ArrowMark Financial Corp.

Welcome to the Stone Castle Financial Corp Q3 2021 Investor Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. Now, I would like to turn the call over to Julie Morocco, Investor Relations of Stone Castle Financial. Please go ahead.

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. Stone Castle Financial has based the forward-looking statements included in this presentation on information available to us as of September 30, 2021. The company undertakes no duty to update any forward-looking statements made herein, All forward-looking statements speak only as of today, November 10th, 2021. In today's call, Stone Castle Financials Management will be providing prepared remarks and commencing with this call, investors will have the opportunity to address their questions directly to investor relations and management via phone and email through the contact information on our website. We will not have a formal Q&A following management's remarks. Now, I will turn the call over to Sanjay Bosley.

Thank you, Julie. Good afternoon, and welcome to Stone Castle Financial's third quarter investor call for 2021. Along with Julie, here with me today is Pat Farrell, our CFO. During today's presentation, I will briefly comment on the banking industry and the credit markets before commenting on the company. Then, I will provide Stone Castle Financial's quarterly results and portfolio review and Pat will provide you with greater detail on our financial results. Starting off with the banking industry, banks continue to show improvement in financial performance. In fact, during the third quarter, loan balances grew across the industry. Looking at the banking industry as a whole, reported net increases in total loans are being driven primarily by auto lending and credit cards. We hope the loan growth trend will continue. It will not only be accreted to bank earnings, but also it should be correlated to an increase in Tier 1 capital ratios. The community banks within the Stone Capital portfolio continue to be well capitalized into the third quarter with median common equity Tier 1 capital ratios reported at 13.09%. Now let me comment on the credit markets. Last week, the Federal Reserve announced that tapering would begin later this month through 2022. With the Fed's continued stance on the transitory nature of inflation, short-term interest rates were held at current levels. However, the markets are beginning to factor in interest rate increases starting by mid-2022. The 10-year U.S. Treasury yield ticked off slightly in the third quarter to end at 1.52% after starting the year below 1%. Corporate credit spreads were relatively stable in the third quarter, as was the case in Q2. As we have mentioned previously, a rise in interest rates should also be accrued to bank earnings, all other things being constant. A rise in base rates should also be beneficial to the company, as approximately 65% of portfolio investments in the company are floating rate assets. An increase in the base rate should result in increased earnings for the company generally. As we have discussed previously, since the transition to Aramark, we have meaningfully increased the portfolio's exposure to floating rate assets. Next, I will cover our origination pipeline. Primary subordinated debt issuance by regional and community banks moderated, raising $1.5 billion in Q3 versus $2.5 billion in Q2, or down 40%. In Q3, primary issuance rate coupons averaged approximately 3.5% also down from Q2. Given the meaningful compression in yields for community banks-related assets, we continue to find regulatory capital securities issued by money-centered banks much more attractive on a risk-adjusted basis. In fact, in Q3, the regulatory capital relief market for money-centered banks had a strong issuance of approximately $2.5 billion and $6.5 billion year-to-date. Transactions in the quarter reflected an expansion of the issuer base. Given the strong pipeline in the primary market for regulatory capital issuance for money center banks, we were not very active in the secondary market. It is important to note that we will be opportunistic in the secondary market as we have been in the prior years. Now on to Stone Castle Financial's results for the third quarter. We are pleased to report that net investment income for the third quarter of 2021 was approximately $2.8 million or 40 cents per share. This quarter's financial performance, specifically earnings per share, is based upon an increased total share count of approximately 7.5%, which is related to the recent registered direct offering. I will give more details on this transaction shortly. Next, during the third quarter, the company also reported a net realized and unrealized gain on investment of approximately $250,000 or $0.04 per share. Hopefully, this highlights to our investors the continuous strong credit quality of the Stone Castle investment portfolio. This was also exhibited in the net asset value at $21.86 per share, which was up 6 cents from the prior quarter.