Some Massachusetts banks are taking a page from the handbook of community development corporations, going out of their way to offer loans to small businesses and developers in economically distressed areas.

The ventures, made possible by the New Markets Tax Credit program, are profitable, according to bank executives whose institutions are tapping into the opportunity. In at least one case, the strategy has led directly to an area bank adding a new office in its loan territory.

“We just opened a new loan office in New Bedford,” said John Hayes, Rockland Trust’s senior vice president and regional loan manager for commercial banking, who works in the new office. “Clearly the [New Markets Tax Credit] pushed us over the top.”

NMTC, a 6-year-old federal program instituted in the final days of President Clinton’s administration, is meant to stimulate investment in low-income communities by offering tax credits to entities that do so. Its original allocation was for up to $6.24 billion in tax credits, which are offered at 39 cents on the dollar for every loan made, and maintained, in federally designated low-income communities.

Under NMTC, banks actually seek out loans in neighborhoods historically avoided by many lenders as too risky but now more in the loan loop after Congress passed the Community Reinvestment Act in 1977 to force the issue.

CRA requires banks to show regulators they’re meeting the credit needs of all communities in which they accept deposits in order to open a new branch, merge, consolidate or switch charters. Banks are regularly examined and graded on CRA performance by regulators.

Banks must demonstrate that they’ve made loans to would-be homeowners and small-business operators who otherwise might not qualify in low- and moderate-income neighborhoods. It’s not always a popular law in the industry, which sees it as difficult to comply with and as having a one-size-fits-all mentality, even though different lending institutions have different circumstances.

Rockland Trust, a $2.9 billion commercial bank, is the only Massachusetts-based bank to receive its own allocation from NMTC.

In 2004, the bank formed a Community Development Entity, or CDE, as part of the process of seeking the competitive allocation. It was granted permission to form the CDE from the U.S. Treasury Department, which administers the program through its Community Development Financial Institutions (CDFI) Fund, to loan up to $30 million. Up to that amount, the government promised to give Rockland Trust’s CDE a 39-cent tax credit for every loan dollar it made and kept in the field in low-income communities, generally defined as having a median income of below 80 percent of the area median, or poverty levels of at least 20 percent.

“The government wants to stimulate investment in low-income communities. This is the carrot – and it’s a big carrot,” explained Kevin Handly, a Boston attorney with Gallagher, Callahan & Gartrell who helped Rockland Trust set up its CDE.

Rockland Trust has made $31 million in loans through the New Markets program, said Vice President and NMTC Coordinator Michael Savage. Last month, it received approval to originate up to $45 million more.

Another bank with Massachusetts branches, Pennsylvania-based Sovereign Bank, has also formed its own CDE and recently was granted the right to loan up to $94 million, which it plans to allocate to small businesses and real estate developments on flexible loan terms in Massachusetts and six other states.

Sovereign and Rockland Trust are two of 63 entities – of which less than a dozen are banks or publicly traded companies – to receive allocations in the latest $3.9 billion round of investment authority.

Three other Massachusetts-based institutions – the Massachusetts Housing Investment Corp., Boston Community Capital and Capital Link (which is doing its lending in areas affected by Hurricane Katrina) – also earned the right to issue up to $165 million in additional loans for the tax credit.

Several local banks contribute to MHIC’s CDE, pooling their private dollars into ventures in which they might not otherwise have found it profitable to invest.

Boston Private Bank, United Commercial Bank, State Street Bank & Trust and Citizens Bank are among the investors, and MHIC hopes to add TD Banknorth, Eastern Bank, Citigroup and Morgan Stanley to the pool in the near future.

Wainwright Bank also loans to the CDC, with separate terms from those an investor would have.

Banks generally earn Community Reinvestment Act points by investing in low-income communities. In the case of New Markets Tax Credit, they’ve won all around, Handly wrote in a Dec. 18 opinion column in Banker & Tradesman.

“In consideration of making a sound loan to a worthy low-income community business, the bank earns interest income, regulatory credit under the Community Reinvestment Act and a significant offset to its federal income tax bill,” he wrote.

The banks’ money has revitalized low-income neighborhoods by financing new buildings, shops, health centers and theaters that bring in jobs and attract consumers. And the banks realize a profit in the process.

‘Minimal’ Risk
MHIC’s CDE fund gets back the 39 percent, said Investment Officer Kathleen McGilvray, and its investors get a percent of those tax credits based on what they invest.

Wainwright Bank loaned money to MHIC’s CDE as a way to give to the community, said Senior Vice President for Community Development Lending Pam Feingold.

“It does help with CRA,” she acknowledged, although she added, “that’s not an issue with Wainwright.”

NMTC is one of the few government subsidies left that funds small business investment and development in low-income areas, she noted.

Through MHIC, Wainwright helped fund the construction of a new building in South Boston for Project Place, a job-readiness program for formerly homeless people, and financed a new Boston home for Community Servings, a nonprofit that offers meals on wheels to people suffering from AIDS and other illnesses, she said.

“The funds are primarily real estate-related,” she said.

Rockland Trust has invested in small businesses trying to build or add locations in low-income areas.

NMTC allows banks to offer riskier loans, but with less risk, which is particularly helpful in economically competitive times, said MHIC’s McGilvray.

“Compared to the low-income housing [tax credit], the risk is minimal,” she said, because if housing goes to the wrong type of tenant or purchaser, an investor could lose at least a portion of their initial investment.

The New Markets Tax Credit is a lot harder to make a mistake with, McGilvray said. Hayes said NMTC is “more flexible than most government programs,” although qualifying for the program required the bank “the better part of two months and 12 people” dedicated to the task.

The main rules are that the entity invested in must remain in the original neighborhood, and if it pays back any part of the loan early, the CDE has up to a year to lend that money out to another qualified project or business, or risk losing the tax credit associated with that sum of money.

That motivates Rockland Trust’s commercial lending staff to know their potential loan candidates well, and always be on the lookout for more – which naturally adds to its commercial lending base while giving the bank the chance to earn more tax credits, Hayes and Savage explained.

Savage said through NMTC, Rockland Trust is becoming known as a bank that can make loans in places where other banks can’t.

Through its CDE, Rockland Trust has successfully loaned $31 million in economically distressed areas in southeastern Massachusetts and Rhode Island since 2004.

The bank is starting to earn back its credit, which is payable over seven years.

What the future holds for NMTC is still unclear. But Congress just reauthorized it with funding through 2008, and those using it here are hopeful the program will remain in place.

“We are hoping that it’s similar to the low-income housing tax credit, which was continually extended and then became permanent,” said MHIC’s McGilvray.