UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY

 

  Investment Company Act file number   811-22853          

 

  StoneCastle Financial Corp.  
(Exact name of registrant as specified in charter)
 
152 West 57th Street, 35th Floor
  New York, NY  10019  
(Address of principal executive offices) (Zip code)
 
Joshua S. Siegel
StoneCastle Financial Corp.
152 West 57th Street, 35th Floor
  New York, NY  10019  
(Name and address of agent for service)

 

Copies of Communications to:

John P. Falco, Esq.

Pepper Hamilton LLP

3000 Two Logan Square / Eighteenth and Arch Streets

Philadelphia, PA 19103-2799

(215) 981-4659

 

Registrant’s telephone number, including area code: (212) 354-6500

 

Date of fiscal year end: December 31

 

Date of reporting period: September 30, 2015

 

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

 

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

Item 1. Schedule of Investments.

The Schedule(s) of Investments is attached herewith.

 

  StoneCastle Financial Corp.
Schedule of Investments (unaudited)
 

 

 As of September 30, 2015

 

      # of    
      Shares/Par    
Company(1)  Investment  Amount ($)(2)  Fair Value 
Term Loans – 32.5%            
Banking – 32.5%            
Citizens Bancshares Co.  Senior Term Loan, 8.75%, 12/21/2024  $13,250,000  $13,250,000 
First Citizens Bancshares, Inc.  Subordinated Term Loan, 8.625%, 6/30/2025  $10,000,000   10,000,000 
Linden Bancshares, Inc.  Subordinated Term Loan, 8.75%, 07/31/2025  $4,000,000   4,000,000 
Market Street Bancshares, Inc.  Subordinated Term Loan, 6.50%, 8/14/2025  $7,500,000   7,500,000 
Sandhills Holding Company, Inc.  Subordinated Term Loan, 8.75%, 7/31/2025  $8,500,000   8,500,000 
Victory Bancorp, Inc.  Subordinated Term Loan, 8.50%, 9/22/2025  $2,500,000   2,500,000 
Williams Holding Company, Inc.  Subordinated Term Loan, 8.75%, 6/30/2025  $1,000,000   1,000,000 
   Total Term Loans
(Cost $46,750,000)
       46,750,000 
Debt Securities – 22.5%            
Banking – 22.5%            
Bankwell Financial Group, Inc.  Unsecured Fixed Rate Subordinated Notes, 5.75%, 8/15/2025  $7,500,000   7,509,375 
Cornerstone Community Bancorp  Subordinated Debenture, 8.80%, 2/27/2025  $5,000,000   5,000,000 
Country Bank Holding Company Inc.  Subordinated Debenture, 8.50%, 5/15/2025  $6,000,000   6,000,000 
Freeport Bancshares, Inc.  Subordinated Debenture, 8.875%, 2/17/2025  $3,150,000   3,150,000 
MidWest Community Financial Corporation  Subordinated Debenture, 8.50%, 11/24/2024  $3,500,000   3,500,000 
MidWest Community Financial Corporation  Subordinated Debenture, 8.50%, 3/3/2025  $1,500,000   1,500,000 
MMCapS Funding I, Ltd. / MMCapS Funding I, Inc.  Fixed Rate Mezzanine Notes, 8.04%, 6/8/2031, 144A(3)  $6,512,291   5,681,974 
   Total Debt Securities
(Cost $31,706,529)
       32,341,349 
Trust Preferred Securities – 33.4%         
Banking – 33.4%            
Amboy Capital Trust I  Trust Preferred Security, 9.00%, 7/29/2029, 144A(3)  $15,500,000   15,500,000 
Capital City TPS LLC Series 2015-1  Capital City TPS 2015-1 9.74%, Note, 9/30/2030, 144A(3)  $1,920,854   1,925,656 
Central Trust Company Capital Trust I  Junior Subordinated Debt, 10.25%, 7/25/2031  $2,500,000   2,532,812 
Countrywide Capital Trust IV  Trust Preferred Security, 6.75%   38,562   978,318 
Deutsche Bank Contingent Capital Trust V  Trust Preferred Security, 8.05%   57,444   1,609,581 
First Alliance Capital Trust I  Junior Subordinated Debt, 10.25%, 7/25/2031, 144A(3)  $6,500,000   6,558,906 

 

1 StoneCastle Financial Corp. | See notes to Financial Statements  
 
      # of    
      Shares/Par    
Company(1)  Investment  Amount ($)(2)  Fair Value 
             
Banking (continued)            
First Citizens TPS LLC Series 2015-1  First Citizens TPS 2015-1 9.74%, Note, 9/30/2030, 144A(3)  $2,240,997  $2,246,599 
M&T TPS LLC Series 2015-1  M&T TPS 2015-1 9.74%, Note, 9/30/2030, 144A(3)  $2,561,138   2,580,347 
Mercantil TPS LLC Series 2015-1  Mercantil TPS 2015-1 9.74%, Note, 9/30/2030, 144A(3)  $4,802,135   4,832,149 
Merrill Lynch Preferred Capital Trust III  Trust Preferred Security, Series D, 7.00%   21,729   551,265 
Merrill Lynch Preferred Capital Trust IV  Trust Preferred Security, Series E, 7.12%   30,263   769,285 
Merrill Lynch Preferred Capital Trust V  Trust Preferred Security, Series F, 7.28%   76,206   1,944,015 
Morgan Stanley Capital Trust VIII  Trust Preferred Security, 6.45%   51,578   1,298,218 
National Bank of Indianapolis TPS LLC Series 2015-1  National Bank Of Indianapolis TPS 2015-1 9.74%, Note, 9/30/2030, 144A(3)  $4,321,922   4,343,532 
PrivateBancorp Capital Trust IV  Trust Preferred Security, 10.00%   13,322   357,696 
   Total Trust Preferred Securities
(Cost $48,626,855)
       48,028,379 
Preferred Stocks – 37.1%            
Banking – 37.1%            
Banc of California Inc.  Depositary Shares, Each Representing a 1/40th Interest in a Share of 7.375% Non-Cumulative Perpetual Preferred Stock, Series D   40,000   1,023,200 
Blue Ridge Bancshares, Inc.  Fixed Rate Cumulative Perpetual Preferred Stock, Series B, 9%  $200,000   200,000 
BNCCORP, Inc.  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $13,750,000   13,750,000 
Chicago Shore Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $6,400,000   6,400,000 
Chicago Shore Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series B, 9%  $150,000   150,000 
Citigroup Inc.  Depositary Shares, Each Representing a 1/1,000th Interest in a Share of 7.125% Fixed Rate Non-Cumulative Preferred Stock, Series J   104,054   2,801,134 
Colony Bankcorp, Inc.  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $3,661,000   3,661,000 
Community West Bancshares  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $1,481,000   1,481,000 
Fidelity Financial Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $2,579,000   2,579,000 
Fidelity Financial Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series B, 9%  $210,000   210,000 
First National Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $1,016,000   1,005,840 
First Priority Financial Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $709,000   709,000 
First United Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $9,000,000   9,000,000 
Katahdin Bankshares Corporation  Floating Rate Non-Cumulative Preferred Stock, Series D, 8.75%  $10,000,000   10,000,000 
Tennessee Valley Financial Holdings Inc.  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $100,000   104,050 
Tennessee Valley Financial Holdings Inc.  Fixed Rate Cumulative Perpetual Preferred Stock, Series B, 9%  $49,000   61,924 

 

  See notes to Financial Statements | StoneCastle Financial Corp. 2
 
Company(1)  Investment  # of
Shares/Par
Amount ($)(2)
  Fair Value 
           
Banking (continued)          
The Queensborough Company  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $250,000  $247,500 
   Total Preferred Stocks
(Cost $53,694,834)
       53,383,648 
Convertible Preferred Stocks – 3.6%         
Banking – 3.6%            
Civista Bancshares Inc.  Depositary Shares, Each Representing a 1/40th Interest in a 6.50% Non-Cumulative Redeemable Convertible Perpetual Preferred Share, Series B   59,001   1,958,833 
SB Financial Group Inc.  Depositary Shares, Each Representing a 1/100th Interest in a 6.50% Non-Cumulative Convertible Perpetual Preferred Share, Series A   250,000   3,250,000 
   Total Convertible Preferred Stocks
(Cost $3,975,025)
       5,208,833 
Common Stocks – 3.6%            
Banking – 2.0%            
Happy Bancshares, Inc.  Equity Security, Private Placement, 144A(3)(4)   44,000   1,036,200 
Middleburg Financial Corporation  Equity Security   10,988   193,499 
Pioneer Bancshares, Inc.  Equity Security(4)   83,400   1,662,996 
           2,892,695 
Non-Bank Financial – 1.6%            
Medallion Financial Corporation  Equity Security - Business Development Corporation  $289,371   2,193,432 
             
   Total Common Stocks
(Cost $5,774,358)
       5,086,127 
Exchange Traded Fund – 2.6%            
Diversified Financial Services – 2.6%         
iShares S&P U.S. Preferred Stock Index Fund  Preferred Stock Exchange Traded Fund   95,797   3,785,897 
   Total Exchange Traded Fund
(Cost $3,798,602)
       3,785,897 
Limited Partnership Interest – 0.7%         
Banking – 0.7%            
Priam Capital Fund I, L.P.  Limited partnership(4)   50,000   1,000,000 
   Total Limited Partnership Interest
(Cost $1,000,000)
       1,000,000 
   Total Long Term Investments
(Cost $195,326,203)
       195,584,233 

 

3 StoneCastle Financial Corp. |  See notes to Financial Statements  
 
Company(1)  Investment  # of
Shares/Par
Amount ($)(2)
  Fair Value 
Short-Term Investment – 1.3%          
Morgan Stanley Institutional
Liquidity Funds - Treasury
Portfolio
   Institutional Share Class   1,913,490  $1,913,490 
   Total Short-Term Investment
(Cost $1,913,490)
       1,913,490 
   Total Investments
(Cost $197,239,693)(5)(6) † — 137.3%
       197,497,723 
   Other assets and liabilities, net — (37.3)%(7)       (53,689,807)
             
   Total Net Assets — 100.0%      $143,807,916 
(1) We do not “control” and are not an “affiliate” of any of our investments, each as defined in the Investment Company Act (the “1940 Act”).
(2) $ represents security position traded in par amount.
(3) Security is exempt from registration under Rule 144A of the Securities Act of 1933.
(4) Currently non-income producing security.
(5) Investments are income producing assets unless otherwise noted by footnote (4).
(6) Cost values reflect accretion of original issue discount or market discount, and amortization of premium.
(7) Includes $58.0 million in bank loan from Texas Capital Bank.
As of September 30, 2015, the cost basis of investment securities owned was substantially identical for both book and tax purposes. Gross unrealized appreciation of investments was $2,163,775 and gross unrealized depreciation was $1,905,745, resulting in net unrealized appreciation of $258,030.

 

  See notes to Financial Statements | StoneCastle Financial Corp. 4
 
  Notes to Schedule of Investments (unaudited)  

 

Investment Valuation–The most significant estimates made in the preparation of the financial statements of StoneCastle Financial Corp. (“SCFC” or the “Company”) are the valuation of equity and debt investments and the effective yield calculation with respect to certain debt securities, as well as the related amounts of unrealized appreciation and depreciation of investments recorded. The Company believes that there is no single definitive method for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments that SCFC makes. The Company is required to specifically fair value each individual investment on a quarterly basis.

 

The Company complies with ASC 820-10, Fair Value Measurements and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements. ASC 820-10 clarified the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date. ASC 820-10 also establishes the following three-tier fair value hierarchy:

 

• Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;

 

• Level 2 — Valuations based on inputs, other than quoted prices included in Level 1, that are observable either directly or indirectly; and

 

• Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

To the extent securities owned by the Company are actively traded and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. Securities traded on inactive markets or valued by reference to similar instruments are generally categorized in Level 2 of the fair value hierarchy.

 

The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by SCFC in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement. The valuation levels are not necessarily an indication of the risk associated with investing in those securities.

 

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, SCFC’s

 

5 StoneCastle Financial Corp. |
 

own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. SCFC uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

 

SCFC will determine fair value of its assets and liabilities in accordance with valuation procedures adopted by its board of directors. The Company may utilize the services of one or more regionally or nationally recognized independent valuation firms to help it determine the value of each investment for which a market price is not available. SCFC’s board will also review valuations of such investments provided by the Advisor. Securities for which market quotations are readily available shall be valued at “market value.” If a market value cannot be obtained or if SCFC’s Advisor determines that the value of a security as so obtained does not represent a fair value as of the measurement date (due to a significant development subsequent to the time its price is determined or otherwise), fair value shall be determined pursuant to the methodologies established by our Board of Directors. In making these determinations, the Company may engage an independent valuation firm from time to time to assist in determining the fair value of our investments. The methods for valuing these investments may include fundamental analysis, discounts from market prices of similar securities, purchase price of securities, subsequent private transactions in the security or related securities, or discounts applied to the nature and duration of restrictions on the disposition of the securities, as well as a combination of these and other factors.

 
   
The Company’s assets measured at fair value subject to the disclosure requirements of ASC 820-10-35 at September 30, 2015, were as follows:  

 

                 
               LEVEL 3
           LEVEL 2  SIGNIFICANT
   TOTAL FAIR  LEVEL 1  SIGNIFICANT  UNOBSERVABLE
   VALUE AT 09-30-15  QUOTED PRICE  OBSERVABLE INPUTS  INPUTS
Term Loan  $46,750,000   $   $46,750,000   $ 
                     
Debt Securities   32,341,349        32,341,349     
                     
Trust Preferred Securities   48,028,379    7,508,378    40,520,001     
                     
Preferred Stock   53,383,648    2,801,134    50,582,514     
                     
Convertible Preferred Stock   5,208,833        5,208,833     
                     
Common Stock   5,086,127    2,386,931        2,699,196 
                     
Exchange Traded Fund   3,785,897    3,785,897         
                     
Limited Partnership Interest   1,000,000            1,000,000 
                     
Short-Term Investment   1,913,490    1,913,490         
                     
Total Investments in Securities  $197,497,723   $18,395,830   $175,402,697   $3,699,196 
                     

 

The Level 3 categorized assets listed above have been valued via the use of a) independent third party valuation firms, or, b) fair valued as determined in good faith by the Board of Directors, in accordance with procedures established by the Board of Directors.

 

For fair valuations using significant unobservable inputs, U.S. generally accepted accounting principles (“U.S. GAAP”) requires SCFC to present reconciliation of the beginning to ending balances for reported fair values that presents changes attributable to total realized and unrealized gains or losses, purchase

 

 

| StoneCastle Financial Corp. 6
 
  and sales, and transfers in and out of Level 3 during the period. Transfers in and out between levels are based on values at the end of a period. U.S. GAAP also requires SCFC to disclose amounts and reasons for all transfers in and out of Level 1 and Level 2 fair value measurements. A reconciliation of Level 3 investments is presented below:

 

                      
         CONVERTIBLE      LIMITED    
   TERM  DEBT  PREFERRED  COMMON  PARTNERSHIP    
   LOAN  SECURITIES  STOCK  STOCK  INTEREST  TOTAL
Balance at                              
December 31, 2014  $13,250,000   $3,500,000   $2,500,000   $2,362,650   $1,000,000   $22,612,650 
Realized gains including earnings                        
Unrealized appreciation on investments               336,546        336,546 
Purchases                         
Sales                        
Transfers in                        
Transfers out *   (13,250,000)   (3,500,000)   (2,500,000)           (19,250,000)
Balance at
September 30, 2015
  $   $   $    2,699,196(1)   1,000,000(2)  $3,699,196 
                               

 

  For more information with regard to significant accounting policies, see the most recent Company’s annual report filed with the Securities and Exchange Commissions.

 

 

 

* Valuation changed from single broker quote to multiple broker quotes.

 

(1) Value based on price to book valuation analysis.

 

(2) Value based on single broker quote.

 

7 StoneCastle Financial Corp. |
 

Item 2. Controls and Procedures.

 

(a)The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

 

(b)There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

Item 3. Exhibits.

 

Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(Registrant)     StoneCastle Financial Corp.  

 

By (Signature and Title)* /s/ Joshua S. Siegel  
  Joshua S. Siegel, Chief Executive Officer  
  & Chairman of the Board  
  (principal executive officer)  

 

Date      11/12/2015  

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By (Signature and Title)* /s/ Joshua S. Siegel  
  Joshua S. Siegel, Chief Executive Officer  
  & Chairman of the Board  
  (principal executive officer)  

 

Date      11/12/2015  

 

By (Signature and Title)* /s/ Patrick J. Farrell  
  Patrick J. Farrell, Chief Financial Officer  
  (principal financial officer)  

 

Date      11/12/2015  

 

* Print the name and title of each signing officer under his or her signature.