Despite a spurt of de novo activity in 2022, Arizona still lacks an abundance of banks headquartered in the state.

Four banks were established in the Grand Canyon state last year, including three true de novos, the most of any state in 2022 and the first new bank in Arizona since 2008. Despite that activity, the number of banks in the state does not match the state's population and income growth metrics. With just 15 banks, Arizona has one headquartered bank for every 492,051 residents, making it the state with the highest population per bank in the country. That ratio will only become more lopsided, as three of those banks are currently the target of mergers.

The lack of Arizona banks has dried up M&A activity and made organic growth the only path forward for the banks in the state.

Number of banks dwindle

Arizona is the 14th-largest state by population, boasting population growth of 19.1% from 2007 to 2023 and additional expected growth of 3.8% by 2028, making it the 12th-fastest-growing state in the country, according to data from Claritas. Furthermore, the state's median household income is expected to grow 16.9% between 2023 and 2028, faster than any other state.

Despite robust growth metrics, Arizona is tied with Delaware and Oregon for the 7th-smallest number of banks by state.

The dearth of banks left in the state is a result of being hit hard with failures during the Great Financial Crisis and years of robust M&A, industry experts said.

"It lost a number of banks then due to failure, but it's also had a very robust M&A environment and the number of banks has declined dramatically," Ernie Panasci, counsel at Spierer Woodward Corbalis Goldberg, a law firm that advises financial institutions on M&A, said in an interview.

With nine bank failures between 2008 and 2010, "Arizona was one of the hardest-hit states in the country," director of investment banking at D.A. Davidson Nathan Ail said in an interview. "The result is you've got a smaller list of folks that survived."

The number of banks headquartered in the state fell sharply between 2008 and 2011, down nearly 30%.

Bleak M&A outlook

Now the state has just 15 banks left. The lack of banks in the state has ground M&A to a near halt, with just seven deals targeting Arizona-based banks since 2019.

M&A in the state will continue to be scarce going forward given the lack of banks in the state, Panasci said. While mergers between Arizona banks are still possible, it is unlikely because "there isn't a big appetite at the present time," Panasci said.

Instead, it is more likely that the banks remaining in the state will be scooped up by out-of-state banks looking to move into Arizona or expand their current presence, he said.

With the lack of M&A prospects for in-state growth, "the path forward is more likely to be organic for most of the banks in the state," Ail said.

Burst of de novo activity

Though the number of banks in the state has dwindled and will continue to with three banks as pending M&A targets, a recent spurt of de novo activity helped to boost the state's number of banks.

One of those banks, Scottsdale Community Bank, was motivated to open its doors in Arizona because of the lack of banks in the state.

"It's been such a long time since a local community bank has come to town," the bank's chief credit officer and COO, Steve Cohen, said in an interview. "We want to provide banking opportunities for what we determined to be an underserved community."

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But even with a small number of community banks in the state, building brand recognition has been tough, Cohen said.

For de novos, it can take up to five years to build a sizable presence in the state, according to Ail. The biggest challenge is usually finding talent capable of quickly chasing and attracting new clients, he added.

"That's probably the hardest part," Ail said. "How do you recruit high-quality bankers that are able to go after and chase business because they're working basically at a startup bank? There is an imbalance with talent and compensation and so forth."

For Scottsdale Community Bank, leveraging personal and business contacts as well as client referrals and partnerships with community organizations has proved fruitful, Cohen said. The bank had $36.7 million in assets at March 31.

Despite the challenges, the recent uptick in de novo activity is "a strong indicator that there is interest in having independent community banks in the state and that people see the opportunity there," Ail said.