Patriot National won't let reg order stifle its small-business plans

Regulatory problems have not derailed Patriot National Bancorp’s goal to build a nationwide Small Business Administration platform.

Though a formal agreement with the Office of the Comptroller of the Currency appears to have sidelined Patriot's plans to buy Hana Financial’s SBA lending unit, the Stamford, Conn., company recently opened loan production offices in Atlanta, Indianapolis and Jacksonville, Fla.

For now, the $952 million-asset Patriot is maintaining a single lender is each office, but it is open to adding staff and entering other markets. Like many other community banks that have entered SBA lending in recent years, Patriot plans to generate fee income by selling the guaranteed portions of the loans it originates.

Patriot's moves also show how a bank can keep growing despite the complications of operating under a regulatory order.

“We want this SBA business to have a major, positive effect on our business model and continue to grow accordingly and become a name-brand SBA lender nationwide,” Richard Muskus Jr., president of Patriot’s bank, said in an interview.

“We’re gaining traction,” Muskus added. “I’ll call it a first phase for us. We have very, very high expectations over the course of 2019, and into 2020, on how effective it’s going to be for our bottom line.”

Patriot seemed poised to jump into the government-guaranteed lending field in a big way in February 2018, when it agreed to buy Hana’s SBA lending business for $83 million. Hana was among the top-100 lenders in the SBA's flagship 7(a) program, closing $96.6 million in loans during the 2018 fiscal year. Hana's volume for the first quarter of the 2019 fiscal year, which ended Dec. 31, topped $17 million.

Patriot CEO Michael Carrazza said the deal with Hana is still on, pending regulatory approval, though he provided no timetable for when it might close. For his part, Muskus said that planning to enter SBA lending began back in 2017, which made it easy for Patriot to stay focused on an organic approach in the wake of the written agreement.

A Hana spokesman did not respond to a request for comment.

“When Patriot began looking for new opportunities in the noninterest income space, it became a pretty logical attraction to seek out perfecting an SBA initiative,” Muskus said.

“We’re in a very active market, metro New York and New England, so prior to launching SBA, we often would see these types of opportunities, but we weren't able to take advantage of them,” Muskus said. "In the event we acquire Hana or any other type of SBA business, that will be an add-on."

Signed on Nov. 7, the 21-page formal agreement with the OCC requires Patriot to improve board oversight and strengthen the auditing and administration of its loan-loss allowance. With such a wide-ranging action in place, a bank can expect to face added challenges pursuing expansion plans, though “there’s no complete prohibition,” said Daniel Stipano, a lawyer at Buckley.

“You have to look at the basis of the action and the bank’s progress in complying with it,” Stipano said. “A formal agreement is a serious action, but it's not as serious as a cease-and-desist order.”

Communication with regulators is critical for any bank looking to grow while operating under an enforcement action, Stipano said.

"You want to be as frank and transparent as possible,” he said. “This is always good idea, but it’s especially true if the OCC's approval is needed. You want to convey to the regulator that you're actively addressing problems, and that management is not only cooperative but capable of fixing them."

Kevin Ferryman, Patriot’s director of SBA lending, said the company’s expansion plans should improve safety and soundness by adding more geographic diversity into its balance sheet.

“Diversifying geographically is a great opportunity for us,” Ferryman said. “Markets like Georgia, Florida and the Midwest, where SBA is highly utilized, are still very competitive, but I think New York and New England are some of the most competitive markets in the country.”

Patriot’s plans extend beyond the SBA. To generate more funding, the company plans to expand its online deposit capabilities gathering later this year.

“We're in the process of relaunching our digital banking platform that will include a redesign of our website,” Muskus said. "We're planning on being more creative with our deposit opportunities. We'll be casting a wider net of geographies and products."

Fierce competition for local deposits prompted the move.

“Our physical footprint may be the most competitive in the country with how many banks are prospecting in our neck of the woods,” Muskus said. “I think the days are gone when, if you need to raise deposits, you go out in the markets and just put a good CD special out there.”

With its loan production offices open only a few weeks, Muskus said Patriot’s plans to sell SBA loans haven’t kicked into high gear. Last year, income from loan sales totaled $162,000.

The company's formal agreement with the OCC comes as enforcement activity has been declining across the board. According to the Chicago consulting firm Navigant, the number of enforcement actions aimed at banks fell by 16% last year, to 177.

The trend is hardly a surprise given a relatively prosperous economy, Stipano said.

"If you look back to the early 2000s, when the economy was strong, there were few enforcement actions taken then and almost no bank failures," he said.

"The wild card [today] is compliance," Stipano added. "In particular, BSA-AML compliance is a perennial issue in good times and bad."

Patriot unveiled its strategy a few months after several other SBA lenders, including industry leader Live Oak Bancshares in Wilmington, N.C., announced their intent to scale back secondary loan sales due to declining premiums. That issue appears to have receded, as it seems less likely that interest rates will keep rising, Ferryman said.

"We’re optimistic [premiums] are going to hold or even improve going forward," Ferryman said.