Though Congress has loosened membership restrictions, some federal credit unions in California are pinning their hopes for growth on the state charter.

About 72% of the state's credit unions are still federally chartered, but 11 have converted to state charters since the beginning of 1997, including eight this year. The state charter does not restrict credit unions geographically, lets them serve companies of any size, and imposes fewer limits on loan products.

"Even with the new field-of-membership rules in HR 1151, credit unions have much greater latitude under state regulations," said Greg Badovinac, regulatory analyst at the California Credit Union League.

Among the recent converts is First Entertainment Credit Union in Hollywood.

Before it swapped charters last August, the $215 million-asset nonprofit was limited to serving entertainment-related companies within 25 miles of its headquarters. Its members include employees of Warner Brothers, Sony Pictures, and MGM Studios.

Now it is reviewing a host of business opportunities throughout California and Nevada-and tapping a backlog of nonentertainment companies in its own backyard.

"We've added 40 companies and two associations the past 60 days," said Charles Bruen, president and chief executive officer. "We've had a waiting list for years."

Of course, life for federal credit unions is not all that bad. The law passed by Congress this summer will soon let federal credit unions again add companies to their fields of membership-a right suspended in 1996 when the Supreme Court enjoined credit unions from adding member groups.

More significantly, federal credit unions do not pay taxes. California credit unions, on the other hand, must pay state tax on income from investments and pay fees to local utilities.

But limits still exist. Federal credit unions may not add new companies that have more than 3,000 employees.

Also, the National Credit Union Administration is proposing to bar most community-based credit unions from serving cities or counties with more than 300,000 people. A vote is scheduled for Dec. 17.

The uncertainty surrounding the community designation persuaded Gene Roberts, chief executive officer at Financial 21 Community Credit Union in San Diego, to switch charters last March.

Once an occupation-based credit union, Financial 21 wanted to convert to a community charter so as to expand membership. And though it could have done so with its federal charter, Mr. Roberts said, the process is complex and burdensome and could take up to 18 months to complete.

By comparison, conversions in California charters take less than six months.

"We didn't want to jump through all the hoops, wasting time and money," Mr. Roberts said.

Another reason to convert is gaining the ability to serve a local chamber of commerce. Unlike federal credit unions, state institutions are allowed to serve chamber employees and employees of member companies.

As long as California-chartered credit unions are taxed, California bankers are likely to raise little objection to the wave of conversions. Indeed, bankers lobbied vigorously-and successfully-against a proposal before the state Legislature this year that would have exempted state- chartered credit unions from paying taxes.

Still, those that have converted do not seem to mind the expense. Financial 21, which had a potential membership of about 12,000 as a federal credit union, can now target up to one million customers.

"The taxes are a small price to pay for the ability to grow," Mr. Roberts said.

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