Losing credit?

The number of megachurches-churches with more than 2,000 in regular weekly attendance-has increased 100-fold since the 1970s, from less than 20 to almost 2,000 today.

For Mark Holbrook, an evangelical Christian who graduated from Biola University in the early 1970s, this growth was a great ministry-and a great business-opportunity. So he joined the staff of a small California credit union, and by 1979 he was president. Today, the Evangelical Christian Credit Union (ECCU) is a financial powerhouse.

By concentrating exclusively on churches and Christian ministries, ECCU has originated more than $3.2 billion in loans-mostly real estate mortgages. How important is ECCU? A Bloomberg report estimated that the top 10 U.S. financial institutions combined did not originate as many church mortgages as ECCU's $661 million 2008 total.

ECCU usually makes loans with interest-only monthly payments and large balloon payments at the five-year mark. In good times, that gives churches time to collect multi-year pledges from building programs, and it gives the property-often in fast-growing areas-time to appreciate.

Yet these are not good times, and ECCU-which grew rapidly over the past decade-has hundreds of loans in its 1,000-loan portfolio coming due. Though ECCU does a national business, it is based in southern California where real estate values have been hard hit. The Associated Press and Bloomberg have recently made ECCU the subject of unflattering profiles, but ECCU spokesperson Jac Latour said those reporters don't understand either the uniqueness of his company or the Christian marketplace.

Who's right?

• Tony Plath, a banking analyst with the University of North Carolina at Charlotte, told me that ECCU's position is "precarious. . . . Their business strategy, which concentrates on evangelical organizations, sounds good. Deep understanding and solid relationships are good. But these guys are over-concentrated." Charlotte is a major financial center, so Plath has had a front-row seat to the meltdown in the financial services industry.

ECCU's Holbrook, though, says he presides over "one of the healthiest institutions in the country. We expect to remain profitable. We see no remote possibility of bankruptcy." Brad Meuli, president of Denver Rescue Mission and a veteran of 17 years in the banking industry with Wells Fargo and others, offered a character reference: "ECCU understands ministry goals, and they help you get there." Meuli reports that the Mission borrowed $3.5 million from ECCU to finance a transitional housing facility, and that when a large donation allowed paying down of the loan, ECCU restructured the terms without charging a fee: "Most banks don't do that."

• Plath points to troubling signs: ECCU has modified the terms of $140 million in loans in 2009, up from less than $4 million in 2008. ECCU, which began in 1964, had not foreclosed on a single loan in its history until 2007, but it sent two foreclosure notices that year, seven more in 2008, and has foreclosed on five loans so far in 2009.

Brian Scharkey, ECCU's chief financial officer, says the average "loan-to-value" ratio of the ECCU portfolio is 58 percent, so even if it has to take possession of property, it could sell the property for more than the loan value.

• Plath counters: "Loan-to-value of 58 percent is good, but relatively meaningless in this environment. Who are you going to sell a church to?" Plummeting real estate prices mean that "if the appraisals are more than 18 months old, you can't trust them anymore." Foreclosing on a church "looks terrible in the community," he says. "On the other hand, you can't just keep modifying loans. At some point regulators will say that these loans are not merely modified, but impaired" and ECCU might have to increase its capital reserves.

Spokesman Latour, though, says, "We've increased reserves for loan losses. We think they're more than adequate." And David Dennison, principal at Church Mortgage Solutions, a Colorado Springs firm that matches churches with funding sources, says ECCU is "a unique organization. They have a unique funding model. I know their people, and they're people of integrity. They're not going anywhere."