StoneCastle Financial Corp (NASDAQ: BANX) Q2 2021 earnings call dated Aug. 05, 2021
Corporate Participants:
Julie Muraco — Investor Relations
Sanjai Bhonsle — Chairman and Chief Executive Officer
Patrick J. Farrell — Chief Financial Officer
Analysts:
Chris O’Connell — KBW — Analyst
Presentation:
Operator
Welcome to the StoneCastle Financial Corp. Q2 2021 Investor Conference Call. [Operator Instructions].
As a reminder, this conference is being recorded. Now I would like to turn the call over to Julie Muraco, Investor Relations of StoneCastle Financial.
Julie Muraco — Investor Relations
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.
StoneCastle Financial has based the forward-looking statements included in this presentation on information available to us as of June 30, 2021. The company undertakes no duty to update any forward-looking statement made herein. All forward-looking statements speak only as of today, August 5, 2021. Now I will turn the call over to Sanjai Bhonsle.
Sanjai Bhonsle — Chairman and Chief Executive Officer
Thank you, Julie. Good afternoon, and welcome to StoneCastle Financial’s second 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 StoneCastle Financial’s quarterly results and portfolio review, and Pat will provide you with greater detail on our financial results before we open the call for questions.
In general, the banking industry continues to perform well, and the latest FDIC quarterly profile report, net income across all banking institutions more than tripled versus the year-ago quarter. In fact, 75% of all banks reported higher quarterly net income and for community banks, in particular, net income grew 77%. Also in June, Fitch Ratings reported that the number of banks with a stable rating doubled on a year-over-year basis. Overall, we continue to believe in the health of the banking industry.
Now let me comment on the credit markets. Recently, the Federal Reserve signaled that interest rates are expected to be stable over the foreseeable future. The 10-year U.S. treasury yield has now contracted to approximately 1.2% or nearly a 50 basis point decline since the beginning of the second quarter. The treasury markets were somewhat volatile during the quarter, given the combination of timing of the Fed’s comments, concerns on inflation and concerns over a new strain of COVID. The corporate credit spreads, however, were relatively stable over the second quarter, suggesting that the economy is recovering as expected.
As I mentioned last quarter, an expanding economy should positively impact bank fundamentals, and we believe StoneCastle’s underlying investment portfolio should reap the benefits of this trend. In addition, if continued economic strength results in future interest rate hikes, StoneCastle is poised to benefit from increases in rates, as approximately 80% of the portfolio today is in floating rate assets.
Next, I will cover our origination pipeline. In the second quarter, regional and community banks issued approximately $2.5 billion in subordinated debt. Issuance rates for the most part were at sub-4% and therefore, continue to be below StoneCastle’s threshold for investments. At this time, we continue to find reg cap issuances by large money center banks much more attractive. In fact, in Q2, the regulatory capital market for money center banks had a strong issuance of approximately $3 billion. We expect the strong pipeline to continue into the third and fourth quarters as banks seek to optimize their balance sheets.
The secondary market had consistent activity in the quarter as well. However, the transactions were competitively priced. As mentioned in our previous call, we continue to look across the entire spectrum of banking institutions for opportunities to participate in regulatory capital relief transactions. Of note, we are seeing activity within regional and community banks as it relates to issuance of reg cap securities to optimize their respective balance sheets. StoneCastle is positioned to benefit from these issuances if the deals offer optimized risk-adjusted returns.
Now on to StoneCastle Financial’s results for the second quarter. We are pleased to report that net investment income for the second quarter was approximately $2.6 million or $0.40 per share. At the end of the second quarter, net asset value was $21.80 per share, up $0.18 from the prior quarter.
Now let me turn to the portfolio review. During the second quarter, the company invested a total of $17.1 million in four regulatory capital transactions. The four new investments positively contributed to the portfolio with a weighted average coupon of 10.1% and a weighted average yield to maturity of approximately 10.3%. The majority of securities were purchased in the primary markets. Yields of these new assets remain accretive to the investment portfolio.
During the second quarter of 2021, the company received proceeds of $4 million from 1 call and 5 paydowns. Subsequent to the end of the quarter, the company invested approximately $5.5 million and received partial paydowns to date of $1.8 million. We have targeted another investment of approximately $3 million at the time of this call.
At quarter-end, the estimated annualized effective yield generated by the invested portfolio, excluding cash and cash equivalents, was 9.47%, up from 9.32% in Q1. This portfolio yield has held stable above 9% for 18 consecutive quarters or 4.5 years running. I want to point out that this yield is produced with a majority of high-quality investment-grade assets.
I also want to mention that subsequent to the end of the quarter, we successfully closed an issuance of $10.8 million in a registered direct offering. This transaction was executed off the company’s active $150 million shelf registration. The issuance price was $21.89, a slight premium to NAV at the time of the transaction and, therefore, accretive to our shareholders.
Last year, one of the commitments ArrowMark made during the StoneCastle transition was to grow assets by investing our available credit line and through opportunities in the equity capital markets. We plan on growing assets using the shelf for accretive transactions in alignment with shareholder interest. We’re excited about the closed transaction and look forward to executing on more of these opportunities when market conditions are favorable.
In my closing remarks, I want to point out the continued advantages of our company and our stock. Our investment team continues to position the portfolio to seek the most advantageous risk-adjusted returns available in banking-related assets in the industry today yet we believe our stock price does not reflect the significant value added by our team and the continued outsized returns we are delivering to our investors.
Since the second half of 2015, we have earned or exceeded our $0.38 dividend, providing consistent performance for our shareholders. Today, the company still offers over 400 basis points of incremental yield versus other banking-related income-oriented vehicles. All the while, we continue to deliver consistent net investment income, a stable and growing NAV and a consistent annualized portfolio yield of over 9%. We believe the company’s stock, whether for an equity or a fixed income strategy, is offering significant value to shareholders at its current yield of approximately 7%.
Now I want to turn the call over to Pat.
Patrick J. Farrell — Chief Financial Officer
Thank you, Sanjai. 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 June 30 was $21.80 per share, up $0.18 from the prior quarter. Now on to 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 $4.2 million or $0.65 per share. Net operating expenses for the quarter were $1.6 million or $0.25 per share, resulting in net investment income for the quarter of $2.6 million or $0.40 per share. As 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 NAV. The net realized capital losses from investments were approximately $960,000 or approximately $0.15 per share. Realized losses due to foreign currency transactions were approximately $519,000 or $0.08 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 second quarter, the change in net unrealized appreciation on investments and foreign currency transactions was approximately $2.6 million or $0.39 per share.
I want to point out the 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 distribution. The regular cash distribution for the quarter was $0.38 per share, which was paid on June 28 to shareholders of record on June 21.
In summary, we began the quarter with a net asset value of $21.62 per share. During the quarter, we generated net income of $2.6 million, net realized capital losses of approximately $960,000 and the unrealized value of the portfolio and foreign currency transactions increased by $2.6 million. The sum of these components reduced by a distribution of $0.38 per share, resulted in a net asset value of $21.80 per share on June 30, which was up $0.18 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 87% 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-marked many of the assets in their portfolios.
At quarter-end, the company had total assets of $250.1 million, consisting of total investments of $246.5 million in cash, interest and dividends receivable and prepaid assets totaling approximately $3.6 million. The total assets reported this quarter reflects approximately $51.7 million of investment-related activities, which closed in the first week of the third quarter. Net of this transaction, the company’s total assets were $198 million at the end of the quarter, up from $182.5 million in Q1 or 7% sequentially. Our dividend yield at the end of the quarter was approximately 6.9%.
Now let me update you on the balance of our credit facility. On June 30, the company had $53.5 million drawn from the facility or 27% of total assets. Based on the 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 Sanjai for closing remarks.
Sanjai Bhonsle — Chairman and Chief Executive Officer
Thank you, Pat. Now operator, I’d like to open up the call for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions]. And our first question comes from the line of Chris O’Connell with KBW. Please proceed with your question.
Chris O’Connell — KBW — Analyst
Hi, good afternoon. So I’d like to start off with just the investment portfolio and what we’re seeing in the investments versus the posted amount of $247 million. It seems like there might have been something to reconcile with the $52 million due to the custodian in kind of netting those out. Can you just provide a little color around that?
Patrick J. Farrell — Chief Financial Officer
Yes. This is Pat. That’s exactly right. Due to the timing of a cash money movement that we had with a custodian on a hedge transaction, that’s what caused that discrepancy there, if you will, and it was resolved immediately after quarter-end. So it’s just a timing issue, really, that popped that up.
Chris O’Connell — KBW — Analyst
Okay. Got it. And is that — it is just filed, but I’m seeing there’s, like, $54 million, I think, with the, like, money market funds. So that, basically, $51 million or so that — take that out of the investment portfolio and the assets to get the leverage ratio, 27% that you guys referred to?
Patrick J. Farrell — Chief Financial Officer
You’re exactly right. Exactly right. That cash in the money market directly offset that due to custodian amount.
Chris O’Connell — KBW — Analyst
Okay. Got it. Makes sense. And congratulations on the successful offering. I was hoping just have you guys provide a little color or update. Is that an indication of a higher growth outlook that we could see in the second half of the year here?
Sanjai Bhonsle — Chairman and Chief Executive Officer
Yes. Hey Chris, this is Sanjai. How are you?
Chris O’Connell — KBW — Analyst
Good, how are you, Sanjai?
Sanjai Bhonsle — Chairman and Chief Executive Officer
Not bad. Yes. So in regards to the investment pipeline, it continues to be fairly active. And as you might recall from our previous comments, Q3 and Q4, generally speaking, are fairly active quarters, the fourth quarter being the most as it relates to issuance of new regulatory capital securities by banks, right? And today, we do have some availability on the credit line. But having said that, we would like to ideally match the investment pipeline with the growth of the company. And if the capital markets allow us to issue additional shares, we would be looking at that. So hopefully, that helps.
Chris O’Connell — KBW — Analyst
Yes, absolutely. And as far as the credit line goes, is that something that if there is a robust kind of growth outlook as you come into the back half of the year here, that it’s something that you might consider increasing in sizes?
Sanjai Bhonsle — Chairman and Chief Executive Officer
Yes. So we do have a fairly good relationship with our banking partner there who has indicated to us from time to time that they like to grow alongside the company. And all things constant, we do expect them to grow with us.
Chris O’Connell — KBW — Analyst
Got it. And then as far as the outlook goes with the pipeline on the reg cap side, is the stuff that you’re putting on still around the same yields in kind of high 9s, low 10 yields?
Sanjai Bhonsle — Chairman and Chief Executive Officer
Yes, that’s right. I mean, that’s kind of what we are seeing in the market today. There will be — on average, I’d say that’s kind of where we’ll end up in the 9s. And yes, so there’s really no material changes there.
Chris O’Connell — KBW — Analyst
Okay. Great. And then excluding the cash, like the steady amount that’s going to fall off the balance sheet. Can you just remind us of the interest rate sensitivity profile? And how much of the portfolio — investment portfolio’s floating rate?
Sanjai Bhonsle — Chairman and Chief Executive Officer
Sure. Pat, do you want to take that? Or do you want me to start?
Patrick J. Farrell — Chief Financial Officer
You could take it and I’ll add on, certainly.
Sanjai Bhonsle — Chairman and Chief Executive Officer
Sure. So Chris, today, if you were to look at it on a total asset basis, about 60% of the portfolio is in floating rate. And so — and that’s — it’s either LIBOR or SOFR type of indexed assets. So again, to clarify, on about $195 million of assets, think about 60% of those being floating.
Chris O’Connell — KBW — Analyst
Okay, great. Got it.
Sanjai Bhonsle — Chairman and Chief Executive Officer
Yeah.
Chris O’Connell — KBW — Analyst
All right. That’s all I had. Thank you.
Sanjai Bhonsle — Chairman and Chief Executive Officer
Thanks Chris.
Operator
There are no questions at this time. I will now turn the call back over to management for closing remarks.
Sanjai Bhonsle — Chairman and Chief Executive Officer
Well, everyone, thank you very much for listening in, and I look forward to answering any questions you all folks might have, and have a great night. Thank you.
Operator
[Operator Closing Remarks]