The financial titans make the headlines: NationsBank buys Bank of America. Wal-Mart Shops For California Banking Base. US Bancorp Swallows Peninsula And Scripps Bank. Depression-Era Insurance-Banking Barrier Broken.

While the tectonic plates move in banking, the evolution of another financial services sector — credit unions — has taken place more quietly. Mergers, product expansion and open membership all held the promise of turning the staid, middle-class credit union industry on its flat-top haircut. But while credit unions over the last 20 years have steadily won the right to enlarge their membership and broaden their product offerings, not all have embraced their new freedoms, nor found these options worth the cost or effort.

Credit unions have their roots in 19th century Europe, but in 20th century America they were aligned with employers or affinity groups. In San Diego, for example, Solar workers formed their own financial cooperative in 1939, and Pacific Bell, AT&T and Western Electric workers formed Santel Credit Union in 1947. The JACL Federal Credit Union was established in 1955 to help Japanese-American citizens get financial services denied to them by banks in the postwar years.

State and federal regulators gradually allowed credit unions to expand their offerings, such as permitting checking accounts in 1980. But even with the freedom to offer more products, when credit unions wanted to grow, they had to attract new members from within their existing potential membership pool or entice current members to bring more of their business from another financial institution.

More change came a few years later when the National Credit Union Administration and various state regulators began allowing credit unions to recruit new employee groups (known as select employee groups, or SEGs) beyond their traditional bases. Then, not long after winning these more flexible membership rules, credit unions (including many in San Diego) converted from federal to state charters and thus from federal to state regulation. In the process some also became “community” credit unions with the latitude to admit anyone with San Diego connections.

So today, with the ability to merge and open membership, San Diego’s $606 million First Future Credit Union, the direct descendant of Santel and the Solar Employees Credit Union, is open to anyone who lives, works or worships in San Diego County.

Cabrillo Credit Union, where Anne Legg is vice president of marketing, also can admit almost anyone who lives or works in San Diego County. It experimented with blending its new open membership freedom with its historical strength of working with employee groups when it approached the numerous high-tech employers near its Scripps Ranch branch. CCU found them uninterested in offering Cabrillo Credit Union membership as an employee benefit.

“We have actively pursued Hitachi and the other employers up there,” Legg says. “They are very good prospects, but it’s hard to get access to them.” So her $96 million credit union still focuses much of its attention on its historical membership base, the U.S. Border Patrol and other non-defense, non-Postal Service federal employees. Legg estimates those groups account for about 70 percent of CCU’s membership.

Although such a long-established field of membership might be saturated with credit union services, Legg reports the Border Patrol has continuing vitality as a customer base because of recent concerns about terrorism. Not only has the agency been hiring but, she says, many border agents have moved on to become sky marshals. Thus, where the Border Patrol might have graduated one recruit class monthly prior to Sept. 11, it now graduates several. The new agents are fertile ground for Cabrillo’s membership recruitment, which often takes place during the new agents’ orientation. CCU’s business from the community at large has picked up in South County, where Cabrillo has a high-visibility branch on Palm Avenue and an ATM adjacent to a McDonald’s.

Despite the obstacles and labor-intensiveness, USA Federal Credit Union has made the commitment to add new SEGs in both conventional and inventive ways. Its traditional field of membership includes active and retired military, Navy contractors, civilian federal employees, Navy League members, their families, and others with various military connections.

Neva Buckhanon is the credit union’s regional business development manager. She reports that after USAFCU opened its Temecula office in 2000, she used old-fashioned research and cold calling of the Chamber of Commerce’s roster to identify likely SEG prospects.

“We’ve added four of the Temecula Valley’s seven largest employers to our membership,” she says.

Most federally chartered credit unions who opt to prospect widely for new members find it easier to have a state charter, reports Gene Roberts, president and CEO of Financial 21 Credit Union and a longtime credit union professional. State charters are a little more wide-open, he says, and the state has a more businesslike approach to regulation.

But USAFCU remains federally chartered, and thus, has had to be more creative in attracting new members. Enter the Prime Meridian Association, a group of people, Buckhanon explains, “who are interested in saving money at a certain level.” The club is open to anyone, she says, for a $10 annual fee, and credit union membership is available to any Prime Meridian member. Some 5,500 have joined.

Financial 21 also has switched to a community charter and has a business development staffer approaching new SEGs. But Roberts believes that only a minority of local credit unions are banking on adding new SEGs to fuel growth.

“Our business development person is reactivating some of our older relationships, and working on community projects as a way of our giving back to the community,” Roberts says. “Adding new SEGs in onesies and twosies is a tough way to market.”

Even tougher is adding members one by one, but North Island Financial Credit Union is giving it a go via a clever plan with a traditional marketing partner, the car dealer.

Michael Maslak, NIFCU’s president and CEO, explains that through a DBA, North Island Auto Group, NIFCU buys loans made by auto dealers themselves. “The car buyer may or may not be a NIFCU member, but we don’t care,” Maslak explains. “We are buying paper from the dealer through a wholesale delivery channel.” And in the process of gaining a productive asset, Maslak adds, NIFCU gains the name and address of a prospective credit union member for follow-up marketing. In other words, he says, “we get the marketing contact,
plus we get the loan.”

NIFCU has a similar arrangement with mortgage brokers. “They are shopping around for loans, and we’re buying paper,” says Maslak. In both arrangements, he adds, “we’re prospecting for members and generating good retail loans.” NIFCU is also one of the few local credit unions making business loans, along with Mission Federal and San Diego County credit unions. All three focus on loans below $10 million, with most at the lower end.

NIFCU’s business and wholesale loan programs exemplify the aggressive product line expansion some credit unions are adopting. Most local credit unions are small and offer a basic line of services: vehicle and boat loans, lines of credit, signature and Visa loans, ATMs, second trust deeds, IRAs and certificates of deposit. But after they reach about $50 million in assets, many credit unions branch out into a dizzying array of products and services, such as first and second mortgages (including jumbo loans), “tax saver” car loans tied to real estate liens, insurance, annuities, car buying services, securities, IRAs, stocks, 401(k) management, bill paying, Internet banking and online brokerage.

Local credit union execs say their institutions have adopted new products and services over the last decade for several reasons. First, says Rod Calvao, president and CEO of San Diego County Credit Union, is because members demand them.

“When you have a board of directors that is truly engaged with your membership, and a staff that is trained to listen to people when they come in,” he notes, “as managers you should have a pretty good idea of what your membership is asking for. Our collective membership knows what it needs to be successful in their financial lives. They will make it clear, and all we have to do is listen.”

USE Credit Union, where Karen Harrison is senior vice president of marketing and corporate development, sees adding new products as a way of adding value for existing members. She cites USE’s Turbo Loan program as an example, where the credit union makes a car loan but holds a non-recorded “courtesy lien” against the borrower’s real estate, thus making the interest tax-deductible in most cases. Like any business, USE Credit Union is following a tried-and-true rule of marketing — that it’s easier to get new business from existing customers than to bring in new ones.

Another reason credit unions are adding products, especially on the lending side, is the continuing savers’ mindset. Mission Federal Credit Union, for example, has seen its deposits double in the last six years.

“Like other insured financial institutions, we are seeing a substantial growth in deposits,” says Ron Martin, president and CEO of Mission Federal Credit Union. “And we are working diligently to turn those deposits around by trying to be creative on the loan side.” This includes making special computer loans of interest to its education-based membership, partnering with Pardee Homes in a special homebuying program, and making low-fee loans for replacing members’ shake shingle roofs. At $1.4 billion, Mission Federal is the second-largest credit union in the county behind San Diego County Credit Union.

Credit union executives have a certain messianic tone when discussing their institutions. The words “nonprofit,” “volunteer-led,” “member-owned” and “cooperative” come up often, and it’s true that credit unions are all of those. And banks, especially local community banks, largely supported the original credit union concept, says Bill McLaurin, president and chief executive of the $80 million Bank of Coronado.

“When the San Diego firefighters got together and decided they wanted a financial co-op, I had no problem with that,” McLaurin says. “The purpose of credit unions was to help people who worked together. It’s a social benefit. “But when all you have to do to join Mission Federal is register 98.6, well, that’s not having a field of membership.”

McLaurin, like most bankers, especially dislikes the tax exemption credit unions hold by virtue of being nonprofits. “On every dollar we make,” McLaurin says, “we pay 41 cents in taxes, including corporate and property taxes. So when we price a product, you have to remember that we’re paying these taxes and we have to factor that in.”

And McLaurin scoffs at the credit unions’ argument that because their members are also their owners, profits are distributed back to their members via lower loan rates or higher savings rates, and thus they are nonprofit. “Hey, we distribute our profits back to our owners too. Anyone can buy stock in Bank of Coronado.”

The credit unions are benefiting from their largely affluent membership, McLaurin says, without returning anything to the community. “I’m paying for the policeman on the corner, they’re not.”

Of course, a proponent of a sharp reduction in taxes would argue that more money in the consumer’s pocket is good for the economy and ultimately the government. But we digress.

Credit unions offer inexpensive services, and as long as they do, more people are likely to use them.