A partner to the credit union industry's biggest merger has pulled out, leaving the fate of the deal uncertain.

Seattle Telco Federal Credit Union dropped out of the three-way deal, claiming it could not stomach the delay caused by the National Credit Union Administration's scrutiny.

The $242 million-asset institution, operating, without a chief executive since February, is losing money.

"It is imperative that Seattle Telco develop financial plans, various new programs, and policies for the near future and long term," said a news release issued by the credit union's board on Monday. "Due to the uncertainties of the proposed merger ... Seattle Telco respectfully withdraws."

Seattle Telco, along with Patelco Credit Union and First Technology Federal Credit Union, filed a merger application with the NCUA in August.

Usually such applications are approved within 90 days, but on Nov. 28 the NCUA told the trio they needed to answer more questions before the government would bless the combination. The agency said it feared the combination might harm smaller credit unions and hurt the industry's image.

Seattle Telco's withdrawal won't prevent the other credit unions from working together in some way, said Thomas Sargent, president of First Technology, Beaverton, Ore.

He noted that the initial merger talks were between San Francisco-based Patelco and First Technology, with Seattle Telco brought in later. "It requires us to take a step back, but I don't see us breaking off," Mr. Sargent said.

Patelco and First Technology have several options, according to Mr. Sargent. They could seek another merger partner to replace Seattle Teleco, they could file a new application to merge themselves, or they could enter joint ventures as stand-alone institutions.

Once the agency's concerns surfaced, living in limbo was too much for Seattle Telco. The institution has lost $4.4 million in the first nine months of 1994 as its investment portfolio took large hits during recent interest rate increases. The board voted to withdraw last Wednesday.

In its release on Monday, Seattle Telco said the lengthy merger process was "inhibiting" its operations.

"We reasoned it was time to address our primary function@ Seattle Telco's members," the release said. "We could no longer provide a credit union of the high standard our members have always respected and appreciated."

Seattle Telco is on the rebound, the release said. A new chief executive will be in office in January and the credit union has dumped the volatile investments. Bob Loftus, NCUA's director of public and congressional affairs, said the agency is confident credit union can work out its problems.

If the merger had gone through, it would have created a $1.4 billion-asset credit union, the 10th-largest in the industry.

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