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By Nathan Peck | MiBiz
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KALAMAZOO — Michigan’s economy has taken the banking industry on a bumpy ride.

For Keystone Community Bank’s president and CEO Tom Schlueter, the last 24 months have been characterized by modest growth, and that growth has introduced difficulties of its own. With total assets of $260 million on $202 million of deposits, Keystone has watched its deposits grow — yet that growth is tempered by slowed demand for commercial and real estate loans, which is impacting its bottom line.

Schlueter recently sat down with MiBiz to discuss the last two years, the prospects for growth in the region and what the recovery in West Michigan may look like.

MiBiz: How has Keystone managed to grow when most of the economy has been hit hard in the recession?

Schlueter: Hardly anything has been immune in the recession — from healthcare to manufacturing. Many of our customers have seen the impact of this recession and are hurting. I can think of only about three of our clients who have really done well over the last three years. Our residential mortgage business was good — it was driven largely by low interest rates. We took people in variable rate mortgages, or loans at 6.5 percent, and got them into lower interest rate mortgages.

MiBiz: You have seen modest asset growth, and deposits are up over the last two years. How do you account for that?

Schlueter: Our deposit growth has been nice — it is a sign that people are getting more conservative. Cash is not a bad thing to have on hand. We are seeing Americans’ savings rate increasing. Banks are having a somewhat difficult time (because) our earnings off of loans are down. We are having a hard time lending — demand is down. Since we opened in 1997, our business loan pipeline up to the last six months is the smallest I have seen. Things are picking up in 2010. We are just not getting people seeking out business loans. A lot of that has to do with consumer confidence, which is tied to business confidence.

MiBiz: What has you concerned in coming months?

Schlueter: I’m concerned about the effect of the end of the homebuyer tax credit (April 30). The homebuyer tax credit was one of the best things the (federal government) has done. I’m concerned in May what will happen when the credit comes off. Homebuyers are tied in to so much of the economy in our country — from appliances to all the odds and ends associated with owning your first home.

There is a lot of talk about inflation and questions about how much and when the Fed will raise interest rates. I would hate to see residential mortgage rates break above 6 percent. There is a psychological factor that may slow home sales. I think that over the longer term, the rates are going up — the Fed has backed out of propping up Freddie Mac and Fannie Mae and you will see interest rates head up a 1/4 to 3/8 of a point. At the same time, another thing that scares me is the risk of some sort of catastrophic event — the impact that could have on the economy is frightening.

Banking is in the process of recovery — 2010 will be OK, and 2011 will be better. We are lending. The basics of lending have not changed, honestly. Is the collateral OK? How’s the cash flow? If there are losses, how are you going to address those issues going forward? I don’t think that has changed. There is money available for good borrowers.

MiBiz: How concerned are you about falling real estate values, both residentially and commercially?

Schlueter: On the residential side, we have seen reductions in appraisals from two years ago, but it is not the 40 percent reductions you are seeing elsewhere around the country. We are seeing properties losing anywhere from zero to 15 or 20 percent. In hindsight, we didn’t see the run up in values that other parts of the state saw. I don’t think that we have been impacted that much, honestly. There is some more supply in the market than demand, but there is no new building right now. It will take some time to work through that supply. Kalamazoo is stabilized by the three schools in this town, Western Michigan University, Kalamazoo College and Kalamazoo Valley Community College — the students, faculty and staff in the community help take the bumps out of the broader economy.

On the commercial side, I think (commercial lease rates) are down a little, especially due to the number of distressed properties on the market. I think it will stay soft for a bit longer. A lot of the developers in the area were responsible and did not build on spec, so we avoided a lot of the problems there.

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• kalamazoo
• keystone community bank
• tom schlueter