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Brea Church Lender Looking to Raise $100M

Brea’s Ministry Partners Investment Co. is set to sell $100 million in bonds to build up its cash and underwrite more mortgages for churches and religious schools, according to a recent filing with the Securities and Exchange Commission.

Ministry Partners acquires loans from Brea’s Evangelical Christian Credit Union, the county’s second-biggest credit union after Santa Ana-based SchoolsFirst Federal Credit Union.

ECCU started Ministry Partners in 1991 as a separate loan investment arm. It owns 42% of the business.

Mark Holbrook, ECCU’s chief executive, is chairman of Ministry Partners.

In 2006, ECCU sold 58% of Ministry Partners to a group of credit unions. Today, some 13 credit unions own part of the business.

Ministry Partners has seen a big jump in troubled loans recently as church borrowers have struggled to make payments amid lower donations.

Nonperforming loans, where borrowers are three months behind or longer on payments, went from 1.9% of the company’s outstanding loans in 2008 to 14.6% in 2009.

Ministry Partners has about $200 million in outstanding loans.

The bond sale is designed to shore up Ministry Partner’s finances and allow it to fund more mortgages from ECCU and then package and sell them to investors.

In the early 1990s, Ministry Partners had more than $50 million in assets, mostly loans. By 2008, that total was up to $275 million, according to government filings.

Last year’s fallout from the financial meltdown that started in 2008 cut Ministry Partners’ assets to $209 million.

“For us, that felt like a significant change,” said Bill Dodson, Ministry Partners president.

After the financial crisis, Ministry Partners no longer was able to sell loans as bonds to Wall Street investors, he said.

Dodson estimated that 80% of the evangelical churches Ministry Partners lends to across the country could be classified as small businesses.

Some could be considered “mega churches,” he said.

But “even the biggest churches in the country haven’t been immune to the economic downturn,” Dodson said.

Net Income

As a result of bad loans, Ministry Partners’ net income fell from $744,000 in 2008 to $54,000 at the end of last year.

Delinquency rates on church loans jumped to 5.5% in 2009, up from 1.1% a year earlier. Loans past due 90 days or more are considered delinquent.

Ministry Partners isn’t interested in taking back property from churches, according to Dodson.

“We’ve never actually had to go to such an extreme,” he said. “We work with our borrowers and try to find reasonable solutions.”

At the end of last year, Ministry Partners had set aside $597,000 for four loans in foreclosure, according to filings.

Ministry Partners isn’t the only church lender finding credit markets still difficult to navigate, Dodson said.

Delinquencies and nonperforming loan rates by churches are at the highest level in more than a decade, he said.

“Church revenue usually correlates to unemployment rates,” he said. “In areas where jobs are in short demand, church financing tends to be under real pressure.”

ECCU’s Holbrook is finding the same situation with the credit union’s portfolio of church-related loans.

“Not surprisingly, we’ve seen stress in areas like Michigan and some parts of Florida,” he said. “But on the positive side, we’re starting to see the number of churches under stress in those markets as well as several others begin to decline.”

Church leaders reluctant to cut services are more willing these days to trim expenses and shore up finances, according to Holbrook.

“They’re now making the hard decisions that come with managing their operations a little more tightly,” he said.

Church finances started to come under real stress about mid-2008, according to Holbrook.

“By definition, these are nonprofit businesses that are dependent on donations,” he said. “Any type of cutback in services is a painful process.”

The past two years have been the most difficult in his 35 years in the financial services business, Holbrook said.

ECCU’s own loan portfolio is close to $3.5 billion. Its core assets—primarily gains from its loans and retained earnings on investments and other services—are around $1.2 billion, according to Holbrook.

“We’ve reduced lending significantly in the past two years as our funding sources have dried up,” he said. “We’re easily originating about 20% of what we were doing two years ago.”

Holbrook said he doesn’t expect lending to dramatically increase in the near term as investors in church debt remain wary of overall conditions.

Unlike many other lenders, ECCU seems to have time on its side. The credit union still has a relatively high capital ratio of 11%. Regulators consider around 7% to be a well-capitalized level.

“Our loan portfolio is probably going to stay relatively flat until investors re-enter the market,” Holbrook said. “The secondary commercial mortgage loan market is still pretty frozen. There’s some activity going on, but it’s going to take another two to three years for commercial lending to return.”

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