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Article by DailyStocks_admin    (10-22-08 04:06 AM)

Filed with the SEC from Oct 2 to Oct 8 :

Guaranty Financial Group (GFG)
Billionaire investor Carl Icahn said that his affiliates had converted 1.5 million Series B preferred shares of Guaranty Financial into 15.1 million common shares. One of Icahn's affiliates also sold 40,000 common shares of the bank holding company at $4.18 per share. Icahn owns about 18.5 million common shares (17%).

BUSINESS OVERVIEW

Overview

We are a holding company organized in 1986 as a Delaware corporation. Our primary operating entities are Guaranty Bank and Guaranty Insurance Services, Inc. We currently operate in four business segments:


• Commercial banking,

• Retail banking,

• Insurance agency, and

• Treasury, corporate and other.


Guaranty Bank, headquartered in Austin, Texas, is a federally-chartered savings bank that began operations in 1988. Guaranty Bank conducts consumer and business banking activities through a network of over 150 bank branches located in Texas and California and provides commercial banking products and services to diverse geographic markets throughout the United States. Guaranty Bank has consolidated total assets in excess of $16 billion and is one of the largest financial institutions headquartered in Texas. Guaranty Insurance Services, Inc., headquartered in Austin, Texas, is one of the largest independent agencies nationally and is a full service insurance agency emphasizing property and casualty insurance as well as fixed annuities. The insurance agency operates through 17 offices located in both Texas and California.

Our origins date back to 1938, when the original charter was given to Guaranty Building and Loan in Galveston, Texas. In late 1988, Temple-Inland Inc. (“Temple-Inland”) formed Guaranty Bank by acquiring three institutions, including what was then Guaranty Federal Savings and Loan Association. At that time, Temple-Inland’s existing insurance operations, which had begun in the late 1950s, were combined with the banking operations to create a financial services group as a part of Temple-Inland. These banking and insurance agency operations continued to grow during the last two decades, with over 30 acquisitions, and in the late 1990s, began to expand and acquire operations in California. On February 26, 2007, Temple-Inland announced its plans to spin-off Guaranty. We completed our spin-off from Temple-Inland on December 28, 2007.

We maintain a website at www.guarantygroup.com. Information found on our website is not intended to be a part of this report. All filings made by us with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website as soon as reasonably practicable after such filings are made.

Our Strategy

Our primary operating philosophy is to maximize long-term stockholder value by growing sustainable client relationships and delivering our products with extraordinary service. We have a commitment to:


• create outstanding long-term value for our stockholders,

• improve the financial success of the people and businesses in the markets we serve,

• make a significantly positive impact in the communities where our customers reside and work, and

• attract, develop, and retain superior employees.

Our core values, listed below, describe our corporate culture and how we operate our business:



• We conduct our business with the highest degree of integrity, honesty, and efficiency,

• We manage our customers’ assets with care,

• We show mutual respect to our clients, our neighbors, and our fellow employees,

• We are passionate about our business, we play to win, and we have fun,

• We are empowered to make decisions that provide creative solutions for our customers, and

• We are entrepreneurial in our actions.

Our specific business strategies are to:


• Grow our commercial lending franchise. Our commercial lending group has emphasized targeting certain industries and product types in which we have expertise. We will continue to serve niche industries in select markets across the country with experienced personnel who can add value to our customer relationships.

• Grow our retail franchise in Texas and California. We will continue to invest in relocating existing bank branches and in opening new branches in the high growth areas of our existing markets. We will also build upon our consumer and small business lending capabilities. We believe these activities along with strategic mergers and acquisitions will enable us to grow our business in each of the markets we will serve.

• Increase fee income. We will continue to emphasize our deposit services, annuities and mutual funds, insurance products, and other products and services that can be provided to our clients to deepen the relationship.

• Provide distinctive customer service. We must retain and attract individuals who understand the financial needs of our customers and are experienced and trained to provide customized solutions.

• Improve operating efficiency. We must continually review our business practices to assure we are operating as efficiently as possible.

• Maintain strong credit and risk standards. We will maintain the strong and effective approach to risk management that has been a foundation of our operating culture.

We believe our corporate culture and business strategies allow us to distinguish ourselves from other financial institutions operating in Texas and California and successfully attract and retain relationships with businesses and individual customers.

Business Segments

We operate in four business segments.

Commercial banking

Commercial banking operates out of a primary production office in Dallas, with satellite production offices in Houston, Austin, San Antonio, Los Angeles, Sacramento, and San Diego. We offer banking services to business and commercial customers including financing for commercial real estate, multifamily and homebuilder construction, mortgage warehouse financing, senior housing, middle market businesses and companies engaged in the energy industry. We provide lines of credit, working capital loans, acquisition, expansion and development facilities, borrowing base loans, real estate construction loans, regional and national homebuilder loans, term loans, equipment financing, letters of credit, and other loan products. The commercial loans we provide are diversified by product, industry, and geography. We lend to nationally known corporations, regional companies, oil and gas producers, top tier real estate developers, mortgage lenders, manufacturing and industrial companies, and other businesses. We have processes in place to analyze and evaluate on a regular basis our exposure to industries, products, market changes, and economic trends. The chart below indicates the primary and other markets where our commercial banking group focuses its efforts.

In each of these markets, we monitor pertinent factors such as industry, sector, geographic, and market conditions for concentrations of credit risk. In particular, for these states shown that exceed five percent of total loans, we benefit from diversification by loan purpose, product type, location, and sector.


Our residential housing portfolio exceeds $5 billion and includes adjustable rate single-family mortgages and loans to finance single-family, multifamily and senior housing construction and loans to finance mortgage warehouse activities. Our commercial real estate portfolio is approximately $2 billion and includes financing for the construction of office, retail, and industrial properties.

The commercial business and energy lending portfolios exceed $2 billion. Commercial and business loans are typically secured by various business and commercial assets principally in Texas and California, but also throughout the United States. Energy loans are typically secured by reserve-based oil and gas collateral, primarily located in Texas, Oklahoma, California, and Louisiana.

Our commercial customers are also able to use our corporate investment services, commercial deposit accounts, and treasury management services, including remote deposit capabilities.

Guaranty Bank maintains formal loan policies, and a committee of the Bank’s board of directors oversees loan approval authorities and credit underwriting standards. Our lending activities are subject to lending limits imposed by federal law. Differing limits apply based on the type of loan and the nature of the borrower, including our overall relationship with the borrower. In general, the maximum amount we may loan to any one borrower is 15% of Guaranty Bank’s unimpaired capital and surplus.

The principal economic risk associated with lending is the creditworthiness of the borrower. General economic factors affecting a borrower’s ability to repay include interest rates, inflation, collateral valuations, and unemployment rates, as well as other factors affecting a borrower’s assets, clients, suppliers, and employees. Many of our commercial loans are made to medium-sized businesses, that are sometimes less able to withstand competitive, economic, and financial pressures than larger borrowers. In periods of economic weakness, these businesses may be more adversely affected than larger enterprises, which may cause increased levels of non-accrual or other problem loans and higher provision for loan losses. To mitigate this risk we have adopted policies, procedures, and standards that help identify problem areas and allow corrective action to be taken on a timely basis.

Our primary commercial banking competitors are the very large national banking organizations such as Wells Fargo, Bank of America, Comerica, JPMorgan Chase, and Wachovia.

Retail banking

We offer a broad range of retail banking services to consumers and small businesses including deposits, loans, and non-deposit investment products. We also offer an array of convenience-centered services, including telephone and Internet banking, debit cards, and direct deposit. We are associated with a nationwide network of automated teller machines of other financial institutions that enables our customers to use ATM facilities throughout the United States and around the globe.

We offer a variety of deposit accounts to our consumers and businesses, including savings, checking, interest-bearing checking, money-market, and certificates of deposit. The primary sources of deposits are residents and businesses located in our Texas and California markets. We have over 100 branches in Texas concentrated in the Austin, Dallas/Fort Worth, Houston, and San Antonio metropolitan areas. We have over 50 branches in California concentrated in the Inland Empire and Central Valley regions of that state. Our California office locations are proximally located in and around the cities of San Diego, Palm Springs, Riverside, Sacramento, Stockton, and Bakersfield. These markets have very attractive consumer and business demographics including eight of the top 25 population growth markets in the country. The chart below provides a breakdown of deposits by state at year-end 2007 and the maps below indicate the areas of Texas and California where we have retail operations.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We gather deposits in two primary markets, Texas and California, both of which we believe offer substantial opportunity for cost-effective growth. We raise funds from deposits and borrowings and invest them in loans and mortgage-backed securities. We focus our lending activities on targeted geographic and industry markets. Our commercial lending is not limited to our deposit-gathering markets. Our loans have collateral characteristics that we have experience managing, such as single-family mortgage, commercial real estate construction, and energy. We attempt to minimize the potential effect of interest rate cycles by investing principally in adjustable rate assets and maintaining an asset and liability profile that is relatively unaffected by movements in interest rates.

Current Market Conditions

Current conditions in the credit markets are difficult and volatile resulting in less liquidity, widening of credit spreads, and a lack of price transparency for many assets. In addition, current conditions in residential housing markets are worsening because of an oversupply of housing including significant increases in foreclosed properties being marketed and decreasing demand partly because of difficulties for buyers in obtaining financing with the significant tightening of credit markets. Flat to declining values in many markets have made it difficult for borrowers to refinance when variable rate loan payments exceed their ability to service the loans. Additionally, homebuilders have found it difficult to sell new homes. These conditions have negatively affected our residential housing activities including single-family construction lending and single-family mortgage investing. As a result, the single-family mortgage and single-family construction portions of our residential housing loans have suffered declines in credit quality, and we recorded higher provisions for credit losses in 2007 than in the prior two years. We expect these conditions will continue throughout 2008. We continue to have sufficient liquidity resources, principally borrowing capacity at the Federal Home Loan Bank of Dallas, to meet our anticipated loan funding and operating requirements.

Analysis of Years 2007, 2006, and 2005

2007


• Net income decreased 36% to $78 million, principally because of a significant increase in provision for credit losses. Our loan portfolio credit quality, particularly single-family construction loans to homebuilders, declined as a result of deteriorating housing markets and, as a result, we recorded provisions for credit losses of $50 million.

• Net interest income decreased 5% to $391 million as a result of a 6% decrease in average earning assets, principally because of repayments on our mortgage-backed security investments and single-family mortgage loans.

• Noninterest income decreased principally as a result of our exit from asset-based lending operations in 2006.

2006


• Net income increased 4% over 2005, as a result of minimal credit losses and a 4% increase in net interest income driven by an increase in average mortgage-backed security investments.

• Noninterest income increased 5% in 2006 (excluding wholesale mortgage origination activities, from which we completed our exit in early 2006), because of increases in our retail deposit fees and insurance agency revenues.

• We recognized $11 million in asset impairments and severance as a result of our exit from asset-based lending operations and completing our exit from wholesale mortgage origination activities.

2005


• While the overall credit quality of our loan portfolio remained strong, we incurred losses on asset-based loans and leases resulting in provisions for credit losses of $10 million.

• We recognized $5 million in severance and other charges relating to our exit from the wholesale mortgage origination business.

Results of Operations

Net Interest Income

Net interest income is the interest we earn on loans, securities, and other interest-earning assets, minus the interest we pay for deposits and borrowings and dividends we paid on preferred stock issued by subsidiaries. Net interest income is sensitive to changes in the mix and amounts of interest-earning assets and interest-bearing liabilities. In addition, changes in the interest rates and yields associated with these assets and liabilities may significantly impact net interest income. See “Risk Management ” for a discussion of how we manage our interest-earning assets and interest-bearing liabilities and associated risks.

Net interest margin, our net interest income divided by average earning assets, is principally influenced by the relative rates of our interest-earning assets and interest-bearing liabilities and the amount of noninterest-bearing deposits and equity used to fund our assets. As a result of our efforts to minimize interest rate risk, our net interest margin was 2.59% in 2007 and 2.58% in 2006 and 2005, despite significant variations in short-term market rates, including a change from a positively-sloped to a negatively-sloped yield curve. We experienced pricing pressure on incremental commercial loans in 2006 and early 2007 as a result of intense competition for loans, but were able to increase our pricing on new commercial loans in late 2007 as credit markets tightened. We also experienced compression of our interest rate spread as a result of mortgage-backed securities we acquired in 2005, 2006, and 2007, because mortgage-backed securities, while requiring less regulatory capital investment, typically carry a lower spread than loans. We also experienced some increases in interest expense in 2005 and 2006 as customers moved deposits from money-market and savings accounts to higher rate certificates of deposit. However, this was offset by an increase in the relative benefit of our net noninterest-bearing funds as market rates increased.

Our average noninterest-bearing demand deposits decreased 9% to $686 million in 2007. However, the net interest income benefit of our net noninterest-bearing funds was $3 million higher in 2007 than in 2006 as a result of higher overall interest rates during 2007.

As we are currently positioned, if interest rates remain relatively stable, it is likely our net interest margin will remain near its current level. However, if interest rates change significantly, our net interest margin is likely to decline. Please read Item 7A. Quantitative and Qualitative Disclosure About Market Risk for further quantitative information about the sensitivity of our net interest income to potential changes in interest rates.

To maintain our thrift charter, we are required to maintain 65% of our assets in HOLA-qualifying loans and investments, including loans with residential real estate collateral, mortgage-backed securities, small business loans, and consumer loans. At year-end 2007, 81% of our assets met the HOLA requirement. Although we do not currently anticipate dropping below the HOLA requirement, if our HOLA-qualifying assets continue to decrease or our commercial loan portfolio grows substantially, we would have to take actions, which might include adopting alternative structures, purchasing additional mortgage-backed securities, or converting Guaranty Bank to a commercial bank charter.

We include single-family mortgage loans, single-family construction loans to homebuilders, mortgage warehouse loans, and multifamily and senior housing loans in residential housing loans.

The majority of our earning assets are variable rate. Increases in the rates earned on our assets in 2007, 2006, and 2005 are principally a result of increases in short-term market interest rates. These market rate increases also increased the rates we paid on our deposit liabilities and borrowings.

Provision For Credit Losses

We recorded $50 million in provision for credit losses in 2007 compared with $1 million in 2006. Weakness in single-family construction and single-family mortgage markets was the primary driver of the 2007 provision for credit losses. We experienced net recoveries of $3 million in 2007 and net charge-offs of $10 million in 2006. Our net recoveries in 2007 were principally related to recoveries associated with loans of the asset-based lending and leasing business we sold in 2006, offset by charge-offs of single-family mortgage and single-family construction loans. Charge-offs in 2006 were principally related to loans in the asset-based lending operations. Net (recoveries) charge-offs were (0.03)% of average loans in 2007 and 0.10% in 2006.

Please read “ Risk Management — Credit Risk Management ” for a discussion about how we manage credit risk and a discussion of our allowances for credit losses.

Service charges on deposits consist principally of fees on transaction accounts. Deposit fees increased each year because of increases in transaction accounts as well as changes we made to the pricing of our overdraft charges.

Commercial loan facility fees consist of fees based on unfunded committed amounts, letter of credit fees, and syndication agent fees. The decrease in commercial loan facility fees was principally a result of less unfunded commitments and fewer sizable syndicated transactions. Noninterest income decreased in 2007 principally as a result of our exit from asset-based lending operations in 2006.

The decrease in loan origination and sale of loans was due to the elimination of our wholesale mortgage origination network in 2005 and the repositioning of our mortgage origination activities in 2004. Since then, we have not generated significant single-family mortgage loans from our correspondent mortgage operations and it is not certain we will be able to do so in 2008.

In 2005, we began a program to expand our banking center network by constructing new retail bank branches in key markets. We opened six new branches in 2007, five new branches in 2006, and six new branches in 2005. We are evaluating construction of additional branches in 2008. We expect these new branches would provide us with additional deposit funding, including noninterest-bearing deposits, and will increase our noninterest income, but would also increase our noninterest expense as a result of additional compensation and depreciation expense by approximately $0.5 million per year for each new branch.

Charges related to asset impairments and severance in 2006 related principally to our exit from asset-based lending operations. Charges in 2005 related to the repositioning of our mortgage activities and the sale of our third-party mortgage servicing rights.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

First Quarter 2008
• Our net interest income increased as a result of an increase in outstanding loans.

• Provision for credit losses increased to $58 million as a result of non-performing loans, principally homebuilder loans, increasing to $261 million.

• Unrealized losses on available-for-sale mortgage-backed securities increased $237 million, net of tax.

• Deferred income taxes increased $150 million principally as a result of the provision for credit losses and unrealized securities losses.
First Quarter 2007
• We completed our exit from wholesale mortgage banking activities.

• We began our activities related to separation from Temple-Inland Inc.

• We received $8 million in net credit loss recoveries and recorded a net credit to provision for credit losses.
Results of Operations
Net Interest Income
Our net interest income increased because of an increase in earning assets, principally loans. Our commercial and business and commercial real estate portfolios grew, while our single-family mortgage and homebuilder portfolios declined in balance.
Our net interest margin declined to 2.49% in first quarter 2008 from 2.56% in first quarter 2007. This decline was principally a result of a higher level of non-performing loans in first quarter 2008. Non-performing loans increased from $28 million at March 31, 2007 to $261 million at March 31, 2008.
As we are currently positioned, if interest rates remain relatively stable, it is likely our net interest margin will remain near its current level. However, if interest rates change significantly, particularly if they decline further, our net interest margin is Provision for Credit Losses
We recorded $58 million in provision for credit losses in first quarter 2008 compared with a $2 million credit to provision for credit losses in first quarter 2007. Significant declines in the financial condition and liquidity of our homebuilder portfolio customers, as a result of current residential housing conditions, were the primary cause of first quarter 2008 provision for credit losses. Net charge-offs were $2 million in first quarter 2008, principally related to uncollectible single-family mortgages. Though we have not yet experienced a significant amount of charge-offs related to recent credit loss provisions, we anticipate it will become necessary for us to acquire the underlying collateral for a number of our loans to homebuilders. It is likely we will record significant charge-offs when we acquire collateral on those loans.
Please read Credit Risk for a discussion of our allowances for credit losses.
Noninterest Income

Insurance commissions and fees increased because of higher non-deposit investment product sales as a result of declining deposit rates.
Commercial loan facility fees consist of fees based on unfunded committed amounts, facility usage fees, letter of credit fees, and syndication agent fees. The decrease in commercial loan facility fees was principally a result of decreases in fees from homebuilders as a result of decreases in activity levels by those customers.

Increases in many of our direct costs and expense categories were because we began to perform many activities ourselves following our separation from Temple-Inland Inc. Additionally, our marketing costs increased in first quarter 2008 as we implemented initiatives related to increasing consumer lending through our branch network and a new checking product.
Income Tax Expense
Our effective tax rate, which was a benefit in first quarter 2008 and an expense in first quarter 2007, was 41% in first quarter 2008 and 37% in first quarter 2007. The increase is a result of the impact of state margin taxes, particularly Texas, which will not decrease proportionate to decreases in net income.

CONF CALL

Rusty LaForge

Thank you and good afternoon everyone. Welcome to Guaranty Financial Group’s second quarter 2008 conference call. Before we get started, please note that the presentations and commentary that you are about to hear contain forward-looking statements that are subject to numerous risks and uncertainties as described in our Forms 10-K, 10-Q, and other reports filed with the SEC. You should not place undue reliance on any of these forward-looking statements. Actual outcomes could differ materially from the views expressed today. We may elect to update forward-looking statements at some future point; however, we specifically disclaim any obligation to do so.

Here with me today are Ken Dubuque, President and CEO and Ron Murff, Chief Financial Officer. I want to call your attention to the slide deck, which we posted on our website, guarantygroup.com, and we will be referring to this over the course of the call.

With that, I’ll turn the call over to Ken.

Ken Dubuque

Thanks, Rusty. Good afternoon. Welcome to our second quarter conference call to discuss financial results. Thank you for joining us. We are disappointed in our financial results for the quarter. The results we issued this morning show that for the quarter we had a net loss totaling $85 million, or $2.24 per share, which included a provision for credit losses of $99 million and a $46 million charge to income tax expense to establish a valuation allowance on deferred tax assets.

Unfortunately, those two charges far exceeded otherwise strong increases in both net interest income and non-interest income. In a moment, Ron will discuss all of those results in much greater detail. However, before I turn it over to Ron I want to provide an update on our progress in accomplishing the short-term goals we set earlier this year. In light of the continued decline in housing market conditions and a lack of liquidity in the mortgage securities market, we turned to a short-term strategy focused on what we call the three Cs – Credit, Cost, and Capital.

First, with respect to credit, we saw another substantial increase both in non-performing loans and loan loss provisions during the second quarter, primarily in the homebuilder and single family mortgage portfolios. While we had very few charge-offs in recent quarter, we acknowledge last quarter that charge-offs typically lag a rise in NPA, and we are seeing those charge-offs increase.

However, you should again keep in mind that the make up of our non-performing loans is primarily secured loans, in particular homebuilder loans and single-family mortgage loans collateralized by land, lot, and houses unless the reserve levels have been set based in large part on the value of the underlying property. Collateral values in these loans types, especially California have dropped significantly and newly obtained appraisals are lower than prior valuations.

However, while past performance does not necessarily equate to the future, our charge-off rate from 2001 to 2007 was less than 10 basis points per year on average excluding asset based lending, which we exited in 2006. That charge-off rate was less than half our peer average. This low charge-off history in our lending areas is testament to our underwriting standards, our relationships, our experience, and our understanding of our products, and markets.

The team of lenders and credit staff that we moved into our Group to focus solely on loans that need special attention have worked hard for the past several months. This team is aggressively identifying emerging problem loans, internally classifying them where appropriate, and taking action where appropriate to mitigate risk.

In addition, we launched a major effort to review our lending standards on a go-forward basis, examining every line of business and tightening standards where appropriate. We need to require a higher equity level, demand greater levels of personal recourse with higher pricing including interest rate floors, and we have also tightened covenant structures. We have not extended any new credit in the homebuilding line of business. Finally, we are reviewing concentrations and hold positions.

As to cost, we are now seeing the benefits of our expense reductions efforts. Our compensation expense is down, and overall we have put in place efficiencies that will achieve annual cost savings of more than $22 million. We also continue to limit new hires, including not filling opening positions – open positions. And we expect to identify utilizing an internal task force, an outside consultant, additional ways in which we can operate more efficiently. For example, we are evaluating all our operating units and lines of business through peer comparisons. We are reducing travel expenses. We are reevaluating our non-essential marketing expenses. We are evaluating our real estate and other non-earning assets. We are reducing planned capital expenditures. And finally, we are rationalizing our branch system and de novo expansion plans.

Now, a third important area of short-term focus is capital. We said last quarter that we intended to manage our capital position appropriately by taking the actions necessary to maintain capital ratios above the minimal levels required to be deemed “well capitalized” by regulatory standards. As of March 31, all our capital ratios exceeded these minimum standards, but we had an effort underway at the time to reinforce our capital position.

Soon after our last conference call we were able to announce in greater detail what efforts were underway. Then in late May, we completed a sale of shares of common stock to raise approximately $38 million in new capital, and last week we announced the closing and funding of private placements of preferred stock and subordinated debt to bring the total amount of capital raised to approximately $600 million.

While we are reporting on June 30th numbers today and our capital ratios continue to exceed regulatory standards to be “well capitalized,” this additional capital raised after June 30th takes us well beyond those standards. Moreover, the new capital also reinforced our strong liquidity position. Today, excess borrowing capacity is more than $4.5 billion.

We also announced today that in light of the recently closed private placement transaction we terminated our previously announced rights offering. Accordingly, we will be making the necessary filings with the Securities and Exchange Commission to withdraw the registration statement covering the rights offering. Without the rights offering, we feel that we have taken the actions necessary to maintain capital ratios above the minimum levels required to be “well capitalized” in the current economic environment.

In addition to the strong focus on these three Cs, we have also kept in mind another C, our customers. We continue to achieve remarkable results in customer service. Earlier this year, Guaranty Bank ranked significantly above the American customer satisfaction index industry average as well as large banks. We have a number of other examples of distinct customer service including our success in handling a CD bubble in the previous quarter.

We have also recently launched a progressive checking product with free usage of any ATM without requiring documentation. It has been well received. Prior to May this year, we opened an average of around 2500 accounts per month throughout our extensive branch network. In the months since the launch of this product, we are opening nearly double that amount. Also, our effort – follow-up efforts with new retail deposit customers, called onboarding, is receiving excellent reviews.

Moreover, on the commercial side, we are enhancing our capital markets and asset management capabilities to provide more complete service to our customers. Providing cost-effective distinctive customer service is still one of our core strategies.

Given current market conditions, we are still focused on these short-term strategy and we clearly have made significant progress on all of them. And at the same time, we have an attractive franchise with an outstanding branch network in the two fastest growing states in the country, Texas and California, an excellent mix of lending and insurance product, dedicated and experienced management and staff, distinctive customer service with up-to-date technology and back office support.

In a moment I will close our prepared remarks with some final thoughts. For now, I will turn things over to Ron to discuss financial results in further detail. Ron?

Ron Murff

Thanks, Ken, and hello everyone. My remarks today will cover our financial results and some of the items on our balance sheet. If you have accessed our slides, I will be referencing those.

Let’s first go to Slide number three. Ken noted that for the second quarter we are reporting an after-tax net loss of $85 million, or $2.24 per share on a basic and diluted basis, compared to $10 million after-tax net loss in the first quarter 2008 and $24 million net income in the second quarter 2007.

Net interest income was $200 million – was $100 million for the second quarter of 2008, up $2 million from the previous quarter, and up $5 million compared to the second quarter of 2007. Our net interest income increased because of an increase in earning assets, principally loans.

Provision for credit losses was $99 million in the second quarter of 2008 compared to $58 million in the previous quarter, and less than $1 million provision in the second quarter of 2007. Provisions for credit losses increased again principally because of weakness in single-family construction, and an increase in provisioning for single-family mortgage loans. Provisions for single-family construction loans during this quarter was nearly two-thirds of the full provision amount. We also took a $14 million provision on a $40 million commitment to a mid-stream energy company that had $31 million outstanding at June 30, and I will discuss this in greater detail in a moment.

Non-interest income was $41 million for the quarter, an increase of 8% from the second quarter of 2007, principally as a result of increased annuity sales commission and increased fees and service charges on deposits. Non-interest income decreased 2% compared to the prior quarter, principally as a result of weakness in the property and casualty insurance markets.

Non-interest expense was $99 million during the quarter, flat from the previous quarter, but this quarter’s expense included $3 million of severance. Non-interest expense was $5 million higher than second quarter of 2007. Like last quarter, the increase compared to a year ago was driven in large part by increases in many of our direct costs and expense categories because we began to perform many activities ourselves following our separation from Temple-Inland.

And finally, rather than a tax benefit for the quarter we had a $28 million income tax expense as a result of establishing a $46 million valuation allowance on deferred tax assets. In assessing the realizability of deferred tax assets we consider whether it is more likely than not we will be able to realize the deferred tax assets. The terms of our separation agreement with Temple-Inland prohibit us from carrying back any net operating tax losses to periods prior to 2008. Therefore, our ability to realize deferred tax assets depends on our tax planning strategy including holding available-for-sale securities to maturity and our generation of taxable income in periods after 2007.

As I mentioned, the bottom line for the quarter was a net loss of $85 million.

If you will turn to Slide number four, we show our historical and current net interest margin. You can see here that over time we have a stable net interest margin even during times of sharp changes in the Fed funds rate, which is due to our mostly adjustable rate balance sheet. We continue our efforts to increase our net interest margin over time by allowing mortgage-backed securities to continue to run off. And we expect the runoff to benefit our net interest margin. However, if interest rates change significantly, particularly if they decline further, our net interest margin is likely to decline. We reported today that for the second quarter of 2008 net interest margins was 2.54%, compared to 2.49% for the previous quarter, and 2.55% in the second quarter of 2007. Any significant increases in non-performing assets will continue to negatively affect our net interest margin.

In the meantime, we are changing our loan portfolio mix and rationalizing our loan portfolio with the appropriate credit standards, loan pricing, and return hurdles, which we expect to improve our margin. In addition, we continue to add loans in our consumer lending portfolio, which we began offering at the end of 2007, and we expect these higher margin loans to improve our net interest margin over the long run.

On the next slide, Slide number five, we show strong increases in both net interest income, and Non-interest income for the quarter, compared to a year ago, with net interest income increasing 5.3% to $100 million and Non-interest income increasing 7.9% to $41 million. You can see the softness in the property and casualty insurance market reflected here in a slightly lower insurance commission and fee amount. And we have broken out non-deposit investment fees so you can see the strong increases in annuity sales, up 60%, compared to the second quarter last year as well as a 15% increase in deposit fees, compared to the second quarter in the prior year. Overall, total revenue increased 6%.

Now, please turn to Slide number six, which is a summary of our balance sheet. We allowed our balance sheet to decrease from $16.4 billion at the end of the first quarter of 2008 to $16 billion at the end of the second quarter due in large part to intentional runoff in our single-family mortgage portfolio of nearly $100 million and payoffs in our mortgage-backed securities portfolio of approximately $200 million. And we also recorded an additional unrealized loss in our mortgage-backed securities portfolio of another approximately $100 million. In a moment we will look at a slide showing the change in each of the loan portfolios in the last quarter and we will talk more about the securities portfolio.

We utilized Federal Home Loan Bank borrowings slightly less this quarter compared to last while our total deposits remained flat compared to the previous quarter. We have shown a decrease in our level of stockholders’ equity from approximately $900 million last quarter to approximately $800 million, which is caused by the additional unrealized loss on available-for-sale securities net of tax, as well as our net loss for the quarter.

Now, turn to Slide number seven. We show a total of $9.2 billion in total deposits and there is a breakdown of the various categories of deposits. The vast majority of these deposits are gathered through our retail franchise and we have continued to focus on increasing Non-interest-bearing checking accounts. We would consider almost all of our deposits to be core deposits. We don’t have any brokered deposits, which tend to be more transient, and our CDs are almost exclusively held by long-term customers.

On Slide number eight, we have included information regarding liquidity. We have a variety of liquidity sources including operating cash flows, new deposits, ability to borrow from the Federal Home Loan Bank, and a portfolio of assets including mortgage – marketable mortgage-backed securities, which we can pledge as borrowings or so if necessary. Our borrowings from the Federal Home Loan Bank are secured by a blanket floating lien of certain of our loans, and by securities we maintain on deposit at the Federal Home Loan Bank.

We continue to have sufficient readily available liquidity resources, principally borrowing capacity at the Federal Home Loan Bank of Dallas to meet our requirements. Today, we have the ability to borrow an additional $2.2 billion from the Federal Home Loan Bank. Additionally, we have other assets not pledged as collateral on float borrowings, which we could pledge as collaterals with Federal Home Loan Bank or other lenders, including the Federal Reserve, providing additional liquidity that brings the total to approximately $4 billion at June 30. And as a result of the recent capital raise it is more than $4.5 billion today.

Turning to Slide number nine, we show the diversity of our loan mix, and we also show how each portfolio changed since the last quarter. Total loans remained relatively stable with only a $26 million net decrease in total loans outstanding on a more than $10 billion loan book. We sold our single-family mortgage company and servicing assets in 2004 and 2005, and we completed the exit from this segment in early ’06. As a result, that is a runoff portfolio getting smaller each quarter at a rate of approximately $30 million per month. In a moment you will see a slide that shows the vintage and other characteristics of the loans in this runoff portfolio. In our other portfolios like many banks recently, we are limiting loan growth in the short term in order to preserve capital. And this gives us the opportunity to rationalize our loan portfolios with the appropriate credit standards, loan pricing, and return hurdles.

We are continuing to make new loans but at a slower rate than in recent years. You can see here that our single-family mortgage warehouse and multifamily and senior housing portfolios had strong growth during the quarter with greater than $100 million increases in each. Single-family constructions loans declined more than $100 million, which I will discuss in much greater detail in a moment.

In the energy portfolio we have had several loans pay off or pay down during the first half of 2008 as a result of asset sales. Our pace of originating new energy loans in the second quarter was less than the amount of payoffs. And earlier I mentioned the loan to a mid-stream energy company that caused us to take a $14 million provision in the second quarter.

First, I want to point out that our energy portfolio totals approximately $1.3 billion in total outstandings. Approximately $200 million in our outstanding amount of energy loans involves loans to midstream energy companies, which are generally secured by accounts receivable inventory and other assets. These loans have performed very well in the past.

However, we had a $39.5 million commitment with $31 million outstanding in this midstream portion of our energy portfolio that caused us to take the $14 million provision this quarter. The loan is part of a shared national credit that we participate in with nearly 40 of the largest financial institutions in our industry. This loan was to a company that from all available information was profitable and reported solid financials. However, the borrower recently filed for Chapter 11 bankruptcy in a sudden turn of events. We see this as an unusual situation that is not reflective of the general health of our energy portfolio.

Furthermore, the rest of the energy portfolio involves loans primarily to exploration and production companies secured by proven oil and gas reserves. We expect to see growth in the energy portfolio in the third quarter. Now, finally on this slide our consumer loans. While not large by total outstanding amount, we did have strong percentage growth in consumer loans more than quadrupling the total amount of loans in this area following the roll out of consumer lending that was initiated at the end of 2007, which continues as planned and in line with our goals for that initiative.

On Slide number 10, we have shown which portfolios have experienced an increase in non-performing loans, and clearly homebuilder loans and single-family mortgage loans are the primary portfolios where we are continuing to work through the most non-performing loans. The number of homebuilder loans deemed non-performing increased from $182 million to $233 million, which is evidence of the continued weak housing market. In a moment I will take you through a table showing the non-performing homebuilder loans by collateral type and geography.

Single-family mortgage loan that are non-performing also increased from $69 million to $97 million and we will also take a look at that portfolio in more detail in a moment.

The amount of REO shown here has increased from $8 million a year ago and $23 million a quarter ago to $42 million at the end of this quarter. This was a net increase in REO of $19 million net of a few sales. We expect continued migration of homebuilder loans to REO in the coming quarters.

With respect to the other category, we include non-performing loans from all of the other loan portfolios here. The total of other non-performing loans is $34 million, up from $10 million the previous quarter. $31 million of the $34 million here is the $31 million outstanding loan to the midstream energy company I mentioned earlier. Other loan portfolios are still performing well with only $3 million in non-performing loans out of the other portfolios.

If you turn to Slide number 11, you can see the increases by category and allowances for loan losses that track fairly closely with the increases in – of the non-performing loans. The allowance for single-family mortgage loans doubled from $12 million to $24 million.

In the previous slide you may have noticed that the amount of non-performing single-family mortgage loans did not double. The reason for the disproportionate increase in the allowance is because we made the prudent decision during the second quarter considering the continued weakness in housing markets to increase the percentage of the allowance for single-family mortgage loans from 10% to 20% of the outstanding amount of the non-performing loans.

On Slide number 12, we show an overview of how our provision for credit losses has more than doubled from $125 million at the end of the year to $261 million as of June 30. You can see that the provision was fairly large in both quarters this year totaling $157 million. Over the past 12 months we have provisioned $209 million. Annualized charge-offs as a percentage of loans was only 8 basis points in the first quarter and 74 basis points in the second.

Most of the charge-offs taken in the second quarter related to loans to homebuilders, and we anticipate we will acquire the underlying collateral for more of our loans to homebuilders and is likely we will record charge-offs when we acquire collateral on those loans.

On the next slide you can see the increase in our net charge-off level. Year-to-date, our net charge-offs as a percentage of average loans outstanding annualized is 0.41%. You can also see on this slide that our peer group in $10 billion to $50 billion holding companies are increasing charge-offs as well. But more importantly, you can see how we compare to our peers historically since 2004 and before we have fairly – we have maintained – fairly consistently maintained a charge-off ratio below that of our peers and other large holding companies. We have taken a very disciplined approach to credit risk management that has resulted in this historically favorable charge-off ratio.

On Slide number 14, you can see the declining outstanding balance of our homebuilder portfolio, which we report under the name single-family construction loans. This portfolio consists of loans to finance homebuilding activities including construction and acquisition of developed lots and undeveloped land. Our total homebuilding lending – homebuilder lending portfolio at the end of the second quarter of 2008 is $1.2 billion, down from $1.3 billion at the end of the first quarter 2008 and $1.8 billion last September.

Single-family construction decreased because of paydowns and payoffs and because we have exited a number of credit relationships to reduce our risk but also because we foreclosed on some homebuilders loans moving the net amount to REO. It is likely these trends will continue.

This portfolio can further – be further divided into two groups – national home – national builders and regional builders. We now have approximately $140 million in outstanding loans to national homebuilders, some of which are unsecured lines of credit, but are typically governed by a borrowing base of unencumbered assets.

Our regional homebuilder portfolio is down to $1.1 billion in outstanding loans from $1.5 billion nine months ago. It is in this portfolio where we continue to see the most difficulty.

On the next slide, Slide number 15, we have an update to the slide that we presented in previous quarters, which breaks out our regional homebuilder loans by collateral type and by geography. For those that are not looking at the slides, we show that of our regional homebuilder loans approximately 16% are in Northern and Central California, another approximately 19% in Southern California, 10% in Texas, 8% in Florida, 75 in Colorado, 5% in Arizona, and the remaining 35% spread out in other states.

Again, I would direct your attention to the amount of exposure in California where we have seen the most deterioration. We are also seeing weaknesses throughout other areas of the country including Chicago and Arizona, but not to the extent we are seeing in California. We don’t have big exposure in Atlanta or Los Vegas. Relatively speaking, Texas is holding up well, and we continue to monitor it as we do all markets.

We also show the amount of non-performing regional homebuilder loans by geography. You can see that the amount of non-performing loans in the California markets is high. And while the amount of non-performing loans in the Northern and Central California region has dropped from $107 million last quarter to $52 million this quarter, that is primarily a result of both paydowns and moving loans out to OREO, and the total amount of loans outstanding in that regions has dropped from $227 million to $174 million for that same reason.

On the other hand, in other areas of California, primarily the Southern region, the amount of total homebuilder loans declined slightly, primarily as a result of paydowns. The amount of loans outstanding that are non-performing in the Southern region increased from $21 million at the end of the first quarter to $71 million at the end of the second quarter.

On Slide number 16, we have provided an update to the slide we presented in the last two quarters, which details our single-family mortgage portfolio broken down show the different types of single-family mortgage loans in our portfolio, some LTV numbers, current average FICO scores, current delinquency rates by product, and the state of origination of the mortgages.

As I mentioned, our single-family mortgage portfolio is primarily a runoff portfolio at this time. We sold our mortgage origination and servicing business in ’04 and ’05, and since that time we have added very little in single-family mortgages through our correspondent program. After adding only a very small amount of mortgage since 2006 through our correspondent program as a part of our efficiency review we closed down the program earlier this year.

The overall balance decreased from $1.6 billion at the end of the first quarter 2008 to approximately $1.5 billion at the end of the second quarter 2008. As you can see at the bottom of the slide 90% of our single-family mortgage portfolio was originated prior to 2006, and as we have discussed before we have not originated or purchased subprime loans.

We have underwritten option ARMs to the fully indexed rate. The original loan to value on first liens was 71%, and considering the vintage of these loans we expect the current LTVs are less than they were at origination because the home prices went up generally before they may have gone down more recently.

Average current FICO scores on our first lien loans is estimated at 710. The 90 days plus delinquency rate for all our first liens at June 30, 2008 was a little over 7%. Total delinquencies for all first liens was 11.87%. Certainly there has been continued stress on mortgage holders. However, another reason for increases in our delinquency rates is going to be caused by shrinking portfolio since this is a runoff portfolio.

We also believe that borrowers maybe experiencing financial stress as a result of holding second liens on their homes behind our first lien. That is the case severity of loss bound for closure maybe be minimal.

Starting at Slide number 17 we have included a few slides with respect to our mortgage-backed securities portfolio. This first slide is a high level overview, which shows that of our $5.1 billion in securities $3.2 billion, or 63% is categorized as held to maturity, the rest available for sale. And it also shows that $1.4 billion, or 29% are agency securities, the rest non-agency.

On Slide number 18 we have prepared this slide to give an understanding of the type of securities we own. You can see that approximately 82% of the non-agency mortgage-backed securities are traditional option ARMs, 13% are hybrid option ARMs, and the remaining 5% are hybrid ARMs. Also, we show the vintage of our non-agency securities and the geographic dispersion.

The next slide shows the amortized cost and fair values of our mortgage-backed securities as of June 30, 2008. In round numbers the combined agency securities available for sale and held to maturity have an amortized cost totaling $1.48 billion and their total fair value is the same. This is a decrease of approximately $160 million as a result of payoffs.

Of the non-agency securities those held to maturity have an amortized cost of approximately $2.28 billion and a fair value of approximately $1.38 billion for a difference of approximately $900 million. The non-agency securities held available for sale have an amortized cost of approximately $1.35 billion and a fair value of approximately $830 million for a difference of approximately $520 million.

The total difference between the amortized cost and the fair value of all of these securities is $1.42 billion, which is an additional unrealized loss of $350 million compared to the previous quarter. $100 million of the increased unrealized loss was for securities held available for sale. The total unrealized loss on available for sale securities is now $513 million, which is recorded net of tax benefit as accumulated other comprehensive loss on our balance sheet and decreases are book equity by such amount, in our case a total of $334 million to date as of June 30, 2008.

Each of the securities are adjustable rate and backed by single-family mortgages. Each of the private issued securities were AAA-rated at the time of purchase and all but one continue to be AAA-rated today. We have not invested in subprime securities, collateralized debt obligations, or subordinated tranches.

At June 30, the average total delinquency rate of the underlying collateral for our non-agency securities was 20.5%. The average current LTV on the underlying loans was 80% based on current loan balance as a percent of the original appraised value. The average original credit score was 707. These securities do not have an insurance wrapper. Rather we feel that the securities maintain their high ratings as a result of the underlying criteria – underwriting criteria of the underlying loans and high levels of subordination.

On Slide number 20 we show that the subordination level on average for all of our non-agency mortgage-backed securities is 15.7%. And on this slide we briefly explain how we come to the conclusion that our significant subordination level of each security provides protection from credit losses.

In our quarterly credit review of each non-agency security we project credit losses on underlying loans for each security over its remaining life using appropriate assumptions for default rates and loss severity. We determine the extent to which each security subordination level is sufficient to absorb the projected losses on the underlying loans. Our conclusion at June 30, 2008 was that the subordination level for each non-agency security continues to be sufficient to protect our securities from credit loss. We continue to expect that we will receive every dollar of principal and interest that is contractually due and we have the intent and the ability to hold the securities to maturity

On Slide number 21 we have listed for your convenience the non-agency securities in our portfolio that have been downgraded or are on negative watch for downgrade. There are 10 of 45 securities listed, nine of which are on negative watch by at least one of the rating agencies and we also show the one security that was downgraded by Moody’s last week. We have listed for you the amortized cost, fair value, and unrealized loss on each of these 10 securities. And as you can see the security that was downgraded had a $21 million unrealized loss on June 30.

Moving now to efficiency on Slide number 22, Non-interest expense was $99 million again during the quarter which on a run rate of $396 million for the year is about a 6% increase from 2007. This increase is driven in large part by increases in many of our direct cost and expense categories because we began to perform many activities ourselves following our separation from Temple-Inland.

Most important, however, you can see that compensation and benefits expense decreased from $51 million to $48 million this quarter, which is a product of our efficiency efforts undertaken at the beginning of the second quarter. That effort caused severance to increase to $3 million. Looking forward, severance charges, of course, are not recurring in nature, and we expect to be able to maintain this lower level of compensation expense. As Ken, we expect to identify even additional ways in which we can operate more efficiently. We will have results discussed regarding these efforts in future quarters.

On Slide number 23 we have shown our capitalized ratios as of – our capital ratios as of June 30, 2008, all of which exceed the regulatory standards to be deemed “well capitalized.” We have also included pro forma capital ratios as of June 30, 2008 reflecting the capital from the private placements that we closed after the end of the quarter on July 21, 2008. You can see that the new capital infusions strengthened our capital ratios further beyond “well capitalized” standards.

Following the additional capital raised Guaranty Bank’s pro forma regulatory capital ratios would be Tier 1 leverage ratio of 9.5%, Tier 1 risk-based ratio of 11.6%, and total risk-based ratio of 14.6%, all of which further exceeded the “well capitalized” standards of 5%, 6%, and 10%, respectively.

And on our last slide, Slide number 24, we show our pro forma capitalization, including the net proceeds from the sale of preferred stock on July 21. Total stockholders’ equity increases from just under $800 million to approximately $1.1 billion. Book equity per share, including these proceeds assuming conversion of all preferred into – preferred stock into common shares is $10.31 and tangible equity per common share under the same assumption comes to $8.74.

Ken, with that, I will turn it back over to you.

Ken Dubuque

Thanks Ron. Clearly this quarter was another very difficult period for the industry as a whole and Guaranty Financial Group in particular. We stated in previous quarters that we expect the conditions to continue to be unfavorable for the bank throughout 2008, and that this current cycle will not likely end soon. We feel that we have set aside appropriate reserves.

We are still not seeing broad based weakness beyond our homebuilder construction portfolio. We have not seen contagion over the commercial real estate, but we continue to monitor this portfolio as well as all our loan portfolios for potential weaknesses.

While we expect general economic conditions to continue to be unfavorable for the bank throughout 2008 trying to determine when the housing market will improve and homebuilder NPAs will decline is still difficult. We are not trying to predict what the government will do about housing or oil prices or overall stimulus. Rather, we are operating on conservative assumptions on these issues. For purposes of evaluating the housing related assets on our books and stresses that our customers experience we are assuming gas prices will remain high and housing prices will remain low for some time.

On the other hand, for example, for purposes of underwriting new energy loans, we are assuming oil prices could decrease further from their recent highs. Overall, this is very much a part of our focus on credit and our attempt to hit these issues head on. We should take from our high level of provision – you should take from our high level of provisioning this quarter that we are focused on identifying credit issues early and making the best of the assets on our books just as we said we were doing three months ago.

Nonetheless, while the deterioration in the housing and credit markets is clearly significant and could continue it’s important to reiterate that we do not originate or purchase subprime loans. We have very few 2006 and 2007 vintage single-family mortgage loans, which is where the majority of issues have occurred.

We bought standard, structured mortgage-backed securities and lending to homebuilders has been a core competency for us.

Long term, our strategy is to still build our commercial lending franchise, grow our retail franchise in Texas and California, increase the income, provide distinctive customer service, and improve our operating efficiency while maintaining strong credit and risk standards.

During the short term, we remain focused on the three Cs – Credit, Cost, and Capital. At the same time, we continue to provide outstanding customer service. We will show our strength through these difficult times.

In that regard, I want to thank our employees for their continuing hard work and support through this challenging period. Thank you for your attention and for your interest in Guaranty Financial Group. Now, we’d be glad to answer your questions.

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