Published June 2004

Washington’s Credit Union completes conversion
to a bank

By Bryan Corliss
Herald Business Writer

You’ve got to forgive him, Joe Adams says, if he slips and calls one of his customers a “member.”

Old habits are hard to break, but after 67 years as a credit union, in April the not-for-profit Washington’s Credit Union in Mountlake Terrace completed its conversion to become the for-profit First Security Bank of Washington.

Most of the old credit union’s 60,000 members won’t see much difference at the new bank, Adams said.

“We’ve still got the 14 branches. We’ve still got the same employees,” he said. “The only difference is we have a different name, and in the very near future we’re going to have different products and be seen in different areas.”

It’s not unheard of for credit unions to convert to banks, said Jay Tejera, a Northwest banking analyst with Wells Fargo in Seattle. But it’s not all that common either, he said. “Nationally, there’s been several dozen in the past few years.”

Typically, they occur when a credit union reaches the limit in the amount of business it can attract from its membership, Tejera said. “Some people are willing to stagnate at these points, and some are willing to grow and expand.”

That’s what First Security’s leadership decided to do.

A few years ago, the credit union found itself in a position where its total deposits were greater than the demand for loans from members. Rather than let the money sit idle, executives looked for ways to use it, Adams said.

Car loans had been a credit union mainstay for decades, but they dried up in the face of zero-percent financing offered by the automakers. Washington’s Credit Union expanded its mortgage lending, but credit union regulations include limits on home loans.

The credit union leadership decided to get into financing home improvements, working through contractors such as siding companies to provide loans to homeowners.

Things went so well that the contractors began asking the credit union to handle more and more of their business, including out-of-state business, and that caused a problem: Credit unions are greatly restricted on doing business outside the state in which they’re chartered.

That’s what started the conversations that led to the recent conversion.

As a bank, First Security can provide financing to the multi-state contractors that it couldn’t as a credit union. It also can expand its first-mortgage portfolio, since bank regulators are more comfortable with mortgages than their credit union counterparts, Adams said.

And the bank can get into new lines of business that it was blocked from before, including small-business loans. Adams said bank officials are working with some of their former credit union members to determine exactly what small-business services First Security will offer.

Those are some of the advantages to being a bank rather than a credit union, Tejera said. In addition, banks can sells shares of stock to investors, which allows them to raise more money to expand.

But there are tradeoffs as well, Tejera said. Credit unions aren’t taxed and don’t have to answer to shareholders, so in general they’re able to offer basic services for less. That gives credit unions a competitive advantage.

As a bank, the question becomes, “Can you compete effectively without utilizing price?” Tejera said. “That’s a very different strategy. ... These are big cultural changes.”

The conversion process took about a year, Adams said. Credit union executives first proposed the change to members in early 2003. They completed balloting at a members meeting in October, at which 75 percent voted in favor of converting to a mutual association — a form of bank organized somewhat along the lines of a credit union. The former members now own pro-rated shares of First Security, and would get a share of the proceeds if the bank is ever sold.

The conversion officially occurred April 1. It went fairly smoothly, Adams said. “It was almost like you came in that night and flipped the switch.”

With the change, First Security has been beefing up its lending force, working with the out-of-state home improvement contractors and weighing the new small-business services, Adams said. The bank is also studying expanding the branch network outside Washington.

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