The church finance climateFINANCE, Financial Services Tuesday, September 3rd, 2013
By Dan Mikes
As the economy has gradually improved over the past few years, we have seen improvement in the financial health of religious institutions in terms of contributions, net cash flow and cash reserves. However, there are still a few lingering effects of the economic meltdown, including weakness in new church construction and depressed real estate values that might make it difficult for a congregation to secure financing.
As one of the largest lenders to the religious community nationwide, we base these observations on financial statements we receive annually from hundreds of our existing customers, as well as the hundreds of loan applications we receive each year from other religious congregations. It should also be noted that these observations for the pool of referenced customers and loan applicants is primarily comprised of the top 20 percent of congregations by attendance size and, consequently, might not be representative of all religious congregations in general.
Clearly, many congregations saw a decline in giving during the great recession. However, much of what was touted as an overall decline in total giving was a function of a drop in new construction, and a corresponding decline in related capital pledge campaign revenues. We reviewed financial statements prepared by Certified Public Accountants as provided by several hundred loan customers. It is important to note that we reviewed the tithes and offerings (T&Os) line item only. We excluded building fund revenue, as historically this revenue line item is the result of non-recurring pledge campaigns launched to raise funds for new construction projects. Clearly, revenue reported at the “building fund” line is not always the result of a pledge campaign, but this was one way in which we could quickly analyze the data to make a useful general observation regarding recurring giving levels. Interestingly, from this view, there was only one year of decline.
From 2008 to 2009, on average, these congregations saw a decline in T&Os of 1 percent. From 2009 to 2010, the number increased 1 percent. And, from 2010 to 2011, the increase was 4 percent. The 2012 data is still being compiled and reviewed.
In spite of stability and improvement in general T&Os in recent years, based on our data, we determined new church construction activity remains depressed. Many congregations put building projects on hold due to an unwillingness to solicit pledge commitments and incur additional debt during a recession or a slow recovery. For example, over the past three years (2010-2012), our construction lending has comprised 24 percent of total loans to religious institutions. Over the years, the number was 47 percent. If 24 percent sounds surprisingly high, don’t forget the pool of referenced data is comprised of congregations in the top 20 percent of the market in terms of congregational size. The larger congregations have tended toward a higher level of physical plant expansion during this megachurch era.
The surprising stability of T&Os indicates that congregations who did not build and incur debt based on upward projections of growth trends or a build-it-and-they-will-come mentality likely did not default on their debts during the downturn. In fact, we have always conservatively used historic net cash flow in our debt underwriting, where we have experienced a very low rate of delinquency foreclosures. At the worst part of the downturn, we reported less than 2 percent of borrowers paying 30 days or more past the due date. This is in stark contrast to numerous other religious institutions lenders who experienced much higher delinquency rates, resulting in a spike in foreclosures nationwide. The most damaging and lingering effect of the downturn arises from the aforementioned spike in foreclosures.
In the aggregate, many “experienced” religious lenders who had bad experiences have left this market segment. Fortunately for borrowers, this has not resulted in a lack of competition, as the void has seemingly been quickly filled by new lenders. The side effect, however, is a notable decline in suitors for borrowers seeking a consultative, experienced partner who can add value to a process often managed by business administrators and leadership teams with little religious physical plant expansion experience.
A consequence of the spike in foreclosures and other distressed sales has been the impact on the real estate valuations of religious facilities. Lenders are often required to limit their loan offers to a maximum loan-to-value ratio — typically 75 percent. In determining valuations, appraisers must cite the recent sales prices of other religious facilities within the region or state. When the typical loan matures each five years, the lender must require a new appraisal. In certain regions, valuations today are coming in as much as 50 percent below prior valuations. There have been — and will continue to be — numerous instances where good congregations who have never over-borrowed and have managed their financial affairs prudently cannot acquire competing financing offers due to a low appraisal value. They end up stuck with their existing lender. In many cases, the out-of-guideline loan-to-value results in an uncomfortable relationship with the lender. Further, the high loan-to-value might result in an unfavorable risk classification within that bank, necessitating a higher loan loss reserve and a higher cost-of-capital assignment for that loan. Bottom line, those captive borrowers are stuck paying a higher-than-market rate.
The damage to these congregations is the result of both the economic downturn and overly aggressive religious lenders and lending practices that put too many borrowers into too much debt during the 2000s. For now, these congregations will need to be patient. Valuations are rising gradually; so, in the future, they may have options to secure more competitive financing.
The good news is that congregations have weathered the worst of the downturn, and contributions and cash reserves have bounced back. There are numerous lenders in the market competing for opportunities to serve religious institutions. Many congregations have taken advantage of historically low interest rates to better position their liabilities for future growth. Our data indicates that, year-to-date, there has been a slight uptick in construction activity. All signs point to continued gradual improvement in nationwide church lending.
Dan Mikes is executive vice president and national manager of the religious institution division of Bank of the West in San Ramon, CA. He has 23 years of experience in lending to religious institutions. Data cited is from Bank of the West’s experience in lending to religious institutions.