Investment portfolios are like aircraft carriers — they take a long time to change direction. That fact of life has dogged credit unions in the last few years as their CEOs and CFOs have labored to adjust their institutions’ cost of money with investment returns in the continuing climate of falling interest rates. This year’s ranking of their efforts as return on assets shows that for the most part, their adjustments are successful.

The National Credit Union Administration reports that credit unions with ROA greater than 0.7 are doing fine, those with 1.0 are stellar. By that measure, San Diego had two fewer stars in the year ended June 30, but more strong performers overall.

Six credit unions notched ROAs over 1.0, including repeat performers San Diego County, Paradise Valley Federal and First Future. Joining them in the firmament this year were Mission Federal, Pacific Marine and San Diego Medical Federal.

But in 2003, only three local credit unions were in that healthy 0.7 to 1.0 range and 17 were below 0.7. This year seven more moved up, leaving 12 in the lowest category.

Return on assets is a financial institution’s yield on assets minus its cost of funds and its expenses. ROA is expressed as a percentage of assets. For credit unions, who as nonprofits cannot issue stock, ROA is the only way to build equity.

“Our ROA goes straight into our undivided earnings,” explains Joel Hudson, CFO of Cabrillo Credit Union. Undivided earnings plus the regular reserve comprise Cabrillo’s net worth, which on June 30 was nearly $13.4 million. Cabrillo posted a 0.93 ROA on June 30.

Like almost all lenders, credit unions have staggered under a tidal wave of loan refinancing during the last few years of declining interest rates. As borrowers flooded in to exchange their high interest rate loans for cheaper ones, credit unions could only watch as the better-yielding assets in their portfolios evolved into less profitable ones.

Nor was the investment market any consolation to credit union money managers. Most are limited by their regulators and the conservative investment philosophies of most credit union boards to government and government-insured securities such as Treasury CDs and the mortgage pools offered by Fannie Mae and Freddie Mac. Although tops for security, their yields are notoriously low.

The result was what the money folks call compression, the narrowing of the margin between what money costs and what it can earn. Until those two rates resumed a more normal spread — a process which has taken several years — ROAs suffered.

Regulators typically advise credit unions to take hits on their ROA as soon as possible and get them over with. David Marquis, the NCUA’s chief of examinations and insurance, says he would rather see a credit union sell off a 30-year, 6 percent mortgage and reinvest in a low-yield, short term investment than carry the mortgage in its own asset portfolio.

“It may push down ROA in the short term, but it leaves the credit union in a better position in the long run,” Marquis says.

Operating expenses also influence ROA in addition to the structural forces, and their impact can send returns up or down. At USA Federal Credit Union, CEO Mary Cunningham says ROA took an upward bump when the lender sold its 43,000-square-foot headquarters/branch in Scripps Ranch in favor of separate offices in owned and leased facilities.

“We’d had our Irma Road offices and branch since the ‘80s and as time went on, the nature of the area had changed to become more residential,” she explains. “It wasn’t convenient or appropriate anymore, so we built a branch at Black Mountain Road and Mira Mesa Blvd., and put administration in leased space about two miles south.”

Other hikes in ROA are smaller but still effective.

“We took a look at our budget in 2003 and decided it wasn’t where we wanted it to be,” says Bob Hamer, executive vice president at Mission Federal Credit Union. Through a combination of belt-tightening and an active push on new loan products, Mission Federal turned in one of the best local gains.

And the future? USA Federal’s Cunningham predicts a rocky path for credit unions as interest rates make a slow rise.

“We must begin paying higher dividends right away to attract depositors,” she says, “but the loan activity typically lags. We are already planning to see an impact on our bottom line.”

— Joanne Gribble