Phoenix Business Journal: Arizona's Banking Desert
Arizona's banking desert: Could the state's lack of home-grown banks hamper the growing economy?
Apr 16, 2021, 6:00am MST
Arizona has plenty of sunshine and saguaros, but one thing the state sorely lacks is community banks.
There are just 12 banks headquartered in Arizona, according to the Federal Deposit Insurance Corporation. Compare that to 34 institutions based in New Mexico, 40 in Utah, 74 in Colorado and 190 in Oklahoma.
Arizona’s banking scene is dominated by the nation’s three biggest banks, JPMorgan Chase, Wells Fargo and Bank of America, which combined hold more than 60% of local deposits.
The state’s growth trajectory is a primary factor in explaining the current market dynamics. As one of the fastest-growing states in the country, national and out-of-state regional banks want to get a foothold in Arizona’s growing market and in many cases have done so through acquisition.
Local banks matter, according to those who run them, and their customers, because in many cases they offer a level of service that larger banks cannot replicate. The lack of home-grown community banks also means that small businesses have fewer borrowing options as they look to scale and with so few banks there are fewer Arizonans with relevant experience to go out and start new ones, just as a handful of Valley executives try to get some new banks off the ground.
The importance of relationship banking came to the fore during the pandemic with the Paycheck Protection Program: As the emergency lending program rolled out, many small businesses turned to national banks to find wait-times and delayed applications as they competed with tens of thousands of other customers.
One business that ran into delays getting a PPP loan from large bank was the Arizona Asthma and Allergy Institute. Chief Operating Officer Todd McGee said the institute had banked with a large national bank for years, but that bank prioritized making those loans to smaller businesses first in the early days of the pandemic.
"Unlike many people, we weren't getting left out because we were too small. We were getting left out because we were too large," he said.
McGee then turned to Lendio, a nonbank online lender, but ended up missing out on the first round of PPP before funds were depleted by mid-April 2020. A colleague recommended that McGee get in touch with Republic Bank of Arizona, one of the area's home-grown community banks, and despite being a new customer, the institute got its PPP loan approved on the first day the program reopened in late April.
"They were great to work with, they were super fast,' McGee said. "Great customer service, that's what they're known for, that's what they win on."
When national banks have tens of thousands of branches, they have to standardize their process whereas local banks can be flexible to meet customer needs, said Jim Unruh, chairman of Gainey Business Bank, a startup bank in formation that's attempting to raise funds and launch in Scottsdale in three or four months, if all goes as planned.
“You don't know what your banking relationship is until you have a problem,” he said. “It's not that [large banks] are bad banks, they're not set up to do that… What a community bank is about is service, in the broadest use of that word, because frankly, if we don't excel at service, we have no right to exist.”
Unruh is on one of three teams looking to launch the first new bank in Arizona since 2007.
How did this happen?
Part of today’s banking situation is historical. As early as 1930, Arizona permitted statewide branching, meaning a single bank was allowed to open branches anywhere else in the state.
In other parts of the country banks were not allowed to branch statewide, so instead each town had its own truly local bank. In Texas for example, which has more than 400 state-chartered banks today, statewide branching was not permitted until 1988.
One Arizona bank that expanded across the state was Valley National Bank. Founded in 1922, the bank grew to dominate the state with more than 200 branches before it was acquired by Bank One in 1992. Bank One was subsequently acquired by JPMorgan Chase in 2004, and in less than a decade a standout Arizona bank was swallowed up by the largest bank in the country.
The big three have bought their way into a historical presence. Bank of America moved into Arizona through the acquisition of Western Savings and Loan Association in 1990. Wells Fargo acquired a significant Arizona presence with the purchase of First Interstate Bancorp in 1996.
The largest Arizona-based financial services company is publicly traded Western Alliance Bancorp (NYSE: WAL), itself a regional bank holding company with some $35 billion in total assets and operations in several states, including its flagship operating subsidiary, Alliance Bank of Arizona. Alliance Bank of Arizona has over $11 billion in local deposits, far larger than the next biggest local bank at just over $2 billion, but it still has less than 9% of state market share, according to the FDIC.
Don Garner, division CEO of Alliance Bank of Arizona, said that growing deposits and market share is a constant topic of discussion for management. He said that service helps the bank stand out from national players.
“It just stands to reason that if you're here in Arizona, you want to do business with an Arizona-based institution,” he said. “Service separates us apart from some of the larger institutions that might be a little bit monolithic in their approach. We're much more customer driven.”
Consolidation sets in
Online banks and fintech companies have also eaten away at market dominance of traditional banks. In the same way, technology has made consolidation among banks more feasible.
As technology seeps deeper into banking, it’s easier to do business with clients wherever they are; a banking app works regardless of distance to a branch. In fact, a record 3,324 bank branches closed nationwide in 2020, according to S&P Global Market Intelligence data.
Dan Bass, managing director of investment banking at Performance Trust Capital Partners in Houston, said his clients are clamoring to get into Arizona, but there’s no community bank acquisition targets left.
“There's just not a lot of banks out there,” he said. “After they get to a certain size and profitability, they get bought up.”
One of the headline-grabbing consolidation moves in the past year affecting Arizona involved a pair of super regional banks. PNC Financial Services Group Inc. (NYSE: PNC) out of Pittsburgh announced its plans to acquire Houston-based BBVA USA in November in a move that will reshape banking across the country. Locally, BBVA is the sixth largest bank in Arizona by deposit size and though PNC only has a few branches in the state, it was planning on expanding in Phoenix even before the BBVA acquisition.
Within Arizona, the consolidation trend has taken on a new twist: In 2019, for the first time in state history, a credit union bought a bank. Arizona Federal Credit Union acquired Pinnacle Bank and full integration of the two systems was completed in March.
Brian Ruisinger, president at Republic Bank of Arizona, said this maneuver is still novel.
“It makes sense because credit unions are historically consumer driven,” he said. “They want to get into the commercial market but they usually don't have the staffing resources, so you buy a bank that's a commercial bank and now you've essentially completely staffed and changed your business model, without having to build it up over years.”
Ruisinger has spent the past decade of his career in Arizona banking, most recently charting a new course for Republic Bank. He was previously the head of Grand Canyon Bank, a startup ‘de novo’ bank that withdrew its application in 2016.
“We withdrew our application and decided that, for the group to stay together, that a better move for us would be to try and acquire an existing charter,” he said. ‘Which we tried to do but ultimately the group didn't stay committed together because a few of the comrades weren't going to be approved.”
The FDIC does thorough background checks on anyone involved in a de novo bank, and in the wake of the 2008 financial crisis some of Grand Canyon Bank’s partners had financial issues that would prevent federal approval.
The FDIC also requires that executives at de novos have experience in leadership at community banks, which comes as a tall order in Arizona since there are so few community banks to begin with.
Federal rules on de novos have loosened in recent years, and three new banks are attempting to open in Arizona, where the rules of formation are less strict than in other states.
'My God, we need banks in this state'
The creation of new banks has been stifled since the Great Recession. In 2006, there were 267 de novo applications filed nationally, according to data from S&P Global Market Intelligence. By 2009, that figure dropped to 12 and it remained low for nearly a decade.
A new bank has not opened in Arizona since 2007, but Scottsdale Community Bank may soon break the dry spell.
George Weisz, the fledgling bank's chairman, said they’ve raised two-thirds of the $16 million the FDIC requires before it grants deposit insurance. If it can raise the extra capital, the bank aims to open this summer; it received conditional approval from the FDIC last October.
“Covid put us back as well, when so many people were holding on to their funds because they didn't know if they needed it for their own business or their own families,” Weisz said. “We're excited to be that first new community bank established in 12 years in Arizona, we've got a bank that's designed to be a win win for our investors and the community. And that means a lot to us.”
Ray Lipman is the chairman of Ocotillo Bank in Chandler, the second of the three Arizona de novos in the formation stage, which in some cases in Arizona can drag out for years. Lipman has worked with de novo banks all over the country and he said it typically takes between 12 and 15 months to complete fundraising, which is the most challenging part of launching a new bank. The economic impact of the pandemic means investors have been less keen on working with startup de novos, but even before the pandemic Arizona's three de novos failed to hit the fundraising timeline that Lipman usually sees.
Ocotillo Bank filed for ‘in organization’ status in late 2019 but withdrew its application with the Arizona Department of Financial Institutions (AZ DFI) in December in order to refocus on technology.
“One of the things that was going on even before Covid-19 hit was the need to not have as many branches. People just don't go to the bank anymore,” Lipman said. “Things have become much more digital in terms of routine transactions so we're going to be revising our business plan for those new realities.”
Lipman said they plan on refiling the application with AZ DFI this summer.
“They understood completely why we were pulling, and they did not want us to pull the plug, they said, ‘My God, we need banks in this state.’” Lipman said.
Phoenix Business Journal