An aspiring challenger bank that had been pursuing a de novo charter has shifted gears, agreeing to sell itself to a Connecticut community bank.
Patriot National Bancorp plans to pay $119 million in cash and stock for American Challenger Development Corp., which has been working for two years to become a digital-first national bank. Both are based in Stamford.
The deal was one of two announced Monday between a traditional community institution and a fintech. BM Technologies in Radnor, Pennsylvania, which spun off from the $19.1 billion-asset Customers Bancorp earlier this year, said it would
With its technology platform fully built and 70 employees on its payroll, American Challenger was eager to open. The deal with Patriot gets it rolling more quickly, according to Felix Scherzer, American Challenger's chairman.
At closing — expected to occur in the first quarter — “we’ll be ready to go to market,” Scherzer said. “We were well and far along with our de novo strategy, [but] when we met with [Patriot Chairman Michael Carrazza] and his team, it was sort of the perfect [opportunity] to accelerate the go-to-market for our side.”
“Truly a great match between them being an established bank and us bringing a fully established, ready-to-go challenger bank technology platform,” Scherzer said.
American Challenger had
Scherzer, who led financial institutions merger-and-acquisition groups at both Credit Suisse and Morgan Stanley, would be chairman of the merged company, while Raymond Quinlan, American Challenger’s CEO, would be the CEO. Quinlan was CEO of Sallie Mae from February 2014 to April 2020.
Paul Davis, director of market intelligence for Strategic Resource Management in Memphis, Tennessee, said the deal “checks some important boxes” for both parties. The $963 million-asset Patriot would obtain the services of a talented, high-powered management team, as well as access to proprietary operations technology American Challenger has been developing since its start in January 2020. For American Challenger the deal would offer access to a charter, deposit insurance and a compliance framework on which to build as it enters the banking field.
American Challenger interviewed more than 6,000 consumers about their banking preferences as part of the process of building its operating system, Scherzer said.
The combined company would operate as two business units, a legacy Patriot Bank division led by current Patriot CEO Robert Russell and an American Challenger division, which will focus on building an online consumer bank.
For Patriot, that means being able to build on its nine branches in Fairfield County, Connecticut, and Westchester County, New York, two of the most affluent jurisdictions in the United States, as well as a growing national Small Business Administration lending operation. Through the first six weeks of the 2022 federal fiscal year, Patriot ranks as the 27th-biggest SBA 7(a) lender in the country, having closed government-guaranteed loans totaling $6 million, according to SBA statistics.
American Challenger, which expects to unveil a new brand for the online consumer bank around the time the sale is completed, intends to leverage its cutting-edge technology to gather deposits and generate a healthy share of consumer loans — “one area where most challenger banks have really fallen flat,” Scherzer said.
To that end, American Challenger said Monday that it had signed a multiyear agreement to purchase $1.75 billion of loans from Sunlight Financial LLC, a unit of Sunlight Financial Holdings, which finances residential solar and other energy-efficient home improvement projects.
American Challenger plans to strike additional deals “with partners that have asset-manufacturing capabilities but don’t have bank funding,” Scherzer said. “Sunlight is really a starting point. We see it as the first of many partnerships that will allow us to have a very solid diversified investment profile that does not take more risk than the average bank.”
“To be able to pull together blocks of assets and asset-generation capabilities is something [American Challenger’s digital-first competitors] haven’t figured out,” Patriot's Carrazza said.
At the same time, Patriot announced a recapitalization program under which it plans to raise $890 million in common and preferred stock and subordinated debt from institutional investors including Oaktree Capital Management and Angelo, Gordon & Co. Patriot “is going to need that capital” to fund the level of business American Challenger anticipates generating, Davis said.
Under the terms of the deal announced Monday, the institutional investors would own 78% of the company. American Challenger common shareholders would receive 4,092 Patriot shares for each American Challenger share. American Challenger’s preferred investors would receive $75,413 in cash plus accrued and unpaid dividends for each preferred share. That would leave American Challenger investors with a 13.8% stake in the combined company; Patriot shareholders would own about 8.2%.
Carrazza, who will serve on the board of the merged company, led a group that rescued Patriot with a
Since then, Patriot has expanded its footprint in southern Connecticut, acquiring the $64.3 million-asset Prime Bank in May 2018, and built a
There have been some bumps in the road. The deal comes two months after the Office of the Comptroller of the Currency
As consumers have demonstrated a growing preference for online banking channels in recent years, Carrazza said Monday that he and his team intended “to pivot to more of a digital platform.” When a former colleague introduced him to Scherzer a little over a year ago, Carrazza was predisposed to a transaction that might push Patriot in that direction.
“What this does is bring in a world-class [management] team and a significant amount of capital to continue to attract the resources needed to roll this digital platform out nationally a lot quicker than we could ever do on our own,” Carrazza said.
“I believe our timing couldn’t be more perfect,” Carrazza said. “The market is ready for this, and we’re in the forefront of becoming the largest digital bank in America.”
