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Hey everyone, welcome back to Alpha Street Interviews. This is Arjun Vijay and I have with
me today Sanjay Ponsley who is the CEO of Stonecastle Financial Corp. The company is an
Aztec listed investment management firm with the ticker symbol BANX. Hey Sanjay, good afternoon,
it's good to meet you. Sanjay first give us a quick overview of Stonecastle Financial Corp and
maybe touch upon your portfolio investments and asset mix as well.
Sure, thanks Arjun and nice to meet with you this morning. Stonecastle Financial Corporation
which trades under the symbol BANX is a closed end investment company and today
Stonecastle Financial Corporation is focused on making non-passive,
non-control investments in banking related securities. Most of these securities today
are issued by community banks, regional banks and money center banks. The company's investment
objective is primarily focused on income generation, capital preservation and providing
risk adjusted returns. The company's strategy is also to mitigate risk by making
investments in higher quality assets that generally mirror investment rate risk.
And then finally, Stonecastle today trades at a 7% dividend yield and its last published NAV
was around $22.05. And what can you tell us about the company's credit quality and
what's your risk mitigation strategy like? Sure, so the company's credit quality today
we view as being pretty high and then as I mentioned in my opening question,
we try to mirror the risk profile within Stonecastle Financial Corporation
to approximate investment rate risk. And if you look at these securities, they are
generally issued by banks that are themselves rated investment rate. So think about ratings from
triple B and up. And so these securities are issued by some pretty sound financial institutions.
And then also as part of our risk management process, we review our portfolio on a daily,
weekly, monthly basis and which further adds to mitigating the risk profile within BNX.
That's great. Can you tell us what is going to be the impact of a rising interest rates
on Stonecastle's portfolio? Sure, it's my favorite question, Arjun. And if you were to look at the
portfolio today, it is about 200 plus million of assets, gross assets within the company. And
about 70% of those assets are in floating rate securities. So think Labor Plus, Solver Plus.
And it's one of the changes that has taken place with positive changes that's taken place
since AeroMark took over the day-to-day management of Stonecastle Financial Corporation. Prior to
that, it was pretty much fixed rate. But today, like I said, about 70% plus of the assets within
the company are floating rates. So obviously, as assets start floating up, the company should
benefit from increased earnings, all things constant. All right, great. You had earlier
mentioned about your net asset value. So let's talk a little bit about that. How do you see
the NAV trends and what are your observations there? Yeah, so there's the other positive
feature of Stonecastle Financial Corporation. The NAV has been fairly stable. Obviously,
during the pandemic, it took a bit of a dip while assets were just folks were trying to find out
values of assets, right, when liquidity kind of dried up. But x that, generally speaking,
the NAV for Stonecastle Financial Corporation has ranged between $21 and $22, and it's fairly stable.
One other thing of note is we do not self-mark any of the assets within the company. These are all
third-party broker quotes. And so there's a lot of transparency into the liquidity profile of these
also given these third-party quotes. Interesting. Sanjay, I know you had briefly addressed this
during your last earnings conference call, but could you expound a bit on your observations on
how community banks in particular have endured the pandemic period and how smooth the reopening
was for you guys? Yeah, another great question. So community banks, they are very important
supporting the local economies, especially the smaller towns, right, in the U.S.
And also, you know, one of the things from structural features for community banks
that has changed meaningfully since the great financial crisis is that their risk profile has
changed meaningfully. So meaning they've gotten to be much more conservative balance sheets.
So, you know, if you were to look at our portfolio today, generally speaking, I think I mentioned
this in the last earnings call. The tier one capital ratios on average for our community banks is
around 13%, you know, meaningfully above their minimum required amounts. And so the banks actually
during COVID went into that period with some strong liquidity and fairly
conservative balance sheets. And, you know, so what happened during the pandemic also is the
PPP loan program took off where the banks, you know, their earnings actually were positively
impacted by the underwriting fees that they charged in underwriting those triple P loans, right?
And obviously, you know, the risk profile, those are also very low because you had basically a
backstop from the U.S. government. So that, you know, the loan program definitely positively
impacted the banks' incomes. Also, from a credit reserves perspective, you know, banks,
banks management teams actually did increase their reserves, as you would expect them to.
But, you know, a lot of that didn't come to fruition because, you know, the Fed, as you know,
pumped up a decent amount of liquidity into the U.S. system and, you know, support a lot of businesses.
So defaults actually did not spike as most people thought they would. And so what you're
seeing today is community banks are pretty much, you know, any type of bank that's well managed
is not reversing those reserves. And, you know, and so given that, banks are fairly active
supporting their local businesses and their local communities.
Okay, great. Lastly, Sanjay, what would you like to tell the viewers who are considering
investing in the company? What is the value prospect for them?
Sure. So, you know, let's take, let's look at the company from a couple of angles.
One is, like I mentioned, you know, the company today invests in securities issued by
community banks and money center banks. And, you know, that itself, I think, highlights the
impact portion of the company. You know, one of the things that I didn't mention during the pandemic
is if you're a minority-owned business or a woman-owned business, 70% of those businesses got
their DPP loans via community bank. And if you're a veteran-owned business, about 60% of those types
of businesses got their loans from a community bank. So you can see how impactful, you know,
community banks were in supporting these businesses during some of the toughest times, right?
And so from an impact perspective, I think, you know, the company registers fairly well.
And then if you're to look from an economic perspective also, you know, like I said, the
company is focused on income generation, capital preservation, and credit quality. And, you know,
if you're to go back in time and kind of look at the financials of the company, you know, it has
really exhibited a lot of stability in terms of income generation. Actually, since, you know,
we took over the management of the company back in February of last year, income actually
has increased within the company, right? You know, we've been outrunning our dividend, you know,
and that's also a function of being able to increase the gross assets under management within the
company. So, you know, that has obviously helped. And from a capital preservation perspective,
it's a high credit quality portfolio, in our opinion. And it has exhibited that in terms of,
you know, and also it has exhibited as stable NAV.
All right. Wonderful. We'll wrap up with that, Sanjay. It was such a pleasant conversation. Thank you for your time.
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