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: March 31, 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 March 31, 2015

 

  Company(1)  Investment  # of
Shares/Par
Amount ($)(2)
  Market Value  
  Senior Term Loan – 9.3%        
  Banking – 9.3%        
  Citizens Bancshares Co.  Senior Term Loan, 8.75%, due December 31, 2024  $13,250,000   $13,250,000   
     Total Senior Term Loan
(Cost $13,250,000)
        13,250,000   
  Debt Securities – 15.3%            
  Banking – 15.3%               
  Cornerstone Community
Bancorp
  Subordinated Debenture, 8.80%, Due 2025  $5,000,000    5,000,000   
  Freeport Bancshares, Inc.  Subordinated Debenture, 8.875%, Due 2025  $3,150,000    3,150,000   
  MidWest Community
Financial Corp.
  Subordinated Debenture, 8.50%, Due 2025  $5,000,000    5,000,000   
  MMCapSSM Funding I, Ltd./
MMCapSSM Funding I, Inc.
  Fixed Rate Mezzanine Notes, Due 2031, 8.04%, 144A(3)  $10,588,037    8,285,139   
  Preferred CPO Limited  Fixed Rate Senior Subordinated Notes,Class B, 10.026%, Due 2030  $435,635    450,556   
     Total Debt Securities
(Cost $21,622,278)
        21,885,695   
  Trust Preferred Securities – 35.3%            
  Banking – 35.3%               
  Amboy Capital Trust I  9.00% Trust Preferred Security, Private Placement, 144A(3)  $15,500,000    15,500,000   
  Capital City TPS LLC Series
2015-1
  Capital City TPS 2015-1 9.74%, Note, 144A(3)  $1,924,289    1,959,398   
  Central Trust Company
Capital Trust I.
  Junior Subordinated Debt, 10.25%, Due July 25, 2031  $2,500,000    2,553,125   
  Countrywide Capital Trust IV  6.75% Trust Preferred Security   38,562    985,645   
  Deutsche Bank Contingent
Capital Trust V
  8.05% Trust Preferred Security   57,444    1,660,131   
  First Alliance Capital Trust I  Junior Subordinated Debt, 10.25%, Due July 25, 2031  $6,500,000    6,624,150   
  First Citizens TPS LLC Series
2015-1
  First Citizens TPS 2015-1 9.74%, Note, 144A(3)  $2,245,004    2,285,964   
  JPMorgan Chase Capital Trust
XXIX
  6.70% Trust Preferred Security, Series CC   20,350    517,297   
  M & T Capital Trust II  8.277% Trust Preferred Security  $1,000,000    1,016,100   
  M&T TPS LLC Series 2015-1  M&T TPS 2015-1 9.74%, Note, 144A(3)  $2,565,718    2,612,530   
  Mercantil TPS LLC Series
2015-1
  Mercantil TPS 2015-1 9.74%, Note, 144A(3)  $4,810,722    4,898,494   
  Merrill Lynch Preferred
Capital Trust III
  7.00% Trust Preferred Security   23,630    606,582   
  Merrill Lynch Preferred
Capital Trust IV
  7.12% Trust Preferred Security   38,264    988,742   
  Merrill Lynch Preferred
Capital Trust V
  7.28% Trust Preferred Security   76,206    1,972,973   
  Morgan Stanley Capital Trust
VIII
  6.45% Trust Preferred Security   51,578    1,319,365   
  NB of Indianapolis TPS LLC
Series 2015-1
  NB of Indianapolis TPS 2015-1 9.74%, Note, 144A(3)  $4,329,650    4,408,645   
  PrivateBancorp Capital Trust
IV
  10.00% Trust Preferred Security   13,322    357,429   
     Total Trust Preferred Securities
(Cost $50,485,392)
        50,266,570   
  Preferred Stock – 49.1%            
  Banking – 49.1%               
  Astoria Financial Corporation  Depositary Shares, Each Representing a 1/40th Interest in a share of 6.50% Non-Cumulative Perpetual Preferred Stock, Series C   407    10,313   
  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    1,000,000   
  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    13,754,584   
  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   180,222    4,981,336   
  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   
  EverBank Financial Corp.  Depositary Shares, Each Representing a 1/1,000th Interest in a share of 6.75% Non-Cumulative Preferred Stock, Series A   25,263    636,345   
  Farmers Capital Bank
Corporation
  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $2,500,000    2,500,000   
  FFW Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $139,000    139,000   
  Fidelity Financial Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $2,579,000    2,581,149   
  Fidelity Financial Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series B, 9%  $210,000    210,175   
  First National Corp.  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $1,016,000    1,005,840   
  First Priority Financial Corp.  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $709,000    709,000   
  First Republic Bank  Depositary Shares, Each Representing a 1/40th Interest in a share of 6.20% Non-Cumulative Perpetual Preferred Stock, Series B   19,631    505,302   
  First Republic Bank  Depositary Shares, Each Representing a 1/40th Interest in a share of 5.625% Non-Cumulative Perpetual Preferred Stock, Series C   21,312    534,505   

 

1 StoneCastle Financial Corp. See notes to Financial Statements  
 
  Company(1)  Investment  # of
Shares/Par
Amount ($)(2)
  Market Value  
              
  Banking (continued)               
  First Republic Bank  Depositary Shares, Each Representing a 1/40th Interest in a share of 7.00% Non-Cumulative Perpetual Preferred Stock, Series E   10,909   $303,380   
  First United Corporation  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $9,000,000    9,018,000   
  HSBC USA Inc.  Depositary Shares, Each Representing a 1/40th Interest in a share of 6.50% Non-Cumulative Preferred Stock, Series H   45,035    1,142,988   
  Katahdin Bankshares Corp.  Floating Rate Non-Cumulative Preferred Stock, Series D, 8.75%  $10,000,000    10,000,000   
  Old Second Bancorp, Inc.  Fixed Rate Cumulative Perpetual Preferred Stock, Series B, 9%  $8,670,000    8,670,000   
  Tennessee Valley Financial
Holdings Inc.
  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $100,000    105,550   
  Tennessee Valley Financial
Holdings Inc.
  Fixed Rate Cumulative Perpetual Preferred Stock, Series B, 9%  $49,000    60,944   
  The  Queensborough
Company
  Fixed Rate Cumulative Perpetual Preferred Stock, Series A, 9%  $250,000    247,500   
     Total Preferred Stock
(Cost $70,325,894)
        70,007,911   
  Convertible Preferred Stock – 3.6%            
  Banking – 3.6%               
  First Citizens Banc Corp.  Depositary Shares, Each Representing a 1/40th Interest in a 6.50% Non-Cumulative Redeemable Convertible Perpetual  Preferred share, Series B   59,001    2,129,936   
  SB Financial Group  Depositary Shares, Each Representing a 1/100th Interest in a 6.50% Non-Cumulative Convertible Perpetual Preferred share, Series A   250,000    2,975,000   
     Total Convertible Preferred Stock
(Cost $3,975,025)
        5,104,936   
  Equity Securities – 4.8%            
  Banking – 4.8%               
  Citizens & Northern
Corporation
  Common stock   12,820    258,708   
  Happy Bancshares, Inc.(4)  Common stock, Private Placement, 144A(3)   44,000    979,000   
  Medallion Financial
Corporation
  Common stock   294,754    2,729,422   
  Middleburg  Financial
Corporation
  Common stock   14,220    260,226   
  Pioneer Bancshares, Inc.(4)  Common stock   83,400    1,599,612   
  Priam Capital Fund I, L.P.(4)  Limited partnership   50,000    1,000,000   
     Total Equity Securities
(Cost $7,140,949)
        6,826,968   
     Total Long Term Investments
(Cost $166,799,538)
        167,342,080   
  Short-Term Investment – 0.7%            
  Morgan Stanley Institutional
Liquidity Funds - Treasury
Portfolio
  Institutional Share Class   1,004,063    1,004,063   
     Total Short-Term Investment
(Cost $1,004,063)
        1,004,063   
     Total Investments
(Cost $167,803,601)(5)(6)*† — 118.1%
        168,346,143   
     Other assets and liabilities, net  —  (18.1)%(7)        (25,844,578)  
     Total Net Assets  —  100.0%        $142,501,565   
  (1) We do not “control” and are not an “affiliate” of any of our portfolio companies, 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) Cost values reflect accretion of original issue discount or market discount, and amortization of premium.  
  (6) Investments are income producing assets unless otherwise noted by footnote (4).  
  * Cash and cash equivalents of $8,568,826 on the Statement of Assets and Liabilities include $1,004,063 of short term investments.  
  As of March 31, 2015, the cost basis of investment securities owned was substantially identical for both book and tax purposes. Gross unrealized appreciation of investments was $1,613,453 and gross unrealized depreciation was$1,070,911, resulting in net unrealized appreciation of $542,542.  
  (7) Includes $33 million in bank loan from Texas Capital Bank.  

 

See notes to Financial Statements StoneCastle Financial Corp. 2
 
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

 

3 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 March 31, 2015, were as follows:

 

                 
   LEVEL 1
QUOTED PRICE
   LEVEL 2
SIGNIFICANT
OBSERVABLE INPUTS
   LEVEL 3
SIGNIFICANT
UNOBSERVABLE
INPUTS
   TOTAL MARKET
VALUE AT 03-31-15
 
Senior Term Loan  $   $13,250,000   $   $13,250,000 
                     
Debt Securities       21,885,695        21,885,695 
                     
Trust Preferred Securities   8,408,165    25,693,375    16,165,030    50,266,570 
                     
Preferred Stock   8,114,169    61,893,742        70,007,911 
                     
Convertible Preferred Stock       5,104,936        5,104,936 
                     
Equity Securities   3,248,356        3,578,612    6,826,968 
                     
Money Market Fund   1,004,063            1,004,063 
                     
Total Investments in Securities  $20,774,753   $127,827,748   $19,743,642   $168,346,143 
                     

 

For fair valuations using significant unobservable inputs, U.S. generally accepted accounting principles (“U.S. GAAP”) require SCFC to present a reconciliation of the beginning to ending balances for reported market values that presents changes attributable to total realized and unrealized gains or losses, purchase and sales, and transfers in and out of Level 3 during the period. For movements between levels within the fair value hierarchy, the Company has adopted a policy of recognizing the transfer at the end of the period in which the underlying event causing the movement occurred. Changes in valuation techniques or market conditions may result in transfers into or out of an assigned level within the disclosure hierarchy. As of March 31, 2015, there were transfers between level 2 and level 3.A reconciliation of Level 3 investments is presented on the next page:

 

                         
   SENIOR
TERM
LOAN
   DEBT
SECURITIES
   TRUST
PREFERRED
STOCK
   CONVERTIBLE
PREFERRED
STOCK
   EQUITY
SECURITIES
   TOTAL 
Balance at December 31, 2014  $13,250,000   $3,500,000   $   $2,500,000   $3,362,650   $22,612,650 
Realized gains including earnings                        
Unrealized depreciation on investments                   215,962    215,962 
Purchases                        
Sales                        
Transfers in           16,165,030            16,165,030 
Transfers out   (13,250,000)   (3,500,000)       (2,500,000)       (19,250,000)
Balance at March 31, 2015  $   $   $16,165,030   $   $3,578,612   $19,743,642 
                               

 

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

 

  StoneCastle Financial Corp. 4
 

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 04/30/2015  

 

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 04/30/2015  

 

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

 

Date 04/30/2015  

 

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