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A Major Player Returns To Mortgages

Frost Bank targets almost $2 billion in mortgage originations

Steve Goode headshot
Steve Goode
A Major Player Returns To Mortgages

Twenty years ago, Frost Bank froze its mortgage operations in the Lone Star State. Now, it’s back in the mortgage business in an aggressive way.

By the end of 2023, players in the Texas mortgage industry are going to feel the heat.

The San Antonio-based bank, seventh largest by assets in Texas, is currently ramping up its mortgage operations. It has hired 80 loan officers and formed a partnership with Infosys to create a digital lending platform.

It’s running a pilot program with only employees being offered mortgages initially. Later this year, it will market mortgages to existing clients and then open the market up to any mortgage seeker.

One Texas mortgage industry expert thinks there’s both good and bad news in Frost’s return. “Both banks and nonbanks will potentially be impacted by Frost’s entry into the mortgage space,” says Marty Green, a Dallas-based partner with Polunsky Beitel Green. “Because mortgage companies expanded to meet the increased demand during the pandemic, Texas already had a very competitive mortgage environment. Frost Bank entering the residential mortgage market will only make it more competitive. But Texas mortgage companies are no strangers to intense competition and will adapt. The good news is that the anticipated growth in Texas will provide ample opportunity for existing market participants, as well as for new participants like Frost Bank.”

When Frost Bank pulled the plug on its mortgage origination business, it stepped away from what was 10% of its loan portfolio at the time. Chairman and CEO Phil Green said he hopes the bank returns to those levels within the next five years. “The way I hope it turns out is, if you look five years out, it'd be the 10-ish percent of the portfolio back when we used to have them on the book before, I think we're around that area, 10%, 12% of the portfolio. So I just think directionally, we'd be in that same level. If you kind of took what would that be and what kind of volumes would that be, you could sort of pencil out how much that might add to growth.”

Marty Green
Marty Green, Polunsky Beitel Green

As of the end of 2022, Frost had a loan portfolio of $17.03 billion. The target for mortgages would be at least $1.7 billion in five years.


Not Chasing Rates

When the housing market collapsed in 2008, some folks thought the bank’s execs knew something everyone else didn’t. “It made us look like geniuses,” said Bill Day, Frost Bank’s senior vice president of communications. “It wasn’t falling in with our model of building relationships with customers. The whole business was commoditized. It wasn’t a business decision. It was an institutional decision.” Frost Bank’s Green told the San Antonio Express that it basically came down to too much emphasis on rate shopping.

Bill Day
Bill Day, Frost Bank

Now some might question the bank’s return to mortgages. The Mortgage Bankers Association reported, on average, independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks lost money on loans they originated in 2022: the first time that’s happened in the 14-year history of the MBA’s annual report on the industry. IMBs and mortgage subsidiaries of chartered banks lost an average of $301 on each loan they originated in 2022. That was down dramatically from an average profit of $2,339 per loan in 2021, the report states.

Marty Green, Partner

Polunsky Beitel Green

As the bank rapidly expands its branch presence across Texas, Frost execs say it made sense to return. “Around 2020 we started talking about the gap - customers were asking for it and we thought if we could offer the same kind of customer service,” Day said. “It is the most significant purchase people make in their lifetime and we weren’t there.”

Day said the company started the process from the ground up beginning in the fall of 2021, but did not want to team up with an existing lender. The bank would not divulge what is investing in the return to mortgages.

Frost Bank has hired about 80 salaried loan officers, Day said, with no plans currently to add more. “We have a good group of mortgage loan officers now, and we probably will add more as we increase our mortgage lending going forward, but that will depend on the volume of loans. We will be flexible as we grow, so there isn’t a specific target number or timetable for that growth,” he said.


Servicing Silver Lining

Day said the bank will focus on home purchases and not refinancing and they won’t be selling the servicing rights. “We want to hang onto that loan,” he said.

That could be the silver lining in the cloudy mortgage industry. The same MBA report that painted the bleak view on originations in 2022 was more celebratory of servicing. On the servicing side of the business, net financial income more than doubled in 2022, the report said. Higher loan balances pushed per-loan servicing fees higher, while servicing expenses dropped as serious delinquencies fell. In addition, valuation markups on mortgage servicing rights and slower prepayment activity contributed to servicing profitability, the report states. Net servicing financial income, which includes net servicing operational income, as well as mortgage servicing right (MSR) amortization and gains and losses on MSR valuations, was at a gain of $586 per loan in 2022, up from a gain of $261 per loan in 2021.

One Texas loan originator thinks Frost might be looking in the wrong direction. “They should be focusing on wholesale and [the non-delegated] channel, instead of loan origination,” says Aslam Mansoor, a loan originator with Liberty Home Mortgage in Plano, 20 miles northeast of Dallas.

Marty Green thinks Frost is making a move at the right time. He deems them a “formidable competitor in an already crowded marketplace.”

He explained, “Frost has been in Texas for over 150 years and currently has over [170] branch locations, so they are a name that Texans will know and be familiar with. They also have a fairly large deposit base and those customers may very well prefer to obtain a residential mortgage directly from their banking institution.

“So the existing footprint, combined with an aggressive plan to expand its banking operations in the state, could provide Frost with an exceptional launching pad for its mortgage operation. It also coincides with some other large banks reducing their mortgage operations in Texas, which provides available mortgage talent in the state from which Frost can staff its mortgage team. So from a timing perspective, Frost may be poised to see fairly immediate success in growing their home mortgage division.”


Full Rollout Coming

The bank is also not rushing into the new offering as it sees what works best and what doesn’t. Mortgages to employees are first as part of the pilot program.

“Our team has created a new mortgage loan process from the ground up to originate and service mortgage loans and keeping with the Frost philosophy, and we've created a great digital and mobile experience around it. Once we complete this pilot program, we'll roll out mortgage lending to customers on a limited basis with the goal of opening it up to everyone later this year,” Phil Green said in the earnings call.

As of the end of February, they have closed two mortgages and they are with bank employees. The goal is to scale up and be fully up and running to offer mortgages to the public by the end of the year.

“We’re moving slow and steady,” Day said. “The main thing is we wanted to build it our way.”

Frost Bank has the wherewithal to wait. Frost is the banking, investments and insurance subsidiary of Cullen/Frost Bankers Inc., a financial holding company with $52.9 billion in assets on Dec. 31, 2022. According to the Texas Department of Banking, Frost is the seventh largest bank in the Lone Star State by asset size and is one of the 50th largest banks in the U.S. Its 172 branches are in Austin, Corpus Christi, Dallas, Fort Worth, Houston, Permian Basin, Rio Grande Valley and San Antonio regions.

However, the move back to mortgages doesn’t come without significant increase in noninterest expenses. “Looking at our projection of full year 2023 total noninterest expenses, we expect total non-interest expense for the full year 2023 to increase at a percentage rate in the mid-teens over our 2022 reported level,” said Green on the earnings call. “Our continued expansion in Houston and Dallas and the introduction of our mortgage product accounts for about 2.5% of that projected growth.

“Also impacting the projected growth rate is significant investments that we will be making in information technology for both people and infrastructure. Investments in marketing in both advertising and people as we focus on expanding the communication of our value proposition and expense growth is also impacted by costs associated with continued support of our staff.”


Overall Growth

The decision to return to mortgage lending comes at a time when the bank, which has been in business for more than 150 years, is also growing. They are wrapping up an expansion in the Houston area that will more than double their presence from about 32 to 55 branches, which they call financial centers. They are also beginning an expansion in the Dallas area that will see Frost grow from 14 to 27 branches. Altogether Frost has 172 locations across Texas.

Day attributed the growth to Frost CEO Phil Green who is known to say “if a business isn’t growing, it’s dying.”

This article was originally published in the Lone Star LO August 2023 issue.
Steve Goode headshot
Steve Goode
Published on
Aug 28, 2023
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