When you’re managing money, it can be a thin line between how much you have to pay for it, and how much you get paid for it. Right now the line between the two is thinner than ever for credit unions. So slim, in fact, that two-thirds of the 29 credit unions headquartered locally have posted a net negative return on assets for the year ended June 30.

Although assets continued their steady climb upward for all but one local credit union, 19 of 29 — including San Diego County and Mission Federal credit unions, the two largest — had drops in their returns on assets. Those that bucked the trend with large gains tended to be among the smaller ones, including San Diego JACL (with $1.1 million in assets) and United Western States Regional ($421,000 in assets).

Return on assets, or ROA to the money-types, is a financial institution’s yield on assets minus its cost of funds and its expenses. ROA is expressed as a percentage of assets, explains the industry’s top government regulator, David Marquis of the National Credit Union Administration. Nationwide, credit unions’ ROA fall mostly between 0.7 and 1.2, reports Marquis.

“Anything over 1.0 we consider exceptional,” he adds.

By his measure, then, eight local credit unions get A pluses for ROA and three more get strong passing grades. In the same ranking last year, however, 15 credit unions posted ROA at 1.0 or above, and five more bested the 0.7 mark.

Marquis confirms that ROAs dropped dramatically for credit unions across the United States over the last year, so the trend at local credit unions is not unusual. Key to understanding the decline, he says, is the sustained run in historically low interest rates.

San Diego Medical Federal Credit Union took one of the biggest ROA hits last year, falling almost 55 percent from 1.05 to 0.48. CEO Paul Lewis explains that in an environment where loan rates are low and remain that way, most new loans are made at rates lower than the loans being paid off. He cites real estate loans, with fixed rates and long terms, as the prime example.

“As loans turn over, new ones are going onto lower and lower interest rates,” he says. “Of course it’s wise for people to prepay their loans and refinance at lower rates. But returns are going to remain under pressure until well after rates go back up.”

Holding a portfolio bulging with fixed-rate mortgages at anemic returns for the next 30 years is a losing business strategy, which is why San Diego Medical and other credit unions are selling their mortgage portfolios and buying mortgage-backed securities on the secondary market. S.D. Medical’s mortgage portfolio went from zero to $9 million over several years, but has been downsized to $6 million.

“We made the decision a while ago not to carry (30-year, fixed-rate loans) anymore in our portfolio,” Lewis says. “We’re still making those loans, and we encourage our members to refinance the loans they have, but who can predict what interest rates will be 30 years from now?”

Also pressing on ROA are continuing jitters about the overall health of the economy. Laid-off workers or those working reduced hours find payments harder to make, and even the worried working, although fully employed, may become timid about debt and more inclined to save. Both present a challenge for credit unions. On one hand, more depositors have to be paid interest, and returns must be high enough to attract them. But on the other hand, less revenue is being generated because fewer borrowers are taking more conservative loans. Making matters worse are the laid-off or underemployed, who cut back on their loan repayments in a predictable sequence, says Stuart Camblin, CEO of San Diego Metropolitan Credit Union.

“Typically, credit card debt is the first to go delinquent. Then we see unsecured credit lines going unpaid, then car payments,” Camblin says. “Mortgages are the last to go.”

Forecasting tough times for its stagnant Visa portfolio and with a limited ability to offer an amenity-rich card program users could find elsewhere, Metropolitan sold its Visa program in 2002 to MBNA, the mega-issuer of Visa cards based in Delaware.

The sale gave a one-time boost to Metropolitan’s ROA last year, Camblin says, which made this year’s decline look all the worse. Metropolitan’s ROA in midyear 2002 was 1.04, but declined more than 60 percent to 0.41 this year.

Still more pressure on ROA results from the weak returns credit unions are getting on their cash investments.

Cash continues to roll in as it has since the stock market meltdown of 2000, says S.D. Medical’s Lewis. Finding profitable places to put cash has become as hard for credit unions as it has for individual savers, especially since federal regulators insist they do nothing to jeopardize principal.

“Everything we invest in is insured by someone or another,” Lewis says. “So we buy a lot of U.S. Treasury instruments and invest in collateralized mortgage pools from Fannie Mae and Freddie Mac.”

But where bank investors might storm the vault over drooping earnings or stock prices, disgruntled credit union members are more likely to unload their woes on a teller — “our listening post,” says S.D. Medical’s Lewis. Some have withdrawn their funds in favor of investments with higher risk and return, he says, but others have put their low-yielding cash to better use.

“They are paying down their mortgages or other loans,” says Lewis, “which is a pretty wise thing to do.”

Despite the low returns and declining ROA, the NCUA’s Marquis says credit unions are doing exactly the right thing to weather the current run of low interest rates.

“We would be concerned if a credit union were to stretch out too far on yields for long-term assets,” says the industry’s top regulator. “We would much rather see them sell off their 6 percent mortgages today, not make a new low-yield loan, but put their cash in a low-yield, short-term investment. It puts a squeeze on their earnings now, but it will leave them in a better position in the long run.”

Credit unions’ net worth is the indicator the NCUA is more interested in, Marquis added, and that is still holding steady or rising industry-wide.

Despite the perfect storm of conditions driving ROA downward, some local credit unions have managed to post modest gains. Leading with a 64 percent increase in ROA was Carlsbad City Employees Federal Credit Union. In a time when many credit unions are trying to expand far beyond their original fields of employment-based membership, Carlsbad EFCU has remained what industry-types call “plain vanilla” — providing its narrow clientele of city of Carlsbad employees with basic saving and lending services.

Sticking with this traditional agenda may account for Carlsbad’s steady-as-she-goes performance, says Bruce May, board president.

“We really haven’t changed anything that we’re doing,” says the city of Carlsbad police officer. “We’re not into mortgages, just vehicles, personal lines of credit and a few RVs.”

However, the credit union’s members are still borrowing at a good clip and delinquencies are below the norm at 1 percent, May says, probably because the city of Carlsbad is financially sound and there are no layoffs on the horizon.