Robert Ladd – Chief Executive Officer Todd Huskinson – Chief Financial Officer.

Bryce Rowe – Baird.

Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporation's Conference Call to report Financial Results for its Second Quarter 2016. At this time, all participants have been placed in a listen-only mode.

The call will be opened for a question-and-answer session following the speakers' remarks. This conference is being recorded, today, Friday, August 5, 2016. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference..

Thank you, Marr. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended June 30, 2016. Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements as well as an overview of our financial information..

Thank you, Rob. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Stellus Capital Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited.

Audio replay of the call will be available by using the telephone number and pin provided in our press release announcing this call. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information.

Today's conference call also may include forward-looking statements and projections and we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections. We will not update our forward-looking statements unless required by law.

To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com, under the Stellus Capital Investment Corporation link or call us at 713-292-5400. At this time, I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd..

Thank you, Todd. Having reached the midpoint of our fourth full year of operation, I thought it would be a good time to review our investment portfolio. The overall investment portfolio of $351 million includes investments in 42 companies located throughout the United States, 23 states plus Puerto Rico and Canada, with no large regional concentration.

There are 22 industry sectors represented with 16% being the largest exposure. Our direct upstream oil and gas represents less than 1% of the total, although we do have a 1% exposure to metals and mining.

38 of the 42 companies have private equity ownership and the average investment for a company is under $9 million or 2.4% of the total portfolio and the largest bid position is $21.8 million, which represents about 6.2% of the total portfolio.

The overall risk rate for the portfolio is approximately 2, which is on plan and we have one nonaccrual that has a fair value of $600,000 or less than 1% of the portfolio. Going to the loan portfolio is $337 million of the total with a weighted average yield of 10.7% and that portfolio has a weighted average maturity of about 5.5 years.

Approximately 79% of the loans are secured by either a first or second-lien. And in addition to the loan portfolio, we have an equity portfolio of $14 million in fair value with a cost basis of $12.9 million. The next topic I'd like to cover is investment activity.

During the second quarter, we made three new debt investments totaling $12.6 million with an average weighted rate of 10.5% and 79% of the portfolio is first lien or the additions of first lien. In addition, we made equity investments totaling $200,000 in two of the three portfolio companies.

We did receive two payouts of $14 million which were all first lien with a 10.4% weighted average yield. As I said on last quarter’s earnings call, we are usually able to replace payoffs with new investments within 30 to 60 days, which is true this past quarter.

Looking forward to the third quarter, we estimate we could have payoffs in the range of, again, $10 million to $20 million. We're often asked about our ability to originate new opportunities, given that we've been essentially fully invested for the past six months.

We were able to do this because we're active in the marketplace and we manage a private institutional fund that has a similar investment strategy as does SCM, and that fund has available capital. With that, I'll turn it over to Todd to cover additional information related to the quarter..

Thanks, Rob. With respect to operating results, we earned $0.34 per share in the second quarter before a one-time charge for offering costs related to our shelf registration statement that was initially declared effective by the SEC in January 2014.

Including these costs, we earned $0.32 per share, $0.02 per share shy of our $0.34 per share dividend for the quarter. For the past six months, we've earned $0.60 per before the one-time charge for offering costs, which is $0.02 less than the dividend for the first half of the year.

Now, looking forward to the balance of 2016, our investment advisors Stellus Capital Management has historically waived a portion of its incentive fees such that earnings have covered our dividends to shareholders.

For 2016, our investment advisors notified the Company that it will waive, if required, during the remainder of 2016, any incentive fee necessary such that overall earnings at least equal to dividends paid for the year of 2016 taken as a whole. Our net asset value per share increased from $13.06 per share at March 31, 2016 to $13.12 at June 30, 2016.

The increase came principally from tightening credit spreads and an increase in equity valuation, partially offset by a further write-down of the original vendor and vendor investment. To recap the vendor matter, $6 million debt loan has now been fully repaid through which we earned approximately $780,000 of interest income.

The original $13 million investment has been written down to $600,000, which we expect will be collected over 2017. With respect to liquidity, at June 30, 2016, and August 5, 2016, we had $110 million and $103 million outstanding under our credit facility respectively.

Our unsecured bonds have a face value of $25 million and will mature on April 30, 2019. In addition, we have fully drawn our $65 million of available SBA guaranteed debentures, which remain outstanding as of August 5, 2016. And finally, we had $10.8 million and $2.4 million of cash as of June 30, 2016 and August 4, 2016 respectively.

Since June 30, 2016, we have funded $400,000 of revolver of HUF Worldwide, LLC. On July 15, 2016, we made a $2.6 million investment in the first-lien term loan of Good Source Solutions, Inc. Additionally, we invested $200,000 in the company's equity. And with that, I'll turn the call back over to Rob..

Okay, thank you, Todd. And Marr, we will now open the session for questions and answers..

Thank you. [Operator Instructions] And our first question will come from Bryce Rowe with Baird..

Thank you. Good morning..

Good morning..

Rob or Todd, just looking through the Q last night and saw the breakdown of the investment portfolio based on your internal risk categories 1, 2, 3 or 4. Noticed that you had kind of an uptick in that category 3, rated or risk-free rated loans and I guess you would call watch list type credit.

Just curious maybe you can get some color around that movement..

Yes, Bryce, so I would say that again we look at the portfolio as a whole and you will also notice that the—an addition, I think it was roughly the same amount that was downgraded to 3 from 2, was upgraded from 2 to 1. So you're going to see movement in the portfolio.

I would say, although the 3 category is a little bit larger than normal, I would say we don't think indicates anything alarming and I would also say that when you get something to a category 4, we would have more concern about it.

I would also say that the – that movement from 2 to 1 and 2 to 3 is not based on any kind of recessionary impact we're seeing in the United States, but more Company-specific..

Okay. And so, Rob, if you do move from 2 to 1 or 2 to 3, is it beyond just a function of kind of revenue trends, whether they would be up or down? Is it a function of, maybe, going from 2 to 1 with a company and a potential sale process? Just trying to get a feel for what drives the movement..

Yes, sure. So the first thing is for something to move categories, it would require sustained performance, whether it be worse or better. And then, secondly, something that goes from a 2 to 1, it could very well be that it's a loan that we expect may pay off in the near future.

But it would also have to be accompanied by a sustained performance better than expected. So, I think it's a good flag that as things move to a one, they become more likely to pay off; as something moves to a 3, it's maybe less likely to pay off, although we potentially have, I know, a three in there that could pay off..

Okay..

So, I think, that’s probably the way to think about it. Sustained performance, either better than expected or worse than expected over some period of time, but anyway, not just one quarter..

Got it. Right, that's helpful. Thank you..

Okay, thank you, Bryce..

[Operator Instructions].

Okay, Marr, I guess hearing none. We will close out the call. Look forward to speaking with everyone again in early November and thank you very much for your support..

And ladies and gentlemen, that does conclude today's conference. Once again, thank you everyone for joining us..