By Scott Miller
smiller@scbiznews.com

Consumers’ reluctance to spend could help loosen up the credit market for small businesses.

Or, it could hog-tie an already distraught economy.

Consumer credit dropped for the first time in 10 years, and the personal savings rate is as high as it’s been in four years.

As spending drops, bank deposits are on the rise, particularly at small community banks that have benefited as people withdraw deposits from struggling national banks and cash out poorly performing securities.

“In our particular case, we’re going to make loans with it,” said Hugh Lane Jr., president of The Bank of South Carolina Corp. “Deposits are the raw material for lending for a community bank, period.”

But it might not be so simple for everyone.

“To lend to businesses that don’t have any sales? That’s the Catch-22,” said Frank Hefner, an economics professor at the College of Charleston.

Bank deposits might be up, but businesses facing declining revenues might not be in any position to borrow, he said.

Spending decline

Consumer borrowing dropped in August for the first time in 10 years, according to the Federal Reserve.

Total consumer credit was $2.577 trillion in August, down from $2.585 trillion in July. Consumer borrowing fell at an annual rate of 3.7% in August, the Fed said, the first decline since January 1998.

Much of the decline was seen in nonrevolving credit, such as car loans or other big-ticket items excluding real estate. Borrowing on revolving credit, such as credit cards, decreased slightly as well.

The personal savings rate, which measures the amount of disposable income that isn’t spent, spiked to nearly 3%, according to the U.S. Bureau of Economic Analysis. The rate has been less than or about 1% for the last four years, even dipping into negative territory in 2005. The last time the savings rate topped 3% was the third quarter of 2001.

“Three percent is amazing,” Hefner said. “The good news is consumers are providing liquidity into the banking system.”

The bad news, he added, is that retailers will suffer.

An increase in personal savings “is only a good sign if the economy’s good,” Hefner said. “It’s a bad sign if it’s because of a bad economy. I think that’s the problem we’re getting into.”

Nothing to spend

“The question really becomes, ‘When will they unlock that and start spending?’” he asked. “When things turn around, that will all get spent.”

Another question is how much consumers are truly saving, if any.

In the past two months, more people began suspending contributions to their 401(k) plans, said Joseph Baker, president of Alcus Financial Group investment advisory firm headquartered in Mount Pleasant.

“That’s going toward bills. These are guys who are pretty much living paycheck to paycheck,” Baker said. “The last resort is to tap into your 401(k).”

More people are struggling to pay their bills, said David Geer, executive director of Family Services Inc., a credit counseling agency in North Charleston.

His business has increased substantially this year. In past years, he would counsel about 200 people a month. Now, he sees about 250 people with unmanageable debt from credit cards, mortgages and payday loans.

“What we see are individuals coming in far greater numbers that haven’t been able to manage their debt structure,” Geer said.

Banks look for growth

Still, banks are making efforts to expand business and grow deposits.

The Bank of South Carolina intends to boost online banking and check processing.

“The first thing we’re going to do is offer a much higher level of Internet banking to commercial customers,” said Lane, the bank president. “Hopefully, we’ll get new business because we’re offering new technology.”

First National Bank of the South just launched a rebranding campaign, naming a Jack Russell terrier its new mascot and crafting the new slogan, “We can do that.” The bank now offers free ATM banking nationwide.

Consumer deposits are up, but, despite the new ad campaign that seemingly plays to consumers more than businesses, the bank isn’t doing anything new in the consumer market, Senior Vice President Robert Whittemore said.

“We’re just trying to increase the awareness,” he said.

Regardless, the bank is expanding despite the current economic uncertainty. First National Bank of the South, which is based in Spartanburg, has branches in Charleston, Columbia, Greenville, York County and Charlotte, N.C. The company will expand its Upstate presence with a new branch in Tega Cay, near Rock Hill, and opened in new branch in Lexington in June.

“We’re essentially looking at two branches a year,” Whittemore said. “What we’re trying to do is get more involved with the consumer retailer in both the deposit side and the credit side.”

Whittemore insists that lending practices are largely the same as they’ve been in the past, despite reports that banks have gotten stricter in giving credit to consumers and businesses.

“Really not a whole lot has changed on that front from a year and a year and a half ago,” he said. “We look at a credit request as it stands by itself.”

Reach Scott Miller at 843-849-3119.