Community bankers increasingly have to fend off credit unions when chasing commercial loans, a crucial source of earning assets for the industry.

Bankers at the D.A. Davidson Financial Institutions Conference in Denver last week said credit unions are more aggressively pursuing loans to businesses and commercial real estate credits, making an already competitive landscape even tougher for small banks.

"They have a lot of capital and they don't pay taxes, so we've seen tremendous competition from credit unions," said Kevin Reevey, a bank analyst for D.A. Davidson. "They're doing [commercial and industrial] and [commercial real estate] lending, which several years ago they didn't do at all."

Data support the sentiments from analysts and bankers. In the first quarter, credit unions reported a 3.9% quarter-over-quarter increase in commercial and industrial loans, according to S&P Global Market Intelligence data. That was nearly double the 2.0% linked-quarter increase at small, domestic commercial banks, according to Federal Reserve data.

Separately, conference attendees said small community banks were having a tougher time competing for retail consumers as national banks have invested in technology enhancements and nonbank lenders have targeted unsecured consumer loans. That has left small community banks focused on business lending, making credit unions' foray into the space particularly troublesome.

Several bankers that focus on smaller cities and rural areas say credit unions have always been competitive on deposit rates and consumer lending, somewhat dismissing concern about credit unions as a new, serious threat. At the same time, they did say credit unions have become more active in business lending.

"Credit unions have always been stiff competition," said OceanFirst Financial Corp. Chairman, President and CEO Christopher Maher in an interview. "I wouldn't say it's any more acute, but I would say that there is an effort [by credit unions] to get more active on the commercial side of the business."

Similarly, Community Bank System Inc. President and CEO Mark Tryniski said the bank has always faced competition from credit unions for deposits but that there has been movement in recent quarters to get more involved in business lending.

"I would say they've gotten more aggressive on the commercial lending side," Tryniski said. "We're seeing them do larger transactions, more complex transactions."

Bank lobbyists have pressed politicians for years to eliminate the credit unions' tax exemption. The issue has resurfaced in recent months after Sen. Orrin Hatch, R-Utah, chairman of the Senate Committee on Finance, sent a letter to the credit unions' top regulator questioning the increase in business lending and what it meant for credit unions' tax exemption. In response, a lobbying group for community banks called on Congress to hold a hearing to re-examine the tax-exempt nature of credit unions.

Some conference attendees echoed some of the points made in Hatch's letter and by lobbyists, saying credit unions are increasingly stretching the definition of "common bond" to attract more members. But Customers Bancorp Inc. Chairman and CEO Jay Sidhu pushed back on the credit union antipathy in a keynote speech at the conference. He said much of the recent success of credit unions comes not from their tax advantage but from their ability to serve customers better. As an example, Sidhu pointed to deposit rates, which have remained near zero at many banks.

"Without being able to access capital markets, credit unions have grown faster than banks that have access to capital markets," Sidhu said. "They are focused, and they have a strategy."