Patriot National's Biggest Investor Sets Course for Growth

Patriot National Bancorp (PNBK) is struggling to stay profitable, but its biggest investor remains pleased with its progress.

For Michael Carrazza, all is going according to plan. That includes a recent decision to make veteran banker Kenneth Neilson the Stamford, Conn., company's chief executive. Neilson has been a Patriot National director since October 2010, when Carrazza invested $50 million in the company.

Neilson succeeded Christopher Maher, who quickly resurfaced in New Jersey as president of OceanFirst Financial (OCFC). Carrazza, Patriot National's chairman, says the transition was planned, with Neilson's ascension marking the "second phase" of his strategy for the $618 million-asset company.

"We had an aggressive plan to cure asset quality issues, bring [the company] back to compliance health and bring it back to" profitability, says Carrazza, chairman and chief executive of Solaia Capital Advisors. (He characterizes his involvement with Patriot National as a "stand-alone" investment that is not associated with Solaia.)

Carrazza appears to be sticking to a popular playbook for private-equity investors, particularly those that fund community banks, says Sam Hamadeh, chief executive of the financial data provider PrivCo. New management "closes money-losing branches and cuts costs to bring the banks from distressed to profitability," he says.

Patriot National used Carrazza's 2010 investment to arrange a bulk sale of problematic assets, drastically reducing nonperforming loans. It also contracted; the company had $980 million in assets in mid-2009.

The company is still struggling with profitability at its bank. Patriot National Bank lost roughly $1.3 million in the fourth quarter after recording a $2.4 million loan-loss provision, according to filings with the Federal Deposit Insurance Corp. For the year, the bank earned $463,000.

Neilson's move from the boardroom to the corner office could indicate that Carrazza is eyeing an exit strategy, says Peter Kovalski, a portfolio manager at Alpine Woods Capital Investors who invests in bank stocks. "A rule of thumb is that private equity has a three- to five-year time horizon," he says.

Most funds began pumping money into community banks in 2010, suggesting that it is too soon for private equity to pull out, Hamadeh says.

To be sure, there have been some notable pullbacks by private-equity firms in recent months.

Four private-equity firms — Blackstone Group, WL Ross & Co., Carlyle Group and Centerbridge Partners — and a few other investors said last week that they would sell about 20 million shares of BankUnited (BKU) in Miami Lakes, Fla., for $494.9 million.

In December, Warburg Pincus sold 10 million shares of stock in Webster Financial (WBS) for $198.5 million. Warburg invested $115 million in the Waterbury, Conn., company in mid-2009.

Exit strategies have also involved mergers.

Shoreline Capital Partners in Mill Valley, Calif., sold Circle Bancorp in Novato, Calif., to Umpqua Holdings (UMPQ) for $24 million late last year. West Coast Bancorp (WCBO) in Lake Oswego, Ore., which agreed to sell last year to Columbia Banking System (COLB), also has private-equity investors.

It might be too soon to discuss private equity's wholesale retreat from community banks. Still, those investors usually look to exit once a management team can show that "underperforming loan rates have improved, with full financial controls in place," Hamadeh says.

Carrazza would not discuss any timetables for his Patriot National investment. He also declined to discuss the possibility of looking for a buyer. "We want to make sure we have a very strong, capable platform," he says. "Our focus is exclusively on profits and earnings."

Neilson could not be reached for comment. The company also has a relatively new chief financial officer; William Gray, who joined the company in August 2011, became the CFO in November when Robert O'Connell retired.

Carrazza claims that Patriot National was in such bad shape when he made his investment that it was unclear if he would break even, much less make a profit.

"I don't think any bank that had the credit statistics that Patriot had has survived," he says. "The challenge was monumental."

About 15% of Patriot National's assets were nonperforming at Sept. 30, 2010, according to the Federal Deposit Insurance Corp. At the end of last year's third quarter, they made up just 5% of total assets.

The company's Tier 1 capital ratio was 14% at Sept. 30, 2012, compared with 6.4% just before Carrazza's investment. Return on equity improved from minus-37.4% to 0.8% over the same time.

Patriot National's turnaround is largely completed, Maher says, adding that it was time for someone else to come in and move the company in a new direction.

"The fixing job is finished," says Maher, who also became OceanFirst's chief operating officer. "The next challenge is building profit."

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