Banking’s new world order

In normal banking times, there was a rule of thumb that said most startup banks could look to turn a profit beginning at about their third year in existence.

Those thumbs have been severed clean off.

Richmond-based Xenith Bank is the newest local bank to try its hand in such a climate, a climate its holding company referred to in a recent letter to shareholders as “the new world order of banking.”

The $211 million bank just completed its first full quarter, losing $1.1 million in the first three months of 2010.

“It takes a little while when you get started to prime the pumps, so to speak,” said Gaylon Layfield, Xenith’s president and CEO.

Xenith finds itself competing with a mostly unknown brand in highly competitive markets including Richmond, Hampton Roads and Northern Virginia. Within the Richmond market alone, there are seven banks of similar asset size.

David Fairchild, president of Union First Market Bankshares, said the startup process is hard for banks.

“It’s pretty hard to get traction as a startup [bank] in any community,” said Fairchild. “It’s hard to get your name out and put together enough locations so that you are reasonably accessible.”

Add to that the fact that Xenith is launching in a time when business isn’t easy to come by.

“It’s true what you read; there’s not a lot of net new business activity,” said Layfield. “But there is a lot of existing business out there.”

Existing business is a nice way of saying Xenith must try to woo customers who are banking elsewhere. For now, the bank is targeting small and mid-size businesses as customers.

Other banks are watching Xenith to see how they go about generating that business.

“The numbers will show that the demand for credit in all arenas is on the aggregate shrinking,” Fairchild said. “It doesn’t take a rocket scientist to see: If you’re new, you’ve got to steal [business] from someplace else.”

Xenith has some advantages over other startup banks. First, thanks to its merger with the parent of SuffolkFirst Bank in December, Xenith entered the market as a new bank by name, but with an established – albeit small – market share that is generating revenue.

That helped Xenith end its first quarter with a $131.5 million deposit base and a $104 million loan portfolio, according to an FDIC report.

Inheriting SuffolkFirst’s small stature also comes with what could be another advantage. Because of its size and a concentrated footprint that didn’t venture too far out of Suffolk, the assets weren’t in bad shape by today’s standards.

Meanwhile, many of the more established banks Xenith is competing against are preoccupied with managing balance sheets that are overwhelmed by troubled loans and foreclosed properties.

According to its first quarter call reports filed with the FDIC, Xenith Bank was operating with $7.3 million in past due and non-accrual loans on its books. By comparison, Bank of Virginia, a $217 million bank, had $10.5 million in past due and non-accrual loans at the end of the first quarter. The $288 million Peoples Bank of Virginia reported $4.4 million in past due and non-accruals, while the $159 million Virginia Business Bank reported $9.6 million in such loans.

“They didn’t have much in their loan portfolio,” Fairchild said, “so they are not saddled with a lot of loan portfolio problems.”

Xenith also brings capital it raised before the market fell – capital some of its competitors are having a tough time finding at reasonable prices these days.

Layfield calls it “dry powder” with which to go out and attack the market.

Nevertheless, in a letter he sent out to Xenith shareholders, Layfield said, “We expect losses to continue for a number of quarters,” with the losses lessening as time passes.

But given the times, Layfield wasn’t so bold as to give his forecast of when his bank might be in the black.

“We don’t have a publicly specific time frame for reaching profitability,” he said. “We are still optimistic that some of those old yardsticks that have held true in the past” are still achievable.

Michael Schwartz covers banking for BizSense. Please email news tips to [email protected]

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11 years ago

Good post. I agree, the banking system has changed a lot compared to the olden days. For example just thinking about the economy they print and print thier way through problems. Why dont they consider saving and producing thier way out of problems the way we did in the good old days?