ArrowMark Financial Corp.
Q4 2021 Earnings Call Transcript

Published: 28 Feb 2022

[Operator:]

Greetings. Welcome to ArrowMark Financial Corp. Fourth Quarter 2021 Investor Conference Call. At this time, all participants are in a listen-only mode. . Please note, this conference is being recorded. I will now turn the conference over to Julie Muraco, Investor Relations of ArrowMark Financial Corp. formerly known as StoneCastle Financial Corp. Thank you. You may begin.

[Julie Muraco:]

Before we begin this conference call, I'd like to remind everyone that certain statements made during the call may be considered forward-looking statements based on current management expectations that involve substantial risks and uncertainties. Actual results may differ materially from the results stated in or implied by these forward-looking statements. This would depend on numerous factors, such as changes in securities or financial markets or general economic conditions; the volume of sales and purchases of shares of common stock; the continuation of investment advisory, administrative and service contracts; and other risks discussed from time to time in the company's filings with the SEC, including annual and semiannual reports of the company. ArrowMark Financial has based the forward-looking statements included in this presentation on information available to us as of December 31, 2021. The company undertakes no duty to update any forward-looking statements made herein. All forward-looking statements speak only as of today, February 28, 2022. In today's call, the management of ArrowMark Financial will be providing prepared remarks. Investors will have the opportunity to address their questions directly to management by calling Investor Relations at 212-468-5441 or emailing [e-mail]. Now I will turn the call over to Sanjai Bhonsle.

[Sanjai Bhonsle:]

Thank you, Julie. Good afternoon, and welcome to ArrowMark Financial's Fourth Quarter Investor Call for 2021. Along with Julie, here with me today is Pat Farrell, our CFO. I would like to start off with an announcement regarding the name change for our company. I'm pleased to report that subsequent to the end of the year, the company transitioned its name from StoneCastle Financial Corp. to ArrowMark Financial Corp. effective February 24. We're excited to have the company's new name, reflect the resources of ArrowMark Partners in its entirety. Nothing else has changed. ArrowMark Financial continues with the same management and same investment strategy and objectives. ArrowMark Financial shareholders will continue to reap the benefits of ArrowMark Partners' wider platform and its deep knowledge of banking-related investments. Now on to the call. In the next few minutes, I'll briefly comment on the recent geopolitical events and its effects on the credit markets before commenting on the company. Then I will provide ArrowMark Financial's quarterly results and portfolio review, and Pat will provide you with greater details on our financial results. Starting with the geopolitical events, the conflict between Russia and Ukraine continued to negatively impact global markets. We believe that our investment portfolio, which is made up of securities, primarily issued by money center banks and U.S. community banks are relatively well insulated from this geopolitical risk. Our investments are highly diversified among industry sectors and geographies. As we take a look at the banks, they have been reporting Q4 earnings flat to slightly ahead of expectations. For banks that I've already reported, in general, fourth quarter loan balances continued to grow modestly as was the case in the third quarter last year. We expect that this loan growth trend will continue. It will not only be accretive to bank earnings, but also it should be correlated to an increase in Tier 1 capital ratios. Now I would like to say a few words on the credit markets. The markets have factored in interest rate increases in the first quarter of 2022. We continue to believe that the expected increase in 2022 will be a positive benefit to the banking sector's earnings. A rise in base rate should be beneficial to our portfolio as well as approximately 70% of the company's total investments are in floating rate assets, notably the regulatory capital securities. All things being equal, the anticipated increase in rates will provide ArrowMark Financial the ability to increase the company's earnings potential as the increase in base rates will have a direct and positive effect on our gross investment income. In other words, the total yield on a floating rate investment in the portfolio, that is, for example, a certain spread over LIBOR base rate will increase as the LIBOR base rate floats up due to an increase in the fed funds rate. Next, I will cover our origination pipeline. In the community banking space, the primary and secondary markets continue to be aggressively priced with primary markets consistently in the 3% to 4% coupon range. While our strategy continues to look across the entire banking sector, the regulatory capital release securities have been consistently and more attractive on a risk-adjusted basis vis-a-vis community banks. In Q4, the regulatory capital relief market for money center banks had a strong issuance of approximately $6.5 billion from more than 20 money center banks. For the full year, the regulatory capital relief issuance was approximately $13 billion. In addition, we were able to purchase assets in the secondary market at attractive prices during the year. Now on to ArrowMark Financial's results for the fourth quarter. We are pleased to report that net investment income for the fourth quarter of 2021 was approximately $2.9 million or $0.41 per share. Also, during the fourth quarter, the company reported a net realized and unrealized loss on investments of approximately $644,000 or $0.09 per share. Our net asset value at the end of the quarter was $21.70, down $0.16 from the prior quarter. Our net asset value has been consistent and stable, reflecting the quality of our assets. The fourth quarter NAV reflects the payment of a special cash dividend of $0.10 plus our regular quarterly cash dividend of $0.38 for a total of $0.48 dividend per share in the fourth quarter. Investors who held ArrowMark Financial for the full year of 2021 received a total of $1.52 in annual distributions, representing a nearly 7.5% dividend yield on December 31, 2021. Now let me turn to the portfolio review. During the fourth quarter, the company invested a total of $22.5 million in 5 regulatory capital transactions. The 5 new investments positively contributed to the portfolio with a weighted average coupon of 10% and a weighted average yield to maturity of approximately 10.2%. The majority of these securities were purchased in the primary market. Deals of the new assets remain accretive to the investment portfolio. The increase in investments during Q4 were partially offset with $14.1 million in proceeds from one call investment, the partial sale of PFF and partial pay downs from 9 investments. You may recall, PFF is iShares preferred and income securities ETF. PFF is now only 2.4% of the portfolio's total investments. As we continue to optimize the yield of the entire portfolio, investors can expect to see ArrowMark Financial continued to reduce its position in PFF. Given the purchase of high-yielding assets and partial sell-down of low-yielding PFF position during the fourth quarter, the company reported an increase in its estimated annualized effective yield to 9.48% as of December 31. The fourth quarter yield is up from 9.2% or up 28 basis points from the prior quarter end. For the year-end, I'm pleased to report that total assets of the portfolio were reported at $218.7 million, up 16% from the prior year. The value of the invested portfolio was reported at $215.4 million, up 21% from the prior year. In closing my remarks, I want to highlight that the company's per share financial results, including net income, NAV and declared dividends were reported in the second half of 2021 on our share count that was 7.5% higher as a result of our registered direct offering. The company was able to deliver strong investment income, absorb the growth in additional shares while reporting consistent and stable results. Now I want to turn the call over to Pat.

[Patrick Farrell:]

Thank you, Sanjai. As I do each quarter, I will present the financial results by going through the components of the company's quarterly results in detail. The net asset value on December 31 was $21.70 per share, down $0.16 from the prior quarter. The decline in NAV in part reflects the company's fourth quarter declared dividend of $0.38 plus an additional $0.10 special dividend. Now on to the breakdown of the NAV components. The NAV is comprised of 4 components

[Sanjai Bhonsle:]

Thank you, Pat. I'd like to thank everyone on the call for listening in today. As always, I look forward to hearing from you and hope to see you soon. Good night.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.

[End of Q&A:]