PUBLIC DISCLOSURE November 19, 2001 Date of Evaluation COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION North Shore Bank of Commerce Name of Depository Institution 126553 Institution s Identification Number Duluth, Minnesota Address of Institution Federal Reserve Bank of Minneapolis Name of Supervisory Agency 90 Hennepin Avenue, Minneapolis, MN 55480 Address of Supervisory Agency NOTE: This document is an evaluation of this institution s record of meeting the credit needs of its entire community, including low- and moderate-income 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 this 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.
TABLE OF CONTENTS Institution s CRA Rating... 1 Description of Institution... 1 Description of Assessment Area... 3 Conclusions... 8
INSTITUTION S CRA RATING: This institution is rated Satisfactory. The bank s CRA rating is based on several factors. The bank s lending to borrowers of different income levels and to businesses of different sizes is good. The bank extends a reasonable number of consumer and residential real estate loans to low- and moderate-income borrowers. Also, the bank extends almost all of its small business loans to entities with gross annual revenues of $1 million or less. The bank s lending in geographical areas of different income levels is good. The dispersion and distribution of its lending among areas of different income levels was also good. The bank s net loan-to-deposit ratio is excellent. The level of the bank s lending inside the assessment area is excellent. DESCRIPTION OF INSTITUTION Based on its size and financial condition, North Shore Bank of Commerce, Duluth, Minnesota ( NSBC ), satisfactorily meets the credit needs of residents and small businesses in its assessment area. The bank received a satisfactory CRA rating at its previous CRA evaluation, dated October 6, 1997. Offices. NSBC operates five full-service offices, a paying and receiving drive-up facility, and nine automated teller machines ( ATM ) in the assessment area. The main office and drive-up facility are in Duluth s downtown commercial district. The bank operates full-service branches at 4801 East Superior Street (Lakeside office), 17 West Calvary Road (Woodland office), 1600 Miller Hill Trunk Highway (Miller Hill Mall) in Duluth, Minnesota, and one branch at 4810 Miller Trunk Highway (Hermantown office) in Hermantown, Minnesota. All the branch offices except the Miller Hill Mall branch operate a drive-up facility. The bank has not opened or closed any offices since the previous evaluation. The bank operates numerous ATMs in the assessment area. It has an ATM at each of the bank s five offices. In addition, it operates three ATMs in grocery stores in Duluth and one ATM in a gasoline station in Hermantown. The bank s ATM located at the main office accepts deposits; all eight of the bank s other ATMs are cash-dispensing-only machines. The bank added four ATMs but closed one since the previous evaluation. It closed an ATM in the Canal Park area. The bank delivers its products through means other than its offices and ATMs. It operates loan production offices in Cloquet, Minnesota, and the Hermantown and the Miller Hill Mall offices. Also, the bank established a web site in October 2000 from which customers can originate transactions, and it continues to provide 24-hour telephone banking. Last, the bank offers debit and ATM cards to its customers. Loan portfolio. According to the September 30, 2001, Report of Condition ( ROC ), the bank s assets totaled $162.0 million, an increase of $39 million since the June, 30, 1997, ROC data noted at the previous evaluation. Between evaluations, the bank s assets increased 32%. The ROC data show the composition of the loan portfolio to be 58% residential real estate, 39% commercial, 2% consumer, and 1% other loans. The bank is a leading residential real estate lender in the assessment area. The composition of the bank s loan portfolio has remained relatively consistent since the last CRA evaluation. The evaluation did not reveal any financial constraints on the bank s ability to lend within the assessment area. 1
Credit products. The bank continues to offer a wide variety of loan products designed to serve the credit needs of residents and small businesses in the assessment area. Its products include closed-end and openend consumer loans, residential real estate loans, and small business loans. Commercial loan programs are directed primarily toward small businesses and include Small Business Administration ( SBA ) loans. The bank also participates in the City of Duluth Downtown Storefront Renovation and Loan Program. Other commercial loan products include lines of credit, letters of credit, commercial real estate, economic development, construction, and equipment loans. The bank offers a wide variety of conventional and government-guaranteed residential real estate mortgages. Its conventional residential real estate loan products include purchase money, refinance, construction, and home improvement loans. The bank also participates in government-sponsored loan programs including: Federal Housing Administration ( FHA ), FHA Title 1 home improvement, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Department of Veterans Affairs, Minnesota Housing Finance Agency ( MHFA ) First-Time Homebuyer, MHFA Home Improvement, MFHA Home Energy, and Wisconsin Housing and Economic Development Authority. In addition, the bank participates in residential real estate mortgage programs directed towards first-time homebuyers and low- and moderate-income borrowers. The bank offers first-time homebuyer residential mortgage loans through MFHA s Minnesota Mortgage Program and Minnesota City Participation Program. It also offers MHFA Community Activity Set Aside mortgage loans. In addition, the bank continues to participate in an affordable housing program with Northern Communities Land Trust ( NCLT ), a nonprofit organization. NCLT purchases and rehabilitates homes and then sells only the home, not the real property, to a qualifying family. NCLT holds the real property in trust and by doing so removes the price of the land from the cost of housing, making the housing more affordable. The bank no longer participates in the Neighborhood Housing Services loan program. The bank has not introduced any new credit products since the last CRA evaluation. The bank also offers consumer loans for a variety of purposes. It offers the following types of consumer loans: home equity loans, home equity lines of credit, fixed-rate installment loans, personal lines of credit, and overdraft lines of credit. For purposes of this evaluation, the bank is subject to the small bank CRA evaluation procedures because it had total assets of less than $250 million at the last two consecutive year-ends. Given its size and offices in a metropolitan statistical area ( MSA ), the bank must report data about its real estate loan activity pursuant to Home Mortgage Disclosure Act ( HMDA ). 1 1 All lenders required to report HMDA data are referred to as aggregate lenders for purposes of this evaluation. 2
DESCRIPTION OF NORTH SHORE BANK OF COMMERCE S ASSESSMENT AREA Assessment area. The bank has defined one assessment area for purposes of CRA. The bank s assessment area partially lies within the Duluth-Superior MSA, and it also includes all of Carlton County, Minnesota. The MSA part of the assessment area is the southern section of St. Louis County, Minnesota, and northern section of Douglas County, Wisconsin. The Duluth-Superior MSA is approximately 150 miles north of Minneapolis-St. Paul, Minnesota, and consists of two counties: St. Louis County and Douglas County. The Fond du Lac Indian Reservation is in the southwestern section of St. Louis County and the northern section of Carlton County within the bank s assessment area. The bank has not changed its assessment area since the previous evaluation. The assessment area consists of 61 census tracts ( CT ) and 7 block numbering areas ( BNA ). The southern section of St. Louis County encompasses 47 CTs while the northern section of Douglas County encompasses 14 CTs in the assessment area. Carlton County is composed of seven BNAs. The assessment area is composed of geographies, which are CTs and BNAs, of all income levels. There are 7 low-income, 13 moderate-income, 34 middle-income, and 10 upper-income geographies. There are four geographies where the income level is unavailable. The assessment area includes the cities of Duluth, Hermantown, Proctor, and Cloquet in Minnesota and Superior in Wisconsin. Specifically, the bank s assessment area consists of the following whole and contiguous CTs and BNAs in their respective counties, as set forth in Table 1 by income level of geography. TABLE 1 ASSESSMENT AREA GEOGRAPHIES BY COUNTY AND INCOME LEVEL Carlton County St. Louis County CTs Douglas County CTs BNAs Low Moderate Middle Upper Low Moderate Middle Middle Upper 16.00 12.00 2.00 38.00 1.00 201.00 202.00 204.00 9701 9703 17.00 13.00 3.00 101.00 5.00 203.00 205.00 9702 19.00 14.00 4.00 102.00 6.00 206.00 207.00 9704 25.00 18.00 9.00 104.00 7.00 208.00 9705 28.00 20.00 22.00 105.00 8.00 210.00 9706 32.00 24.00 29.00 106.00 10.00 301.00 9707 26.00 30.00 111.00 11.00 302.00 27.00 31.00 112.00 23.00 303.00 33.00 34.00 113.00 103.00 37.00 36.00 114.00 Population. 2 The bank s assessment area has a population of 189,067. According to the unpublished 2000 U.S. Census data, populations of the counties within the assessment area increased slightly between 1990 and 2000. Population data are not yet available for each geography in the assessment area; therefore, direct comparison between 1990 and 2000 data is not yet possible. Table 2 illustrates the change in population for each county in the assessment area between 1990 and 2000. 2 Unless otherwise indicated, the discussion of the economic and demographic data is based on 1990 U.S. Census data. 3
TABLE 2 POPULATION FOR COUNTIES IN ASSESSMENT AREA County 1990 Census Population 2000 Census Population Percentage Change St. Louis 198,213 200,528 1.2% Carlton 29,259 31,671 8.2% Douglas 41,758 43,287 3.7%. For purposes of classifying borrowers incomes, this evaluation uses the Department of Housing and Urban Development s estimated 2001 median family income for the relevant area. For borrowers in the MSA, this figure is $49,800. For borrowers in the nonmetropolitan part of the assessment area (Carlton County), this figure is $47,100. For purposes of classifying CT or BNA income levels, this evaluation uses the relevant area s median family income from the 1990 U.S. Census. For the MSA, this figure is $30,561. For the nonmetropolitan areas of Minnesota, the 1990 median family income is $28,933. The median family income for the bank s assessment area is $31,354, and its median household income is $25,271. There are 49,096 families and 73,266 households in the bank s assessment area. Approximately 9.9% of the families and 14.6% of the households in the assessment area have incomes below the poverty level. The number of families with incomes below the poverty level is slightly higher than such families statewide (7.3% and 7.6% for Minnesota and Wisconsin, respectively). The number of households with incomes below the poverty level within the assessment area is slightly higher than such households statewide (10.5% and 10.4% for Minnesota and Wisconsin, respectively). Table 3 lists pertinent demographic characteristics of the bank s assessment area. TABLE 3 DEMOGRAPHIC CHARACTERISTICS OF ASSESSMENT AREA Assessment Bank Assessment Area Characteristics Area Data Duluth-Superior MSA Data CT and BNA Summary Total Number of CTs 61 87 Number of Low- CTs 7 8 Number of Moderate- CTs 13 18 Number of Middle- CTs 28 48 Number of Upper- CTs 9 9 Number income unavailable 4 4 Total Number of BNAs 7 Number of Low- BNAs 0 Number of Moderate- BNAs 0 Number of Middle- BNAs 6 Number of Upper- BNAs 1 4
TABLE 3 DEMOGRAPHIC CHARACTERISTICS OF ASSESSMENT AREA Assessment Bank Assessment Area Characteristics Area Data Duluth-Superior MSA Data Summary Median Family - 1990 3 $31,354 $30,561 Percentage of Low- Families 19.3% 19.9% Percentage of Moderate- Families 18.1% 18.5% Percentage of Middle- Families 22.8% 23.5% Percentage of Upper- Families 39.8% 38.1% Median Household - 1990 $25,271 $23,690 Percentage of Low- Households 24.4% 25.5% Percentage of Moderate- Households 15.2% 15.5% Percentage of Middle- Households 17.4% 17.2% Percentage of Upper- Households 43.0% 41.8% Miscellaneous Information Total Population 189,067 239,971 Percentage of Families With s Below 9.9% 10.0% Poverty Level Total Housing Units 82,677 116,013 Percentage of Owner-Occupied to Total Units 63.7% 60.3% Percentage of Rental to Total Units 24.7% 21.8% Percentage of Vacant to Total Units 11.6% 17.9% Affordability Ratio 4 57.7 57.7 Median Housing Age (years) 32 40 Median Housing Value $43,788 $41,043 Most of the assessment area s low-income CTs are in or around Duluth s downtown area. Six lowincome CTs are in St. Louis County and one is in Douglas County. The total population of the lowincome CTs is 9,462, which represents 5.0% of the assessment area s population. The bank s main office and ATM are in CT 19.00, which is in Duluth s downtown commercial district. The bank also operates an ATM at Jubilee Foods in CT 17.00. Most of the other low-income CTs are near Duluth s downtown commercial district in the Endion, East Hillside, Central Hillside, and Lincoln Park neighborhoods. In addition to low-income CTs, the assessment area has 13 CTs classified as moderate-income areas. Ten of the CTs are in St. Louis County while 3 are in Douglas County. The total population on the moderateincome CTs is 27,205, which is 14.4% of the assessment area s population. For the most part, the assessment area s moderate-income areas border the low-income areas of Duluth s downtown. Middle-income geographies comprise the largest portion of the assessment area and include 28 CTs and 6 BNAs. The total population in the middle-income CTs is 114,944, which represents 60.8% of the population. The bank s Miller Hill Mall office, loan production office, and ATM are in CT 3.00. The bank also operates ATMs at the Lakeside Jubilee Foods located in CT 2.00 and Kenwood Jubilee Foods located in CT 4.00. The bank s loan production office in the town of Cloquet is in BNA 9701. 3 See Appendix A for definitions of low-, moderate-, middle-, and upper-income. 4 This ratio is defined as the median household income divided by the median housing value. 5
Upper-income geographies include nine CTs and one BNA. The total population in the upper-income geographies is 37,444, which is 19.8% of the assessment area s population. The bank operates three offices with ATMs located in upper-income geographies: Lakeside office (CT 6.00), Woodland office (CT 1.00), and Hermantown office and loan production office (CT 103.00). The bank also operates one additional ATM at the Pike Holiday Station in CT 103.00. CTs 22.99, 25.99, 201.99, and 210.99 are classified as crews-of-vessels by the U.S. Census Bureau. This classification is reserved for shipboard populations, and the CTs are assigned to the offshore area adjacent to the vessel s homeport. The total population of these CTs is 12. These four CTs will not be included in the discussion of the bank s performance in the assessment area. Examiners contacted local government officials, members of community development organizations, and representatives of housing organizations familiar with the housing, development, and business characteristics of the assessment area in an attempt to identify community credit needs. Information obtained from these contacts was used in evaluating the bank s CRA performance. The evaluation did not reveal any unmet credit needs in the assessment area. Economy. According to bank management and community contacts, the economy in the assessment area is not booming but is relatively stable. Historically, natural resources industries have had a large effect on the health of the local economy. The Duluth-Superior area has been trying to reduce its reliance on the natural resources industries through diversification during the last 15 years. Typically, employment in the natural resources industries offers the highest-paying wages in the area. Currently, the area s various economic sectors are performing at different levels. During the last year, the economy has slowed down some, especially in the manufacturing, mining, and shipping industries. The taconite plants and mines in the area have experienced significant slowdowns. The recent mine closure in Hoyt Lakes, Minnesota, has resulted in a slowdown in the shipping and railroad transportation industries. Duluth has also experienced a shift in employment from higher-paying manufacturing, mining, and shipping occupations to lower-paying service, tourism, and retail jobs. Job growth has also occurred in the health and education occupations. According to economic data on employment and growth rates for Duluth by the Minnesota Department of Trade and Economic Development, the following sectors have experienced growth between 1990 and 1998: finance (finance, insurance, and real estate) has increased 268.2%, transportation (transportation, communication, and utilities) has increased 47.2%, retail has increased 20.3%, services increased 95.6%, and manufacturing increased 4.1%. The mining industry decreased 7.3% during the period. The unemployment rate for the assessment area is slightly higher than the statewide rates. According to October 2001 labor statistics published by the states of Minnesota and Wisconsin, the unemployment rates for the counties in the assessment area range from 3.9% to 4.2%. The statewide unemployment rates for the same period were 3.2% and 3.9% for Minnesota and Wisconsin, respectively. The largest employers in the assessment area include hospitals, post-secondary institutions, and government entities. The assessment area has four post-secondary institutions with a combined enrollment of 22,442 students. The post-secondary institutions in the assessment area are the University of Minnesota Duluth, College of St. Scholastica, Lake Superior College in Duluth, and the University of Wisconsin-Superior in Superior. The retail and service industry also constitutes a large number of employers in the area. 6
According to the City of Duluth Housing Needs Assessment Study conducted in fall 1998 ( Needs Assessment ), Duluth s population is aging rapidly. In addition, Duluth is experiencing out migration of younger people. Housing characteristics. According to one community contact, the market for new housing developments in Duluth has been stagnant during the last several years. This situation is partially due to geographic constraints and the density of housing in the area. Construction costs for new housing are very high due to several factors, such as unionized labor, imported materials, and land site preparation costs. Much of the land in Duluth is already developed, and most of the available land is rocky or sloping. The community contact noted the area does have some flatter land that could be developed; however, the areas are controversial due to prior commercial development use that resulted in environmental problems. Also, some groups in the area want to preserve existing green space. Consequently, much of the new housing development in the assessment area is occurring in Hermantown and Proctor, which are west and southwest of Duluth, respectively. The assessment area has 82,677 housing units. Approximately 5,539 of the housing units are in lowincome CTs; of these units, 1,071 are owner occupied, 4,094 are rental, and 374 are vacant units. Only 2.0% of the assessment area s owner-occupied units are in low-income CTs. Within the low-income CTs, the percentages of rental units and owner-occupied units are 73.9% and 19.3%, respectively. The moderate-income CTs have 12,686 housing units; of these units, 5,630 are owner occupied, 6,261 are rental, and 795 are vacant. Only 10.7% of the assessment area s owner-occupied units are in moderateincome CTs. Within the moderate-income CTs, the percentages of rental units and owner-occupied units are 49.4% and 44.4%, respectively. As most of the housing units in the low- and moderate-income CTs are rental units, the need for home mortgage loans in these areas is somewhat limited. The median age of the housing stock is 32 years for the assessment area and 40 years for the Duluth- Superior MSA. According to community contacts, more than 60% of Duluth s housing stock is more than 60 years old. As such, many homes in the area require renovation to remain livable and in compliance with housing codes. According to the Needs Assessment, many of the homes in need of major repair were located in four low-income CTs, one moderate-income CT, and one middle-income CT. These CTs are located near the downtown commercial business district and along the waterfront areas of Lake Superior and include the Lincoln Park, West Duluth, Lower Central, and East Hillside neighborhoods. One community contact indicated the East Hillside neighborhood has the densest housing in Duluth and has a high percentage of units rented to students. The area s student population has had a substantial impact on availability and quality of affordable housing in the community. The contact stated many of the old Victorian mansion homes in the area have been carved into five or six apartments. Landlords are much more likely to rent to students who they can charge rent of $300 per person versus a family who they can charge approximately $700. The high number of student housing rentals in the area has resulted in a shortage of parking and deterioration of housing stock in the neighborhood. A community contact noted the affordable housing issue in the area is one of economics, not supply. A significant number of housing units in the area are run down and need rehabilitation. Typically, rehabilitation costs increase the overall purchase price of a home, thereby making such a purchase less affordable. Also, the shift in employment from the higher-paying manufacturing and mining jobs to lower-paying tourism, service and retail jobs has increased the number of lower wage earners who have less disposable income to apply to purchasing a home. Compounding this situation, housing prices have increased dramatically during the last few years. As a result, it is more difficult for the low- to moderateincome wage earners to afford housing. 7
CONCLUSIONS WITH RESPECT TO PERFORMANCE CRITERIA The bank s performance in meeting the credit needs of its assessment area is satisfactory. This evaluation is based on residential real estate loans, consumer loans, and small business loans. These loan products represent the major product lines, either by number of loans or dollar amount of loans, for the bank. Table 4 sets forth the bank s loan data. TABLE 4 NORTH SHORE BANK OF COMMERCE LOAN ORIGINATIONS FOR THE PERIOD SEPTEMBER 1, 1999, TO SEPTEMBER 30, 2001 Loan Type Total Number of Loans % Total Amount of Loans % Residential Real Estate 1,945 54% $174,927,845 74% Consumer 1,266 35% $27,172,680 14% Commercial 402 11% $33,924,506 12% For purposes of assigning the bank s performance criteria ratings, the examiners placed the most weight on residential real estate loans. The analysis on the following pages is based on a statistical sample of residential real estate, consumer, and small business loans originated during the six-month period of January through June 2001. The statistical sample consisted of 138 residential real estate loans, 119 consumer loans, and 92 small business loans. To determine the bank s CRA rating, examiners analyzed the following criteria, in order of importance: Lending to borrowers of different income levels and businesses of different sizes Geographic distribution of loans Loan-to-deposit ratio Lending inside the assessment area Record of responding to complaints about the CRA performance LENDING TO DIFFERENT BORROWER INCOME LEVELS AND TO BUSINESSES OF DIFFERENT SIZES The bank s level of lending to borrowers of different income levels and to businesses of different sizes is good. The bank has a good record of extending residential real estate and consumer loans to borrowers with low and moderate incomes. The bank offers an array of products to service the needs of these borrowers. Further, the bank s record of extending small business loans to businesses with gross annual revenues of $1 million or less is very good. Table 5 reflects the percentages of residential real estate and consumer loans made to borrowers of the different income levels of low, moderate, middle, and upper. 8
TABLE 5 DISTRIBUTION OF LOANS IN THE ASSESSMENT AREA BY BORROWER INCOME LEVELS* Low Moderate Middle Upper Residential Real Estate Loans Total Number of Loans 12% 25% 22% 41% Total Amount of Loans 8% 20% 19% 53% Consumer Loans Total Number of Loans 20% 14% 27% 39% Total Amount of Loans 11% 12% 31% 46% Demographic Data Percentage of Families by 19.3% 18.1% 22.8% 39.8% Assessment Area Percentage of Households by Assessment Area 24.4% 15.1% 17.4% 43.0% * level is determined based on the 2001 MSA median family income of $49,800 and the nonmetropolitan median family income for Minnesota of $47,100. Residential real estate lending. The data in Table 5 indicate the bank s level of residential real estate lending to low- and moderate-income borrowers is good. The bank s residential real estate lending to moderate-income borrowers is very good and exceeds the demographic distribution of such families in the assessment area. Although the bank s residential real estate lending to low-income borrowers is slightly lower than the percentage of low-income families residing in the assessment area, the percentage of loans to low-income borrowers at 12% is satisfactory. The bank s lending to low- and moderate-income borrowers has improved since the last evaluation when the bank extended 8% and 21% of it residential real estate loans to low- and moderate-income borrowers, respectively. The bank s level of residential real estate lending to low-income borrowers reflects a variety of assessment area factors. First, as previously noted, the affordable housing issue in the area is one of economics, not supply. A number of housing units near and around Duluth s downtown business district are run down and require rehabilitation. Further, the shift in employment from the higher-paying manufacturing and mining jobs to lower-paying tourism, service and retail jobs has increased the number of lower income wage earners who have less disposable income to apply to purchasing a home. In addition, the housing prices during the last few years have increased dramatically compared to wage increases. As a result, it is more difficult for the low- and moderate-income wage earners to afford housing. Second, 9.9% of the families and 14.6% of the households in the assessment area have incomes below the poverty level. Generally, individuals in this category often will not be able to obtain residential real estate loans. Third, 25% of the population in the assessment area is younger than 18 years and 16% is older than 65 years. Further, the population has probably aged since the 1990 U.S. Census. Generally, such individuals have limited credit needs, particularly for residential real estate loans to purchase homes. The bank s 2000 HMDA data show that the bank s performance with respect to reportable loans is comparable with that of the aggregate lenders. Table 6 shows the data for both the bank and the aggregate lenders. 9
TABLE 6 BORROWER DISTRIBUTION OF 2000 HMDA LOANS Low- Borrowers Moderate- Borrowers Middle- Borrowers Upper- Borrowers Institution and Location # % # % # % # % NSBC 63 9% 120 17% 196 29% 308 45% Aggregate Lenders 579 10% 1,173 21% 1,642 29% 2,202 39% As illustrated in the table, the bank s lending to low- and moderate-income borrowers is comparable to the aggregate lenders in the bank s assessment area. The aggregate lenders data are the combined total of lending activity reported by all lenders subject to HMDA in the MSA section of the assessment area. The bank originated 26% of its 2000 HMDA loans to low- and moderate-income borrowers. The comparable figure for the aggregate lenders is 31%. Although the percentage of loans originated by the bank is slightly lower than that for the aggregate lenders, it appears reasonable nonetheless. The bank offers a wide variety of loan products directed specifically toward low- and moderate-income individuals in the assessment area. As mentioned in the Description of the Institution section, the bank offers MHFA and FHA loans for these individuals. It also participates in the NCLT program to address the credit needs of the assessment area s low- and moderate-income individuals. The evaluation did not reveal any unmet credit needs involving residential real estate loans. Consumer lending. The bank s consumer lending to low- and moderate-income borrowers is good. The data in Table 5 indicate the bank s level of consumer lending to low-income borrowers is very good and is slightly higher than the percentage of low-income families in the assessment area. Although the bank s level of consumer lending to moderate-income borrowers is slightly lower than the percentage of such families in the assessment area, the percentage of loans to moderate-income borrowers at 14% is reasonable. The bank offers an array of consumer loan products to serve the needs of residents of the assessment area. It offers both closed- and open-end products for a variety of needs. The bank is also willing to extend small consumer loans to serve residents of the assessment area; the consumer loan data reveal that the bank extended 19% of the loans in amounts between $2,500 and $5,000. Bank management noted the current market demands for consumer loans for low- to moderate-income individuals consists of credit cards and automobile loans. The bank does not offer credit card products but does make applications for another creditor available to its customers. Also, management indicated the bank is not able to compete with automobile dealers in the area for financing of automobile purchases; many consumers seek financing directly from the automobile dealers. The community contacts did not reveal any unmet credit needs relating to consumer loans in the assessment area. Small business lending. The bank s small business lending is very strong. The bank extended 94% of the small business loans to businesses with gross annual revenues of $1 million or less. The last evaluation revealed that the bank extended 87% of its small business loans to these entities. See Table 7 for more information about the bank s small business lending. 10
TABLE 7 SMALL BUSINESS LENDING IN THE ASSESSMENT AREA Small Business Loans $100,000 or Less More Than $100,000 to $250,000 or Less More Than $250,000 to $1,000,000 or Less Percentage of small business loans 83% 15% 2% Of loans within loan amount category, percentage of loans to businesses with revenues less than $1 million 93% 100% 100% Aggregate data reported by financial institutions subject to the reporting requirements of CRA for 1999 and 2000 5 reveal that they originated 59% and 45%, respectively, of the reported loans to entities with gross annual revenues of $1 million or less. According to data published by Dun & Bradstreet as of June 1999, 89.6% of the businesses in the assessment area have gross annual sales of less than $1 million. In light of the aggregate reporters small business loan activity and the number of small businesses in the assessment area, the bank s small business lending is very strong. To meet the credit needs of small businesses in the assessment area, the bank offers SBA loans. Also, the bank participates in the City of Duluth Downtown Storefront Renovation and Loan Program to assist small businesses. Overall, the bank s lending to individuals of different income levels and to business entities of different sizes is good. The bank extends consumer loans to low- and moderate-income individuals. Further, the bank s residential real estate lending to such individuals is good, especially considering the assessment area factors. In addition, the bank extended the vast majority of its small business loans to small entities and for small amounts. The bank demonstrates good responsiveness to meeting the credit needs of all residents and small businesses in its assessment area. It meets this category s standards for satisfactory performance. GEOGRAPHIC DISTRIBUTION OF LOANS The dispersion and distribution of the bank s loans in the assessment area is reasonable and does not reveal any unexplained geographical gaps. The bank originates most of its loans to borrowers in the part of St. Louis County in its assessment area. This is expected and reasonable given that all of the bank s offices are in St. Louis County and both Douglas and Carlton counties are some distance from these offices. The bank extended loans in most of the geographies in the assessment area. It extended loans in 78.7% of the St. Louis County CTs in the assessment area. The bank extended loans in 66.7% and 71.4% of the CTs and BNAs in those parts of Douglas and Carlton counties, respectively, in the assessment area. The bank did not extend loans in one low-income CT. This area is south of the central downtown business district and represents less than.5% of the assessment area s population. The CT has 445 housing units with a median housing age of over 60 years. Approximately 50.8% of the housing units are rental units. In addition, 31.7% of the population is under the age of 18 while 10.2% is 65 or older. Approximately 43.7% of households in the CT have incomes below the poverty level. Given the demographics of the CT, it is not unreasonable that the bank did not originate any loans in this CT. 5 Financial institutions subject to the reporting requirements of CRA are independent institutions that had assets of $250 thousand or more as of the last two calendar year-ends and institutions affiliated with companies that had banking or thrift assets of $1 billion or more as of the last two calendar year-ends. 11
The bank did not extend loans in four moderate-income CTs. Two of these CTs are in St. Louis County and the others are in Douglas County. The population in the two St. Louis County CTs is 1.8% and in the two Douglas County CTs is 2.0% of the assessment area population. It appears that the few people in these areas as well as the distance of the Douglas County areas from the bank probably account for the lack of lending in these four areas. Table 8 shows the distribution of loans in the assessment area by geography income level. TABLE 8 DISTRIBUTION OF LOANS IN THE ASSESSMENT AREA BY CT AND BNA INCOME LEVEL* Low Moderate Middle Upper NA Loan Type # $ # $ # $ # $ # $ Residential Real Estate Loans 3% 1% 6% 3% 58% 55% 33% 41% 0% 0% Consumer Loans 1% 0% 5% 3% 52% 60% 42% 37% 0% 0% Small Business Loans 36% 40% 15% 22% 27% 18% 22% 20% 0% 0% Demographic Data Number of CTs and BNAs 7 13 34 10 4 Percentage of CTs and BNAs 10.3% 19.1% 50.0% 14.7% 5.9% Percentage of Families 3.5% 13.4% 63.0% 20.1% NA Percentage of Owner- 2.0% 10.7% 65.8% 21.5% NA Occupied Units * classification of geographies based on 1990 median family income. Residential real estate lending. The bank s residential real estate lending in low- and moderate-income areas is low but reasonable. As the table indicates, the bank originated 9% of its consumer residential lending in the low- and moderate-income CTs. The bank s level of residential real estate lending within the assessment area s low- and moderate-income geographies declined slightly from the 10% noted at the last evaluation. Families in such areas represent 16.9% of the assessment area s population; however, only 12.7% of the assessment area s owner-occupied housing is in low- and moderate-income CTs. The bank s residential real estate lending in low- and moderate-income CTs can be explained by the assessment area s demographic characteristics and other factors. The low- and moderate-income CTs are located in and around the downtown Duluth commercial business district. Within the downtown area, the bank actively extends small business loans. The number of available owner-occupied housing units in the area is limited as a majority of the housing units in the low- and moderate-income CTs are rental units. Only 2.0% and 10.7% of the owner-occupied housing units in the assessment area are in the low- and moderate-income CTs, respectively. Approximately 73.9% of the housing units in the low-income CTs are rental units while 49.4% of the housing units in the moderate-income CTs are rental units. The housing in the low- and moderate-income CTs is mature as little housing development in these areas has occurred. Turnover within these areas is also limited. Approximately 18.7% of the population in the low-income CTs is under the age of 17 while 24.0% of the population is age 65 or older. For moderate-income CTs, 24.4% of the population is under the age of 17 while 14.8% of the population is age 65 or older. When combined, those populations represent 40.1% of both the low- and moderate-income CTs. Generally, such 12
individuals have limited credit needs, particularly for residential real estate loans to purchase homes. 38.7% of the families and 39.3% households in the low-income CTs have incomes below the poverty level. For moderate-income CTs, 20.2% of families and 23.1% of households have incomes below the poverty level. Individuals in this category often will not be able to obtain consumer real estate loans. As previously mentioned, the assessment area has four colleges with a combined enrollment of approximately 22,442 students. Students generally do not need residential real estate loans. Housing development is not occurring in the assessment area s low- and moderate-income CTs. Rather, it is occurring in the Hermantown area. As previously mentioned, the Needs Assessment states that many homes in need of major repair were located in CTs near the downtown commercial business district and along the waterfront areas of Lake Superior and include the Lincoln Park neighborhood. The additional renovation costs increase the overall cost of purchasing a home making such a purchase less affordable. The bank extends relatively few residential real estate loans in the assessment area s low- and moderateincome areas. Table 9 shows the data for the bank and aggregate lenders. TABLE 9 GEOGRAPHICAL DISTRIBUTION OF 2000 HMDA LOANS Low- Geographies Moderate- Geographies Middle- Geographies Upper- Geographies Institution and Location # % # % # % # % NSBC 10 1% 70 10% 363 51% 270 38% Aggregate Lenders 147 3% 761 13% 3,462 60% 1,358 24% Although the bank s lending in the assessment area s low- and moderate-income areas is slightly lower than that of the aggregate lenders, it is not unreasonable for the reasons stated above. In addition, while the bank s main office is in a low-income CT, three of the other branches are located in upper-income CTs and one is located in a middle-income CT. The bank also has three loan production offices located in middle- and upper-income geographies. One office is in Cloquet (Carlton County) while the others are at the bank s Hermantown and Miller Hill Mall branches. Based on the locations of the bank s offices the distribution of loans in the assessment area by geography income level is reasonable. Consumer lending. The bank s consumer lending in low- and moderate-income areas is low but reasonable. The bank extended 6% of its consumer loans in low- and moderate-income geographies. The bank s level of consumer lending within the assessment area s low- and moderate-income geographies declined slightly from the 9% noted at the last evaluation. Families in such geographies represent 16.9% of the assessment area s population. The bank offers a variety of consumer loan products to meet the consumer credit needs of residents of the assessment area, including low- and moderate-income CTs. Small business lending. The bank actively originates small business loans in the assessment area s lowand moderate-income areas. According to the data in Table 8, the bank originated 36% of the number and 40% of the dollar amount of small business loans to entities in low-income CTs. The bank originated 15% of the number and 22% of the dollar amount of small business loans to entities in moderate-income CTs. The combined totals are 51% of the number and 62% of the dollar amount of the small business loans originated to entities located in low- and moderate-income CTs. 13
The bank s small business lending in low- and moderate-income areas compares favorably with the aggregate reporters. Table 10 shows the aggregate data reported by financial institutions subject to the reporting requirements of CRA for 1999 and 2000. TABLE 10 AGGREGATE REPORTERS SMALL BUSINESS LENDING IN THE ASSESSMENT AREA BY INCOME LEVEL OF GEOGRAPHY Low Moderate Middle Upper Loan Year # $ # $ # $ # $ 1999 19.3% 31.1% 12.6% 14.8% 54.0% 43.7% 14.1% 10.5% 2000 23.4% 33.3% 16.0% 11.3% 41.6% 38.9% 19.0% 16.5% The bank s number and dollar amount of loans originated to low- and moderate-income CTs exceeds the aggregate reporters. Overall, the bank has a good record of lending in all parts of its assessment area. The loan data does not indicate that bank arbitrarily restricts lending activity in any part of the assessment area. The bank has a record of actively extending small business loans in the assessment area s low- and moderate-income areas. Its other lending in these areas appears reasonable. Thus, the bank meets this category s standards for satisfactory performance. LOAN-TO-DEPOSIT RATIO ANALYSIS Given the bank s asset size, financial condition, and assessment area s credit needs, the bank s net loanto-deposit ratio is strong. Since the previous evaluation, the bank s quarterly net loan-to-deposit ratio has ranged from 64% to 79%. For the past 16 quarters, the bank s average net loan-to-deposit ratio is 71%. Since the last evaluation, the bank s quarterly average net loan-to-deposit ratio declined slightly from 73%. Also, the bank continues to hold one community development loan originated prior to the last evaluation. The bank s quarterly average net loan-to-deposit ratio compares favorably with local competitors. Table 11 sets forth the 16-quarter average net loan-to-deposit ratios for the bank and its local competitors. TABLE 11 QUARTERLY AVERAGE NET LOAN-TO-DEPOSIT RATIO Name and Location Assets as of September 30, 2001 (in millions) Average Net Loan-to-Deposit Ratio NSBC $162.0 71% Western National Bank, Duluth, Minnesota $ 96.2 80% Park State Bank, Duluth, Minnesota $ 26.3 67% Republic Bank, Incorporated, Duluth, Minnesota $138.5 80% The Pioneer National Bank of Duluth, Duluth, Minnesota $ 70.5 70% National Bank of Commerce in Duluth, Duluth, Minnesota $ 39.7 96% The First National Bank of Proctor, Proctor, Minnesota $ 18.2 50% Superior Savings Bank, Superior, Wisconsin $ 57.6 105% Community Bank, Superior, Wisconsin $ 67.3 82% Superior National Bank, Superior, Wisconsin $ 29.4 64% 14
The bank s net loan-to-deposit ratio as compared with the five competitor banks in Duluth is the third highest. The bank is significantly larger than its local competitors, except for branches of large national and regional banks operating in the assessment area. Financial information is not available for branches of these banks. Although the bank has a high net loan-to-deposit ratio, not reflected in the ratio is the large amount of residential real estate loans originated by the bank and sold on the secondary market or to government agencies. Including these loans in the net loan-to-deposit ratio calculation would result in a higher ratio for the bank. The bank s net loan-to-deposit ratio is comparable to that of its national peer group. The September 30, 2001, Uniform Bank Performance Report indicates the bank s net loan-to-deposit ratio is 75.8% while the national peer group s is 77.5%. The bank s ratio places it in the 45th percentile of its national peer group. The national peer group s average net loan-to-deposit ratio for the past 16 quarters is 74.1% while the bank s is 71.0%. The bank s peer group includes all insured commercial banks having assets between $100 million and $300 million with three or more banking offices and located in a metropolitan area. Bank management indicated competition among financial institutions in the assessment area is very strong. At least 12 financial institutions are active within the bank s assessment area. The bank s net loan-to-deposit ratio is very good, particularly given the dollar amount of residential real estate loans not reflected in the ratio. The bank actively sells residential real estate loans to the secondary market or government agencies. This allows the bank to make new funds available for reinvesting in loans. Given these factors and the bank s community development lending since the last evaluation, the bank s net loan-to-deposit ratio exceeds the standards for satisfactory performance. COMPARISON OF CREDIT EXTENDED INSIDE AND OUTSIDE THE ASSESSMENT AREA The bank s lending activity in the overall assessment area is very strong. A review of the bank s residential real estate, consumer, and small business loans reveals that the bank extends a significant majority of its loans in the assessment area. Table 12 shows the percentages of residential real estate, consumer, and small business loans that the bank extended in the assessment area. TABLE 12 LOANS ORIGINATED WITHIN THE ASSESSMENT AREA Loan Type Total Number of Loans Total Amount of Loans Residential Real Estate 95% 93% Consumer 97% 96% Small Business 93% 99% Overall, the bank extended 95% of both the total number and total dollar amount of loans in the assessment area. The bank s level of lending in the assessment area is high. The data show that the bank extended almost all of its residential real estate, consumer, and small business loans to borrowers within the assessment area. Thus, the level of the bank s lending activity in the assessment area exceeds the standards for satisfactory performance. 15
GENERAL The evaluation did not reveal any violations of the substantive fair lending and housing laws and regulations. It did reveal procedural violations of the technical provisions of Regulation B--Equal Credit Opportunity Act and Regulation C--Home Mortgage Disclosure Act, which bank management promised to correct. In addition, the bank has not received any CRA-related complaints since the previous evaluation. 16
Appendix A Glossary of Common CRA Terms (For additional information, please see the Definitions sections of Regulation BB at 12 C.F.R. 228.12.) Assessment Area - The geographic area(s) delineated by the bank and used in evaluating the bank s record of helping to meet the needs of its community. The assessment area must include the geographies where the main office, branches, and deposit-taking automated teller machines are located. The assessment area must consist only of whole geographies, may not reflect illegal discrimination, and may not arbitrarily exclude low- or moderate-income geographies. Block Numbering Areas (BNAs) - BNAs are geographic entities similar to census tracts. Metropolitan areas are most often delineated into census tracts, while rural areas are delineated into BNAs. Census Tracts - Census tracts are small, relatively permanent geographic entities within counties delineated by committee of local data users. Generally, census tracts have between 2,500 and 8,000 residents and boundaries that follow visible features. Community Development - Includes affordable housing (including multifamily rental housing) for lowand moderate-income individuals, community services targeted to low- and moderate-income individuals, activities that promote economic development by financing businesses or farms that have gross annual revenues of $1 million or less, or activities that revitalize or stabilize low- or moderate-income geographies. Community Development Loan - A loan that has community development as its primary purpose and (except in the case of a wholesale or limited-purpose bank) 1. has not been reported or collected by the bank or an affiliate as a home mortgage, small business, small farm, or consumer loan, unless it is a multifamily dwelling loan and 2. benefits the bank s assessment area(s) or a broader statewide or regional area that includes the bank s assessment area(s). Community Development Service - A service that has as its primary purpose community development, is related to the provision of financial services, has not been considered in the evaluation of the bank s retail banking services, benefits the bank s assessment area(s) or a broader statewide or regional area that includes the bank s assessment area, and has not been claimed by other affiliated institutions. Consumer Loans - Loans to individuals for household, family, and other personal expenditures. These loans do not include real estate-secured loans. Dun & Bradstreet Data - Data collected by Dun & Bradstreet regarding types of businesses and their respective gross annual revenues. This data can be sorted by geographies. Level - Both geographies and individuals can be described in terms of their income levels. In MSAs, the level is based on the MSA median income. In non-msa areas, the level is based on the statewide, non-msa median income. Low- - Less than 50 percent of the area median income Moderate- - At least 50 percent and less than 80 percent of area median income. 17