The Good Book: Keeping Loans to Churches on Track

Just days before Easter, a community bank foreclosed on Faith Christian Church in Lakewood Ranch, Fla. Like other church foreclosures across the country, the story made headlines—a public relations nightmare for banks.

In this case, Pastor Tim Smith was forgiving, telling a local newspaper, The Bradenton Herald, he had no ill will toward the bank. "They had every right," Smith said. "We couldn't pay our mortgage."

But he also said that he had expected Easter service to be the last one at the church, and that the bank could have been more understanding about the timing.

Church foreclosures, a particularly prickly problem for lenders, have hit a record high, with the recession decimating contributions from congregations of all types nationwide. Lower property values and overly optimistic expansion projects are also to blame.

In the past two years, 270 church properties were sold after a loan default, 90 percent of them by banks, according to data from CoStar Group. The jump in foreclosures is striking: there were only 24 sales in 2008, and a mere handful during the decade before that.

Even so, several banks that have specialized in church lending for decades say they have never foreclosed on a religious facility. These banks are now refinancing troubled church loans made by others during the more prosperous years before the financial crisis. They contend church lending can be a lucrative niche—for those who understand the unique underwriting criteria involved.

Bank of the West has 27 bankers dedicated to church customers, says Dan Mikes, executive vice president and manager of religious institution banking there. The bankers, who handle marketing, lending and servicing, are trained internally, as there are no formal training courses in the industry for church lending, he says.

Results suggest the approach at the $62.4 billion-asset San Francisco bank is working: not only has it never foreclosed on one of its church loans, it has needed to restructure only a half-dozen of them over the past two decades, Mikes says. Throughout the economic downturn, its 30-day delinquency ratio has never exceeded 25 basis points on a church loan portfolio of $1.3 billion.

In his view, one key to success is relying on a church's historic cash flow to assess its borrowing capacity. He says other lenders often project that the congregation and income will grow.

"Many competitors have assumed that capital pledge campaigns, which commonly precede physical plant expansions, could be perpetuated should the church not realize growth after building the new facility," Mikes says.

Church lending is so attractive to the $90 million-asset Citizens Bank & Trust Co. in Nashville, Tenn., that these loans make up 75 percent of its overall loan portfolio, says Deborah Cole, the president and CEO.

That's helped boost the spread on the loan portfolio to 5.29 percent as of the first quarter.

Citizens has only two dozen employees, and several are dedicated to servicing church customers, says Cole, who also regularly takes calls from pastors herself. The bank typically makes loans to churches within an eight-county area around Nashville, as well as in Memphis, where it has one branch.

The underwriting policy focuses on income statements, same as with traditional commercial loans, Cole says. Citizens analyzes a church's total debt to annual revenue, along with its membership giving, shock-testing each for varying scenarios.

Citizens also analyzes the expenditures of a church, which can vary by denomination, she says. For example, some denominations, such as Methodists, send payments to their national body, so the bank takes that into account. Some churches, especially those with a sizable music ministry, pay out more in salaries. Others operate food banks or provide shelter for the homeless.