Bank Locally to Build a Stronger Arizona Economy

By Kimber Lanning

Arizona is the most underserved state in the country in terms of community banks per capita. There are only 15 institutions located in the state and six counties have no locally controlled banks at all. Local First Arizona is gearing up for Community Banking Month in April during which time we will continue our efforts to encourage Arizonans to move their money to community banks to increase local lending and improve our state’s resiliency before the next major economic downturn strikes.

The lack of locally controlled deposits limits the available capital for local businesses. This particularly affects small and start-up businesses, which account for the majority of jobs in Arizona. Community banks provide a traditional approach to banking with a focus on using local deposits to reinvest in the local community through lending. As such, they are also strong supporters of entrepreneurship. They take a relationship-based approach to customer service and are characterized by local ownership and local decision making.

Fundamentally, community banks focus on providing traditional banking services in their local communities. They obtain most of their deposits locally and primarily make loans to local businesses. Community banks are built on long-term personal relationships with their customers. Given their smaller size and local focus, they have detailed knowledge of their communities and their customers. Because of this, community banks tend to be more open to basing credit decisions on nonstandard data obtained through long-term relationships, as opposed to formula-based underwriting criteria used by larger banks. On average, 47 percent of loans at community banks in Arizona in 2016 were to small businesses versus only 14 percent at large banks.

The lack of community banks in Arizona is evidenced by the share of deposits held by large national banks in this market. Although 92 percent of banks in the U.S. are community banks, four large national banks hold 43 percent of deposits. In Arizona, where three of these large national banks operate (Chase, Wells Fargo and Bank of America), the largest national banks hold 70 percent of deposits, other non-community banks hold 23 percent, and locally controlled banks account for only 7 percent of deposits statewide. This creates a gap in local capital markets that may be limiting the expansion potential for small businesses in Arizona and creating a drag on overall economic growth in the state.

The good news is, thanks to individuals and businesses moving their money into local banks, the market share for locally controlled banks has increased by 3 percent over the past three years.

Consolidation has had the greatest effect on the largest and smallest banking institutions. Over the past 20 years, consolidations, in concert with policies that favor the biggest banks, have caused significant growth of the largest banks and a decline in the number of locally controlled community banks. But there is something residents can do: we can grow the size of the community banks’ share by moving our money to them.

A defining characteristic of community banks is their focus on traditional deposit and lending activities. One of the major trends that has occurred in community bank lending over the past 20 years has been the shift away from mortgages and credit cards toward commercial lending and in particular toward secured commercial real estate loans. At the same time, big banks were shifting in the opposite direction, away from commercial lending toward credit cards and mortgages. Of the largest banks in Arizona, Chase lends the most to small businesses, but those loans amount to just 6 percent of their overall portfolio here.

If you love your state, the smartest thing you can do is move your money to a locally controlled bank so you can be sure you’re supporting the growth of new businesses and jobs here in Arizona. At Local First, we know the task can be daunting, so we’ve created a handy checklist to be sure you don’t forget anything when you decide to find a new home for your hard-earned dollars. Make your money work to build a better state by keeping it in the hands of Arizona’s local banks!

Kimber Lanning is the executive director of Local First Arizona and the Local First Arizona Foundation.

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