POWELL, Wyo.- As more and more credit unions build up their member business lending programs serving a once untapped market, their entry has ruffled the feathers of many community bankers who see the gain as an encroachment on their territory. Indeed, member business loans have increased from $6.7 billion in 2002 to $8.9 billion in 2003, according to NCUA. Still, credit unions are nowhere near the amount of volume that banks generate, which still make 90% of all commercial loans compared to 0.5% for credit unions. But the swiftly-changing landscape has put community banks on guard as they compete head to head with credit unions for business loans. Some have even gotten the wind unexpectedly taken out of their lending sails when they discover current customers secured their business loans at credit unions. That was the case for First National Bank of Trust in Powell, Wy. The $224 million community bank recently lost a big commercial loan to an outside-the-area credit union, said David Reetz, vice president of marketing and economic development. "It was a very good customer of ours," Reetz said. "I had never anticipated the loan would go to a credit union. They're offering more home loans than they ever did and now commercial loans. To be that aggressive, it's taking business away from us." Reetz said unequivocally the credit union was able to offer the customer a "subsidized rate." "They can do this, we can not," he said. "It's not allowing us to compete on an equal plane." Small business lending continues to become a bigger and vital part of a bank's portfolio because the competition, which includes credit unions, have taken away their consumer lending portfolio, Reetz said. "Consumer lending had been one of our staples but some banks just don't do them anymore," he offered. "Credit unions already have good market share in consumer loans but it's apparent they're going after bigger and longer term loans." According to the Independent Community Bankers of America, the average community bank has $150 million in assets putting it on "uneven" footing with larger, billion dollar credit unions, it claims. The ICBA has been adamant in its opposition to a provision in the proposed Credit Union Regulatory Improvements Act (CURIA) that would increase the member business lending limit of 12.25% of total loan portfolio to 20%. That increase, if enacted, would fly in direct opposition to the original intent of credit unions, the ICBA has said. "We're concerned with their rapid entry into commercial lending so long as they remain tax-exempt," said Ron Ence, ICBA vice president of congressional relations. "Credit unions' purpose was to serve those of modest means. It's doubtful that the Congress envisioned they would be offering member business loans." Ence said because commercial lending is a "highly specialized business," credit unions may not be hiring the experienced staff needed to oversee such intricate loans. "It's questionable as whether they have the experience or staff to do this in a safe and sound manner," Ence said. That is a concern that isn't being discussed loudly enough and the implications could be dangerous down the road not just for community banks and credit union competition but for customers and members, said Thad Woodard, president of the North Carolina Bankers Association. The Tar Heel State has been on the radar screen lately due to the growing number of credit unions that are amassing impressive business lending activity much to the chagrin of some local community banks. "I've seen my share of financial ups and downs and have great concern with depth," Woodward explained. "I saw it with the savings and loans. They had all these new authorities but did not have the depth of management to execute them. There could be a potential for a downfall if the right people aren't hired to execute the loans. Two years of experience is just not enough." Woodward said he recently heard of a rural community bank in Virginia that recently lost two commercial loans to credit unions and similar losses are being heard more "in a lot of corners." Still, banks generally don't have a problem with the small credit unions that are fulfilling their original purpose of serving people of modest means, he said. "But when you talk about the 90 credit unions with $1 billion in assets or more – and that billion dollar club continues to grow – offering commercial lending, it's time to make an adjustment," Woodward said, mainly through rescinding their tax-exemption status. That status continues to be a perennial hot button topic along with the "regulatory burdens" that Community Reinvestment Act guidelines community banks say they are required to follow. One president of a West Coast community bank who wished to remain anonymous citing the number of credit union clients he works with said CRA is "easily the most expensive regulation community banks have to comply with." "It's labor intensive, it's burdensome, it's unfair that credit unions don't fall under the same requirements we do," the president said. As a CRA officer, Reetz knows "the law requires that we make a bigger commitment to low and moderate income borrowers, make qualified investments and community developments." "Community development requires strong financial institutions but if you dilute the marketplace with too many players, there may be a saturation point and what's going to happen when a (strong standout) is needed when the bumpy times occur," Reetz asked, alluding to the S&L crisis in the 1980s. Between 1980 and early 1995, 1,273 savings and loan associations, 1,569 commercial and savings banks and 2,330 credit unions failed in the U.S. due in large part to poorly designed deposit insurance, faulty supervision, and restrictions on investments prevented savings and loans, according to The Savings and Loan Crisis: Lessons from a Regulatory Failure. Despite the changing financial marketplace, savings and loans could not hedge interest rate and credit risks. The collapse of this industry was ultimately caused by "a confluence of adverse economic conditions and misguided regulatory decisions," the authors said. Still, some community bankers view competition from credit unions as a good indicator of whether they're offering their customers the best rates but a gray area has emerged in their eyes. "Competition is always healthy. My biggest concern is if you got an identity and you get benefits because of that identity, then you have to respect and adhere to that identity," said Bob Hahn, president of $93 million First National Bank of North County in San Marcos, Calif. Hahn said he's "not bitter or angry" but has actually "sat on the sidelines and really marveled at how successful (credit unions) are." Indeed, California is home to several of the nation's largest credit unions and many of them have revved up their business lending activity lately. "There's plenty of business to go around but (credit unions) can price differently because they're structured differently," Hahn said, who also believes many of their expanded services are the result of a strong lobbying group. "I would say their lobbying group is more successful and bigger than the banking groups," Hahn offered. "They can expand their membership without definition, not have to pay taxes. They're probably one of the best franchises to manage." A "40% head start" would anger any business owner going against similar competitors, said Cameron Coburn, chairman, president and CEO of $180 million Bank of Wilmington in North Carolina. "Don't get me wrong, banks can and do compete very well with credit unions in commercial lending," Coburn assured. "I welcome competition but not when it's under blatantly unfair rules." With the growing resentment from some community banks towards credit unions access to business lending, there are, surprisingly, a number of alliances between the two that are amicable. Last summer, $75 million First Business Bank-Milwaukee's subsidiary, $550 million First Business Financial Services, partnered with $700 million UW Credit Union to provide trust services to its members. "As commercial banks, we are looking at probably larger (business lending) opportunities than credit unions," said Mark Meloy, president/CEO First Business Bank-Milwaukee. "That's the landscape today but we're not nave to think that it won't evolve into something else. If credit unions or thrifts want to serve business loans, this is a free enterprise. Any business will want to take a look at how growth (from competitors) and the marketplace will look over time." [email protected]