Paradigm Shift

What would your credit union do if it lost one-third of its lending portfolio? Creighton Federal Credit Union rolled with the punches.

 
 

Credit unions have a lot on their minds. Loan yields are slim, and non-interest income is vulnerable. Financial institutions are cutting expenses, increasing efficiency, and examining profitability. Credit unions’ business models are in flux, but that doesn’t mean their outlook on taking care of members is changing. Along with challenges, 2011 brings with it the opportunity for credit unions to show a little flexibility, innovation, and willingness to shake things up.

Creighton Federal Credit Union ($46.6M, Omaha, NE) knows how to roll with the punches. The credit union serves the staff and students of Creighton University. Historically, it was a major student lender that participated in the government-backed Federal Family Education Loan Program (FFELP).

“We were successful at being the lender of choice for students attending Creighton,” says Thomas Kjar, president of Creighton Federal Credit Union. “It was a good business until 2008. Then the credit markets seized and nobody wanted to buy [student loans].”

The total elimination of FFELP in 2010 forced the credit union to take a fresh look at its lending model.

“A third of our loan portfolio went away all at once,” Kjar says.

The credit union might have been down, but it was not out. Taking into account its membership (approximately 20% are students) and its market (CNNMoney named Omaha one of the strongest-performing cities during the recession), it developed a real estate loan that catered to its members and fit into the city’s development initiatives.  

Creighton’s membership includes students entering a professional field (law, medical, dental) who tend to stay in the area after graduation. Omaha’s downtown district is undergoing a revitalization, and the city’s housing market includes several entry-level condos that range from $120,000-$130,000 to the mid-$200s. It’s a great market for young professionals, however, with no money down and no job history, recent grads struggle to meet conventional lending qualifications.

“Their future is bright, but they have no money,” says Kjar. “We created a mortgage we thought would appeal to them and help them get into a mortgage.”

And appeal it does. The loan is structured as a 10-year balloon (it re-prices at market price after 10 years) with payments amortized over 30 years. The borrower must have good credit, future earnings potential, and a 10% down payment. Because the credit union portfolios the loan and handles processing requirements such as title and recording in-house, it can charge fees that are “about half” of what a conventional mortgage would be.

The credit union launched the mortgage program in 2008, and over the past two years the credit union has generated approximately 71 loans and $7 million from it. And of course, the credit union has seen a bleed-over effect from members with mortgages taking advantage of other credit union product offerings.

“It hit a nerve,” Kjar says. “It was something they [members] were looking for. Because they had a relationship with us, they thought of us.”

The effects of the program are even more evident when viewing the change of the loan portfolio composition. Over the past three years, the credit union’s renewed focus on real estate lending has played a part in the more than 12% increase in real estate concentration.

Creighton Loan Composition 2007

Creighton Loan Composition 2010

Source: Callahan's Peer-to-Peer