This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: 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 and zero. Now, I would like to turn the call over to Julie Morocco, Investor Relations of Stone Castle Financial. Please go ahead.
spk02: 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 semiannual reports of the company. Stone Castle Financial has based the forward-looking statements included in this presentation on information available to us as of September 30, 2021. The company undertakes no duty to update any forward-looking statements made herein, All forward-looking statements speak only as of today, November 10th, 2021. In today's call, Stone 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.
spk05: Thank you, Julie. Good afternoon, and welcome to Stone Castle Financial's third 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 Stone Castle Financial's quarterly results and portfolio review and Pat will provide you with greater detail on our financial results. Starting off with the banking industry, banks continue to show improvement in financial performance. 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 are being driven primarily by auto lending and credit cards. We hope the loan growth trend will continue. It will not only be accreted to bank earnings, but also it should be correlated to an increase in Tier 1 capital ratios. The community banks within the Stone Capital portfolio continue to be well capitalized into the third quarter with median common equity Tier 1 capital ratios reported at 13.09%. Now let me comment on the credit markets. Last week, the Federal Reserve announced that tapering would begin later this month through 2022. With the Fed's continued 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 off slightly in the third quarter to end at 1.52% after starting the year below 1%. Corporate credit spreads were relatively stable in the third quarter, as was the case in Q2. As we have mentioned previously, a rise in interest rates should also be accrued to bank earnings, all other things being constant. A rise in base rates should also be beneficial to the company, as approximately 65% of portfolio investments in the company are floating rate assets. An increase in the base rate should result in increased earnings for the company generally. As we have discussed previously, since the transition to Aramark, we have meaningfully increased the portfolio's exposure to floating rate assets. Next, I will cover our origination pipeline. Primary subordinated debt issuance by regional and community banks moderated, raising $1.5 billion in Q3 versus $2.5 billion in Q2, or down 40%. In Q3, primary issuance rate coupons averaged approximately 3.5% also down from Q2. Given the meaningful compression in yields for community banks-related assets, we continue to find regulatory capital securities issued by money-centered banks much more attractive on a risk-adjusted basis. In fact, in Q3, the regulatory capital relief market for money-centered banks 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 in the primary market for regulatory capital issuance for 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 on to Stone Castle Financial's results for the third quarter. We are pleased to report that net investment income for the third quarter of 2021 was approximately $2.8 million or 40 cents per share. This quarter's financial performance, specifically earnings per share, is based upon an increased total share count of approximately 7.5%, which is 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 investment of approximately $250,000 or $0.04 per share. Hopefully, this highlights to our investors the continuous strong credit quality of the Stone Castle investment portfolio. This was also exhibited in the net asset value at $21.86 per share, which was up 6 cents from the prior quarter.
spk04: Now let me turn to the portfolio review.
spk05: During the third quarter, the company invested a total of $20.4 million in four regulatory capital transactions. The four new investments positively contributed to the portfolio with a rated average coupon of 8.59% and a rated 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 $500,000 in a 9% community bank preferred stock purchased in the secondary market. The increase in investments during Q3 were partially offset by $4.4 million in paydowns from six investments and partial sale of $5 million of PFF. As you might recall, PFF is the iShares Preferred and Income Securities ETF. Historically, PFF has been realizing a net dividend income of between 4% and 5%. and we decided to partially replace the security holding with a higher-earning regulatory capital security. Given the relatively strong pipeline of investments 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 paydowns and calls to date of approximately $8.2 million. At quarter end, the estimated annualized effective yield generated by the investor's portfolio, excluding cash and cash equivalents, was 9.2%, down slightly from Q2. However, the slight decrease in the portfolio yield is being muted by the increased base of investments. The total assets of the company have increased over the last 12 months. Year-over-year, the 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, the company successfully closed on a $10.77 million registered direct offering. The issuance was at a slight premium to NAV at the time of the transaction and therefore accretive to our shareholders. This transaction increased the company's total shares outstanding by 7.5%. I also want to mention that in October, the company established an at-the-market offering program, or ATM, for up to $30 million that will be executed at or above NAV. We are very pleased to report on these capital markets activities When I first started as CEO, we made the commitment to grow the asset base of Stone 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 as it will result in the enhanced liquidity of 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's stock, whether for an equity or a fixed income strategy, is offering significant value to our shareholders at its current yield of approximately 7%.
spk04: Now, I want to turn the call over to Pat.
spk03: 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 six cents from the prior quarter. Now, onto the breakdown of the NAV components. The NAV is comprised of four components. net investment income, realized capital gains and losses, the change in value of the portfolio's investments, and lastly, distributions paid during the period. Let's review these components. Gross income for the quarter was approximately $4.4 million, or 63 cents per share. Net expenses for the quarter were $1.6 million, or 23 cents per share, resulting in net investment income for the quarter of $2.8 million, or 40 cents per share. As is the case every quarter, the timing of calls and paydowns impact 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 780,000 or 11 cents 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 third quarter, the change in net unrealized depreciation on investments and foreign currency transactions was approximately $530,000, or 7 cents 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 cents per share, which was paid on September 28th to shareholders of record on September 21st. In summary, we began the quarter with a net asset value of $21.80 per share. During the quarter, we generated net income of 2.8 million, net realized capital gains of approximately 780,000, and the unrealized value of the portfolio and foreign currency transactions decreased by $530,000. The sum of these components, reduced by a distribution of $0.38 per share, resulted in a net asset value of $21.86 per share on September 30, which was up $0.06 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 company's underlying value versus other publicly traded closed-end funds and BDCs whose portfolios 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, the company had total assets of $210.9 million, consisting of total investments of $206 million, and 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 6.9%. Now let me update you on the balance of our credit facility. On September 30th, 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.
spk04: Thank you, Pat. I'd like to thank everyone on the call for listening in today.
spk05: As always, if you have questions or would like to speak to us, please reach out to Julie and she will schedule it. Have a good night and have a safe and healthy holiday season.
spk01: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Disclaimer