How community banks are serving faith groups

Robert E. James is president of Carver State Bank in Savannah, Ga. About 14% of the community bank’s loan portfolio consists of faith-based lending, which has led to many longtime, loyal church customers. Photo by Angela Hopper

Because of the unique funding streams and beliefs of faith-based organizations and their congregations, they carry their own risks and rewards when it comes to lending. Here are how several community banks are serving their customers of various faith traditions.

By Ed Avis

The COVID-19 crisis hit churches, mosques and synagogues particularly hard. Across the country, they were forced to halt in-person gatherings, and many attendees also saw their incomes decline, causing some to reduce their support of these organizations or stop donating altogether.

For community banks that lend to faith-based groups, it could have spelled disaster. But these groups put their resilience on display in the face of turmoil.

“What I think was phenomenal was that even though we made some payment deferrals to church borrowers early in COVID, pretty soon they began to perform quite well,” says Pete Williams, senior vice president and chief credit officer of $343 million-asset M&F Bank in Durham, N.C. “A lot of churches were pretty quick to establish an online giving platform, and a lot of larger churches had streaming services. One church started having services in their parking lot, where everyone would drive in and tune their radio to a certain station to hear the service.”

The ability of many houses of worship to rally their congregations and keep close to their communities during a pandemic underscores that they can be excellent customers for community banks. As long as a community bank does its homework and understands the unique characteristics of lending to faith-based organizations, this kind of lending can become a healthy segment of its loan portfolio.

Churches make up about 30% of M&F Bank’s portfolio. “From a historical standpoint, this segment has performed as well or better than any other segment,” Williams says. “We have an excellent track record with them. Even with everything we went through in COVID, we didn’t have any serious financial issues with faith-based organizations. It’s really mind-blowing if you think about it.”


Advantages of church lending

For $67 million-asset Carver State Bank in Savannah, Ga., 14% of its loan portfolio is to churches, primarily for building acquisition and renovation. According to the community bank, there are advantages to church lending beyond the immediate loan revenue. For example, most of the bank’s religious organization loans have been to Black churches, says president Robert E. James, and that has led to loyal relationships with the institutions.

“When we meet with a church, we’ll talk to four or five officers of the church,” he says. “In addition to being leaders in the church, they are leaders in the community. So, there is always the possibility of creating other banking relationships—and goodwill—just from having a good meeting.”

Wil Hobbs, senior vice president and community impact director of $762 million-asset Community Bank of the Bay in Oakland, Calif., says he has observed the relationship-building value of lending to churches in his community. Places of worship make up about 4% of the community bank’s portfolio.

“We’ve gotten from our lending the general perception that we’re good guys,” Hobbs says. “I’ve been consistently gratified from people saying they know about us because of the connections formed through the faith-based organizations they’re part of.”

How Devon Bank handles interest-free lending

Many Devon Bank borrowers practice faiths that prohibit them from paying interest, a fundamental component of traditional lending. The $420 million-asset community bank is located in a neighborhood of Chicago heavily populated by Orthodox Jews and Muslims, whose religious traditions place restrictions on paying or receiving interest, though how stringently they adhere to those restrictions varies.

“For Jews, the Bible says, ‘Thou shall not deal in interest with thy neighbor, but you can with a stranger,’” says David Loundy, the bank’s CEO and chairman of the board. “So, they define that as meaning they cannot deal in interest with other Jews, but others are fair game. For Muslims, it’s considered to be war against God to deal with interest, so there’s a larger percentage of Muslims who take that seriously.”

For customers who won’t pay interest, Devon Bank offers two financing options. The first is a cost-plus sale where the community bank buys a property and then sells it to the customer at a marked-up price on an installment plan without interest. This is primarily used for residential mortgages, and Devon Bank offers the product in 25 states.

“They are simply buying our house,” Loundy says. “We design it to be economically identical to a conventional loan.”

As with a regular mortgage, the buyer of a property using the cost-plus model owns the property at closing. And if the borrower defaults, the bank can foreclose.

The other model Devon Bank uses is rent to own. Loundy says this model is used more often for commercial transactions, because the rent payments can be tied to an index, unlike in the cost-plus model where the payments remain the same throughout the financing period. In the rent-to-own model, the title transfers when the borrower finishes the payments.

Interest-free finance has been part of Devon Bank’s business for about 20 years, Loundy says. “A lot of our customers are thrilled that [we] understand their concerns and are making an effort to accommodate,” he adds.

Evaluating creditworthiness

Success in lending to faith-based organizations starts the same way as it does with any other kind of loan: with a careful examination of the customer’s finances.

For example, Carver State Bank evaluates three years of financial statements of churches that are seeking loans, James says. That includes a cash flow analysis to ensure the church can handle the loan payments.

“With a nonprofit institution, especially a church, you want to look at the consistency of their giving,” James says. “We want to see what the normal tithes and offerings the church has.”

Kelly Law, vice president and commercial relationship manager of Heartland Bank, visits customer Shane Hart (left) of One Church in Gahanna, Ohio. Photo by Alan Geho

Williams says M&F Bank looks at trends in a church’s “giving units,” meaning households that donate. A broad base of givers implies that a church’s offerings will be consistent over time; in contrast, a large percentage of the church’s revenue coming from just a small number of givers represents a risky situation.

But after those basics, examining a church’s application veers into some territory that is different from a regular business. For example, while a community bank is concerned about the leadership of any business it lends to, the strength and longevity of a pastor is especially important when considering a loan to their organization.

For example, James says a successful pastor can inspire giving. “The biblical requirement of tithing works for some older members of churches and the people who are really committed to the institution, but others are inspired to give based on the quality of the leadership,” he adds.

While they may inspire increased donations, a religious leader may also pose a potential financial risk for the lender. “The big difference between lending to the church and other businesses is that it’s really a leap of faith regarding the personnel,” says Scott McComb, chairman, president and CEO of $1.6 billion-asset Heartland Bank in Whitehall, Ohio, “because if something happens to the main pastor, things can go awry quickly.”

McComb says the pastor of a church client had an affair within the organization, which caused half of its parishioners to leave. Suddenly, the church couldn’t make its mortgage payments.

In another case, a church’s longtime pastor retired and his replacement was not as successful. Membership dropped from 1,200 parishioners to 200, and the group could no longer service its debt.

Naturally, it’s hard to predict those types of occurrences. But a church should have a succession plan to deal with that possibility, Williams says. And having a competent church board of directors can decrease the likelihood of leadership turnover.

Churches that are part of major denominations and have regional organizations above them generally have a more secure leadership situation, McComb says.

“If you’re part of a denomination, that’s a plus, because generally the district office has some wherewithal to control the situation in their branch churches,” he says. “Sometimes, they’ll send in an interim pastor if things get sideways to straighten things out.”

Another potential difference between evaluating a typical business loan application and a church’s application is the value of the collateral. Whereas a retail storefront, warehouse or office building could be sold to settle a secured mortgage, selling a church building can be more difficult.

“Don’t hang your hat on the collateral,” Williams says. “Most churches are specialized buildings, so they’re only marketable to a finite group of individuals.”

We’ve seen several organizations recover using their own particular fundraising tactics, such as special fundraisers or revival celebrations, to liquidate their debt.”
—Robert E. James, Carver State Bank


Risks of faith-based lending

Sometimes faith-based organizations run into problems and cannot repay their loans. When that happens, banks generally don’t want to foreclose because of the potential hit to their reputation in the community. So, they do as they do with any business loan that goes sour: They ask the borrower what’s causing the missed payments and try to work out a solution. However, churches have an advantage over regular businesses in that they can raise money by asking members to contribute to a special offering or by fundraising.

“We’ve seen several organizations recover using their own particular fundraising tactics, such as special fundraisers or revival celebrations, to liquidate their debt,” James says. “All religious organizations have some [fundraising opportunities] like that.”

Sometimes, the solutions are unorthodox. In the case of the church whose pastor had an affair, causing half of the congregation to leave, McComb engineered an exchange of bank properties between that church and another church client that needed more room and was able to take over the payments.

“The other church was busting at the seams and needed a bigger building, so we put them together and said, ‘How about you guys swap?’” he says. “We ended up figuring out if there were any cash differences and made a deal.”

In the other case, where the new pastor didn’t live up to the former pastor, McComb connected the shrinking church to another faith organization that had been meeting in a high school and wanted a building of its own. The two merged congregations.

“They came together and now have one church and they are able to service the debt,” he says.

Hobbs says that in two cases in which clients of the bank were at risk of default, Bank of the Bay found other lenders that were willing to take over the loans.

“These were for-profit organizations that were pursuing a business strategy of making patient-money loans to churches,” Hobbs says, “and they hoped to have longer-term relationships with the churches.”

While there can be challenges like any other type of group, the bottom line for community banks that lend to faith-based organizations is that it’s good for business.

“It’s no different from other lending,” Hobbs says. “We’ve not had more adverse situations than with any other category. And it’s an opportunity to have a good loan and burnish our image in the community.”

How do denominational and independent borrowers differ?

There are countless types of faith-based organizations. But many lenders distinguish these groups by putting them into two groups: independent or major denomination with a regional office structure.

In general, churches that belong to a major denomination with a regional office structure, such as United Methodist, Presbyterian Church (USA) or United Church of Christ, are preferable as borrowers because of the support the denominations offer to their member churches.

“A lot of times, the district office will guarantee loans,” says Scott McComb, chairman, president and CEO of Heartland Bank in Whitehall, Ohio. “New churches getting started sometimes can rely on their district office for capital.”

In addition to guaranteeing loans or providing capital, regional offices often offer oversight and counseling to member churches, which is useful if a member of that denomination runs into financial trouble and can’t repay a loan.

“In the structured denominations, if a congregation is having trouble repaying its loan, it’s going to have other problems. That means that the congregation is going to be under evaluation by the episcopal leadership,” says Robert E. James, president of Carver State Bank in Savannah, Ga. “So, the episcopal leadership is going to be working on that congregation to see if it can get its problems worked out.”

The community bank will work with the congregation and its leaders to work through issues, James adds.

Independent churches are often called nondenominational—though many Baptist churches are also independent—and are traditionally led by pastors who exert greater control over the organization than a pastor of a denominational church. This may mean there’s a greater risk of leadership disruption unless there’s a strong board and succession plan.

“You would normally conclude that it would require more work to evaluate a religious organization that is not part of a structured denomination,” James says. “But [Carver State Bank] has 94 years of history of lending to churches—and I would guess most of our loans have been to Baptist churches—and I don’t think we’ve had any real losses on a loan to a religious organization.”

Ed Avis is a writer in Illinois.