Filed with the SEC from June 12 to June 18:
Guaranty Financial Group (GFG)
Billionaire investor Carl Icahn entered into an agreement with Guaranty Financial under which the company will sell him about 1.06 million shares of its Series B convertible preferred stock for $55 million. Icahn also entered into a purchase agreement under which Guaranty Bank will sell him units consisting of Guaranty Bank subordinated notes -- with an original principal amount of $175 million -- and 406,000 shares of Series B preferred stock. Icahn will pay $175 million for the units. The investor also entered into a letter agreement with Guaranty Financial under which he and the nominating and governance committee will work to identify a qualified candidate to serve as a director. Icahn will also have certain pre-emptive rights with regard to the issuance of specified securities for one year following the issuance of the Series B preferred. Icahn has 3,455,493 shares (7.74%).
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:
â€˘ Commercial banking,
â€˘ Retail banking,
â€˘ Insurance agency, and
â€˘ 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. (â€śTemple-Inlandâ€ť) formed Guaranty Bank by acquiring three institutions, including what was then Guaranty Federal Savings and Loan Association. At that time, Temple-Inlandâ€™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 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:
â€˘ create outstanding long-term value for our stockholders,
â€˘ improve the financial success of the people and businesses in the markets we serve,
â€˘ make a significantly positive impact in the communities where our customers reside and work, and
â€˘ attract, develop, and retain superior employees.
Our core values, listed below, describe our corporate culture and how we operate our business:
â€˘ We conduct our business with the highest degree of integrity, honesty, and efficiency,
â€˘ We manage our customersâ€™ assets with care,
â€˘ We show mutual respect to our clients, our neighbors, and our fellow employees,
â€˘ We are passionate about our business, we play to win, and we have fun,
â€˘ We are empowered to make decisions that provide creative solutions for our customers, and
â€˘ We are entrepreneurial in our actions.
Our specific business strategies are to:
â€˘ 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.
â€˘ 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.
â€˘ 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.
â€˘ 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.
â€˘ Improve operating efficiency. We must continually review our business practices to assure we are operating as efficiently as possible.
â€˘ 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.
We operate in four business segments.
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.
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 Bankâ€™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 Bankâ€™s unimpaired capital and surplus.
The principal economic risk associated with lending is the creditworthiness of the borrower. General economic factors affecting a borrowerâ€™s ability to repay include interest rates, inflation, collateral valuations, and unemployment rates, as well as other factors affecting a borrowerâ€™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.
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.
David W. Biegler, 61, has served as Chairman of Estrella Energy, L.P., a natural gas transportation and processing firm, since August 2003. Mr. Biegler retired at the end of 2001 as Vice Chairman of TXU Corporation, when it engaged in power generation and energy marketing and provided electric and natural gas utility services and other energy-related services. He also served as President and Chief Operating Officer of TXU Corporation from 1997 to December 2001. From 1993 to 1997, he served as Chairman, President and Chief Executive Officer of ENSERCH Corp. He currently serves on the boards of Dynegy Inc., Trinity Industries, Inc., Austin Industries, Inc., Southwest Airlines, Inc. and Animal Health International. Mr. Biegler also serves as chairman of Dynegyâ€™s Compensation and Human Resources Committee, as chairman of Southwest Airlines, Inc.â€™s Compensation Committee, and as chairman of Trinity Industries, Inc.â€™s Audit Committee. Mr. Biegler also serves on the Board of Directors of Guaranty Bank, a subsidiary.
Leigh M. McAlister, 58, has been a professor with the University of Texas at Austin since 1986. She previously held positions at the University of Washington and Massachusetts Institute of Technology. From 2003 to 2005, Dr. McAlister was Executive Director of the Marketing Science Institute, a not-for-profit institute established as a bridge between business and academia. She is a member of the Editorial Boards of Marketing Science, Journal of Marketing Research, Journal of Consumer Psychology, and Marketing Letters. Dr. McAlister has served on the Board of Guaranty Bank, a subsidiary, since 1999.
Raul R. Romero, 54, is President and Chief Executive Officer of Alliance Consulting Group, LLC, a marketing consulting firm, a position he has held since 2005. From 2002 to 2005, he was Partner and President of S&B Infrastructure, Ltd., a wholly-owned subsidiary of S&B Engineers and Constructors, Ltd., a privately held engineering, procurement and construction company. In 1999, Mr. Romero was appointed to a six-year term on the University of Texas System Board of Regents by then Governor George W. Bush. He served until 2001, chaired that boardâ€™s Special Committee on Minorities and Women, and served on the Academic Affairs Committee, Facilities Planning and Construction Committee, and Special Committee on Telecommunications and Technology Transfer. He also served as a Regional Representative and Vice Chairman of the Board for Lease of University Lands. Mr. Romero has served on the Board of Guaranty Bank, a subsidiary, since 2001.
Bill Walker, 64, a retired executive with Motorola Inc., served in a variety of manufacturing and leadership positions during his 36 years with that company, most recently as Senior Vice President and General Manager of Motorolaâ€™s Semiconductor Products Sector from 2000 until his retirement in 2004. Mr. Walker has served on the Board of Guaranty Bank, a subsidiary, since 2002.
MANAGEMENT DISCUSSION FROM LATEST 10K
Cautionary Statement Regarding Forward-Looking Statements
Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations contains â€śforward-looking statementsâ€ť within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are identified by their use of terms and phrases such as â€śbelieve,â€ť â€śanticipate,â€ť â€ścould,â€ť â€śestimate,â€ť â€ślikely,â€ť â€śintend,â€ť â€śmay,â€ť â€śplan,â€ť â€śexpect,â€ť and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risk and uncertainties. A variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
â€˘ general economic, market, or business conditions;
â€˘ demand for new housing;
â€˘ competitive actions by other companies;
â€˘ changes in laws or regulations and actions or restrictions of regulatory agencies;
â€˘ deposit attrition, customer loss, or revenue loss in the ordinary course of business;
â€˘ costs or difficulties related to transitioning as a stand-alone public company;
â€˘ inability to realize elements of our strategic plans;
â€˘ changes in the interest rate environment that expand or reduce margins or adversely affect critical estimates and projected returns on investments;
â€˘ unfavorable changes in economic conditions affecting housing markets, credit markets, real estate values, or oil and gas prices, either nationally or regionally;
â€˘ natural disasters in primary market areas that may result in prolonged business disruption or materially impair the value of collateral securing loans;
â€˘ assumptions and estimates underlying critical accounting policies, particularly allowance for credit losses, that may prove to be materially incorrect or may not be borne out by subsequent events;
â€˘ current or future litigation, regulatory investigations, proceedings or inquiries;
â€˘ strategies to manage interest rate risk, that may yield results other than those anticipated;
â€˘ a significant change in the rate of inflation or deflation;
â€˘ changes in the securities markets;
â€˘ the ability to complete any merger, acquisition or divestiture plans; regulatory or other limitations imposed as a result of any merger, acquisition or divestiture; and the success of our business following any merger, acquisition or divestiture;
â€˘ the final resolutions or outcomes with respect to our contingent and other corporate liabilities related to our business and any related actions for indemnification made pursuant to the various agreements with Temple-Inland and Forestar;
â€˘ the ability to raise capital; and
â€˘ changes in the value of real estate securing our loans.
Other factors, including the risk factors described in Item 1A , may also cause actual results to differ materially from those projected by our forward-looking statements. New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Matters Affecting Comparability of Historical Financial Information
Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations covers periods prior to the spin-off. As a result, the discussion and analysis of historical periods does not reflect the impact of our becoming a separate public company, including potential changes in debt service requirements and differences between administrative costs allocated to us by Temple-Inland and those we will incur as a separate public company.
Our historical results may not be indicative of our future performance and do not necessarily reflect what our financial condition and results of operations would have been had we operated as an independent, stand-alone entity during the periods presented, particularly since changes occurred in our capitalization and will occur in our holding company operations as a result of the spin-off.
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
â€˘ 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.
â€˘ 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.
â€˘ Noninterest income decreased principally as a result of our exit from asset-based lending operations in 2006.
â€˘ 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.
â€˘ 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.
â€˘ 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.
â€˘ 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.
â€˘ 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 â€śRisk Management â€ť 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.
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 â€ś Risk Management â€” Credit Risk Management â€ť 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.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Analysis of First Quarter 2008 and 2007
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 likely to decline. Please read Item 3. 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.
The majority of our earning assets are variable rate. Decreases in the rates earned on our assets in first quarter 2008 compared to first quarter 2007 are principally a result of decreases in short-term market interest rates. These market rate decreases also decreased the rates we paid on our deposit liabilities and borrowings.
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.
nsurance 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.
Segment Performance Summary
First quarter 2008 segment operating results decreased 90% or $57 million compared to first quarter 2007. The principal cause of the decrease was $52 million in provision for credit losses on commercial loans. The provision for credit losses was predominantly related to increases in non-performing homebuilder loans, which increased from $117 million at December 31, 2007 to $182 million at March 31, 2008. In first quarter 2007, we recorded $3 million credit in provision for credit losses on commercial loans, principally a result of net recoveries of $8 million related to two asset-based financing transactions that had previously been written off.
Thank you, and good afternoon everyone. Welcome to Guaranty Financial Groupâ€™s first 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 Form 10-K and other reports filed with the SEC. Do 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 this morning are Ken Dubuque, President and CEO and Ron Murff, Chief Financial Officer. I want to call your attention to the side deck which we post inn our Website, guarantygroup.com, and we will be referring to this over the course of the call. With that, Iâ€™ll turn the call over to Ken.
Thanks, Rusty. Good afternoon, welcome to our first quarter conference call to discuss financial results. Thank you for joining us. Our first quarter as an independent publicly traded company has been a very challenging time, as it has been for many in our industry. We still benefit from our place in Texas as the second largest publicly traded financial institution headquartered there. However, the continued decline in housing market conditions and liquidity in securities markets as demanded that we focused our short-term strategy on key elements of our business and align our organization to support these critical objectives. To this end we completed an internal organization and initiated a comprehensive business assessment program. I will explain these changes in more detail in a moment.
When we discussed our year 2000 results back in February, one of our goals was ensure that our audience understood our history, who we are now and what we saw for the company going forward. We discussed in detail our areas of business and the different assets that we own. If you were not able to listen to that conference call or otherwise have not fully heard our story, please consider obtaining transcript of that conference call or review our past investor presentation or other SEC filings or contact our Investor Relations department for more information.
In sum, we have had a large successful history in retail and commercial banking and our spinoff afforded us new opportunities for enhancing growth and profitability. We do not â€“ we do have an interesting and exciting story of how we got to where we today and who we are now. But today, we will keep our focus on results and financial position for the first quarter 2008 and where we are going from here. At this time I will briefly cover our financial results as Ron will be discussing this in greater detail. After Ron's comments, I will close with some final words.
Turning to our income statement, earlier today we released our financial results for the first quarter 2008. For the first quarter, we are reporting a net after-tax loss of $10 million or $0.28 a share. Compared to that â€“ to impaired after-tax net income of $6 million last quarter and $27 million in the first quarter of 2007. The primary reason for the loss this quarter was a sharp increase in loss provision. During all of 2007, we recorded a provision for credit losses of $50 million, $33 million of which was recorded in the fourth quarter. This compares to only $1 million recorded in all of 2006; however, in the first quarter 2008, we booked a provision of $58 million, primary because of continued weakness in the single family construction market.
The primary driver of the increase in our provision was the increase in our nonperforming loans from $166 million at year-end 2007 to $261 million at the end of first quarter 2008. But it also included increases in reserve for loans that we already â€“ that were already in our nonperforming category as well. On the other hand, during the first quarter 2008, we only had $2 million in net charge-offs. Ron will discuss these results in further detail in just a moment.
Let me turn to our balance sheet. We will not go over our entire balance sheet again this quarter, I do want to provide a quick overview of those areas of most interest to our investors. Within our $16 billion balance sheet, our loan portfolio totals approximately $10 billion and we hold just over $5 billion in mortgage backed securities. As I mentioned a moment ago, we have $261 million in nonperforming loans within our $10 million portfolio loans of which $182 million or approximately two-thirds are from our homebuilder construction loan portfolio. The current amount of outstanding loans to homebuilders on our books is down from approximately $1.8 billion two quarters to go to $1.3 billion today.
After this quarter's $58 million loan loss provision, our total allowance for loan loss is $172 million. More than half, $89 million of these reserves are against homebuilder loans. Our ratio reserves as a percentage of all loans is 1.67% up from 1.17% at the end of the previous quarter. Our reserves as a percentage of nonperforming loans is 69%. The ratio as a percentage of NPLs is low compared to prior years as we have historically experienced low levels of NPLs. However, we have often explained that our nonperforming loans are primary secured loans. We do not have a material number of secured loans that are nonperforming. We feel they are appropriate reserved through the consistent application of our loan loss reserve methodology.
As to mortgage backed securities. With respect to the amortized cost basis of $5.3 billion in mortgage backed securities this is a relatively large proportion of our assets. All its securities are collateralized by adjustable rate single-family mortgages, none of which are subprime. Approximately one-third of the securities are agency underwritten with a remaining two-thirds being private issuers. All of the securities were rated AAA at the time of purchase and continue to be rated AAA today. It is worth noting that the rating agencies began a wave of downgrades for the mortgage backed securities several months ago and have downgraded a very substantial number of securities mostly secured by subprime collateral and many of which are even more complex collateralized debt obligations or CDOs. Today all our securities are still AAA rated. This is consistent with the story that weâ€™ve been telling for many months now.
Securities that we purchased had standard structures with very high subordination levels. Not only have we not invested in subprime securities, none of the securities are collateralized debt organizations or subordinated truancies. Of course, we cannot predict with certainty whether securities that we own will be downgraded by one or more of the rating agencies in the future but we continue to monitor developments (inaudible) are working diligently to ascertain the market value and intrinsic value of these securities which Ron will discuss in greater detail. We still have the intent and ability to hold these mortgage backed securities to maturity and based upon our current analysis, we do not expect any credit losses within these securities.
I want to talk about our short-term goals. Last quarter, I outlined our long-term strategy, a key component of which includes growth in various areas of our business. However, itâ€™s very clear that current economic conditions require short-term strategy thatâ€™s focused on the issues that have arisen in the banking market, as well as the particular issues that we are confronted with a guaranty. In this regard, we have taken substantial measures to address what we call the three Cs that are critical factors to success to our business: Credit, cost and capital. Our Board of Director is proactive in support of this focus as well. We have a very strong and experienced Board of Directors that understand these issues well.
Our management team discussed these issues and during the fourth quarter, I led an internal management reorganization and include in the following major changes to address these highlight areas. First, with respect to credit, as reported this morning and I have since â€“ I have briefly outlined, we saw another substantial increase both in nonperforming loan and loan loss provisions during the first quarter. More than two-thirds of the increase in nonperforming loans and provisions comes out of our loans to homebuilders, which we report as part of our single family construction loans.
We had zero accrual [ph] charge-offs, this in homebuilder loans during the first quarter, which followed charge-off is only $4 million homebuilder loans in the fourth quarter of 2007. However, charge-offs typically lag a rise in NPAs. Iâ€™M trying to predict what amount of our NPAs may be charged off in the future, you should keep in mind that the make-up of our nonperforming loans is primarily secured loans, in particular homebuilder loans secured by land, (inaudible) and houses. And thus the reserve levels have been set based in large part upon the value of the collateral behind them. Clearly we have witnessed a decrease in the value of property in certain markets in particular in California, but there is still value to property even in California, the underlying land and is collateral for homebuilder loans in California is predominantly entitled, which is a long process to complete in that state. We continuously monitor our loan portfolio and update the valuation of collaterals necessary to ensure that our reserve levels are appropriate. As a result, a large portion of our increase in reserves this quarter was for loans that were already included as nonperforming loans but we determined it was appropriate that the amount of reserves against these loans should be increased. With (inaudible) and loan loss provision as a result of these developments and new information during the first quarter, we feel we are appropriately reserved.
With respect to charge offs. Our charge-off rate from 2001 to 2007 was less than 10 basis points per year on average, excluding asset-based lending, a business we did in 2006. This has been less than half our peer average. This low charge-off history in our lending areas is testament to our strong underwriting standard, our relationships, our experience and our understanding of our products and markets.
With respect to our underwriting, all of our loans are underwritten at a central location in our Dallas office. We have a sophisticated underwriting operation and very experienced members of the Executive Management that average 25 years to 30 years of experience.
On the construction side, we chose to business with top tier developers. We focus on institutional quality projects. We underwrite to multiple scenarios and our underwriting criteria is consistent with our risk appetite with clear risk and pricing policy and top down communication. None the less, real estate markets are cyclical such that even well conceived and underwritten projects can be stressed during the older rebuilding cycles that characterize these markets. Mark Crawford, our Chief Risk Officer has responsibility for our credit function, and (inaudible) are among others who reports to Mark. Mark came to Guaranty more than 14 years ago with several years of regulatory experience with both the Federal Reserve and the OTS prior to joining Guaranty.
In addition, we took steps during the first quarter to move ten of our best lenders in a group to focus solely on loans that needed special attention. This team and our normal credit team are very focused on aggressively identifying emerging problem loans early, internally classifying them were appropriate and taking action where we can to mitigate risks. This group is looking for innovative solutions to move many of these assets from the bankâ€™s balance sheet (inaudible) take the credit. They are working diligently and we expect them to be successful in maximizing collections.
We put most in action plans on the loans that need the most attention. We will continue to put great emphasis on this effort. Weâ€™ve also added a couple of new season bankers from outside Guaranty, one to lead our homebuilding division to bring a fresh perspective to the loans on our books and one in our credit group providing additional manpower to monitor. These moves are clearly intended to put an even greater emphasis on credit to Guaranty.
In addition, as part of our heightened focus on credit, weâ€™ve looked and underlying standards is on a go-forward basis prior to the market disruptions that occurred during 2007. We saw competitors making pricing concessions and structural concessions. And we saw rationalizing in credit decisions. Banks naturally became very competitive in the easy credit environment of the past several years. As a result of (inaudible) in credit, weâ€™ve looked at every line of business and taking standards were appropriate. We are now requiring higher equity level, demanding greater levels of personnel recourse with higher pricing including interest rate floors.
We will carefully manage our syndication risk. Weâ€™ll also take in covenant structures, and we are now being more insistent on obtaining borrowing account or operating accounts through our borrowers, and the number of positive relationships with our new borrowers is increasing.
Now let me turn to costs, which have always been a focus at Guaranty. That 18 months ago, we conducted a review of our organization. We reduced our annual expenses by $14 million. However, as result of the spin off from Temple-Inland, and as we created new departments and processes to ensure smooth operations as an independent public company, we have experienced increasing costs. In todayâ€™s economic environment and as a newly independent public company accountable to a broad based with shareholders instead of just one, efficiency and productivity is more important than ever. Accordingly, as part of the reorganization I mentioned before during the first quarter, we named a new Chief Administrative Officer with immediately evaluating areas of the company, where we can eliminate excess cost.
Robert Greenwood who has been with Guaranty for 17 years and most recently served as our Chief Lending Officer was named to this newest position. And in this function, he is overseeing our cost cutting and efficiency improvements efforts as well as managing our administrative and operational function. Kevin Hanigan, who is our Senior Executive Vice President in Retail Bank is now overseeing Retail and Commercial at the title of Chief Banking Officer, and Kevin continues to keep our team focused on the business of banking and revenue generation.
In the past couple of months, Robert and his team took in a new official inventory of the entire company including our banking and insurance function and talked with our executive officers in order to identify opportunities for cost reduction that would not impact our high level of customer service. A number of these initiatives are under way, including the elimination of 135 jobs announced this week. This is more than a 5% reduction in our workforce. Job cuts are never easy to implement but unfortunately became necessary in light of the difficult economic environment. Additional long-term cost saves are expected to reduce through improvements in efficiency and productivity and we will update you in future quarters.
Financial services is just that. Thus, we do not intend to allow these cost reductions to lower the quality of our service provided to our customers. Our goal is to continue to out product the local and also out service the national providing distinct customer service is still one of our core strategy. Now as to our third important short-term focus, capital. We intend to manage our capital position appropriately. It is always been our intent to take whatever actions are 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 the minimum standards to be considered well capitalized and we continue to keep a sharp focus on this issue.
So given market conditions, we are being very proactive by implementing these short-term strategies that Iâ€™ve outlined. Even still, we have a very attractive franchise with a great branch of network, experienced Senior Management, lenders and staff, distinctive customer service in great markets with great demographics supporting them which should lead to improved results over time. In a moment I will close our prepared remarks with some thoughts regarding our long-term strategy. For now I will turn things over to Ron to discuss financial results in further detail.
Thanks, Ken and hello everyone. My remarks today will cover our financial results and some of the items on balance sheet. If you have accessed our slides, I will be referencing those. Letâ€™s first go to slide number three, Ken noted for that for the first quarter we were reporting an after-tax net loss of $10 million or $0.28 loss per share on a basic and diluted basis, compared to $6 million after-tax net income in the fourth quarter of 2007, and $27 million in net income in the first quarter of 2007.
Net interest income was $98 million for the quarter â€“ first quarter of 2008 down $4 million from the previous quarter but up $3 million compared to the first quarter of 2007. The decrease from the prior quarter was principally due to a decrease in average earning assets resulting from a decrease in single-family mortgage loans, single family construction loans and mortgage backed securities as well as a 10 basis point reduction in our net interest margin. Net interest margin for the first quarter of 2008 was 2.49% compared to 2.61% for the previous quarter and 2.56% in the first quarter of 2007.
Net interest margin decreased because of margin compression caused by the unprecedented sudden sharp interest rate cuts by the Federal Reserve, which prevented our deposits from adjusting downward as fast as our assets, not withstanding that we are an adjustable rate lender. And the increase in our nonperforming loans has also put down with pressure on our net interest margin, which is discussed in more detail in our later slide. Provision for credit losses was $58 million in the first quarter of 2008 compared to $33 million in the previous quarter and a net recovery of $2 million in the first quarter of 2007.
Provisions for credit losses increased again principally because of weakness in single family construction. Provisions for single family construction loans during this quarter totaled $41 million and the other $17 million increase in provisions was spread fairly evenly throughout the other loan portfolios and are unallocated. We experienced $2 million in net charge-offs during the first quarter of 2008 compared to $6 million in net charge-offs during the previous quarter and net recoveries of $8 million during the first quarter of 2007. As Ken mentioned 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 our loans to home builders and it is likely we will record charge-offs when we acquire collateral on those loans.
Non interest income was $42 million for the quarter, a 10% increase over both the previous quarter and first quarter of 2007, principally as a result of increased fix annuity sales commissions and fees and service charges on deposits. Insurance commissions and fees including fixed annuity sales increased nearly 20% to $19 million for the quarter compared to the first quarter of '07. The decrease in fixed annuity sales â€“ this increase in fixed annuity sales was due in part to declining deposit rates thereby leading some deposers to purchase these fixed annuities. And service charges on deposits increased 8% to $13 million for the quarter compared to $12 million in the first quarter of '07.
These increases more than offset a decline in commercial loan facility fees from $6 million in the first quarter of '07 to only $4 million this quarter. The decrease this commercial loan facility fees were primarily a result of decreases in fees from home builders as a result of decreases in activity levels by those customers. Non interest expense was $99 million during the quarter, an increase of 4% compared to the previous quarter and 6% increase compared to the first quarter of '07. This increase was driven in large part by increases in many of our direct costs and expense categories because we began to perform them, many activities ourselves following our recent spinoff from Temple-Inland. And finally as a result of the loss of the quarter, we had an income tax benefit of $7 million resulting in net after-tax loss of $10 million for the quarter.
As I mentioned a moment ago, our net interest margin declined from 2.59 in the fourth quarter of '07 to 2.49 this quarter. The decline from the previous quarter is a result of both margin compression in the first quarter, as well as our increase in nonperformers. If you will turn to slide number four, youâ€™ll see our annual net interest margin dating back to 1998 and on this slide weâ€™ve shown the changes to the fed fund rates during this period as well. Clearly on a long-term historical basis, we have maintained a very stable net interest margin, which is a result of our balance sheet consisting of nearly all adjustable rate assets.
Historically, the strategy in place was to be interest rate neutral and maintain this stable net interest margin without the use of derivatives. We also recognize that our net interest margin is below our peers and in that regard, we have previously mentioned we don't have plans to purchase additional mortgage backed securities and we expect that runoff to have some benefit to our net interest margin. However, continued margin compression and an increase in non performing assets will negatively affect our net interest margin and we expect to continue â€“ the continued decreases in our net interest margin until interest rates stabilize and credit performance improves.
Now please, turn to slide number five which is a summary of our balance sheet. We allowed our balance sheet to decrease from $16.8 billion at the end of '07 to $16.4 billion the end of the fourth quarter due in large part to runoff in single-family mortgage portfolios, runoff in our mortgage backed securities and the unrealized losses recognized in our mortgage backed securities portfolio. Some of this decline was offset by increases in areas of our commercial lending portfolios which is shown as slide that I will cover in a moments. The level of our federal bank borrowings ask did not change since the end of the prior period.
Our total deposits decreased from $9.4billion to $9.2 billion now. The decrease in deposits from the end of the prior period was caused primarily by small amount of deposit outflow during a period where we saw a disproportionately large number of CDs mature during February and March of '08. In a moment, I will discuss the bubble in our CD maturities that we manage fairly well during the quarter to limit the overall decrease in total deposits and I will discuss our deposit mix. Weâ€™ve also shown a decrease in our level of stockholderâ€™ equity from approximately $1.1 billion to about $900 million.
Our Board of Directors made the decision to not pay a dividend in the first quarter, a reflection of the Board's focus to ensure the bank remains well capitalized and loss of the quarter was only $10 million. Accordingly, the decrease in shareholdersâ€™ equity of a little over $200 million is instead a reflection of the increase and accumulated other comprehensive loss from $35 million to $272 million during the first quarter, which is the effect of further unrealized losses in our available-for-sale securities net of tax benefits, which I will discuss in greater detail in a moment. These unrealized losses on mortgage backed securities also impacted our book value per share as noted here.
Now turn to slide number six. The vast majority of these deposits are gathered through our retail franchise and we have recently focused on increasing checking accounts which have increased to 20% of total deposits. We also have a tremendous opportunity for growth in deposits through our commercial operations. We would consider most of our deposits to be core deposits. We don't have any broker deposits which tend to be more transient and our CDs are almost exclusively held by long-term customers.
As I mentioned we saw a disproportionately large number of CDs maturing in February and March of '08. Slide number seven shows details of this CD bubble. $1.7 billion of our $4.5 billion in CDs or about a third was up for maturity in February and March of '08. Our team recognized this upcoming bubble well ahead of the maturity dates and several initiatives were put in place to in order to both maximize the amount of the deposits retained simultaneously decreasing the average annual percentage rate on the deposits. We equipped our sales force with client CD renewal lists, initiated an active calling program and we empowered our branch managers to make exceptions on rate when appropriate.
We were successful in renewing the $1.4 billion of the $1.7 billion in CDs and the average APY decreased from 4.98 to 3.19. Even more importantly, we also made an effort to retain customers with multiple accounts, and as a result of the approximately 2500 customers that we did not retain, 84% of those customers were single-service CD-only households. And accordingly of the total deposit relationship from the customers with maturing CDs during this bubble which totaled $3.1 billion, we retained approximately $3 billion in some form of deposit with Guaranty, meaning that a portion of the CDs not renewed then transferred into other deposit accounts. And other $100 million decrease in the total deposit relationships from these customers because we were proactive in referring maturing CD holders to our annuity sales professionals we believe that a significant portion of the $67 million in incremental annuity sales during the quarter was a result â€“ a direct result of these referrals.
One additional goal during this process was to also smooth out this bubble so this is not an issue again next year and we were successful in doing so. Overall, this successful effort in retaining customers while accomplishing these goals is evidence of the tremendous customer service provided by Guaranty. On the next slide, we have included a chart showing the results of the annual American customer satisfaction index. This year we engaged ACSI to conduct further research in the same methodology as the independent research of the largest US retail banks and asked them to benchmark our position as compared to the other banks included in the index.
You can see here that Guaranty ranks significantly above the ACSI banks industry average and the larger banks in the ACSI research. While we have a number of other examples of distinctive customer service including our success in handling the recent CD bubble, we are also â€“ we are glad to also to be able to present this hard evidence of research produced by ACSI.
Turning to slide number nine, we show our loan mix. Here we show our loan portfolios as a percent of total loans. You can also see the total dollar amount of loans in our earnings release. We built our loan portfolio to $10 billion comprised of adjustable rate loans. The loan mix is also been changing in recent quarters. This since last quarter both the single-family mortgage and construction portfolios had decreased by 2% of total loans each and multifamily and senior housing portfolios â€“ single-family mortgage warehouse portfolio and our commercial real estate portfolio have each increased since the end of year.
We sold our single-family mortgage company and servicing assets in 2004 and 2005 and we completed exit from the segment in early 2006, and as a result, that is a runoff portfolio getting smaller each quarter. In a moment I will get to a slide providing more details on the single-family mortgage portfolio. We anticipate our commercial real estate loans will continue to increase for the remainder of 2008 as refund draws on committed construction loans.
On the next slide, you can see the change in mix of our commercial loans and overall, we have seen another strong yet conservative increase in our commercial lend from $8.2 billion at year end '07 to $8.5 billion at the end of the first quarter. You can see the decrease in single family construction lending and the increase in multifamily and senior housing single-family warehouse and CRE. Energy loans on the other hand remain relatively flat during the quarter and in our energy lending department we have our own experienced engineers employed within the bank to ensure conservative loan structures that continues to be a very strong performing portfolio.
Please turn to slide number 11. This shows our historical net charge-offs as a percentage of loans and show how it compares to our peers. As you can see, we take a very disciplined approach to credit risk management. This is translated into favorable net charge-off performance both on an absolute basis and relative to our peers. We adopted a comprehensive enterprise-wide Risk Management system before it was popular to do so. Examples of this we are implementing a two-dimensional risk rating program in place of our prior one-dimensional rating system and to assess risk within each bank unit including subsidiaries. The bank uses a sophisticated computer modeling program which includes assessment of global information technology, compliance and operational risk.
Slide number 12, however, shows the recent increase we have experienced in our norm performing loan levels. We have compared favorability to our peers historically as shown in this slide. Clearly we have seen a significant increase in nonperforming loans which you can see is driven by dramatic increase in homebuilder loans. On the next slide, we have broken down nonperformers in even greater detail so you can see where non performing assets increased from $36 million at the end of the first quarter of '07 to $179 million at the end of '07 and $284 million at the end of the first quarter. Clearly the spike was caused primarily by our home builders.
Of the $284 million in nonperforming assets, $182 million is home builders and $69 million is single-family mortgage loans within the $33 million of other, $23 million is foreclosed real estate which is the difference between our $261 million in nonperforming loans versus $284 million in nonperforming assets at the end of the first quarter.
On slide number 14, we recorded another $58 million in provision for loan losses during the quarter which raised our allowance for loan loss at $172 million. The increase to $172 million at the end of this quarter is an increase of over %100 million since the '07. You can see on this slide that a disproportionately large amount of allowance for single family construction loans, which is consistent with the level of nonperforming loans in this area. We have shown that we experienced an increase in nonperforming loans but most of our additional provision for loan losses resulted from further provisioning necessary for loans that were already included in nonperforming status.
This is resulted in our ratio of reserve to nonperforming loans relatively stable compared to the previous quarter is now 69%. But our ratio of reserves to total loans increase want 6%,7% at the end of the year â€™06 to 1.17 at the end of 2007 to 1.67% at the end of this quarter. We have identified $170 million of impaired loans and we have established $57 million or 33% in reserves against those loans. It is important to note that our nonperforming assets consistent primarily of real estate secured loans, the underlying of which is the primary determinant of the required reserve level. With this increase in loan loss provision, we feel we are appropriately reserved.
On slide number 15, you can see the declining outstanding balances of our homebuilder portfolio, which we report under the name single-family construction loans. This portfolio consistent of loans to finance home building activities including construction and acquisition of developed (inaudible) and undeveloped land. Our total home before lending portfolio at the end of the fourth quarter of '08 is $1.3 billion down from $1.5 billion at the end of 2007 and down from $1.8 billion three months before that. Single family construction loans decrease because of payoffs and because we have exited a number of credit relationships to reduce our risk, it is likely this trend will continue.
This portfolio can also be further divided into two groups, national builders and regional builders. We now have approximately $150 million at outstanding loans to National home builders some of which are unsecured lines of credited but typically governed by a borrowing base of unencumbered assets. Previously all of our nonperforming loans have been contained within what we call our regional homebuilder group, and I now have one loan out of what we consider our National homebuilders on nonperforming loans stats and we may see continued deterioration even in this portfolio.
The outstanding balance of the homebuilder loan that is now on nonperforming status is about $16 million. Our regional homebuilder portfolio is down to $1.2 billion in outstanding loans from just $1.5 billion to six months ago. It is in this portfolio where we continue to seat most difficulty. We are not taking on new homebuilder customers at this time. Utilization rates by the National builders were reasonably low. The only advances to the regional builders would be the rare new product in a market where demand is stable and we would also have advances to regional home builders to complete projects already under way.
Our loans to regional builders are typically what we called 'guidance line.' Request for additional advances are certainly looked at closely and additional funds are advanced only when appropriate. As a result, the aggregate amount of our loans to home builders is decreasing.
On the next slide, slide number 16, an update to the slide that we presented last quarter which breaks out our regional homebuilder loans by collateral, type and by geography. For those who do not have these slides we show the our regional homebuilder loans approximately 19% are in northern and central California. Another 19% in Southern California. 10% in Texas. 10% in Florida. 7% in Colorado. 5%, Arizona, and remaining 30% 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 seeing weakness throughout the other areas of the country including Florida, Chicago and Arizona. Relatively speaking, Texas is holding up well, and we continue to monitor it as we do all of our markets.
We have added a new column on the far right of this page, which shows the nonperforming loans out of this portfolio and gives you more information as to the geography of those nonperforming loans. As we have stated before this shows that northern and central California is where we are experiencing the most difficulty with regional homebuilder loans, but in Southern California, our borrowers at least have not experienced as much difficulty as those in northern and central California.
On slide number 17, weâ€™ve provided an update to the slide we presented last quarter which details our single-family mortgage portfolio broken down to show the different types of single- family mortgage loans and our portfolios, some LTV numbers, current FICO scores, delinquency rate by product and state of origination of the mortgages. Again our single-family mortgage portfolio is primarily runoff portfolio at this time. We sold our mortgage origination servicing businesses in '04 and '05 and since that time weâ€™ve added very little single-family mortgages through our correspondent program.
In '07, we added only added about $60 million to single-family mortgage portfolio and in the first quarter of '08 we added less than $10 million. As you can see at the bottom of the slide, approximately 93% of our single-family mortgage portfolio was originated prior to '06 and as we have discussed before we have not originated or purchased sub-prime loans. We have underwritten option ARMs to the fully indexed rate, the original loan-to-value on first length was 71%., and considering the vintage of these loans that current LTVs are even less than they were at origination.
Average current FICO stores on our first lien loans is estimated at 707. Last quarter we reported 90-day plus delinquency rate for our first liens was 3.2% and total delinquency at that time was 7.5%. Certainly there has been continuing stress on mortgage holders. However, another reason for increase in our delinquency rate is going to be caused by shrinking portfolio since this is a runoff portfolio. Starting slide number 18, we have included a few slides with respect to our mortgage-backed securities portfolio. This first slide is a high-level overview that shows of our $5.3 billion in securities, $3.4 billion or about two-thirds is categorized as held to maturity and the rest are available for sale and it also shows that about one-third are agency securities. The rest are non-agency.
On slide 19, we have prepared this slide to give an understanding of the type of securities we own. You can see that approximately 83% are traditional, option ARMs. 13 are hybrid option ARMs and the remaining 5% are hybrid ARMs. With respect to vintage we show our security vintage, the percentage that is 2007 vintage is reflection of the approximately $1.1 billion in non-agent securities that we purchased in late '07 after we saw market disruptions in the securities market driver turns to a level that we included were attractive at that time.
The next slide is an update to the slide we used previously showing the amortized cost and fair values of our mortgage backed securities as of March 31, 2008. In round numbers, the combined agencies securities available for sale and held to maturity have an amortized cost totaling approximately $1.64 billion and their total fair value is the same. Of the non-agency securities, those held to maturity have an amortized cost of approximately $2.35 billion and a fair value of approximately $1.7 billion for a difference of $650 million. The non-agency securities held available for sale have an amortized cost of approximately $1.36 billion and a carrying value of approximately $0.94 billion for a difference of $420 million.
Total difference between the amortized cost and the fair value of all these securities is $1.07 billion. In particular, however the appropriate â€“ the approximately $421 million unrealized loss and available for sale securities is recorded net of tax benefits as accumulated other comprehensive income on our balance sheet and as mentioned before decreases our back equity by such amount in our case $272 million. As Ken mentioned each of these securities are adjustable rate backed by single-family mortgages. Each of the (inaudible) securities were AAA rated at the time of purchase and continue to be so. We have not invested in subprime, securities collateralized debt obligations or subordinated tranches.
At March 31st, the average delinquency rate for our non-agency securities was 15.6%. We have also shown you the current LTVs and the average original credit score for these securities. None of these securities have an insurance wrapper rather the AAA rating, we feel remains on each these securities primarily as a result of the underwriting criteria of the underlying loans in high level of subordination. On slide number 21, weâ€™ve shown that the subordination levels at issue date for all of the private issue, private label securities was an average of 10.7%. We have seen significant and growing subordination levels primarily as a result of prepayments that pay off our senior tranches first and the average subordination level of these private securities has increased to 15.5% at March 31st, 2008.
These soluble and growing subordination levels provide protection from credit losses because other investors absorb the losses first. As we look at our securities only $199 million of our $3.7 billion of non-agency securities by unpaid principal balance have subordination levels below 10%. We continue to believe that our high subordination levels will result in no credit losses in our securities. On the next slide, weâ€™ve prepared a brief discussion of the evaluation of these securities in particular the source of the valuations. With respect to agencies, estimated values are provided by vendor sources. With respect to non-agencies, we obtained bids on benchmark bonds from several Wall Street dealers and market participants. We utilized the median bid for each benchmark security to determine the market yield for the segment and we utilized market yields and discount cash flow analysis on each of the remaining 37 securities to estimate their fair value.
As also noted on this slide, there have been four sales in the market that have contributed to a further decline in non-agency MBS market values during the quarter. However since the end of the quarter, we have seen estimated fair values get somewhat better up approximately five points which would reduce total unrealized losses to in the neighborhood of $900 million.
Notwithstanding these fluctuations because we are a buy and hold investor with the intent and ability to hold these securities to maturity and we expect to receive all principal and interest on all of them, none of the unrealized losses are considered other than temporary impairments which means that the unrealized losses do not run through our income statement.
On slide 23, we showed an example of what is going on in the market by look agent one particular security. We have listed all securities by queues up in our 10-K and 10-Q. There is a disparity within the market price for AAA rated option or mortgage backed securities and their intrinsic value. Clearly there are only modest bank purchases in todayâ€™s market. For example, looking at this particular security, the balance we own is $127 million. Our basis 102. The market bid during the first quarter could have been as low as 60. From a credit perspective, an investor should expect to receive full principal which costs the purchaser $0.60 on the dollar at this price and should expect to receive all stated interest with no expected losses of principal and interest in this bond in large part due to the high subordination levels.
We listed the subordination level of this bond in our 10-Q is17%. Of all that particular bond shows current 60-day delinquencies at 21%, you have to remember that actual charge-offs would have to exceed the 17% subordination level before this senior tranch will experience loss. In other words, 40% of the underlying homeowners defaulted at a weighted average 40% loss rate, that is 16% so this bond at 17% subordination level would still not experience loss.
Moving on to efficiency on slide number 24, noninterest expense was $99 million during the quarter, which on a run rate of $396 million for the year is about 6% increase from 2007. The increase 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. In addition, our marketing costs increased as we implemented initiatives relating to increasing consumer lending throughout our branch network and a new checking product. Our efficiency ratio increased to 71% for the quarter due in part to this increase in cost but it was also negatively affected by a low amount of average assets and a smaller spread.
Net noninterest expense of $57 million was actually flat from the fourth quarter of '07 and is only $3 million increase from the first quarter of '07 and with respect to particular line items shown on this slide, many of the increases are a result of reclassification from what was previously labeled shared service allocations from Temple-Inland. Those costs are now portioned out and on to the separate line items such as compensation occupancy and information system.
If you turn slide number 25, weâ€™ll outline the effort recently initiated to analyze and implement substantial cost reduction which Ken discussed earlier. This week, we are cutting 135 jobs or approximately 5% of the company's work force which results in $10 million total annualized expense reduction. Additional initiatives that we are looking at include limiting new hires, including not filling open positions, reducing travel expenditures, evaluating all of our operating units, evaluating our real estate and other nonearning assets. Reduction in planned expenditures and rationalizing our branch system. We plan to update you on our progress in these areas in the future.
Our last slide is slide number 26. We have shown our capital ratios as of March '08 and you can see that we remain well capitalized pursuant to OTS standards. Ken, with that I will turn it back over to you.
Thanks, Ron. Clearly this quarter was another very difficult period. These results, however, did not take us by surprise. I stated last quarter that we expected conditions to continue to be unfavorable for the bank throughout 2008 and that that this current cycle will not likely end soon. We were appropriately reserved at the end last quarter based on developments in economic conditions up to that point. And at this point, as a result of conditions that continue to deteriorate during the quarter, especially with our homebuilder borrowers, we felt that it was appropriate to set aside these additional reserves.
We are not, and I repeat, not, seeing broad-based weakness beyond our homebuilder construction. Our other portfolios are still performing quite well. We have not seen significant (inaudible) over to commercial real estate, so we are monitoring for potential weaknesses. We have conducted a correlation analysis of potential declines in consumer spending to test other portfolios such as corporate and middle market borrowers. For example, with respect to our borrowers in the building products business or electronics business. After that analysis, we are still not expecting significant credit deterioration spread to our other portfolio.
As to the economy and the industry in general, visibility on when the housing market will improve and homebuilder MPAs will(inaudible) decline is still difficult. As mentioned in our conference call last quarter, we expect general economic conditions to continue to be unfavorable for the bank throughout 2008. We also continue to expect that housing should bottom out this year. Lower rates would take some of the pressure off the mortgage market. And again while the deterioration in the housing and credit markets is clearly significant, (inaudible) it is important to reiterate that we do not originate the purchase of sub prime loans.
We have very few 2006 and 2007 vintage single-family mortgage loans. We bought standard structured mortgage backed securities and lending to home builders is a core competency for us that we have been doing for a long time and understand well. We believe it is highly likely that we are in a recession already, and unlike recent recessions this one can drag on while the financial markets correct. We expect that concern inside the fed over inflation and the dollar, though legitimate will be set aside for the time being.
Most of the burden will fall on the fed to follow the liquidity freeze and is likely to involve other central banks, sovereign well funds and more engineered mergers among commercial banks and investment banks. Clearly hedge funds and private equity are already setting up distressed asset function waiting for a perceived bottom. A confident bid will need to materialize in the mortgage market to perceive the chain of events necessary to cause home prices to stabilize and the economy begins to improve. The economy, jobs, assumption, industrial production (inaudible) will follow housing and housing is the catalyst. In the meantime, we will continue to do our best work with our borrowers to minimize losses. The rollout of our consumer lending throughout our retail branches continues to go well and is functioning smoothly.
We expect to be able to report substantive results of this customer acquisition strategy in a later quarter when we have more history to report on. Long term, our strategy is still to grow our commercial lending franchise, grow our retail franchise in Texas and California, increase fee income, provide distinctive customer service and improve our operating efficiency while maintaining strong credit and risk standards. During the short term, however, we are very much focused on the three Cs: credit, cost and capital. At the same time, we remain focused on customer service, quality growth and a conservative risk process. I want to thank you for your attention and interest in Guaranty Financial Group. While we have tried to anticipate many of your questions and provide candid and complete answers, we will be glad to answer any additional questions.