More than a year into the financial crisis, the carnage caused by high unemployment has expanded into states whose economic health had been taken for granted. Banks once thought to be relatively immune from the woes of California, Florida and Nevada are finding there's no place to hide.
In North Carolina, for example, banks as big as BB&T Corp. in Winston-Salem and as small as Yadkin Valley Financial Corp. in Elkin are now expressing concern about credit quality, particularly when it comes to real estate.
It wasn't supposed to happen there. The state missed out on the rapid home-price appreciation witnessed on the coasts, allowing it to also escape the worst of the collapse in the subprime mortgage market. Few lenders in North Carolina were hit hard when the bottom fell out of housing in 2007 and 2008, and banks such as BB&T touted the state's resilience as an anchor of their bottom lines.
But concern is growing among those placed deeply in the state's banking environment that North Carolina will suffer in any event, and will be late to the recovery party when it comes. If so, it may signal more trouble to come in vast areas of the Southeast and Midwest that had appeared similarly safe.
"I don't see much going on in North Carolina right now," William Long, the president and chief executive of Yadkin Valley, said during an Oct. 22 quarterly conference call. "I think the market in general here is still very soft."
It took up to six months for parts of North Carolina to experience the stress and strain of the recession, Long said, "and I'm just assuming that it's going to be three, four, six months later that we recover compared to the rest of the country." The $2.05 billion-asset company's nonperforming assets jumped 38% from a quarter earlier, to $55.1 million.
Wood Britton, a managing director at The Orr Group LLC, an investment bank based in Winston-Salem, noted the state has suffered from a "false sense of security."
Though only two banks have failed in North Carolina since the end of 2000, both were closed in the past six months.
Anxiety is centered on a high unemployment rate. At 10.8% in September, compared with 6.8% a year earlier, the state is one of 14 dealing with double-digit unemployment, according to the latest data from the Labor Department. The list includes others that were not major participants in the housing bubble, such as Ohio, at 10.1%; Illinois and Tennessee, at 10.5%; Kentucky, at 10.9%; and South Carolina, at 11.6%. (The U.S. unemployment rate last month was 9.8%.)
While North Carolina's credit quality has been better than many others', it is deteriorating, according to midyear data from the Federal Deposit Insurance Corp. Delinquent loans made up 3.23% of all loans in the state at June 30, compared with 2.77% in the first quarter and 1.39% a year earlier. Those metrics continue to outperform other high-unemployment states such as South Carolina (4.57%), Alabama (4.01%), Tennessee (3.52%) and Illinois (3.35%).
Yadkin Valley isn't the only bank taking delayed hits from its dealings in North Carolina.
James Gordon, the chief financial officer at South Financial Group Inc. in Greenville, S.C., warned last week that up to $202 million in goodwill tied to operations in North Carolina and South Carolina is susceptible to an impairment charge stemming from an ongoing evaluation. The $12.4 billion-asset company reported a $340.8 million loss in the third quarter after bad loans fell 2.9% from the second quarter but remained high, at $544.6 million. The expected impairment charge would come nearly a year after South Financial recorded a similar charge, $238 million, for its Mercantile Bank operations in Florida.
Small banks aren't the only ones expressing concerns about losing money in parts of the state.
Kelly S. King, the president and CEO of BB&T, mentioned during the $165 billion-asset company's quarterly conference call that he is seeing weakness along the Carolina coastline.
Walter Todd 3rd, a portfolio manager at Greenwood Capital Associates LLC in Greenwood, S.C., said North Carolina has spent decades trying to wean itself from an overreliance on manufacturing. Charlotte's banking community, meanwhile, has taken employment hits, with the sale of Wachovia Corp. to Wells Fargo & Co. in December and job cuts by Bank of America Corp. after buying Merrill Lynch & Co. a month later.
While North Carolina's biggest cities have not been as overbuilt as Atlanta, for example, lenders are just not seeing a rebound.
"There is some residential housing coming back, but in very small numbers," Yadkin Valley's Long said, with most sales involving homes priced at less than $200,000. "Other than that, I just don't see it."
