By Andrew Evan Serwer REPORTER ASSOCIATE William E. Sheeline

(FORTUNE Magazine) – Believe it or not, the Midwest has become a land of the best sort of banking: go-go conservatism. During the years of Rust Belt recession and cascading bank failures, survivors learned how to clamp down on costs, develop profitable niches, and turn a Scroogelike eye on that ol' buddy from the Lions Club who wants to borrow another million. The nation's industrial core is bouncing back these days, and analysts are beginning to see a surge in loan growth that should produce record earnings for Midwestern banks, especially those in Michigan and Ohio. The region's rebirth is being fueled by the cheap dollar, which has charged up exports. Imports have slowed somewhat, boosting domestic demand. Economists at the Federal Reserve Banks of Cleveland and Chicago say industrial activity in the Midwest has outstripped the rest of the country for the past 18 months. Business failures are down 12% this year. And did you know this? Unemployment in Cleveland has slipped below the national average. With factories nearing capacity, executives are trooping over to local banks for loans to expand operations. So far in 1988, banks in the Chicago Federal Reserve district have lent 8% more than they did last year. Loans are up 6% in Cleveland. Even if loan growth were to falter, most analysts say they would still love these heartland banks. ''All of my picks stand on their own,'' says Chris Kotowski, a banking analyst with Oppenheimer & Co. ''They will continue to be among the most consistently profitable banks in the country.'' Most lenders in the region, including all of those listed in the table below, have returns on shareholders' equity that exceed the average return for major U.S. banks. Analysts are also pleased to find little or no Third World debt on their books. Nor have these banks engaged in any wild-eyed real estate lending. Most of these bank shares sell for P/E multiples that are 40% lower than that of the average Standard & Poor's 500 stock. Analysts suspect that investors still consider the region a bastion of slow growth. Virginia Adair of Merrill Lynch says that's a bum rap: ''It's really unfair to call the region the Rust Belt anymore, because its economy has become so diverse.'' The specter of rising interest rates also scares investors away from banks. But Frank Suozzo of First Boston says these regionals will benefit as rates edge upward because they increase loan rates faster than they step up the payout for consumer deposits, their primary source of funds. Banc One of Columbus, Ohio, long a Wall Street favorite, has set the standards for consumer banking. It continues to gobble up small and midsize lenders throughout the region with little or no dilution to its shares. Banc One is now the largest bank in Indiana, the second-biggest in Ohio, and No. 3 in Wisconsin. Says J. Richard Fredericks of Montgomery Securities, one of many analysts urging purchase of the stock: ''Return on assets was 1.53% last % quarter, which is like breaking the sound barrier or running a sub-four-minute mile.'' He expects earnings of $2.65 a share this year, a stupendous 34% rise over 1987. Dilution has dampened enthusiasm for National City, a Cleveland institution strong in commercial lending. The bank plans to acquire First Kentucky National for $600 million, which will dilute earnings nearly 9%. ''The stock got creamed when Wall Street got wind of that,'' says Oppenheimer's Kotowski, ''but National City is an extremely well-run bank, its fundamentals are still there, and we are still recommending the stock.'' Another abundantly profitable bank, Comerica -- formerly Detroitbank -- recently raised its dividend by 23%. Adair of Merrill Lynch points out that the bank has been adept at jumping into profitable niches like loans to auto dealers, who farm the money out in loans to customers. It plans to acquire for $55 million Grand Bancshares of Dallas, a strong institution by Texas standards with $480 million of assets. The buyout will not dilute earnings. NBD Bancorp, the biggest bank in Michigan, which thrives on its franchise as chief lender to the region's small and middle-size businesses, is now diversifying. It has expanded its lucrative trust business and is pushing ahead in technology and electronic banking. Nonperforming loans are down 27% and are only 0.8% of total loans as of the first quarter of this year, compared with Citibank's 4.5%. NBD has a mere $226 million in Third World loans. In October, Michigan and Ohio open their borders to all banks from states that allow reciprocal banking. Analysts think that banks from outside the region will prefer to enter the market through acquisition. A possible candidate is Society, a midsize bank in Cleveland. It has a paltry amount of nonperforming loans and a healthy balance of consumer and commercial lending. Analysts say Society's improving profitability could attract a large Pennsylvania bank or one of the New York behemoths. Michigan National, of Farmington Hills, plunged into the red in 1983 because of ties to the Penn Square fiasco. Now thanks to Chief Executive Robert Mylod, a former president of Fannie Mae, it is back from the dead, according to Charles Cranmer of Goldman Sachs. Says Cranmer: ''Mylod has cut out the fat in management and got rid of unprofitable branches. This bank is nothing glitzy, just block and tackle, but it's a good value.'' The stock sells for $45, only 7.5 times Cranmer's earnings estimate for this year.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: BUSY TAKING IN -- AND LENDING -- RUST BELT BUCKS Maybe we should all stop talking Rust Belt. Midwestern banks, such as NBD of Detroit at right, are the envy of slickers on the East and West coasts. DESCRIPTION: Net income, return on shareholders' equity, stock price range, recent price of stock of six midwestern banks.