ArrowMark Financial Corp.

Greetings. Welcome to Arrowmark Financial Corp. 4th Quarter 2021 Investor Conference Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Julie Morocco, Investor Relations of Arrowmark Financial Corp., formerly known as Stonecastle Financial Corp. Thank you. You may begin.

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 semi-annual 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 statement made herein. All forward-looking statements speak only as of today, February 28, 2022. In today's call, the management of Aramark 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 jmorocco at aramarkpartners.com. Now I will turn the call over to Sanjay Bose.

Thank you, Julie. Good afternoon and welcome to Aramark 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 out with an announcement regarding the name change for our company. A police report that subsequent to the end of the year, the company transitioned its name from Stonecastle Financial Corp. to Aramark Financial Corp., effective February 24th. We're excited to have the company's new name reflect the resources of Aramark Partners in its entirety. Nothing else has changed. Aramark Financial continues with the same management and same investment strategy and objectives. Aramark Financial shareholders will continue to reap the benefits of Aramark Partners' wider platform and its deep knowledge of banking-related investments. Now onto this 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'll provide Aramark 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-centered 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 have already reported, in general, fourth quarter loan balances continue 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 one capital ratios. Now, I'd 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 rates 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 relief 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-centered banks had a strong issuance of approximately $6.5 billion from more than 20 money-centered banks. For the full year, 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 Aramark 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 41 cents per share. Also, during the fourth quarter, the company reported a net realized and unrealized loss in investments of approximately $644,000, or 9 cents per share. Our net asset value at the end of the quarter was $21.70, down 16 cents 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 10 cents, plus a 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 $1.62 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 five regulatory capital transactions. The five 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. Yields 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 paydowns from nine investments. You may recall PFF is the 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 Aramark Financial continue to reduce its position in PFF. Given the purchase of high-yielding assets and partial sell-down of low-yielding PFF positions during the fourth quarter, the company reported an increase in its estimated annualized effective yield to 9.48% as of December 31st. 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 investor 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 a 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.

Thank you, Sanjay. 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 31st was $21.70 per share, down 16 cents from the prior quarter. The decline in NAV, in part, reflects the company's fourth quarter declared dividend of 38 cents plus an additional 10 cent special dividend. Now, on to the breakdown of the NAV components. The NAV is comprised of four components, net investment income, realized capital gains and losses, the change in value of the portfolio's investments, and lastly, distributions paid during the period. Let's review these components. Gross income for the quarter was approximately $4.5 million or $0.64 per share. Total expenses for the quarter were $1.6 million or $0.23 per share, resulting in net investment income for the quarter of $2.9 million or $0.41 per share. As is the case every quarter, the timing of calls and paydowns impact the income generation of the company. Realized capital gains and losses in the quarter is the second component affecting the change in NAV. The net realized capital gains from investment activities were approximately $2.2 million or $0.32 per share. The third component, changes in unrealized appreciation or depreciation of the portfolio, relates to how the value of the entire investment portfolio has changed from the previous quarter end to the current quarter end. For the fourth quarter, the change in net unrealized depreciation on investments and foreign currency transactions was approximately 2.9 million, or 41 cents per share. I want to point out that gains and losses from foreign currency hedging activities do not impact our net income. The fourth component affecting the change in net asset value is distribution. The regular cash distribution for the quarter was 38 cents per share. The company also declared a $0.10 special cash dividend for a total quarterly distribution of $0.48, paid on January 5, 2022. The special dividend was up $0.05, or 100%, from the prior year and reflects the company's ability to consistently over-earn its quarterly dividend rate. In fact, the company has over-earned its current $0.38 dividend since the fourth quarter of 2019. In summary, we began the quarter with a net asset value of $21.86 per share. During the quarter, we generated net income of $2.9 million, net realized capital gains of approximately $2.2 million, and the unrealized value of the portfolio and foreign currency transactions decreased by $2.9 million. The sum of these components, reduced by total distribution of $0.48 per share, resulted in a net asset value of $21.70 per share, on December 31st, which was down 16 cents from the prior quarter. Turning to the valuations for our portfolio holdings, it is worth noting that the vast majority of the portfolio continues to be independently marked. For the quarter, approximately 81 percent of the portfolio prices or marks reflect a minimum of two quotations or actual closing exchange prices. These quotations represent an independent third-party assessment of the current value of the portfolio. This should provide a greater degree of confidence in the company's underlying value versus other publicly traded closed-end funds and BDCs whose portfolios are comprised of assets that do not have readily available market quotations and therefore self-mark many of the assets in their portfolios. At quarter end, the company had total assets of $218.7 million, consisting of total investments of $215.4 million in cash, interest, and dividends receivable and prepaid assets totaling $3.3 million. I would like to highlight the growth in assets to our investors. Of note, year over year, total assets increased $30 million or up 16%, as Sanjay mentioned earlier. This asset growth was due in part to the company's mid-year $10.8 million registered direct offering, along with optimizing the use of our credit line, and actively identifying accretive investments for the portfolio during the period. At quarter end, our dividend yield was approximately 7%. Now let me update you on the balance of our credit facility. At December 31, 2021, the company had $60 million drawn from the facility, or 27% of total assets. Based on regulated investment company rules, we may only borrow up to 33.3% of our total assets. Now I want to turn the call back over to Sanjay for closing remarks.

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.

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