Every now and again it's interesting to study the statistics ofthe credit union industry. Some we find merely satisfy an idlecuriosity, while others can have far more serious implications.

For example, well over half of the credit unions under $100million in assets are experiencing declining membership, accordingto a peer-to-peer analysis run by a credit union CEO that he sharedwith me. In fact, one credit union that shall remain nameless had acapital ratio north of 19%, yet was declining in membership andchecking penetration over the past three years after more than 700%promotional cost per member.

Just looking at these statistics you don't get the entirepicture of what was going on, but you can ask: Is this a prudentuse of members' money? That is the ultimate question all creditunion management teams must face. Sitting on that much capital withnegative membership growth is not a long-term businessstrategy.

Yet, other credit unions with less than $100 million in assetsinvested less money per member and experienced much greaterreturns. My comments aren't a death cry for smaller creditunions–far from it. Of the existing 7,339 credit unions accordingto Merger Solutions Group's David Bartoo, 5,970 have less than $100million in assets. But there comes a point when some managementteams and boards need to think about what's best for theirmemberships, whether that's new management, fresh ideas or amerger.

The NCUA has raised the plight of many smaller credit unions but has said it doesn'tknow what to do about it. While the potential individual hits tothe insurance fund do not amount to much, the potential cumulativeeffect could present a major safety and soundness concern. Rightnow, potential merger partners are scared to take on bad assets,Bartoo explained. Instead of an increase of credit union mergersover the crisis, the industry is actually experiencing adecrease.

Over the last decade, there has been a 34% decrease in creditunions under $100 million in assets. By contrast, credit unionsover that size have experienced a 44% increase. Interestingly bankswith less than $100 million in assets have decreased 48%, whilelarger banks only by 11%. This is somewhat apples to orangesthough, given that the largest quartile of credit unionsencompasses those over $29.8 million in assets, while banks'largest quartile comprises those over $220 million in assets.

Unless a credit union needing a merger partner is a perfect fitfor the institution taking it over and holds high-quality assets,the NCUA might need to sweeten the pot to make the deal. In 2009,there were 28 failed credit unions; 16 were liquidated and 12 wereassisted mergers, according to the NCUA. The total cost to theinsurance fund was $124.2 million on nearly $3 billion in creditunion assets, or 4% of assets on average. (Keep in mind one ofthose was the merger of $1.6 billion Eastern Financial into similarly sizedSpace Coast. The NCUA couldn't have paid a whole lot for thatone.)

However, in 2010 the NCUA said the assets of failed creditunions only reached $577 million, but the total cost of the 18liquidations and 10 assisted mergers tallied $220.7 million,equaling and average of 38% of the assets. For 2011, the NCUA hasshut down 11 credit unions totaling $396.6 million in assets at acost of $40.1 million for an average loss of 10%.

On average over the two-and-a-half years, theNCUA has liquidated these credit unions at a 17% loss ratio. At thesame time, the FDIC took median hits (I know median is not the sameas average, but I'm working with the data I have) of 23% for 2011,23% for 2010 and 29% in 2009, according to SNL Financial.

Getting back to that 17% figure of deposit insurance losses forfailed credit unions, let's look at the now $1.5 billion Texans Credit Union, which is under NCUAconservatorship. The credit union is so large and geographicallyconfined, it's limited in potential merger partners. At 17%, whichwould be historic average over the last few years, that could be a$255 million hit to the NCUSIF, greater than the $170 million hitfrom St. Paul Croatian's failure.

Now take that 17% and let's extrapolate that out to the currentCAMEL 4 and5 credit unions. The NCUA reported that as of June 30,troubled credit unions' assets totaled nearly $40 billion. Thatequals a potential for $6.8 billion in losses to the insurancefund. Obviously, some of the troubled credit unions will climb outand some will fail but that's a snapshot of the potential. TheNCUSIF's reserve balance stands at nearly $1.2 billion.

But looking at the NCUA's budgeted loss expectations to theactual, are these credit unions really that bad off? How troubledare the CAMEL 4 and 5s? Is the NCUA putting off liquidating ormerging some credit unions? How is it that year-to-date the NCUAhad budgeted $325 million for insurance losses yet the actual hasbeen $6.2 million?