The Relationship Of Size & Growth

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Eight years ago the Filene Research Institute set out to answer what it thought was a simple question: does asset size really matter?

The answer to that question has turned out to be a whole lot more complicated.

"We were curious about why credit unions grow," said Bob Hoel, executive director of Filene Research Institute, following the release of the institute's most recent study, "Asset Growth at Credit Unions: Growth in Membership Versus Assets Per Member." It was authored by University of Wisconsin professors Jon Udell and William Kelly. "We often think that little credit unions cannot grow, but the averages for small credit unions are very misleading. We looked at the top 20% of credit unions in terms of growth for each asset category, and what we found is that the top 20% of smaller credit unions do extremely well. But the laggards in that asset range really pull down the averages considerably."

Those averages, Hoel suggested, could easily lead one to believe that small credit unions simply don't grow like their larger counterparts, and indeed, the study found that the largest credit unions do, on average, grow faster than small and mid-sized credit unions. So, on the surface, size does matter.

"But the researchers also determined that there is nothing inherent to small credit unions that keeps them from growing," he explained. "In fact, in our previous research, we found that the first predictor of how well a credit union will grow is: are you a good lender? Every time you find a great lender, no matter what size, you will find a fast-growing credit union."

When credit unions in each size category were divided into fast-growers and slow-growers, the researchers found that among fast-growers, size does not have a strong correlation to growth rates. The smallest asset category grew about as fast as the largest, and across all asset sizes growth rates in real assets fell into the rather narrow range of approximately 9% to 11%. Among fast growers in the broad range of asset sizes from $5 million to $500 million, size did not show a strong correlation with either the growth rate of either members or assets per member.

More important to a credit union's rate of growth than size is how it goes about growing: growing the number of members or growing the amount of assets per member.

"If you really want to grow, and you want to grow quickly, then you must attract new members," Hoel counseled. "It's clear that attracting new members is the key if you wish to be rapidly growing."

Growth in membership was roughly one-and-a-half to two times as important as growth in assets per member in contributing to overall asset growth among fast growers.

And just when you think size doesn't matter, it comes into play again here, too. "Across asset sizes, they do not see a strong association between size and the subsequent growth rate of assets per member," the study's authors said. "However, they do see a strong relationship between credit union size and subsequent growth rate in number of members. Membership growth appears to be the dominant reason that larger size is associated with higher growth in total assets."

But that doesn't mean that growing the assets-per-member ratio is not worth the investment. "Credit unions with more assets per member have lower operating expense ratios than other credit unions," Hoel observed. "So, instead of trying to bring down the expense ratio by cutting operating costs, you can try to boost your assets per member, instead, and I think a lot of people miss that. You can shrink the numerator, or you can boost the denominator."

The Slow-Growers

Among slow-growers-the bottom 20% in real asset growth-the study found that growth rates of membership increase steadily with asset size, ranging from about negative 3% per year among the smallest credit unions to a positive 3% among the largest. Slow-growers in most asset size categories had negative growth in real assets per member.

"The findings indicate that fast growers in all but the smallest asset size categories give strong emphasis to membership growth, while not neglecting growth in assets-per-member," Hoel offered. "Among fast-growers below $5-million in assets, growth in real assets-per-member rises to the same level of importance as growth in membership. Credit unions of all sizes that wish to grow should give special attention to increasing their membership growth, while not neglecting their growth in real assets per member. Nothing inherent in smaller size necessarily hinders subsequent growth. Many small credit unions can and do grow as rapidly as their larger colleagues."

But can a credit union thrive but also not grow? "I suppose it's possible that you could have a credit union out there that's thriving but not growing, but you'd have to at least be able to cover inflation," Hoel said. "We're not saying that growth is good or that growth is evil, but the fact is it's hard to remain vital if there is no growth. It's difficult to keep an organization sharp without growth. It's what challenges your people, and it's a good indicator that you are serving your members well, because they will bring more business to you if you are serving them well."

Another point Hoel said the research bears out is that growth of membership doesn't have to mean converting to a community charter. "There are plenty of ways to grow regardless of the type of charter you have," he offered. "For those credit unions that serve groups, the fact of the matter is that employee turnover is substantial, especially with all the retiring Baby Boomers. We have to do a better job of reaching out to new employees. Plus, there are other types of employees we can go after: contract employees and outsource employees. And then there's all those family members."

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