Pending approval by the NCUA, the two credit unions will begin joint operations Oct. 1. Navy Fed will retain all of USA Fed's 19 branches, including 11 military base branches in Japan and Korea.

USA Fed's headquarters building will become Navy Federal's new West Coast operations center and will support plans to expand in the San Diego area over the next six years, Sadler said.

"The merger with USA Federal Credit Union is a great opportunity for both of our credit unions as we unite our members, employees and operations," Navy Federal President/CEO Cutler Dawson said in the release. "This is important for us because it strengthens our presence in southern California and expands our branch access for members-here and overseas."

The combined credit union will have over 200 branches worldwide, more than $43 billion in assets and more than 3.5 million members.

Cunningham, however, was not entirely positive about the merger, saying she tried in vain to gain approval for a capital recovery plan that would have saved her institution.

"This is ending not like we hoped at all," she said. "It is no ending at all. It is sad."

Cunningham told The San Diego Business Journal in a Sept. 13 article she had attracted three interested bidders for the CU's Japanese and South Korean branches "that would have saved the institution." However, the NCUA rejected the capital restoration plan as too risky and forced the credit union to merge instead, she said.

NCUA Spokesman John McKechnie said, "NCUA supports USA Federal Credit Union's decision to seek a merger."

Cunningham declined to speak further on the NCUA rejection, although she did confirm the comments in the Business Journal were accurate.

California Credit Union League Interim CEO Dave Chatfield said he doesn't have intimate knowledge of USA Federal's balance sheet and capital recovery plans but said he had discussed the possibility of selling the branches with Cunningham and that he "knows enough to have an educated opinion."

Chatfield said Cunningham told him the Asian branches had been valued by a professional firm at between $25 million and $30 million. An influx of $30 million, minus the institution's $11.6 million net loss so far this year, could have potentially returned capital to September 2009 levels, when it reported 5.52% net worth, provided USA Fed's net losses didn't increase further.

Chatfield said the situation between USA Federal and the NCUA has some resemblance to Arrowhead Credit Union, which was seized by the NCUA June 25 after the regulator rejected its plan to sell branches and loans to Alaska USA FCU. The sale of Arrowhead branches was approved by the NCUA, but the agency nixed the sale of loans.

"It's not just at Arrowhead and USA Fed, there are probably other cases around the country where a credit union had assets that were of value so that when capital ran low, they could sell them and replenish capital to some degree," he said. "It was certainly a viable strategy for USA Fed."

Chatfield also said he hopes Navy Fed joins the CCUL, adding it's his understanding the Virginia-based institution has more members in California in any other state. Sadler said no decision has been made regarding Navy Fed's joining the league.

USA Fed's last profitable year was 2006, when the then-$700 million credit union earned a $2.2 million net profit. Performance turned south in 2007, when the cooperative reported a $5.76 million net loss, driven primarily by loan loss provisions that increased to nearly $8 million from $3 million 12 months earlier.

The following year resulted in an $11 million net loss. Fourth-quarter 2008 was particularly painful, when delinquencies suddenly increased to 2.26% from 1.54% the previous quarter. USA Fed also charged off $1 million worth of Western Corporate FCU paid-in capital and accounted for an NCUSIF stabilization assessment. As a result, net worth plunged to 6.61% as of Dec. 31, 2008, down from 8.08% during third quarter.

Last year, USA Fed's future grew even dimmer, as the credit union reported a nearly $17 million net loss, and at 2009 year-end had only 4.40% net worth and a loan quality score of more than 8.6%, which represents delinquency and charge-off ratios combined. That figure rose further to 10.20% as of June 30, 2010.

Loan losses are a problem in many categories, including credit cards, indirect loans and real estate. As of June 30, USA Fed reported $46 million in modified loans, representing 8.62% of its portfolio. At year-end 2009, more than $4.5 million in real estate loans had been charged off, and almost $3 million has been charged off as of June 30 this year.

Nearly $60 million worth of outstanding interest- only and payment-option other real estate loans were reported as of June 30, compared to $183 million worth of fixed-rate first mortgages on the books and $106 million adjustable-rate first mortgages outstanding.

USA Fed also has $42.6 million worth of indirect loans outstanding, after charging off $1.8 million already this year, resulting in a current 7.31% charge off ratio. All were reported as an outsourced lending relationship, not point of sale.

Credit union spokesman Rob Folsom confirmed USA Federal had a significant mobile home portfolio, which "definitely contributed" to the credit union's losses. However, he could not say to what extent, and would not quantify the portfolio or loss figures.

Cunningham was in Madison, Wis., Sept. 15, resigning from her position on the board of CUNA. She was previously president/CEO of CUNA Credit Union for six years before taking the USA Fed post in 2001.

–[email protected]

Senior Correspondent

Jim Rubenstein contributed to this article.