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This Isn’t the First Crisis The Valley’s Banking Industry Has Faced

The Valley has come a long way over the past 25 years, and the banking and financial sector is no exception. Challenges, crises and legislation brought about dramatic change that has created a new era in banking and finance. In the mid-80s local banks dominated the sector, while regional and national banks were nonexistent. The Valley was home to the “big three” — Valley National, First Interstate Bank of Arizona and The Arizona Bank.

The financial sector was real estate driven, with a considerable concentration in housing and commercial real estate development. Second to real estate were the “Five C’s” of Arizona’s economy: climate, cotton, citrus, cattle and copper.

The savings and loan and real estate crises of the late-80s were the turning point in the Valley’s banking sector. At a time when Arizona’s “big three” were suffering, large banking corporations invaded. Bank of America’s first “real” presence in the Valley was assimilating five different savings and loans in the state.

In summary, there have been many milestones over the past 25 years that have shaped the banking sector. Such milestones include sustaining itself through the S&L crisis and the severe commercial real estate downturn of the late-80s; recovering from the infamous Lincoln Savings and American Continental debacle; weathering the “dot-com” implosion of 2000; and passing the Interstate Banking Act that led to dramatic industry consolidation of local banks into regional, national and global banking organizations. More recently, the securitization boom in both the residential and commercial real estate market revolutionized real estate lending.

Today’s “big three” — Chase, Wells Fargo and Bank of America — control the vast majority of deposits statewide and a much more dramatic concentration of banking resources overall. But more importantly, small and mid-size banks have reemerged. 
There is also now more proactive leadership in the business community.

Arizona and the Valley have a more diverse economic base due to the dramatic progress of our investment in education, as well as the high-tech, defense, life sciences, health care, biotech, telecom, optics, hospitality, entertainment and transportation industries. We now have an “alignment” of stakeholders, including the public, business, academic and philanthropic sectors, and therefore stronger initiatives for more diverse economic development, such as sustainable systems, solar and renewable energy and land management.

That said, in 2009 we are again faced with many economic challenges that will no doubt continue to shape our industry and affect how we operate. Banks need to grow wiser and smarter in serving their communities and Arizona’s businesses. We are resource constrained from a state revenue standpoint and by expenditures driven by our phenomenal population growth and federal-mandated programs. Arizona is a high-growth state and we need to strike the right balance between infrastructure “catch-up” and smart and balanced growth. The banking industry has and will continue to support a more knowledge-based and service-oriented economy.

What does the future hold for the banking and financial sector? Banks will need to play a transformational leadership role in public issues, specifically economic diversification and development, as well as public finance. The industry must become a recognized leader for innovative approaches to capital formation and connecting intellectual capital with financial capital.

We must also promote a diverse array of financial institutions from small local community banks and mid-size niche banks to larger regional and global institutions that promote cross-border trade finance and strategic alliances.

There is no doubt that the next 25 years will bring as many challenges and reforms as we have overcome in the past, but our state’s banks will regain their strength; the strong will survive, consolidate the weak and prosper with our state’s growth. And as Arizona’s banking industry continues to grow stronger and smarter, we foster confidence as we reaffirm the leadership role in Arizona’s economic foundation.

merger

The Wave Of Bank Mergers Has Changed The State’s Financial-Services Landscape

The banking industry has plenty of troubles, but in Arizona, the least of its problems is the aftermath of recent mergers. Bankers and industry observers say the state’s financial-services landscape hasn’t significantly changed because of the consolidations. Other than the usual branch closings and potential employee layoffs, they don’t see a big shakeup looming. One expert, however, wonders if continuing mergers nationally will lead to a banking system dominated by giant institutions that no one can afford to have fail.

There have been five bank mergers in Arizona since last summer. JPMorgan Chase & Co. acquired Washington Mutual, Wells Fargo & Company acquired Wachovia Bank and National Bank of Arizona absorbed Silver State Bank branches in Arizona. Mutual of Omaha entered the local market with its acquisition of First National Bank of Arizona, and US Bank acquired Downey Savings & Loan branches in Arizona.

“If you take a look at Phoenix and compare it to other communities, we have a large number of financial institutions,” says Lynne Herndon, Phoenix city president of BBVA Compass, formerly Compass Bank. “If you paint it with a broad brush, while there have been a significant number of mergers, this does not necessarily have the impact one might think.”

The impact would have been much greater in a smaller market, where the number of financial institutions dropped precipitously, Herndon says. But the mergers have generated a few ripples.

Herndon and Doug Hile, chairman and CEO of Meridian Bank, note that the elimination of a handful of players perpetuates the return to more traditional lending standards recently prompted by Arizona’s real estate meltdown and the ensuing recession. Hile also sees a higher concentration of retail deposits flowing into larger banks and shrinking market share for smaller banks.

“Most of the smaller banks are not in a position, or even have an opportunity, to acquire those deposits,” Hile says.

Dwindling market share is somewhat detrimental to community banks because it means Arizona’s large banks are just getting bigger, he notes.

While large banks rule the retail banking realm, community banks are the backbone of commercial banking and likely will remain so, Hile says.

“Business customers often want to have contact with the decision makers at their bank and that’s how small banks operate,” Hile says. “In that regard, the (small) banks that are healthy will have an opportunity to acquire new commercial customers.”

Alex Wilson, senior lecturer at the Eller College of Management at the University of Arizona, has a different point of view. “Your number of choices in commercial banking is disappearing,” Wilson says. “And creativity is lost as it becomes more corporatized.”

Wilson laments two potential outcomes of bank mergers — the weakening of a sense of community and the loss of institutional knowledge when middle and senior management are laid off. “

Well-run big banks know enough to try to reinstate that as quickly as they can,” Wilson says. “Badly run big banks lose that.”

Customers more concerned about fees, interest rates and having a variety of banking products to choose from are assured that competition is alive and well despite the mergers.

“There are still plenty of banks in Arizona and there is still plenty of competition,” says Marshall Vest, an economist at the Eller College of Management. “I don’t think we’re at the point where we have just one or two major players that will dictate fees and rates.”

Felecia Rotellini, superintendent of the Arizona Department of Financial Institutions, agrees: “We have a lot of competition. We always have. This is a very popular place for banking.”

Mergers probably have strengthened Arizona’s banking industry, Rotellini adds. “The banks that remain are healthy because of the merger-and-consolidation process and are a testament to our federally insured banking system,” Rotellini says. “Banks that were not healthy were acquired by healthier banks and that was done without any disruption in business.”

But as Wilson watches mergers roll out coast-to-coast, he wonders about the ultimate outcome. “

We’re probably heading for a world of three super national banks and probably a handful of little community niche banks,” Wilson says. “The good-sized regional banks are disappearing from the spectrum very quickly. As a result, (Bank of America) will be there, Wells (Fargo) apparently will be there and there will be Citi (Citigroup). I don’t know who will be left standing. The only ones left may be those little community banks.”

Citigroup, a global behemoth with multiple lines of business in financial services, is struggling and Wilson points to it as an example of the kind of risk that comes with an ever-expanding corporate waistline.

“In normal times, I would say (getting bigger) deepens the balance sheet and creates more international presence,” Wilson says. “But in the face of what is happening … I’m not sure you can make that statement. If one of these biggies falls, the ground is going to shake severely. Bigger is more efficient, but it is not necessarily better.”

| www.azdfi.gov | www.compassbank.com | www.ebr.eller.arizona.edu | www.meridianbank.com |