Stellus Capital Investment Corporation (SCM) Earnings

Management highlights

- **Overall Portfolio & Activity** • Since its November 2012 IPO, the firm has invested ~$2.8 billion across over 250 companies, received ~$1.8 billion in repayments, and paid $339 million in dividends ($18.49 per share to IPO investors). • In Q1 2026, the firm invested $18 million in 3 new portfolio companies, completed $9 million in other investment activity at par, received $35 million from 3 full loan repayments, $6.6 million in other partial repayments, and realized a $750 thousand gain from one equity exit. • The portfolio ended Q1 with 116 portfolio companies, up from 115 at the end of Q4 2025. The average investment per company is $9 million at fair value, and the single largest investment is $18.5 million at fair value. Substantially all portfolio companies are backed by private equity sponsors. - **Asset Quality** • Overall asset quality is slightly better than internal plans. One new loan was added to the non-accrual list in the quarter, bringing the total to 6 non-accrual loans across 6 companies. Management acknowledges non-accrual levels are higher than desired and is actively working to resolve or rehabilitate these positions. • The firm has no exposure to the large-scale SaaS software sector. It holds small positions in industry-specific proprietary software/IT companies, all of which are internally rated 1 or 2 and performing as expected, with no material markdowns related to AI sector disruption. - **Strategic Update: Ridge Post Capital Integration** • Stellus Capital Management, the firm's external adviser, is expected to join the Ridge Post Capital platform in summer 2026. • The partnership is expected to deliver meaningful new investment opportunities, particularly through Ridge Post's RCP Advisors lower middle market private equity fund strategy, which has relationships with over 200 private equity firms. Management estimates this could generate hundreds of millions of dollars in new annual lending opportunities across the Stellus platform. - **Share Repurchase Program** • The firm recently announced a new $20 million common share repurchase program, prompted by the stock trading at a ~25% discount to NAV. Management believes repurchasing shares at current valuations creates clear value for long-term shareholders. - **Growth Capacity** • The firm projects it has capacity to grow its investment portfolio by $75 million to $100 million from current levels, supported by two sources: the expected approval of a third SBIC license in summer 2026, and recycling of proceeds from equity realizations and resolved non-accrual positions. Resolved non-earning positions can be reinvested at ~3x leverage through existing credit facilities.

Guidance

- Management expects that by the end of Q2 2026, total portfolio size will remain roughly stable, with new investment funding expected to equal repayment proceeds. • Management projects total equity realizations of $9 million for the remainder of calendar 2026, with approximately $6 million of that amount expected to be realized gain. • The Q2 2026 dividend was declared at $0.34 per share, payable monthly. Over time, management expects dividends will align with net investment income plus realized gains, which will result in a lower dividend level than the current payout as the firm reduces 2025 spillover income balances. • Management expects the third SBIC license to be awarded in summer 2026. • The integration of the external adviser into the Ridge Post Capital platform is expected to close in summer 2026. • Meaningful reduction in non-accrual levels is not expected immediately, with noticeable improvement projected for the end of 2026 or early 2027.

Segment performance

Stellus Capital Investment Corporation is a business development company (BDC) focused on private credit investments. No separate product segment reporting is provided in the transcript. The overall consolidated investment portfolio had a fair value of $990 million as of March 31, 2026, down from $1.01 billion as of December 31, 2025. Key consolidated financial metrics for Q1 2026: GAAP net investment income was $0.26 per share; core net investment income (excluding estimated excise taxes) was $0.27 per share; realized gains of $750 thousand from one equity position brought total realized income to $0.29 per share. Net asset value (NAV) per share decreased by $0.28 during the quarter. 99% of the portfolio by value consists of senior secured loans, 92% are floating rate, 81% of the portfolio at fair value is internally rated 1 or 2 (on or ahead of performance plan), and 19% is rated 3 or below (not meeting plan expectations). Non-accrual loans represent 9.2% of total portfolio cost and 5.2% of total portfolio fair value.

Risks & headwinds

- Non-accrual loans are currently elevated at 5.2% of portfolio fair value, which is higher than management's target level. One additional loan was added to non-accrual in Q1, and the pace of resolving existing non-accrual positions has been slower than expected. • Net asset value declined by $0.28 per share in Q1, driven by $0.20 per share in combined net realized and unrealized losses tied primarily to two specific debt investments. • The competitive lending environment in the firm's target lower middle market has kept credit spreads from widening meaningfully, despite spread widening in upper market segments, which can pressure net investment income. • Forward-looking results are subject to factors that could cause actual outcomes to differ materially from projections, as disclosed in the firm's SEC filings.

Analyst Q&A

• Q: Eric Zwick (Lucid Capital) asked for clarification: if dividends will eventually align with lower net investment income (NII) plus realized gains, does management expect to reset dividends lower, and can NII grow from current levels? /

  A: Management confirmed that NII is expected to stay around current levels for the foreseeable future, so a dividend cut is expected to align the payout with earnings as the 2025 spillover balance is reduced.

• Q: Zwick also asked why no shares were repurchased in Q1 under the previously announced program, whether the pending Ridge Post transaction delayed activity. /

  A: Management explained the lack of repurchases was solely due to the limited trading window between the fourth quarter 10-K issuance and the end of Q1. A much longer trading window is available in Q2, and repurchase activity will proceed.

• Q: Zwick asked about current lending spread levels in the deal pipeline compared to 90 days ago and compared to the existing portfolio yield. /

  A: Management reported spreads have stabilized in the lower middle market, without the material widening seen in upper market segments. Average new deal spreads are currently ~5.5% over SOFR, with some deals clearing higher, but spreads have not meaningfully widened to date.

• Q: Robert Dodd (Raymond James) asked what the timeline is for reducing elevated non-accrual levels to more normal targets. /

  A: Management noted that non-accrual resolutions typically take 12 to 24 months, and no immediate large reduction is expected. Noticeable improvement is projected by the end of 2026, with further progress into early 2027, as resolved non-accrual proceeds are recycled into new earning investments.

• Q: Paul Johnson (KBW) asked what factors have driven the recent increase in non-accruals, whether it stems from broader macro or underwriting trends. /

  A: Management confirmed all non-accrual increases stem from company-specific issues, not broader macro or industry trends or systematic underwriting errors. Most non-accrual positions reached that status after private equity sponsors (which back nearly all positions) exhausted their willingness to add additional supporting capital. The share of underperforming (rating 3+) portfolio stayed flat quarter-over-quarter, and the latest non-accrual addition was already rated 3 prior to the move.