Nearly half the locally based credit unions in this year’s ranking had returns on assets — or ROA — above the 1.0 level generally regarded as good by financial industry experts.

ROA is the ratio between net income and average total assets, expressed as a percentage, explains Kim Bannan, vice president of credit union development, research and information of the California Credit Union League. “It is one way to tell how well a credit union’s management has done in building income off every dollar in assets,” she explains, adding that the 1 percent benchmark applies to all kinds of financial institutions.

Topping the list at 2.25 was San Diego County Credit Union, the homegrown behemoth nearing $2 billion in assets.

Credit union officials declined to comment on SDCCU’s top ranking. But CEOs at other credit unions suggested various ways to explain the good performance. Ron Martin runs Mission Federal Credit Union, the second-largest credit union at $1.3 billion in assets, with a 1.51 ROA, third in the local ranks. His credit union’s high score is the result of the one-time sale in the second quarter of a student loan portfolio to Brazos Group of Texas, one of the largest buyers of student loans behind Sallie Mae and Citibank.

“We remain in the student lending business,” Martin says, “but these particular loans were indexed to government rates, which are at their lowest rates in history right now.”

One-time deals such as this sale bump up ROA, but other factors are more common influences. Marla Shepard, chief executive of Mira Mesa-based First Future Credit Union, says return on investments, expense control and control of loan delinquencies are the real basis of ROA for credit unions.

“Like a lot of credit unions, we make very conservative investments with the funds that are not loaned out,” Shepard explains. “We make only insured investments below the $100,000 federal insurance level,” using a broker to locate favorable rates anywhere in the country.

In the past, for example, First Future has chunked $99,000 in 12-to-24-month certificates at First Capital Bank in Georgia, American Home Bank in Pennsylvania and Pacific Crest Bank in San Diego, among others. It also uses the Western Corporate Federal Credit Union, a “credit union for credit unions” based in San Dimas, and government agency securities.

North Island Financial Credit Union takes an even more conservative route, investing directly in government paper such as the Farm Credit Bank, Fannie Mae, Freddie Mac and Treasury bills, says Kim Reedy, chief financial officer.

Second on Shepard’s list of ROA factors is expense control, which can be hard when trying to expand services or upgrade technology.

“We took a hit on our ROA a while ago for a new mainframe computer, and when we opened our branches in Carlsbad and Chula Vista, and remodeled Escondido,” she says, but adds that these costs were incurred intentionally, to improve service. Mission Federal’s Martin and the Credit Union League’s Bannan agree that, in these situations, credit unions are much more likely to endure a downturn in ROA than to dip into capital.

Credit unions build capital differently from banks, Martin explains. “Banks can go to the capital markets and raise money for equity. We don’t. Our capital is built over time as a function of our internal earnings.” Furthermore, according to Bannan, credit unions are required by their federal regulator — the National Credit Union Administration — to be capitalized at 7 percent, 1 percent higher than banks.

Finally, for ROA computation there is a delicate balancing act on loans, the core asset for credit unions. First, loan rates must be weighed against interest paid to depositors, Bannan says. Both must remain competitive, she said, adding that loans must be balanced against deposits to ensure adequate income.

Most credit unions are being swamped with deposits, the so-called “flight to safety” which has been going on throughout the current stock market slide. Until credit unions can turn those funds around into loans, she said, they must be parked in investments, most of which are low-earning.

“If investment rates turn around, we’d see ROAs recovering at some credit unions,” she predicts. Even so, she said, for California credit unions as a whole, ROAs steadily climbed over the last few years, from .94 in 1997 to 1.20 as of June 30.

Mission Fed’s Martin observes that even this deposit-heavy situation can be to a credit union’s strategic advantage. “In the case where a credit union gets an influx in savings but hasn’t yet been able to turn it around in loans, the board may make a strategic decision to accept a lower ROA in order to pick up new market share and build more profitable relationships over time.”

The 1 percent benchmark, while widely accepted among professional financial managers, is not without controversy in credit unions.

“Some people think that if your ROA is 1.0 or more, you’re not doing a good job for your membership — your loan rates are too high or deposit rates are too low,” she observes. “They will ask you, ‘Are you a loan or a bank?’”

The challenge for credit unions, she says, is to maintain loan and savings rates, watch expenses and still preserve a good ROA. She notes that credit unions typically do not have as many fees as banks, or charge as much. It’s a revenue stream banks enjoy, Shepard says, but credit unions generally do not.

Just as one-time events can boost a credit union’s ROA, one-time costs or write-offs or accounting changes can depress it. That’s the case for Financial 21 Community Credit Union, where Chief Executive Gene Roberts explains that his June 30, 2002, ROA “got hammered” by a one-time adjustment required by auditors for a joint venture in which Financial 21 partnered with four Los Angeles-area credit unions to make mortgage loans.

“Our auditors required us to have our loan servicing valued by a third party, and it came back substantially less than we had valued it,” Roberts explained. “Ordinarily, our ROA range is about 75 basis points.”