Business Overview and History

Patriot National Bancorp was founded in 1994 and has since grown to become a prominent player in the northeastern United States banking landscape. The bank's core operations are centered around commercial and residential real estate lending, commercial and industrial lending, consumer and other lending, and construction lending. Over the years, Patriot has built a diverse loan portfolio, with commercial real estate loans comprising the largest segment at 59.83% of the total loan portfolio as of December 31, 2023.

The company's history has been marked by periods of both challenges and growth. In the early 2000s, Patriot faced difficulties related to the bursting of the dot-com bubble, experiencing asset quality issues and increased loan loss provisions. To address these challenges, the bank implemented a strategic restructuring plan, reducing its exposure to higher-risk commercial real estate loans and diversifying its loan portfolio.

The 2008 financial crisis presented another major hurdle for Patriot, as its commercial real estate and construction loan portfolios suffered significant stress. The bank recorded substantial loan loss provisions, leading to net losses in 2009 and 2010. During this period, Patriot focused on strengthening its capital position and improving credit risk management.

Despite these setbacks, Patriot has also achieved notable milestones. In 2006, the company completed a successful capital raise, providing resources to support growth and enhance its market presence. Patriot expanded its geographic footprint by opening new branch locations in Connecticut and New York to better serve its customer base.

In the years following the financial crisis, Patriot worked diligently to improve its financial performance. The bank optimized its balance sheet, reduced exposure to higher-risk loan segments, and implemented enhanced underwriting procedures. These efforts helped Patriot navigate the challenging post-crisis environment and return to profitability.

The company's recent history has been marked by a series of challenges, including the COVID-19 pandemic, which significantly impacted the bank's operations and asset quality. In 2020, Patriot reported a net loss of $3.82 million, driven by a $818,000 charge related to restructuring and merger-related activities. The following year, the bank was able to bounce back, reporting a net income of $5.09 million in 2021.

However, the bank's troubles resurfaced in 2023, as it reported a net loss of $4.18 million. This loss was primarily driven by a $1.11 million impairment charge and a $1.45 million provision for credit losses. The bank's non-performing assets, which include non-accrual loans and other real estate owned, increased from $21.31 million at the end of 2023 to $43.36 million as of September 30, 2024, reflecting the continued deterioration of asset quality.

Financial Profile and Ratios

Patriot National Bancorp's financial profile has been a source of concern for investors and regulators alike. As of September 30, 2024, the bank's total assets stood at $974.08 million, a decline from the $1.09 billion reported at the end of 2023. This reduction in assets was primarily driven by the bank's strategy to limit loan growth and allow loans to pay down in an effort to strengthen its capital ratios.

The bank's capital ratios have been a significant area of focus, as Patriot has struggled to maintain regulatory requirements. As of September 30, 2024, the bank's common equity tier 1 capital ratio was 8.19%, the tier 1 capital ratio was 8.19%, and the total risk-based capital ratio was 9.29%, all of which fell short of the regulatory well-capitalized thresholds of 6.50%, 8.00%, and 10.00%, respectively.

In April 2024, the Office of the Comptroller of the Currency (OCC) notified the bank that it had established individual minimum capital ratios (IMCR) for Patriot, requiring a common equity tier 1 capital ratio of 10.00%, a tier 1 capital ratio of 10.00%, a tier 1 leverage ratio of 9.00%, and a total risk-based capital ratio of 11.50%. The bank's failure to meet these heightened capital requirements has resulted in regulatory scrutiny and the need for immediate action to address the situation.

For the fiscal year 2023, Patriot reported annual revenue of $34.25 million and a net loss of $4.18 million. The bank's operating cash flow for the year was negative $10.72 million, with free cash flow at negative $11.13 million. In the most recent quarter (Q3 2024), the bank reported revenue of $7.06 million and a significant net loss of $26.95 million. This substantial decrease in net income was primarily driven by a $25.1 million valuation allowance recorded against deferred tax assets.

Liquidity and Cash Flow

Patriot National Bancorp's liquidity position has been a mixed bag. As of September 30, 2024, the bank's on-hand liquidity (consisting of interest-bearing cash, cash equivalents, and unpledged available-for-sale securities) stood at $123.96 million, representing 12.94% of total liabilities. This marked an improvement from the 6.77% ratio reported at the end of 2023, primarily due to the payoff of a $70.00 million Federal Reserve Bank Term Funding Program (BTFP) borrowing.

The bank's operating cash flow, however, has been a concern, with a net cash outflow of $10.72 million for the year ended December 31, 2023. This negative cash flow was driven by a decline in net income, as well as an increase in loans and other investments. The bank's free cash flow, defined as operating cash flow minus capital expenditures, was also negative at $11.13 million for the same period.

As of September 30, 2024, Patriot had $72.77 million in cash, cash equivalents, and restricted cash. The bank maintains a $5 million unsecured federal funds line of credit facility with correspondent banks, which was fully available as of the same date. Additionally, Patriot has $146.30 million in FHLB borrowing capacity, of which $140.86 million was utilized, including a $45 million standby letter of credit.

The company's debt-to-equity ratio stood at 7.56 as of September 30, 2024, indicating a high level of leverage. This elevated ratio underscores the bank's ongoing challenges in maintaining a robust capital position.

Product Segments and Loan Portfolio

Patriot National Bancorp's loan portfolio is diversified across several key segments:

1. Commercial Real Estate Loans: As of September 30, 2024, this segment totaled $452.15 million, representing 59.83% of the total loan portfolio. This marked a slight decrease from $472.09 million at the end of 2023, reflecting the bank's efforts to restrict loan growth and strengthen capital ratios.

2. Residential Real Estate Loans: The residential real estate loan portfolio stood at $94.58 million, or 12.52% of the total loan portfolio, as of September 30, 2024. This segment decreased from $106.78 million at the end of 2023. In 2024, the bank reentered the residential mortgage business, originating loans through its new Residential Mortgage Division.

3. Commercial and Industrial Loans: This segment amounted to $134.33 million, or 17.78% of the total loan portfolio, as of September 30, 2024. It decreased from $163.56 million at the end of 2023 as part of the bank's strategy to manage down credit exposure in higher-risk areas.

4. Consumer and Other Loans: As of September 30, 2024, this segment totaled $68.42 million, or 9.05% of the total loan portfolio, down from $99.69 million at the end of 2023. The decrease was primarily due to a reduction in the purchased unsecured consumer loan program.

5. Construction Loans: This segment stood at $3.83 million, or 0.51% of the total loan portfolio, as of September 30, 2024, decreasing from $4.27 million at the end of 2023.

6. Construction to Permanent - Commercial Real Estate Loans: This segment totaled $2.36 million, or 0.31% of the total loan portfolio, as of September 30, 2024, compared to $2.46 million at the end of 2023.

Overall, Patriot's total loan portfolio decreased from $848.86 million at the end of 2023 to $755.67 million as of September 30, 2024, reflecting the bank's focus on reducing credit exposure and strengthening capital ratios. The allowance for credit losses on loans stood at $14.98 million as of September 30, 2024, representing 1.98% of gross loans, compared to $15.93 million, or 1.88% of gross loans, at the end of 2023.

Restructuring and Strategic Initiatives

In response to its ongoing challenges, Patriot National Bancorp has embarked on a strategic restructuring process to improve its financial position and operational efficiency. In February 2025, the bank announced the appointment of Steven Sugarman as the new President and member of the Board of Directors. Sugarman, the founder of Banc of California, was brought in to lead the company's restructuring efforts and assist in a capital raise to bring the bank to a "well-capitalized" status.

The bank's strategic initiatives focus on reducing its asset base, improving credit quality, and strengthening its capital ratios. This includes limiting new loan originations, allowing the existing loan portfolio to pay down, and selectively managing down its credit exposure in higher-risk areas. Additionally, the bank has been actively exploring capital market and strategic initiatives to shore up its financial position.

Risks and Challenges

Patriot National Bancorp faces several key risks and challenges that could continue to hinder its performance:

1. Asset Quality Deterioration: The bank's non-performing assets have increased significantly, reflecting the ongoing stress in its loan portfolio. Continued deterioration in asset quality could lead to additional credit losses and further strain the bank's financial resources.

2. Regulatory Compliance: Patriot's failure to meet the OCC's heightened capital requirements poses a significant risk, as the regulator could impose further sanctions or take enforcement actions if the bank does not address the issues in a timely manner.

3. Liquidity and Funding Pressures: The bank's negative operating cash flow and reliance on potentially volatile funding sources, such as brokered deposits, could make it challenging to maintain adequate liquidity levels and fund its operations.

4. Competitive Landscape: Patriot operates in a highly competitive banking environment, which could limit its ability to grow its customer base and generate sustainable revenue streams.

5. Economic Conditions: Adverse changes in the macroeconomic environment, such as a recession or prolonged downturn in the real estate market, could further exacerbate the bank's challenges and impact its overall performance.

Outlook and Conclusion

Patriot National Bancorp's path forward remains uncertain, as the bank continues to navigate a challenging operating environment and address its significant regulatory and financial hurdles. The appointment of Steven Sugarman as the new President and the ongoing strategic restructuring efforts are positive steps, but the bank will need to act swiftly and decisively to improve its capital position, asset quality, and operational efficiency.

The success of Patriot's turnaround efforts will be critical in determining the bank's long-term viability and its ability to serve the needs of its customers and communities. Investors and stakeholders will closely monitor the bank's progress in the coming quarters, as Patriot works to regain the trust and confidence of its regulators, clients, and the broader financial community.

The bank's focus on reducing its asset base and strengthening its capital ratios is evident in the decline of its total loan portfolio and the improvement in its on-hand liquidity ratio. However, the significant net loss in Q3 2024, driven by the valuation allowance against deferred tax assets, underscores the ongoing challenges faced by the institution.

As Patriot National Bancorp continues its restructuring efforts, the bank will need to balance the need for capital preservation with opportunities for sustainable growth. The reentry into the residential mortgage business through its new Residential Mortgage Division represents a potential avenue for diversification and revenue generation, but the bank must carefully manage this expansion in light of its capital constraints and regulatory requirements.

The coming months will be crucial for Patriot as it works to meet the OCC's individual minimum capital ratios and demonstrate its ability to operate as a well-capitalized institution. The bank's success in these efforts will be pivotal in determining its future trajectory and its ability to create long-term value for shareholders while maintaining its commitment to serving its local communities.