UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number 811-22853           

 

	ArrowMark Financial Corp.
	(Exact name of registrant as specified in charter)

 

	100 Fillmore Street, Suite 325
	Denver, CO 80206
	(Address of principal executive offices) (Zip code)

 

	Sanjai Bhonsle, CEO
	ArrowMark Asset Management, LLC
	100 Fillmore Street, Suite 325
	Denver, CO 80206
	(Name and address of agent for service)

 

Copies of Communications to:

John P. Falco, Esq.

Pepper Hamilton LLP

3000 Two Logan Square / Eighteenth and Arch Streets

Philadelphia, PA 19103-2799

(215) 981-4659

 

Registrant's telephone number, including area code: (303) 398-2929

 

Date of fiscal year end: December 31

 

Date of reporting period: December 31, 2023

 

 

 

EXPLANATORY NOTE:

 

Registrant is filing this amendment to its Form N-CSR for the reporting period ended December 31, 2023 originally filed with the Securities and Exchange Commission on March 7, 2024 (Accession Number 0001104659-24-031938). The sole purpose of this amendment is to update Audit Committee member information in Items 3 and 5(a). Except as set forth above, this amendment does not amend, update or change any other items or disclosures found in the original Form N-CSR filing.

 

Item 1. Reports to Stockholders.

 

(a)

Include a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Act (17 CFR 270.30e-1).

 

 

 

	Annual Report
	December 31, 2023

 

 

 

 

 

NASDAQ | BANX

ir.arrowmarkfinancialcorp.com

 

 

ARROWMARK FINANCIAL CORP.

Table of Contents

 

Page

 

Letter to Shareholders		1
About ArrowMark Financial Corp		3
Consolidated Schedule of Investments		7
Consolidated Statement of Assets and Liabilities		11
Consolidated Statement of Operations		12
Consolidated Statements of Changes In Net Assets		13
Consolidated Statement of Cash Flows		14
Consolidated Financial Highlights		15
Notes to Consolidated Financial Statements		17
Auditor’s Report		33
Dividends and Distributions		34
Senior Securities		36
Share Price Data		37
Fee Table and Example		38
Tax Information		40
Additional Information		40
Results of Stockholders Meeting		41
Board Approval of the Management Agreement		42
Management		45
Shareholder Information		49
Privacy Notice		57

 

 

This page intentionally left blank.

 

 

Letter To Shareholders

 

February 29, 2024

 

Dear Shareholders,

 

We are pleased to provide you with the enclosed annual report for ArrowMark Financial Corp. (“ArrowMark Financial” or the “Fund”) for the twelve months ended December 31, 2023.

 

2023 endured one of the most aggressive interest rates increases in recent history, despite this, the economy remained resilient as evidenced by continued consumer spending, a healthy job market, and lower than predicted default rates. During the fourth quarter, the U.S. Federal Reserve’s (the “Fed”) remarks signaled lower interest rates in 2024, sparking a stock rally that rippled across markets. The policy shift was followed by steeper declines in inflation during the quarter, which dropped from 3.7% to 3.4%.

 

Regulatory capital relief, which comprises 87% of the portfolio, primary market activity accelerated into year end and contributed to record full-year issuance of $21-$23bn. Adding to the typical fourth quarter surge of activity, the Fed’s guidance on the treatment of various regulatory capital relief transaction structures drove a resurgence of activity from U.S. banks.

 

In 2023, the Fund’s investments in regulatory capital relief securities, showed resilience and outperformance resulting from strong income generation from floating-rate security coupons and the strength of underlying collateral fundamentals. Income generation from these securities, which increased over the course of the year given the rise in base rates, more than offset modest mark-to-market price volatility. During the 12-month period, the Fund returned 16.93% (net), outperforming the Bloomberg High Yield, Bloomberg Aggregate, and Morningstar Leveraged Loan which returned 13.44%, 5.53%, and 13.08%, respectively. As a reminder, regulatory capital is the amount of capital a bank or financial institution needs to satisfy the capital requirements as determined by banking regulators.

 

While our investment strategy continues to include the entire banking sector, from community banks to global money center banks, the Fund’s new investments of $30.3 million were made in regulatory capital relief securities as we believe the asset class offered a more attractive coupon and risk-return profile vis-à-vis community banking investments.

 

The Fund’s Net Asset Value (“NAV”) increased year-over-year by 2.69% from $20.79 to $21.43. The Fund reports its NAV monthly, which we believe helps stabilize the stock price during periods of market volatility and creates pricing alignment with the underlying investments.

 

During 2023, the Fund declared distributions totaling $2.20 per share, including a long term capital gain distribution of $0.42 per share in October and a special distribution of $0.10 per share in the fourth quarter. In September, the Fund announced that its Board of Directors increased the quarterly cash distribution to $0.45 per share from $0.39 per share, an increase of $0.06 from the previous recurring quarterly rate. Since the fourth quarter 2019, the Fund has over-earned its stated distribution rate.

 

Forward Outlook

 

We expect the Fund’s opportunity set to persist as banks place an even greater focus on capital management due to a variety of factors, including increased loan loss provisions, interest rate-driven mark-to-market declines of banks’ significant fixed income holdings, increased capital buffers, and regulatory changes. Security return profiles remain attractive on an absolute basis and represent a material premium to traditional markets. In addition, the combination of collateral quality, collateral diversification, and the alignment created with issuing banks through security structures, contribute to the asset class’s historical track record of outperformance during periods of rising rates and/or general market turbulence.

 

 

On the following pages, we provide additional details on our 2023 financial and operational results. We appreciate your continued support of ArrowMark Financial. We look forward to updating you on our progress throughout the year.

 

Sincerely,

 

Sanjai Bhonsle

Chairman & CEO

 

 

About Arrow Mark Financial Corp. 

 

MANAGEMENT DISCUSSION AND SUMMARY

 

This report provides information on the financial performance for ArrowMark Financial Corp. ("ArrowMark Financial" or the "Fund") for the year ended December 31, 2023. ArrowMark Financial (BANX) is a closed-end management investment company listed on the NASDAQ Global Select Market.

 

As of year-end, the Fund had total assets of $203.7 million, consisting of total portfolio investments of $196.6 million and a cash and other assets of $7.1 million. Based on total investments of $196.6 million, the portfolio investments consisted of 5.3% term loans, 5.6% structured debt securities, 87.6% Regulatory Capital Securities in the form of credit-linked notes (“Regulatory Capital Securities”), 1.2% trust preferred and preferred securities, and 0.3% of short- term or cash and cash equivalent investments.

 

For the full year ended December 31, 2023, ArrowMark Financial had total investment income of $28.7 million and net operating expenses of $10.0 million. This resulted in net investment income of $18.7 million or $2.63 per share based on average shares outstanding during the year. The Fund had realized and unrealized gains of $1.6 million or $0.21 per share. During the year, ArrowMark Financial declared distributions of $2.20 per share.

 

The fourth quarter 2023 declared dividend of $0.55 per share was comprised of a regular cash dividend of $0.45 per share and a special cash dividend of $0.10 per share. For the full year ended December 31, 2023, an investment in ArrowMark Financial resulted in a total annual return of 20.89%, including the reinvestment of distributions based on the closing market prices of ArrowMark Financial’s stock.

 

Net Asset Value at year end, December 31, 2023, was $21.43 per share, reflecting an increase of $0.64 per share from the prior year end. This was compromised of net investment income of $2.63 per share, offset by net realized and unrealized gains of $0.21 per share, and cash distributions declared to shareholders of $2.20 per share, including the Fund’s fourth quarter special cash distribution of $0.10 per share.

 

PORTFOLIO DISCUSSION

 

THE PORTFOLIO

 

ArrowMark Financial makes long-term, non-control investments in banking-related assets including securities issued by community banks and global financial institutions for regulatory capital relief transactions which are issued by both U.S. and foreign issuers to assist a bank in managing its regulatory capital requirements.

 

Over the course of 2023,ArrowMark Financial purchased securities totaling $30.3 million, which consisted of eight transactions. During the same period, the Fund executed redemptions totaling $34.5 million. This was comprised of call (redemption) notices of $17.0 million in five transactions and received paydowns and partial paydowns of approximately $17.5 million.

 

 

As of December 31, 2023, the Company had a total investment portfolio of $196.6 million representing 96.5% of total assets and consisting of:

 

Investment Type		Amount1
Term Loans			5.3	%
Structured Debt Security			5.6	%
Regulatory Capital Relief Securities2			87.6	%
Trust Preferred and Preferred Securities			1.2	%
Money Market (Short Term Investment)			0.3	%

 

1	Based on Total Investments of $196.6 million

2	Regulatory Capital Securities in this category are in the form of Credit-Linked Notes

 

PORTFOLIO CONSIDERATIONS

 

ArrowMark Financial is steadfast in its pursuit of constructing a portfolio that we believe is able to generate long-term, risk-adjusted returns, primarily for income distribution. The Fund seeks to achieve this goal while maintaining high credit quality standards.

 

Among the factors that affect the timing of capital deployment are: (i) a bank’s timeframe to obtain internal approvals to issue, (ii) the protracted nature of mergers and acquisitions, and (iii) an approval process from government regulators which must provide final regulatory approvals for a bank merger, capital issuances and capital redemptions (refinancing).

 

The Fund continues to source community banking debt, trust preferred and preferred securities and, Regulatory Capital Securities in the form of credit-linked notes. Regulatory Capital Securities are issued by both U.S. and foreign bank issuers to manage their regulatory capital requirements. All of the purchase transactions in 2023 were Regulatory Capital Securities. The second largest type of investment is Structured Debt Securities, solely consisting of Community Funding 2018, LLC. Community Funding 2018, LLC is comprised of community bank debt and trust preferred or preferred securities.

 

INVESTMENT PROCESS

 

ArrowMark Financial’s investment committee is focused on delivering on what we believe to be attractive risk-adjusted returns through in-depth fundamental research with an emphasis on risk mitigation for capital preservation. The Fund conducts due diligence on pending investments in several phases, and the assessment of downside risk is integrated into each phase of the process. Sourcing investments and access to new investment opportunities are a result of the Fund’s dedication to building and maintaining strong banking relationships, as well as working with intermediaries in the banking sector. The investment team provides in-depth analysis of security structure and underlying collateral to determine the financial integrity of the institution. The investment process includes both quantitative and qualitative reviews with investment decisions made by an experienced investment team that has worked together across the spectrum of banking-related assets for over 13 years. The investment team places a high value on its relationships with the underlying bank’s management teams, and conducts regular in person or teleconference reviews, with particular focus on the bank’s local markets. The Fund’s disciplined approach to due diligence and its commitment to credit quality reflects its long-term view of creating shareholder value. The Fund believes shareholders have high regard for this dedicated and disciplined approach to portfolio construction. We expect the investment process will serve to provide predictable cash flows and stable to growing net asset value over an extended timeframe.

 

 

Under the ArrowMark Partners (“ArrowMark Partners”) platform, the breadth and the scope of personnel working on the investment portfolio and in the operations of ArrowMark Financial have been significantly expanded. We believe that the depth of expertise in banking-related assets across ArrowMark Partners platform offers a significant and intangible advantage to the Fund and to our shareholders.

 

Investment advice is provided to the Fund by ArrowMark Asset Management, LLC.

 

INVESTMENT FOCUS

 

ArrowMark Financial typically pursues a range of investments in a bank’s capital structure. A bank’s capital structure includes senior and subordinated debt, Regulatory Capital Securities, preferred stock, and common equity. Bank holding company senior debt can also be absorbed at the bank level and become part of the bank’s capital structure. As a lender, a bank makes senior and mezzanine loans to borrowers. A bank’s common equity and the bank’s loan loss reserves offer a capital buffer to absorb credit losses from bank loans. Under normal circumstances, ArrowMark Financial would only incur a credit loss if the bank’s common equity plus loan loss reserves were exhausted.

 

Conclusion

 

We believe that ArrowMark Financial offers investors a unique opportunity to participate in a Fund focused on investing in banking-related assets.

 

The Fund will continue to work diligently for our shareholders by prudently managing the investment portfolio with the capital entrusted to us. ArrowMark Financial’s investment team works meticulously to deploy capital with a long-term focus on risk-adjusted returns, capital preservation, and credit quality. The Fund is focused on executing a disciplined and rigorous investment approach in the best interest of our stakeholders. ArrowMark Financial believes these investment considerations are paramount in its stewardship, and in the value that we offer to our shareholders.

 

ArrowMark Financial continued its solid progress in 2023. The Fund was able to take advantage of its liquidity, available through its credit line, to invest assets at what we view as attractive prices throughout the year.

 

We believe the strength of the management team and the Fund’s ability to nimbly respond to market opportunities will position the Fund for growth, as well as offer an attractive yield and risk-adjusted returns.

 

Our mission is to create long-term value for our shareholders. We appreciate the recognition and the support over the past year, and we wish you a safe year ahead.

 

 

Performance Data

 

Comparison of change in value of $10,000 investment in ArrowMark Financial Corp. vs. Bloomberg U.S. Aggregate Total Return Value Index and Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index (Unaudited)

 

Average Annual Total Returns
		1 Year				5 Year				10 Year
ArrowMark Financial Corp.1			20.89	%			8.11	%			5.75	%
Bloomberg U.S. Aggregate Total Return Value Index			5.53	%			1.10	%			1.81	%
Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index			13.44	%			5.35	%			4.59	%

 

 

¹ Based on market price.

 

The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or redemption of Fund shares. Current performance may be lower or higher. Performance data current to the most recent month-end may be obtained by calling Investor Relations at (212) 468-5441.

 

The Fund intends to evaluate performance as compared to that of the Bloomberg U.S. Aggregate Total Return Value Index and the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index. The Bloomberg U.S. Aggregate Total Return Value Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market and the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index is an index that measures the performance of high yield, non-investment grade corporate bonds, with a maximum allocation of 2% to any one issuer. References to an index over a specific period are provided for your information only and should not be considered indicative of an investment in ArrowMark Financial Corp. Note that an index is unmanaged and the information contained herein does not reflect any investment management fees or transaction costs. It is impossible to invest directly in an index.

 

The Fund’s investment objectives, strategies, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the Fund and may be obtained by calling 877-737-6374. Please read carefully before investing.

 

 

ArrowMark Financial Corp.

Consolidated Schedule of Investments 

 

As of December 31, 2023

 

Company(1)		Investment		# of Shares/Par Amount(2)				Fair Value(3)
Term Loans – 6.9%
Banking – 6.9%
Equity Bancshares Inc.		Subordinated Term Loan, 7.00%, 6/30/2030		$	5,000,000			$	4,812,500
F.N.B.C. of La Grange, Inc.		Subordinated Term Loan, 6.38%, 1/01/2030(4)		$	700,000				588,000
TransPecos Financial Corp.		Senior Term Loan, 9.00%, 10/01/2028		$	4,000,000				3,660,000
Tulsa Valley Bancshares		Subordinated Term Loan, 6.38%, 12/31/2028(4)		$	1,700,000				1,428,000
		Total Term Loans (Cost $11,400,000)							10,488,500
Structured Debt Security – 7.2%
Banking – 7.2%
Community Funding 2018, LLC.		Preferred Shares (Estimated effective yield 9.34%), 144A(5)(6)		$	14,860,000				10,959,250
		Total Structured Debt Securities (Cost $14,691,250)							10,959,250
Regulatory Capital Relief Securities – 113.1%
Banking – 113.1%
Absolute		Credit Linked Note, 17.85%, 10/10/2027(7)(8)**		$	3,857,979				3,896,559
Algonquin		Credit Linked Note, 14.84%, 11/20/2025(8)+		$	3,000,000				2,864,787
Algonquin		Credit Linked Note, 15.57%, 11/01/2028(8)+		$	2,000,000				1,995,405
Algonquin		Guarantee Linked Note, 13.84%, 05/01/2027(8)+		$	5,000,000				4,785,058
AMF Ireland Finance - Series 1		Profit Participating Note, 18.85%, 06/30/2031(7)(8)		$	7,000,000				7,035,700
AMF Ireland Finance - Series 2		Profit Participating Note, 12.60%, 7/31/2029(7)(8)		$	4,900,000				4,900,000
Auto ABS Synthetic French Loans		Credit Linked Note, 16.43%, 12/15/2030(7)(9)**		€	3,000,000				3,320,130
Boa Vista		Credit Linked Note, 12.97%, 09/07/2026(9)**		€	2,000,000				2,207,900
Castelo		Credit Linked Note, 12.96%, 05/05/2025(9)**		€	1,952,649				2,115,964
Cedar		Credit Linked Note, 14.47%, 12/15/2027(9)**		€	2,854,860				3,157,925
Cedar		Credit Linked Note, 14.97%, 03/30/2030(7)(9)**		€	4,300,000				4,806,322
CHAKRA		Credit Linked Note, 14.76%, 06/26/2027(7)(8)+		$	4,000,000				3,920,000
Colonnade		Credit Linked Note, 17.45%, 04/30/2028(7)(8)		$	5,910,579				5,827,646
Colonnade		Credit Linked Note, 17.18%, 11/30/2029(7)(8)		$	7,140,002				6,866,892
Colonnade		Credit Linked Note, 17.99%, 12/15/2029(7)(8)		$	5,000,000				5,025,000
Colonnade		Credit Linked Note, 17.32%, 04/30/2030(7)(8)		$	9,769,570				9,297,172
CRAFT		Credit Linked Note, 17.10%, 12/15/2027(7)(8)		$	5,000,000				5,257,500
CRAFT		Credit Linked Note, 15.66%, 04/30/2028(10)		$	2,008,783				2,154,420
CRAFT		Credit Linked Note, 14.14%, 02/21/2031(10)		$	3,200,000				3,152,000
Elvetia		Credit Linked Note, 9.71%, 10/20/2029(11)+		CHF	2,000,000				2,351,941
Elvetia		Credit Linked Note, 10.96%, 10/20/2030(11)+		CHF	2,933,972				3,394,798
Elvetia		Credit Linked Note, 11.21%, 1/20/2031(7)(11)+		CHF	2,550,000				3,071,946
FCT Colisee		Credit Linked Note, 14.47%, 01/09/2024(12)+		€	1,694,352				1,878,429
FCT Colisee		Credit Linked Note, 11.98%, 07/07/2034(9)+		€	2,131,686				2,355,863
FCT Opale		Credit Linked Note, 12.50%, 05/05/2030(8)+		$	4,000,000				3,990,000
Future Ready Chakra		Credit Linked Note, 13.35%, 12/15/2030(8)+		$	5,000,000				4,694,750

 

 

Company(1)		Investment		# of Shares/Par Amount(2)				Fair Value(3)
Regulatory Capital Relief Securities (continued)
Banking (continued)
LOFT		Credit Linked Note, 12.85%, 02/28/2030(7)(8)		$	2,870,000			$	2,984,800
LOFT		Credit Linked Note, 24.35%, 02/28/2030(7)(8)		$	6,910,000				7,255,500
Mespil		Credit Linked Note, 15.34%, 12/08/2031(8)**		$	4,743,607				4,615,055
Muskoka		Credit Linked Note, 15.59%, 11/01/2027(8)+		$	2,650,000				2,624,814
Nansa		Credit Linked Note, 13.37%, 03/01/2026(9)**		€	7,001,194				7,671,001
Nightingale LF		Credit Linked Note, 15.94%, 04/01/2028(7)(13)**		£	2,000,000				2,519,983
Premium Green PLC		5 Year Secured Amortizing Floating Rate Note, 16.40%, 12/20/2024(8)+		$	1,176,576				1,180,988
Premium Green PLC		5 Year Secured Amortizing Floating Rate Note, 13.57%, 06/29/2026(12)**		€	1,642,266				1,796,300
Premium Green PLC		5 Year Secured Amortizing Floating Rate Note, 13.47%, 11/10/2026(12)+		€	1,832,564				1,905,316
Pymes Magdalena		Credit Linked Note, 11.92%, 03/20/2024(9)**		€	2,040,456				2,192,531
Resonance		Credit Linked Note, 11.98%, 10/05/2028(9)**		€	2,080,764				2,260,881
Salisbury		Credit Linked Note, 15.69%, 06/16/2027(13)+		£	5,079,745				6,230,989
Salisbury		Credit Linked Note, 14.94%, 03/20/2028(13)+		£	672,232				834,612
Salisbury		Credit Linked Note, 15.19%, 04/17/2028(7)(13)+		£	4,127,719				5,276,918
Salisbury		Credit Linked Note, 17.29%, 04/17/2028(13)+		£	1,934,883				2,402,282
Start		Credit Linked Note, 15.35%, 06/16/2025(8)+		$	4,383,840				4,022,174
Terra		Credit Linked Note, 13.25%, 09/25/2029(8)**		$	10,000,000				9,624,000
Waterloo		Credit Linked Note, 15.10%, 03/21/2026(7)(8)**		$	2,700,000				2,700,000
		Total Regulatory Capital Relief Securities (Cost $174,310,203)							172,422,251
Trust Preferred and Preferred Securities – 1.6%
Banking – 1.6%
Fidelity Federal Bancorp		Fixed Rate Cumulative Perpetual Preferred Stock, Series A - 9%(14)		$	2,789,000				2,231,200
Fidelity Federal Bancorp		Fixed Rate Cumulative Perpetual Preferred Stock, Series B - 9%(14)
				$	200,000				160,000
		Total Trust Preferred and Preferred Securities (Cost $3,004,203)							2,391,200
		Total Long-Term Investments (Cost $203,405,656)							196,261,201
Money Market Fund – 0.2%
Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio		Institutional Share Class - Money Market Mutual Fund (MISXX) 5.21%			363,895				363,895
		Total Money Market Fund (Cost $363,895)							363,895
		Total Investments (Cost $203,769,551)(15)(16) — 129.0%							196,625,096
		Other assets and liabilities, net — (29.0)%(17)							(44,189,545	)
		Total Net Assets — 100.0%*						$	152,435,551

 

(1)

Except with respect to Community Funding 2018, LLC ("CF 2018"), we do not "control" and are not an "affiliate" of any of our investments, as such terms are defined under the Investment Company Act of 1940 (the "1940 Act"). We may be deemed to control and be an affiliate of CF 2018 because we are the sole member of such entity.

(2)	Par Value in USD, GBP, EUR or CHF.

(3)	Fair Value is determined in good faith in accordance with the Company’s valuation policy and is reviewed and accepted by the Company’s Board of Directors.

 

 

(4)	The estimated effective yield including structuring fees paid annually through maturity of 2030 and 2028, respectively, is 9.60%.

(5)	Securities are exempt from registration under Rule 144A of the Securities Act of 1933.

(6)

The preferred shares are considered an equity position. Equity investments are entitled to recurring distributions which are generally equal to the remaining cash flow of the payments made by the underlying company’s securities less contractual payments to debt holders and company expenses. The estimated effective yield indicated is based upon a current projection of the amount and timing of these recurring distributions and the estimated amount of repayment of principal upon termination. Such projections are periodically reviewed and adjusted as needed. The estimated effective yield may ultimately not be realized.

(7)	Investments determined using significant unobservable inputs (Level 3). The value of such securities is $ 83,962,068 or 55.08% of net assets.

(8)	Floating rate note: SOFR + minimum of 7.16%

(9)	Floating rate note: 3M EURIBOR (Floored at 0%) + minimum of 8.00%

(10)	Floating rate note: 3M SOFR + minimum of 8.76%

(11)	Floating rate note: 3M CHF LIBOR + minimum 8.00%

(12)	Floating rate note: 3M EURIBOR + minimum 9.50%

(13)	Floating rate note: SONIA + minimum 9.75%

(14)	Non-income producing securities

(15)	As of December 31, 2023, the tax cost basis of investment securities was $203,769,551. The gross unrealized appreciation over tax cost was $2,780,453 and gross unrealized depreciation under tax cost was $9,924,908. Net unrealized depreciation of tax cost under value was $7,144,455.

(16)	Cost values reflect accretion of original issue discount or market discount, and amortization of premium.

(17)	Includes $45,000,000 in bank loans from Texas Capital Bank.

*	Substantially all of the Company’s portfolio assets are pledged in respect of the credit facility (see note 7 to financial statements).

**	Held in Marshall Holdings Limited II.

+	Held in Marshall Holdings Limited III.

 

Forward foreign currency contracts outstanding as of December 31, 2023 were as follows:

 

Currency Purchased				Currency Sold				Expiration		Counterparty		Unrealized Appreciation (Depreciation)
USD		9,122,766		CHF		7,670,422		01/31/24		NWG		$	(29,360	)
USD		37,711,089		EUR		33,912,850		01/31/24		NWG			221,916
USD		18,464,023		GBP		14,436,296		01/31/24		NWG			59,341
GBP		300,000		USD		383,700		01/31/24		NWG			(1,233	)
												$	250,664

 

ABS		Asset-Backed Security
CHF		Swiss Franc
EUR		Euro
EURIBOR		Euro London Interbank Offered Rate
GBP		British Pound
LIBOR		London Interbank Offered Rate
NWG		NatWest
PLC		Public Limited Company
SOFR		Secured Overnight Financing Rate
SONIA		Sterling Overnight Interbank Average Rate
USD		United States Dollar

 

Affiliated Investments

 

Investments in and advances to Affiliates (as per		Shares/Principal				Net Realized Gain/Loss			Net Increase (Decrease) in Unrealized				Interest				12/31/2023
210.12-14) for Year Ended 12/31/2023		Amount*				for Year			Appreciation				Received				Value
Security Name
Community Funding 2018, LLC., Preferred shares, 9.34%*		$	14,860,000			$	–		$	(268,084	)		$	1,670,770			$	10,959,250

 

*The balance at the beginning of the period was $19,000,000. During the year the Fund made no additions or sales of the position and received paydowns at par of $4,140,000.

 

 

Additional Information

 

The following is a listing of the underlying unsecured loans that were made by Community Funding 2018, LLC. See Notes to Financial Statements for additional information on ArrowMark Financial Corp’s. investment in Community Funding 2018, LLC.

 

Bank Name		Principal Amount				State
Big Poppy Holdings, Inc.		$	9,000,000				California
Delmar Bancorp			4,500,000				Maryland
Fidelity Federal Bancorp			8,000,000				Indiana
First Bancshares, Inc.			10,000,000				Mississippi
Halbur Bancshares			3,000,000				Iowa
Vintage Bancorp			1,650,000				Kansas
Total		$	36,150,000

 

 

Financial Statements 

 

Consolidated Statement of Assets and Liabilities As of December 31, 2023

 

Assets
Unaffiliated investments in securities, at fair value (Cost $189,078,301)		$	185,665,846
Affiliated investments in securities, at fair value (Cost $14,691,250)			10,959,250
Cash			427,004
Foreign Cash (Cost $16,409)			16,409
Receivable for investments sold			1,635,072
Unrealized appreciation on forward foreign currency contracts			281,257
Interest and dividends receivable			3,925,707
Prepaid assets			786,000
Total assets			203,696,545
Liabilities
Loan payable (Note 7)			45,000,000
Dividends payable			3,911,862
Investment advisory fees payable			898,362
Payable for securities purchased			479,140
Excise tax payable (Note 5)			360,470
Loan interest payable			304,024
Unrealized depreciation on forward foreign currency contracts			30,593
Accrued expenses payable			276,543
Total liabilities			51,260,994
Net Assets		$	152,435,551
Net assets consist of:
Common stock, at par ($0.001 per share)		$	7,112
Paid-in capital			156,284,515
Total distributable earnings (loss)			(3,856,076	)
Net Assets		$	152,435,551
Net asset value per share
Common Stock Shares Outstanding			7,112,453
Net asset value per common share		$	21.43
Market price per share		$	18.16
Market price discount to net asset value per share			(15.26	)%

 

 

Consolidated Statement of Operations For the Year Ended December 31, 2023

 

This Statement of Operations summarizes the Company’s investment income earned and expenses incurred in operating the Company. It also shows net gains (losses) for the period stated.

 

Investment Income
Interest from unaffiliated investments		$	26,527,632
Interest from affiliated investments			1,670,770
Dividends			240,730
Origination fee income (Note 9)			128,660
Other income (Note 9)			115,511
Total investment income			28,683,303
Expenses
Interest expense			3,550,396
Investment advisory fee			3,468,767
Professional fees			384,894
Excise tax (Note 5)			360,470
Transfer agent, custodian fees and administrator fees			351,148
Directors’ fees			348,973
Bank fees			294,400
Valuation service fees			230,477
Investor relations fees			229,651
Delaware franchise tax			85,929
Insurance expense			77,445
Miscellaneous fees (proxy, rating agency, etc.)			707,442
Total expenses			10,089,992
Waivers and/or reimbursements			(70,994	)
Net expenses			10,018,998
Net investment income			18,664,305
Realized and Unrealized Gain/(Loss) on Investments, Forward Foreign Currency Contracts and Foreign Currency Translations
Net realized gain (loss) on investments			(748,130	)
Net realized loss from forward foreign currency contracts			(4,246,221	)
Net realized gain from foreign currency translations			1,916,546
Net change in unrealized appreciation on unaffiliated investments			4,268,219
Net change in unrealized depreciation on affiliated investments			(268,084	)
Net change in unrealized appreciation on forward foreign currency contracts			648,915
Net change in unrealized appreciation on foreign currency translations			12,376
Net realized and unrealized gain/(loss) on investments, forward foreign currency contracts and forward foreign translations			1,583,621
Net Increase in Net Assets Resulting From Operations		$	20,247,926

 

 

Consolidated Statements of Changes In Net Assets

 

These statements of changes in net assets show how the value of the Company’s net assets has changed during the last two periods. The difference reflects earnings less expenses, any investment gains and losses, distributions, if any, paid to shareholders and the net of Company share transactions.

 

		For the Year Ended December 31, 2023				For the Year Ended December 31, 2022
Increase (Decrease) in Net Assets
From Operations
Net investment income		$	18,664,305			$	13,077,463
Net realized gain on investments, forward foreign currency contracts and foreign currency translations			(3,077,805	)			3,615,022
Net change in unrealized depreciation on investments, forward foreign currency contracts and foreign currency translations			4,661,426				(11,326,530	)
Net increase in net assets resulting from operations			20,247,926				5,365,955
Distributions to shareholders
From total distributable earnings			(15,639,229	)			(11,786,706	)
Total distributions			(15,639,229	)			(11,786,706	)
From Company share transactions
Proceeds from sales			—				458,264
Reinvestment of distributions			167,793				118,650
Increase in net assets resulting from Company share transactions			167,793				576,914
Total increase/(decrease)			4,776,490				(5,843,837	)
Net assets
Beginning of year			147,659,061				153,502,898
End of year		$	152,435,551			$	147,659,061
Shares outstanding
Beginning of year			7,102,626				7,075,430
Proceeds from sales			—				21,114
Reinvestment of distributions			9,827				6,082
End of year			7,112,453				7,102,626

 

 

Consolidated Statement of Cash Flow

 

This Statement of Cash Flows shows cash flow from operating and financing activities for the year stated.

  

		For the Year Ended December 31, 2023
Cash flows from operating activities
Net increase in net assets from operations		$	20,247,926
Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities:
Purchase of investments securities			(31,569,865	)
Proceeds from sales and redemptions of investment securities			39,080,774
Net sales of short-term investments			3,077,228
Net realized loss on investments			748,130
Net change in net unrealized appreciation on investments			(4,000,135	)
Net change in unrealized appreciation on forward foreign currency contracts			(648,915	)
Net accretion of discount			(351,919	)
Decrease in prepaid expenses			459,974
Increase in receivable for investments sold			(1,635,072	)
Increase in interest receivable and dividends receivable			(676,784	)
Increase in payable for securities purchased			479,140
Decrease in advisory fees payable			(19,564	)
Increase in loan interest payable			257,227
Increase in excise tax payable			113,507
Increase in accrued fees payable			126,204
Net cash provided by operating activities			25,687,856
Cash flows from financing activities
Decrease in loan payable			(10,600,000	)
Cash distributions to shareholders			(15,039,861	)
Net cash used for financing activities			(25,639,861	)
Net increase in cash			47,995
Cash and Foreign Cash:
Beginning of year			395,418
End of year		$	443,413
Supplemental disclosure of cash flow information
Cash paid for interest		$	3,293,169
Distributions reinvested		$	167,793

 

 

Consolidated Financial Highlights

 

The financial highlights show how the Company’s net asset value for a common stock share has changed during the year.

 

		For the				For the				For the				For the				For the
		Year				Year				Year				Year				Year
		Ended				Ended				Ended				Ended				Ended
		December 31,				December 31,				December 31,				December 31,				December 31,
		2023				2022				2021				2020				2019
Per share operating performance
Net Asset value, beginning of year		$	20.79			$	21.70			$	21.44			$	21.83			$	21.43
Net investment income1			2.63				1.84				1.60				1.68				1.54
Net realized and unrealized gain/(loss) on investments1			0.21				(1.09	)			0.28				(0.50	)			0.38
Offering cost1			—				—				—				—				—
Total from investment operations			2.84				0.75				1.88				1.18				1.92
Less distributions to shareholders
From net investment income			(1.78	)			(1.66	)			(1.62	)			(1.57	)			(1.52	)
From net realized capital gains			(0.42	)			—				—				—				—
Total distributions			(2.20	)			(1.66	)			(1.62	)			(1.57	)			(1.52	)
Net asset value, end of year		$	21.43			$	20.79			$	21.70			$	21.44			$	21.83
Per share market value, end of year		$	18.16			$	17.04			$	21.97			$	19.25			$	22.30
Total investment return based on market value2			20.89	%			(15.16	)%			23.19	%			(5.76	)%			24.00	%
Total investment return based on net asset value2			16.93	%			4.80	%			9.25	%			7.22	%			9.32	%
Ratios and supplemental data
Net assets end of period (in millions)		$	152.4			$	147.7			$	153.5			$	140.8			$	143.2
Ratios (as a percentage of average net assets):
Expenses before waivers and/or recoupment, if any3			6.72	%			5.64	%			4.47	%			4.17	%			4.39	%
Expenses after waivers and/or recoupment, if any4,5			6.67	%			5.64	%			4.41	%			4.17	%			4.39	%
Net investment income6			12.43	%			8.72	%			7.46	%			8.10	%			7.11	%
Portfolio turnover rate			16	%			29	%			20	%			60	%			13	%
Revolving credit agreement
Total revolving credit agreement outstanding (000s)		$	45,000			$	55,600			$	60,000			$	43,000			$	17,700
Asset Coverage per $1,000 for revolving credit agreement			4,387				3,656				3,558				4,274				9,090

 

1	The net investment income and unrealized gain/(loss) on investments per share were calculated using the average shares outstanding method.

2

Investment return based on net asset value includes management fee and all other expenses paid by the Fund. Dividends are reinvested in accordance with Fund’s Dividend Reinvestment Plan. Investment return based on market value is based on share market price and reinvestment of distributions at the price obtained under the Dividend Reinvestment Plan. Total return does not include sales load and offering expenses.

3	Ratio of expenses before waivers or recoupment, if any, to managed assets equals 5.13%, 4.08%, 3.34%, 3.49%, 3.55%, 3.83%, 3.67%, 3.58% and 3.62% for the years ended December 31, 2023, 2021, 2020, 2019, 2018, 2017, 2016 and 2015, respectively.

4	Excluding interest expense, net operating expenses would have been 4.31%, 4.09%, 3.53%, 3.61%, 3.40%, 3.61%, 3.75%, 3.74% and 3.54% for the years ended December 31, 2023, 2022, 2021, 2020, 2019, 2018, 2017, 2016 and 2015, respectively.

5	Ratio of expenses after waivers or recoupment, if any, to managed assets equals 5.09%, 4.08%, 3.38%, 3.49%, 3.55%, 3.78%, 3.73%, 3.52% and 3.35% for the years ended December 31, 2023, 2022, 2021, 2020, 2019, 2018, 2017, 2016 and 2015, respectively.

6	Ratio of net investment income to managed assets equals 9.48%, 6.31%, 5.65%, 6.77%, 5.75%, 5.74%, 5.51%, 5.23% and 4.88% for the years ended December 31, 2023, 2022, 2021, 2020, 2019, 2018, 2017, 2016 and 2015, respectively.

 

 

Consolidated Financial Highlights 

 

The financial highlights show how the Company’s net asset value for a common stock share has changed during the year.

 

		For the				For the				For the				For the				For the
		Year				Year				Year				Year				Year
		Ended				Ended				Ended				Ended				Ended
		December 31,				December 31,				December 31,				December 31,				December 31,
		2018				2017				2016				2015				2014
Per share operating performance
Net Asset value, beginning of year		$	21.56			$	21.22			$	21.62			$	21.86			$	23.07
Net investment income			1.63				1.58				1.56				1.44				0.84
Net realized and unrealized gain/(loss) on investments			(0.10	)			0.26				(0.50	)			(0.17	)			0.01
Offering cost			—				—				—				—				(0.06	)
Total from investment operations			1.53				1.84				1.06				1.27				0.79
Less distributions to shareholders From net investment income			(1.66	)			(1.50	)			(1.46	)			(1.29	)			(1.22	)
Return of capital			—				—				—				(0.22	)			(0.78	)
Total distributions			(1.66	)			(1.50	)			(1.46	)			(1.51	)			(2.00	)
Net asset value, end of year		$	21.43			$	21.56			$	21.22			$	21.62			$	21.86
Per share market value, end of period/year		$	19.30			$	20.13			$	18.69			$	16.30			$	19.47
Total investment return based on market value			3.84	%			16.21	%			24.45	%			(8.68	)%			(13.59	)%
Total investment return based on net asset value			7.65	%			9.62	%			6.53	%			7.88	%			3.28	%
Ratios and supplemental data
Net assets end of period (in millions)		$	140.4			$	141.0			$	138.6			$	140.8			$	142.1
Ratios (as a percentage of average net assets):
Expenses before waivers and/or recoupment, if any			5.01	%			4.93	%			5.02	%			4.87	%			3.73	%
Expenses after waivers and/or recoupment, if any			4.95	%			5.01	%			4.94	%			4.50	%			3.73	%
Net investment income			7.52	%			7.39	%			7.33	%			6.56	%			3.41	%
Portfolio turnover rate			30	%			16	%			34	%			101	%			30	%
Revolving credit agreement
Total revolving credit agreement outstanding (000s)		$	51,000			$	25,750			$	61,500			$	25,000			$	22,500
Asset Coverage per $1,000 for revolving credit agreement			3,753				6,478				3,253				6,631				7,317

 

 

Notes to Consolidated Financial Statements 

 

Note 1 — Organization

 

ArrowMark Financial Corp. (“AMFC” or the “Company”) is a Delaware corporation registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, (the “Investment Company Act”) which commenced investment operations on November 13, 2013. In addition, AMFC has elected to be treated for tax purposes as a regulated investment company (‘‘RIC’’) under Subchapter M of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’).As an investment company, the Company follows the accounting and reporting guidance of the Financial Accounting Standards Board and the Accounting Standards Codification Topic 946 “Financial Services — Investment Companies.”

 

Investment Objectives — ArrowMark Financial Corp.’s primary investment objective is to provide stockholders with current income, and to a lesser extent, capital appreciation. There can be no assurance that the Company will achieve the investment objectives.

 

Investment Strategies — The Company is focused on income generation, capital preservation, and providing risk-adjusted rates of return. The Company attempts to achieve its investment objective through investment in preferred equity, debt and subordinated debt, structured notes and securities, convertible securities, regulatory capital securities and common equity issued or structured by banks and financial institutions including community banks, larger regional, national and money center banks domiciled in the United States and foreign and global money center banks. (“banking-related securities”). The Company makes investments that will generally be expected to pay the Company dividends and interest on a current basis and generate capital gains over time. The Company may seek to enhance the Company’s returns through the use of warrants, options and other equity conversion features. The Company has a policy to invest, under normal circumstances, at least 80% of the value of its net assets plus the amount of any borrowings for investment purposes in such banking-related securities.

 

The Company focuses its portfolio on making long-term, passive, non-control investments in the banking sector, including “regulatory capital securities” which are securities issued or structured by banks seeking capital that is treated more favorably under banking regulations than other types of capital, acquisitions and other refinancing activities regulatory capital securities are issued or structured by a bank to maintain or reduce its regulatory capital requirements by transferring certain credit risks to investors. Regulatory capital securities may be structured in a variety of ways and are highly bespoke to the needs of the bank or other deposit-taking institution involved. Regulatory capital securities may be in the form of structured notes (e.g., credit-linked notes), contingent convertible securities, and other structured products or transactions. The Company intends to continue to direct investments in numerous issuers differentiated by asset size, business models and geographies. The Company also may invest in an option strategy that will normally consist of writing (selling) call options on bank equity securities in the Company’s portfolio (“covered calls”).The Company invests in foreign securities and the Company is not limited in the amount of assets the Company may invest in such foreign securities.

 

 

The Company indirectly invests in securities issued or structured by banks through structured securities and credit derivatives, including collateralized loan obligations (CLOs) and credit-linked notes. The Company currently invests in credit-linked notes for which the performance and payment of principal and interest is tied to a reference asset such as a pool of loans originated by a bank and held on its balance sheet. The Company also invests in equity and junior debt tranches of CLOs, and other debt securitizations, that are collateralized by a portfolio consisting primarily of unsecured, subordinated loans made to (and, to a lesser extent, unsecured, subordinated debentures and notes issued by) community banks or savings institutions or their respective holding companies. The Company may also invest in other securities and instruments that are related to these investments or that the Adviser believes are consistent with the Company’s investment objectives, including senior debt tranches of CLOs and loan accumulation facilities. These indirect investments provide exposure to and focus on the same types of direct investments that the Company makes in banking companies and, accordingly, the Company’s investments in structured securities (such as credit-linked notes and CLOs) and credit derivatives that provide exposure to the banking industry are considered an investment in banking securities. The loans or other assets pledged as collateral in these securitizations may not be publicly rated by any rating agency, and may have greater credit and liquidity risks than investment-grade corporate obligations that are publicly rated. The Company believes that the use of such instruments complements the Company’s overall strategy and enhance the diversity of the Company’s holdings.

 

The Company may also incur additional leverage to the extent permitted by the Investment Company Act. Although the Company normally seeks to invest substantially all of the Company’s assets in banking-related securities, the Company reserves the ability to invest up to 20% of the Company’s assets in other types of securities and instruments.

 

Additionally, the Company may take temporary defensive positions that are inconsistent with the Company’s investment strategy in attempting to respond to adverse market, economic, political or other conditions. If the Company does so, the Company may not achieve the Company’s investment objective. The Company may also choose not to take defensive positions.

 

Consolidation of Disregarded Entities — The Company makes investments in securities through Marshall Holdings II, Limited and Marshall Holdings III, Limited, both organized under the laws of the Cayman Islands (the “Disregarded Entities”).The consolidated financial statements of the Company include all assets and liabilities of the Disregarded Entities. All inter-company accounts and transactions have been eliminated. As of December 31, 2023, the net assets of the Designated Entities were $112,665,621, which represented 73.91% of the Fund’s net assets.

 

Note 2 — Significant accounting policies

 

The following is a summary of significant accounting policies consistently followed by AMFC in the preparation of its financial statements. The preparation of the financial statements is in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and requires the Board of Directors, inclusive of the sub-committees, and ArrowMark Asset Management, LLC (the "Advisor") to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents — AMFC considers all highly liquid debt instruments with a maturity of three months or less at the time of purchase to be cash equivalents.

 

Investment Valuation — The most significant estimates made in the preparation of the financial statements of ArrowMark Financial Corp. are the valuation of equity and debt investments and the effective yield calculation with respect to certain debt securities, as well as the related amounts of unrealized appreciation and depreciation of investments recorded. The Company believes that there is no single definitive method for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments that AMFC makes. The Company is required to specifically fair value each individual investment on a quarterly basis.

 

 

The Company complies with ASC 820-10, Fair Value Measurements and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements. ASC 820-10 clarified the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date. ASC 820-10 also establishes the following three-tier fair value hierarchy:

 

·	Level 1— Quoted prices in active markets for identical securities;

 

·	Level 2 — Other significant observable inputs. These inputs may include quoted prices for the identical instrument on an active market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates, and similar data; and

 

·	Level 3 — Significant unobservable inputs, including the Company’s own determinations about the assumptions that a market participant would use in valuing the asset or liability, and that would be based on the best information available.

 

To the extent securities owned by the Company are actively traded and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. Securities traded on inactive markets or valued by reference to similar instruments are generally categorized in Level 2 of the fair value hierarchy.

 

The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgement. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by AMFC in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement. The valuation levels are not necessarily an indication of the risk associated with investing in those securities.

 

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, AMFC’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. AMFC uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

 

 

AMFC will determine fair value of its assets and liabilities in accordance with valuation procedures adopted by its Board of Directors. The Company may utilize the services of one or more regionally or nationally recognized independent valuation firms to help it determine the value of each investment for which a market price is not available. AMFC’s Board of Directors will also review valuations of such investments provided by the Advisor. To the extent AMFC invests in securities for which market quotations are readily available, such market value will be used to value those securities. If a market value cannot be obtained or if the Advisor determines that the value of a security as so obtained does not represent a fair value as of the measurement date (due to a significant development subsequent to the time its price is determined or otherwise), fair value shall be determined pursuant to the methodologies established by the Board of Directors. In making these determinations, the Company may engage an independent valuation firm from time to time to assist in determining the fair value of our investments. The methods for valuing these investments may include fundamental analysis, discounts from market prices of similar securities, purchase price of securities, subsequent private transactions in the security or related securities, or discounts applied to the nature and duration of restrictions on the disposition of the securities, as well as a combination of these and other factors.

 

Structured Debt Securities– AMFC may acquire equity or preferred equity in structured debt securities or other structured financings. In valuing such investments, AMFC attempts to obtain a minimum of two marks provided by recognized industry brokers as a primary source, supplemented by actual trades executed in the market at or around period-end, as well as the marks provided by the broker who arranges transactions in such investment vehicles. Any event adversely affecting the value of such structured debt securities and other structured financings, including events that impact the value of the underlying collateral held by such vehicles, would be magnified to the extent leverage is utilized. AMFC’s investment in structured debt securities and other structured financings that utilize leverage may make it more likely that substantial changes in the Company’s net asset value (“NAV”) will occur.

 

The fair value of the structured debt securities is determined using market price quotations (where observable) and other observable market inputs. When using market price quotations from brokers, fair value is calculated using the average of two or more indicative broker quotes obtained as of the valuation date. When quotations are unobservable, internal valuation models (typically including discounted cash flow analysis and comparable analysis) are employed. Structured debt securities are generally categorized as Level 2 or 3 in the fair value hierarchy, depending on the availability of broker quotes and observable inputs. At December 31, 2023, AMFC’s investment in Community Funding 2018, LLC was valued on the basis of the average of two broker quotes.

 

Service fees are paid to StoneCastle Investment Management, LLC, (“The Servicer”).The Servicer rebates the entire service fee to AMFC quarterly. For the year ended December 31, 2023 this amounted to $115,511 relating to Community Funding 2018, LLC.

 

Regulatory Capital Relief Securities. Regulatory capital relief securities are senior unsecured debt obligations that are credit linked to the performance of a reference portfolio of certain loan related claims on corporate and similar entities. The fair value of regulatory capital relief securities is generally based on broker quotes. Regulatory capital relief securities are generally categorized as Level 2 or 3 in the fair value hierarchy, depending on the availability of broker quotes.

 

Preferred and Trust Preferred Securities. The fair value of preferred securities and trust preferred securities is generally determined using market price quotations (where observable) and other observable market inputs (including recently executed transactions). When using market price quotations from brokers, fair value is calculated using the average of two or more indicative broker quotes obtained as of the valuation date. When quotations are unobservable, internal valuation models (typically including discounted cash flow analysis and comparable analysis) are employed. Perpetual preferred and trust preferred securities are generally categorized as Level 2 or 3 in the fair value hierarchy, depending on the availability of observable inputs.

 

 

Debt Securities. Under procedures established by the Board of Directors, we value secured debt, unsecured debt, senior term loans, subordinated term loans and other debt securities, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value).We attempt to obtain market quotations from at least two brokers if available. If not available or when market quotations are deemed not to represent fair value, we typically utilize independent third party valuation firms to assist us in determining fair value. Our independent valuation firms consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations for such Level 2 and Level 3 categorized assets. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors. Such determination of fair value may involve subjective judgments and estimates.

 

Equity Securities. AMFC may invest in equity securities (including exchange traded funds) for which bid and ask prices can be observed in the marketplace. Bid prices reflect the highest price that the marketplace participants are willing to pay for an asset. Ask prices represent the lowest price that the marketplace participants are willing to accept for an asset. The Company’s policy for listed securities for which no sale was reported on that date is generally to value the security using the last reported “bid” price if held long, and last reported “ask” price if sold short. Equity securities are generally categorized as Level 1 or 2 in the fair value hierarchy, depending on trading volume levels.

 

Forward Contracts. Forward contracts are traded on the OTC market. The fair value of forward contracts is determined using observable inputs, such as currency exchange rates or commodity prices, applied to notional amounts stated in the applicable contracts. Forward contracts are generally categorized in Level 2 of the fair value hierarchy.

 

The Company’s assets measured at fair value subject to the disclosure requirements of ASC 820-10-35 at December 31, 2023, were as follows:

 

		TOTAL FAIR VALUE AT 12-31-23				LEVEL 1 QUOTED PRICE				LEVEL 2 SIGNIFICANT OBSERVABLE INPUTS				LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS
Assets
Term Loans		$	10,488,500			$	—			$	10,488,500			$	—
Structured Debt Security			10,959,250				—				10,959,250				—
Regulatory Capital Relief Securities			172,422,251				—				88,460,183				83,962,068
Trust Preferred and Preferred Securities			2,391,200				—				2,391,200				—
Money Market Fund			363,895				363,895				—				—
Derivatives:
Foreign Currency Contracts
Forward Foreign Currency Contracts			281,257				—				281,257				—
Total Assets		$	196,906,353			$	363,895			$	112,580,390			$	83,962,068

 

 

		TOTAL FAIR VALUE AT 12-31-23				LEVEL 1 QUOTED PRICE				LEVEL 2 SIGNIFICANT OBSERVABLE INPUTS				LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS
Liabilities
Derivatives:
Foreign Currency Contracts
Forward Foreign Currency Contracts		$	(30,593	)		$	—			$	(30,593	)		$	—
Total Liabilities		$	(30,593	)		$	—			$	(30,593	)		$	—

 

The Level 3 categorized assets listed above have been valued via the use of a) independent third party valuation firms, or, b) fair valued as determined in good faith by the Board of Directors, in accordance with procedures established by the Board of Directors.

 

For fair valuations using significant unobservable inputs, U.S. GAAP requires AMFC to present a reconciliation of the beginning to ending balances for reported fair values that presents changes attributable to total realized and unrealized gains or losses, purchase and sales, and transfers in and out of Level 3 during the period. Transfers in and out between levels are based on values at the end of a period. U.S. GAAP also requires AMFC to disclose amounts and reasons for all transfers in and out of Level 1 and Level 2 fair value measurements. A reconciliation of Level 3 investments is presented below:

 

		REGULATORY CAPITAL RELIEF SECURITIES
Balance at December 31, 2022		$	69,529,738
Realized loss including earnings			—
Unrealized appreciation on investments			649,691
Purchases			26,852,524
Sales			(4,000,635	)
Transfers in			7,723,827
Transfers out			(16,793,077	)
Balance at December 31, 2023		$	83,962,068

 

The change in unrealized appreciation on Level 3 securities held as of December 31, 2023 was $649,691.

 

		FAIR VALUE AT 12-31-23				VALUATION TECHNIQUES		UNOBSERVABLE INPUTS				ASSUMPTIONS				IMPACT TO VALUATION FROM AN INCREASE TO INPUT
Regulatory Capital Securities		$	83,962,068			Broker Quote			—				—				—
		$	83,962,068

 

 

In accordance with Regulation S-X Rules 3-09 and 4-08(g), the Company evaluates its unconsolidated subsidiary-Community Funding 2018, LLC (“CF 2018”) as a significant subsidiary under the respective rules. However, as of December 31, 2023, CF 2018 was not considered a significant subsidiary under Regulation S-X Rule 1-02(w). Based on the requirements under Regulation S-X Rule 4-08(g), the summarized financial information of CF 2018 for the year ended December 31, 2023 is presented below:

  

Community Funding 2018, LLC.

 

		Amount
Assets
Cash: Expense Reserve		$	100,000
Collateral Loans Outstanding
Big Poppy Holdings, Inc.		$	9,000,000
Fidelity Federal Bancorp.			8,000,000
First Bancshares, Inc.			10,000,000
Halibur Bancshares			3,000,000
Delmar Bancorp			4,500,000
Vintage Bancorp.			1,650,000
			36,150,000
Total Assets		$	36,250,000
Liabilities
Pro-Rata Note outstanding		$	8,730,250
Pro-Rata Note outstanding			2,414,750
Pro-Rata Note outstanding			11,145,000
Total Liabilities		$	22,290,000
Equity
Preferred Shares (non-voting, equity investment)(a)		$	13,960,000
Total Equity		$	13,960,000
Total Liabilities and Equity		$	36,250,000

 

^(a) Investment by ArrowMark Financial Corp., purchased at a discount. Valued at $10,959,250 at 12/31/23, see Schedule of Investments, page 7.

 

CF 2018 Interest Collections and Disbursements for year ended December 31, 2023

 

Interest Collections		$	3,153,990
Interest Disbursements to Preferred Shares and Notes			(3,153,990	)
Net		$	–

 

CF 2018 Principal Collections and Disbursements for year ended December 31, 2023

 

Principal Collections		$	10,350,000
Principal Disbursements to Preferred Shares and Notes			(10,350,000	)
Net		$	–

 

Securities Transactions, Investment Income and Expenses — Securities transactions are recorded on trade date for accounting and financial statement preparation purposes. Realized gains and losses on investments sold are recorded on the identified cost basis. Interest income is recorded on the accrual basis. Accretion of discounts and amortization of premiums are recorded on a daily basis using the effective yield method except for short term securities, which records discounts and premiums on a straight-line basis. Dividends are recorded on the ex-dividend date.

 

Dividends and Distributions to Shareholders — Dividends from net investment income, if any, are declared and paid quarterly. Distributions, if any, of net short-term capital gain and net capital gain (the excess of net long-term capital gain over the short-term capital loss) realized by AMFC, after deducting any available capital loss carryovers are declared and paid to shareholders at least annually. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S.GAAP. These differences include the treatment of non-taxable dividends, losses deferred due to wash sales and excise tax regulations. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications within the components of net assets.

 

 

Forward Foreign Currency Transactions/Contracts — The Fund may enter into forward foreign currency contracts to hedge against foreign currency exchange rate risk on their non-U.S. dollar denominated securities or to facilitate settlement of foreign currency denominated portfolio transactions. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The contract is marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is extinguished, through either delivery or offset by entering into another forward foreign currency contract, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was extinguished.

 

Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected in the Statements of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counter parties to meet the terms of their contracts. For the year ended December 31, 2023, the Fund’s average monthly volume of forward foreign currency contracts was as follows:

 

Forward Foreign Currency Contracts — Purchased				Forward Foreign Currency Contracts — Sold
$	251,064			$	66,111,873

 

Foreign Currency Translation — The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. The effect of changes in foreign currency exchange rates on investments is included within net realized and unrealized gain (loss) on investments. Changes in the value of other assets and liabilities as a result of fluctuations in foreign exchange rates are included in the Statement of Operations within net change in unrealized gain (loss) on foreign currency translations. Transactions denominated in foreign currencies are translated into U.S. dollars on the date the transaction occurred, the effects of which are included within net realized gain (loss) on foreign currency.

 

Master Netting Agreement — In order to define its contractual rights and to secure rights that will help mitigate its counterparty risk, the Fund has entered into an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”).An ISDA Master Agreement is a bilateral agreement between the Fund and a counterparty that governs certain OTC derivatives and typically contains, among other things, collateral posting terms and netting provisions in the event of a default and/or termination event. Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. Bankruptcy or insolvency laws of a particular jurisdiction may restrict or prohibit the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to terminate derivative contracts prior to maturity in the event the Fund’s net assets decline by a stated percentage or the Fund fails to meet the terms of its ISDA Master Agreements. The result would cause the Fund to accelerate payment of any net liability owed to the counterparty.

 

 

Collateral Requirements — For derivatives traded under an ISDA Master Agreement, the collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Fund and the counterparty. Cash collateral that has been pledged to cover obligations of the Fund and cash collateral received from the counterparty, if any, is reported separately on the Statement of Assets and Liabilities as cash pledged as collateral and cash received as collateral, respectively. Non-cash collateral pledged by the Fund, if any, is noted in the Portfolio of Investments. Generally, the amount of collateral due from or to a counterparty is subject to a certain minimum transfer amount threshold before a transfer is required, which is determined at the close of business of the Fund. Any additional required collateral is delivered to/pledged by the Fund on the next business day. Typically, the counterparty is not permitted to sell, re-pledge or use cash and non-cash collateral it receives. The Fund generally agrees not to use non-cash collateral that it receives but may, absent default or certain other circumstances defined in the underlying ISDA Master Agreement, be permitted to use cash collateral received. In such cases, interest may be paid pursuant to the collateral arrangement with the counterparty. To the extent amounts due to the Fund from its counterparties are not fully collateralized, they bear the risk of loss from counterparty nonperformance. Likewise, to the extent the Fund has delivered collateral to a counterparty and stands ready to perform under the terms of its agreement with such counterparty, it bears the risk of loss from a counterparty in the amount of the value of the collateral in the even the counterparty fails to return such collateral. Based on the terms of agreements, collateral may not be required for all derivative contracts. For financial reporting purposes, the Fund does not offset derivative assets and derivative liabilities that are subject to netting arrangements, if any, in the Statements of Assets and Liabilities.

 

The following tables present derivative assets and liabilities net of amounts available for offset under a master netting agreement and any related collateral received or posted by the Fund for forward foreign currency contracts as of December 31, 2023:

 

Counterparty		Derivative Assets - Gross				Derivative Available for Offset				Collateral Received				Derivative Assets - Net*
NatWest		$	281,257			$	(30,593	)		$	—			$	250,664

 

* Net amount represents the net receivable from the counterparty in the event of a default.

 

Counterparty		Derivative Liability - Gross				Derivative Available for Offset				Collateral Posted				Derivative Liability - Net**
NatWest		$	30,593			$	(30,593	)		$	—			$	—

 

** Net amount represents the net payable to the counterparty in the event of a default.

 

Currency Risk — The Fund invests in securities of foreign issuers, including American Depositary Receipts. These markets are subject to special risks associated with foreign investments not typically associated with investing in U.S. markets. Because the foreign securities in which the Fund may invest generally trade in currencies other than the U.S. dollar, changes in currency exchange rates will affect the Fund’s NAV, the value of dividends and interest earned and gains and losses realized on the sale of securities. Because the NAV for the Fund is determined on the basis of U.S. dollars, the Fund may lose money by investing in a foreign security if the local currency of a foreign market depreciates against the U.S. dollar, even if the local currency value of the Fund’s holdings goes up. Generally, a strong U.S. dollar relative to these other currencies will adversely affect the value of the Fund’s holdings in foreign securities.

 

 

Foreign Securities Market Risk — Securities of many non-U.S. companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. Securities of companies traded in many countries outside the U.S., particularly emerging markets countries, may be subject to further risks due to the inexperience of local investment professionals and financial institutions, the possibility of permanent or temporary termination of trading and greater spreads between bid and asked prices of securities. In addition, non-U.S. stock exchanges and investment professionals are subject to less governmental regulation, and commissions may be higher than in the United States. Also, there may be delays in the settlement of non-U.S. stock exchange transactions.

 

Disclosure About Derivative Instruments and Hedging Activities — The following tables provide quantitative disclosures about fair value amounts of, gains and losses on, the Fund’s derivative instruments as of December 31, 2023.

 

The following table lists the fair values of the Fund’s derivative holdings as of December 31, 2023 grouped by contract type and risk exposure category.

 

Derivative Type		Balance Sheet Location		Equity Contracts				Foreign Currency Contracts				Total
Asset Derivatives
Forward foreign currency contracts		Unrealized appreciation on forward foreign currency contracts		$	—			$	281,257			$	281,257
Total Value - Assets				$	—			$	281,257			$	281,257
Liabilities Derivatives
Forward Foreign Currency Contracts		Unrealized depreciation on forward foreign currency contracts		$	—			$	(30,593	)		$	(30,593	)
Total Value - Liabilities				$	—			$	(30,593	)		$	(30,593	)

 

The following table lists the amounts of realized gains or losses included in net increase in net assets resulting from operations for the year ended December 31, 2023, grouped by contract type and risk exposure.

 

Derivative Type		Income Statement Location		Equity Contracts				Foreign Currency Contracts				Total
Realized Gain (Loss)
Forward Foreign Currency Contracts		Net realized loss from forward foreign currency contracts		$	—			$	(4,246,221	)		$	(4,246,221	)
Total Realized Gain (Loss)				$	—			$	(4,246,221	)		$	(4,246,221	)

 

The following table lists the amounts of change in unrealized appreciation (depreciation) included in net increase in net assets resulting from operations for the year ended December 31, 2023, grouped by contract type and risk exposure.

 

Derivative Type		Income Statement Location		Equity Contracts				Foreign Currency Contracts				Total
Change in appreciation (depreciation)
Forward Foreign Currency Contracts		Net change in unrealized appreciation on forward foreign currency contracts		$	—			$	648,915			$	648,915
Total change in appreciation				$	—			$	648,915			$	648,915

 

Note 3 — Investment Advisory Fee and Other Fee Arrangements

 

ArrowMark Asset Management, LLC, serves as investment advisor to AMFC pursuant to a management agreement with AMFC (the “Management Agreement”). For its services as the investment advisor, AMFC pays the Advisor a fee at the annual rate of 1.75% of managed assets. AMFC will pay the management fee quarterly in arrears, and it will be equal to 0.4375% (1.75% annualized) of our managed assets at the end of such quarter, including cash and cash equivalents and assets purchased with borrowings.

 

 

In addition, for the year ended December 31, 2023, the Advisor reimbursed the Fund $70,994 for expenses related to Investor Relations Fees, representing approximately 0.05% of net assets.

 

AMFC currently pays each Director who is not an officer or employee of the Advisor a fee of $55,000 per annum, plus $1,500 for each in-person meeting of the Board of Directors or committee meeting. The chairman of AMFC’s audit committee, nominating committee and the Lead Independent Director are each paid an additional $10,000 per year. Directors do not receive any pension or retirement plan benefits and are not part of any profit sharing plan. Interested Directors do not receive any compensation from AMFC. AMFC has incurred $348,973 of Directors fees for the year ended December 31, 2023.

 

Note 4 — Purchases and Sales and Redemptions of Securities

 

For the year ended December 31, 2023, (i) the cost of purchases was $31,569,865 (ii) the sales and redemptions of securities was $39,080,774.

 

Note 5 — Federal Tax Information

 

The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Internal Revenue Code and, as such, to not be subject to federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify for RIC tax treatment, AMFC is required to distribute at least 90% of its investment company taxable income, as defined by the Code.

 

Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statement to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

AMFC has followed the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires AMFC to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. AMFC has determined that there was no effect on the financial statements from following this authoritative guidance. In the normal course of business, AMFC is subject to examination by federal, state and local jurisdictions, where applicable, for tax years for which applicable statutes of limitations have not expired.

 

In order to present net asset components on the Statement of Assets and Liabilities that more closely represent their tax character, certain reclassifications are made to the net asset components. Net assets, net investment income and net realized gains were not affected by these adjustments. For the year ended December 31, 2023, these adjustments increased distributable earnings by $360,470 and decreased paid-in capital by $360,470. The primary reasons for this reclassification relates to a reclass of capital gain to ordinary income, disallowed expenses, redesignation of dividends paid and fund level return of capital.