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Midwest bankers keeping 'a close eye' on manufacturing woes

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Midwest bankers keeping 'a close eye' on manufacturing woes

Banks that operate in America's manufacturing heartland may start to feel the squeeze as tariffs and the United Automobile Workers' strike against General Motors drag on.

The manufacturing purchasing managers' index saw its lowest reading since January 2016 in August, when the sector contracted slightly. A trade deal with China has yet to be reached, keeping tariffs in place on many products and raw materials in the sector. The United Auto Workers began a strike against General Motors Co. on Sept. 16 that has closed manufacturing plants across the country.

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Banks in markets where manufacturing makes up most small business and employment may see lending activity and credit quality suffer if these issues continue, bankers and analysts said.

"Every bank that is a significant commercial and industrial lender is affected when things slow down," said David Findlay, President and CEO of Warsaw, Ind.-based Lakeland Financial Corp. The bank has the highest deposit market share in Elkhart, Ind., the county where manufacturing has the highest employment location quotient, a measure of an area's employment in an industry relative to the national average.

"We've seen a little bit of a downturn. Margins are getting impacted a little bit," said James Sandgren, President and COO at Evansville, Ind.-based Old National Bancorp. Old National operates branches throughout the manufacturing-heavy states of Indiana, Michigan, Wisconsin and Kentucky.

Long-term, fixed contracts are most affected by tariffs, said Sandgren, because companies are not able to pass the additional costs on to their customers. "Short-term contracts [have] been able to weather the storm by passing along those costs," he said.

Lakeland's Findlay said tariffs have impacted business but added that the uncertainty surrounding them is a bigger problem than the additional costs they impose.

"The most significant impact of tariffs to date has been the psychological impact on the manufacturing and agricultural sector," he said. "It's that uncertainty that creates a pause in people's decisions, as it relates to expansion of their business, growth of their business, future investment in their business."

Resolving tariffs with China would be "very positive," the bank CEO said.

Banks across the Midwest have suffered downturns before, particularly during the Great Recession. Both manufacturers and banks have since changed their behavior to become more resilient, said bankers and analysts.

After the last recession, many companies started building cash reserves, said Sandgren. He said deposits at Old National have been growing recently as customers are saving more.

Meanwhile, banks have diversified their portfolios.

"One positive characteristic of banks across the Midwest is they've done a good job not to overexpose themselves to one particular sector," said Damon DelMonte, a bank analyst with Keefe Bruyette & Woods. "A lot of banks are better positioned to deal with these headwinds today than they were during the last go-round."

Banks have been fighting through the downturn, and Sandgren said that although Old National is concerned with weaker manufacturing activity, tariffs are not the single biggest concern at manufacturers.

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"We'll continue to keep a close eye on [manufacturing]," said Sandgren. "[Finding] skilled labor continues to be the biggest issue for our manufacturing customers."

The United Auto Workers strike against GM has yet to affect Old National, but Sandgren said if it drags on, it may begin to affect the bank.

"If it's a long-term thing, the ripple effect will probably impact almost all banks," said Sandgren. The bank's exposure to GM itself is low, but if the plants stay closed, smaller machine shops that sell to the automaker may suffer, and loans to consumers employed at the plants may begin having credit quality issues. The strike would need to last "well over a month" before the bank is impacted, said Sandgren.

The length of the strike is the real concern, said KBW's DelMonte. "It's obviously something to be concerned about and aware of, but I don't know if it ultimately has a truly meaningful impact, especially if it gets resolved in a short period of time."