The South Tops Wall Street

Why financial activities firms are making a beeline to southern states

By Jennifer LeClaire and Trisha Ostrowski

It was the last hurdle, the final frontier. As of 1996, the American South topped the Northeast, Midwest, and West in every Gross Regional Product category but one. The only category where the South did not outperform all other U.S. regions was the FIRE sector (finances, insurance, and real estate). Then in the year 2000, the South overtook the final category.

Once dominated by the Northeast, the South posted a FIRE gross regional product of more than $250 billion in 2000. That's $2 billion more than the Northeast's total.

"Is the South's dominance a function of wealth moving into southern states? Is it because better jobs are being created? Is it because the education system is getting better? Or could it be the lower cost of living?" asks Joe Hollingsworth, Jr., author of The Southern Advantage and chief executive of the Hollingsworth Companies, a Clinton, Tenn.-based industrial construction and real estate firm. "I believe it is a combination of all those things." With the advent of NAICS coding, the FIRE sector is now known as "financial activities."

A convoy to the South
Something is undoubtedly bringing folks from the North, East and West to the southern states. The U.S. Census Bureau reports an increase of nearly 15 million people in the south since 1990. That's 5 million more than western states and far and beyond any other region. Of the 100 fastest-growing counties with 10,000 or more residents, 63 are in the South. And Texas is now the second largest state in the union. As Hollingsworth noted, populations have been gradually migrating from the other parts of the country - and other parts of the world - to the South because the cost of living is about 91 percent of the national average and the quality of life is often higher.

How does this relate to the booming financial activities sector? In several ways: more people mean more housing, more schools - and more banks. "As the population shifts south, we will see banking activity shift with it because banks will follow their customers," reasons Bennet Koren, an attorney with New Orleans-based law firm McGlinchey Stafford, which represents some of the largest banks in the South. "We should see more banks continue to locate their corporate headquarters in the South, along with mortgage companies."

Observers note that the population shift has brought more affluent people to the Southeast. Perhaps that accounts for the healthy growth that Michael Kennedy, senior client partner in the Atlanta office of Korn/Ferry International, an executive recruitment firm, is seeing in the wealth management sector. "Financial services firms are placing more of an emphasis on building wealth management teams of professionals to tap into all the individual wealth that has migrated to or been created in the south," Kennedy says. "And it's not just Southeast-based firms like SunTrust and Wachovia. Northern-based firms like Citigroup are also coming to the south to build out private client services groups."

The South now leads the nation in financial activities employment.

Financial Activities Employment by Region (in thousands)

Northeast 1,811,000
Midwest 1,590,000
West 1,707,000
South 2,684,000

Source: U.S. Bureau of Labor Statistics; 2002 figures

Business-friendly climates
Just as the cost of living is attractive, the cost of doing business is also drawing financial activities companies to the South. The region has a long-standing reputation for its business-friendly climate. Experts say the tax structure is often less rigid and the regulatory regime is not as comprehensive as many other states.

Charlotte's banking-friendly laws played a key role in wooing Bank of America, the largest bank in the country, and Wachovia Corporation, the fourth-largest, to the region. Their presence has spawned a growing financial services industry cluster, with 253 companies employing 60,000 professionals. In fact, Charlotte is now the second largest financial center in the U.S. Only New York holds more financial assets than Charlotte (over $1 trillion).

"We are building on the core competency that financial services organizations have created here," says Kenny McDonald, vice president of economic development for the Charlotte Regional Partnership. "The booming financial services sector has allowed information technology firms to flourish here and now we are beginning to see opportunities in bioinformatics. The skilled talent that Charlotte has attracted to work in the banking industry is transferable to other industries outside the financial services world."

Further south, Birmingham's pro-business environment has attracted financial industry players like Region's, Compass and Amsouth banks. And Region's recent merger with Union Planters is bringing some of Union Planter's top management to the area. Birmingham employs more than 12,000 people in the financial activities sector, according to Chad Newell, executive vice president of the Metropolitan Development Board in Birmingham. "We have an excellent tax structure, a quality work force, pro-business government and private sector leaders that encourage growth in the region," he notes. "We have 72,000 college students within a one hour radius. That's a substantial future talent base to pull from."

Richmond is also becoming an established financial center and a natural choice for financial services companies. Greater Richmond is the largest financial center in Virginia, in part due to the location of the 5th Federal Reserve Bank in its downtown. The community's position as a financial services up-and-comer was solidified in December 2003 when Wachovia Securities announced that it would expand in Richmond, adding an additional 1,000 jobs. Even before Wachovia's news, Richmond was already posting big employment numbers from some of the nation's best firms. Capital One Financial Corp. employs more than 9,000 there and Sun Trust Banks employs nearly 4,000. Genworth Financial (formerly known as GE Financial) and several large insurance companies also call Richmond "home."

Location, location, location
Location is another determining factor in favor of the South. With hubs like Atlanta (Hartsfield International Airport is the busiest airport in the world) financial customers and clients can come and go with ease. That is one reason why the Federal Reserve Bank houses its southeast regional headquarters there, along with Fortune 500 SunTrust bank. While Wachovia's northern headquarters are secure in Charlotte, the bank's southern headquarters will be located in Atlanta after the acquisition of Alabama-based SouthTrust is completed. Washington Mutual, RBC Centura and BB&T Corporation are also operating in the Atlanta market. That makes Atlanta the banking capital in the Southeast, with deposits totaling over $82 billion in 2003.

"You have to look at the movement of deposits as a growth factor," says Deloitte Consulting principal Patrick Bechdol. "These institutions are fundamentally deposit chasing institutions and as the population gets older and moves towards climates and locations where people will spend the balance of their lives, we will see those institutions continue to move with their customers."

Coupled with transportation is technology. The South now has a technology and communications infrastructure that competes with the rest of the U.S. "With improved communications across the country, it really doesn't matter where you locate," says Bob Goforth, an economic development consultant who has focused on the South for nearly 50 years. "In the metropolitan areas of the south, communications are just as good as they are anywhere. Combine that with lower costs of doing business and it only makes sense to move operations to the South and rely on technology to transfer communications and data long-distance."

The work force
When it comes to education levels, the South is on course to surpass all other regions, according to Hollingsworth's research. In 2001, the national high school graduation rate was 84.1 percent. Now, less than two points behind is the South's high school graduation rate of 82.2 percent. The figure represents nearly a three-point gain on the national high school graduation average in 10 years.

Mirroring the increase in high school educational attainment in the South is the rise in the number of Southerners who hold college degrees of four years or more. The current U.S. average is 25.6 percent. The current average in the South of residents with four-year degrees or more is 23 percent, or a scant 2.6 percent difference from the U.S. average. This rise in college-educated Southerners has produced a large base of independent thinkers and innovators.

"My prediction is that we are going to lead the educational revolution," Hollingsworth says. "Then how is the rest of the country going to think when the South starts getting ranked as the highest educational area? We are only about five or six years away from that. The education factor is helping draw more companies in various industries. It is a self-fulfilling prophecy. If you believe that you can attract financial activities companies to the South and you build that momentum with each company, that momentum will begin to bring you notoriety and all of the sudden financial services firms begin to see the South as a natural selection."

Sterling National Mortgage, a subsidiary of New York-based Sterling Bancorp, expanded in Charlotte two years ago and Kreg Groat, vice president of the subsidiary, says he couldn't be happier with the work force there. The company employs 50 people now and will add another 15 in the next month. "The southeastern U.S. has a large talent pool of qualified banking professionals," he says. "With its financial services, mortgage brokerages and bank headquarters, Charlotte presents a fantastic opportunity to employers. We've got an education system here that provides plenty of smart, talented young professionals looking for employment. It's certainly helped our business. We don't find ourselves relocating a lot of people to this region."

Financial Activities Employment in Southern States

Alabama 98,000
Arkansas 50,000
Washington, D.C. 31,000
Florida 474,000
Georgia 213,000
Kansas 69,000
Kentucky 85,000
Louisiana 100,000
Maryland 151,000
Mississippi 46,000
Missouri 71,000
North Carolina 189,000
Oklahoma 84,000
South Carolina 90,000
Tennessee 139,000
Texas 581,000
Virginia 182,000
West Virginia 31,000

Source: U.S. Bureau of Labor Statistics; 2002 figures rounded to nearest 1,000

Other factors
An undeniable factor in the Southern financial business boom are the mergers and acquisitions that continue to make headlines in a consolidating banking industry. The 1990s saw a wave of mergers that have reduced the number of banks by 5 percent each year and the South has come up big. "Banking leaders, their aggressive acquisition strategies and their ultimate decisions to place post-merger headquarters in the South has seen activity increase in southern states," says Deloitte's Bechdol. "There are a number of big transactions left to do over the next 18 months and that could change the scene."

With so many financial activities companies displaced in the wake of 9-11, could the South be benefiting from firms that are seeking to spread the risk? Though it's difficult to quantify, industry insiders do not rule out the possibility. "We may be experiencing a dispersion of certain activities following September 11," says Goforth. "Businesses that were concentrated in lower Manhattan are now scattered in different locations."

Then there is the "who you know" factor. Rusty Benton, founder and chief executive of WealthTrust, Inc., a Nashville-based financial advisor, has acquired eight affiliates across the South. Benton says beyond all the obvious advantages for financial activities companies, the South offers an intangible benefit to its own. "The South has a 'who you know' element to doing business," he reveals. "There's a network of Southerners who know each other. It's almost like doing business in a small town. I haven't seen that in other parts of the country where we have looked to acquire firms."

The future is bright
With so much to gain and so little to lose, experts predict financial activities companies will continue to establish a presence in the South - and that growth will begin to spread beyond the typical clusters found in Charlotte, Atlanta and Florida.

"Firms will begin looking more for mid-sized, southeastern cities, like Nashville and Birmingham," Kennedy predicts. "With good business climates, livable communities, low cost of living and great universities, there is a growing interest from northeastern companies."

Hans Gant, senior vice president of economic development with the Metro Atlanta Chamber of Commerce, reminds that the South is the fastest growing region in the U.S. "If you look at what the economic forecasters are saying, the South will continue to be the fastest growing region in the country," he says. "As the South grows the financial industry will continue to grow here."