Corporate credit unions in the Carolinas plan to merge in an effort to deal with increased competition and expected tough new regulations.

First Carolina Corporate Credit Union, Greensboro, N.C., and Carolina Corporate Credit Union, Columbia, S.C., have been discussing a possible combination since June, said First Carolina chairman Jim Blaine.

The boards of both corporates last month endorsed merging to create a $600 million-asset corporate, and the transaction could be completed by September.

"This is to gain efficiencies and (in anticipation of) stricter guidelines," said Mr. Blaine, who also is chief executive of Raleigh-based State Employees Credit Union. "If the new corporate regs are extremely strict, we have to bulk up on assets as costs go up."

"We aren't having any problems at the present; what we were having trouble doing was looking ahead at the future," said John Franklin, chief executive of Carolina Corporate and South Carolina Credit Union League. "We decided to look for a solution now rather than wait for shrinking margins drove us into noncompetitiveness."

For years industry officials and analysts have predicted consolidation among corporates because smaller ones - such as $214 million-asset Carolina Corporate - are increasingly having trouble competing for credit union investment dollars.

A new factor in consolidation is the National Credit Union Administration, which has been cracking down on the industry's liquidity centers. The NCUA's corporate proposal in April, which would require corporates to beef up their capital and narrow their investment powers, nudged Carolina Corporate into asking First Carolina to acquire it.

Mr. Franklin said it would have been impossible for Carolina Corporate to both grow and increase its capital to meet the NCUA's expected target of 4% in three years.

The proposal was roundly bashed, and the agency has withdrawn it. Still, tough new regulations that would make life even more difficult for smaller corporates are expected.

"The idea of corporates combining is nothing new, but NCUA's regulation, or anticipation of the regulation, might be the thing that finally makes it happen" on a wide scale, said Keith Peterson, an economist for the Credit Union National Association. "Corporates don't want to dwindle into insignificance."

The combination would make First Carolina, as the surviving institution would be known, among the top 12 of the 41 corporates. It would be the second-largest corporate in the southeastern United States after Southeast Corporate Federal Credit Union, Tallahassee, Fla.

Mr. Blaine and Mr. Franklin said the two corporates are a good fit. They both used the same computer system, and South Carolina credit unions won't even have to change their account numbers.

"A merger should be transparent," Mr. Franklin said.

One attractive aspect of Carolina Corporate is an agreement with Wachovia Corp. by which the corporate's member credit unions can make deposits and cash checks at the bank's branches.

Although First Carolina's charter allows it to serve credit unions in every state, Mr. Blaine said there are no plans to expand outside the two- state area.

But Mr. Franklin - who would have no further connection with the corporate after a merger - said future mergers are possible.

A study last year determined that corporates with less than $600 million in assets will have a tough time remaining competitive, he said. In the Southeast, only Southeastern Corporate, with $1.1 billion in assets, rises to or surpasses that threshold, according to Dec. 1994 data from Callahan & Associates, a Washington-based consulting firm.

"You'd have to be foolish not to recognize the potential," he said.

Any future merger partner would have to be compatible with First Carolina's conservative, matched-book investment practices, Mr. Franklin said.

"If a corporate was to come in, it would have to recognize the philosophy of being a safe harbor for liquid funds" and not "chase after hot money," Mr. Franklin said.

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