Greetings, and welcome to the StoneCastle Financial Corp. Quarter One Financial Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Rachel Schatten, General Counsel of StoneCastle Financial. Thank you. Please begin.

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 will depend on numerous factors, such as changes in securities of 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 March 31, 2020. The company undertakes no duty to update any forward-looking statements made herein. All forward-looking statements speak only as of today, May 7, 2020.Now, I will turn the call over to Sanjai Bhonsle.

Thank you, Rachel. Good afternoon, and welcome to StoneCastle Financial's first quarter investor call for 2020. Here with me today are Pat Farrell, our CFO; and Josh Siegel, a member of the Board of StoneCastle-ArrowMark Asset Management.I would first like to start off this call by acknowledging the many organizations and workers who are helping our country in this time of crisis. This is a challenging time for all, including our families and friends. And our thoughts and best wishes are with the entire medical community, including first responders and those families most affected by the coronavirus. Like many of you, we at, StoneCastle Financial, have been working remotely these last 2 months. Our technology teams work quickly to ensure that daily operations would not be affected, and I'm happy to say that the company had a seamless transition to remote operations. The management teams in Denver and New York City are working in concert in the best interest of our shareholders.Now on to the first quarter results. During today's presentation, I want to spend time discussing the company. Then I will provide StoneCastle Financial's quarterly results and portfolio review, and Pat will then provide you with greater detail on our financial results before we open up the call for questions. StoneCastle Financial's common stock was not immune to the extreme market volatility experienced since late February. Putting aside the market conditions weighing on the stock, the company's operations are solid and stable, and the investment team has been active in originating portfolio assets.Over the last few months, the credit markets tightened as the Federal Reserve stepped in to provide liquidity. Even though Q2 and Q3 predictions for U.S. GDP and unemployment are uncertain, we believe that once the current restrictions are lifted and the economy fully responds to the…

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 $19, down $2.83 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's investments, and lastly, distributions paid during the period. Let's review these components.Gross income for the quarter was $3.7 million or $0.56 per share. Net operating expenses for the quarter were $1.2 million or $0.17 per share, resulting in net investment income for the quarter of $2.5 million or $0.39 per share. Realized capital gains and losses in the quarter is the second component affecting the change in NAV. The net realized capital losses were approximately $301,000 or $0.05 per share, primarily due to premiums related to the 2 full calls in the quarter. 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 first quarter, the portfolio recorded unrealized depreciation of approximately $18.3 million or $2.79 per share. The fourth component affecting the change in net asset value is distributions. The cash distribution for the quarter was $0.38 per share. The distribution was paid on March 25 to shareholders of record on March 18.In summary, we began the quarter with a net asset value of $21.83 per share. During the quarter, we generated net income of $2.5 million, net realized capital losses of approximately $301,000, and the unrealized value of the portfolio investments decreased by $18.3 million. The sum of these components, offset by a distribution of $0.38 per share, resulted…

Thank you, Pat. Now operator, I would like to open up the call for questions.

[Operator Instructions] Our first questions come from the line of Chris O'Connell of KBW.

So just wanted to start with the investment portfolio and, I guess, a little bit of the quarter and then some of the outlook. First off, during the quarter, as I understand it, there was no investments made. First of all, is that correct? And then if so, I think there had been referenced to a couple of potential investments in community banks similar to the FNBC deal on last quarter's call.Can you just talk about maybe what happened with those investments? If they're still in the pipeline and got delayed? Or if you pulled back because of pricing or other reasons? Or if they pulled back and yes, start there.

So during 1Q, obviously, starting about mid-March, the country basically went down -- went into a shutdown, and we started to see an acceleration in market disruptions. And so during that time, I think people were just trying to find level on investments and probably just minding their -- the portfolios on a day-to-day basis. So in short, some of the transactions that we're looking at during 1Q naturally got pushed into 2Q. And as you know, we have a decent amount of dry powder to spend. And during this time, we kind of took the opportunity to assess the market because we want to be very prudent and methodical in how we deploy the capital. And as kind of dust cleared towards the end of 1Q, in 2Q, we started to see some pretty interesting investments across both the community banking space and the alternative capital space. And so during the quarter, we invested across three different transactions, one of them being the community banking investment.And generally speaking, these investments were driven by four sellers. And we believe that we've got them at a fairly attractive price and very happy with those three investments. And we do expect to see some of the investments that kind of went on pause during 1Q to materialize during 2Q or maybe even 3Q. But rest assured, the pipeline is fairly strong. We are seeing some attractive investments, but -- and like I mentioned a second ago, we will be prudent and methodical as we progress.Josh, would you like to add something?

That was pretty comprehensive. I mean, I do think the demand for capital is going to pick up either smart bankers who are ahead of the curve and want to reserve and have some dry powder for defensive reasons, and we're getting some inbound calls from banks that are thinking about leaning in and being offensive, that, if one of their neighboring banks runs into more trouble than they expected, it could be an opportunity to acquire an adjunct physically located bank.

Got it. That's helpful. And yes, I guess going on that point at the end there, I mean, I think we've already seen a good amount actually in last, I guess, as earnings has kind of started to wind down in the last week or two, some preferred and sub debt raises from $10 billion plus, but still community banks pick up here so there does seem to be a greater demand for capital. If you could maybe separate the portfolio to kind of community bank investments and then the alternative capital investments and maybe frame the types of opportunities or the demand for opportunities that you're seeing into the second quarter?And then on the alternative capital side, is $30 million still the goal in order to bring over kind of in the short-term? Is that time line been pushed back at all as you kind of wait to see how the market plays out?

Yes. So Chris, taking the first part of your question, we are seeing, and we are having calls as it relates to the community banking space for new issuance in the primary market, right? And that's -- we're getting a lot more inbound inquiry there than, say, we did during 4Q or even the beginning of 1Q, and so excited about that. But as you know, in that -- in the primary market, that the community banking space is fairly resilient and the spreads there are still pretty tight, like I mentioned in my initial comments, between 5% and 5.5%. So the opportunities that we've seen that are attractive are more in the secondary. And I'm fairly certain that a couple of deals will come through in the primary market that will kind of fit our investment criteria. And then moving on to the alternative capital space, like I said, the pipeline there is fairly strong, too. And I -- probably equal weight in terms of the opportunities that we're seeing on both sides and that's definitely a lot more exciting than, say, 4Q.And in regards to your last question, the last part of the question regarding the $30 million, obviously, we made some decent progress during 2Q. And over the next couple of months, we think, we are on target to kind of hit the $30 million investment goal that we had mentioned in the prior calls.

Great. That's helpful. And then I guess just rounding off portfolio growth here. I mean, it sounded like from the prepared comments that there has not been any pay-downs, redemptions or calls to quarter to date. Is that -- did I hear correctly?

Pat, do you want to take that?

Yes. Do you mean -- well, in Q1, we certainly did. But for Q2, we haven't reported anything on that yet. We have not had any so far this quarter.

Great. All right. And then just moving on quickly. What was the investment yield this quarter?

10.92%.

Got it. Okay, great. And then -- and I'll just do one more and then step out. But is there -- we can get the call reports as they come out. But is there anything preliminarily that you're worried about in the current portfolio within the community bank investments? I know it's early on, and it's mostly just reserve builds right now so there's not too much probably that's changed quarter-over-quarter really in the actual financials. But is there any single investment or area of investments that you're taking particularly good care putting under the magnifying glass?

Chris. I'll take the first part of the question, which is more our portfolio-specific. And I'll let Josh kind of talk a little bit more the wider industry background. And so, as it relates to our portfolio, like I've mentioned, we are in touch with a decent of our portfolio investments. And I'm happy to say that, to date, we have not heard of any red flags popping out from banks management teams in the particular markets. And as it relates to the banks, obviously, they are increasing their allowances. They'll probably see some increased defaults. But as you know, these banks went into this downturn with fairly strong balance sheet and with Tier 1 capital ratios meaningfully above the minimum required and decent amount of liquidity.Also, the PPP program, the banks are fairly excited about that, as you might guess. There, the underwriting fees of anywhere between 100 basis points to 500 basis points, that income is going to be fairly strong for banks -- some of the banks. And that should help partially mitigate any increases in allowances, etcetera. So in summary, we have not -- none of the banks have waved any red flags to us yet. And we really don't expect that in the near-term here.Josh, anything to add?

Sure. I think we have just some general views. And as Sanjai just said, if you look at Q1 in general, all right, which is obviously the most current data anyone has on banks in the banking industry outside of some head hog 8-K, which is quite rare of an event, Q1 was, for the most part, unstated, right? Through basically mid-March, life was life. So while we would expect the beginnings of things, two weeks of lockdown isn't going to show up in bank's balance sheets that quickly. So if we just think about the general cycle, banks report 30 to 45 days after the quarter. So March 31 would be end, you're talking May 1 to May 15, right. Kind of the window we're in here. But that's only talking about credit issues, TDRs, any of those issues on the banks, that would have occurred in Q1. That's not showing up in any great way.Now that doesn't mean that most, if not all, bankers are expecting Q2 is not going to be as rosy. But that doesn't show up until, again, 30 to 45 days after the end of the quarter. So now we're talking in June to in July, to August 1 to August 15. So I don't expect to see from almost any bank in our portfolio or generally material information until probably near the end of June at the earliest. And for credits, yes, that'll start to play out. You've already seen some relief from the regulators, giving banks flexibility that if credits were in good standing before COVID lockdown, they can defer payments or do some restructuring without classifying it as a TDR. And from chats I have been having with folks in DC., there are definitely discussions about other types of regulatory easing to give the economy time as well as to give the Federal Government time to put more stimulus dollars into the system.So the short version of this long answer is, no, I don't think we're going to see anything in the short run. I think, over the coming months, you'll start to see where some of the pain is occurring. It's probably going to be more weighted to metropolitan markets just due to where COVID concentrations are. In Duluth, Minnesota or [indiscernible] Fontana, the lockdown is nowhere near as severe and so the economic impact to the local pound isn't as bad. We've heard that pretty consistently. So I'm not expecting to hear and see any real data for a bit of time, if that makes sense?

Our next questions come from the line of Devin Ryan of JMP Securities.

This is Brian Mckenna for Devin. So just first one for me. I'm curious if the remote working environment impacts your ability at all to underwrite and source deals? And really, how much of your business gets done in person?

Brian, good question. And the short answer to that is it has not impacted us whatsoever. With all the technology that's available to us, it's been fairly seamless. Our sourcing calls, our due diligence calls, our investment community calls, that I'm glad to say, has been all seamless. And as probably you have read, having work at home makes for some fairly long days.So we're pretty efficient, and we get things done on a pretty timely fashion.

Got it. And then net investment income has been pretty steady the last several quarters here. So, I'm just curious how you're thinking about the dividend and dividend coverage? And is it your expectation that you'll continue to cover it moving forward?

Yes. So in regards to that, as you know, any dividend decisions that we make has to be approved by the Board. And as time progresses here, we will be having some meaningful discussions with our -- I shouldn't say, meaningful, we'll have discussions with our Board in regards to dividend on a quarter-by-quarter basis. And as where we sit today, like I've mentioned, our portfolio is still fairly robust. And we really don't see any changes there here in the near-term.

We have no further questions in the queue. I will now hand the call back over to management for any closing remarks.

Yes. So I just want to thank everyone for listening, and we appreciate your support of StoneCastle Financial, especially during these uncertain times and market volatility. We are confident we'll come out of this stronger and more resilient. And I look forward to finally meeting all of you in person in the future as the country reopens, and we're back to our new normal.So, have a good evening. And again, thank you very much, and happy to answer any questions that you might have on the follow-on.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.