It's plan B for the organizers of Xenith Corp. in Richmond, Va. — and that B now stands for buy.

Last fall the group of veteran bankers had set an ambitious goal: creating the largest start-up in state history. But regulatory hurdles and the arid capital markets prompted Xenith to shift gears and pursue an acquisition instead — a road that banking's entrepreneurs are said to increasingly be choosing.

Last month Xenith struck a deal to take over the $175 million-asset First Bankshares Inc. in Suffolk, Va. The new plan will require less capital than starting a bank from scratch and lets Xenith take advantage of current lending opportunities a lot sooner than if it had waited to get a charter. Several bank organizers have run into problems getting charters in recent quarters, in part because the Federal Deposit Insurance Corp. has significantly slowed approval of deposit insurance for new banks.

"The FDIC was not going to grant a bank charter to anyone in this market," said Laurence C. Pettit, a senior vice president at the Richmond investment bank Anderson & Strudwick Inc., which represented First Bankshares in the deal. "They basically said, 'We aren't going to grant any new charters in certain [geographic] areas' and that is where Xenith was."

The FDIC has said there is no moratorium, formal or informal, on new bank insurance. Still, many organizers are switching to an acquisition strategy, several industry watchers said. This year the newly formed Austin Bancshares Inc. agreed to buy La Grange Bancshares Inc., the parent of the $29 million-asset Colorado Valley Bank. Austin Bancshares' founder cited the difficulty of obtaining approval for a new charter right now as one of the reasons for not starting from the ground up.

Xenith has lined up commitments for $40 million of capital, which it would pump into First Bankshares' SuffolkFirst Bank when the deal closes, which is expected to occur next quarter. Xenith is trying to raise another $30 million, and SuffolkFirst has $16 million of capital that it could leverage as well.

The original start-up plan called for Xenith to raise a total of $70 million to $100 million.

"Given the changes in the financial markets, we think this is a far superior approach," said T. Gaylon Layfield 3rd, Xenith's president and chief executive officer. "This provides us with an existing banking company that has a net interest margin and profitability, and that's advantageous."

Layfield is an old hand in the Virginia market. He was the president and chief operating officer of Signet Banking Corp. of Richmond when it was sold to First Union Corp. in 1997. (First Union is now a part of Wells Fargo & Co.) Other Xenith executives worked at Signet or First Union.

Layfield said that immediately after the deal closes SuffolkFirst Bank would add a branch in Richmond and one in northern Virginia. (The three it has right now are in Suffolk.)

In return for recapitalizing the bank, Xenith's owners would swap their shares for stock in First Bankshares, whose stockholders could choose between keeping their shares or cashing out at $9.23 apiece. That price is 1.28 times First Bankshares' tangible book value and more than triple where the stock was trading before the deal was announced last month. The deal values First Bankshares at $21 million.

First Bankshares would change its name to Xenith Bankshares Inc.; it would continue using the SuffolkFirst handle in existing markets and use the Xenith brand in new ones. The new company would be headquartered in Richmond.

Darrell Swanigan, First Bankshares' chief executive and president, would become a regional executive vice president, and other managers would remain too.

"This opens up a tremendous amount of opportunity for us so that we can reach out to a broader segment of our market with additional capital and make larger loans to any one individual or corporation," Swanigan said. "This opportunity to team up with some very knowledgeable Virginia bankers who know the Virginia landscape quite well, added to the management team we have here … was just a good fit for both companies. And naturally, the opportunity to expand outside the Suffolk market is going to be opened up."

SuffolkFirst isn't suffering like other banks across the country, and Swanigan said Xenith approached his company about the deal. The bank's ratio of noncurrent to total loans was 0.93% at the end of March, compared with the average for banks with $100 million to $300 million in assets in Virginia of 1.66% and nationally of 2.64%.

The bank's total risk-based capital ratio, at 15.25%, is in line with Virginia peers' 15.75% and above the national average of 14.59% for banks its size.

Of the $40 million Xenith has lined up, $35 million would come from the Dallas private-equity firm BankCap Partners and the rest from the organizers.

Brian Jones, a partner with BankCap, said it doesn't mind Xenith's strategy change.

"An acquisition of an existing bank in the current environment is a good move for the team … and it presents some strong opportunities for the bank," Jones said. "It is an opportunistic deal, given what has happened in banking sector since we set out."

The core strategy of focusing on midsize business customers will remain the same as organizers originally envisioned, Layfield said. "We are still going to be very clearly focused on that middle market space," he said. "This will add to that a bit more of a retail focus than we would have otherwise envisioned, but having said that, SuffolkFirst is largely a community bank that targets smaller business."

Still, with its capital targets lowered Xenith is now expecting to court a lower tier of that middle market. Originally Xenith wanted to cater to businesses with annual sales of up to $250 million. Layfield said the plan now is to focus on customers with sales up to $100 million.

On the other hand, SuffolkFirst, whose focus is customers with sales of $10 million or less, would quadruple its lending limit after the merger, to $8 million per customer.

Michael W. Clarke, the president and CEO of the $750 million-asset Access National Corp. in Reston, Va., said time is of the essence for Xenith to get started because of the lending opportunities healthy banks have now.

"A lot of banks on the competitive landscape are internally focused because of credit issues," he said. "Our bank has relatively healthy credit metrics. That is affording us some opportunity to pick up new business. Us and Xenith are in the same camp." It is a "great environment for well-capitalized, well-managed community banks."

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