For One CEO, A Bull Market

SAN DIEGO-SD Medical FCU has been ranked No. 1 among all credit unions nationwide for Average Investment Yield for nine consecutive quarters, but according to its CEO, being on top is not the goal.

SD Medical FCU closed 2011 with a 6.20% average yield on its investment portfolio, far ahead of the 4.84% average yield reported by FedFinancial Credit Union in Maryland, which was ranked #2 in data compiled by Callahan & Associates. The average yield on all credit union investment portfolios was 1.50% during 2011, according to Callahan's.

Paul Lewis, head of the $71.1-million credit union, told Credit Union Journal he personally handles the investment portfolio. What's the secret? "Study and dedication," said Lewis.

"Most CEOs let someone else manage the portfolio, so I'm somewhat unusual. I have been studying investments throughout my career," he said. "I have an MBA in financial management, and about 12 years ago I began working with a firm called Performance Trust. The company taught me a consistent methodology, which is very important. Certainly changes are made over time, but the key is to be consistent year after year."

Loans to members remains the "primary concern" of SD Medical, Lewis continued.

"We do not do investments over loans, but if we have surplus liquidity our philosophy is to do the best we can with that money," he reported. "Many credit unions just let that money sit, but I consider it a profit center. I am looking for the best risk-reward opportunities in the marketplace, with the assistance of my broker."


SDMFCU's Strategy

SD Medical follows a "shape management" approach, which Lewis said means the anticipated performance of any bond is analyzed in several different interest rate scenarios and plotted out. Then, the projected performance of a given bond is plotted against investment alternatives.

"We are looking for a chart in which we get the best overall risk-reward," he explained. "One bond might perform well in one rate scenario, but not as well in the opposite scenario."

In addition, SD Medical is always looking to balance its portfolio. For instance, Lewis said, if it has several bonds that benefit in a "rates-up" scenario, then it balances with bonds that would perform in a "rates-down" scenario.

"We are always looking for balance and always mathematically based," he said. "I am not looking to predict rates-we want to perform the best we can in all different rate environments. We are the best-performing credit union in the country in yield, which is really cool, but it is not our goal. We have been the best-performing credit union in the country for the last nine consecutive quarters, according to Callahan. We try to outperform in any environment, and sometimes you do really well. We prepare ourselves for luck."

Lewis acknowledged the size of SD Medical's investment portfolio is "in a sweet spot." If it had a bigger portfolio, it might not be able to perform the way it does now, he said.


Extra Funds Go To Net Worth

"Our portfolio is not tiny. At one point we had $32 million, right now I have $18 million, with the size of the portfolio driven by loan demand. It is easier to be choosy if you have a smaller portfolio. If I was managing WesCorp's portfolio I couldn't do that."

In its December 2011 Call Report, SD Medical had $790,648 in net income prior to assessments. It paid $103,033 to the Corporate Stabilization Fund, leaving it with net income of $687,615. It reported more than $1.4 million in income from investments. Its net worth ratio was 13.07% ("well capitalized").

"Over the years we have made a lot of extra money from our portfolio, and some of that has gone into net worth," Lewis said.

SD Medical serves people who reside in San Diego or the surrounding area, those who work in the medical field and current or former military.