PUBLIC DISCLOSURE COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION

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1 PUBLIC DISCLOSURE January 22, 2013 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION Bank of Texas RSSD: West Wall Midland, Texas Federal Reserve Bank 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 s CRA Rating...1 II. Scope of Examination...1 III. Description of Institution...2 IV. Description of Assessment Areas...3 V. Conclusions with Respect to Performance Tests...12 VI. Appendix A Loan Distribution Tables for Midland Assessment Area...16 VII. Appendix B Loan Distribution Tables for El Paso Assessment Area...18 VIII. Appendix C Loan Distribution Tables for Kent, Dickens, and Stonewall Counties Assessment Area...20 IX. Glossary... 22

3 INSTITUTION S CRA RATING: This institution is rated Satisfactory. Bank of Texas (bank) performance demonstrates a reasonable record of meeting the credit needs of its assessment areas, including low- and moderate-income individuals, in a manner consistent with its resources, operating philosophy, and credit needs of the community it serves. The factors supporting this rating include: A majority of small business loans, 83.3% of the number and 79.2% of the dollar volume were originated within the bank s assessment areas. A reasonable loan-to-deposit ratio (LTD) of 68.4% as of September 30, 2012, with a quarterly average of 70.1% since the previous CRA evaluation, given the bank s resources and competition in the assessment areas. A reasonable penetration of loans among businesses of different sizes. A reasonable dispersion of loans throughout the bank s assessment areas. SCOPE OF EXAMINATION The bank s lending performance with respect to the CRA was assessed by analyzing a sample of 54 commercial loans totaling $47.9 million originated by the bank between January 1, 2011 and December 31, The bank made one Home Mortgage Disclosure Act (HMDA) reportable loan in Since one loan is not enough to draw any reasonable conclusions about the bank s performance, no HMDA loans were analyzed in connection with this performance assessment. The evaluation was conducted using the CRA small bank performance standards. Small bank CRA performance standards evaluate the following criteria: Average LTD since the last CRA evaluation. The overall level of lending within the assessment area. The bank s lending to borrowers of different income levels and businesses and farms of different sizes. The bank s geographic distribution of loans within its assessment area. The bank s response to written complaints with respect to CRA performance in the assessment area. Each standard is viewed as part of an overall picture of the bank s performance in meeting the credit needs of its delineated assessment areas. The assessment of the bank s performance placed the most weight on the lending activities related to meeting the credit needs associated with small businesses in the Midland and El Paso assessment areas. These assessment areas received full scope reviews. The review of the bank s performance in its non-metropolitan assessment area was conducted on a limited scope basis. The non-metropolitan assessment area has limited lending and deposits, and the bank s focus is on El Paso and Midland where there are more opportunities for loans and a larger deposit base. 1

4 DESCRIPTION OF INSTITUTION The bank is a $232.5 million retail institution with branches located in Midland, Texas; El Paso, Texas; and Jayton, Texas. In 2010, the bank changed its name from Kent County State Bank, established branches in Midland and El Paso, and moved its headquarters from Jayton to Midland. The bank has no automated teller machines or drive-through services. The institution offers online banking from its website, BRANCH ADDRESS Midland Branch 306 W. Wall St. Midland, TX Jayton Branch 102 Donaho St. Jayton, TX El Paso Branch 320 Texas Ave. El Paso, TX CENSUS TRACT/ COUNTY LOBBY HOURS INCOME LEVEL /Moderate Midland Mon.-Fri. 9 am 3 pm /Middle Kent Mon.-Fri. 9 am 3 pm 17.00/Low El Paso Mon.-Fri. 9 am 3 pm As of September 30, 2012 the bank reported total assets of approximately $232.5 million, gross loans of $143.9 million, total deposits of $207.6 million, and a net loan-to-deposit ratio of 70.1%. The following table reflects the loan portfolio mix: PRODUCT 9/30/2012 $(000 S) % OF LOANS Real Estate 1-4 Family Res Construction Lns 10, Other Const Lns & Land Dev & Other 14, Farm Land 1, Family Res Secured by First Liens 4, Family Res Secured by Junior Liens Multifamily Lns Secured Owner Occupd NonFrm NonRes 9, Lns Secured by Other NonFrm NonRes 44, Total Real Estate 85, Agricultural Commercial and Industrial 52, Consumer State and Political Subdivisions 5, Other 2 >0.00 Gross Loans 143, The bank s ability to meet various credit needs of the community has not been hampered by its capacity to lend, its financial condition and size, product offerings, prior performance, legal 2

5 impediments, or other factors. The bank received a Satisfactory rating on its last CRA performance evaluation dated December 30, 2008 performed by the Federal Deposit Insurance Corporation. DESCRIPTION OF ASSESSMENT AREAS The bank s three assessment areas consist of two Metropolitan Statistical Areas (MSAs) and three contiguous non-msa counties. The Midland MSA, the El Paso MSA, along with Dickens, Kent, and Stonewall counties comprise the bank s assessment areas. Demographic and economic information impacting the bank s performance context are discussed below. Information was obtained from publicly available sources including the U.S. Department of Commerce s Bureau of the Census, 2000; the U.S. Department of Labor; the U.S. Department of Housing and Urban Development (HUD); Dun & Bradstreet; and the Texas Workforce Commission. DESCRIPTION OF MIDLAND MSA This assessment area consists of the Midland MSA, which is comprised of Midland County. The 2011 estimated population for the Midland County is approaching 141,000. The assessment area population grew 20.9% between 2000 and The city of Midland, population 111,147, is the county seat. The other significant municipality in the area is Odessa, which falls mostly in Ector County. Midland is also a component of the Midland-Odessa Combined Statistical Area, which includes the counties of Midland and Ector. As of the assessment date, the bank operated one retail branch in the assessment area. The Midland branch contained $96.0 million in deposits as of June 30, The bank ranks 12 th in deposit market share out of 15 FDIC-insured financial institutions operating in the Midland banking market. The deposits in the bank s one branch represented 1.89% of the total deposits in FDIC-insured financial institutions. Wells Fargo, N.A. dominates the market, with approximately 22% of total deposits, followed by Bank of America, N.A, and Community National Bank. The following table details selected characteristics of the assessment area. 3

6 Combined Demographics Report Assessment Area(s): Midland MSA Income Categories Tract Distribution Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low-income , , Moderate-income , , , Middle-income , , , Upper-income , , Unknown-income Total Assessment Area , , , Housing Housing Types by Tract Units by Owner-Occupied Rental Vacant Tract # % % # % # % Low-income 2,305 1, Moderate-income 8,319 5, , Middle-income 21,534 13, , , Upper-income 15,902 9, , , Unknown-income Total Assessment Area 48,060 29, , , Total Businesses by Businesses by Tract & Revenue Size Tract Less Than or = $1 Million Over $1 Million Revenue Not Reported # % # % # % # % Low-income Moderate-income 2, , Middle-income 3, , Upper-income 2, , Unknown-income Total Assessment Area 9, , Percentage of Total Businesses: Total Farms by Farms by Tract & Revenue Size Tract Less Than or = $1 Million Over $1 Million Revenue Not Reported # % # % # % # % Low-income Moderate-income Middle-income Upper-income Unknown-income Total Assessment Area Percentage of Total Farms: Based on 2011 D&B information according to 2000 Census Boundaries. 4

7 Income Characteristics: As of the 2000 census, there were 31,158 families in the assessment area, about 10.3% of which live below the poverty level. The poverty rate is slightly below the 12% statewide poverty level. The Midland MSA contains 27 census tracts comprised of two low-income (7.4%), six moderate-income (22.2%), eleven middle-income (40.7%), and eight upper-income (29.6%) tracts. Approximately 21% of the families are low-income, 19% are moderate-income, 19% are middle-income, and 41% are upper-income. The Midland MSA median family income for 2011 was $66,000 as depicted in the table below. INCOME LEVEL 2011 MIDLAND MSA Median Income $66,000 Low-income $0>$33,000 Moderate-income $33,000>$52,800 Middle-income $52,800>$79,200 Upper-income $79,200 and up Housing: According to the 2000 census, there were 48,060 housing units in the assessment area. Almost 62% of housing units are owner-occupied. Of the owner-occupied housing units, 4.5% are located in low-income census tracts, 18.4% in moderate-income, almost 44.7% in middleincome, and 32.4% in upper-income census tracts. The owner-occupancy rate is slightly above the state average of 58%, with 62% of Midland MSA housing units being owner-occupied, 27% rental, and 11% vacant. Housing is more affordable than the state average based on the 2011 Texas Housing Affordability Index 1 (THAI) of 2.18 versus the State index of Just over one percent of the assessment area s population lives in college dormitories, other group quarters, nursing homes, and correctional facilities. Labor, Employment, and Economic Characteristics: Oil and gas production, healthcare, and education are the primary industries in the community. The Midland area regularly supplies more than 60% of all oil and gas produced in Texas, and is home to more than 20% of the nation s oil reserves. Major area employers include the Midland Independent School District, Midland Memorial hospital, the City of Midland, Midland College, and Warren Equipment Companies. The following table provides unemployment rates for the state of Texas and the assessment area. 1 The Texas Housing Affordability Index (THAI) is an index score, which is calculated by the Texas Real Estate Center at Texas A&M University. Researchers first calculate the income required to qualify for a conventional 80/20, 30-year home loan to purchase a home at the median price for the area, based on the prevailing area interest rate. The index score is computed by dividing median family income for the area by the required income to purchase a median-priced home. An index score of more than 1 means that homes are relatively affordable in the area, and households of median income should be able to qualify to buy a median-priced home with ease and have more income left over for other purchases. 5

8 UNEMPLOYMENT RATES FOR YEARS (NOT SEASONALLY ADJUSTED) Area United States 9.6% 8.9% Texas State 8.2% 7.9% Midland MSA 5.3% 4.4% According to 2011 Dun & Bradstreet data, there were approximately 9,569 business establishments in the assessment area, with just over 90% reporting gross annual revenues of $1 million or less. Approximately 5% of small businesses were located in low-income census tracts, 2% in moderate-income census tracts, 39% in middle-income census tracts, and 32% in upper-income census tracts. The MSA has one of the state s lowest 2011 annual unemployment rates at 4.4%, well below the state average of 7.9%. Community Contacts and Credit Needs: Contact was made with a community leader working in small business development. The contact stated that the credit needs in the community include small business lending. In addition, there are opportunities for financial institutions to participate in reinvestment activities such as the Small Business Administration s 504 lending program. DESCRIPTION OF EL PASO MSA The El Paso MSA consists solely of El Paso County. The 2011 estimated population for the assessment area is approaching 821,000. The assessment area population grew 20.8% between 2000 and The city of El Paso, population 649,121, is the county seat. Other municipalities in the county include Horizon City and Socorro. As of the assessment date, the bank operated one retail branch in the assessment area. The El Paso branch contained $22.4 million in deposits as of June 30, The bank ranks 17 th in deposit market share out of 18 FDIC-insured financial institutions operating in the El Paso banking market. The deposits in the bank s one branch represented 0.34% of the total deposits in FDIC-insured financial institutions. Wells Fargo, N.A. dominates the market, with approximately 22% of total deposits, followed by JP Morgan Chase Bank, N.A. and Bank of America, N.A. Demographic and economic information impacting the bank s performance context are discussed below. Information was obtained from publicly available sources including the U.S. Department of Commerce s Bureau of the Census, 2000; the U.S. Department of Labor; the U.S. Department of Housing and Urban Development (HUD); Dun & Bradstreet; and the Texas Workforce Commission. The following table details selected characteristics of the assessment area. 6

9 Combined Demographics Report Assessment Area(s): El Paso Income Categories Tract Distribution Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low-income , , , Moderate-income , , , Middle-income , , , Upper-income , , , Unknown-income Total Assessment Area , , , Housing Housing Types by Tract Units by Owner-Occupied Rental Vacant Tract # % % # % # % Low-income 8,615 1, , Moderate-income 66,259 35, , , Middle-income 73,165 46, , , Upper-income 76,408 50, , , Unknown-income Total Assessment Area 224, , , , Total Businesses by Businesses by Tract & Revenue Size Tract Less Than or = $1 Million Over $1 Million Revenue Not Reported # % # % # % # % Low-income 2, , Moderate-income 8, , Middle-income 8, , Upper-income 11, , Unknown-income Total Assessment Area 30, , , , Percentage of Total Businesses: Total Farms by Farms by Tract & Revenue Size Tract Less Than or = $1 Million Over $1 Million Revenue Not Reported # % # % # % # % Low-income Moderate-income Middle-income Upper-income Unknown-income Total Assessment Area Percentage of Total Farms: Based on 2011 D&B information according to 2000 Census Boundaries. 7

10 Income Characteristics: As of the 2000 census, the El Paso MSA contains 126 census tracts comprised of eight low-income (6.3%), 41 moderate-income (32.5%), 41 middle-income (32.5%), and 36 upper-income (28.6%) tracts. Twenty-two percent of the families are lowincome, 17% are moderate-income, about 19% are middle-income, and almost 42% are upperincome. The 20.5% of families living below the poverty rate is far above the state average at 12%. The El Paso MSA median family income for 2011 was $41,100 as depicted in the table below. INCOME LEVEL 2011 EL PASO MSA Median Income $41,100 Low-income $0> $20,550 Moderate-income $20,550>$32,880 Middle-income $32,880>$49,320 Upper-income $49,320 and up Housing: According to the 2000 census, there were 224,447 housing units in the assessment area. Of the owner-occupied housing units, 0.9% are located in the low-income census tracts, 26.7% are in moderate-income, 3.9% are in middle-income, and 37.5% are in upper-income census tracts. At 59.5%, the home ownership rate is slightly above the state average of 58%. Approximately 34% of the housing units are rental, and 6% are vacant. The median home price in 2010 was approximately $91,000. Housing is more affordable than the state average based on the 2011 THAI of 1.92 versus the State index of 2.5. Almost 2% of the assessment area s population lives in college dormitories, other group quarters, nursing homes, and correctional facilities. Labor, Employment, and Economic Characteristics: Manufacturing, tourism, education, and the service sector are the primary industries in the community. Additionally, the military and certain federal government agencies have a major presence in the area. El Paso is home to Fort Bliss, which is the U.S. Army s second largest installation. Major area employers include Fort Bliss, El Paso Independent School District, Ysleta Independent School District, and the City of El Paso. The following table provides unemployment rates for the state of Texas and the assessment area. UNEMPLOYMENT RATES FOR YEARS (NOT SEASONALLY ADJUSTED) Area United States 9.6% 8.9% Texas State 8.2% 7.9% El Paso MSA 9.8% 10.3% 8

11 According to 2011 Dun & Bradstreet data, there were approximately 30,262 business establishments in the assessment area, with just over 90% reporting gross annual revenues of $1 million or less. Almost seven percent of small businesses were located in the low-income census tract, 27% in moderate-income census tracts, 28% in middle-income census tracts, and 38% in upper-income census tracts. The MSA has one of the state s highest 2011 annual unemployment rates at 10.3%, above the state average of 7.9%. Community Contacts and Credit Needs: Contact was made with community leaders working in economic development and small business development. These contacts stated that the credit needs in the community include small dollar loans particularly $50,000 and less, a willingness to make riskier loans, and flexible lending standards. DESCRIPTION OF DICKENS/KENT/STONEWALL COUNTIES This assessment area consists of the non-metropolitan counties of Dickens, Kent, and Stonewall. The 2011 estimated population for the three counties is nearly 5,000. The assessment area s population declined 0.9% between 2010 and The city of Dickens is the largest city and is the county seat of Dickens County. Jayton is the largest city and county seat in Kent County. Aspermont is the largest city and county seat of Stonewall County. Each of the counties contain only one census tract. The three tracts are middle-income and designated as distressed. A nonmetropolitan middle-income geography is designated as distressed if it is in a county that meets one or more of the following triggers: (1) An unemployment rate of at least 1.5 times the national average, (2) a poverty rate of 20% or more, or (3) a population loss of 10% or more between the previous and most recent decennial census or a net migration loss of 5% or more over the five year period preceding the most recent census. According to the Federal Financial Institution Examination Council (FFIEC) Dickens County is distressed due to poverty, and Kent and Stonewall Counties are distressed due to population loss. The three counties are also designated as underserved. A nonmetropolitan middle-income geography is designated as underserved if it meets criteria for population size, density, and dispersion that indicate the area s population is sufficiently small, thin, and distant from a population center and that the census tract is likely to have difficulty financing the fixed costs of meeting essential community needs. As of the assessment date, the bank operated one retail branch in Jayton, Texas. The Dickens/Kent/Stonewall assessment area branch contained $16.7 million in deposits at June 30, The bank ranks 3 rd in deposit market share out of three FDIC-insured financial institutions operating in the Dickens/Kent/Stonewall banking market. The deposits in the bank s one branch represented approximately 17% of the total deposits in FDIC-insured financial institutions. Spur Security Bank has almost 42% of market share, and The First National Bank of Aspermont has roughly 41% of the market. Demographic and economic information impacting the bank s performance context are discussed below. Information was obtained from publicly available sources including the U.S. Department of Commerce s Bureau of the Census, 2000; the U.S. Department of Labor; the U.S. Department 9

12 of Housing and Urban Development (HUD); Dun & Bradstreet; and the Texas Workforce Commission. The following table details selected characteristics of the assessment area. Combined Demographics Report Assessment Area(s): Dickens Co, Kent, Stonewall Co Income Categories Tract Distribution Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low-income Moderate-income Middle-income , Upper-income Unknown-income Total Assessment Area , , Housing Housing Types by Tract Units by Owner-Occupied Rental Vacant Tract # % % # % # % Low-income Moderate-income Middle-income 2,855 1, Upper-income Unknown-income Total Assessment Area 2,855 1, Total Businesses by Businesses by Tract & Revenue Size Tract Less Than or = $1 Million Over $1 Million Revenue Not Reported # % # % # % # % Low-income Moderate-income Middle-income Upper-income Unknown-income Total Assessment Area Percentage of Total Businesses: Total Farms by Farms by Tract & Revenue Size Tract Less Than or = $1 Million Over $1 Million Revenue Not Reported # % # % # % # % Low-income Moderate-income Middle-income Upper-income Unknown-income Total Assessment Area Percentage of Total Farms: Based on 2011 D&B information according to 2000 Census Boundaries. 10

13 Income Characteristics: As of the 2000 census, the assessment area contained only three middle-income census tracts. Approximately, 21% of families are low-income, about 20% are moderate-income, almost 25% are middle-income, and 34% are upper-income. The 13.46% poverty rate is slightly above the state average at 12%. The non-msa median family income for 2011 was $48,600 as depicted in the table below. INCOME LEVEL 2011 NON MSA/MD Median Income $48,600 Low-income $0> $24,300 Moderate-income $24,300>38,800 Middle-income $38,800>58,320 Upper-income $58,320 and up Housing: According to the 2000 census, there were 2,855 housing units in the assessment area. The home ownership rate is slightly below the state average of 58%, with 56% of assessment area housing units being owner-occupied. Almost 16% of the housing units are rental and 28% are vacant. Housing is more affordable than the state average based on the 2011 THAI of 1.65 for Dickens, 1.33 for Kent, and 0.93 for Stonewall versus the State index of 2.5. Just over 9% of the assessment area s population lives in correctional facilities, while approximately 2% live in nursing homes. Labor, Employment, and Economic Characteristics: Agriculture and oil production are the major industries. According to Dun & Bradstreet, there were approximately 304 business establishments in the assessment area as of 2011, with 88% reporting gross annual revenues of $1 million or less. Dickens County has one of the state s highest 2011 annual unemployment rates at 13.6%, above the state average of 7.9%, while Kent and Stonewall counties were below the state average at 6.0% and 5.0%, respectively. The following table provides unemployment rates for the state of Texas and the assessment area. UNEMPLOYMENT RATES FOR YEARS (NOT SEASONALLY ADJUSTED) Area United States 9.6% 8.9% Texas State 8.2% 7.9% Dickens County 10.1% 13.6% Kent County 5.9% 6.0% Stonewall County 5.1% 5.0% Community Contacts and Credit Needs: No community contacts were made in this assessment area. 11

14 CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS LOAN-TO-DEPOSIT RATIO The general purpose of CRA is to encourage banks to meet the credit needs in their assessment areas while operating in a safe and sound manner. To gain an understanding of the bank s lending activity, the net LTD ratio is reviewed to approximate the credit demand of the assessment area and assess the bank s willingness to meet the community s demand for credit. The bank s net LTD ratio is considered reasonable, given the bank s size and financial condition, the credit needs of the assessment area, and the competitive local banking environment. As of September 30, 2012, the net LTD ratio was 68.4%, and the quarterly average since the previous evaluation was 70.1%. To better understand the bank s performance in relation to its assessment areas, a comparison of two similarly situated local banks was performed. These banks were chosen for analysis based on their proximity and similar size and structure. The similarly situated banks have net LTD ratios of 72.7% and 75.5% as of September 30, Their quarterly average net LTD ratios were 69.9% and 77.9%. As noted, the bank s LTD ratios are in line with its peers and reflect favorably upon the bank s efforts to meet the credit needs of its community. LENDING IN ASSESSMENT AREA A substantial majority of the bank s 54 sampled loans were originated inside its assessment areas. The bank extended 45 loans, or 83.3% by number inside its assessment areas, These loans represent $37,965,000 or 79.2% by amount in the assessment areas. This level of lending inside the assessment areas indicates the bank is serving the credit needs of its assessment areas. The remaining analyses will be based on loans made inside the bank s assessment area. LENDING TO BORROWERS OF DIFFERENT INCOMES AND TO BUSINESSES AND FARMS OF DIFFERENT SIZES The distribution of lending based on revenue levels of the borrowers reflects a reasonable penetration among businesses of different sizes. A majority of the loans were made to businesses with gross annual revenues under $1 million. Data supporting this analysis can be seen in detail in the separate assessment area discussions. GEOGRAPHIC DISTRIBUTION OF LOANS The geographic distribution by the income level of geographies within the assessment areas is reasonable. This conclusion is based on the bank s performance in each assessment area in comparison to demographic and to the aggregate of lenders that report CRA data. Loans were 12

15 generally made in close proximity to the bank s branches, and there were no conspicuous gaps or anomalies in the lending patterns. Data supporting this analysis can be seen in detail in the separate assessment area discussions. RESPONSE TO COMPLAINTS There were no complaints related to CRA during the review period. Consequently, the bank s performance in responding to complaints was not considered in evaluating its overall CRA performance. FAIR LENDING OR OTHER ILLEGAL CREDIT PRACTICES REVIEW No evidence of discriminatory or other illegal credit practices inconsistent with helping to meet community credit needs was identified. The bank is in compliance with the substantive provisions of the anti-discrimination laws and regulations. Established policies and procedures are designed to ensure ongoing compliance with applicable laws and regulations. CONCLUSIONS WITH RESPECT TO PERFORMANCE CRITERIA BY ASSESSMENT AREA MIDLAND MSA ASSESSMENT AREA Performance context issues in the separate assessment areas determined the overall conclusion. Detailed information concerning the bank s lending in the assessment area can be found in the tables located in Appendix A. LENDING TO BUSINESSES OF DIFFERENT SIZES The distribution of lending based on revenue levels of the businesses reflects a reasonable penetration among businesses of different sizes. To determine the bank s performance, the bank s lending is compared to the assessment area demographics. Because of its size, the bank is not required to report small business loan data. However, to obtain a sense of loan demand, the bank s lending is compared to the aggregate data of banks that report small business loan data annually. Based on the business demographic data, there are 9,569 businesses within the assessment area. Of this number, approximately 98% of the businesses reported revenues of less than or equal to $1 million. The bank made 13 of the sampled commercial loans in this assessment area. Six loans (46.2%) totaling $5.4 million the loans were to businesses with gross annual revenues of $1 million or less. Three loans (23.1%) totaling $3.8 million were made to start-up businesses, where the bank relied upon pro forma income statements. The bank made four loans (30.8%) totaling $8.3 million to businesses of greater than $1 million. The bank s performance compares favorably to the aggregate lenders. The aggregate lenders made approximately 35% of the number of loans originated to small businesses. 13

16 Another way to gauge the bank s small business lending performance is to review the data by loan amount. Small businesses 2 typically require smaller dollar credits. The bank made five loans (83.3%) totaling $339 thousand in amounts under $100,000 to small businesses. GEOGRAPHIC DISTRIBUTION OF LOANS The geographic distribution by the income level of geographies within the assessment area is reasonable. The Midland MSA includes only two low-income census tracts, only 5% of businesses in the assessment area are located in those tracts, and aggregate lenders reported 4.5% of loans originated in those tracts. The bank originated none of its 13 sampled loans in lowincome census tracts. The bank made five loans for $14.8 million, or 38.5% of the number of sampled loans, in moderate-income census tracts. This compares favorably to the percent of small businesses located in moderate-income tracts and the volume of loans originated by the aggregate lenders in those tracts. The bank made three loans totaling $380 thousand, or 23.1% of the number of sampled loans, in middle-income census tracts and five loans totaling $2.3 million, or 38.5% of the sampled loans, in upper-income census tracts. While the bank s performance in low-income census tracts compared unfavorably to the demographics and to aggregate lenders, the performance in moderate-income census tracts exceeded the demographics and aggregate lenders. EL PASO ASSESSMENT AREA Detailed information concerning the bank s lending in the assessment area can be found in the tables located in Appendix B. LENDING TO BUSINESSES OF DIFFERENT SIZES The distribution of lending based on revenue levels of the borrowers reflects a reasonable penetration among businesses of different sizes. Based on the business demographic data, there are 30,262 businesses within the assessment area. Of this number, just over 95% of the businesses reported revenues of less than or equal to $1 million. The bank made 14 loans for a total of $5.4 million, or 60.9% of the 23 commercial loans sampled, to businesses with gross annual revenues of $1 million or less, with six totaling $13.2 million, or 26.1% of the number of sampled loans, to businesses of greater than $1 million in revenues. Additionally, three totaling $1.7 million, or 13% of the loans of sampled loans, in the El Paso assessment area were made to start-up businesses with pro forma income. The bank s performance compares favorably to the aggregate lenders. The aggregate lenders made only 45.1% of their loans to small businesses. Another way to gauge the bank s small business lending performance is to review the data by loan amount. Small businesses typically require smaller dollar credits. The bank made five loans (35.7%) totaling $280 thousand in amounts under $100,000 to small businesses. 2 Small businesses are those with gross annual revenues of $1million or less. 14

17 GEOGRAPHIC DISTRIBUTION OF LOANS The geographic distribution by the income level of geographies within the assessment area is reasonable. The El Paso MSA includes eight low-income census tracts, with almost seven percent of small businesses in the assessment area located in those tracts, and aggregate lenders reported 7.9% of loans originated in low-income census tracts. The bank made four loans totaling $2.3 million, or 17.4% of the number of sampled loans, in low-income census tracts. Eight loans totaling $5.7 million, or 34.8% of the number of sampled loans, were originated in moderate-income census tracts. The bank originated two loans totaling $3.6 million, or 8.7% of the number of sampled loans, in middle-income census tracts, and nine loans for $8.8 million, or 39.1% of the number of sampled loans, in upper-income census tracts. The bank s performance in moderate-income census tracts exceeds the demographics, with 27.7% of businesses being located in moderate-income census tracts, and slightly exceeds the aggregate banks performance, with 26.3% of loans in moderate-income census tracts. Aggregate banks exceeded the bank s performance in middle-income census tracts and the bank was in line with aggregate lenders in upper-income census tracts. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN KENT/DICKENS/STONEWALL ASSESSMENT AREA The bank s performance in the assessment area received a limited review and is considered to be generally consistent with the overall performance in the other assessment areas. The bank s market share and branch presence in the Kent/Dickens/Stonewall Counties market is limited, containing just 12% of the bank s total deposits and seven or 17% of loans sampled during this analysis. Therefore, the following conclusion regarding performance did not weigh heavily in the overall rating. Facts and data reviewed can be found in Appendix C. ASSESSMENT AREA LENDING INSIDE BORROWER INCOME GEOGRAPHIC ASSESSMENT AREA DISTRIBUTION Kent/Dickens/Stonewall Consistent Consistent Not rated 15

18 Appendix A Loan Distribution Tables for Midland Assessment Area 16

19 Small Business Loan Distribution Table Assessment Area: Midland MSA SMALL BUSINESS # % $(000s) % By Tract Income Low 0 0.0% 0 0.0% Moderate % 14, % Low/Moderate Total % 14, % Middle % % Upper % 2, % Total % 17, % By Revenue Total $1 Million or Less % 5, % Over $1 Million % 8, % Not Known % 3, % Total % 17, % By Loan Size $100,000 or less % % $100,001 - $250, % 0 0.0% $250,001 - $1 Million (Bus)-$500k (Farm) % 1, % Over $1 Million (Bus)-$500k (Farm) % 16, % Total % 17, % By Loan Size and Revenue $1 Million or Less $100,000 or less % % $100,001 - $250, % 0 0.0% $250,001 - $1 Million (Bus)-$500k (Farm) 0 0.0% 0 0.0% Over $1 Million (Bus)-$500k (Farm) % 5, % Total % 5, % Aggregate Lenders CRA Loan Distribution Table Small Business Aggregate Lenders: Midland MSA SMALL BUSINESS SMALL FARM # % $(000s) % # % $(000s) % By Tract Income Low % 4, % 0 0.0% 0 0.0% Moderate % 34, % % % Low/Moderate Total % 38, % % % Middle % 38, % % 1, % Upper % 34, % % % Unknown 0 0.0% 0 0.0% 0 0.0% 0 0.0% Tract Unknown % 1, % 1 3.8% 4 0.2% Total 2, % 113, % % 2, % By Revenue Total $1 Million or Less 1, % 42, % % 1, % By Loan Size $100,000 or Less 2, % 36, % % % $100,001 - $250, % 14, % % % $250,001 - $1 Million (Bus)-$500k (Farm) % 62, % % 1, % Over $1 Million (Bus)-$500k (Farm) 0 0.0% 0 0.0% 0 0.0% 0 0.0% Total 2, % 113, % % 2, % 17

20 Appendix B Loan Distribution Tables for El Paso Assessment Area 18

21 Small Business Loan Distribution Table Assessment Area: El Paso SMALL BUSINESS # % $(000s) % By Tract Income Low % 2, % Moderate % 5, % Low/Moderate Total % 7, % Middle 2 8.7% 3, % Upper % 8, % Total % 20, % By Revenue Total $1 Million or Less % 5, % Over $1 Million % 13, % Not Known % 1, % Total % 20, % By Loan Size $100,000 or less % % $100,001 - $250, % 1, % $250,001 - $1 Million (Bus)-$500k (Farm) % 3, % Over $1 Million (Bus)-$500k (Farm) % 15, % Total % 20, % By Loan Size and Revenue $1 Million or Less $100,000 or less % % $100,001 - $250, % % $250,001 - $1 Million (Bus)-$500k (Farm) % 1, % Over $1 Million (Bus)-$500k (Farm) % 3, % Total % 5, % Aggregate Lenders CRA Loan Distribution Table Small Business Aggregate Lenders: El Paso MSA SMALL BUSINESS SMALL FARM # % $(000s) % # % $(000s) % By Tract Income Low % 32, % % % Moderate 2, % 92, % % % Low/Moderate Total 2, % 124, % % % Middle 2, % 74, % % % Upper 3, % 117, % % % Tract Unknown % 2, % % % Total 8, % 318, % % % By Revenue Total $1 Million or Less 3, % 124, % % % By Loan Size $100,000 or Less 7, % 108, % % % $100,001 - $250, % 53, % 2 6.9% % $250,001 - $1 Million (Bus)-$500k (Farm) % 156, % 1 3.4% % Over $1 Million (Bus)-$500k (Farm) 0 0.0% 0 0.0% 0 0.0% 0 0.0% Total 8, % 318, % % % 19

22 Appendix C Loan Distribution Tables for Kent, Dickens, and Stonewall Counties Assessment Area 20

23 Small Business Loan Distribution Table Assessment Area: Dickens, Kent, Stonewall Counties SMALL BUSINESS # % $(000s) % By Tract Income Middle % % Total % % By Revenue Total $1 Million or Less % % Total % % By Loan Size $100,000 or less % % Total % % By Loan Size and Revenue $1 Million or Less $100,000 or less % % Total % % Aggregate Lenders CRA Loan Distribution Table Small Business Aggregate Lenders: Kent, Dickens, and Stonewall Counties SMALL BUSINESS SMALL FARM # % $(000s) % # % $(000s) % By Tract Income Middle % % % 1, % Tract Unknown % % 0 0.0% 0 0.0% Total % % % 1, % By Revenue Total $1 Million or Less % % % 1, % By Loan Size $100,000 or Less % % % % $100,001 - $250, % 0 0.0% % % $250,001 - $1 Million (Bus)-$500k (Farm) 0 0.0% 0 0.0% % % Over $1 Million (Bus)-$500k (Farm) 0 0.0% 0 0.0% 0 0.0% 0 0.0% Total % % % 1, % 21

24 GLOSSARY Aggregate lending: The number of loans originated and purchased by all reporting lenders in specified income categories as a percentage of the aggregate number of loans originated and purchased by all reporting lenders in the metropolitan area/assessment area. Census tract: A small, relatively permanent statistical subdivision of a county. Census tract boundaries do not cross county lines; however, they may cross the boundaries of metropolitan statistical areas. Census tracts average about 4,000 inhabitants, and their physical size varies widely depending upon population density. Census tracts are designed to be homogeneous with respect to the population characteristics, economic status, and living conditions to allow for statistical comparisons. Community development: All agencies have adopted the following language: Affordable housing (including multifamily rental housing) for low- or moderate-income individuals; community services targeted to low- or moderate-income individuals; activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration s Development Company or Small Business Investment Company programs (13 CFR ) or have gross annual revenues of $1 million or less; or activities that revitalize or stabilize low- or moderate-income geographies. Effective September 1, 2005, the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have adopted the following additional language as part of the revitalize or stabilize definition of community development. Activities that revitalize or stabilizei. Low-or moderate-income geographies; ii. iii. Designated disaster areas; or Distressed or underserved nonmetropolitan middle-income geographies designated by the Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, based ona) Rates of poverty, unemployment, and population loss; or b) Population size, density, and dispersion. Activities that revitalize and stabilize geographies designated based on population size, density, and dispersion if they help to meet essential community needs, including needs of low- and moderate-income individuals. Consumer loan(s): A loan(s) to one or more individuals for household, family, or other personal expenditures. A consumer loan does not include a home mortgage, small business, or small farm loan. This definition includes the following categories: motor vehicle loans, credit card loans, home equity loans, other secured consumer loans, and other unsecured consumer loans. Family: Includes a householder and one or more other persons living in the same household who are related to the householder by birth, marriage, or adoption. The number of family households always equals the number of families; however, a family household may also include non-relatives living with the family. Families are classified by type as either a married-couple family or other family, which is further classified into male householder (a family with a male householder and no wife present) or female householder (a family with a female householder and no husband present). Geography: A census tract delineated by the United States Bureau of the Census in the most recent decennial census. Home Mortgage Disclosure Act (HMDA): The statute that requires certain mortgage lenders that do business or have banking offices in a metropolitan statistical area to file annual summary reports of their mortgage lending activity. The reports include such data as the race, gender, and income of the applicants; the amount of loan requested; and the disposition of the application (for example, approved, denied, or withdrawn). Home mortgage loans: Includes home purchase and home improvement loans as defined in the HMDA regulation. This definition also includes multifamily (five or more families) dwelling loans, loans for the purchase of manufactured homes, and refinancing of home improvement and home purchase loans. 22

25 Household: Includes all persons occupying a housing unit. Persons not living in households are classified as living in group quarters. In 100 percent tabulations, the count of households always equals the count of occupied housing units. Low-income: Individual income that is less than 50 percent of the area median income, or a median family income that is less than 50 percent, in the case of a geography. Market share: The number of loans originated and purchased by the institution as a percentage of the aggregate number of loans originated and purchased by all reporting lenders in the metropolitan area/assessment area. Metropolitan area (MA): A metropolitan statistical area (MSA) or a metropolitan division (MD) as defined by the Office of Management and Budget. A MSA is a core area containing at least one urbanized area of 50,000 or more inhabitants, together with adjacent communities having a high degree of economic and social integration with that core. A MD is a division of a MSA based on specific criteria including commuting patterns. Only a MSA that has a population of at least 2.5 million may be divided into MDs. Middle-income: Individual income that is at least 80 percent and less than 120 percent of the area median income, or a median family income that is at least 80 percent and less than 120 percent, in the case of a geography. Moderate-income: Individual income that is at least 50 percent and less than 80 percent of the area median income, or a median family income that is at least 50 percent and less than 80 percent, in the case of a geography. Multifamily: Refers to a residential structure that contains five or more units. Other products: Includes any unreported optional category of loans for which the institution collects and maintains data for consideration during a CRA examination. Examples of such activity include consumer loans and other loan data an institution may provide concerning its lending performance. Owner-occupied units: Includes units occupied by the owner or co-owner, even if the unit has not been fully paid for or is mortgaged. Qualified investment: A qualified investment is defined as any lawful investment, deposit, membership share, or grant that has as its primary purpose community development. Rated area: A rated area is a state or multistate metropolitan area. For an institution with domestic branches in only one state, the institution s CRA rating would be the state rating. If an institution maintains domestic branches in more than one state, the institution will receive a rating for each state in which those branches are located. If an institution maintains domestic branches in two or more states within a multistate metropolitan area, the institution will receive a rating for the multistate metropolitan area. Small loan(s) to business(es): A loan included in loans to small businesses as defined in the Consolidated Report of Condition and Income (Call Report) and the Thrift Financial Reporting (TFR) instructions. These loans have original amounts of $1 million or less and typically are either secured by nonfarm or nonresidential real estate or are classified as commercial and industrial loans. However, thrift institutions may also exercise the option to report loans secured by nonfarm residential real estate as small business loans if the loans are reported on the TFR as nonmortgage, commercial loans. Small loan(s) to farm(s): A loan included in loans to small farms as defined in the instructions for preparation of the Call Report. These loans have original amounts of $500,000 or less and are either secured by farmland, or are classified as loans to finance agricultural production and other loans to farmers. Upper-income: Individual income that is more than 120 percent of the area median income, or a median family income that is more than 120 percent, in the case of a geography. 23