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US Manufacturing-Belt Lending Fuels Regional Banks' Loan Growth

By David Benoit Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Years ago, banks in industrial states such as Ohio, Michigan and western Pennsylvania yearned to find new markets. Now, as American manufacturing makes its surprising turnaround, those banks are finding growth in their gritty home turf. They are making loans to the likes of Tom Gasbarre, head of Gasbarre Products Inc., a manufacturing equipment company in DuBois, Penn. Gasbarre turned to Huntington Bancshares Inc. (HBAN) for loans after his community bank suddenly stopped lending after 2008. Gasbarre, whose company manufactures industrial furnaces, precision tool-making equipment and giant machines that press powders into parts for the metallurgy industry, has been expanding through acquisitions. He used Huntington last quarter to finance the purchase of a Michigan company that specialized in heat-treating equipment, including furnaces, he told Dow Jones Newswires in an interview. For the first time in years, he said, his company is considering expanding its physical plant because it might run out of capacity. At Huntington, commercial and industrial loans in the first quarter were up 7% from the prior year, an impressive turnaround from a 2% drop in the year-earlier quarter. Chief Executive Steve Steinour told reporters growth would continue. Customers "are buying inventory, they are expanding, they are creating jobs, just like small businesses are, and we are there to finance them," Steinour said. Huntington is one of a number of banks this quarter to show marked improvement in commercial lending because they are making loans to manufacturing companies. Just as manufacturing is driving the U.S. economy higher, growing at a rate four-times the overall economy's expansion, the industry is powering bank-loan growth. The Federal Reserve's latest study on the economy, the beige book, reported manufacturing confidence continued to increase. The Institute for Supply Management's report for March showed a slight decline in activity from February, but it wasn't as much as economists expected, and it still conveyed expansion. Unemployment in Michigan peaked above 14% and was still at 13.3% a year ago, but is now down to 10.3%. Ohio unemployment fell to 8.9% from 10.5% in the past year. Banks with exposure to heavy industries in these states showed some of the strongest lending growth in first-quarter earnings this week, and sounded even more positive about the environment. To be sure, the lending growth remains at a tentative stage. Many banks' balance sheets are still shrinking as they shed loans made before the crisis. Also, deposits are rising and utilization rates on lines of credit remain low, highlighting that businesses continue to stockpile cash instead of increasing spending. KBW analysts said large banks reported loans were down 6% on average. J.P. Morgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) all reported drops. Even banks in the manufacturing-heavy region from Pennsylvania to Michigan continue to work through troubled loans from the financial crisis. Two of the biggest lenders in that region, Fifth Third Bancorp (FITB) and PNC Financial Services Group Inc. (PNC), said Thursday that total loans were down. Both reached into Florida in the past decade. But both banks said industrial loans were a bright spot in the quarter. PNC, based in Pittsburgh, reported average commercial loans rose 1.5% in the first quarter compared to the prior year. In the 2010 first quarter, loans were down 17.5% from the 2009 period. Fifth Third, of Columbus Ohio, reported average commercial loans were up 4% in the first quarter compared to 2010's first-quarter drop of 9%. CEO Kevin Kabat said in an interview that the "contained" loan growth was boosted by Ohio, and included different types of customers, though manufacturing was strongest. "We are just beginning to hear about some inventory build, but I wouldn't say that was a trend by any means," Kabat said. M&T Bank Corp. (MTB), in Buffalo, N.Y., and KeyCorp (KEY), in Columbus, Ohio, both said manufacturers were borrowing more. M&T said Pennsylvania manufacturing led its 1% average commercial-lending growth; by the end of the period, loans were up 5%. Chief Financial Officer Rene Jones said that "in no way, shape or form are we are looking at robust loan growth." Meanwhile at KeyCorp, Beth Mooney, who is taking over as CEO on May 1, said the Great Lakes region appeared to be taking to heart the accounting plan of "first in, first out." "We saw good old-fashioned property-, plant- and equipment-type lending come back," Mooney said. The most positive comments came from Huntington. Mike Fezzey, president of its Eastern Michigan region, which includes Detroit, said middle-market loans, which the bank classifies as those to companies with revenue of more than $20 million, were up 30% from the fourth quarter. Wulco Inc., of Cincinnati, used Huntington financing to buy $1.2 million in equipment this quarter. Wulco CEO Rick Wulseck is attempting to diversify his family-run defense-contracting business into the oil-and-gas and aerospace fields. He said he anticipates hiring and expanding substantially in the second half of the year. Fezzey said the environment is much different than the past few years. "There has been a conservative approach from the community the last few years," Fezzey said. "This bank and this region, in particular, are aggressively pursuing the rebound." -By David Benoit, Dow Jones Newswires; 212-416-2458; david.benoit@dowjones.com

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