this transaction shortly.

Next during the third quarter. The company also reported a net realized and unrealized gain on the investment.

Total approximately $250000 or <unk> per share.

Awfully.

This highlights doors Masters the continued strong credit quality of the stone castle investment portfolio.

This was also exhibited in our net asset value at $21 at 86 cents per share.

Which was up 6% from the prior quarter.

Now, let me turn to the portfolio.

During the third quarter the company invested a total of $24 million.

Our regulatory capital transaction.

The four new investments positively contributed to the portfolio.

The weighted average coupon of 859%.

The weighted average yield to maturity of approximately $8 96%.

These securities were purchased in the primary market.

Yields of these new assets remain accretive to the investment portfolio.

The company also invested approximately $500000 and a 9% community bank preferred stock.

Just in the secondary market.

The increase in investments during Q3 were partially offset by $4 4 million and paid out.

From six investments and partial sale of $5 million.

<unk>.

As you may recall PFF as the Ishares preferred and income security ETF.

Historically PFS has been realized that's dividend income of between 4% and 5%.

We decided to partially replace the security holding with their higher Ernie regulatory capital Securities.

Given the relatively strong pipeline our investment in the primary market.

Subsequent to the end of the third quarter.

The company invested an additional $11 $4 million in new investments and received partial paydown and calls to date of approximately $8 2 million.

At quarter end.

Estimated annualized effective yield generated by the investment portfolio.

<unk> cash and cash equivalents were nine 2%.

Down slightly from Q2.

However, the slight decrease in the portfolio yield is being muted by the increased pace of investment.

The total assets of the company have increased over the last 12 months.

Year over year with total assets of the portfolio increased by $61 million or 41%.

Now let me highlight.

A few very positive developments related to the growth of the company.

In Q3.

Company successfully closed on a 10 seven 7 million registered direct offering.

The issuance was at a slight premium to NAV at the time of the transaction.

Therefore accretive to our shareholders.

This transaction increased the company's total shares outstanding by seven 5%.

I also want to mention that in October the company established and aftermarket offering program or ATM footprint $30 million that will be executed at or above NAV.

We are very pleased to report on these capital markets activity.

When I first started as CEO, we have made the commitment to grow the asset base of strong capital Financial Corp.

When market conditions were optimal.

By utilizing our active $150 million shelf registration for just in time capital.

These two opportunities demonstrate this commitment.

We believe growing the asset base of the company will benefit our shareholders.

The drill results and the enhanced liquidity all stone castle financial stock.

In closing my remarks, I want to point out that our investment team continues to position the portfolio to seek the most advantageous risk adjusted returns available in the banking related assets in the industry today.

We believe the company stock whether farm equity or fixed income strategy.

As offering significant value to our shareholders at its current yield of approximately 7%.

Now 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 in detail.

The net asset value on September 30th was $21 86 per share up <unk> <unk> from the prior quarter.

Now onto the breakdown of the components.

<unk> is comprised of four components net.

<unk> income realized capital gains and losses, the change in value of the portfolio's investments and lastly distributions paid during the period.

A review of these components.

Gross income for the quarter was approximately $4 4 million or <unk> 63 per share.

Net expenses for the quarter were $1 6 million or 23 per share.

<unk> net investment income for the quarter of $2 8 million or <unk> 40 per share.

Is this the case every quarter the timing of calls and Paydowns impacted the income generation of the company.

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

The net realized capital gains from investment activities were approximately 780000 or <unk> 11 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 and for.

For the third quarter the change in net unrealized depreciation on investments and foreign currency transactions was approximately 530000 or <unk> <unk> per share.

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

The fourth component affecting the change in net asset value is distributions the regular cash distribution for the quarter was 38 per share which was paid on September 28 to shareholders of record on September 21.

In summary, we began the quarter with a net asset value of $21 80 per share during.

During the quarter, we generated net income of $2 8 million net realized capital gains of approximately 780000 and.

And the unrealized value of the portfolio and foreign currency transactions decreased by 530000.

The sum of these components reduced by distribution of 38 per share resulted in a net asset value of $21 86 per share on September 30th which was up six 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 82% 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 in the companys underlying value versus other publicly traded closed end funds and bdcs, whose portfolios are comprised of assets that do not have readily available market flotation and therefore self mark many of the assets in their portfolios.

At quarter end the company had total assets of $210 9 million consisting of total investments of $206 million in cash interest.

Dividends receivable and prepaid assets totaling approximately $4 9 million.

I would like to highlight the growth in assets to our investors.

Of note year over year total assets increased $61 1 million up 41% as Sanjay mentioned earlier.

This asset growth was due to the company actively identifying accretive investments for the portfolio during the period as well as optimizing the use of our credit line.

Our dividend yield at the end of the quarter was six 9%.

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

On September 30, the company had $55 million drawn from the facility or 26% of total assets.

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.

I'd like to thank everyone on the call or listening in today.

As always if.

You have questions I would like to speak to us.

Please reach out to Julie and Sheila schedule it.

Have a good night and have a safe and healthy holiday season.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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