As one of the largest cities in the country, Phoenix has no shortage of banks to serve its residents and businesses. Worldwide commercial financial services companies such as Wells Fargo, JP Morgan Chase & Co., and Bank of America can be found in just about every neighborhood. But one thing the Valley is lacking is community banks. Three new banking institutions — “de novo banks” — are looking to change that.

After more than a decade without any new banks, these businesses, known as “de novo banks,” are on the verge of opening, which would make them the first new charter banks to open in the state since 2007. A de novo bank is a newly chartered bank that is not acquired through purchase.

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Getting started

A de novo bank is a newly chartered bank as opposed to one that is the result of a merger or acquisition or a newly opened branch office. Any bank beginning from scratch is considered de novo — the title is dropped after five years of operations. De novo banks include community banks, which have assets of $10 million or less, but are not exclusive to them.

“In 2008, there were 32 community banks in Metro Phoenix; there are currently four,” says a spokesperson for Gainey Business Bancorp, one of the de novo banks seeking approval from the Federal Deposit Insurance Corporation (FDIC), with the hopes of beginning operations by January 2022. Scottsdale Community Bank and Integro also are under review by the FDIC. Scottsdale Community and Gainey have received conditional approval.

The past decade saw a drastic downturn in the number of banking corporations, both national and community, located in the state. “Fifteen banks left between 2009 and 2014. There used to be 93 banks in Arizona. Today, there are 66 bank names registered here, only nine of which are Arizona headquartered and chartered,” says Paul Hickman, CEO of the Arizona Bankers Association. “After that happened, the regulators didn’t really approve de novo banks nationwide for a period of four or five years.”

Before a new bank opens, it must receive approval for a state charter and FDIC secure deposit insurance and comply with any capital requirements from regulators. To get insurance and approval from the FDIC, the bank must provide a mission statement, business plan with financial projections, and policies for loans and other investments and operations.

Changing regulations

Tighter restrictions set by the FDIC after the Great Recession make it difficult for banks to get approved and open. But in 2015, the Arizona Department of Financial Institutions began to allow banks to raise capital before FDIC approval, with the intent of speeding up the process.

Stephen A. Lenn, a lawyer at Brennan Manna Diamond who has worked with charter banks in the past, explains, “Very few banks open their doors and are profitable right away. It takes time to build that up.

“The FDIC wants to make sure that the bank has enough capital to not only engage in business, but that it’s enough to carry through the rough times, and that you also have people in place who know how to [operate this type of institution],” Lenn continues.

Conditional approval for Gainey means continuing the momentum it has created by meeting the next steps that the FDIC has laid out for it.

“We continue to work every day with a number of prospects that are looking over our plans. There’s no lack of confidence that we’re going to have any issue meeting the conditions,” notes Joseph Stewart, president and CEO of Gainey. The company must raise a minimum of $15 million in capital.

“The pandemic slowed us down because it’s not easy to raise capital when you’re limited in how you get together with people,” Stewart says. He adds that with the economic growth happening in the state, people are feeling confident in their investment.

Jim Unruh, board chair for Gainey, continues, “We have to provide real value to our stakeholders. We believe this is very attractive for our investors. We project a good rate of return in relatively low risk business, with the secondary benefit being the value it creates in the community by helping these young businesses to thrive and to grow.”

Market shift

Along with de novo activity, there has been a rise in out-of-state banks moving into the Arizona market.

Hickman notes, “We’re also seeing regionals enter the market. Sunflower Bank came in, among others. There’s more interest and you’re going to see more of that than we will de novo banks.” A regional bank is one with assets between $10 billion and $100 billion.

Some locally based banks are being sold to out-of-state competitors, as well. It is much easier for these deals to happen than to get a new bank approved by the FDIC, Hickman explains.

According to Stewart, there is a need for banks that serve different clients in different sized markets. Community banks cater to small to mid-size markets. National and international institutions that have branches in the Valley do not replace the local community banks and cannot match the customer service provided by community banks.

“The out-of-state banks are always going to be a part of our economy, because Phoenix is one of the most attractive markets in the country,” Unruh says. “But Gainey will have a much faster turnaround time and a deeper level of involvement. We don’t have to call other cities, and we don’t have to fit within a box for a customer.”

“Opening a bank starts with criteria that has to be met, and the most important thing is a real need. That led to this opportunity,” Unruh continues. “This is local people assessing what is missing in the market, and what was missing in Arizona was banks that really specialize in supporting the small to medium-sized business.”

Hickman concludes that in today’s market, there is a need from the community for every level of banking.

“You have to have banking at all levels to reach all different constituencies. You have to have the consumer banks where people will walk in and cash a paycheck, and you need niche banks,” he explains. “The more variety we can have in Arizona, the better.”