U.S. Central eyes mergers with smaller corporates.

Taking the first step toward inevitable consolidation, U.S. Central Credit Union announced last week that it is looking for merger partners among the corporate credit unions.

Exactly which of the 43 corporates U.S. Central is eyemg is unclear, but observers said prime targets are corporates with assets of less than $300 million.

"Corporates with $300 million or under are having a hard time," said Richard Johnson, president of $12.7 billion-asset Western Corporate Federal Credit Union, the largest corporate. These smaller corporates can't offer market rates to the credit unions they serve, Mr. Johnson said.

By merging, U.S. Central would serve a dual role of providing investing and lending services to corporate credit unions and regular credit unions. Currently it works only with oorporate credit unions.

In announcing the plan last week, U.S. Central officials echoed this concern.

Some corporates "have been searching for new alternatives to more effectively serve the credit unions in their states," said Chuck Puma, senior vice president of finance and marketing for $19.8 billion-asset U.S. Central.

But some industry officials see U.S. Central's expansion bid as a means of seff-proservation as more coqborates invest credit union funds on their own, rather than funneling them into the Kansas giant.

"They've finally made a public statement that the direction they're going in isn't going to work and they're looking for a new one," said Daniel chin err, president of $1.1 billion-asset Indiana Corporate Federal Credit Union.

"I think the market will make it happen even if U.S. Central doesn't do it," agreed Mr. Johnson, who sits on U.S. Central's board.

Although U.S. Central would be performing the role of a corporate by working directly with regular credit unions, it is not trying to compete with them, Mr. Purvis insisted.

After a merger, U.S. Central would serve credit unions previously served by the corporate. But it wouldn't try to serve credit unions in the area served by any corporate that decides to remain independent, he added.

There have long been calls for consolidating corporates because the range and quality of services they offer - and their ability to compete with outside investment companies and federal agencies vary widely.

As of June 30, the 43 corporates held $41.8 billion in assets. Eleven have assets exceeding $1 billion.

While National Credit Union Administration officials had no comment on U.S. Central's announcement, the agency is expected to encourage mergers.

An NCUA-commissioned study of corporates earlier this year backed mergers of U.S. Central with the smaller corporates. It also advocated wider fields of membership for corporates to increase competition.

Although some corporates' charters allow them to have a broad membership base, in reality each corporate has a monopoly on a state or a few states.

"Providing each corporate with a wider field of membership would provide additional benefits to natural-person credit unions and their members," the report said. "Although the additional competition would probably result in mergers among corporates, the surviving corporates would be better capitalized and staffed, and better able to serve their constituencies."

Over the next several months NCUA will be considering new regulations for corporates that could influence how consolidation will progress.

"NCUA historically has been supportive of fewer corporates rather than more," said Charles W. Filson, president of the Washington-based consulting firm Callahnn & Associates. He was the federal regulator's director of examination and insurance in the early 1980s.

In the past, agency officials have said they are concerned about the increasing mount of credit union dollars being invested through Wall Street firms, over which the NCUA has no control.

Mr. Purvis said U.S. Central officials will be discussing their plans with NCUA and corporate officials in coming months.

In preliminary testing of the waters, none of the corporates contacted for this story were interested in merging.

Mr. Schoenherr of Indiana Corporate said U.S. Central needs to do a better job of pitching its strategy.

"I can't see the advantage to our members of merging into U.S. Central," he said. "If there is an advantage, they haven't told us yet."

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