Is Consumer Lending the New Model? with Mainstream Credit Cards Evolving, and CRE Still Smarting, Experts Say Community Banks May Return to Significant Personal Lending. Relationship Banking May Blossom Again

Article excerpt

Cheap, frugal, and debt-free--or working towards it--got cool in a hurry for many American consumers. For others, it dropped on them like a ton of bricks.

Whether by design or necessity, consumer debt in the U.S. has shrunk as part of the ongoing deleveraging of the economy. Overall consumer debt outstanding fell by 5.75% in August, 10.5% in July, 5.25% in June, according to the Federal Reserve.

This comes at a time when credit availability, both in supply and form, is going through significant upheaval.

Major economic dislocation makes for a tough time to parse what shifts like this mean not only for the economy, but also the players in it--including community banks trying to determine "what's next." This is especially so when current problems dominate thinking. However, the trick to good driving is to focus on what's coming ahead, not just right in front of the windshield.

A range of bankers, consultants, and economists interviewed indicate that community bankers who understand what has changed in consumer finance--and how--may find fresh opportunities coming down the road. And many say that circumstances may even favor community banks as the industry takes the next curve.

No one is saying that community banks are going to have a "back to the future" revival. "I don't see community banking getting into personal loans like they used to make--making loans for refrigerators, for instance," says Jay Brew, chief bank strategist for m.rae resources, inc., Bethlehem, Pa.

But, clearly, for many, something is going to have to change, even if they aren't facing months or more of CRE cleanup.

It comes down to profitability, says veteran community banker W. Kirk Wycoff--chairman of the board and past CEO at Pennsylvania's $478 million-assets Continental Bank.

"We only make money when we take interest-rate risk or credit risk," says Wycoff, who is also partner in Patriot Financial Partners, L.P., a private equity firm specializing in banks. "This is a lousy time for credit risk--we're in a recession." Wycoff says many banks have so tweaked their gap that they are at "0," with less than half a year's duration. He sees consumer credit as an avenue for reasonable risk in both categories.

[ILLUSTRATION OMITTED]

Mixed factors drove change

"It is an open question, in my mind, how much of the deleveraging is demand-driven and how much is supply-driven," says Jonathan Zinman, associate professor of economics at Dartmouth College, who specializes in household finance and retail financial issues. "On the demand side, it's unclear how much is a matter of psychology, and being more attuned to the the risk of job loss and other risks, or how much of the deleveraging could be a permanent shock for some people, feeling poorer, and being poorer, and feeling that they have less income to spread across their lives."

Meredith Whitney, CEO of Meredith Whitney Advisory Group, LLC, and an expert on debt, noted in a recent Wall Street Journal op-ed that credit-card lines have been cut by 25% since last year. That was prompted both by economic factors and by card issuers who began to shift policies and practices in the wake of passage this May of the Credit Card Accountability Responsibility and Disclosure Act of 2009. And Whitney predicted more than $1 trillion more in credit-card-line cuts by the end of 2010.

"For most Americans, credit card availability became their savings account," reflecting the financial enfranchisement of millions who had never had plastic before, says Walter Moeling, partner in the banking practice at Bryan, Cave LLP, Atlanta.

"People loved their credit cards," says Dartmouth's Zinman, "and the ability to get credit on demand."

Indeed, the shift in attitude shows in more than consumer credit outstanding. Ed Seifried, former professor of economics and business at Lafayette University, Easton, Pa. …