PUBLIC DISCLOSURE COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION

Transcription

1 PUBLIC DISCLOSURE July 13, 2015 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION Frost RSSD # W. Houston Street San Antonio, TX Federal Reserve of Dallas 2200 North Pearl Street Dallas, Texas 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.

2 Table of Contents I. INSTITUTION RATING...4 Overall Rating...4 Table of Performance Ratings...4 Summary of Major Factors Supporting Rating...4 II. INSTITUTION...6 Description of Institution... 6 Scope of Examination... 9 Conclusions with Respect to Performance Tests III. METROPOLITAIN AREAS (Full Scope Review)...19 Instutition s Operations in the Austin-Round Rock-San Marcos, TX Assessment Area Conclusions with Respect to Performance Tests Institution s Operations in the Fort Worth-Arlington, TX Assessment Area Conclusions with Respect to Performance Tests Institution s Operations in the Houston-The Woodlands-Sugar Land, TX Assessment Area Conclusions with Respect to Performance Tests Institution s Operations in the McAllen-Edinburg-Mission, TX Assessment Area Conclusions with Respect to Performance Tests Description of Operations in San Antonio-New Braunfels, TX Assessment Area..76 Conclusions With Respect To Performance Tests... 83

3 IV. METROPOLITAN AREAS (Limited Scope Review)...91 Conclusions With Respect to Performance Tests...92 Brownsville-Harlingen, TX Corpus Christi, TX Dallas, TX Midland, TX Odessa, TX V. NONMETROPOLITAN STATEWIDE AREA (Limited scope Review)...93 Conclusions With Respect to Performance Tests...93 VI. APPENDICES...94

4 INSTITUTION RATING INSTITUTION RATING INSTITUTION'S CRA RATING: Frost is rated Satisfactory. The following table indicates the performance level of Frost (Frost) with respect to the lending, investment, and service tests. TABLE OF PERFORMANCE RATINGS PERFORMANCE LEVELS FROST BANK PERFORMANCE TESTS Lending Test* Investment Test Service Test Outstanding X High Satisfactory X X Low Satisfactory Needs to Improve Substantial Non Compliance *The lending test is weighted more heavily than the investment and service tests when arriving at an overall rating. Summary of Major Factors Supporting Rating Major factors supporting the institution s rating include: Lending activity reflects good responsiveness to assessment areas' credit needs. A substantial majority of loans are made in the bank s assessment areas. The geographic distribution of loans reflects excellent penetration throughout the assessment areas. The distribution of Home Mortgage Disclosure Act (HMDA) lending reflects adequate penetration among customers of different income levels. The distribution of small business lending reflects good penetration among businesses of different revenue sizes. Makes a relatively high level of community development loans. Makes use of innovative and/or flexible lending practices in serving assessment area needs. Has an excellent level of qualified community development investments and grants, particularly those not routinely provided by private investors and is often in a leadership position. Makes extensive use of innovative and/or complex investments to support community development initiatives. Exhibits good responsiveness to credit and community development needs. 4

5 INSTITUTION RATING Delivery systems are reasonably accessible to the bank s geographies and individuals of different income levels in the assessment areas. The record of opening and closing of branches has not adversely affected the accessibility of its delivery systems, particularly to low- and moderate-income (LMI) geographies and/or LMI individuals. Services do not vary in a way that inconveniences its assessment areas, particularly LMI geographies and/or LMI individuals. Provides a relatively high level of community development services. 5

6 INSTITUTION DESCRIPTION OF INSTITUTION Frost is wholly-owned by Cullen/Frost er s Incorporated, which is a one-bank holding company headquartered in San Antonio, Texas and is the largest Texas-based banking company that operates only in Texas. As of December 31, 2014, Frost operates branch offices and 138 full-service ATMs throughout Texas. In addition, Frost provides free ATM withdrawals to customers at over 1,190 ATMS throughout Texas. The bank s ATMs, although not exclusively, are primary located in H.E.B grocery stores and Valero Corner Stores throughout the state. As of December 31, 2014, Frost had total assets of $28.3 billion. No known legal impediments exist that would restrain the bank from meeting the credit needs of its assessment areas. For this examination, eleven assessment areas were reviewed. Total deposits for the assessment areas as of December 31, 2014 were $24.2 billion. Descriptions of the assessment areas listed below are found in the applicable assessment area sections of this report. Austin-Round Rock-San Marcos, TX MSA Brownsville-Harlingen, TX MSA Corpus Christi, TX MSA Dallas-Plano-Irving, TX MD Fort Worth-Arlington, TX MD Houston-The Woodlands-Sugar Land, TX MSA McAllen-Edinburg-Mission, TX MSA Midland, TX MSA Odessa, TX MSA San Antonio-New Braunfels, TX MSA Willacy County, TX Non-MSA Business Structure: Frost is strategically aligned into two primary business segments: ing and Frost Wealth Advisors (FWA). Each core business segment is delineated by the products and services that each segment offers. All Frost assessment areas have the same lines of business, have the same product and service offerings, and utilize similar service delivery methods. Pricing guidelines for products and services are the same across all assessment areas. The ing operating segment, which represents the most dominant business line, includes both commercial and consumer banking services, Frost Insurance, and Frost Securities, Inc. The FWA operating segment includes fee-based services within private trust, retirement services, and financial management services, including personal wealth management and brokerage services. All significant business activities are conducted at the bank level. On June 22, 2012, Frost officially completed its charter conversion from a national bank charter supervised by the Office of the Comptroller of the Currency (OCC), to a state-chartered institution and a member of the Federal Reserve System, supervised by the Federal Reserve of Dallas and the Texas Department of ing. On June 21, 2014, Frost acquired 1 This does not include the one branch that closed in Willacy County in

7 INSTITUTION Western National, Midland, Texas. Through the acquisition, Frost expanded its branching footprint to the Midland, TX and Odessa, TX MSAs. In 2012, Frost closed the one branch operating in the non-metropolitan area of Willacy County, TX, thus exiting that assessment area. Loan Portfolio: The following table shows the distribution of Frost s loan portfolio as of December 31, 2013 and As indicated in the table, Commercial and Industrial loans comprised the greatest percentage by dollar volume of Frost s loan portfolio for the most recent two years. The next highest volume by dollar amount for both years was Commercial Real Estate loans Product 12/31/2014 $(000 s) % of Loans 12/31/2013 $(000 s) % of Loans Real Estate 1-4 Family Residential Construction Loans 120, , Other Construction Loans & Land Development & Other 839, , Farm Land 62, , Family Revolving 220, , Family Residential Secured by First Liens 428, , Family Residential Secured by Junior Liens 266, , Multifamily 110, , Loans Secured Owner Occupied Nonfarm Nonresidential 861, , Loans Secured by Other Nonfarm Nonresidential 1,923, ,736, Total Real Estate 4,832, ,254, Depository Institutions 1, Agricultural 37, , Commercial and Industrial 4,786, ,032, Consumer 386, , State and Political Subdivisions 141, , Other 488, , Lease Financing 313, , Gross Loans 10,987, ,516, Product Offerings: Frost offers a wide variety of consumer, residential real estate, and commercial loan products to fulfill the credit needs of the residents and businesses in its assessment areas. Frost provides a full range of consumer banking services, including checking accounts, savings programs, automated teller machines, overdraft facilities, drive-in and night deposit services, safe deposit facilities, and brokerage services. Frost also offers a variety of consumer loan products including auto loans, consumer installment loans, personal lines of credit, and lot loans. They also offer first and second lien home improvement loans, home equity loans, and home equity lines of credit. The home improvement loans, along with other loans secured by residential real estate, are typically reported under the Home Mortgage Disclosure Act (HMDA). The table above indicates residential real estate loans represent almost 10% of the bank s lending. Frost does not offer traditional 30-year, first-lien mortgage loans. For those customers wanting a traditional, 30-year mortgage, Frost can fulfill those credit needs through their relationship with Cornerstone Home Lending, Inc. The majority of Frost s consumer mortgage 7

8 INSTITUTION loans are second lien mortgages, or piggy-back loans, and home equity lines of credit. The home equity lines of credit tend to have competitive rates and flexible loan terms, which many customers find more attractive than the traditional home improvement loan. Loans secured by commercial real estate and loans for a commercial and industrial purpose are the categories of loans from which loans to small businesses data is collected and reported under the CRA. Loans are made for a wide variety of general corporate purposes, and commercial loan products include: financing for industrial and commercial properties and, to a lesser extent, financing for interim construction related to industrial and commercial properties, financing for equipment, inventories and accounts receivable, and acquisition financing, as well as commercial leasing and treasury management services. Loans reported under the CRA also include business credit cards, which tend to be for smaller dollar amounts and are often needed by small businesses to meet day-to-day operating expenses. Frost offers credit card loans; however, they are underwritten, originated and serviced through a third party and not reflected in the bank s small business loans. Many of the top aggregate lenders within Frost s assessment areas predominately offer and originate credit card loans, which will make the aggregate lenders percentage of small dollar amount loans much higher than lenders who do not originate credit cards loans. As the table on page seven depicts, Frost did not originate a significant volume of small farm loans during the review period; therefore, these loans are not discussed in this report. Construction and land development loans may be reportable as community development loans, provided they have a primary purpose that meets the definition of community development under Regulation BB. Multi-family loans may also be reported both under HMDA and as community development loans; however, Frost is not actively engaged in this type of lending and only originated 11 multi-family purpose loans during the three-year review period. Based on the preceding information, CRA-reportable loans carried the most significant weight for the purposes of this evaluation. Frost also provides international banking services to customers residing in or dealing with businesses located in Mexico. These services consist of accepting deposits (generally only in U.S. dollars), making loans (in U.S. dollars only), issuing letters of credit, handling foreign collections, transmitting funds, and to a limited extent, dealing in foreign exchange. Frost acts as a correspondent bank for over 300 financial institutions consisting primarily of banks in Texas. These banks maintain deposits with Frost, which offers them a full range of services including check clearing, transfer of funds, fixed income security services, and securities custody and clearance services. Previous Performance Evaluation: The bank received a Satisfactory rating on its previous CRA performance evaluation dated May 13, 2013 performed by the Federal Reserve of Dallas. The lending test was rated High Satisfactory, the investment test was rated Outstanding, and the service test was rated High Satisfactory. 8

9 INSTITUTION SCOPE OF EXAMINATION All assessment areas were evaluated for lending, investment, and service performance. Fullscope reviews were conducted for five of the bank s 11 assessment areas and were selected based on the volume of lending, number of branches, percent of total deposits, demographic information, as well as the length of time since the last full-scope review. Overall, approximately 80.4% of lending activity (by number of loans), 80.5% of the total deposits, and 77.0% of total branches were evaluated through the full-scope reviews. Assessment areas receiving full-scope reviews are: portions of the Austin-Round Rock-San Marcos, TX MSA; Fort Worth-Arlington, TX MSA; portions of the Houston-The Woodlands-Sugarland, TX MSA; McAllen-Edinburg-Mission, TX MSA, and portions of the San Antonio-New Braunfels, TX MSA. A description of each full-scope assessment area is included in the applicable assessment area section of this report. Examination Review Period and Products Reviewed The evaluation period covered January 1, 2012 through December 31, The lending test performance was based on HMDA and CRA-reportable small business and small farm loans for the period of January 1, 2012 through December 31, For the Midland and Odessa, TX MSAs, which were added when Frost acquired Western National, the lending performance was based upon loan data for the period of January 1, 2014 through December 31, As mentioned previously, CRA-reportable small farm loans and HMDA-reportable multi-family loans are not a major product for the bank; therefore, they were given little weight in the overall evaluation. Additionally, these products will not be discussed individually in the report. Community development loans, investments, and service activities from January 1, 2012 through December 31, 2014 were considered during this evaluation; however, the review period for community development activity for the Midland and Odessa, TX MSAs was from January 1, 2014 through December 31, The evaluation also considered prior period community development investments. Examination Analysis The evaluation of the bank s record of lending in the individual assessment areas includes the use of and comparison to demographic characteristics. The primary sources for the demographic information are the 2010 U.S. Census and Dun & Bradstreet (D&B) data. Demographic characteristics of a particular assessment area are useful in analyzing the bank s record of lending as they provide a means of estimating loan demand and identifying lending opportunities. To understand small business and small farm loan demand, self-reported data of revenue size and geographical location from business and farm entities is collected and published by D&B. The demographic data should not be construed as defining an expected level of lending in a particular area or to a particular group of borrowers. The information is used to understand the bank s performance context and evaluate the bank. Loans are evaluated to determine the lending activity inside and outside the bank s assessment areas. In addition, loans inside the assessment areas are evaluated on the geographic and borrower-income distribution for each assessment area. The bank s geographic distribution with 9

10 INSTITUTION respect to HMDA loans is assessed by comparing the percentages of loans made in each geography type (low-, moderate-, middle, and upper-income) to their percentage of owneroccupied units in each geography type. Small business loans are compared to the percentage of small businesses and farms within each geographic income category. The bank s borrower income distribution with respect to HMDA loans is assessed by comparing the percentage of loans made to borrowers in each income category (low-, moderate-, middle, and upper-income) to the percentage of families in each income category. Poverty level is determined by both income and family size. Generally, a larger proportion of poverty level families are in the low-income category and, to a certain extent, the moderate-income categories. Borrowers at poverty level often do not qualify for real estate loans, so the percentage of families below the poverty level is considered when evaluating lending performance to LMI borrowers. The bank s borrower income distribution with respect to small business loans was assessed by comparing the percentage of loans made to businesses in each revenue category (less than or equal to $1 million, or greater than $1 million) to the percentage of total businesses in each revenue category. The bank s lending performance was compared to the performance of aggregate lenders in 2012, 2013, and Aggregate lenders include all lenders required to report HMDA and CRA data within the respective assessment areas. Commercial credit card loans are included in many aggregate lenders CRA loan numbers, which is a product not directly offered by the bank. The bank s lending performance for HMDA and CRA loans was also compared to the demographic numbers within the assessment areas for both the geographic distribution and borrower profile analyses and considered when forming conclusions. The bank s market share of lending is also discussed to provide a better understanding of how the bank ranks within the respective areas. For both the geographic distribution and borrower income analyses, the bank s lending performance was evaluated by dollar amount and percentage by number. Unless otherwise specified, the percentages throughout the performance evaluations represent the bank s lending by number of loans originated. Examiners conducted a total of 18 interviews with community representatives during the review period in order to understand community credit needs. Community contacts were located throughout the assessment areas and included representatives of community-based organizations, municipalities, and quasi-government agencies. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS Lending Test The bank s overall Lending Test rating is High Satisfactory. Lending performance is good in all of the full-scope assessment areas. The geographic distribution of loans is excellent in four of the assessment areas and good in the McAllen, TX Assessment Area. The penetration of loans among borrowers of different income levels and businesses of different sizes is considered good 10

11 INSTITUTION in three full-scope assessment areas and adequate in two. Additionally, the bank makes a relatively high level of community development loans. Community development lending was excellent in the Houston, TX and San Antonio, TX Assessment Areas, good in the Fort Worth, TX and McAllen, TX Assessment Areas, and adequate in the Austin, TX Assessment Area The San Antonio-New Braunfels, TX MSA had the greatest impact on the lending test due to a higher concentration of deposits, branches, and combined HMDA and CRA small business lending than the other assessment areas. References are made to the bank s lending distribution by geography and borrower income throughout this report. Detailed information about the bank s HMDA- and CRA-reportable loans can be found in tables in Appendix F for full-scope assessment areas and Appendices G and H for limited-scope areas. Lending Activity The bank s lending levels reflects good responsiveness to assessment area credit needs. The following table summarizes the lending activity from January 1, 2012 through December 31, As the data indicates, the bank makes more small business loans than other types of loans. SUMMARY OF LENDING ACTIVITY JANUARY 1, 2012 THROUGH DECEMBER 31, 2014 Loan Type # % $000s % HMDA home purchase , HMDA refinancing 1, , HMDA home improvement 3, , HMDA multifamily , Total HMDA-related 5, , Total small business 12, ,161, Total small farm , Total Loans 17, ,751, The table below shows the distribution of loans inside and outside the bank s assessment areas. A substantial majority of loans are made in the bank s assessment areas. LOAN TYPE ASSESSMENT AREA CONCENTRATION INSIDE ASSESSMENT AREA OUTSIDE ASSESSMENT AREA # % $000 s % of $ # % $000 s % of $ Home Purchase $102, $11, Home Improvement 3, $257, $24, Refinancing 1, $161, $11, Multifamily $5, $6, Total HMDA-related 5, $526, $54, Total Small business 11, $2, $257,

12 INSTITUTION Total Small farm $6, $3, TOTAL LOANS 16, $3,436, , $314, Geographic Distribution and Distribution by Borrower and Business Revenue Size The geographic distribution of loans reflects excellent penetration throughout the assessment areas. Of the five full-scope assessment areas performance, four are considered excellent and one is considered adequate. The overall distribution among borrowers of different income levels and businesses of different sizes is good. Of the five full-scope assessment areas performance, three are considered good and two are considered adequate. The bank offers several programs with the specific purpose of helping to meet housing-related needs of LMI individuals and communities. Some of these include the following: Progress Home Improvement Loan Program: The program is offered to individuals that are 80% or less of the U.S. Department of Housing and Urban Development (HUD) Family Median. There is a secured and unsecured product, both of which allow for alternative credit sources, such as utility bills, if no other credit is available, to qualify a loan applicant. Other features include lower minimum loan amounts, lower monthly payments, and discounts off the current interest rate. The unsecured loan also allows for a debt-to-income ratio of up to 50%, versus 40% for the traditional home improvement loan. These loans are offered in all of Frost s assessment areas and included in the bank s HMDA reportable home-improvement loans, which are discussed in further detail in each individual assessment area section of this report. Frost also offers loan products that are specifically tailored to small businesses, which include the following: Progress Interim Program: This program is offered to builders participating in local Affordable Parades of Homes or building in subdivisions that are affordable and targeted to persons 80% and below the HUD Family Median who can take advantage of local down payment and closing cost assistance programs. The product offers competitive loan rates and no fees. Small Business Partners: Frost partners with other small business lending entities to make small business loans in all of its assessment areas, to create and provide more lending opportunities to small businesses. For example, Frost partners with and serves as a referral source for LiftFund (formally ACCION Texas), the largest micro-lending entity in the United States, and PeopleFund. Both of these organizations are Community Development Financial Institutions (CDFI). LiftFund and PeopleFund make loans to start-up, "mom and pop" shops, or very small businesses, and work with them to become viable small businesses. Frost provides a revolving line-of-credit statewide, provides annual operating funds, serves on the board of directors and loan committees in some markets, and has made referrals to LiftFund. Frost also collaborates with the Small Business Administration (SBA), Small Business Development Centers, Service Corps of Retired Executives (SCORE), Federal Home Loan of Dallas, Chambers of 12

13 INSTITUTION Commerce, local government agencies, and many more entities to provide small business loans, products, information, and literacy to small businesses Community Development Lending Frost makes a relatively high level of community development loans. Frost originated or renewed 128 community development loans totaling approximately $473.9 million during the three-year review period, which includes two community development loans originated just outside of the Houston, TX Assessment Area. Based on dollar amount, this is a 72.7% increase from the prior examination. At the last examination, the bank originated or renewed 42 loans totaling $274.4 million. The largest portion of the community development lending by dollar amount was in the San Antonio-New Braunfels, TX and the Houston-Sugarland-Baytown, TX Assessment Areas, which were given more weight considering this is where Frost has its largest presence. The community development loans originated during the evaluation period were for a variety of purposes including multi-family housing, but the majority of the loans were for the purpose of providing community services to individuals or LMI areas and for affordable housing. Community Development Lending Purpose Number $( 000s) Affordable Housing 25 $47,769 Community Services 93 $248,520 Economic Development 8 $171,061 Revitalize and Stabilize 2 $6,500 Total 128 $473,850 Frost s community development lending is excellent in the San Antonio-New Braunfels, TX and Houston-The Woodlands-Sugarland, TX Assessment Areas. The community development lending in the Brownsville-Harlingen, TX; Corpus Christi, TX; Fort Worth-Arlington, TX; and Mc Allen, TX Assessment Areas was good. There was an adequate level of lending in the Austin-Round Rock-San Marcos, TX; Dallas-Plano-Irving, TX; and the Midland, TX Assessment Areas. The non-metropolitan area of Willacy County, TX and the Odessa, TX Assessment Areas had few, if any, community development loans. The San Antonio-New Braunfels, TX Assessment Area had the greatest impact on the community development lending test due to a higher concentration of deposits, branches, and combined HMDA and CRA small business lending than the other assessment areas. More information on community development lending can be found in each full-scope assessment area section. Investment Test 13

14 INSTITUTION Frost s overall Investment Test rating is Outstanding. The bank has an excellent level of qualified community development investments and grants, particularly those not routinely provided by private investors, often in a leadership position. Specifically, performance is excellent in all five of the full-scope assessment areas. The San Antonio-New Braunfels, TX MSA had the greatest impact on the investment test due to a higher concentration of deposits, branches, and combined HMDA and CRA small business lending than the other assessment areas. Frost had 108 current-period qualified investments totaling approximately $586.9 million and 52 prior period investments of $27.9 million. These numbers include one prior-period qualified investment made within the bank s broader regional banking area that contributed to Frost s overall performance. This investment is in addition to the specific assessment area tables and discussions. The bank also made qualified grants and donations totaling $3.7 million to organizations with a purpose of community development. The investments and grants have increased 812.2% from $67.7 million at the previous examination. Frost has been a leader in the purchase of school bonds in the State of Texas for numerous years, but only started including school bond purchases as part of the CRA investment portfolio in Of the current period investments, $384.8 million are in General Obligation Revenue Bonds designated for school districts where 75% or more of the students are considered economically disadvantaged. Frost s investments demonstrate excellent responsiveness to the most pressing credit and community development needs throughout the assessment areas. Community contacts identified affordable housing, financial literacy, and small business loans as a common opportunity and need. Frost addressed these needs by investing in Small Business Investment Companies (SBIC), General Obligation Revenue Bonds, and the purchase of Ginnie Mae (GNMA) Mortgage Backed Securities (MSBs) and Texas Mortgage Revenue Bonds (MRBs) that are targeted to LMI individuals. More information on specific community development investments can be found in each full-scope assessment area section. Service Test Frost s overall performance for the Service Test rating is High Satisfactory. The bank s performance is good in four of the full-scope assessment areas and adequate in one assessment area. Specific details of the service performance are discussed in the respective assessment area sections of this report. Retail Services Retail delivery systems are reasonably accessible to the geographies and individuals of different income levels. During the exam period of January 1, 2012 through December 31, 2014, Frost opened six branches, closed six branches, and acquired seven. Of the branches within the LMI areas, one branch was opened, one closed (Willacy County), and two were acquired. A specific listing of the branches that opened or closed during the review period may be obtained by accessing the bank s CRA public file, which is available on the bank s web site. Also, refer to the individual assessment areas for details regarding the bank s distribution of branches and 14

15 INSTITUTION ATMs. Frost s opening and closing of branches has not adversely affected the accessibility of banking services to LMI geographies. In addition, the banking services and business hours do not vary in a way that inconveniences any portion of the bank s assessment areas, particularly LMI geographies and individuals. ing hours are fairly consistent across all areas. Generally, the standard banking hours are Monday through Thursday, 9 a.m. to 5 p.m., Friday, 9 a.m. to 6 p.m., and Saturdays from 9 a.m. to 2 p.m. Motor banks are usually open from 7:30 a.m. until 6 p.m. on weekdays and on Saturday from 9 a.m. to 2 p.m. The only variation in hours is for those branches that do not have a motor bank or do not offer Saturday hours at the motor bank. These specific branches are distributed throughout the assessment areas and do not vary in a way that inconveniences LMI geographies and/or LMI individuals. The bank also offers the following no- or low-cost deposit accounts and uses the following alternative delivery systems. Free and Flexible Checking Accounts: Frost created and introduced a new checking product designated for LMI individuals or individuals living in LMI areas. The product has no minimum balance requirement and is free if the customer has direct deposit of their regular monthly income. If the customer does not have direct deposit, the monthly fee is only two dollars. Frost also offers a simple, low-cost, checking account product that provides customers with everything they need to manage their money, including free bill pay, external transfers, and mailed paper statements. The basic fee is $5, which Frost will waive if the customer has any one of the following: $100 total monthly direct deposit $1,000 minimum daily balance $2,500 combined average daily balance in personal deposit accounts Mobile ing: In the Fort Worth-Arlington, TX Assessment Area, Frost has a mobile banking team that visits two senior citizen apartments/living facilities to make deposits and provide cash withdrawals so customers do not have to leave their living environment. Over 80% of the seniors visited are LMI customers. HEB ATMs: Beginning in 1994, Frost partnered with HEB Grocery Stores to offer ATMs in their stores throughout the state. These ATMs are owned and operated by HEB, but are available to Frost customers free of charge. Currently there are over 300 ATMs in HEB stores throughout the bank s assessment areas, or just outside of the bank s assessment areas. Many of these ATMs are located in LMI areas. Valero and 7-Eleven Corner Stores: Similar to the HEB partnership, Frost offers free ATM withdrawals to Frost customers at over 600 Valero and almost 60 7-Eleven Corner Stores in Texas. 15

16 INSTITUTION Internet Café: All Frost locations have computer terminals available in their branches that provide free online banking to customers who may not have access to a computer, such as LMI individuals. American Sign Language: Frost continues to offer the DeafLink program, which provides certified American Sign Language (ASL) interpreters to its customers through videoconference and secure, encrypted Internet access. Frost is the first banking institution in the nation to offer real-time accessibility to the deaf and hard-of-hearing community. Frost at Work Program: This program allows employees of Frost commercial customers to open accounts at their place of employment so workers do not need to take the time to go to the bank. It promotes direct deposit and other products to employees who do not have bank accounts. It is a way to assist corporations in educating their "unbanked" employees on checking accounts and makes it easy for them to begin a banking relationship. The Frost at Work program also provides the option for those without a banking relationship to have a debit card for payroll, ensuring safety and quickness in obtaining payroll deposits. These business clients are offered financial literacy programs to help educate their workforce on the importance of money management, the basics of banking, and the benefits of having a checking account. As of 2014, over 400 companies participate in the Frost at Work program, over 32,000 accounts have been opened since the program started, and 22.7% of Frost at Work customers who opened accounts live in LMI census tracts. VITA Check Cashing: Volunteer Tax Assistance (VITA) provides LMI individuals with free tax assistance in completing their federal taxes by certified tax preparers. These tax preparers also assist in obtaining the earned income tax credit (EITC) and other tax allowances. VITA not only provides a direct service to the individual, but also puts money back into the local economies. From , Frost provided free check cashing to all participants of the VITA programs in the San Antonio-New Braunfels, Austin-Round Rock-San Marcos, Houston- Sugarland-Baytown, and Fort Worth-Arlington, TX Assessment Areas. Frost employees also assisted in free tax preparation and served on committees that sponsor VITA. Free Loan Servicing: Frost provides free loan servicing for all San Antonio Habitat for Humanity mortgage loans. In 2012, over 696 loans were serviced at no charge and by 2013 and 2014 that number increased to 754 and 700 loans, respectively. Community Development Services Frost provides a relatively high level of community development services throughout its assessment areas. Frost provided 21,591 hours of community development services during the review period. Community development services are excellent in four assessment areas, good in two assessment areas, adequate in three assessment areas, and poor in one assessment area. In one assessment area the bank provided few, if any, community development services. Overall, the bank provides a relatively high level of community development services that benefit LMI residents and small businesses within the assessment areas. 16

17 INSTITUTION The bank s directors, officers, and staff members are involved in numerous organizations and activities that promote or facilitate affordable housing for LMI individuals, services for LMI individuals, economic development, and revitalization of LMI areas, along with financial literacy outreach efforts. In addition, Frost has created the following programs to provide financial literacy to LMI students, individuals, and small businesses. Home Improvement Mini-Expo: In 2013, Frost created the Mini-Expo to assist LMI homeowners in the areas of home improvement how-to tips, teaching about home improvement loan options, how they work, how to choose a contractor, and home improvement subsidy programs available to homeowners. Frost collaborates with the local government, contractors, utility and water companies, and non-profit organizations in the housing sector. The Mini-Expo brings many services together to offer LMI homeowners a one-stop shop. This event is innovative and responsive to community needs. Frost Financial Youth Academy: Frost developed the Frost Financial Youth Academy to provide financial education and products to high school juniors and seniors at schools that have a majority of LMI students. Currently, Frost employees offer the program at seven schools in six assessment areas. Small Business Outreach Program: The Frost Small Business Outreach Program includes a literacy program, targeted products, and other materials used to further promote small business lending. The outreach/literacy program provides insight as to what a commercial bank expects from a small business. It explains the reasons a bank needs certain requested information and discusses what a banker looks for in a loan request. It also details the importance of a business plan and maintaining updated financials. To complement the outreach program, a "Borrowers Guide for Small Business and Entrepreneurs" was developed. This guide is also provided to local Small Business Development Centers (SBDC), LiftFund, and handed out at business expos and working sessions as a tool for small businesses. The bank also collaborates with varying organizations throughout all its assessment areas to provide financial literacy training to small businesses. Frost works with each non-profit or entity to understand its particular needs, and the financial literacy training is then customized to fit each individual organization. The organizations work specifically with small businesses, creating an opportunity for Frost to provide financial literacy training to large audiences. Please refer to the individual assessment areas for examples of other community development services provided by the bank during the review period. FAIR LENDING OR OTHER ILLEGAL CREDIT PRACTICES REVIEW The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Consumer Financial Protection Bureau (CFPB). In general, the Dodd-Frank Act gives the CFPB, among other things, primary supervisory authority over insured depository 17

18 INSTITUTION institutions with total assets of more than $10 billion when assessing compliance with the requirements of Federal consumer financial laws. The Federal Reserve System retains authority to enforce compliance with the CRA and certain other consumer compliance laws and regulations. During the review period of this evaluation, the Federal Reserve of Dallas did not cite violations involving illegal discrimination or other illegal credit practices that adversely affected the evaluation of the bank s CRA performance. As of the date of this evaluation, the Federal Reserve of Dallas is unaware of any violations of the Equal Credit Opportunity Act or Regulation B, or any unfair, deceptive, or abusive acts or practices identified by the CFPB. 18

19 Austin-Round Rock-San Marcos, TX METROPOLITAN AREA (Full-scope Review) INSTITUTION S OPERATIONS IN THE AUSTIN-ROUND ROCK-SAN MARCOS, TX ASSESSMENT AREA The Austin-Round Rock-San Marcos, TX Assessment Area includes in their entirety Hays, Travis, and Williamson Counties, hereafter referred to as the Austin, TX Assessment Area. These counties, along with Bastrop and Caldwell Counties, which are excluded from the assessment area, make up the Austin-Round Rock-San Marcos, TX Metropolitan Statistical Area (MSA). Within the assessment area portion of the MSA there are 36 low-, 76 moderate-, 115 middle-, and 102 upper-income census tracts. There are also three census tracts where income is unknown. As of December 31, 2014 Frost operated 17 branches in the assessment area representing 12.6% of its branches. There is one branch located in a low-income census tract, four branches in moderate-income census tracts, three in middle-income census tracts, and nine branches in upper-income census tracts. Certain economic and demographic data is available for analysis for the Austin-Round Rock-San Marcos, TX MSA as a whole and not the specific assessment area. However, it is reasonable to believe that the data for the MSA provides a good representation of the characteristics of the assessment area because the population of the assessment area includes 93.5% of the Austin- Round Rock-San Marcos, TX MSA, and distribution of low-, moderate-, middle-, and upperincome families for the assessment area and MSA are similar according to 2010 census data. The Austin, TX Assessment Area is located in the central portion of the state, which is part of the 25 county region known as the Texas Hill Country. The assessment area is bordered on the east and southeast by Bastrop and Caldwell Counties, which make up the rest of the Austin-Round Rock-San Marcos, TX MSA, and on the west by Blanco and Burnet Counties. To the north are the non-metropolitan Bell and Milam Counties and to the south is the San Antonio-New Braunfels, TX MSA. The assessment area consists of 332 census tracts, including 36 lowincome and 76 moderate-income tracts making up 33.7% of the assessment area census tracts. According to the 2010 Census, the Austin, TX Assessment Area population was 1,604,052, which accounts for 6.4% of the population in the state. Based on the 2000 population of 1,159,836, the assessment area has experienced an increase of 38.3% over the past 10 years. The most current data by the U.S. Bureau of Census shows an area population of 1,825,420 as of April 1, Austin is the state capital of Texas, the largest city within the assessment area, and the 4 th largest city in the State of Texas with a 2010 population of 790,390, which accounts for 49.3% of the population in the assessment area. The following table provides further information by county. Refer to the end of the Performance Context section for more detailed demographic information of the assessment area. 19

20 Austin-Round Rock-San Marcos, TX County 2014 Population Estimate % Increase Since 2010 Major Cities Hays 185, San Marcos*; Kyle; Buda; Travis 1,151, Williamson 489, *Denotes county seat Austin*; Pflugerville; Cedar Branch Georgetown*; Round Rock; Cedar Park; Leander As of June 30, 2014, the bank had $2.4 billion in deposits in the Austin, TX Assessment Area representing 10.8% of the bank s total deposits. It also represents a deposit market share of 7.4%, which includes all other FDIC insured deposits that are located in the assessment area. Wells Fargo, N.A. holds the largest deposit share at 22.1%, followed by of America, N.A., at 17.0%, and JPMorgan Chase, N.A., at 16.1%. Many of the bank s competitors are statewide and multi-regional banks, but competition does not appear to have adversely affected Frost s ability to serve the credit needs of its assessment area, specifically in regards to small business lending. The bank originated 1,540 small business loans in 2012, 2013 and 2014, which represented 12.8% of its total small business lending. The bank ranked 12 th out of 132 institutions in 2012, 11 th out of 137 institutions in 2013, and 12 th out of 143 institutions in 2014 in the origination of small business loans. The top ranked reporters were predominantly credit card issuers, including American Express, FSB; Chase USA, NA; Capital One USA, NA; Citibank, NA; and FIA Card Services, NA. The bank originated 785 HMDA reportable loans in 2012, 2013, and 2014, which represented 13.4% of its total HMDA lending. The bank ranked 58 th out of 676 institutions in 2012, 57 th out of 708 institutions in 2013, and 60 th out of 689 institutions in 2014 in the origination of HMDA reportable loans. The top ranked reporters were Wells Fargo, NA; JPMorgan Chase, NA; Network Funding, L.P.; of America, NA; and Flagstar, FSB. Characteristics For purposes of classifying borrower income, this evaluation uses the FFIEC Median Family data for the relevant area. The following chart reflects the estimated median family income for the years 2012 through 2014 for the Austin-Round Rock-San Marcos, TX MSA. It also provides a range of the estimated annual family income for each income category (low, moderate, middle, and upper). According to the 2010 Census, 8.8% of the families in the assessment area lived below the poverty level. 20

21 Austin-Round Rock-San Marcos, TX Level Median $75,900 $73,200 $75,400 Low-income < $37,950 < $36,600 < $37,700 Moderate-income $37,950 - $60,720 $36,600 - $58,560 $37,700 - $60,320 Middle-income $60,720 - $91,080 $58,560 - $87,840 $60,320 - $90,480 Upper-income $91,080 $87,840 $90,480 Housing Characteristics According to the 2010 Census, there were 634,303 housing units in the assessment area, with 53.6% of the units classified as owner-occupied, 38.4% classified as rental units, and 8.0% of the available housing is vacant. Just over a majority of the assessment area s housing units are owner-occupied; however, rental units make up 55.8% of housing in LMI tracts. This limits the opportunities for mortgage originations in these tracts. The median housing value for the Austin, TX Assessment Area in 2010 was $186.8 thousand. According to data from the Real Estate Center at Texas A&M University, the median housing price in the Austin-Round Rock-San Marcos, TX MSA has steadily increased. The median housing price for new homes in 2010 was $189.4 thousand and rose to $240.0 thousand by 2014, a 26.7% increase. In 2010, new residential construction in the Austin-Round Rock-San Marcos, TX MSA was at the lowest it had been in 15 years. However, from 2010 to 2014, annual permits for new single-family homes rose 91.0% from 6,200 to 11, The Austin-Round Rock-San Marcos, TX MSA has fared relatively well in terms of foreclosures compared to many metropolitan areas in the country, which range from 0.7% to 16.0% throughout the nation in September The foreclosure rate for the Austin-Round Rock-San Marcos, TX MSA was 1.3% in September 2013, which is in the lowest 10% of foreclosure rates in the country. The percentage of mortgages considered seriously delinquent (defined as more than 90 days past due or in foreclosure) decreased from 3.5% in September 2012 to 2.7% in September Overall, 11.2% of the housing stock in the assessment area is in low-income tracts. In these census tracts, 22.1% of the housing units are owner-occupied, 65.4% are rental units, and 12.5% are vacant. In addition, 4.6% of all owner-occupied housing units in the assessment area are located in low-income tracts. The median age of housing stock in these tracts is 32 years and the median housing value in low-income tracts for the assessment area in 2010 was $118.6 thousand. Using the 2014 median income level for assessment area families, and assuming an average mortgage payment equal to 28% of gross income for a 4.0% fixed-rate, 30 year loan, a home of this value would be still be considered affordable for a low-income family, although a barrier to homeownership is typically a down payment. The monthly rental payment in low-income tracts in 2010 was $756, which is less affordable than the monthly mortgage payment of $566 for a 2 Real Estate Center at Texas A&M University. Building Permits: MSA: San Antonio, TX. Available at: Accessed: May 4, Foreclosure-Response.org: Metropolitan Delinquency and Foreclosure Data: September Available at Accessed: May 4,

22 Austin-Round Rock-San Marcos, TX $118.6 thousand home for 30 years at a 4.0% interest rate. However, 32.6% of families in lowincome tracts have incomes below the poverty level, which may make it difficult to qualify for a loan. Moderate-income tracts account for 21.7% of the housing stock in the assessment area. In these census tracts, 40.0% of the housing units are owner-occupied, 50.8% are rental units, and 9.1% are vacant. The median age of housing stock in these tracts is 27 years and the median housing value in moderate-income tracts for the assessment area in 2010 was $127.4 thousand. Using the 2014 income level for assessment area families, and assuming an average mortgage payment equal to 28% of gross income for a 4.0% fixed-rate, 30 year loan, a home of this value would be affordable for a moderate-income family, although a barrier to homeownership is typically a down payment. However, 19.1 % of families in moderate-income tracts have incomes below the poverty level, which may make it difficult to qualify for a loan. At 34.7%, a large portion of the housing stock in the assessment area is in middle-income tracts. In these census tracts, 57.9% of the housing units are owner-occupied, 35.1% are rental units, and 7.0% are vacant. The median age of houses in these tracts is 18 years and 5.6% of families in middle-income tracts have incomes below the poverty level. The median housing value in middle-income tracts for the Austin, TX Assessment Area in 2010 was $164.5 thousand. Approximately 32.4% of the housing stock in the assessment area is in upper-income tracts. In these census tracts, 68.8% of the housing units are owner-occupied, 24.3% are rental units, and 6.8% are vacant. The median age of housing stock in these tracts is 18 years and only 2.8% of families in upper-income tracts have incomes below the poverty level. In addition, the median housing value in upper-income tracts for the assessment area in 2010 was $280.8 thousand. Employment and Economic Conditions The national average unemployment rates for 2012, 2013, and 2014 were 8.1%, 7.4%, and 6.2%, respectively. Unemployment rates for all of the counties in the assessment area were lower than the annual unemployment rates for Texas and the national average. According to the 2010 Census, the unemployment rate was 10.5% in low-income tracts and 7.5% in moderate-income tracts. The higher unemployment rates in LMI tracts could affect loan demand from these tracts. 22