PUBLIC DISCLOSURE COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION

Transcription

1 PUBLIC DISCLOSURE August 17, 2009 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION Midland States Bank RSSD # West Jefferson Street Effingham, Illinois Federal Reserve Bank of St. Louis P.O. Box 442 St. Louis, Missouri NOTE: This document is an evaluation of this institution s record of meeting the credit needs of its entire community, including low- and moderateincome neighborhoods, consistent with safe and sound operation of the institution. This evaluation is not, nor should it be construed as, an assessment of the financial condition of the institution. The rating assigned to this institution does not represent an analysis, conclusion, or opinion of the federal financial supervisory agency concerning the safety and soundness of this financial institution.

2 TABLE OF CONTENTS I. Institution Rating... 1 II. III. Institution a. Scope of Examination... 1 b. Description of Institution 3 c. Conclusions with Respect to Performance Tests 4 St. Louis Missouri-Illinois Multistate Metropolitan Statistical Area a. Summary i. Multistate Metropolitan Area Rating. 8 ii. Scope of Examination 8 iii. Description of Institution s Operations. 9 iv. Conclusions with Respect to Performance Tests b. Metropolitan Area (reviewed using full-scope review procedures) i. Description of Institution s Operations. 12 ii. Conclusions with Respect to Performance Tests.. 18 III. IV. Illinois a. State Rating 27 b. Scope of Examination 27 c. Description of Institution s Operations. 28 d. Conclusions with Respect to Performance Tests 32 Appendices a. Scope of Examination Tables b. Summary of State and Multistate Metropolitan Area Ratings 39 d. Glossary Table of Contents

3 INSTITUTION INSTITUTION'S CRA RATING: The Lending Test is rated: The Community Development Test is rated: SATISFACTORY Satisfactory Satisfactory Overall, Midland States Bank s CRA performance is considered to be satisfactory, largely due to satisfactory ratings in the state of Illinois, which carried the most weight towards the bank s overall institution ratings. The major factors supporting the institution s ratings include: The overall geographic distribution of the loan products reviewed reflects reasonable penetration in low- and moderate-income (LMI) census tracts. The distribution of loans reflects reasonable penetration among individuals of different income levels, including LMI individuals, and among small business and farm entities. The bank has a more than reasonable loan-to-deposit (LTD) ratio, given the bank s size, financial condition, and the credit needs of its assessment areas. A majority of the bank s lending occurred inside its designated assessment areas. The overall level of community development performance demonstrates adequate responsiveness to the community development needs of the assessment areas through qualified loans, investments, donations, and services. There have been no CRA-related lending complaints against the bank during this review period. SCOPE OF EXAMINATION Midland States Bank maintains operations in three delineated assessment areas within two states, Illinois and Missouri. In light of these performance context characteristics, the bank received three sets of ratings: overall, institution ratings; ratings for the state of Illinois; and ratings for the St. Louis, Missouri-Illinois multi-state metropolitan statistical area (St. Louis MSA). The bank s core assessment area is comprised of six contiguous, non-metropolitan (non-msa) counties in south-central Illinois (this is the only assessment area reviewed for the state of Illinois ratings). The other two assessment areas are both inside the St. Louis, MO-IL multi-state MSA. One assessment area is in Missouri, and one assessment area is in Illinois. The combined performance from these two assessment areas contributed to the overall ratings for the St. Louis MSA. The following table details the number of branch offices, 1 deposit dollars, the presence of 1 These numbers do not reflect a mobile branch office applicable to the Missouri-St. Louis MSA assessment area. 1

4 merger/acquisition (M&A) activity, and the CRA review procedures applicable to each assessment area, completed as part of this evaluation. Assessment Area Branch Branch Deposit Deposit CRA Review M&A? # % $ % Procedures Illinois Non-MSA , Yes Full Scope Illinois-St. Louis MSA , Yes Full Scope Missouri-St. Louis MSA , No Full Scope TOTAL , N/A N/A Although the previous table indicates a majority of branch resources within the Illinois-St. Louis MSA assessment area, this information is reflective of a bank merger/acquisition that took place during the latter part of the bank s CRA review period. During most of this CRA review period, Midland States Bank operated only one branch office in the Illinois-St. Louis MSA assessment area. Consequently, the Illinois, non-msa assessment area represented the majority of branch resources (including the bank headquarters) and deposit dollars in effect during most of the CRA review period, and, therefore, performance in this assessment (and the related state of Illinois ratings) was weighted most heavily when arriving at overall institution ratings. Lastly, and is also noted in the previous table, all three of the bank s assessment areas were evaluated using full-scope review procedures. For the lending test, loans originated during 2008 were used in the evaluation of the bank s CRA performance, which included residential real estate loans reported under the Home Mortgage Disclosure Act (HMDA) for 2008 and small business loans and small farm loans originated in The review period used for the community development test included qualified community development loans, investments/donations, and services initiated during the period from the previous CRA evaluation date to the current evaluation (August 6, 2007, through August 17, 2009). In addition, certain community development investments initiated prior to this examination review period but still outstanding were also considered as part of the bank s overall community development performance. 2 See the Glossary in Appendix D for the definitions of HMDA loans, small business loans, and small farm loans. 2

5 DESCRIPTION OF INSTITUTION Midland States Bank, an interstate retail bank headquartered in Effingham, Illinois, is a whollyowned subsidiary of Midland States Bancorp, a one-bank holding company also located in Effingham, Illinois. The bank is a full-service financial institution offering a complete line of commercial and consumer purpose loan and deposit products, and operates 15 branch offices in two different states and three separate CRA assessment areas. Since the 2007 CRA evaluation of Midland States Bank, the bank has added nine branch offices through merger and acquisition activity (two new offices in the Illinois, non-msa assessment area, and seven new offices in the state of Illinois within the Illinois-St. Louis MSA assessment area); the bank did not close any branch offices during the review period. Midland States Bank has the ability to meet the credit needs of its assessment areas based on the bank s asset size, financial condition, and other resources. As of June 30, 2009, the bank reported total assets of $1.1 billion, which is up percent from the last CRA evaluation date ($380.6 million as of March 31, 2007). This significant increase in the asset size of the bank was due largely to several bank mergers/acquisitions completed since the previous CRA evaluation. As of the same date, gross loans and leases were $591.5 million (52.5 percent of total assets), and deposits totaled $952.7 million. The bank s loan portfolio composition by credit category is displayed in the following table. Distribution of Total Loans Credit Product Type Amount in $000s Percentage of Total Loans Construction and Development 95, Commercial Real Estate 228, Multifamily Residential 19, Family Residential Secure by First Liens 105,485 81, Secured by Junior Liens 5, Home Equity Loans 18, Farmland 16, Agricultural 7, Commercial and Industrial 95, Loans to Individuals Credit Cards 6, Other Revolving Plans 97 <0.1 Other Loans to Individual 6, Total Other Loans 16, TOTAL 591, By dollar amount of loans, Midland States Bank s primary lending focus continues to be loans secured by commercial real estate, which represents 38.6 percent of the loan portfolio. Although the bank focuses on commercial lending in all markets, the emphasis is even stronger within the 3

6 Missouri assessment area, which has a nominal retail focus. Other significant products include loans related to 1-4 family residential real estate collateral (17.8 percent) and commercial and industrial loans, which represent 16.2 percent of the bank s loan portfolio. Lastly, the bank is also actively involved with the origination and subsequent sale of 1-4 family residential mortgage loans into the secondary market. Loans of this nature are actually sold by the bank immediately after origination; this activity is not captured in the asset figures displayed in the previous table. Midland States Bank received a satisfactory rating at the previous CRA evaluation conducted as of August 6, 2007; at that time, intermediate small bank examination procedures were used. There are no legal impediments or financial constraints that would hinder the bank from serving the credit needs within its defined assessment areas. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS Midland States Bank meets the criteria for an overall institution rating of satisfactory, based upon the performance evaluation of the bank s lending and community development activities. The bank s CRA performance was evaluated using the Federal Financial Institutions Examination Council s (FFIEC) Interagency CRA Procedures for Intermediate Small Institutions. The evaluation criteria for intermediate small institutions consist of two tests, the lending test and the community development test. The bank s lending performance was based upon loan activity from three categories: HMDA data, small business, and small farm loans. These three loan categories are considered the bank s primary lines of business, based upon lending volume by number and dollar amounts, and in light of the bank s stated business strategy. Therefore, loan activity represented by these credit products is deemed indicative of the overall lending performance of the bank. The CRA performance standards under the lending test evaluate the following five criteria as applicable: 3 The geographic distribution of loans by census tract income level. The distribution of loans by borrower profile (income level and business/farm revenue size). The bank s average LTD ratio. The level of lending within the assessment areas. Review of the bank s record of acting upon public, CRA-related complaints (if any). Midland States Bank received satisfactory lending test ratings for both the state of Illinois and the St. Louis MSA. In addition to satisfactory geographic distribution performance and borrower distribution performance in each assessment area, the bank s LTD ratio is more than reasonable given the institution s size, financial condition, and assessment area credit needs. Further, the bank made a majority of its loans within its assessment areas. Lastly, under the lending test, no CRA-related complaints were made against the bank during this CRA review period. 3 The first two bullet items (geographic distribution and borrower profile distribution) are evaluated at the individual assessment area level only. 4

7 The second test, the community development test, considers the bank s responsiveness to community development needs through its level of community development loans, qualified investments/donations, and community development services provided. Although the bank received a community development test rating of needs to improve in the St. Louis MSA, the bank s community development test rating for the state of Illinois was satisfactory, and since the state of Illinois performance conclusions carried the most weight, the bank s overall institution community development test rating is satisfactory. LENDING TEST As is reflected in the table below, the bank received satisfactory lending test ratings for both the state of Illinois and the St. Louis MSA. State/Multistate MSA State of Illinois St. Louis, Missouri-Illinois Multistate MSA OVERALL Lending Test Rating Satisfactory Satisfactory Satisfactory These ratings are based on geographic distribution analyses reflecting reasonable dispersion throughout the bank s assessment areas and borrower distribution analyses revealing satisfactory penetration among individuals of different income levels, including LMI levels, and among businesses and farms of different sizes. Loan-to-Deposit (LTD) Ratio One indication of the bank s overall level of lending activity is its LTD ratio. The following table displays the bank s quarterly average LTD ratio 4 in comparison to that of four regional banks which are considered to be similarly situated to Midland States Bank. LTD Ratio Analysis Name Asset Size Headquarters Average LTD Ratio Midland States Bank $ 1,126.3 Effingham, IL 88.1% $ 1,142.8 Mattoon, IL 88.8% Regional Bank Competitors $ Dieterich, IL 66.2% $ Vandalia, IL 66.1% $ Effingham, IL 80.5% 4 The average LTD ratio represents an 8-quarter average, dating back to the bank s previous CRA evaluation (September , through June 30, 2009). 5

8 Based on data from the previous table, Midland States Bank s LTD appears to be more than reasonable compared to other banks, reflecting strong responsiveness to assessment area credit needs. The bank s quarterly average LTD ratio was 88.1 percent for the review period and, for the last eight quarters, ranged from a high of 96.3 percent to a low of 61.6 percent. In comparison, the quarterly average LTD ratios for the comparison banks ranged from 66.1 to 88.8 percent. Therefore, in light of the bank s lending levels as analyzed for the review period, Midland States Bank s level of lending is considered satisfactory. Assessment Areas Concentration The following table displays the number and dollar volume of loans made inside the bank s combined assessment areas. Lending Inside and Outside of Assessment Areas Loan Type Inside Outside Assessment Area Assessment Area TOTAL HMDA 81.4% 18.6% 100% $26,232 $12,395 $38, % 32.1% 100% Small Business 63.6% 36.4% 100% $37,525 $31,850 $69, % 45.9% 100% Small Farm 80.8% 19.2% 100% $6,135 $1,417 $7, % 18.8% 100% TOTAL 72.8% 27.2% 100% $69,892 $45,662 $115, % 39.5% 100% The previous table demonstrates that for all three loan categories, the bank made a majority of loans to borrowers and businesses residing or operating in the bank s combined assessment areas. Of the 744 loans reviewed, 72.8 percent by number and 60.5 percent by dollar volume were originated within the bank s assessment areas. Therefore, Midland States Bank meets the standard for satisfactory performance under this lending test criterion. Review of Complaints No CRA-related complaints were made against Midland States Bank during this evaluation review period. 6

9 COMMUNITY DEVELOPMENT TEST Despite unsatisfactory community development performance in the St. Louis MSA, Midland States Bank s overall community development performance demonstrates satisfactory responsiveness to the community development needs of its assessment areas, particularly in the state of Illinois assessment area. State/Multistate MSA State of Illinois St. Louis, Missouri-Illinois Multistate MSA OVERALL Community Development Test Rating Satisfactory Needs to Improve Satisfactory Based on the bank s performance context, Midland States Bank s ratings were significantly weighted towards CRA performance in the state of Illinois, where the bank s level of community development loans, investments, and services was good. The bank s community development performance in the St. Louis MSA was needs to improve, due to a poor level of community development activity. However, based on the weighted performance from the state of Illinois, the overall community development test rating for the overall institution is satisfactory. FAIR LENDING OR OTHER ILLEGAL CREDIT PRACTICES REVIEW During the consumer affairs examination conducted concurrently with this CRA evaluation, a fair lending analysis was performed to assess the bank s compliance under Regulation B (Equal Credit Opportunity) and the Fair Housing Act. The analysis concluded that the bank is in compliance with the substantive provisions of the antidiscrimination laws and regulations for the products and services reviewed. 7

10 ST. LOUIS MISSOURI-ILLINOIS MULTISTATE METROPOLITAN AREA CRA RATING FOR ST. LOUIS MO-IL MSA: 5 The Lending Test is rated: The Community Development Test is rated: NEEDS TO IMPROVE Satisfactory Needs to Improve Major factors supporting these ratings include: Overall, the geographic distribution of loans reflects reasonable dispersion throughout both of the bank s St. Louis MSA assessment areas. For both of the St. Louis MSA assessment areas, the distribution of loans reflects reasonable penetration among borrowers, including LMI borrowers and businesses and farms of different sizes. The bank s overall level of qualified community development loans, investments, and services reflects poor performance within the St. Louis MSA assessment areas. SCOPE OF EXAMINATION Midland States Bank operates within two assessment areas inside the St. Louis, MO-IL multistate MSA. One assessment area is in Missouri, and one assessment area is in Illinois. Both of these assessment areas were reviewed using full-scope examination procedures. The lending test used HMDA, small business, and small farm loans originated during 2008 in the evaluation of the bank s performance. The review period used for the community development test included qualified community development loans, investments/donations, and services initiated during the period from the previous CRA evaluation date to the current evaluation (August 6, 2007, through August 17, 2009). In addition, certain community development activities initiated prior to this examination period but still outstanding were also considered as part of the bank s overall community development performance. 5 This rating reflects performance within the multistate metropolitan area. The statewide evaluations are adjusted and do not reflect performance in the parts of those states contained within the multistate metropolitan area. 8

11 Midland States Bank s ratings in the St. Louis MSA reflect a combination of performance from the two separate assessment areas within the MSA. The following table details assessment area asset allocation by branch offices, 6 deposit dollars, the presence of merger/acquisition activity, and the CRA review procedures applied to each assessment area. Assessment Area Branch # Branch % Deposit $ Deposit % M&A? CRA Review Procedures Illinois-St. Louis MSA , Yes Full Scope Missouri-St. Louis MSA , No Full Scope TOTAL , N/A N/A Although this table indicates a majority of bank resources within the Illinois-St. Louis MSA assessment area, it is reflective of bank merger/acquisition activity that took place during the latter part of the bank s CRA review period. Throughout most of the CRA review period, Midland States Bank operated one branch office in each St. Louis MSA assessment area; consequently, both assessment areas were fairly equally weighted when making performance conclusions for the overall St. Louis MSA. 7 DESCRIPTION OF INSTITUTION S OPERATIONS IN ST. LOUIS MISSOURI- ILLINOIS MSA As noted previously, the bank operates in two separate assessment areas within the St. Louis MO-IL multi-state MSA one assessment area on the Missouri side, and one assessment on the Illinois side. The Missouri-St. Louis MSA assessment area is comprised of only the westerncentral parts of St. Louis County, which include the bank s only Missouri branch office located in Chesterfield, Missouri. This branch office operates distinctly differently from other Midland States Bank branch facilities. Unlike other offices, it caters primarily to commercial customers and has very little consumer loan activity. As discussed previously, although it is still a fullservice branch, offering the bank s full line of both deposit and loan products, it does not have a traditional teller line, ATM, or drive-up banking services. Also, this office offers a mobile branch facility, which is used primarily for remote deposit acceptance, as an added commercial customer convenience. As opposed to the Missouri-St. Louis MSA assessment area, bank operations in the Illinois-St. Louis MSA assessment area function in the traditional, community banking manner (similar to the rest of the bank s overall operations), offering the bank s full line of consumer and commercial loan and deposit products. Previous to this examination review period, this assessment area consisted of two counties located in the far eastern portion of the MSA and 6 These numbers do not reflect a mobile branch office applicable to the Missouri-St. Louis MSA assessment area. 7 Although the Illinois-St. Louis MSA assessment area was given slightly more rating consideration, it was not enough to materially affect the overall, St. Louis MSA rating conclusions. 9

12 included only one bank office. In the first quarter of 2009, bank operations were expanded in light of a bank merger/acquisition, including seven additional bank offices. This assessment area was in turn expanded to include the increased bank presence, adding two more counties in their entirety. Additional detail regarding the Midland States Bank s operations in the St. Louis MSA assessment areas, including bank structure, population, income/wealth, housing, and industry/employment demographics, is included later under the Description of Institution s Operations sections applicable to these individual assessment areas. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN ST. LOUIS MISSOURI-ILLINOIS MSA While the bank s lending test performance is considered satisfactory, the bank s performance under the community development test is unsatisfactory in the St. Louis MO-IL MSA. As these tests are considered equally weighted when determining a rating for the overall MSA, 8 the bank s overall rating for this MSA is correspondently unsatisfactory. Generally speaking, when forming rating conclusions for the overall MSA, slightly more weight was given to performance from the Illinois-St. Louis MSA assessment area. However, as bank operations/resources were largely similar for both the Illinois-St. Louis MSA and Missouri-St. Louis MSA assessment areas during the majority of the CRA review period, 9 the slightly increased weighting of the Illinois-St. Louis MSA performance did not materially affect overall ratings. Additional detail regarding the bank s lending test and community development test performance in the St. Louis MSA assessment areas is included later under the Conclusions with Respect to Performance Test sections applicable to these individual assessment areas. LENDING TEST As displayed in the following table, the lending test for the St. Louis MO-IL MSA is satisfactory based on reasonable performance in both assessment areas. St. Louis, MO-IL Multistate MSA Illinois-St. Louis MSA Assessment Area Missouri-St. Louis MSA Assessment Area OVERALL Lending Test Performance Reasonable Reasonable Satisfactory 8 Under the CRA, a bank must receive at least a satisfactory rating for each test in order to receive an overall satisfactory rating. 9 As noted under the Description of Institution s Operations in St. Louis Missouri-Illinois MSA section, the bank operated one branch office in each assessment area for most of the review period. 10

13 Review of lending activity in each assessment area reflected reasonable performance, by both geographic distribution analysis and borrower distribution analysis. COMMUNITY DEVELOPMENT TEST The following table shows that the bank s needs to improve community development test rating is largely based on poor performance in the Missouri-St. Louis MSA assessment area. St. Louis, MO-IL Multistate MSA Illinois Assessment Area Missouri Assessment Area OVERALL Community Development Test Performance Adequate Poor Needs to Improve The bank s level of combined community development loans, investments, and services for the Missouri-St. Louis MSA assessment area was poor and, while community development performance was slightly better for the Illinois-St. Louis MSA assessment area, it was not strong enough to improve the overall community development test rating for the St. Louis MSA. 11

14 METROPOLITAN AREAS (Evaluated using full-scope review procedures) DESCRIPTION OF INSTITUTION S OPERATIONS IN ST. LOUIS MO-IL MSA, ILLINOIS ASSESSMENT AREA For this review period, Midland States Bank delineated one assessment area in the Illinois portion of the St. Louis MSA. At the previous CRA evaluation, the Illinois-St. Louis MSA assessment area consisted of two counties, Bond and Clinton, which are located in the far eastern portion of the MSA. However, due to bank expansion through merger/acquisition activity in the first quarter of 2009, this assessment area was significantly expanded to include two additional counties, Monroe and St. Clair, which are both located along the Missouri-Illinois border. Midland States Bank operates eight bank offices throughout its Illinois-St. Louis MSA assessment area. Bank Structure As noted above, Midland States Bank significantly expanded operations in the Illinois-St. Louis MSA assessment area. At the previous CRA evaluation, the bank only operated one branch office in this assessment area, which was located in Bond County. However, in the first quarter of 2009, the bank added seven branches through bank merger/acquisition activity. In light of this expansion, the bank now maintains an additional five offices in Monroe County and two offices in St. Clair County. Midland States Bank did not close any Illinois-St. Louis MSA offices during this review period. General Demographics 10 The bank s Illinois-St. Louis MSA assessment area, which had a population of 2,698,687, is located in West Central Illinois and it includes four of the eight counties located on the Illinois side of the St. Louis MSA. This assessment area has more rural areas to the east and urban/suburban areas to the west, including the city of East St. Louis. Of the four counties in this assessment area, St. Clair has the largest population by far at 256,082. Belleville, Illinois, the county seat of St. Clair County, had a population of 41, Unless otherwise noted, demographic information is based upon year 2000 census information. 12

15 Income and Wealth Demographics As previously noted, the bank s Illinois-St. Louis MSA assessment area is comprised of four counties within a portion of the St. Louis MSA. These counties contain a total of 68 census tracts, which are displayed in the following table by income level of geography and family population characteristics. Assessment Area Geographical Information by Income Category 2000 Census Data Low- Moderate- Middle- Upper- Unknown TOTAL Assessment Area Geographies 16.2% 23.5% 51.5% 8.8% 0.0% 100% Family Population 8,043 16,510 54,646 9, , % 18.5% 61.4% 11.0% 0.0% 100% Although the previous table reveals that the majority of assessment area census tracts are considered to be middle-income, there is still a significant portion of LMI geographies (39.7 percent) and families living within these geographies (27.5 percent). All low-income census tracts are centered near the East St. Louis area within St. Clair County. There are moderateincome census tracts in and near the East St. Louis area and a little further east in the Belleville area. Outside of St. Clair County, there is one moderate-income census tract in Bond County and one moderate-income census tract in Clinton County. Based upon 2000 census data, the median family income for the assessment area was $49,502, which is below that of the St. Louis MSA median family income figure of $53,435. More recently, the Department of Housing and Urban Development (HUD) estimates the 2008 St. Louis MSA median family income to be $65,000, representing a 21.6 percent increase from The following table displays population percentages of assessment area families by income level, compared to the St. Louis MSA population as a whole. Assessment Area Family Population by Income Level 2000 Census Data Low- Moderate- Middle- Upper- Unknown TOTAL Assessment Area 20,271 17,290 21,063 30, , % 19.4% 23.7% 34.2% 0.0% 100% St. Louis MSA 137, , , , , % 18.4% 22.6% 39.6% 0.0% 100% As displayed in the previous table, the population characteristics of the assessment area are very similar to that of the entire St. Louis MSA. Both the assessment area and the MSA have a significant percentage of LMI families, noted to be 42.2 and 37.8 percent, respectively. 13

16 Further, the percentage of assessment area families living below the poverty level (10.0 percent) is above that of the St. Louis MSA figure (7.5 percent). Housing Demographics Housing development in the Illinois-St. Louis MSA assessment area was relatively robust through most of 2007, until encountering the economic downturn that has affected most of the country since However, the recession does not appear to be negatively affecting the assessment area as much as major metropolitan areas in the United States. Further, housing affordability in the assessment area has historically been reasonable as compared to the entire St. Louis MSA. The 2000 median housing value for the assessment area was $78,512, which is significantly less than the St. Louis MSA median housing value of $94,895. Similarly, assessment area housing has been reasonably affordable relative to respective income levels. The affordability ratio 11 for the assessment area was 51.0 percent, which is higher than the St. Louis MSA affordability ratio of 46.0 percent. Lastly, the median gross rent figure for the assessment area was $496, also below that of the St. Louis MSA figure of $522. Therefore, it appears housing values for the assessment area have been both relatively stable and affordable, as compared to the St. Louis MSA. Industry and Employment Demographics The industry characteristics of the Illinois-St. Louis MSA assessment area vary significantly in light of having an urban zone centered around the city of East St. Louis, sprawling suburban areas going east from the Missouri border, and some areas primarily rural in nature to the far southern and eastern boundaries. Consequently, the assessment area industry mix is diverse, including service industries throughout, retail trade and construction industries dominating the suburban zones, and the agricultural industry playing a significant role in the very southern and eastern areas. Similarly, unemployment rates for the Illinois-St. Louis MSA assessment area vary significantly by county, but 2008 averages for the combined assessment area counties are generally similar to that of the entire MSA, as is displayed in the following table This figure is calculated by dividing the median household income by the median housing value; it represents the amount of single family owner-occupied housing that a dollar of income can purchase for the median household in the geography. Values closer to 100 percent indicate greater affordability. 12 Source: Bureau of Labor Statistics. These figures are based on unemployment rates that are not seasonally adjusted. 14

17 County Most Recent (July 2009) 2008 Average Bond Clinton Monroe St. Clair Assessment Area Avg St. Louis MSA As displayed in the previous table, current unemployment rates for the Illinois-St. Louis MSA assessment area counties vary from a low of 7.1 percent (Monroe County) to a high of 10.3 percent (St. Clair County). As with the St. Louis MSA, Illinois-St. Louis MSA assessment area unemployment rates have generally been increasing since the beginning of However, the county unemployment rates are lower now than they were at the beginning of 2009 (the exception being St. Clair County), while the current St. Louis MSA unemployment rate (9.9 percent) is higher than its January 2009 unemployment rate (9.1 percent). Community Contact Information As a part of this CRA examination, four previously completed community contact interviews conducted by this Reserve Bank and other supervisory agencies were reviewed in order to obtain additional assessment area background, including information relating to credit needs, community development opportunities, and the local economy. Of these interviews, two were with individuals specializing in housing, and two interviews were conducted with people working in government planning/economic development roles. The interviewees were headquartered in various areas throughout the Illinois-St. Louis MSA assessment area, including the cities of Belleville, Columbia, Clinton, and Collinsville. Generally speaking, these community contacts echoed the slowdown effects of the current recession, but they also indicated that their respective areas don t seem to be hit as hard as many areas throughout the country. Further, these individuals perceptions of banking conditions in the assessment area were generally favorable, stating that the banking community is doing a good job of meeting the credit needs of both consumers and businesses. 15

18 DESCRIPTION OF INSTITUTION S OPERATIONS IN ST. LOUIS MO-IL MSA, MISSOURI ASSESSMENT AREA During this review period, Midland States Bank delineated one assessment area in the Missouri portion of the St. Louis MSA. The Missouri-St. Louis MSA assessment area is comprised of only the western-central parts of St. Louis County, including one branch office located in Chesterfield, Missouri. Bank Structure The bank s only branch office in the Missouri-St. Louis MSA assessment area operates distinctly different from other Midland States Bank branch facilities. Unlike other offices, it caters primarily to commercial customers and has very little consumer loan activity. Although it is still a full-service branch, offering the bank s full line of both deposit and loan products, it does not have a traditional teller line, ATM, or drive-up banking services. Also, this office offers a mobile branch facility, which is used primarily for remote deposit acceptance, as an added commercial customer convenience. The mobile branch facility was introduced during this review period, and the bank has not closed any offices in this assessment area. General Demographics 13 The bank s Missouri-St. Louis MSA assessment area (population 315,569) is located in the western-central part of St. Louis County, which is only one of seven counties comprising the Missouri side of the St. Louis MSA. 14 The bank s one office in this assessment area is located in Chesterfield, Missouri, which is a second-ring western suburb of St. Louis and is the largest city in west St. Louis County (the population was 46,635 as of ). Income and Wealth Demographics As previously noted, the bank s Missouri-St. Louis MSA assessment area includes part of St. Louis County. This area includes 57 of the 173 census tracts in the county, which are displayed in the following table by income level of geography and family population characteristics. 13 Unless otherwise noted, demographic information is based upon year 2000 census information. 14 In addition to the seven counties comprising the Missouri portion of the St. Louis MSA, the MSA also includes the city of St. Louis, which is a separate municipality not included in any county. 15 United States Census estimates

19 Assessment Area Geographical Information by Income Category 2000 Census Data Low- Moderate- Middle- Upper- Unknown TOTAL Assessment Area Geographies 0.0% 0.0% 15.8% 84.2% 0.0% 100% Family Population ,554 76, , % 0.0% 12.1% 87.9% 0.0% 100% The previous table reveals that there are no LMI census tracts in the bank s Missouri-St. Louis MSA assessment area, and the vast majority of assessment area families live in upper-income geographies. Based upon 2000 census data, the median family income for the assessment area was $84,977, which is well above the 2000 St. Louis MSA median family income figure of $53,435. More recently, HUD estimates the 2008 St. Louis MSA median family income to be $65,000, representing a 21.6 percent increase from The following table displays population percentages of assessment area families by income level, compared to the St. Louis MSA population as a whole. Assessment Area Family Population by Income Category 2000 Census Data Low- Moderate- Middle- Upper- Unknown TOTAL Assessment Area 5,572 8,584 14,451 58, , % 9.8% 16.5% 67.3% 0.0% 100% St. Louis MSA 137, , , , , % 18.4% 22.6% 39.6% 0.0% 100% As displayed in the previous table, the population characteristics of the assessment area indicate significantly more wealth relative to the entire MSA. The assessment area LMI population only totals 16.2 percent of all families, which is less than half of the LMI family population percentage for the entire MSA (37.8 percent). Similarly, the percentage of assessment area families living below the poverty level is well below that of the MSA, 2.0 percent compared to 7.5 percent. Housing Demographics Historically, housing development in recent decades has been fast-paced in the Missouri-St. Louis MSA assessment area, particularly in the Chesterfield vicinity, and the houses being built are mainly geared toward upper-income buyers. Consequently, demographics for this assessment area indicate that housing is expensive. The 2000 median housing value for the assessment area was $182,774, nearly double that of the median housing value for the St. Louis MSA, $94,895. Further, these high housing costs appear very expensive, even in light of the 17

20 relatively high income levels for the assessment area population. The affordability ratio 16 for the assessment area is only 35.0 percent, which is significantly lower than the St. Louis MSA affordability ratio of 46.0 percent. Therefore, it appears that even though Missouri-St. Louis MSA assessment area income levels are high, they have not kept pace with increasing home values. Lastly, the median gross rent figure for the assessment area was $736, again, significantly higher than the St. Louis MSA figure of $522. Therefore, it appears housing values in the assessment area are very high. Further, this high-cost housing is relatively unaffordable, even after considering the high-income levels characteristic of this assessment area. These housing values stand out in stark contrast to most other MSA areas and the overall St. Louis MSA demographics. Industry and Employment Demographics Similar to housing development, business development in recent decades has also been robust in the Missouri-St. Louis MSA assessment area, particularly in the Chesterfield region. Portions of Chesterfield are located in the floodplain of the Missouri River, now known as Chesterfield Valley. This area was submerged during the Great Flood of 1993; higher levees built since then have led to extensive commercial development in the valley. Chesterfield Valley is the location of Spirit of St. Louis Airport, used for corporate aviation, as well as the longest outdoor strip mall in America. The remainder of Chesterfield is located on the bluffs above the floodplain and includes significant residential and retail development. As with the St. Louis MSA, Missouri-St. Louis MSA assessment area unemployment rates have generally been increasing since the beginning of The St. Louis County unemployment rate was 9.6 percent as of July 2009, up significantly from an average of 5.9 percent for Similarly, the St. Louis MSA unemployment rate for July 2009 was 9.9 percent, significantly above the 2008 average for the MSA, which was 6.6 percent. 17 CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN ST. LOUIS MO-IL MSA, ILLINOIS ASSESSMENT AREA LENDING TEST Midland States Bank meets the criteria for a satisfactory lending test rating, based upon the performance evaluation of the bank s lending activities within the Illinois-St. Louis MSA assessment area. Despite weakness noted in relation to the geographic distribution of small business loans, the overall geographic distribution of loans reflects reasonable distribution throughout the assessment area. Secondly, loan activity analysis reveals reasonable penetration 16 This figure is calculated by dividing the median household income by the median housing value; it represents the amount of single family owner-occupied housing that a dollar of income can purchase for the median household in the geography. Values closer to 100 percent indicate greater affordability. 17 Source: Bureau of Labor Statistics. These figures are based on unemployment rates that are not seasonally adjusted. 18

21 among individuals of different income levels, including LMI levels, and businesses/farms of varying sizes. Geographic Distribution of Loans As previously noted, the Illinois-St. Louis MSA assessment area is comprised of four metropolitan counties in their entirety. Within this assessment area, there are 11 low-income, 16 moderate-income, 35 middle-income, and six upper-income census tracts. The analysis in this section illustrates the distribution of the bank s loan activity across these geographies, in comparison to key assessment area demographics. The first review details the bank s geographic distribution of loans reported under the HMDA. The following table displays the results of this review, compared to the percentages of owner-occupied housing units located in each geography income category. Distribution of Loans (Number and Dollar Volume in $000s) Inside Assessment Area by Income Level of Geography Geography Income Classification Loan Type TOTAL Low- Moderate- Middle- Upper- Unknown % 33.3% 66.7% 0.0% 0.0% 100% 2008 HMDA $ 0 $ 908 $ 2,243 $ 0 $ 0 $ 3, % 28.8% 71.2% 0.0% 0.0% 100% Owner-Occupied Housing 6.0% 18.5% 63.9% 11.5% 0.0% 100% The geographic distribution analysis of HMDA loans reflects excellent lending performance under the CRA. The bank s penetration to moderate-income geographies represents 33.3 percent of loans by number (28.8 percent of dollar volume), which compares very favorably to the level of owner-occupied housing units located in moderate-income tracts (18.5 percent). On the other hand, HMDA loans made to borrowers residing in low-income census tracts initially appears to be poor. However, after considering the bank s branch structure relative to the location of the low-income areas in question, the bank s performance in low-income tracts does not appear unreasonable. Historically, the bank has only maintained a very limited presence in this assessment area; in fact, throughout the 2008 loan review period, the bank only operated one branch office, which is located in the far-eastern part of the MSA. All low-income census tracts in the Illinois-St. Louis MSA assessment area are located in the far-western part of the assessment area, centered near downtown East St. Louis. Consequently, it is not surprising that, for this review period, Midland States Bank does not have loan penetration in this far-western part of the assessment area. Therefore, in light of the bank s performance context relating to branch structure and the location of low-income census tracts within this assessment area, the bank s geographic distribution of HMDA loans reflects strong penetration throughout the Illinois-St. Louis MSA assessment area. 19

22 Similar to the HMDA data analysis, the bank s geographic distribution of small business loans was also reviewed. The following table displays the results of this review, compared to the estimated percentages of businesses located in each geography income category. Distribution of Loans (Number and Dollar Volume in $000s) Inside Assessment Area by Income Level of Geography Geography Income Classification Loan Type TOTAL Low- Moderate- Middle- Upper- Unknown 2008 Small Business Business Institutions % 12.0% 84.0% 4.0% 0.0% 100% $ 0 $ 221 $ 2,519 $ 250 $ 0 $ 2, % 7.4% 84.2% 8.4% 0.0% 100% 6.8% 18.2% 62.4% 12.6% 0.0% 100% Analysis of small business lending activity did not indicate geographic distribution performance commensurate with that of comparison figures. Small business loan activity inside the assessment area revealed that only 12.0 percent of small business loans were made in moderateincome geographies (representing 7.4 percent of the dollar volume of loans), and no small business loans were made in low-income census tracts. As discussed in the previous section relating to the geographic distribution of HMDA loans, a lack of small business lending in lowincome census tracts is not considered unreasonable, in light of the bank s performance context relating to branch structure. However, the low number of small business loans made in moderate-income census tracts does not demonstrate reasonable penetration to these areas, where it is estimated that 18.2 percent of assessment area small businesses are located. 18 Similar to the small business loan analysis, the bank s geographic distribution of small farm loans was also analyzed. However, as this assessment area is part of a metropolitan area, it is not primarily rural in nature. Consequently, agriculture-related loans are not a significant credit need in this assessment area, compared to other types of credit. In 2008, the bank only made five small farm loans inside this assessment area, which is not considered unusual in light of the assessment area s primarily urban/suburban characteristics. Although the minimal number of small farm loans in this review significantly decreases the materiality of these findings, all five of these loans were made to farms inside middle-income census tracts, where 86.1 percent of farms are estimated to be located, 19 reflecting adequate performance. 18 These statistics are derived from Business Geodemographic Data for the assessment area, as reported by Dun & Bradstreet (for the year 2008). 19 These statistics are derived from Business Geodemographic Data for the assessment area, as reported by Dun & Bradstreet (for the year 2008). 20

23 Lastly, based on combined activity from the three loan categories reviewed, the bank had loan penetration in only a small percentage of assessment area census tracts. Of a total of 68 Illinois- St. Louis MSA assessment area census tracts, the bank had loans in only eight different census tracts. However, considering the bank s performance context, this is not considered indicative of unsatisfactory CRA performance. A closer review of the bank s lending activity reveals that most of these loans were made in the larger census tracts located in the eastern portion of the assessment area, where the bank maintained its only branch office for most of the review period. This lending activity is a substantial distance away from the smaller census tracts located in the more densely populated East St. Louis city area. In light of the bank s performance context, especially in relation to the size of census tracts closest in proximity to the bank s Bond County office, it stands to reason that most of the bank s loans would be located in the larger census tracts in the eastern part of the assessment area. There are two moderate-income census tracts inside the eastern most assessment area counties, and the bank had significant loan activity in both of these geographies. Consequently, when considering activity from the HMDA small business and small farm loan categories, the bank s overall geographic distribution performance reflects satisfactory penetration throughout the Illinois-St. Louis MSA assessment area. Borrower s Profile The lending test performance standards evaluate the bank s lending to borrowers of various income levels. When reviewing consumer loans related to home mortgages, borrowers are classified into low-, moderate-, middle-, and upper-income categories by comparing applicant income to the most recent median family income figure, as estimated by HUD. In 2008, this figure was $65,000 for St. Louis, MO-IL MSA. The following table shows the bank s distribution of 2008 HMDA loans by borrower income level for the Illinois-St. Louis MSA assessment area. Distribution of Loans (Number and Dollar Volume in $000s) Inside Assessment Area by Income Level of Borrower Borrower Income Classification Loan Type TOTAL Low- Moderate- Middle- Upper- Unknown % 28.2% 35.9% 17.9% 15.4% 100% 2008 HMDA $ 70 $ 884 $ 1,205 $ 594 $ 398 $ 3, % 28.1% 38.2% 18.9% 12.6% 100% Family Population 22.8% 19.4% 23.7% 34.2% 0.0% 100% Overall, the bank is doing an adequate job of making home loans to LMI borrowers. Figures in the previous table indicate excellent penetration to moderate-income borrowers, but penetration to low-income borrowers is weak. As noted above, 28.2 percent of HMDA loans reviewed were 21

24 made to moderate-income borrowers, which is significantly higher than the demographic figure indicating that 19.4 percent of assessment area families are of a moderate-income level. Alternatively, the percentage of loans made to low-income borrowers (2.6 percent) is much lower than the demographic comparison figure (22.8 percent). Even though the bank s mortgage lending to low-income borrowers reflects poor performance, the bank s overall LMI lending performance is reasonable in consideration of strong lending levels to moderate-income borrowers. The lending test performance standards evaluate the bank s lending to businesses of different sizes. For CRA purposes, a business is considered to be a small business if its gross annual revenues in the preceding calendar year were $1 million or less. The following table shows the distribution of 2008 small business loans by business revenue size and size of loan. Lending Distribution by Business Revenue Level Gross Revenue $1 Million or Less Greater Than $1 Million TOTAL Loan Origination Amount (in $000s) <$100 <$100>$250 >$250<$1,000 TOTAL % 28.0% 0.0% 84.0% % 4.0% 8.0% 16.0% % 32.0% 8.0% 100% Based on the analysis of business loans, the bank is doing a reasonable job of meeting the credit needs of small businesses. As noted in the previous table, 84.0 percent of all of the 2008 small business loans were made to businesses with gross annual revenues of $1 million or less. This small business lending level is commensurate with business geodemographic data, which indicate that 89.7 percent of institutions inside the assessment area are small businesses. Further, the data indicate that 56.0 percent of the small business loans reviewed were in amounts of $100,000 or less. Using loan amount as a proxy for the size of a business, this provides evidence that the bank is meeting the needs of the smallest businesses within its assessment area. In light of these findings, the bank s small business lending is considered satisfactory. Similar to the borrower profile review of small business loans, the bank s small farm loan performance was also reviewed. For CRA purposes, a farm is considered to be a small farm if its gross annual revenues in the preceding calendar year were $1 million or less. As the Illinois-St. Louis MSA assessment area is largely urban/suburban in nature, agriculturally based loan products are not in strong demand. Consequently, overall farm lending levels are low. However, based on a review of the five small farm loans made in this assessment area, the bank is doing a reasonable job of meeting the credit needs of small farms. Each of the five small 22