Where credit is due.

• Author: Wittebort, Suzanne
• Position: Banking industry and the Charlotte Reinvestment Alliance - Includes related articles - Special Report: Banking

After years of prodding, banks discover that doing good also can be good business.

Last year, when NCNB began its takeover of C&S/Sovran, its leap into the nation's banking stratosphere was snagged briefly by a thorny debate over social and economic justice. Community activists challenged the merger, alleging that the bank had failed to serve all sectors of its community as required by the federal Community Reinvestment Act of 1977. The controversy was heated and at times bitterly emotional. One community activist bluntly called the bank "a racist and uncaring institution."

At a time when racial tensions seem to be tightening nationwide, business interests and community concerns met with a resounding clash on North Carolina's front doorstep. For many, it was a confusing spectacle that shined the spotlight on the perplexing issue of community investment -- making capital available to low-income and minority individuals, businesses and neighborhoods. Are the state's banks racist villains intent on ignoring the hard-working poor? Or are they regulation-smothered victims, being forced into loss-making loans by do-gooder bureaucrats and opportunistic community groups?

As it turns out, neither characterization is accurate. As a group, the nine major North Carolina banks have a far better community-investment record than the national average. Of the seven largest banks rated, four -- Wachovia, First Citizens, Central Carolina Bank and First Union -- have been deemed "outstanding" by regulators. Nationally, less than 9% of banks have received that rating, according to Kenneth Thomas, a Florida consultant who is writing a book on the ratings.

Three others -- NationsBank, Southern National and Centura -- were rated "satisfactory," the designation of about 80% of banks across the country, Thomas says. BB&T and United Carolina Bank have yet to be publicly rated.

All these banks are mobilizing aggressive efforts to expand their services throughout their communities. But despite substantial progress and some notable achievements over the past three years, thousands of North Carolinians and many low-income neighborhoods and small businesses remain outside the financial mainstream. While communication is improving, banks are finding community lending far more challenging than perhaps they ever dreamed. In response, they are working, sometimes with the groups that have been their toughest critics, to devise products, programs and projects to mine profits from their own traditionally neglected back yards.

But some community-development activists say they have heard enough talk. Now they want to see banks put their money where their mouths are. Community groups and regulators alike are beginning to look hard at amounts of loans that have been made, not just money committed to be lent at some unspecified time in the future. "There have been more contacts with community organizations, minority vendors, small businesses. But have their efforts resulted in changes in operations and attitudes of banks so that it results in more lending? If not, it's just smoke and mirrors," says Abdul Rasheed, executive director of the North Carolina Association of Development Corporations in Raleigh.

Many bankers admit that traditionally the industry didn't seek out low-income and minority customers. "There's been a perception throughout society that if you have to allocate resources, you cater products and services to middle-income America, the people with the station wagon and the cocker spaniel," says one. "A lot of lending officers are more comfortable with people they would see at the Rotary or the Jaycees, people they know best."

"In the past, banks did not see their function as providing society with credit," observes Bobby Lamy, director of the Center for Economic and Banking Studies at Wake Forest University's Babcock School of Management. "They saw their function as making a profit and protecting depositors. Low-income communities may be their own back yard, but they've never been in that part of the yard."

Now the state's biggest banks believe that they can do it all. CRA lending, bankers emphasize, is not charity. "We've accepted the fact that CRA is not a dirty word and not a social program. It's just good banking," says Harold Sellars, senior vice president and CRA officer for United Carolina Bank.

At Wachovia, for example, "we're getting into all the low-income housing programs that make sense for us," says Bert Wayne, senior vice president in charge of the bank's CRA efforts. "But they've got to be profitable, and while they're not all as profitable as some of your other operations, there's still a profit factor there. We're not doing loss-leader work here. The returns are very reasonable."

More bankers are viewing providing credit and services to these communities as less a pesky regulatory obligation than a genuine opportunity to drum up profitable business. "There's tremendous promise out there. There's a huge clientele and customer base the banks can do a better job working with," says Richard Furr, executive vice president of CCB.

Sums up Sally Poteat, community-development director at Blue Ridge Community Action Inc. in Morganton, "It's a win-win situation. The communities get what they never had, and the banks meet their CRA requirements and make money in the long run."

But there are other costs associated with CRA projects. Whether it's marketing a mortgage to a customer unfamiliar with the TABULAR DATA OMITTED process, intense underwriting scrutiny of a small-business loan or designing a complex housing deal, community investment can take up lots of time for bankers. "We can spend the same time on a $425,000 project as on a $40 million project. So it is labor-intensive. That adds to the cost," Wachovia's Wayne says.

Documenting their efforts for regulators creates a never-ending paperwork burden, bankers say. For example, it took nine notebooks and 2,200 pages to record First Citizen's CRA efforts over the past 18 months. Moreover, bankers sometimes feel they are struggling to meet a moving target. "No bells and whistles go off when you've done enough," one says.

Still, the payoff promises to make it worthwhile, Wake Forest's Lamy believes. "Banks' images were distorted in the 1980s," he says. "CRA offers an opportunity to get some respect back. The answer is not in fighting it but in using it to their advantage. Banks that are smart and make extensive efforts to satisfy CRA can win, big time. Their investment will yield high return."

Much of the new attention to community lending is the result of regulatory pressure. Though enacted in 1977, the Community Reinvestment Act wasn't seriously enforced until 1989, when the S&L bailout law mandated public disclosure of regulators' assessments of banks' performances. That year, for the first time, mergers were denied on grounds that the institutions involved had failed to comply with the CRA law.

North Carolina banks have felt the heat. First Union and Wachovia have endured challenges to mergers during the past few years. The challenge to the NCNB acquisition of C&S/Sovran was one of the most dramatic ever, leading to hearings last fall before Federal Reserve Board officials in four cities. Ultimately, it was effectively scotched by NCNB's announcement that it would commit a record $10 billion to community...