Going commercial: some say unlocking the amount of business loans credit unions can make could kill community banks.

• Author: Maley, Frank
• Position: FEATURE - Illustration

Tamara Short Weightman was sure there was a better way to run a portrait studio. As the proud mother of a 16-month-old boy, she had been to several in Raleigh. None got it quite right. They were too expensive, for example, or produced lame pictures.

She found the kind of studio she wanted while visiting family in Northern Virginia. "You know," she thought. "This is something I could do. I could replicate this in Raleigh."

Problem was, she didn't have enough money. She started writing her business plan and looking for cash but could come up with only $25,000--savings from her job as a systems analyst for Dallas-based Affiliated Computer Services. She went to her bank in early 2003 for a $60,000 loan, but Charlotte-based Bank of America told her it didn't offer the type she needed.

She also struck out at two other banks. One gave no reason for turning her down. The other offered to lend her the money if she could put $60,000--perhaps borrowed from a relative--in a certificate of deposit as collateral. "In other words, if you don't need the loan, we'll give it to you," she says.

Affiliated Computer Services joined Raleigh-based Coastal Federal Credit Union that summer. She applied to Coastal that October for a business loan. She closed on the loan in March after nailing down a location for the business between a Babies "R" Us store and a Chuck E. Cheese's pizza parlor.

Her business, Snaphappy Inc., hasn't done as well as she'd hoped. She opened it in June, after the Easter rush, and advertising proved more costly than expected. But she has made her loan payments and hopes business will pick up around the holidays.

She's just one example of how banks fail some would-be entrepreneurs and why credit unions need the freedom to offer more business loans, Coastal CEO Larry Wilson says. "We're not talking about someone that's illiterate here. This lady's pretty bright. And I'm surprised that she was turned away."

Not all credit unions offer business loans. Most can't allow their commercial-loan portfolios to exceed 12.25% of assets because of a law Congress passed in 1998. Credit unions want to change that. A bill before Congress would raise the cap to 20%--the same as savings-and-loan associations. Some loans don't count against the cap. If loans to an individual member total less than $50,000, they are exempt. The bill would raise that exemption to $100,000.

It would have only long-term consequences in North Carolina, where no credit union subject to the cap is close to it. But it has intensified the issue of how close credit unions can come to acting like banks before they're taxed like banks. Credit-union executives say they're a band of Davids fighting legions of Goliaths. Bank backers cast credit unions as government-sanctioned tax evaders that don't deserve greater commercial-lending authority.

Big banks have little to fear. Bank of America, the top revenue producer on BUSINESS NORTH CAROLINA's Financial 100 ranking of the state's top lending institutions, has more in assets than the nation's credit unions combined. Credit unions hold about 10% of all deposits statewide and nationwide. But smaller banks have found it tough to compete against them for deposits and consumer loans and don't relish the notion of more competition for business loans.

"The community-banking industry in North Carolina is getting eaten alive by credit-union competition," says Tony Plath, associate professor of finance at UNC Charlotte. "And if we don't find a way to cut it off, we're going to lose about half of our community banks."

To hear some bankers tell it, credit unions just started making commercial loans. In fact, some credit unions have long offered them. The state's first credit union was formed in 1916 in Lowes Grove, near Durham, to provide credit to farmers, according to the Credit Union National Association.

But State Employees Credit Union--the nation's second largest, with $12 billion in assets as of June 30--doesn't make business loans, CEO Jim Blaine says. "We serve state employees, teachers and their families. They are not small-business people, so they don't need those services, though their spouses may. So we get a lot of requests from our members to help them out. But we don't feel like we can do it either cheaper or better than the banking industry."

The Federal Credit Union Act of 1934 authorized the formation of federally chartered credit unions and limited membership to people with a common bond such as a company's employees. Bankers cite the law when they think credit unions are getting too big. Mike Miller, CEO of Asheboro-based FNB and chairman of the North Carolina Bankers Association, says, "Our beef is with what is really a new breed of credit unions, the ones that have grown so fast and have bastardized the old common-bond requirements."

Coastal and two Winston-Salem-based credit unions--Truliant Federal and Allegacy Federal--have been among the most aggressive in taking advantage of the Credit Union...