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ArrowMark Financial Corp. (BANX)·Q3 2019 Earnings Summary

Executive Summary

  • Q3 2019 delivered total earnings of $3.42M, or $0.52 per share, comprised of net investment income (NII) of $2.50M ($0.38/share) and net realized gains of $0.92M ($0.14/share) driven largely by the sale of Happy Bancshares common stock .
  • NAV per share was $21.75, down $0.05 sequentially, reflecting ~$1.22M of unrealized depreciation as portfolio marks adjusted and gains were realized .
  • Management executed two high-coupon “alternative capital” bank securities (3M LIBOR + 10%, >12% current coupons), lifting the estimated annualized portfolio yield to 9.55% from 9.16% in Q2; these investments are expected to add ~$0.02 per share to quarterly gross income net of prepayment headwinds .
  • Leverage remained conservative: $25.2M drawn on the $62M facility (≈14.9% of total assets) with an equity premium to NAV of ~1.9%, and a $0.38/share quarterly distribution was paid in September .
  • Catalysts: shift toward higher-yielding alternative capital securities, potential 2020 refinance of the Community Funding CLO senior piece at materially lower rates, and moderating call activity into Q4 (~$15M currently callable) .

What Went Well and What Went Wrong

What Went Well

  • Executed two alternative capital investments at >12% current coupons (3M LIBOR+10%), acquired slightly below par, raising the estimated annualized portfolio yield to 9.55% (from 9.16% in Q2) .
    “Both securities carry a coupon of 3-month LIBOR plus 10%… current coupon for both exceed 12%… resulted in an increase in the estimated annualized portfolio yield from 9.16% at the end of Q2 to 9.55% at the end of Q3.”
  • Realized ~$1.0M capital gain ($0.14/share) on the sale of Happy Bancshares, doubling the original $1.0M investment since 2014 with an average annualized return >14% .
  • Maintained dividend coverage with NII of $0.38/share and paid a $0.38/share distribution; shares traded at a premium (~1.9%) to NAV at quarter-end .

What Went Wrong

  • Gross investment income softened to $3.96M (from $4.04M in Q2) as prepayments/calls reduced income by ~$0.05/share in the period, partly offset by the newly added higher-yielding investments .
  • Unrealized depreciation of ~$1.22M reduced NAV by $0.05 QoQ despite the realized gain on Happy Bancshares .
  • Dividend income fell to $0.77M from $1.09M in Q2 as called/redeemed securities and portfolio mix shifts reduced this component of income .

Financial Results

MetricQ1 2019Q2 2019Q3 2019Consensus/Guidance
Total Investment Income ($)$4,235,550 $4,043,437 $3,961,163 N/A (S&P Global consensus unavailable)
Total Expenses ($)$1,753,720 $1,577,193 $1,461,663 N/A
Net Investment Income ($)$2,481,830 $2,466,244 $2,499,500 N/A
NII per Share ($)$0.38 $0.38 $0.38 N/A
Total Earnings per Share ($)N/AN/A$0.52 N/A
NAV per Share ($)$21.63 $21.80 $21.75 N/A

KPIs and Balance-Sheet Highlights

KPIQ1 2019Q2 2019Q3 2019
Estimated Annualized Portfolio Yield (%)9.29% 9.16% 9.55%
Total Assets ($)$181,317,601 $168,153,822 $169,203,133
Investments at Fair Value ($)$173,064,511 $165,115,844 $166,898,025
Loan Payable / Credit Facility Drawn ($)$38,000,000 $24,000,000 $25,200,000
Quarterly Distribution per Share ($)$0.38 $0.38 $0.38
Market Price Premium/(Discount) to NAV (%)-0.93% 0.05% 1.89%

Notes: Credit facility limit remained $62.0M in Q1 and Q3 .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Dividend/Distribution PolicyOngoingBoard reviews quarterly; coverage intact Continued $0.38/share paid in Q3; Board reviews quarterly; management indicates coverage remains intact Maintained

No formal quantitative guidance on revenue, margins, OpEx, taxes, or segment metrics was provided in the 8‑K or call .

Earnings Call Themes & Trends

TopicQ1 2019 (Prior)Q2 2019 (Prior)Q3 2019 (Current)Trend
Alternative capital / regulatory capital reliefExploring non-traditional/regulatory capital transactions; patient capital stance Evaluating regulatory capital relief; working pipeline Executed two LIBOR+10% alt-capital securities (>12% current coupon) From evaluation to execution
Pipeline & deal flowQuiet market; disciplined deployment Pipeline building; traded a $10M block >10% yield (settlement pending) Seeing pickup; Q4 historically more active Improving
CECL/regulatoryMacro/regulatory caution; cycle awareness —CECL delay for small banks offers “breathing room,” but regulators may push preparedness; limited delay impact on larger banks Ongoing focus
Calls/redemptions$17.5M calls in Q1 $12.9M calls in Q2 YTD calls ~$48.5M; only ~$15M callable near-term into Q4 High YTD, moderating ahead
Technology at banks——Heightened bank focus on tech/efficiency; PrecisionLender example New emphasis
Leverage/credit facility$38M drawn; leverage 21% Facility cost reduced to 1M LIBOR+2.35%; expense sensitive to rates $25.2M drawn; ~14.9% of total assets; potential CLO refi to ≈5% senior rate in 2020 Favorable funding, refi optionality

Management Commentary

  • Strategy and portfolio yield: “Both securities carry a coupon of 3‑month LIBOR plus 10%… current coupon for both exceed 12%… resulted in an increase in the estimated annualized portfolio yield from 9.16% at the end of Q2 to 9.55% at the end of Q3.”
  • Earnings composition: “Earnings for the third quarter were approximately $3.4 million or $0.52 per share… net investment income of $2.5 million or $0.38 per share and approximately $1 million in net realized capital gains of $0.14 per share.”
  • Credit quality: “We believe no meaningful credit issues currently exist within the portfolio, and the majority of the underlying banks continue to be scored investment grade by Kroll Bond Rating Agency.”
  • Dividend/yield positioning: “Our dividend yield at the end of the quarter was approximately 7%…” and the $0.38/share distribution was paid on September 27 .
  • Capital markets backdrop: “Sub debt yields compressing to 5% to 6%… decline in bank equity multiples… ideal time to invest in alternative capital securities.”

Q&A Highlights

  • Pipeline and yields: Management sees increased inquiries into Q4; traditional product yields often 5–6% (not attractive), selectively pursuing high‑7s to 8%+ deals; alternative capital deals executed at >12% coupons .
  • Calls outlook: Only ~$15M currently callable into Q4; despite $48.5M YTD calls, earnings held up, and forward call exposure is limited near-term .
  • CECL implementation: Delay provides smaller banks some “breathing room,” but regulators may still expect progress; larger banks remain effectively on track—limited impact on BANX opportunity set near-term .
  • Funding and CLO refi: Facility pricing at 1M LIBOR+2.35% aids NII; 2020 refi opportunity for Community Funding CLO senior piece could reduce rate from 6.40% step-up closer to ~5%, improving free cash flow and extending tenor with bank counterparties .
  • Macro tone: Banks “hunkering down,” slowing lending; increased tech spend to improve efficiency and profitability; no acute credit hotspots in BANX’s focus areas .

Estimates Context

  • Wall Street consensus for BANX’s Q3 2019 EPS/revenue was unavailable via S&P Global at the time of this analysis (data feed limit encountered). As a result, we cannot quantify beats/misses vs. consensus for Q3 2019. We anchor comparisons to reported results and sequential trends from company filings and the call .
  • Given BANX’s niche focus and structure, external quarterly estimate coverage may be limited; we will update if/when S&P Global consensus becomes accessible.

Key Takeaways for Investors

  • The pivot toward alternative capital securities materially enhanced portfolio yield (9.55% at Q3 end) and should add ~$0.02/share to quarterly gross income net of prepayment headwinds—positive for dividend sustainability and NII run-rate .
  • Dividend coverage remained intact with $0.38/share NII vs. $0.38/share distribution; management/Board continue to review distributions quarterly, signaling discipline on payout policy .
  • Call activity was elevated YTD but appears set to moderate ($~15M callable into Q4), reducing reinvestment drag and stabilizing income .
  • Funding remains favorable (1M LIBOR+2.35%); a potential 2020 CLO senior refi toward ~5% could be a meaningful NII tailwind and extend asset non-call periods .
  • Conservative balance sheet with ~14.9% of total assets drawn on the $62M facility and shares trading near a small premium to NAV help support flexibility and investor confidence .
  • Macro: community banks are slowing loan growth and focusing on technology/efficiency; BANX’s focus on investment‑grade bank exposures and alternative capital niches may offer attractive risk‑adjusted returns late in the cycle .
  • Watch for continued sourcing of bespoke, high‑coupon bank capital transactions and any updates on the CECL/regulatory backdrop and CLO refi timing—key drivers of forward income trajectory .