The world's largest credit union, the $40 billion Navy FederalCredit Union, confirmed last week its interest in acquiring theailing $634 million USA Federal Credit Union of San Diego.

The prospective merger, marked by Navy Federal's participationat an upcoming conference slated for this week in San Diego, comesas the NCUA publicly acknowledged the serious problems at theCalifornia CU. The credit union began last spring soliciting bidsfrom suitors, including Navy Federal.

In a brief statement, the NCUA said the agency “concurs with USAFederal's decision to pursue a merger. USA Federal is under promptcorrective action as required under the Federal Credit Union Act.”Following its traditional practice on potential mergers in process,the NCUA had no comment about the bidders meeting.

In sending an executive team to San Diego, officials of NavyFederal acknowledged the its keen interest in becoming a bidderbased on its Department of Defense footprint and military field ofmembership in San Diego. Navy has 350,000 members and 14 branchesin the San Diego market. USA Federal, which serves the NavalTraining Center in San Diego, has a membership of 61,000 worldwide,with branches in California, Japan and Korea.

USA Federal has experienced a disastrous past 12 months,plunging from 6.62% net worth as of June 30, 2009, to only 2.76% asof June 30, according to NCUA data. The CU posted an $11.6 millionnet loss as of June 30. It lost $16.8 million last year. Both itsdelinquency and charge-off ratios have doubled during the last yearto a combined ratio of 10.20%.

Regarding the merger talks, a Navy Federal spokeswoman said theconsolidation idea was broached at least two months ago by USAFederal's President/CEO Mary Cunningham, who declined to comment onthe merger discussions.

Apart from USA Federal, Navy Federal officials have alsoacknowledged their possible interest in a merger with theNCUA-conserved $156 million Keys FCU of Key West, Fla., which alsoserves a military complex. That CU has been under conservatorshipfor nearly a year and for a time was being partnered with the $505million Dade County FCU of Miami, which later dropped its mergerdeal.

Meanwhile, the NCUA's overall policy on mergers of troubled CUswas coming under new scrutiny last week following a separate July31 conservatorship in Utah of the $139 million Family First FCU ofOrem.

NCUA watchers, including CEOs of the nation's largest andhealthiest CUs on the East Coast and in the Midwest, expressedpuzzlement at NCUA policies on Family First and on the $808 millionArrowhead Central CU of San Bernardino, Calif., in which no bidswere awarded.

Asked whether changes are afoot in how the NCUA managesinvoluntary mergers, John McKechnie, director of public andcongressional affairs, stressed that each conservatorship case isdifferent and that “typical considerations in a decision toconserve vs. award a bid include overall financial condition of thecredit union, loan portfolio and compatibility of field ofmembership.”

Commenting specifically on the failure of Family First,McKechnie said the NCUA's regional office had recommended aconservatorship “in order to gain full operational control ofFamily First, to complete a thorough review of all loan portfolios,to develop a more complete understanding of the Family Firstfranchise value, and to ultimately mitigate the NCUSIF loss.”

Conservatorships, said McKechnie, “are undertaken in an effortto preserve member assets and maintain uninterrupted service ifpossible.” ? –[email protected]

Correspondent-at-Large Heather Anderson contributed to thisarticle.