The net spread per employee ratio is a productivity measure not found within the NCUA FPR calculations. It is determined by annualizing the net interest margin (interest income less interest expense) and dividing by the number of employees at the credit union.
The leading credit unions by this measure focus on core products and services and controlling expenses. As a result, these credit unions can increase the dividend rate on their members’ share accounts, and still maintain a high net spread ratio. These credit unions also invest in their employees- the average annual salary is two to three times the industry’s average of $38,318 as of June 2005.
*Excludes Navy, NCSECU, & Merck Employee
As the graph above illustrates, credit unions over $1 billion in assets are all over the map. The trend line indicates that credit unions for the most part exhibit higher productivity levels with fewer employees. The circled area represents the most productive and/or efficient credit unions, two of which are STAR One Credit Union and Pacific Service Credit Union, which produce $300,000 and $275,000 per employee respectively.
In contrast, the average for credit unions over $1 billion in assets is $125,000 and the industry average is $100,000. How are STAR One and Pacific Service differentiating themselves and achieving such high results?
STAR One Credit Union (Sunnyvale, CA; $2.9 billion in assets; 131 employees)
STAR One offers a simple product line that includes regular savings accounts, auto loans, first mortgage and first deeds. It does not offer money market share accounts. “We try to keep pace with Fed Funds long-term,” said CEO Rick Heldebrant. “We’ve adjusted our rates upwards a little faster than other institutions. As a result, our members do not switch over to special teaser rates on CDs.”
STAR One pays out 55.4 percent of its income in dividends, which is over twice the industry average of 24.6 percent. The credit union is able to do that by controlling its operating expenses ratio (0.8 percent versus 3.2 percent for the industry). STAR One has only three branches even though it has $2.9 billion in assets, and believes that it can deliver superior member value in terms of service and rates on its core products. As a result, its members typically belong for 20 to 25 years due to the high level of service they receive from STAR One’s core group of employees who earn on average $98,800 per year.
Pacific Service Credit Union (Walnut Creek, CA; $1.0 billion in assets; 98 employees)
Pacific Service is another example of an efficient credit union that focuses on its primary products and services. Although the credit union has members from northern to southern California, like STAR One, it only has three branches but is in the process of building a fourth. It consciously chooses which products to offer to its membership and works with various third party vendors on projects it does not view as its core competencies.
Before Pacific Service offers a new product, three things have to happen according to Noelle Fischer-Herbert, vice president of corporate development. “The members have to want it, we have to be among the elite offering it and we want to make money on it,” she said. The credit union recently began offering risk-based auto lending, but tries to introduce new products in a six- to nine-month time span. “We want our employees to feel comfortable with the new offerings before we introduce it to our membership,” said CEO Tom Smigielski.
Pacific Service delivers a 39 percent dividend payout ratio on its share accounts, which is a result of a 1.7 percent operating expense ratio. “We compare our rates to the local competition on a weekly basis and adjust them as necessary,” said Smigielski. “We try to always maintain one of the top rates in the area.”
While several credit unions are achieving success with various net spread ratios, STAR One and Pacific Service have developed a strategy that delivers superior value with a core group of employees and a core product selection.