After an infusion of $50 million of fresh capital, Patriot National Bancorp Inc. in Stamford, Conn., joins the ranks of struggling community bank companies that are moving from retrenchment to recovery.
PNBK Holdings last week completed its $50 million investment in Patriot, capping a 15-month process of trying to save the ailing $817 million-asset company.
Michael Carrazza, a New York financier who led the investment team, said the infusion signals a new start for a company that was burned by residential real estate development. Though he wants Patriot to grow, the first order of business is exiting the written agreement with the Office of the Comptroller of the Currency under which the bank has been operating since February 2009.
"The first thing is stabilization," Carrazza said in an interview last week. "We've satisfied the capital requirements, and that takes a lot of the pressure off, but there are still a lot of elements that need to be addressed. Once we are compliant, we will come out with phase two."
Similar recapitalizations are occurring in the industry, and experts said more investors should adopt Carrazza's mindset.
"Fresh capital can really take the bank off the ledge, but investors have to know that it is going to take time to work through the real estate, instill a new credit culture and rebuild," said Charles Crowley, a managing director at Paragon Capital Group. "That doesn't happen in a quarter or two. Investors need to take a five-year view for a properly done recapitalization."
Carrazza appears to be committed to Patriot for the long haul, as evidenced by the lengthy recapitalization process.
He signed a letter of intent with the company in July 2009. In October 2009 he sued Patriot for breach of contract after it began to entertain a different offer of $50 million on better terms. By December, he dropped the suit and entered into a definitive agreement with the company after adding a provision that would let existing shareholders share in recoveries.
Carrazza, whose background is in private equity, has hired Christopher D. Maher to be the company and bank's president and chief executive. Maher is a former executive vice president of retail banking at Dime Community Bancshares in New York.
Though several investment groups have invited veteran CEOs to help run the banks they target, Carrazza sought a rookie CEO.
"We wanted someone who had the requisite experience and had seen both bad times and good times," Carrazza said. "But we also wanted someone who had never been CEO, because it would be more meaningful."
Susan O'Donnell, a managing director at Pearl Meyer & Partners LLC, an executive compensation consulting firm, said succession planning and a need for fresh thinking has led more companies to choose mid-level executives for top positions.
"This is actually happening a lot right now," O'Donnell said. "The industry is ripe for change, and that is bringing in some great hires. Sometimes you need some new blood."
In an interview, Maher said his priority is to return Patriot's significant pool of nonperforming assets to "normalized levels."
As of June 30, the company had $108 million in nonperforming loans, or 17.57% of total loans. Though this is a large proportion, Patriot's former chief executive, Charles Howell, maintained last fall that the total did not tell the whole story. The bulk of the nonperformers are construction loans for luxury homes in the tony areas of Greenwich, Conn. — neighborhoods directly tied to Wall Street's fortunes. As bonuses dipped during the economic downturn, so did loan payments.
Those loans, however, had low loan-to-value ratios, meaning that actual losses could be relatively small.
Karen Dorway, the president of BauerFinancial, a bank rating firm in Coral Gables, Fla., said Patriot's data backs up that claim.
"Given the high level of nonperforming assets, the chargeoff numbers are not as much as you would expect," Dorway said. "Still, they needed that capital."
The $50 million investment will take the tangible common equity ratio from a thin 3.8% to nearly 10%, based on June 30 data.
Maher said he is figuring out the best ways to work through the portfolio. He wants to make sure that Patriot does not relax its aggressive stance on workouts now that it has ample capital.
Once the company is on firmer footing, Carrazza and Maher said, it will look for ways to expand and diversify. For instance, they are interested in replacing the rundown construction portfolio with commercial credits.
"We are looking at ways to grow and diversify responsibly. Organic growth is probably going to be the priority," Carrazza said. "We will look at other strategic opportunities, too, but not before the house is in order."