Welcome to the StoneCastle Financial Corp. Q1 2021 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] Now I would like to turn the call over to Julie Muraco, Investor Relations of StoneCastle Financial. Please go ahead.

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 volumes 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 this forward-looking statements included in this presentation on information available to us as of March 31, 2021. The Company undertakes no duty to update any forward-looking statements made herein. All forward-looking statements speak only as of today, May 13, 2021. Now I will turn the call over to Sanjai Bhonsle.

Thank you, Julie. Good afternoon, and welcome to StoneCastle Financial's 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 StoneCastle Financial's 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, industry research continues to show that 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 as they reported 21% net income growth. During that same period, 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 1.9% versus the previous quarter. We have seen this trend continue during the first quarter. A majority of the company's portfolio of community banks have reported their first quarter results. StoneCastle's community banks portfolio reported net income and deposit growth of 7.1% and 4.6%, sequentially during the quarter and 62% and 23% on a year-over-year basis. They also reported average Tier 1 capital ratios at 13.3%, which is up slightly from Q4. Also, StoneCastle's community bank portfolio reported a fourth quarter change in reserves up 1.2%. And 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…

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 at March 31 was $21.62 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 $4.1 million or $0.63 per share. Net operating expenses for the quarter were $1.5 million or $0.23 per share, resulting in net investment income through the quarter of $2.6 million or $0.40 per share. As a reminder, in Q4, we had $0.03 per share of non-recurring income related to the reimbursement of certain expenses in connection with the transition to ArrowMark. As is the case every quarter, the timing of calls, pay downs 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 gains from investments were approximately $91,000 or $0.01 per share. Realized gains due to foreign currency transactions were approximately $1.8 million or $0.28 per share. The third component changes and 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, the change in net unrealized depreciation on investments through foreign currency transactions was approximately $860,000 or $0.13 per share. I want to point out the gains and losses from foreign currency hedging activities do not impact our net income.…

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. [Operator Instructions] Our first question comes from Chris O'Connell with KBW. Please go ahead.

Hi. Good evening, guys.

Hello, there.

Hey, Chris. Hope all is well.

Thanks. And the same. So I just want to start off with the portfolio yield this quarter. Can you dive in, I guess a little bit more than I was expecting given the shift over the past couple of quarters toward the regulatory capital investments, which are typically higher yielding. Can you just walk through some of the dynamics there? And maybe based on what you're putting on the books now where you can see that yield kind of stabilizing going forward?

Sanjai, I'll take that.

Sure. You can start, I'll add if you miss anything.

Yes. That's fine. Yes. This quarter we had – one of the big securities that came off was a maturity of young partners. And that was earning a 10.5% yield for us. So that was a big piece that came off. We also had a number of pay downs that also came through on securities that were earning in the 8s to high-9s. We did put on a number of securities, some are 12, 10, 10, but we did have a couple that were in the mid-7s or low-7s. So it's just a function of – during this period what we happen to put on. Overall in terms of the income, as you know, it's timing of when securities are called or sold at the end of last quarter, we had a number of securities that were called right at the end of December. So it takes a little time to put all that money to work. Sanjai, do you want to add on?

Yes. I mean, the only thing I would add Chris is, when I look at our pipeline, it is still holding on to some fairly healthy coupons. So I think high-9s, low-10s type of spread over a base rate, right. And over the last year you've probably seen some – some of the active trade in [2WF]. We’re trying to optimize the portfolio. But I started a venture, I'd say going forward our pipeline looks pretty good in terms of kind of asset stripes.

Got it. The low-7s yield that you are mentioning was that yields being rolling off this past quarter or was being put on?

We had a mix, we actually had – our residents came off at 750. And we had – let's say, we've had a [indiscernible] came on it at 738. So it's really just a mix. I mean, like I mentioned, we put on $6 million – $6.5 million that was earning between 10 and 12.

Okay. Got it. So is it fair to characterize the yield is kind of bouncing somewhere around the 950 range or kind of similar to what somewhere between this quarter and last quarter going forward all is equal?

Yes. I would say so.

Okay, great. And then just looking at the outlook here, I appreciate your comments on the overall environment and the potential for some ramp up from the U.S. are based on the regulatory capital securities going forward. I know that given the seasonality dynamics, 4Q is a little bit stronger on those investments and 1Q is usually a little bit of a lag. The first month or so if you triple that seems to be some pretty good origination volumes to kick off 2Q. Is the overall pipeline holding up to what you guys have already put on in the second quarter? And do you it’s kind of continue at that pace as you move through the rest of the quarter?

Yes. The short answer is yes. What we saw even during the – first of all, I'm just taking a step back. 1Q was a bit of a slow start just because it seems like this year people took their time to come back to the desk. I'm assuming it's all about COVID fatigue. But however, early part of February, the markets kicked in pretty nicely, and it was really on the secondary side, right? Because new deal ramp up primary issuance, adaptive structure, et cetera, so it takes a bit of time, however, fortunately the secondary market was 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're seeing in the secondary market. And I would guide that it's going forward for the balance of this quarter and early part of next quarter, you'll probably see the same mix in terms of new issue versus secondary.

There are no further questions. I would like to turn the floor over to management for closing comments.

Yes. Stacy, I'll just probably give another few seconds here to see if does any other questions coming through. I think we have Chris back.

Chris O'Connell.

Hi. Just follow-up a little bit, kind of a small item, but I was just wondering what the dynamics were around. The other fee line, like miscellaneous fees and seems like it dropped off to one of the lower levels that you guys have seen recently and maybe some of the drivers around that.

Sure. The other income was that reimbursed in last quarter was the reimbursement that we have related to the transition to ArrowMark. So we had reimbursement that came in last quarter was a one-time item.

Okay. I mean, it seems like the run rate even prior to last quarter, though, it was close to kind of just over like double. Where it came in this quarter or is this kind of a 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, got it. And then in terms of just maybe a little basic overview, could you just walk me through again just exactly what the foreign hedging strategy is and how that runs through you get the financial statements each quarter?

Sure. So what we do on a monthly basis is the PMs will look at the amount of securities that are in euros or pounds or whatever currency we happen to have and then hedge that for the month. At the end of the month, they'll close out that position. And as a result, you'll see this quarter, we had some big gains there, $1.8 million, $1.9 million in currency gains this quarter. The other side of that then is that the portfolio securities, some of them might go the other way. So the value of those decrease then that's the whole purpose for doing the hedge. All those transactions flow through on the income statement, on the statement of operations separately. And those are all laid out, right there. So $1,675 million for realized gain loss on the contracts and then translations, et cetera. But everything flows through separate line items there. Is that helpful?

Yes. Absolutely. And so those are being fully hedged. Is that correct?

Yes.

Got it. Okay. That's it. I think I'm all set. So I'll step out of the queue for now. Thank you.

Okay.

[Operator Instructions]

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 at this time. And thank you for your participation.