Stellus Cap Investment (NYSE:SCM) reported first-quarter financial results on Tuesday. The transcript from the company's first-quarter earnings call has been provided below.

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The full earnings call is available at https://www.webcaster5.com/Webcast/Page/2625/54017

Summary

Stellus Cap Investment reported $0.26 per share of GAAP net investment income for Q1 2026, with a core net investment income of $0.27 per share.

The company realized gains of $750,000 on one equity position, resulting in a total realized income of $0.29 per share, but experienced a net asset value decrease of $0.28 per share due to dividend payments and losses from two debt investments.

Stellus Cap Investment's portfolio is valued at $990 million, slightly down from $1.01 billion, with 99% of loans secured and 92% at floating rates; non-accrual loans increased to 9.2% of total cost.

The company is initiating a $20 million share buyback program as shares are trading at a 25% discount to net asset value.

Future outlook includes maintaining a portfolio size of approximately $970 million by the end of Q2 2026, with expectations for realizations of $9 million and potential growth through Ridgepost Capital partnership.

Management noted the goal to align dividends with net investment income plus realized gains, potentially resulting in a lower dividend level.

Full Transcript

OPERATOR

Good morning ladies and gentlemen and thank you for standing by. At this time, I would like to welcome everyone to Stellus Cap Investment's conference call to report financial results for its first fiscal quarter ended March 31, 2026. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star 0 on your telephone keypad. This conference is being recorded today, May 12, 2026. 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.

Robert Ladd (Chief Executive Officer)

Okay, thank you, Holly. Good morning everyone and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2026. We have six topics to cover this morning. First, the financial results for the quarter, portfolio and asset quality outlook update opportunities with Ridgepost Capital, our share buyback program, and future growth in the portfolio. 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.

Todd Huskinson (Chief Financial Officer)

Thank you, Rob. I'd like to remind everyone that today's call is being recorded. Please note that the 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 may also 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 forward looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelliscapital.com under the Public Investors link or call us at 713-292-5400. Now I'll cover our operating results for the quarter, but would like to start with our life to date activity. Since our IPO in November 2012, we've invested approximately $2.8 billion in over 225 companies and received approximately $1.8 billion of repayments while maintaining stable asset quality. We've paid 339 million of dividends to our investors, which represents $18.49 per share to an investor in our IPO in 2012. In the first quarter we generated $0.26 per share of GAAP net investment income and core net Investment income was $0.27 per share, which excludes estimated excise taxes. During the quarter we also realized gains of $750,000 on one equity position which resulted in total realized income for the quarter of $0.29 per share. Net asset value decreased $0.28 per share during the quarter from two components. The first was $0.08 per share of dividend payments that exceeded earnings, which was necessary to continue to pay out the spillover balance from 2025. The second was a net realized and unrealized loss of $0.20 per share related primarily to two debt investments. We ended the quarter with an investment portfolio at fair value of $990 million across 116 portfolio companies, a decrease from $1.01 billion across 115 portfolio companies as of December 31st. During the first quarter we invested $18 million in three new portfolio companies and had $9 million in other investment activity at par. We also received three full repayments totaling $35 million, one equity realization which resulted in a realized gain of $750,000 and received $6.6 million of In March 31st, 99% of our loans were secured and 92% were priced at floating rates. The average loan per Co. Is $9 million and the largest overall investment is $18.5 million, both at fair value. Substantially all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 81% of our portfolio is rated a 1 or a 2 or on plan or ahead of plan and 19% of the portfolio is marked at an investment category of three or below, meaning not meeting plan or expectations. We added one new loan to our non accrual list during the quarter. Currently we have six loans to six portfolio companies on non accrual which comprise 9.2% of the total cost and 5.2% of the fair value of the total investment portfolio respectively, which represents a slight increase from the prior quarter. We recognize that the level of non accrual loans is higher than we would like. We're focused on reducing the number of dollar magnitude of these loans. We're actively working each position and are making progress in exiting the positions or bringing them back onto an accrual status. There's been much speculation about the impact of artificial intelligence on the large scale SaaS software industry. As we mentioned on our last call, Stellus does not have exposure to the large scale SaaS software sector. We do have portfolio companies in. Software and information they provide in many cases deal with proprietary data. We believe AI will enable improvements in many of our portfolio companies across a variety of industry sectors to improve the speed information. Each of these companies is rated on our risk rating system as either a one or two, meaning on plan or ahead of plan. And now I'd like to turn the call back over to Rob to cover a number of other topics.

Robert Ladd (Chief Executive Officer)

Thank you Todd. As we look ahead to the second quarter of 2026, I'll cover four topics the outlook for Q2 our advisors plans to join the Ridgepost Capitals platform, our $20 million share buyback program and opportunities for growth. First, with respect to outlook, as of today our Portfolio is approximately 970 million across 117 portfolio the balance of the quarter we would expect repayments to equal new fundings, thus ending the quarter approximately where we are today. We expect to realizations throughout the year. At this point we estimate $9 million for the balance of the year with approximately 6 million of this in realized gains. Regarding dividends, in April we declared the dividends for the second quarter of this year of $0.34 per share in the aggregate payable monthly. Looking forward, we are making progress in reducing the amount of spillover income and we expect that over time our dividend will approximate our net investment income plus realized gains. At this point that would be at a lower level than the current dividend. Now turning to Ridgepost, we look forward to our external advisor, Stellus Cap Management joining the Ridgepost Capital Platform this summer. We've been impressed with Ridgepost Capital's organization. They have excellent leadership and we should benefit from meaningful new investment opportunities working with them, particularly through their lower middle market private equity fund to fund strategy known as Ridgepost Capital Partners. RCP has relationships with over 200 private equity firms and with their focus on the lower middle market, many of these sponsors are candidates for us to provide financing for their portfolio companies. We think this could provide hundreds of millions of dollars of new lending possibilities across the entire Stellus platform each year. Now turning to the share repurchase program, we recently announced a common stock repurchase program of up to $20 million. This decision reflects the current trading level of our shares, which are approximately a 25% discount to net asset value. Historically, our stock has traded at or above NAV for many years. At the current price levels, we believe repurchasing shares represents a good opportunity to generate value for our shareholders and now opportunities for growth. I'd like to conclude our remarks by outlining the opportunity to grow our portfolio, we project that we have the capacity to increase our investment portfolio by 75 to $100 million from here. This opportunity comes from two sources. The first is from a third SBIC license, which we're optimistic will be re awarded this summer. And the second is from recycling equity gains and non accrual loans that have been resolved. As a reminder, a dollar of an equity position or a non accrual loan that turns to cash can be reinvested into a new loan close to $3 through our leverage facilities. In closing, let me thank everyone for your continued support and we'll now turn to the Q and A session.

OPERATOR

At this time we will be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Your first question for today is from Eric Swick with Lucid Capital.

Eric Swick (Equity Analyst)

Good morning, Eric. Hey, good morning. Rob and Todd wanted to start just to make sure I understood some of the commentary there and the remarks with relation to the expectation for dividends to be in line with Net Investment Income (NII) plus realized gains. Did I understand that? You kind of mentioned that the way it was lined up currently that Net Investment Income (NII) plus realized gains would be lower than the current dividend level. So just trying to figure out, are you expecting to be able to grow Net Investment Income (NII) over time or potentially think about resetting that the dividend level as well? Just trying to kind of hone in on that a little bit.

Robert Ladd (Chief Executive Officer)

Sure, sure. So I'd say that although we'd like to grow the NII per share from here, we think we're probably at a level that we'll be at for a while. So our expectation is the dividend will be coming down associated with that. Got it. Okay, that's helpful. That's what I thought I heard. And then just with regard to share repurchases, I know you talked about it last quarter as well in terms of being att, given where the stock is trading today. But correct me if I'm wrong, I don't think you repurchased anything in 1Q. So was anything that kept you out of the market, potentially the pending acquisition of the Advisor by Ridgepost or anything else? Yeah. No. No. Good question. Good point. So we did not repurchase any Shares after the previous quarter end. But a reminder, when issuing a K, we have a short period from the issuance of the K to the end of the quarter. So there's just limited periods we can be repurchasing. We will have a much longer window this quarter and it was strictly tied to the timing of that and nothing else.

Eric Swick (Equity Analyst)

Got you. Okay, understood. Thank you. And last one for me. Wondering if you can just talk about the pipeline a little bit. I know you expect it to grow in the back half of the year post of the Ridge post tie up. And curious from a spread perspective, if you can talk about where you're seeing spreads in the pipeline today relative to 90 days ago and also kind of compared to the current existing portfolio yield.

Robert Ladd (Chief Executive Officer)

Yes. So relative to spreads. So as the private credit has been disrupted a little bit, we are seeing some, I'd say steadiness in spreads. We've not seen the same widening that the upper market is seen, but I think we've certainly seen stabilization. And so I'd say our average deal we're looking at today is approximately a 5% spread over SOFR. Could be higher, but it's stabilized but not meaningfully wider yet.

Eric Swick (Equity Analyst)

Okay, good to hear that it's at least stabilized and hopefully some widening going forward. So. Great. Well, that's all for me today. Thank you so much.

Robert Ladd (Chief Executive Officer)

Okay, many thanks, Eric.

OPERATOR

Your next question is from Christopher Nolan with Ladenburg Salmon.

Christopher Nolan (Equity Analyst)

Hey guys, I guess for Todd. Todd, does the. I know your leverage, your regulatory leverage ratios are low, but when including the sba, you know, it's somewhat higher. Does the SBA in any way restrict what your regulatory leverage ratios could be?

Todd Huskinson (Chief Financial Officer)

No, no, it's the SBA leverage is excluded from regulatory leverage. So it's a two to one regulatory leverage. Our regulatory leverage is around one times and then it's two times with the SBA debentures a little bit less than two times now because we've paid off a number of debentures.

Christopher Nolan (Equity Analyst)

Okay. So your unsecured notes and so forth doesn't put any sort of restrictions on your total leverage, just on your regulatory leverage. Correct? Correct.

Todd Huskinson (Chief Financial Officer)

Yep, that's right. Okay. And the credit facility are part of regulatory leverage, and then the debentures are in addition to that as total leverage. Got it. And so we can see, you know, your regulatory leverage ratios are impressively low. So we can just see that you guys have a fair amount of balance sheet flexibility from that. Is that a fair interpretation? That's correct. Yeah, I think that's correct. It's of course Limited by borrowing base, but that's right. We have a lot of running room

Christopher Nolan (Equity Analyst)

with respect to that. Okay. And then I guess you mentioned in your comments that you didn't have much software exposure, but in your industry list, is it buried into another industry like high tech industries?

Todd Huskinson (Chief Financial Officer)

Yeah, I'd seen a couple. It would be in several. It could be in high tech, it could be in the industry it serves. Because as I mentioned, those software products are very industry specific and could be like a service as well. That might be industry specific and those might be in different industry categories. And we see with other BDCs where they've had to take down unrealized depreciation and software positions. Have you guys experienced that as well? We have not. Those positions are marked approximately where they were at last quarter end and are basically marked close to par. Yeah, yeah, they're both, they're all, they're all, you know, good solid, performing loans. I mentioned they're either a one or a two on our risk rating scale. So all doing fine.

Christopher Nolan (Equity Analyst)

Okay, thank you. Yeah, thank you.

OPERATOR

Your next question for today is from Robert Dodd with Raymond James.

Robert Dodd (Equity Analyst)

Good morning, Raymond.

Todd Huskinson (Chief Financial Officer)

Good morning. Just sticking with that software. Well, not lot of software. The marks on the quarter you said there's 22 cents in NAV attrition, primarily markdowns and debt investments. Can you give us any how much of that was SP as you're just mark to market versus actual company specific elements? Yes. So I would say Robert, most of that is coming from kind of net company movements we had, you know, and most of those markdowns were on two specific positions. So you know, we did have certainly some spread markdowns in terms of just the models. But the majority of that was coming from two equity positions and we also had a little bit of equity as well. Two debt positions, I'm sorry, that are wiped down on the equity as well. Got it, got it.

Robert Dodd (Equity Analyst)

Thank you. Going back to the Eric's question on spreads and you said that you've seen some stability there sometimes obviously can be a lag between how the smaller end of the market, so to speak, responds to spread movements versus the upper end of the market and to your point, so do you think the spread stability rather than expansion you're seeing right now is more a function of just things lagging what's going on in the upper market? Or do you think that it's just that the competitive environment in your end of the market is just not moved and you just don't expect those spreads to widen materially or at All.

Todd Huskinson (Chief Financial Officer)

Yeah, Robert. So I would say that it's driven by the latter. That still a competitive space that we're in and we're seeing things getting done in the high fours up to the mid to high fives. So I'd say it's a competitive nature. Things are slower in terms of deal flow. I think as you see deal flow pick up, there's certainly opportunity to have the spreads also widen some. But so far I think it's not a lag. I think it's just the competitive nature of where we are. Appreciate that.

Robert Dodd (Equity Analyst)

Thank you. And then just one more on the non accruals and you address this. They are a little elevated. You've got some, you want to work that down. Rotate those into either back onto accrual or into income producing assets. I mean any color you can give on. I think you mentioned you're making some progress. I mean how. It's a slow process. I won't say fast, I don't mean fast. But what kind of timeline do you think that could go noticeably lower than where it is currently in terms of the non accrual and non income producing debt capital assets?

Todd Huskinson (Chief Financial Officer)

Yes. So we discussed this on the last call and I think I would say the same thing. I think we're, you know, I think not going to be immediate. I would be thinking toward the end of the year this year and then These are generally 12 to 24 month resolution, so to speak. But just we wanted to make sure that we haven't, you know, we're very focused on it but I think it's going to take, you know, some more time. But we are seeing some progress in some. And the other thing that you've noted and I mentioned in my remarks is that as we get some of these equity realizations in and we have some larger positions, this is a great opportunity to recycle what are non earning assets they could appreciate but non current earning assets to put leverage on them and grow the portfolio again. So we think we'll start to see that come to fruition toward the end of this year. So those two things combined, think of it more toward the end of this year into first of next year, but not immediately.

Robert Dodd (Equity Analyst)

Thank you.

Todd Huskinson (Chief Financial Officer)

Yeah, thank you.

OPERATOR

Robert, your next question is from Paul Johnson with kbw.

Paul Johnson (Equity Analyst)

Good morning, Paul. Good afternoon guys. Thanks for taking my questions just a little bit more on the non rules. As Robert said, those are elevated. I think they're probably as high as they've ever been for Stellus. I'm just curious what I guess has been the weakness there. Has it just been kind of a challenging vintage or has there been something maybe more specific in terms of what's driven the more recent, I guess, increase in non accruals?

Todd Huskinson (Chief Financial Officer)

Yeah, so. Good question, Paul. I'd say they're all company specific, not driven by any kind of a macro trend or an underwriting trend that we, you know, all of our businesses, when we underwrite them, there are a few key characteristics. One, they have a substantial equity partner behind it, a private equity firm. Two, the equity component to the company is at least, or typically at least 50% of the capital structure and each has serious covenants, traditionally a fixed charge coverage and a leverage test. So when we go into it, we're not expecting problems, but we certainly underwrite. If we went through a recession, how would this company do? But we ended up having not a recession, but again, company specific issues that have made some of them challenging. Also, it's worth noting that because there's a private equity sponsor beyond substantially all of these, it is typical that a private equity firm will put in capital at least twice to solve problems. So that's helpful to say that if we have something non accrual, the sponsor owner has supported this over time and just gotten to the point where they're not able to support it anymore. So again, company specific, nothing we could tie down to anything that would be an overall trend. Part of it too is we've also had in the past, we've had things come off non accrual or be resolved and we're having some slowness in that activity. And that's why I noted that we're working it and working it hard to get that to reduce over time. So I think it's, we haven't been able to take as many off as we've added. But anyway, thanks for the question. And that's where we are.

Paul Johnson (Equity Analyst)

Got it. Okay, appreciate that. And then, I mean it sounds, if I'm not mistaken, your 1 to 2 rated names roughly around 19% of the portfolio, I believe last quarter. I don't think there's too much change quarter over quarter in terms of like the internal watch list, you know, with the new addition here to non accrual, I believe that may have already been captured within, you know, your internal watch list. Is that safe to say that, you know, any of the, you know, addition here to non accrual is not necessarily a surprise and is, you know, was more or less kind of within the bucket of underperforming rated names. And that's relatively unchanged quarter over quarter.

Todd Huskinson (Chief Financial Officer)

That's right, Paul. And again, I think so. It's 19%. That is risk grade three or below. And you're right, that number didn't change.

Paul Johnson (Equity Analyst)

My mistake.

Todd Huskinson (Chief Financial Officer)

No, no, no worries. And that the one that did move to non accrual was already a risk grade three before.

Paul Johnson (Equity Analyst)

Okay, thanks. That's all for me.

Todd Huskinson (Chief Financial Officer)

Yeah, thanks so much, Paul.

OPERATOR

We have reached the end of the question and answer session and I will now turn the call over to Robert Ladd for closing remarks.

Robert Ladd (Chief Executive Officer)

Okay, thanks again, Holly. Thanks for your help and thanks everyone for participating, your support over many years of our company. And we look forward to giving you an update again in early August relative to the second quarter. Thank you.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.