Cullen/Frost Bankers Inc (CFR) 2008 Q4 法說會逐字稿

Good morning, my name is Kimberly, I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bank year end and fourth quarter earnings conference call. All lines are placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer. (Operator Instructions) Thank you.

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

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 the Dick and Phil, I need to take a moment to address the safe harbor provisions. Some of 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 in 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.

Good morning, and thank you for joining our call. I'm pleased to provide you with a brief overview of the results we reported today for the fourth quarter of 2008 and the full year. As always, Phil Green, our CFO will follow with more detail after which we will be happy to answer any questions. Our results are strong, the numbers are good, they speak for themselves. And frankly, I'm happy to let the numbers do the talking. But I will say this: in a year in which the economy in general and the the financial sector in particularly set so many records for wrong reasons, it feels good to be on the right side of the record book. That's the kind of quarter and year that we enjoyed at Cullen/Frost. Before diving in to 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's approach and culture. This customer relationship program has been a great success. For 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 companies talk about getting back to basics in response to today's challenging businessing climate, remember that Cullen/Frost never abandoned the basics. That's why we are moving confidently in to 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 link quarter basis, Cullen/Frost had the largest increase in average deposits without acquisition 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 a 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% 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% for the fourth quarter from the fourth quarter of '07.

That's a snapshot of our solid 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 to $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 for the third quarter -- from the third quarter The majority of the net increase is related to the declines in home building industry and the affects of hurricane Ike which were less severe than we initially projected. 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 and out of town, and $19 million was related to one credit which is now reported in potential problem loans. Acknowledging these two events reduces delinquencies to $83 million which is more in line 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 year end of '07. Two primary borrowers contributed to the increase and in both cases, we are making progress. The borrowers are cooperative and collateral protection is 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 in de novo 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 and 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 a total dollar volume of new loan pipeline was flat compared to last year, we generated 21% increase in new loan requests from prospects, offsetting reduction in the 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 booked from prospects was up 16%. The story here is that thanks to the multi-year 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 at near record levels. We are making loans at historic levels. We open new financial centers in Dallas and San Antonio and will open additional location in the coming months. We introduced new products such as our on line momentum account last year and we will roll out robust mobile banking services this year. I mentioned at the beginning that our success drives 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 fared better so far than the rest of the nation. I hope that remains the case despite the weakening conditions in the state. Current projections are that Texas will see 2.5% job loss in 2009. Austin and Dallas are most exposed to current recessions because of the high tech and finance insurance in 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 at an example. Where we 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 climate. You can do this when you trust the customer and the customer trusts you. Our culture is also exemplified by our employees who are devoted to giving customers the best service possible. As always, I want to thank everyone at Cullen/Frost for their commitment to Cullen/Frost's 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 our interest in our company, and now, I will turn the call over the Phillip 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 are certainly broad, the I we feel that the current consensus earnings estimate for 2009 is reasonable. Regarding some of the factors that impact the outlook, there are obviously some good and some more challenging. On a challenging side, I point out that we expect the cost we pay for FDIC premiums to increase dramatically from about [$4 million] in 2008, to $15 million in 2009, an increase of $0.12 a share. That's not something we can do much about, it's a reflection of the times and is an increased cost the industry's having to bear. Another cost that we'll see increase sharply is in the area of pensions. In 2008, we actually saw a slightly negative pension cost of $269,000 as earnings on planned assets generated sufficient returns to offset costs, however, the historic drop in the market in 2008 that's affected virtually all investors will impact pension expense in 2009 by $6 million or $0.06 a share, even though the 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 categorized as challenges before I point out some positives. First,, regarding margin. The drop in margin during the four quarter was actually not as bad as it appeared, because 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 correspondents instead of handling these on an agent basis. This money went directly in to the Fed account at a small spread which diluted the margin. As the Fed funds market has moved more in line with the rate paid by the Fed, we will once again handle most of the funds on a agent basis for a small fee. I mentioned 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've seen 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. Finally, on the challenge side of the ledger, in light of the current economic environment, we expect the increased provisions in 2009 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 at 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 the growth and high single digits because of the prospecting efforts of our staff during the year, which Dick has already discussed. We expect deposit volumes to at least equal the growth in loans. Some of this is our status for a safe haven for safety and service. Some of it is our good deposit rates, and some of it is the fact that companies just don't have any use for the money. Another positive we've seen is that our strong capital liquidity have 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 at tax equivalent yields averaging 8.2%. We would love to do more of these. An example -- another example is that at the end of the year, we contributed an additional $30 million to the pension plan, which after funding costs, will result in a $1.6 million pretax benefit, helping to reduce the impact of the lower investment returns I mentioned earlier. Another positive is loan pricing. We are making significant process improving the loan pricing to levels more reflective of the current environment and less reflected -- reflective of the historically low credit spreads of the last several years. We've implemented a pricing matrix that's more responsive to risk and 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 sometimes 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, notwithstanding 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.

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

(Operator Instructions) We will pause for just a moment to compile the q and a roster. Your first question comes from John Pancari from JPMorgan.

Can you give a little bit more detail on the -- your delinquencies? I believe you indicated the past dues and totals, but I'm just wondering, are they for all past dues from 30 days up, or is it -- do you have the breakout for the 30 to 89 days, versus the 90 plus.

To answer the first part of your question, it is 30 days up, and I am reaching for the 90 days. You will recall -- did you understand the -- 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 remove into potential problems, and it's in that $50 million that I talked about. If you look at the numbers, 90 days and over was $19 million of the $121 million.

Okay.

Does that answer your question?

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

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

Okay. Can you give the numbers again for the potential problem loans?

Potential problem loans were $50 million, $50.8 million, up from $42.4 million. I will point out to you that that increase is to borrowers, one is a -- interesting enough, 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, all 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 is happening. The good news is it's 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 $11 million of the increase. I'm talking about potential problems.

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

It was the pizza, yes, the pizza company that I was just talking about. And what we were doing over year end and because of the sale fell through, we were working through it, and it got past due in the 30 day range, and now it's renewed and in potential problems.

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

They are up and they continue to have the same characteristics of 60% of energy related, and it is -- nothing is over of 10% in that regard. I It was primarily up because of two credits, and one was in the spirits business and the other one is in a manufacturer of coolers and freezers, which is the number one brand I would say in that market. So those were -- they were up about $40 million, they were up from 9/30 of $502 million to $534 million.

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

Is that outstanding balances, is that what you are talking about?

That's correct. That's outstanding balances. I would 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 company which fell through, and we are getting some new reserve studies to see exactly where we sit. It's -- 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, and that's been increasing. Interesting enough, out of the non-performer increase of $29.8 million, $22.8 million were really on 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 and had $255 million outstanding. Today we have commitments of $342 million and $207 million outstanding. $60 million of those are criticized, $5 million -- $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 in criticize from last June, it's gone from 52 to 59, to 60, and I particularly get 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, and I get a great comfort, if you can get a comfort in a commodity that's moving so much. We have $590 million outstanding in production loans, that's 123 different credits. 63% are advanced, 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 deck, which we use a lot are -- another way to say it is the liquidation value, in '09, we are looking at 3375 oil, 375 gas, 103750 oil and 413 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 is hedged at $84.57and 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 is 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, 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 over leveraged.

While I'm on the portfolio, as 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 in -- 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 the details, 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 is we looked at 80% of our entire portfolio to do this analysis, and our largest credit is $30 million defrost out of a $50 million credit we had. It's own 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 Kohls, a Best Buy a Ross, a Petsmart. It's got 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 that $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, so you are working through what you will do with the rest of the center.

I realize you asked a simple question, and I wrote you a book, but I wanted you to know how we are 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, I'm comfortable, and on the other side of the equation, because we have 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 '80's, we are able to work problems and grow this business at the same time. And that takes a lot of discipline.

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

You're welcome.

Your next question is from Terry McEvoy from Oppenheimer.

Good morning.

Good morning.

Thanks for the response to John's question. 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 the wide range, that I'm on the same page with your comments.

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

Okay, that's what I see as well. Just the last question, you seem very kind of optimistic about charge-offs remaining consistent in '09 where where they were in the fourth quarter in 2008, but then on the other side, you do appear somewhat cautious about the out look 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, can 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?

Let me just make a couple of quick comments and clarify, and then I'll let Dick make some comments. I don't think I specifically said charge-offs would be flat. I said I don't think they'd increase significantly. I think we're running charge-offs about 24 basis points, and 2008, I think we're looking around -- we're expecting around 29 basis points or 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, just because we are going in to a climate that's slowing. 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 are doing, a lot of things. This is just an early outlook for the year. But that's the kind of 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, and we feel good about that level of providing. So again, that's where we see things at this time. But I will turn it over to see if Dick has got any comments on that.

Phil has given a good summary. You asked a good question, because we recognize both sides of the equation. It's really consistent. We've looked at the amount of increases. We looked and analyzed the risk so far that we see. When I say so far, with everything we know today, we've 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-offs taking out the hurricane last year -- 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, that's -- I will tell you, this time next year, I will be proud of that in the economic situation that we have.

That's helpful. Thank you.

(Operator Instructions)

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

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

Good morning.

Good morning, Jon.

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

No, there really isn't. You look at -- let me kind of go back to the other two things I said. You will see Austin, Austin's is really doing well and doing well right now. But it will swing more, because it's got the high tech. You've seen the results of the tech companies the last couple of weeks, and so you can see that things swing at broader positions. And Dallas, Dallas, despite what happened in the '80s, is still the financial center to a large extent of Texas and it's got a lot of insurance companies, a lot of real estate, and it's also got the telecom in those markets. So you will see those swing more. Historically, San Antonio stays pretty much just about where the state average is. Toyota, we are glad to have a new Toyota plant here, which 10 or 20 years from now, we will probably have more of a manufacturing swing. Fort Worth has 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 interesting enough, we lost -- when I say lost pipeline, these are loans we declined because of pricing or structure. Last year, it was $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 because a little surprised. 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 to structure, same in the second quarter. It also started to slow, which won't be any surprise because the loan volume slowed -- or new, 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 are staying 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 doesn't pick up any trash along the way. That's exactly what we are doing.

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

I think that our expectations for the coming year are that we will get half our growth from the investment side of things, from the market and 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'm hearing. I have not heard of any dislocations on the investment side of things. But I am familiar that what they have been doing is steady and it's been successful.

I think one of the other strengths, when you say, Phil, has been our fixed income, which is performed well in the combination of what we've done in equities, I would like to talk with you about what is happening in the equity market. And certainly, we've 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.

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

Going back to a 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, and one of the factors, I think part of it, I think a big part of it 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 having an effect on loan growth, and I think you need to keep that in mind as you go forward.

Last question, could you maybe comment on your attitude towards acquisitions in '09? Obviously, the market has changed quite a bit, and I'm just curious what your thoughts are.

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. Secondly, I would say to you that any acquisition that we consider, I believe this is an environment that I cannot imagine how long the due diligence would be.

Makes sense, thank you.

Next question is from Jennifer Demba of SunTrust.

Hi Jennifer.

Thank you, good morning.

Good morning.

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

Hold on just a minute. I would say 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 got -- as I've already said, you've got home builders and little bit of land in there. You've got one $2.5 million dollars loan that is related to Ike that we talked about. You've got about a $7 million insurance company that's in those numbers. And other than that, that's pretty much where it is. So I would say home building pretty much dominates it, and we talked a lot about that. We gave you a good summary. And we--other than that it's pretty diversified. If you look at the problems, take home building out, really the increases are what I call management issues, even the oil and gas line was a management issue. Weak management always starts to appear faster in a recession than it does in good times.

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

Thank goodness.

Yes.

And I didn't -- as I told you when we put the $10 million, we had no idea. That was a lot worse storm than anybody realized, because everybody in the world was financed -- focused on the financial storm and not the other. But we are still looking. It's -- those things take a while to find out. It's interesting, this $2.5 million dollars 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 or anything, we are just working with it. I'm talking about from just -- it was just more than they could take.

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

Yes, that's really what happens is the longer you go, it takes long 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'd flown in to Galveston after the storm as I did and reported last quarter, there were just mountains of trash and today they are gone. We are still looking at what is happening. You could probably say that we are about $7 million related to Ike versus the 10. And as I just pointed out, all the factors are still going on. But there is no doubt the longer you go, you learn more about that, and the egg starts to get scrambled along with everything else that's going on in the economy.

Okay. Thank you very much.

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