Q&A: Who would start a bank in this economy?

xenithagainThere’s a new kid on the banking block. Xenith Bank, currently in organization, recently moved into their new office headquarters downtown. The bank will focus on small- and medium-size business. BizSense sat down with Chief Executive and President T. Gaylon Layfield to talk about the plans for the bank and the issues facing the banking industry.

The bank plans to open with about $70 million in capital early in the second quarter of this year. The lead investor is a private equity group from Dallas.

Layfield worked for the bygone Signet Bank for 23 years. His one-year tenure as that bank’s chief executive and president was cut short by its acquisition by First Union Bank, which was eventually acquired by Wachovia.

Below is an edited transcript.

Richmond BizSense: Why start a bank now? Is this the ideal time?

Gaylon Layfield:
Our initial thinking really predates all of this economic dislocation we’ve had since last summer.

Our original premise identified an underserved market between the community banks and the handful of mega banks that are the outgrowth of all the consolidation that took place in the industry for the last 10 to 15 years.

Today is admittedly a difficult period of time, particularly from the standpoint of investors, confidence and raising capital. But from the market opportunity standpoint, we think it’s better than it was when we initially defined the market and the opportunity.

RBS: What sort of business and industries are you specifically targeting, and what type of amounts are you looking to lend?

GL: Our market really is a broad array of commercial and industrial clients and customers. We are really designing the bank to meet what we think are the statewide demands, which are very diverse in Virginia. It is everything from government to financial services, to light manufacturing, to defense industry related activities, and some high tech and emerging market. We’ll certainly do some real estate lending, primarily focused on local developers as opposed to national developers.

In terms of size, we are targeting customers that would have somewhere between $5 million and $200 million in sales, and that translates into loans from a few hundred thousand dollars up to $12 million loan commitments.

RBS: In the current climate, businesses are going under because they can’t qualify for loans. Why is this happening, and when will banks start to lend again?

GL: It’s hard to know when we might get through all of this. It appears we are in for at least ’09 being another difficult economic year. There are huge shifts taking place in the financial industry. This whole thing you hear about called deleveraging.

Both commercial and investment banks, particularly the really large ones, have been operating over the last 10 years or so with an incredible amount of leverage on their balance sheet. And in this new environment, it has become perfectly clear that that is not sustainable.

A lot of what we are seeing in the local market here in Virginia where people can’t get loans or it’s difficult to get a project financed, a lot of that is just a function of all these large institutions that were doing that business are basically having to cut the size of their institution, in many cases 30 percent to 40 percent. As that happens, they are just unable to continue to be as active as they were, making those kinds of loans and those kinds of commitments.

For a bank like Xenith, the ability to come to the table with a relatively clean balance sheet, fresh capital and enough of it where you can step in and do transactions of a significant size is important in terms of generating economic growth. Secondly, there is a huge amount of demand for it, because the others that have traditionally been doing it have to shrink.

The other piece is simply banks being more cautious in a difficult economic time. That’s prudent. That’s a cycle and we’re probably tighter now than we have been in a long time before it loosens back up. In the long run that’s not a bad thing. It’s a normal cycle.

RBS: Banks need to lend to make money, but at the same time they have been very conservative in their lending. If banks aren’t lending, how that does affect their bottom line?

GL: That’s a problem. Banks need good earning assets to be profitable. There is also a challenge in banking on the deposits side. Because of banks needing liquidity, they are paying pretty high rates on certificate of deposits. That means their cost of funds is relatively high, while at the same time interest rates are low and the demand on the commercial side is lower, so the yield on the loans has gotten pushed down. All of which are having an impact on banks’ earnings in this market.

The biggest impact is banks’ concern about capital. Their unwillingness to continue to be actively engaged in lending is really more about their concern around the quality of their existing loan portfolio in their existing environment and the potential losses they might suffer.

RBS: For banks in organization, is there more scrutiny from federal regulators and what are they focused on?

GL: There are a couple of things going on with regulators. One is they have lots of problems around the country that they are having to attend to, so just in terms of distractions they are pretty busy folks these days. They are still supportive of what we and others are trying to do. They are particularly concerned about certain markets in the country: Atlanta, Florida and Arizona. Most the concern is around residential real estate. There are some particular markets where I suspect they would scrutinize very closely any new banking organization.

For us, they have been supportive, and we are having conversations with them on a regular basis. In this environment, they are being very careful and they should be.

RBS: What kind of impact do you expect Xenith to have on the local economy?

GL: If you look at the total size of the Virginia economy and a bank the size of Xenith having plus or minus $70 million in capital, it’s going to make a difference. But is it going to transform the Virginia economy? No, it’s not going to do that. But it can be an important catalyst for lots of business activity that might otherwise not get off the ground. Over time, as we grow, we think we can turn this into a major banking presence across the state and have a major impact from an economic development standpoint.

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