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Cullen/Frost Bankers, Inc. (NYSE:CFR)

Q4 2008 Earnings Call

January 28, 2009 11:00 am ET

Executives

Greg Parker - EVP and Director of IR

Dick Evans - Chairman and CEO

Phil Green - Group EVP and CFO

Analysts

John Pancari - JPMorgan

Terry McEvoy - Oppenheimer

Jon Arfstrom - RBC Capital Markets

Jennifer Demba - SunTrust

Operator

Good morning. My name is Kimberly and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bank yearend and fourth quarter Earnings Call. (Operator Instructions)

Thank you. Mr. Greg Parker, Executive Vice President and Director of Investor Relations, you may begin your conference.

Greg Parker

Thank you. This morning's conference call will be led by Dick Evans, Chairman and CEO and Phil Green, Group Executive Vice President and CFO. Before I turn the call over to Dick and Phil, I need to take a moment to address the Safe Harbor provisions.

Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the Safe Harbor Provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of the text and this morning's earnings release for additional information about the risk factors associated with these forward-looking statements.

If needed, a copy of the release is available at our website or by calling the Investor Relations department at 210-220-5632.

At this time, I will turn the call over to Dick.

Dick Evans

Good morning and thank you for joining our call. I am pleased to provide you with a brief overview of the results we reported today for the fourth quarter 2008, and the full year. As always, Phil Green, our CFO, will follow with more detail after, when we will be happy to answer any questions.

Our results are strong. The numbers are good. They speak for themselves. And frankly, I am happy to let the numbers do the talking. But I will say this, in a year in which the economy in general, and the financial sector in particular set so many records for wrong reasons; it feels good to be on the right side of the record book.

And that's the kind of quarter and year that we enjoyed at Cullen/Frost. Before diving into the numbers, I want to talk about why we are positioned, especially when there is so much pain throughout the industry and the economy. A big factor is that a few years ago, we launched a comprehensive program to examine our business from every angle, to understand where we want to take the company and how we get there.

As a result, we are now very disciplined in our ability to target, pursue and win the right kind of customer, one who fits Cullen/Frost approach and culture. This customer relationship program has been a great success. For Cullen/Frost, a new banking relationship means we have the customer’s primary operating account.

It takes months of hard work to secure a new customer relationship and a good deal of hard work after to produce new financial product pipelines, and that's exactly what we have done. Plenty of basic blocking and tackling. When you hear some of the companies talk about getting back to basics in response to today's challenging business and climate, remember that Cullen/Frost never abandoned the basics. That's why we are moving confidently into the New Year.

Let's look at fourth quarter results. Net income for the fourth quarter was $53 million, or $0.89 per diluted common share, compared to the fourth quarter 2007, earnings of $54.7 million, or $0.93 per diluted common share. For the fourth quarter of 2008, our returns on average assets and equity were 1.47% and 12.79% respectively, compared to 1.65% and 15%, 18% in 2007.

On a linked quarter basis, Cullen/Frost had the largest increase in average deposits, without acquisitions, in company history of $507 million, confirming our reputation as a safe haven in difficult times.

Our average loans and deposits continue to grow during this quarter. Average loans for the fourth quarter were up over 13% on an annualized basis to $278 million from the prior quarter. Meanwhile the provision for possible loan losses for the quarter was $8.6 million compared, to net charge-offs of $5.4 million.

For the fourth quarter of 2007, the provision was $3.6 million compared to net charge-offs of $3.5 million. Our allowance for possible loan losses as a percentage of total loans was 1.25% at December 31, 2008, compared to 1.19% at the end of the fourth quarter of last year.

Non-interest income for the fourth quarter of 2008 was $69.2 million, an increase of 4.2% over a year earlier. Net interest margin was 4.60% for the fourth quarter of 2008, compared to 4.70% in the fourth quarter of ‘07. Net interest income on a taxable-equivalent basis rose 6.2% to $143.7 million, compared to $135.3 million reported in the fourth quarter of ‘07.

Our capital levels remain strong, well above levels considered well-capitalized. This was a big factor in our decision against seeking government funds under the TARP program. Looking at expenses, we see that non-interest expenses for the fourth quarter of 2008 were $123.5 million, up 8.2% from the fourth quarter of ‘07. That's a snapshot of our stellar fourth quarter, which contributed significantly to a very good year overall.

Annual earnings for 2008 were $207.3 million, $3.50 per diluted common share, compared to '07 of $212.1 million, or $3.55 per diluted common share. For the year, the return on assets and equity were 1.51% and 13.11% respectively, compared to 1.63% and 15.20% reported in '07.

Now let's turn to credit quality. We experienced some deterioration in the fourth quarter, based on increases in non-performing assets and delinquencies. But this increase was moderate, manageable and better than what the rest of the industry is experiencing.

Non-performers aggregated $78 million at the end of the quarter, which is an increase of $22.9 million from the third quarter. The majority of the net increase is related to declines in home building industry and the affects of Hurricane Ike, which were less severe than we initially projected.

And while non-performers have increased, they are well below current industry levels as a percentage of total assets and total loans. Charge-offs for the quarter were $7.9 million and recoveries totaled $2.5 million, for a net position of $5.4 million.

The year end net charge-off figure of $19.9 million is 0.24% of average loans. It's significant that our fourth quarter gross and net charge-offs were less than those in the third quarter of 2008. We project charge-offs to remain constant, which is contrary to overall industry trends.

Past due loans at the end of the fourth quarter totaled $121.8 million, or 1.38% of total loans, which is higher than the prior quarter by $47.6 million. Approximately $20 million of total increase resulted from administrative issues that usually arise during the holidays, when people are traveling in and out of town. And $19 million was related to one credit, which is now reported in potential problem loans.

Acknowledging these two advances reduces delinquencies to $83 million, which is more inline with the linked quarter total. Potential problems were $50.2 million on December 31, up $42.4 million at the end of the third quarter, and up from $30.3 million at yearend of '07.

Two primary borrowers contributed to the increase and in both cases, we are making progress. The borrowers are cooperative and collateral protection has afforded the bank.

On the consumer side, the picture is positive across the Board. Customer growth is strong, with mid single-digit growth to 6.6% in the number of consumer transaction accounts, and continued good results into noble account acquisition.

Compared to the fourth quarter of '07, consumer loans were up and deposit balances grew, thanks to strong growth and consumer transaction accounts. Fees from consumer service charges were relatively flat, reflecting the decrease in overall consumer spending.

The business side is performing well. For 2008, we increased the number of new relationships by 56% over 2007. Our loan portfolio commitments increased 10% and, while total dollar volume of new loan pipeline was flat compared to last year, we generated 21% increase in new loan requests from prospects, offsetting a reduction in the volume of loan requests from existing customers.

Still, we felt the impact of the economy despite these results. Booked new loan commitments were down 4% compared to last year, although the amount of book from prospects was up 16%. The story here is that, thanks to the multiyear effort to analyze and revamp our development model, we are generating new relationships and more loans, in spite of the economic crisis.

That's a quick review of our results. And in closing this portion of the call, I want to thank everyone at Cullen/Frost for turning in a strong quarter and year.

Despite the turbulence in the broader economy, we are growing this business in near record levels. We are making loans at historic levels. We opened new financial centers in Dallas and San Antonio and we will open additional locations in the coming months.

We introduced new products, such as our online Momentum account last year, and we will rollout robust mobile banking services this year.

I mentioned at the beginning that our success derives from our disciplined conservative approach to business. I should also point out two other key elements. First, our business is tied directly to the health of the Texas economy. We operate almost exclusively in Texas and, as you know, Texas has faired better so far than the rest of the nation.

I hope that remains the case, despite the weakening condition in the state. Current projections are that Texas will see a 2.5% job loss in 2009. Austin and Dallas are most exposed to current recessions because of the high-tech and finance insurance and real estate, respectively.

San Antonio and Fort Worth do better in a recession, while Houston is stable at current oil and gas prices, but substantial further declines in price for a prolonged period of time would cause Houston to be affected more. However, this state and this company have been through difficult times before. The management team here recalls the challenges of the 1980s, and so we know how to adapt, endure and grow in these conditions.

The other contributor to our success is very basic. It's our culture of the company. We put a huge emphasis on relationships and character, which really sustains us in good times and bad.

Take credit quality as an example, where we have worked closely with borrowers to work through tough issues together. As a result, we are experiencing fewer charge-offs than you might expect in this in climate. You can do this, when you trust the customer and the customer trusts you.

Our culture is also exemplified by our employees. We were devoted to giving customers the best service possible. As always, I want to thank everyone at Cullen/Frost for their commitment to Cullen/Frost success and their contribution to a great quarter and year.

The good news is that apart from the economy, our culture and our business approach are very much in our control. That gives me a great sense of optimism about our future, as I hope it does to all our investors. We appreciate your interest in our company.

And now, I will turn the call over to Phil Green.

Phil Green

Thank you, Dick. Just a few more comments and then we will open it up for questions.

First, let me say regarding our earnings outlook for the year, while the range of analyst estimates is certainly broad, we feel that the current consensus earnings estimate for 2009 is reasonable. Regarding some of the factors that impact our outlook for the year, there are obviously some good and some more challenging.

On the challenging side, I point out that we expect the cost we pay for FDIC premiums to increase dramatically, from about $4 million dollars in 2008, to $15 million in 2009, an increase of $0.12 a share. That's not something we knew much about; it's a reflection of the times and is an increase cost the industries have to bear.

Another cost we will see increased sharply is in the pensions. In 2008, we actually saw a slightly negative pension cost $269,000 as earnings on planned assets generated sufficient returns to offset costs. With the historic drop in the market in 2008, that’s affected virtually all investors. It will impact pension expense in 2009 by $6 million, or $0.06 a share, even though our plan was frozen several years ago. So, to recap these two items that reflect the general impact of the current financial crisis combined for a cost of $0.18 per share on 2009's outlook.

I want to note a few other items that might be categories challenges, before I point out some positives. First, regarding margin, the drop in margin during the fourth quarter was actually not as bad as it appeared because the 11 basis points of the 14 basis point drop occurred, because we expanded the balance sheet during the quarter $320 million by purchasing Fed funds directly from our downstream correspondence instead of handling these on an agent basis.

This money went directly into our Fed account at a small spread, which diluted the margin. As the Fed funds market has moved more inline with the rate paid by the Fed, we will once again handle most of these funds on an agent basis for a small fee. I mention this in order to provide visibility on our baseline margin.

Now as far as the outlook, I believe we are likely to see some margin pressure from two primary areas. First, as prepayment speeds pick up on our mortgage-backed securities portfolio and these funds are reinvested at lower rates, and second, we see a drop in the LIBOR rates versus the first half of 2008.

Another challenge I will mention is the cost we are incurring to upgrade and enhance our core processing systems, as well as bank systems such as retail delivery, telephone customer service and commercial loan origination. These enhancements have been in progress for some time, and their rollouts will result in a higher run rate than we would like to see in this area over time.

Not only on the challenge side of the ledger, in light of the current economic environment, we expect the increase provisions in 2008 above last year’s elevated levels in order to build reserves. Although at this point, we don't expect a significant increase in charge-offs.

Now let's look some positives we currently see for the year. First, volumes for both loans and deposits have been very strong. We expect loan growth, the grade of loan growth to drop somewhat from 2008, but still expect to grow in higher single-digits because of the prospecting efforts of our staff during the year, which Dick is already discussed.

We expect deposit volumes to at least equal the growth in loans. Some of this is our status as a safe haven for safety and service. Some of it is our good deposit rates and some of it the fact that companies just don't have any use for the money. Another positive we see is our strong capital liquidity has allowed us to take advantage of certain high quality investment opportunities at very advantageous rates.

For example, during the fourth quarter, we purchased $400 million of AAA municipals backed by the Texas Permanent School Fund, a tax equivalent yields averaging 8.2%. We would love to do more of these.

Another example is that, at the end of the year, we contributed an additional $30 million to our pension plan, which, after funding costs, will result in a $1.6 million pre-tax benefit, helping to reduce the impact of the lower investment returns, I mentioned earlier.

Another positive is loan pricing. We are making significant progress improving our loan pricing to levels more reflective of the current environment and less reflective of the historically low credit spreads over the last several years.

We have implemented a pricing metrics that's more responsive to risk. We are also working to reduce the level of our LIBOR denominated assets in favor of prime-based assets.

I should also mention that our $1.2 billion interest rate swap is now paying us over $52 million per year at the current rate levels. With regard to fees, although some items of non-interest income won’t be there in 2009, such as the student loan business, which they killed last year, and there won’t be a Visa IPO. We should see some strong growth in service charges, given lower rates and decent growth for trusts and insurance fees.

Finally, not withstanding some of the unusual expenses, I noted earlier, I think our expense growth should be fairly well controlled. So, that's a feel for what we are currently seeing for this year.

And with that I’ll turn it back over to Dick for questions.

Dick Evans

Thank you, Phil. We will be happy to entertain your questions.

Question-and-answer session

Operator

(Operator Instructions) Your first question comes from John Pancari from JPMorgan.

John Pancari - JPMorgan

Can you give a little more detail on your delinquencies? I believe you indicated the past dues in totals, but obviously just wondering are they for all past dues from 30 days up, or do you have the breakout for the 30 days versus the 90 plus?

Dick Evans

To answer the first part of your question, it is 30 days up and I’m reaching for the 90 days. You will recall, did you understand, at year end it's typical that sometimes you get a little jump, and that was $20 million. The other $20 million was related primarily to an account that we removed, and two potential problems, and it's that $15 million that I talked about. If you look at the numbers, 90 days, and over it was $19 million of the $121 million.

John Pancari - JPMorgan

Okay.

Dick Evans

Does that answer your question?

John Pancari - JPMorgan

That does. Okay. And then Dick, can you give--

Dick Evans

Just for clarification you probably have this, that's up about $5 million from where it was last quarter the over 90 days, over last year, I'm sorry. Last year.

John Pancari - JPMorgan

Okay. And can you give me the numbers again for the potential problem loans?

Dick Evans

The potential problem loans were $50.8 million, up from $42.4 million. I will point out to you that increase is two borrowers. Interesting enough, the one is a pizza franchise, which is quite frankly at the right part of the business in an economic slowdown.

This happens to be a one price or you can eat type of franchise. They have been working most of the year on a sale. The sale fell through because of the capital markets. Which quite frankly is kind of a theme that you will see going through a lot of what’s happening.

The good news is, is cash flowing. I wish it wasn’t quite as tight, but it is cash flowing positive. So, that's $19 million of the increase. And then there is a collection agency that also was selling its portfolio that fell through and that's a $11 million of the increase. I'm talking about potential problems.

John Pancari - JPMorgan

Okay. And the past dues, you identified a large credit there. What was that one? What industry?

Dick Evans

It was the Pizza math. Yes, the Pizza company that I was just talking about.

John Pancari - JPMorgan

Okay.

Dick Evans

And what we were doing over yearend and because the sale fell through, we working into it, it got past due in the 30 day range, now it's renewed and in potential problems.

John Pancari - JPMorgan

Okay, all right. And then, can you just comment quickly on your snicks portfolio credit trends there?

Dick Evans

They are up and they continue to have the same characteristic of 60% of energy related and it is nothing is over 10% in that regard. It was primarily up because of two credits, and one was in the spirits business, and the other one is a manufacturer of coolers and freezers, which is the number one brand, I’d say, in that market. So, they were up about $40 million, they were up from $930 million of $502 million to $534 million.

Phil Green

I will just also add that, if you look at the categories by industry, the energy component was up by about $30 million, which would be the largest single increase, and then we did have the beer, ale and spirits that Dick talked about also.

John Pancari - JPMorgan

Is that outstanding balances, is that what you’re talking about? Or is that--

Dick Evans

That's correct.

John Pancari - JPMorgan

Okay.

Dick Evans

That's outstanding balances. I’d say to you in the shared national credits, there is only one credit that is classified and it is an energy credit, interesting enough, it is not because of pricing, which I think is fortunate. It is a company, it's a $19 million credit. It's a company that spent most of ‘08 working on a sale of the company, which fell through, and we are getting some new reserve studies to see exactly where we sit.

We have $19 million of the $240 million credit. I might just, while we are on energy, because we certainly I think if you look at the three categories going forward that we really focus on, obviously one to four family houses. That's been increasing, interestingly enough, out of the non-performer increase of $29.8 million, $22.8 million were really in two credits and it was dominated by a home building industry.

We think, and it's always tough to call, we think maybe the increase of problems on home building has started to slow. When you and I first started talking, if you go back, I think it was in the third quarter of last year, we had commitments of $480 million, had $255 million outstanding. Today, we have commitments of $342 million and $207 million outstanding. $60 million of those are criticized; $5.5 million are foreclosed.

The foreclosure is staying around the $4.5 million to $5.5 million dollars range. And if you look at the trend and criticize from last June, it's gone from $52 million to $59 million, to $60 million. And I’m particularly getting some comfort from September to the end of the year, still hanging around the $60 million range.

Secondly, I think in this volatile energy market, we have spent a great deal of time analyzing our energy portfolio. I get great comfort, if you can get comfort in a commodity that's moving so much. We have $590 million outstanding in production loans, that's 123 different credits. 63% (inaudible) which means there is a lot of liquidity in the borrowing base, 30% of our portfolio is oil, 70% is gas.

When you look at the sensitivity price desk, which we use a lot, or another way to say it is the liquidation value. In '09, we are looking at 33.75 oil, 3.75 of gas, 10, 37, 50 oil and 4.13 gas, and so on and so forth. You also have to take into consideration that the portfolio overall is hedged in '09, 54% of the oil hedged at $84.57 and 42% of the gas is hedged at 775.

So, in this volatile time of bridging through '09, it gives me some comfort. Now, certainly there are some credits that have zero hedged and some are 99% hedged, but that's the overall. We didn't chase the higher price deck. The highest price deck we used was $60 oil and 650 gas.

So, I think, we have got a conservative approach to how we land. We land only on crude developed production. We focus in the mid-continental production and we focus on high diversification long life. We have very little along the Gulf Coast. We have no offshore or foreign production. So, our customers really have simple structures and are not overleveraged.

And while I'm on the portfolio, and as when you're talking about going forward, I think the other focus that we have done a great deal of analysis on in our portfolio is within commercial real estate. I think the biggest focus, we believe potential challenges would be in the retail centers. And again, our analysis, just to give you a couple of detail, we have $495 million, 51% are construction loans, 37% are interim, 56% of that portfolios in Houston, which is the largest, which has been the stronger part of the economy here, and San Antonio is about 19%.

One of the things that we also spent some time looking at, as we looked at 80% of our entire portfolio to do this analysis, and our largest credit is $30 million to Frost, out of a $50 million credit we had, it's on budget, it's on time, it's debt service is 1.20 times. It's got a Wal-Mart Super Store, it's got a Kohl’s, it’s got a Best Buy, Ross, PetSmart. It's got some Whataburger and Taco Cabana and some of the lower end, but areas of restaurants that are growing.

We have 14 credits over $10 million. We have $10 million. It represents $200 million of the $384 million that I talked to you about. That's 14 projects; there is only one problem loan in that regard. It's a commitment of $10 million, of which $5 million is outstanding today.

It is included in the potential problems I talked to you about. And that one tenant is strong and so you're just working through what you will do with the rest of the center.

I realize, you asked me a simple question and I wrote you a book, but I wanted you to know how we're thinking about the challenges in the portfolio, and we are doing extensive analysis to make sure that we are getting on top of our problems early, which is a characteristic of our company.

And at the end of the day, while the Texas economy is slowing, and I'm comfortable and on the other side of the equation, because we've had the experience, and we have experienced staff, and already organized in such a way really as a result of what we learned in the '80s, we were able to work problems and grow this business at the same time. And that takes a lot of discipline.

John Pancari - JPMorgan

I appreciate you writing the book and you answered my other two questions. So, thank you.

Dick Evans

You're welcome.

Operator

Your next question is from Terry McEvoy from Oppenheimer.

Terry McEvoy - Oppenheimer

Good morning.

Dick Evans

Good morning.

Terry McEvoy - Oppenheimer

Thanks for the response to John's questions. Most of my questions have been answered. Still what '09 consensus estimate are you looking at? The numbers are all over the place, as you pointed out. But I just want to make sure, given that wide range, that I'm on the same page with your comments.

Dick Evans

The one I saw was, I think is around 342.

Terry McEvoy - Oppenheimer

Okay. That’s about it. And then just a last question, you seem very optimistic about charge-offs remaining consistent in '09, with where they were in the fourth quarter in 2008. But then on the other side, you do appear somewhat cautious about the outlook for the economy and the impact to some of your borrowers, and we did see that increase in NPAs and delinquencies.

So, what gives you the conviction that charge-offs are going to be flat? And then could you talk about the reserve building process that you mentioned. Do you think we will see a similar amount in '09 versus 2008, in terms of the dollar amount?

Phil Green

Let me just make a couple of quick comments and clarify and then I'll let Dick make some comment. I don’t think I specifically said charge-offs would be flat. I said, I don't think they increased significantly. I think we're running charge-offs about 24 basis points in 2008. We expect around 29 basis points, so, 29, 30 basis points.

So, that's not a huge increase in terms of dollar amounts. But we expect to be building a reserve, and just because we are going in to a climate that's slowing, and so we would look to increase our reserve for loan losses. We are right now expecting to provide, say $20 million in excessive charge-offs. But that's going to depend on what classifications, doing a lot of things.

This is just an early outlook for the year. But that’s the thing we are looking at, is building the reserve up and it really just gives us the ability to meet any portfolio deterioration that we see. Now we feel good about that level of providing. So, again, that’s where we see things at this time. But I’ll turn it over, to see if Dick has any comments on that.

Dick Evans

Phil has given you a good summary. You asked a good question, because we recognize both sides of the equation. It's really consistent. We looked at the amount of increases. We've looked and analyzed the risk so far that we see. When I say so far, with everything we know today, we have analyzed all of it. And we can say to you that while we know classified are increasing, non-performers have increased, potential problems have increased in that regard.

We are comfortable with that level of charge-off taken out the hurricane last quarter in the third quarter. They got somewhere consistent to that, and when Phil said if you look at this company, the 24 basis points, if you look back over a number of years, it's about where it runs. And if we ease up to 29 basis points, which we're reserving for, I will tell you this time next year I’ll be proud of that in the economic situation that we have.

Terry McEvoy - Oppenheimer

That's helpful. Thank you.

Operator

(Operator Instructions)

Greg Parker

I think we have one more question, we’re holding for it.

Operator

Your next question comes from Jon Arfstrom of RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

Good morning.

Dick Evans

Good morning, Jon.

Jon Arfstrom - RBC Capital Markets

Dick, you made one comment in your prepared comments about how San Antonio and Fort Worth probably faired better in economic slowdown. Is that just simple as the job mix that you talked about or there is something else behind that comment?

Dick Evans

No, there really isn't. Let me kind of go back to the other two things I said. You'll see Austin, Austin is really doing well, and doing well right now, but it will swing more because it's got the high tech. And you've seen the results of the tech companies the last couple of weeks and so you can see that thing swing at broader positions. Dallas, despite what happened in the '80s, is still the financial center to a large part of Texas, and has a lot of insurance companies, a lot of real estate, and it's also got the telecom in those markets.

So, you'll see those swings more and, historically, San Antonio stays pretty much just about where the state average is. You know Toyota, we are glad to have the new Toyota plant here, which, I don't know, 10 years to 20 years from now we'll probably have more of a manufacturing swing.

Fort Worth has a little more manufacturing than San Antonio market, but no, there is really not anything in addition to that. I also look I've reported to you for over two years the loss pipeline, and interestingly enough, we lost, when I say lost, pipeline these are loans that we declined because of pricing restructure, and last year it was a $1.2 billion and still pretty strong number. We had that growth and yet we declined $1.2 billion, it ran about 50-50 structure pricing.

I looked at the numbers a little surprised that in '07 it was $1.150 billion. As we went through the year of '08, it started off in the first quarter. It was 50-50, pricing restructure, same in the second quarter, it also started to slow, which won't be any surprise because the loan volume slowed, as I reported to you new prospects.

And at the end, the fourth quarter were 60% that we declined before, because of structure in 39 pricing. So, that gives me some comfort that we stay in with our discipline of good structure in the company.

And at the same time, because of the discipline in the sales that I talked somewhat length about, is as we wind our way through this slowing economy, this can be a great opportunity for a company to grow its business. It just has to be sure it gets the golden nuggets and don’t pick up any trash along the way. And that's exactly what we are doing.

Jon Arfstrom - RBC Capital Markets

Two other questions. Either you or Phil had referred to maybe a bit of flight to quality on the deposit front. And you've seen some disruption in the brokerage business and I'm curious what you feel the pipeline looks like in your trust business, have you seen more people come to Cullen/Frost because of maybe some dissatisfaction with their other relationships?

Phil Green

I think that our expectations for the coming year, we will get half our growth in the investment side of things, from the market, half the growth from new business. That's traditionally what we look at. And I think we have been pretty successful with that.

I think our success has just been steady from what I hear. I have not heard of any particular dislocations on the investment side of things. But I’m familiar that what they have been doing there, it is steady and it's been successful.

Dick Evans

I think one of the other strengths, when you say Phil, has been our fixed income, which has performed well in combination with what we have done in equities. I have talked to you about what’s happening in the equity market and certainly, we had our challenges. I'm proud of the work our people have done, but they’ve done a great job on the fixed income side.

Phil Green

They have and we do a great job in the oil and gas side of the business, too, really had good growth in that this year. Although as you would expect, since a lot of the fees are based upon royalties to an extent bonuses from leasing activity, we will be in a challenging market coming into next year with that. They’ve done a good job as well.

Dick Evans

I want to just going back to the previous discussion as far as growing loans, one of the reasons our loan growth, you who lived with us for a long time, remember all of ‘07, we had a lot of discussion about, why we weren't able to grow as fast as others could. One of the factors, I think part of it was our, I think a big part was our discipline, as far as structure that I’ve already said.

But another thing is the advanced rate on commitments, the funding rate. And we went through ‘06 at about 47%, if you look at that. If you look at ‘07, it just dropped, in fact it got as low as right at 41%, and this year, or last year in ‘08, it moved up all year long back up to the 47%. So, you see that affect on loan growth, and I think you need to keep that in mind as you go forward.

Jon Arfstrom - RBC Capital Markets

Okay. Just a last question. Could you comment on your attitude towards acquisitions in ‘09? Obviously, the market has changed quite a bit. And I'm curious what your thoughts are.

Dick Evans

First of all, don't forget we are a company that is interested in acquisitions. Number one, because of culture and quality of the organization and the highest customer service, so that separates a lot out of it to begin with. And secondly, I would say to you that any acquisition that we considered, I believe this is an environment that I cannot imagine how long the due diligence would be.

Jon Arfstrom - RBC Capital Markets

That makes sense. Thank you.

Operator

Your next question comes from Jennifer Demba of SunTrust.

Dick Evans

Hi, Jennifer.

Jennifer Demba - SunTrust

Thank you, good morning.

Dick Evans

Good morning.

Jennifer Demba - SunTrust

Of your $78 million in non-performers, can you give us a sense of what some of the largest ones are in size?

Phil Green

Hold on just a minute. The largest one we added was $11 million, and then nearly everything else is in the $2 million to $3 million range. And sure you've got, as I've already said, you've got homebuilders and a little bit of land in there. You got one $2.5 million loan that is related to Ike that we talked about. You've got about $7 million insurance company that's in those numbers. And other than that, that's pretty much where it is.

So, I would say homebuilding pretty much dominates it and we talked a lot about that. We gave the summary. And other than that, it's pretty much diversified. If you look at the problems homebuilding has, really the increases are what I call management issues, even though oil and gas line was a management issue, and weak management always starts to appear faster in a recession than it does in good times.

Jennifer Demba - SunTrust

Dick, you mentioned earlier that your Ike problem loans were perhaps lower than you originally projected.

Dick Evans

As I told you, when we put the $10 million we had no idea. The storm was a lot worse than anybody realized, because everybody in the world was focused on the financial storm and not the other, but we are still looking. Those things take a while to find out. It's interesting, just $2.5 million loan I mentioned to you. It was kind of a weak sister before the storm, and it just kind of finished them off, from the standpoint of just really creating a problem out of it. When I say that, don't come to the conclusion. I'm talking about a loss and we are just working with it. It was just more than they could take.

Jennifer Demba - SunTrust

So, at this point it looks like maybe you will have overprovided for Ike and you can kind of shift some of that into general economic deterioration. Is that a fair way to look at it?

Dick Evans

Yes, really what happens is, the longer you go, it takes longer to find out how much it is. There is no question. We have fewer extensions than we expected, we have fewer delinquencies, the insurance checks are still coming in. The clean up has really been amazing.

If you flew into Galveston right after the storm, or when I did and reported last quarter, there were just mountains of trash and today they are gone. And we're still looking at what's happening. You could probably say that we are about $7 million related to Ike versus the $10 million and, as I just pointed out, all the factors are still going on, but there is no doubt that longer you go, you learn more about that and the eggs start to get scrambled along with everything else that's going on in the economy.

Jennifer Demba - SunTrust

Okay. Thank you very much.

Operator

There are no further questions at this time.

Dick Evans

Thank you for your continued support in our company. We appreciate your good questions. This completes our call.

Operator

Thank you for participating in today's conference. You may now disconnect.

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