Succumbing to regulatory pressure, two West Coast credit unions last Friday abandoned what would have been the industry's biggest merger.

The high hurdles set by the National Credit Union Administration - including a public hearing and a federal push for an ethics probe at Patelco Credit Union - persuaded the boards of Patelco and First Technology Federal Credit Union to withdraw their six-month-old application.

The managements of both credit unions are incensed by the actions of what they consider a hostile regulator.

"Our boards find ourselves in a position where we can no longer justify the commitment of additional resources to a process that appears to be both inequitable and interminable," said Carolyn Strong, First Technology's chairman.

If successful, the transaction would have created a $1.3 billion-asset institution.

Though the merger is dead, the two credit unions are still looking to collaborate so they can offer high-tech products and delivery systems to members, sources said. Among the options being considered are creating a joint subsidiary or forming an alliance. First Technology also is considering converting to a state charter and trying to merge with Patelco through state authorities.

The fate of an inquiry into alleged management abuses at Patelco by the institution's supervisory committee was up in the air Monday. In a Feb. 24 letter, the NCUA told Patelco it would not rule on the merger until an investigation was conducted.

Even though the deal is off, an inquiry is likely to go forward.

Bob Loftus, the NCUA's director of public and congressional affairs, said the agency will be "closely observing" the fate of the investigation, which would probe allegations ranging from forgery to employee intimidation.

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