Welcome to the StoneCastle Financial Corp. First Quarter 2018 Investor Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Rachel Schatten, General Counsel of StoneCastle Financial.

Good afternoon. 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 its presentation on information available to us as of March 31, 2018. The company undertakes no duty to update any forward-looking statement made herein. All forward-looking statements speak only as of today, May 3, 2018. Now I will turn the call over to StoneCastle Financial's Chairman and Chief Executive Officer, Josh Siegel.

Thank you, Rachel. Good afternoon, and welcome to StoneCastle Financial's first quarter 2018 investor call. In addition to Rachel, joining me today is Pat Farrell, our Chief Financial Officer. I'd like to start the call today with a review of StoneCastle Financial's quarterly results, as well as take time for a portfolio review due the number of transactions that occurred during the quarter. Then I will turn the call over to Pat, who will provide you with greater detail on our financial results before I open up the call for questions. Net investment income for the quarter was $2.7 million or $0.41 per share. Total assets were approximately $182.6 million, and the value of the investor portfolio was $178.8 million. During the quarter, the company invested $58.2 million in seven investments, and sold nine investments totaling $43 million. At quarter end, the estimated annualized current portfolio yield was 8.16%. However, excluding the investment in PFF, iShares U.S. Preferred Stock ETF, it would have been 9.17%. I'll have more comments on this during the portfolio review. The net asset value at the end of the quarter was $21.58, up $0.02 from the prior quarter. We believe no meaningful credit issues currently exist within the portfolio and the majority of the investments continued to be scored investment grade by Kroll Bond Rating Agency. Now, let me turn to the portfolio review. The first quarter was an active one with the number of purchases and sales related to our investment in a new pooled vehicle, Community Funding 2018, which closed February 23. As I noted last quarter, StoneCastle sold nine holdings to the vehicle, valued at $43 million and in return received $26 million in cash and $17.6 million par amount of preferred shares. The average investment size of the holdings sold was…

Thank you, Josh. As I do each quarter, I will present the financials by going through the detailed components to help you understand the value of the company. The net asset value at March 31, was $21.58, up $0.02 from the prior quarter. The NAV is comprised of four components; net investment income, realized capital gains and losses, the change in value of the portfolio and investment, and finally distributions paid during the period. Let me walk through these components. Gross income for the first quarter was $4.2 million or $0.65 per share. Net investment income for the quarter was $2.7 million or $0.41 per share. Net operating expenses for the quarter were $1.5 million or $0.24 per share. During the quarter, our advisor waived approximately $87,000 in management fees on the PFF investment. The second component affecting the change in NAV for the quarter is realized capital gains and losses. The net realized capital loss for the quarter was approximately $1.43 million or $0.22 per share. The majority of this loss was due to the contribution of nine investments into Community Funding 2018. The third component changes an unrealized appreciation or depreciation of the portfolio relates to have the value of the entire investment portfolio has changed from the previous quarter end to the current quarter end. For the first quarter, the unrealized appreciation of the portfolio increased by approximately $1.36 million or $0.21 per share, nearly $800,000 of the unrealized appreciation was due to the Priam corporate action and subsequent acquisition of common stock of Howard Bancorp. As Josh mentioned, this transaction produced the total return of 1.6 times our investment and an annualized IRR of approximately 14%. Also of note this quarter, Community Funding CLO had unrealized appreciation of approximately $300,000. As I note each quarter, the…

Thank you, Pat. Now, Operator, we would like to open up the call for questions.

Thanks. Good afternoon.

Good afternoon.

Wanted to ask two questions, Josh. One, I'm sure you were pleased to see the announcement that Wintrust is acquiring Chicago Shore. And it looks that transaction will close late in the third quarter. So curious if you've kind of done the analysis to understand how that might affect the mark where you're carrying Chicago Shore, and any unpaid dividends up to this point.

Well, the marks are the marks. We'll see how the Street reacts. Clearly, we've made sure and communicated what's publically out there. While I would say we don't expect any surprises, mergers aren't done until the fat lady sings. So let's just always be a little guarded not to count our chickens until they're actually in the bank account. That said, Pat, what's our current accrual right now?

Yeah, so right now we've got about $0.24 in back accruals, if you will, that Chicago Shore would be paying us up on.

Today?

As of today, right. And that goes for about $0.022, $0.023 a quarter looking forward. So you could add another couple of quarters in possibly, depending on - your guess is good as ours with regard to when the timing goes, but that's the rate with them. Other than that, we don't really know anything else about it, other than that was in the press release.

Got it. Okay. That's helpful. And then, I guess, second question, you saw the activity listed here in the first quarter including the term loan in American Capital Bank Corp. Just curious maybe why that may not have fit into the new CLO?

It'd be for various reasons. Sometimes it has to do with maturities. It has to do with the nature of the banks, even though credit can good. That particular institutional investor has some areas they like and some areas they don't like. And so, in that specific situation it wasn't appropriate to put it in there. But also, we are in a balanced way cognizant of trying to maximize our capital to deploy. And something that's yielding generally in the high 8ths or 9 or above would actually - I mean, yes, we could get further out of it by putting it into the vehicle. But we actually get more assets deployed if we keep it directly on the balance sheet. So $7 million of $9 million on the balance sheet versus ballpark $3-odd-million or $2.8 million, 40% of that - actually, $2.8 million exactly at something higher, but we need to get our dollars deployed so we can maximize earnings for the company. So in the case of American Capital, I'd have to go back if that was specifically for the sort of gross deployment of dollars we yield, or if this was also one that didn't fit the specific profiles for that institutional investor. But in the either case, we're happy with the earnings on that.

Yeah, understood. Okay, well, that's helpful. That's all for me. Thank you.

Sure.

Our next question is from Devin Ryan with JMP Securities. Please proceed with your question.

Hey, good evening, guys. This is Brian McKenna filling in for Devin. First one…

Hey.

Hey, how are you?

Good.

First one for me, maybe could you just drill in a little bit to just some of the drivers you're seeing right now in the backdrop? I know you mentioned it's a little bit slower, so just trying to get some additional color there. And then, kind of secondarily on top of that, I know there are some puts and takes. But can you talk about what the investment pipeline looks like today and then how that compares versus yearend 2017 and one year ago?

Sure. I mean the attributes that are driving demand, of course, center on always a few key issues. One is the growth rate of the loan book of banks. If the growth rate of the loan book is exceeding retained earnings, then they need capital from time to time. When you look at a private bank merging with another private bank, it's usually not a terribly desirable transaction for the acquired if it's a 100% stock of someone else's private bank. You do want to get some dollars out. So we're seeing an increase in the interest from some M&A transactions that would like to have a cash component. And a very effective way to do that is with sub-debt. Because right now we are seeing, let's say, tepid loan growth in the industry. I mean, it's fine, it's continuing to grow, but it's not on a toward-pace [ph]. The economy is sitting stable. There is just not a huge amount of retained earnings related need, although but that topically comes up here and there. The equity markets over the last, call it, six months are still keeping bank valuations at reasonably high levels. So if you are a public bank and you're buying a private bank, you're looking to raise common stock at a premium to book. And quite a substantial one that probably has at least a nominal effect of cost that could be less unless you think you're going to go from two book to three book, in which case doing something preferred would make more sense. So we've seen across the whole industry, I think a lot of folks sitting tight, because the bid ask on some of the M&A transactions, we see them every couple of days, something getting announced. More on the small to…

Yeah. Okay. Got it. I appreciate all the color. And then, just second one for me, just what - I appreciate the commentary just on the ETF assets, but is there any kind of sense of urgency to get those kind of rolled into other longer-term investments, or how should we think about the timing of that kind of coming and rolling off into higher yielding investments? Just trying to gauge the timing from kind of here to year-end per se?

No, there is no rush. Pat and I are having my thighs. We're trying to put out as quickly as we can. But we didn't like the fact that the cash position and sort of the disparity in that curve, we said, look, if we pick up some of PFF, which we always like the credit profile and what's underneath there, the yield on its own is okay. But we said, look, we're not going to charge investors - and it's granted [ph] to our election. But we're not going to charge investors a full quarter of management fees to pick up dividend. And so we waived our fees, so if you sort of waive our fee, all of a sudden that 5.60 is more or like 7-and-change-percent, it's not bad and it definitely helps to get the earnings. We try to be shareholder friendly. For us - I think, people know at this point, we're very long-term oriented. And so, if we can extract more free cash flow for our investors, while we continue to process new credits, that seem to be the prudent. We haven't actually done it in a while. But we want to do that while we finish at the pipeline, but now we're not sitting on our laurels. We are pushing the team and are sort of referring agents as hard as we can. In fact, the ABA recently brought us another deal, so they still do earn something for that fee that we pay them, and we're happy about that. So now, we're pushing hard and want to have it deployed as fast as we can. But we're not going to bend on credit quality.

Yeah, okay. Got it. I appreciate the color. Thanks, guys.

You bet.

[Operator Instructions] Our next question is from Christopher Testa with National Securities. Please proceed with your question.

Hey, good afternoon, guys. Thanks for taking my questions.

Hi, Christopher.

Yeah, just curious obviously congrats on successfully doing another pooled transaction. Just wondering, Josh, is there a certain limits of how much of securitizations as a percent in your investments, you're comfortable of doing, is there a certain sort of soft cap that you have on that?

Well, there is, but you can't, it's not a number. So for example, if we did a greater percent of our portfolio where just to have fun with that, it was 80% equity and 20% debt. That's one thing. If we do a transaction that's 20% equity and 80% debt, that's a different thing. So we sort of drill to the underlying exposure that's what we care about. And so we really look on that basis. I don't think like I said, we're going to do a whole lot more than what we have here. I think we would want to grow more organically from here, and we're sorting of pushing from more preferred investments and all those things that we see coming through. So there is technically nothing wrong with doing them as long as we're very, very careful and consent of what risk for taking and we are.

Got it. Okay. And just touching on that a bit, I think, you had mentioned that, you're putting an additional $10 million of sub-debt into the structure, traditionally - and correct me if I'm wrong, I don't know if that varies on a case-by-case basis. But is there a limit generally to how much the debt holders will tolerate in terms of how much sub-debt versus term debt goes into these?

Well, sub-debt and term debt are pretty much anonymous, if whether a senior debt or sub-debt.

Okay.

Sub-debt being a Tier 2 capital instrument, senior debt just being debt for a bank, clearly the sub-debt is preferable for the institution - no, but for the institutional investors, compared to the days of trust preference, which were deferrable and sub-debt is non-deferrable. They are happy with 100% sub-debt.

Yeah, okay. Got it. And I appreciate your comment to the previous gentleman's question about, CSIL [ph] and all of that. I'm just curious to the extent that you get your crystal ball out, how much - when do you think banks are going to start waking up to this? Because I know, you had mentioned, in the white paper, basically that you wrote that you could go from well capitalized to cease and desist overnight if this came in. And it seems that given the kind of lackluster deal flow going on that it seems that banks are asleep at the wheel of this. Are they just generally procrastinators by nature? Or are they not fully aware of this? Any detail there is appreciated.

Great question. Well, one of my favorite Texas bankers told me a line years ago, and he said there's two bankers' prayers. There's the morning prayer and the evening prayer. And the morning prayer says, God, don't let me do something first and do something stupid and the evening prayer is, God, don't let me wait too long and miss it. And that is very much the adage of most bankers. And I say that lovingly, because we do love these banks. But they are not quick to react. It has been the case that I've seen in 25 years dealing with these banks that they tend to - I wouldn't say be asleep at the wheel, but reticent to act early. And that tends - right, I mean - if we talk about CSIL [ph] that's exactly why the IASB and FASB are sort of forcing this down the throats of public companies saying, if you're not going to reserve early enough, we're going to make to do it, because none of you guys had enough reserves going into the last crisis. So it's sort of a public recognition of we think that institutions are a bit slow to react until they see the fire started. So it's not that we're seeing it coming, but you've had such benign credit markets for so many years now. The tepid management team at the bank would say, well, there's nothing to worry about right now, it's coming in 18 months, we'll deal with it later. The problem is the crowd mentality, right. When we get there and all of the banks start calculating the numbers, and say, I need capital. It's unfortunate for them, great for us and our investors, the rates might have to go up a lot, because there is just supply and demand. There isn't $40 billion or $20 billion, or even $10 billion of private community bank capital investors available. And if there is that much need, well, I'm sorry, first-come first-serve, and the highest price wins. And it's not like a secret. We've told them this. We've told them this publically. We've talked about this in bank meetings and trade association meetings, trying to wake them up. We published that paper. So I think the ABA is spending an increasing amount of time with their accounting policy staff on this. I'm seeing the journals American Banker, SNL writing more about it. So we can only be - our voice is only so loud, even though we're a pretty prominent voice in the industry, they have to decide on their own. And I love clichés. You can lead a horse to water, but we can't make them issue capital, so…

All right, now appreciate that. And last one for me, Josh, we've heard a lot about potential Dodd-Frank rollbacks and I know you've spoken on this previously. But it's gotten more media attention recently. Just curious if you could kind of just give us the lay of the land on just how beneficial the current proposals would be for community banks? Is this really just optically something that looks nice or is this something that's going to be meaningfully - a meaningful tailwind rather for community banks?

Well, okay, couple of answers in there. Hensarling had been reluctant to accept the senate version of the Crapo bill. There seems to be some growing pressures that may be in the coming weeks, although I've only heard it from the R side of the aisle, that we might end up taking it as it is. On the other hand, I've heard from more than one congressperson that the longer this moves into the summer and you get closer to the election season, there is going to be a growing reluctance of the D side to pass anything pro-bank. So let's just sort of keep that in the back of our minds. As it relates to provisions in the current senate draft, because of course the house draft has a couple of different issues, will it help community banks? Yes. Do the Dodd-Frank issues have much effect? No. We'll help and we were involved in some of that, working with Hensarling in his - and other members of the house financial services committee on the house side, bringing up some of the issues that bankers had raised to us, such as for example HMDA data, the collecting of certain demographic socioeconomic data related to mortgages. Well, community banks are a small piece of the national mortgage pie. Yet, having to pull X number of employees of a 70% bank to calculate this information, it's not going to change the national statistics in any meaningful way, but it was quite a burden on small banks. So there are a number of those kinds of things that are in there that would help. So it will ease things on the margin. It's not going to kick the doors down and have wild profitability, because banks are already actually having quite strong profitability with consistent year after year in the 9s. So even with a kind of a slower market we're still generating 7-plus-percent yields on strong investment grade credits. So we like that. So the worst case is things stays they are and the banks stay profitable. The best case is no great change, but on the margin life is a little easier for smaller bank. Maybe they could do a bit more lending. It could have a more meaningful impact for regional and money center banks that do have Dodd-Frank constraints. But that will still be a TBD as well.

Got it. Okay, that's all for me. Thanks for taking my questions.

Absolutely.

We have reached the end of the question-and-answer session. I would like to turn the call back over to management for closing remarks.

Thank you, operator. Well, we as always appreciate the investor support in our company. And have a wonderful summer. And we look forward to speaking to you in August.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and have a good day.