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Christy Rivers -
StoneCastle Financial Corp. -
Chairman & CEO
StoneCastle Financial Corp. (Nasdaq:BANX)
StoneCastle Financial Corp.
Published – February 2, 2021
Interview conducted by:
Lynn Fosse, Senior Editor, CEOCFO Magazine
CEOCFO: Mr. Bhonsle, would you tell us about StoneCastle Financial Corp. and what led you to take over the CEO role last year?
Mr. Bhonsle: About a year ago ArrowMark Partners acquired certain assets of the manager that was managing the assets of StoneCastle Financial Corp. The Company now has an advisory agreement with StoneCastle-
The focus of that change in investment manager was to afford shareholders of StoneCastle the opportunity to invest with continuity and expand the invested portfolio across all bank-
StoneCastle Financial is a company that is structured as a closed-
The company’s focus is on income generation, capital preservation, and providing risk adjusted returns. Today the company is trading around an 8% dividend yield. If you were to look at the portfolio, it is made up of diversified investments across thirty states with Indiana, California and New York being the top three states in terms of exposure.
CEOCFO: What has changed at StoneCastle over the last year and how has the company evolved under your leadership?
Mr. Bhonsle: We have kind of left more of the same intact, so to speak. What I mean by that is other than bringing a big bank strategy together with a small bank strategy that was run by the legacy team, there is a lot of continuity of strategy and objectives. If you look at it from a human capital perspective, Julie Muraco, our investor relations person, Patrick J. Farrell, our chief financial officer, David Lentinello, our controller, and even the founder, Joshua (“Josh”) Siegel, all have continued after the transition. Just to mention, Josh Siegel who is the former CEO of StoneCastle Financial, serves as a board member of the investment manager.
From an investment strategy, today BANX continues to invest in community banking-
CEOCFO: Why does that make sense for you and your investors?
Mr. Bhonsle: From an investment perspective, the company remains focused on the banking strategy and investing in bank-
CEOCFO: Would you tell us about relative value? That is one of the key messages about StoneCastle Financial.
Mr. Bhonsle: As I said previously in my introductory comments, the dividend yield on BANX for StoneCastle Financial Corp., today is around 8%. When you compare StoneCastle Financial against other vehicles in the marketplace and particularly the financial services, we have over a 500-
CEOCFO: Would you speak to StoneCastle’s net asset value?
Mr. Bhonsle: I think the key word there is stable. One of the things that we have started doing here over the past couple quarters is that the company is reporting its Net Asset Value now, on a monthly basis and not only on a quarterly basis. The last reported NAV as of the end of December of 2020 was $21.44. The NAV, if you look at it over the last two years has been fairly consistent ranging in-
CEOCFO: Would you speak to the company’s credit quality? How does your portfolio team manage risk?
Mr. Bhonsle: The company investments today are with banks primarily rated investment grade. Our overall community banking exposure is related to banks with an average score of BBB. Our money center banks are all rated in the single A to BBB range, so it is a fairly high-
In terms of management, we conduct extensive due diligence on all investments prior to purchase, and post-
As part of our portfolio management process, we have regularly scheduled meetings to grow our investment portfolio, to discuss macro scenarios, and to discuss the individual investments that we hold. We analyze various scenarios in terms of market conditions and in terms of investments so that we can make a decision whether to sell any particular investment or hold on to it.
CEOCFO: What might your team look at that less experienced and knowledgeable people might not take into consideration?
Mr. Bhonsle: ArrowMark Partners today is a fairly large manager that has many different verticals managed within the firm. We cover everything from equities to fixed income, alternative fixed income, and private debt. The firm itself has a lot of institutional knowledge that we all bring to bear when we make decisions across each one of the verticals. From that perspective, getting industry and/or macro views is fairly easy for our analysts because of the resources that are available internally. StoneCastle Financial now has the advantage of this deep bench.
Within that, we have a team that is just focused on the banking space and these are experienced folks with twenty plus years of experience and have looked at and invested in banks within various cycles such as the great financial crisis and the pandemic. These investment analysts are familiar with banking regulations and what is changing there, what is expected to change in terms of regulations and how they are going to impact banks. Having that kind of wherewithal and knowledge is very important to make the right investment decisions for a long-
CEOCFO: In your last management call you spoke about StoneCastle Financial and the community banks in terms of an impact investment. Would you expound on that? Do you see people being more concerned about impact in their investments?
Mr. Bhonsle: I’m glad you asked this question. To answer the last part of your question, absolutely. ESG (Environmental, Social and Governance), along with impact is a growing discussion among investors and the broader stakeholder community and that is not missed by us. One could argue that it is about time people are considering and discussing ESG and impact going forward. If you were to look at community banks, they have a significant and positive impact when you look at the local markets in terms of community development, financial inclusion, and job creation.
If you just look at the last stimulus package that came out last year, the PPP loans, which were made to businesses that were shut down, or used to continue employment while businesses were required to shut down; if you look at the amount of PPP loans that were made by the banks across the community banking space and money center banks, community banks accounted for a significant portion of the distribution of those PPP loans. Of those PPP loans that the community banks made, a decent amount went to minority-
In terms of numbers if you were to look out there, 74% of all the minority-
CEOCFO: COVID significantly impacted the credit markets in 2020? How are the credit spreads in the market today and what do you think 2021 will bring?
Mr. Bhonsle: To give a bit of a background, if you look at the 1st and 2nd Quarter of 2020, there was a significant dislocation in the markets. You saw asset prices plunge and the risk premium increased pretty meaningfully. A lot of that if you think about it, was driven by technical factors; a lot of forced sellers, and people that had too much leverage in their funds that unfortunately had to sell assets to cover the calls on their leverage facilities. There was a lot more technical and yes, there was a lot more fundamental issues out there too, but it did not warrant the kind of gapping out on asset prices. If you look at Q-
Where we sit today and looking back on 2020, asset prices pretty much rebounded all the way back to pre-
Going forward in 2021, we are cautiously optimistic in terms of the economy, but we do need our businesses to open up on a sustainable basis, so the vaccine roll-
CEOCFO: How have the market spreads impacted alternative capital issuances, both primary markets and secondary markets?
Mr. Bhonsle: The spreads usually do not impact the issuance of capital securities. It is really a balance sheet tool for large banks to manage their capital ratios. In 2020, it was a fairly active year for the issuance of alternative capital securities, fourth quarter was extremely busy, so we expect 2021 to be also a fairly active year in primary issuances of capital securities.
CEOCFO: What would you like new investors who are considering StoneCastle Financial Corp. to know about the company, and what if anything might someone miss when they are looking at the company?
Mr. Bhonsle: StoneCastle Financial is a company that is focused on income generation and capital preservation and its investments are primarily in investment grade rated banks. From a risk perspective, fairly low risk in our opinion. When you look at the relative value versus its peers, it generates over a 500 basis points incremental dividend yield, and you are looking at investment grade risk across our portfolio.
I think what might be missed with our potential investors is that we are a fairly large manager that manages assets across different verticals and from a resources perspective the company has access to a lot of resources it can rely on, and that was very much evident during the pandemic when we were able to take advantage of buying relatively cheap alternative capital securities in the secondary market; something that was not available to the company prior to the transition to ArrowMark Partners.
We do sometimes get lumped in with other BDCs, but we are not a BDC. We are a company structured as a closed-
StoneCastle Financial Corp., Sanjai Bhonsle, Closed-
“When we compare ourselves to our peers on a yield basis, we generate a meaningful amount of incremental dividend yield versus our peers”. Sanjai Bhonsle