ArrowMark Financial Corp. Q2 FY2021 earnings call

• Banking industry: Net income across all banking institutions more than tripled vs year-ago quarter; 75% of banks had higher net income; community banks' net income grew 77%; Fitch Ratings saw stable ratings double year-over-year.
• Credit markets: Fed signaled stable interest rates; 10-year U.S. treasury yield declined; corporate credit spreads stable; expanding economy benefits bank fundamentals; ~80% of portfolio in floating rate assets.
• Origination pipeline: Q2 regional and community banks issued ~$2.5B subordinated debt (below threshold); large money center banks had ~$3B reg cap issuance in Q2; secondary market active; looking for reg cap opportunities to optimize balance sheets.
• StoneCastle financials: Q2 net investment income $2.6M or $0.40 per share; NAV $21.80 up $0.18 from prior quarter; invested $17.1M in 4 reg cap transactions; received $4M from calls/paydowns; closed $10.8M registered direct offering; consistent dividend since H2 2015; over 400 basis points incremental yield vs other banking-related vehicles; NAV components discussed including gross income, net operating expenses, realized capital gains/losses, and changes in portfolio value.

For StoneCastle Financial Corp.'s Q2 2021, net investment income for the second quarter was approximately $2.6 million or $0.40 per share. At the end of the second quarter, net asset value was $21.80 per share, up $0.18 from the prior quarter. The estimated annualized effective yield generated by the invested portfolio, excluding cash and cash equivalents, was 9.47% at quarter-end, up from 9.32% in Q1. There are no distinct product segments with revenue contribution percentages as the focus is on the overall investment portfolio.

• Origination pipeline expected to remain active into Q3 and Q4 as banks optimize balance sheets.
• Plan to grow assets using the shelf for accretive transactions in alignment with shareholder interest.
• Credit facility had $53.5M drawn on June 30, which is 27% of total assets, with ability to borrow up to 33.3% of total assets based on regulated investment company rules.

• Forward-looking statements involve risks such as changes in securities/financial markets, general economic conditions, volume of stock sales/purchases, continuation of contracts, and other risks from SEC filings.
• Timing issue with cash money movement with custodian affecting portfolio valuation reconciliation, which was resolved immediately after quarter-end.

Q: Comment on the investment portfolio reconciliation with the $52 million due to custodian timing issue.

A: Pat Farrell states it's a timing issue caused by a cash money movement with a custodian on a hedge transaction, resolved immediately after quarter-end.

Q: Discuss the growth outlook and credit line.

A: Sanjai Bhonsle says the investment pipeline continues to be active, Q3 and Q4 are typically active quarters, and there is availability on the credit line with the banking partner expected to grow with the company.

Q: Outlook on the yields of regulatory capital investments.

A: Sanjai Bhonsle mentions yields are in the high 9s, low 10s on average.

Q: Interest rate sensitivity profile and floating rate portion of the portfolio.

A: Sanjai Bhonsle says about 60% of the portfolio is in floating rate assets on approximately $195 million of assets