e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Quarterly Period Ended September 30, 2008 |
OR
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Transition Period From to |
Commission File Number: 001-33661
Guaranty Financial Group Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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74-2421034 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
1300 MoPac Expressway South, Austin, Texas 78746
(Address of Principal Executive Offices, including Zip code)
(512) 434-1000
(Registrants telephone number, including area code)
Not Applicable
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer þ |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date:
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Number of common shares outstanding |
Class |
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as of November 3, 2008 |
Common Stock (par value $1.00 per share)
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108,914,265 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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Unaudited |
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September 30, |
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December 31, |
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2008 |
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2007 |
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(In millions) |
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ASSETS |
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Cash and cash equivalents |
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$ |
229 |
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$ |
277 |
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Restricted cash |
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32 |
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107 |
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Loans held for sale |
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1 |
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16 |
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Loans, net of allowance for losses of $231 at
September 30, 2008 and $118 at December
31, 2007 |
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10,081 |
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9,928 |
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Securities available-for-sale |
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1,151 |
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1,882 |
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Securities held-to-maturity |
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2,884 |
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3,642 |
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Investment in Federal Home Loan Bank stock |
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224 |
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256 |
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Property and equipment, net |
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234 |
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233 |
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Accounts, notes, and accrued interest receivable |
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70 |
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97 |
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Goodwill |
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135 |
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144 |
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Other intangible assets |
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20 |
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26 |
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Deferred income taxes |
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138 |
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72 |
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Other assets |
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192 |
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116 |
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TOTAL ASSETS |
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$ |
15,391 |
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$ |
16,796 |
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LIABILITIES AND EQUITY |
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Deposits |
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$ |
9,210 |
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$ |
9,375 |
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Federal Home Loan Bank borrowings |
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4,464 |
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5,743 |
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Other liabilities |
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134 |
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125 |
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Subordinated notes payable to trust |
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314 |
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314 |
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Subordinated debt of subsidiary |
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237 |
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Subordinated debentures and other borrowings |
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31 |
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101 |
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TOTAL LIABILITIES |
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14,390 |
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15,658 |
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STOCKHOLDERS EQUITY |
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Preferred stock, par value $0.01 per share, 25
million shares authorized, 6.2 million shares
issued and outstanding at September 30, 2008 |
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Common stock, par value $1 per share, 200
million shares authorized, 44.7 million shares
issued and outstanding at September 30, 2008
and 35.4 million shares issued and outstanding
at December 31, 2007 |
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45 |
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35 |
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Additional paid-in-capital |
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1,256 |
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902 |
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(Accumulated deficit) retained earnings |
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(31 |
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236 |
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Accumulated other comprehensive loss, net |
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(269 |
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(35 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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1,001 |
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1,138 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
15,391 |
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$ |
16,796 |
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Please read the notes to the consolidated financial statements.
1
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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(In millions, except per share) |
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INTEREST INCOME |
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Loans and loans held for sale |
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$ |
123 |
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$ |
179 |
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$ |
405 |
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$ |
525 |
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Securities available-for-sale |
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23 |
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16 |
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78 |
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34 |
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Securities held-to-maturity |
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35 |
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53 |
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123 |
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170 |
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Federal Home Loan Bank stock dividends |
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1 |
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2 |
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6 |
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9 |
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Other earning assets |
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2 |
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1 |
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2 |
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3 |
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Total interest income |
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184 |
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251 |
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614 |
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741 |
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INTEREST EXPENSE |
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Deposits |
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(57 |
) |
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(88 |
) |
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(193 |
) |
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(257 |
) |
Borrowed funds |
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(44 |
) |
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(64 |
) |
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(140 |
) |
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(195 |
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Total interest expense |
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(101 |
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(152 |
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(333 |
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(452 |
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NET INTEREST INCOME |
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83 |
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99 |
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281 |
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289 |
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Provision for credit losses |
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(78 |
) |
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(19 |
) |
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(235 |
) |
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(17 |
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NET
INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES |
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5 |
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80 |
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46 |
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272 |
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NONINTEREST INCOME |
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Insurance commissions and fees |
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10 |
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13 |
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33 |
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38 |
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Service charges on deposits |
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14 |
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14 |
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42 |
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39 |
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Non-deposit investment sales commissions |
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6 |
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7 |
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22 |
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17 |
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Other-than-temporary-impairment on
mortgage-backed security |
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(53 |
) |
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(53 |
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Other |
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4 |
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8 |
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20 |
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25 |
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Total noninterest income |
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(19 |
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42 |
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64 |
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119 |
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NONINTEREST EXPENSE |
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Compensation and benefits |
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(46 |
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(45 |
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(145 |
) |
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(136 |
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Occupancy |
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(9 |
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(7 |
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(26 |
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(20 |
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Information systems and technology |
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(5 |
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(4 |
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(14 |
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(11 |
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Charges related to asset impairments and severance |
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(14 |
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(17 |
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Other |
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(31 |
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(34 |
) |
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(101 |
) |
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(110 |
) |
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Total noninterest expense |
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(105 |
) |
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(90 |
) |
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(303 |
) |
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(277 |
) |
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(LOSS) INCOME BEFORE TAXES |
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(119 |
) |
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32 |
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(193 |
) |
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114 |
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Income tax expense |
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(43 |
) |
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(11 |
) |
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(64 |
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(42 |
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NET (LOSS) INCOME |
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$ |
(162 |
) |
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$ |
21 |
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$ |
(257 |
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$ |
72 |
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NET (LOSS) INCOME APPLICABLE TO COMMON EQUITY |
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$ |
(218 |
) |
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$ |
21 |
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$ |
(313 |
) |
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$ |
72 |
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(LOSS) EARNINGS PER COMMON SHARE |
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Basic and diluted |
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$ |
(4.89 |
) |
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n/a |
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$ |
(7.94 |
) |
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n/a |
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AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |
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Basic and diluted |
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44.5 |
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n/a |
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39.4 |
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n/a |
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Please read the notes to the consolidated financial statements.
2
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Unaudited
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Nine Months Ended September 30, |
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2008 |
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2007 |
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(In millions) |
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CASH PROVIDED BY (USED FOR) OPERATIONS |
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Net (loss) income |
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$ |
(257 |
) |
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$ |
72 |
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Adjustments: |
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Depreciation and amortization |
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17 |
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13 |
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Depreciation of assets leased to others |
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4 |
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5 |
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Amortization of core deposit and other intangible assets |
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3 |
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4 |
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Amortization and accretion of financial instrument
discounts and premiums and deferred loan fees and
origination costs, net |
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(3 |
) |
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12 |
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Provision for credit losses |
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|
235 |
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17 |
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Deferred income taxes |
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58 |
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(8 |
) |
Other-than-temporary-impairment on mortgage-backed security |
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53 |
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Goodwill and intangible asset impairment |
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14 |
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Changes in loans held for sale |
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15 |
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4 |
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Other |
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6 |
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5 |
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|
145 |
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|
124 |
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CASH PROVIDED BY (USED FOR) INVESTING |
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Securities available-for-sale: |
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Purchases |
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(1,128 |
) |
Principal payments and maturities |
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|
102 |
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|
100 |
|
Sales |
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|
265 |
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Securities held-to-maturity: |
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Purchases |
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(142 |
) |
Principal payments and maturities |
|
|
555 |
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1,126 |
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Sales deemed to be at maturity |
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|
143 |
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Federal Home Loan Bank stock: |
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Purchases |
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(11 |
) |
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(21 |
) |
Redemption |
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49 |
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69 |
|
Loans originated or acquired, net of collections |
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(439 |
) |
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|
13 |
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Sales of loans |
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14 |
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22 |
|
Sales of foreclosed real estate |
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|
12 |
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|
5 |
|
Acquisitions, net of cash acquired |
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(7 |
) |
Capital expenditures |
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(18 |
) |
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(29 |
) |
Other |
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|
1 |
|
|
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(4 |
) |
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|
673 |
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|
4 |
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CASH PROVIDED BY (USED FOR) FINANCING |
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Deposits, net |
|
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(165 |
) |
|
|
(134 |
) |
Repurchase agreements and short-term borrowings, net |
|
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(1,039 |
) |
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|
351 |
|
Long-term Federal Home Loan Bank and other borrowings: |
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|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
445 |
|
Payments |
|
|
(240 |
) |
|
|
(797 |
) |
Issuance of subordinated debt of subsidiary |
|
|
237 |
|
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Issuance of subordinated notes payable to trust |
|
|
|
|
|
|
172 |
|
Redemption of preferred stock issued by subsidiaries |
|
|
|
|
|
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(305 |
) |
Sale of common stock |
|
|
38 |
|
|
|
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|
Sale of preferred stock |
|
|
312 |
|
|
|
|
|
Dividends paid to Temple-Inland Inc. |
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|
|
|
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(35 |
) |
Other |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(866 |
) |
|
|
(303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net decrease in cash and cash equivalents |
|
|
(48 |
) |
|
|
(175 |
) |
Cash and cash equivalents at beginning of period |
|
|
277 |
|
|
|
372 |
|
|
|
|
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|
Cash and cash equivalents at end of period |
|
$ |
229 |
|
|
$ |
197 |
|
|
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Interest paid |
|
$ |
322 |
|
|
$ |
453 |
|
|
|
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|
Please read the notes to the consolidated financial statements.
3
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Unaudited
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Accumulated |
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(Accumulated |
|
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Other |
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Preferred |
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Common |
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Additional |
|
|
deficit) |
|
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Comprehensive |
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Total |
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Shares |
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Shares |
|
|
|
|
|
|
Paid-in- |
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Retained |
|
|
(Loss) Income, |
|
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Stockholders |
|
|
|
Outstanding |
|
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Outstanding |
|
|
Common Stock |
|
|
Capital |
|
|
Earnings |
|
|
net |
|
|
Equity |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
|
|
|
|
35 |
|
|
$ |
35 |
|
|
$ |
902 |
|
|
$ |
236 |
|
|
$ |
(35 |
) |
|
$ |
1,138 |
|
Net loss first six months 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95 |
) |
|
|
|
|
|
|
(95 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
losses on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(459 |
) |
|
|
(459 |
) |
Associated deferred taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for six months ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(394 |
) |
Sale of common stock |
|
|
|
|
|
|
8 |
|
|
|
8 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
38 |
|
Share-based compensation, share-settled awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Issuance of shares upon vesting of restricted
stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Restricted stock grants |
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
|
|
|
|
|
45 |
|
|
$ |
45 |
|
|
$ |
934 |
|
|
$ |
141 |
|
|
$ |
(334 |
) |
|
$ |
786 |
|
Net loss third quarter 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(162 |
) |
|
|
|
|
|
|
(162 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
losses on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
99 |
|
Associated deferred taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for three months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97 |
) |
Sale of preferred stock |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
312 |
|
Preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
|
6 |
|
|
|
45 |
|
|
$ |
45 |
|
|
$ |
1,256 |
|
|
$ |
(31 |
) |
|
$ |
(269 |
) |
|
$ |
1,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for nine months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to the consolidated financial statements.
4
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 Summary of Significant Accounting Policies
Background
Guaranty Financial Group Inc. (Guaranty, we, or our in these financial statements) is a
grandfathered unitary savings and loan holding company that owns several subsidiaries, the most
significant of which is Guaranty Bank, a federally-chartered savings bank. Guaranty Bank offers a
broad range of retail banking services in two primary markets, Texas and California, and lends to
business and commercial customers in target markets throughout the United States. Guaranty Bank
also conducts insurance agency operations through its subsidiary, Guaranty Insurance Services, Inc.
In third quarter 2008, we sold 6.2 million shares of our Series B Mandatory Convertible
Perpetual Cumulative Preferred Stock, and $275 million face value of subordinated debt of Guaranty
Bank, in private placements for aggregate proceeds of $562 million, before offering costs of $21
million (the Private Placements). On September 29, 2008, our stockholders approved the
conversion of the preferred stock into common shares, and on October 1, 2008 the conversion
occurred. Prior to conversion, the convertible preferred stock accrued dividends at a rate of 14%
per year and dividends accrued through the conversion date were paid in shares of common stock
based on the conversion price of the convertible preferred stock. We used the net proceeds from
these transactions to repay Federal Home Loan Bank (FHLB) borrowings. Substantially all of the
net proceeds qualify as regulatory capital for Guaranty Bank.
Basis of Presentation
We prepare our unaudited interim financial statements in accordance with generally accepted
accounting principles (GAAP) and Securities and Exchange Commission (the SEC or Commission)
requirements for interim financial statements. As a result, we do not include all the information
and disclosures required by GAAP for complete financial statements. However, in our opinion, we
have included all adjustments considered necessary for a fair presentation. Our interim operating
results are not necessarily indicative of the results that may be expected for the entire year.
Actual results can, and probably will, differ from those we currently estimate. Examples of
significant estimates include our allowance for credit losses, valuation of mortgage-backed
securities and assessment of whether any impairment is other-than-temporary, ability to realize
deferred tax assets, and our assessments of goodwill and other intangible assets for impairment.
For further information, please read the financial statements and related notes included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
New Accounting Pronouncements
Effective January 1, 2008, we adopted Statement of Financial Accounting Standard (SFAS) No.
157, Fair Value Measures and SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP,
and expands disclosures about fair value measurements. SFAS No. 159 permits an entity to elect
fair value as the initial and subsequent measurement method for financial assets and liabilities.
We have not elected the fair value option for any financial instruments. The adoption of SFAS No.
157 and SFAS No. 159 did not have a material impact on the measurement of our financial statements.
For more information about the fair value of our financial instruments, see Note 13.
In September 2008, the SEC issued a memorandum, SEC Office of the Chief Accountant and FASB
Staff Clarifications on Fair Value Accounting, and in October 2008, the Financial Accounting
Standards Board (FASB) issued Staff Position FSP 157-3, Determining the Fair Value of a Financial
Asset When the Market for that Asset is Not Active. The SEC memorandum and the FSP both addressed
fair value measurements when there are few observable transactions for a financial instrument.
There are currently no observable transactions for our non-agency mortgage-backed securities, and
little reliable observable evidence. Broker price estimates we received for these securities vary widely from broker-to-broker. As a result, in third quarter 2008 we
have used internal measurement methods, maximizing the use of available observable evidence, in
estimating the value of our non-agency mortgage-backed securities. As a result of the issuance of
the SEC memorandum and the FSP, we placed somewhat less weight on non-binding indicative broker
quotations for the non-agency securities than we have in previous periods. However, we consider
our fair value measurements appropriate.
5
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Pending Accounting Pronouncements
SFAS No. 141 (revised 2007), Business Combinations This new standard retains the acquisition
(purchase) method of accounting of SFAS No. 141, establishes the acquisition date as the date the
acquirer achieves control, and requires assets acquired and liabilities assumed be measured at
their fair values at that date. One implication of SFAS No. 141 to financial institutions is
historical allowance for loan losses of the acquired entity will not be recorded by the acquiror;
rather, the acquiror will record the loans at fair value, which will be reduced by the fair value
of the credit risk inherent in those loans. SFAS No. 141 will be effective for us beginning
January 1, 2009.
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of
FASB Statement No. 133 This new standard expands disclosures about derivative instruments in
financial statements. SFAS No. 161 will be effective for us beginning January 1, 2009. We are
currently assessing the effect SFAS No. 161 will have on our financial statements, but anticipate
it will only result in additional disclosures regarding derivative instruments, which are presently
insignificant to us.
Note 2 Loans
Loans consist of:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
Single-family mortgage |
|
$ |
1,397 |
|
|
$ |
1,672 |
|
Single-family mortgage warehouse |
|
|
924 |
|
|
|
695 |
|
Single-family construction (homebuilders) |
|
|
1,060 |
|
|
|
1,510 |
|
Multifamily and senior housing |
|
|
2,044 |
|
|
|
1,541 |
|
Commercial real estate |
|
|
1,837 |
|
|
|
1,674 |
|
Commercial and business |
|
|
1,432 |
|
|
|
1,340 |
|
Energy |
|
|
1,399 |
|
|
|
1,470 |
|
Consumer and other |
|
|
219 |
|
|
|
144 |
|
|
|
|
|
|
|
|
Total loans |
|
|
10,312 |
|
|
|
10,046 |
|
Less allowance for loan losses |
|
|
(231 |
) |
|
|
(118 |
) |
|
|
|
|
|
|
|
Loans, net |
|
$ |
10,081 |
|
|
$ |
9,928 |
|
|
|
|
|
|
|
|
Our single-family mortgage loans include $377 million at September 30, 2008, and $502 million
at December 31, 2007, of adjustable-rate mortgages that have various monthly payment options
(Option ARMs). We collected a net of $1 million of previously deferred interest on Option ARMs
in third quarter 2008 and $4 million in first nine months 2008. We recognized and added to the
principal balance of Option ARMs $2 million in interest income in third quarter 2007 and $5 million
in first nine months 2007. Cumulative deferred unpaid interest on Option ARMs was $18 million at
September 30, 2008 and $22 million at December 31, 2007.
At September 30, 2008, we had $3.5 billion of unfunded commitments related to outstanding
loans and $365 million in commitments to originate loans. At September 30, 2008, we had
outstanding standby letters of credit totaling $292 million, which represent our obligation to
guarantee payment of other entities specified financial obligations or to make payments based on
any failure by them to perform under an obligating agreement. The amount, if any, we will
ultimately have to fund is uncertain, but we have not historically been required to fund a
significant amount of letters of credit. At September 30, 2008, we did not have a significant
amount of deferred fees related to letters of credit.
6
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
At September 30, 2008, we had $1.1 billion of real estate construction loans and $366 million
of unfunded loan commitments to single-asset commercial real estate construction entities we
believe meet the definition of a variable interest entity. Our involvement is as a lender in the
customary form and we do not bear or benefit from the majority of the variability in cash flow or
fair value of each entitys assets.
Activity in the allowance for credit losses was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
250 |
|
|
$ |
72 |
|
|
$ |
118 |
|
|
$ |
65 |
|
Provision for loan losses |
|
|
81 |
|
|
|
19 |
|
|
|
234 |
|
|
|
17 |
|
Charge-offs |
|
|
(100 |
) |
|
|
(1 |
) |
|
|
(123 |
) |
|
|
(4 |
) |
Recoveries |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
231 |
|
|
|
91 |
|
|
|
231 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded credit commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
11 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
Provision (credit) for commitment-related
credit losses |
|
|
(3 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
8 |
|
|
|
7 |
|
|
|
8 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined allowances for credit losses at end of period |
|
$ |
239 |
|
|
$ |
98 |
|
|
$ |
239 |
|
|
$ |
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (credit) for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan losses |
|
$ |
81 |
|
|
$ |
19 |
|
|
$ |
234 |
|
|
$ |
17 |
|
Commitment-related credit losses |
|
|
(3 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined provision for credit losses |
|
$ |
78 |
|
|
$ |
19 |
|
|
$ |
235 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about the unpaid principal balance of past due, nonaccrual, restructured, and
impaired loans follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days or more |
|
$ |
27 |
|
|
$ |
6 |
|
Recorded investment in nonaccrual loans |
|
|
470 |
|
|
|
166 |
|
Restructured troubled loans included in nonaccrual loans |
|
|
|
|
|
|
1 |
|
Recorded investment in impaired loans (included in nonaccrual loans) |
|
|
234 |
|
|
|
118 |
|
Allowance for loan losses on impaired loans |
|
|
42 |
|
|
|
20 |
|
Direct reduction of recorded investment in impaired loans
(principal charged off) |
|
|
84 |
|
|
|
4 |
|
Performing restructured troubled loans |
|
|
8 |
|
|
|
|
|
Performing loans restructured at market rates (deemed troubled) |
|
|
90 |
|
|
|
29 |
|
Our nonaccrual loans at September 30, 2008 include $295 million of single-family construction
(homebuilder) loans and $108 million of single-family mortgage loans. We did not recognize a
significant amount of interest income on impaired loans in first nine months 2008 or 2007.
Interest income we would have recognized on nonaccrual loans, had they been performing in
accordance with contractual terms, was $8 million in third quarter 2008, $19 million in first nine
months 2008, and $1 million in third quarter 2007 and first nine months 2007.
Foreclosed assets were $50 million at September 30, 2008 and $13 million at December 31, 2007.
We expect foreclosed assets to increase further in fourth quarter 2008, principally a result of
increasing foreclosures on single-family houses and residential lots collateralizing homebuilder
loans.
7
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Beginning in third quarter 2007 and through second quarter 2008, we solicited for modification
performing single-family mortgage loan borrowers whose loans were nearing the end of a fixed rate
accrual period and would soon enter the floating rate period of their loan contracts. We obtained updated credit
scores for the borrowers and offered them five-year extended fixed rate accrual periods at the
then-current market rate for borrowers with similar credit scores. Our objective in making these
offers was to retain performing loans, which we expected the borrowers would likely otherwise
refinance with other lenders offering fixed rate terms. We only offered these terms to performing
borrowers who had not previously been delinquent and had not inquired of us to reduce payment
terms. We did not re-underwrite the loan collateral or further underwrite the borrowers income.
As a result, we are unable to determine what interest rate the borrowers on loans we modified would
have been able to obtain from other lenders. Therefore, we have categorized the loans we modified
under this performing loan modification program as trouble debt restructurings. At September 30,
2008, 89% of the borrowers were current on their loan payments, and we estimate approximately 80%
of the loans have a current loan-to-value ratio below 80%.
Note 3 Securities
Securities consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Fair Value |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
At September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government |
|
$ |
12 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12 |
|
U.S. Government Sponsored Enterprises (FNMA,
FHLMC) |
|
|
216 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
216 |
|
Non-agency |
|
|
1,333 |
|
|
|
|
|
|
|
(414 |
) |
|
|
919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,561 |
|
|
|
2 |
|
|
|
(416 |
) |
|
|
1,147 |
|
Equity securities |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,565 |
|
|
$ |
2 |
|
|
$ |
(416 |
) |
|
$ |
1,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government |
|
$ |
48 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
47 |
|
U.S. Government Sponsored Enterprises (FNMA, FHLMC) |
|
|
671 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
672 |
|
Non-agency |
|
|
2,165 |
|
|
|
|
|
|
|
(785 |
) |
|
|
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,884 |
|
|
$ |
3 |
|
|
$ |
(788 |
) |
|
$ |
2,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government |
|
$ |
14 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
14 |
|
U.S. Government Sponsored Enterprises (FNMA,
FHLMC) |
|
|
552 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
552 |
|
Non-agency |
|
|
1,366 |
|
|
|
|
|
|
|
(54 |
) |
|
|
1,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,932 |
|
|
|
4 |
|
|
|
(58 |
) |
|
|
1,878 |
|
Equity securities |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,936 |
|
|
$ |
4 |
|
|
$ |
(58 |
) |
|
$ |
1,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government |
|
$ |
57 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
57 |
|
U.S. Government Sponsored Enterprises (FNMA, FHLMC) |
|
|
1,172 |
|
|
|
4 |
|
|
|
(3 |
) |
|
|
1,173 |
|
Non-agency |
|
|
2,413 |
|
|
|
1 |
|
|
|
(213 |
) |
|
|
2,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,642 |
|
|
$ |
5 |
|
|
$ |
(216 |
) |
|
$ |
3,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
At acquisition, all of the non-agency securities we own carried AAA ratings by two different
nationally recognized securities rating organizations. At September 30, 2008, each of those rating
organizations had downgraded some of these securities. The following information summarizes our
non-agency securities by the lowest rating assigned by either of those rating organizations at
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Fair Value |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
Highest investment grade |
|
$ |
1,335 |
|
|
$ |
972 |
|
Second-highest investment grade |
|
|
148 |
|
|
|
98 |
|
Third-highest investment grade |
|
|
248 |
|
|
|
154 |
|
Lowest investment grade |
|
|
820 |
|
|
|
534 |
|
One grade below investment grade |
|
|
745 |
|
|
|
392 |
|
Below |
|
|
202 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
$ |
3,498 |
|
|
$ |
2,299 |
|
|
|
|
|
|
|
|
See Note 13 of these Notes to the Consolidated Financial Statements for disclosures about our
fair value estimates.
In third quarter 2008, we sold U.S. Government Sponsored Enterprise-issued securities totaling
$412 million in amortized cost, including securities classified as available-for-sale and held-to-maturity. Each of the held-to-maturity securities and substantially all of the available-for-sale securities
had a remaining
principal balance less than 15% of the amount outstanding when we acquired the security. As
allowed by GAAP, we have deemed such sales to be maturities for purposes of classification of our
remaining securities. The remaining available-for-sale securities sold were sold at prices close to par value.
At September 30, 2008, we determined it probable we would not recover all principal and stated
interest on one of the non-agency securities we own. As a result, we recorded a charge to other
noninterest income in earnings of $53 million to reduce the carrying amount of the security to the
estimated fair value of $79 million.
A significant amount of the mortgage-backed securities we own have Option ARMs as the
underlying assets. None of the securities include sub-prime loans as underlying assets. The
amortized cost at September 30, 2008 of securities in our portfolio with Option ARMs as the
underlying assets was $3.6 billion. Of these, $249 million were issued by U.S. Government
Sponsored Enterprises (FNMA, FHLMC) and the remaining $3.3 billion are senior or senior-support
tranches issued by non-agency institutions.
Other than the security for which we recorded an other-than-temporary-impairment, we consider
the unrealized losses on the securities we own to be temporary because:
|
|
|
The securities cannot be settled at maturity or through prepayment in a way precluding
recovery of substantially all of our recorded investment. We do not have significant
purchase premiums on the securities. |
|
|
|
|
We have no specific plans to sell these securities and we have the ability and intent
to hold them until repayment. |
|
|
|
|
We believe, based on our current estimates of cash flows on the securities, we will
receive all stated interest and principal. Each of the non-agency securities is
credit-enhanced by subordinate tranches not owned by us, which will absorb credit losses of
the underlying loans until those tranches are depleted. We currently estimate the credit
losses on the underlying loans will not exceed those subordinate tranches and other forms
of credit enhancement and, therefore, our securities will not incur credit losses. |
9
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4 Deposits
Deposits consist of:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand |
|
$ |
315 |
|
|
$ |
779 |
|
Interest-bearing demand |
|
|
3,850 |
|
|
|
3,648 |
|
Savings deposits |
|
|
182 |
|
|
|
172 |
|
Certificates of deposit |
|
|
4,818 |
|
|
|
4,776 |
|
Brokered certificates of deposit |
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,210 |
|
|
$ |
9,375 |
|
|
|
|
|
|
|
|
At September 30, 2008, approximately $1.1 billion (12%) of our deposits, excluding those of
our subsidiaries and affiliates, exceeded the then-current federal deposit insurance limit of
$100,000 per individual. Subsequent to September 30, 2008, a change in federal law temporarily
increased insured deposit coverage to $250,000 per individual. At September 30, 2008,
approximately $174 million (2%) of our non-commercial deposits exceeded $250,000 per individual,
and $401 million of our commercial deposits (excluding those of our subsidiaries and affiliates)
exceeded $250,000. The Federal Deposit Insurance Corporation (the FDIC) subsequently determined
to temporarily insure, for a 30 day free coverage period, most commercial noninterest-bearing
transaction accounts beyond the $250,000 limit. That coverage began on October 14, 2008. The FDIC
later announced details about continuing full insurance coverage beyond the initial 30 day free
coverage period, after which institutions will pay an annualized 10 basis point assessment for this
coverage. This assessment will be collected quarterly for coverage from November 13, 2008 through
December 31, 2009. Institutions that do not opt-out of the extended program for commercial
deposits by December 5, 2008 will pay this special assessment. Though our participation in any
extended insurance program for commercial deposits is dependent on the ultimate program features
and cost, it is unlikely we will choose to opt-out before the deadline.
Note 5 Borrowings
We allocated $237 million of the proceeds from the Private Placements to the Guaranty Bank
subordinated debt. The Guaranty Bank subordinated debt accrues interest at 12% on its $275 million
face amount, resulting in an effective interest rate of approximately 15% after accretion of the
discount and amortization of offering costs we allocated to the subordinated debt. We are entitled
to call the Guaranty Bank subordinated debt at face value beginning in June 2013 and it matures in
June 2018.
Information about our short-term (original maturities of 12 months or less) and long-term
(original maturities greater than 12 months) FHLB borrowings and other
borrowings follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Ending |
|
|
|
|
|
|
Ending |
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term FHLB borrowings |
|
$ |
3,910 |
|
|
|
2.5 |
% |
|
$ |
4,949 |
|
|
|
4.3 |
% |
Long-term FHLB borrowings |
|
|
554 |
|
|
|
4.3 |
% |
|
|
794 |
|
|
|
4.2 |
% |
Subordinated notes payable to trust |
|
|
314 |
|
|
|
4.5 |
% |
|
|
314 |
|
|
|
7.2 |
% |
Subordinated debt of subsidiary |
|
|
237 |
|
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
Subordinated debentures and other borrowings |
|
|
31 |
|
|
|
7.1 |
% |
|
|
101 |
|
|
|
8.5 |
% |
In second quarter 2008, we redeemed $25 million, and in third quarter 2008 we redeemed $45
million, of our subordinated debentures using restricted cash we had placed on deposit with the
trustee in 2007 for the debentures.
10
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Interest expense on borrowings consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term FHLB borrowings |
|
$ |
26 |
|
|
$ |
49 |
|
|
$ |
93 |
|
|
$ |
142 |
|
Long-term FHLB borrowings |
|
|
7 |
|
|
|
7 |
|
|
|
23 |
|
|
|
25 |
|
Subordinated notes payable to trust |
|
|
3 |
|
|
|
6 |
|
|
|
12 |
|
|
|
14 |
|
Subordinated debt of subsidiary |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
Subordinated debentures and other borrowings |
|
|
1 |
|
|
|
2 |
|
|
|
5 |
|
|
|
7 |
|
Preferred stock issued by subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
44 |
|
|
$ |
64 |
|
|
$ |
140 |
|
|
$ |
195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, $12 billion in principal balance of our loans and securities were
pledged as collateral for FHLB borrowings.
Note 6 (Loss) Earnings Per Common Share
We compute (loss) earnings per common share by dividing net (loss) income applicable to common
equity by the weighted average common shares outstanding as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In millions, except per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(162 |
) |
|
$ |
21 |
|
|
$ |
(257 |
) |
|
$ |
72 |
|
Preferred dividends |
|
|
(10 |
) |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
Beneficial conversion feature |
|
|
(46 |
) |
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common equity |
|
$ |
(218 |
) |
|
$ |
21 |
|
|
$ |
(313 |
) |
|
$ |
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
and diluted |
|
|
44.5 |
|
|
|
n/a |
|
|
|
39.4 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share basic and diluted |
|
$ |
(4.89 |
) |
|
|
n/a |
|
|
$ |
(7.94 |
) |
|
|
n/a |
|
We have not included outstanding option awards or unvested restricted stock in our diluted
weighted average shares outstanding calculations for 2008 because those items would have been
anti-dilutive as a result of our net loss. Because Temple-Inland Inc. did not distribute our stock
until December 28, 2007, we do not present earnings per share under GAAP for 2007. Had our stock
been outstanding in third quarter 2007 and first nine months 2007 in the amount distributed by
Temple-Inland Inc., basic earnings per share would have been $0.59 and $2.04 (proforma).
Because the preferred stock we sold in the Private Placements was mandatorily
convertible into common stock upon the September 29, 2008 approval by our stockholders, and there
were no other circumstances under which the shares would not be issued, we included the equivalent
common shares in the calculation of weighted average common shares outstanding beginning on the
date of conversion approval by our stockholders. Prior to conversion, the preferred stock was
anti-dilutive to our diluted loss per share.
The conversion price for the preferred stock of $5.17 per share was below the $6.01 per share
market price for our common stock on the effective date of the Private Placements. This beneficial
conversion feature was recognized as a one time deemed preferred dividend in third quarter 2008
upon stockholder approval of the conversion.
11
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
At September 30, 2008, Temple-Inland Inc. and Forestar Real Estate Group Inc. directors and
employees held 28 thousand stock-settled units on our stock. The following information summarizes
outstanding stock option awards on our stock held by Temple-Inland Inc. and Forestar Real Estate
Group Inc. directors and employees at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
(Current |
|
|
|
|
|
|
|
Exercise Price |
|
|
Contractual |
|
|
Value Less |
|
|
|
Shares |
|
|
Per Share |
|
|
Term |
|
|
Exercise Price) |
|
|
|
(In thousands) |
|
|
|
|
|
|
(In years) |
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
1,605 |
|
|
$ |
12 |
|
|
|
5 |
|
|
$ |
|
|
Exercisable |
|
|
1,276 |
|
|
|
11 |
|
|
|
5 |
|
|
|
|
|
Note 7 Income Taxes
A reconciliation of the federal statutory rate to our effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
State taxes, net of federal benefit |
|
|
(1 |
)% |
|
|
1 |
% |
|
|
(1 |
)% |
|
|
2 |
% |
Valuation allowance on deferred tax assets |
|
|
(66 |
)% |
|
|
|
|
|
|
(64 |
)% |
|
|
|
|
Impairment of non-deductible goodwill |
|
|
(4 |
)% |
|
|
|
|
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36 |
)% |
|
|
36 |
% |
|
|
(33 |
)% |
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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. We are unable to carry
back any net operating tax losses to periods prior to our spin off from Temple-Inland Inc.
Therefore, our ability to realize deferred tax assets depends upon our tax planning strategies,
including holding available-for-sale securities to repayment, and our generation of future taxable
income. We consider deferred tax assets related to unrealized losses on available-for-sale
mortgage-backed securities not considered other-than-temporary more-likely-than-not to be realized
because we expect the temporary differences to reverse without resulting in tax deductions. Our
recent operating results, current economic conditions, and challenges in our loan portfolio make it
difficult to predict future operating results with sufficient certainty to support recoverability
of the other deferred tax assets. As a result, we increased our valuation allowance against
deferred tax assets by $85 million in third quarter 2008.
We file income tax returns in the U.S. federal jurisdiction and various states. With few
exceptions, we are no longer subject to U.S. federal, state, and local income tax examinations by
authorities for years before 2004. Because of timing differences between when expenses are
recognized under GAAP and when items become deductible on our tax returns, we may pay taxes in a
period in which we report a net loss under GAAP.
12
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Significant components of our deferred taxes are:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
81 |
|
|
$ |
41 |
|
Unrealized losses on available-for-sale and impaired securities |
|
|
163 |
|
|
|
19 |
|
Other |
|
|
54 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
298 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Investment in FHLB stock |
|
|
(20 |
) |
|
|
(18 |
) |
Other |
|
|
(9 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
(29 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance |
|
|
269 |
|
|
|
72 |
|
Valuation allowance |
|
|
(131 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
138 |
|
|
$ |
72 |
|
|
|
|
|
|
|
|
Note 8 Litigation
We are involved in various legal proceedings that arise from time to time in the ordinary
course of doing business and believe we have established adequate reserves for any probable losses.
We do not believe the outcome of any of these proceedings will have a significant adverse effect
on our financial position, long-term results of operations, or cash flow. It is possible, however,
charges related to these matters could be significant to our results or cash flow in any one
period.
A class action in California, related to our former mortgage banking operations, was dismissed
but remains under appeal by the plaintiff. We have established reserves we believe are adequate
for this matter, and do not anticipate the outcome will have a significant adverse effect on our
financial position or results of operations or cash flow.
As a result of our participation in the Visa USA (Visa) network, principally related to ATM
and debit cards, we own 33 thousand Class B common shares of Visa for which we have no carrying
value. As a former member of Visa, we participate in an indemnification provision in Visas
bylaws. We are not a named defendant in any of Visas litigation matters, and have no access to
any non-public information about the matters. Visa recently announced it had reached settlement on
one of the indemnified matters. Based on the information we have obtained we do not believe our
indemnification obligation for that matter is significant.
Note 9 Segment Information
We currently operate in four business segments:
|
|
|
Commercial banking, |
|
|
|
|
Retail banking, |
|
|
|
|
Insurance agency, and |
|
|
|
|
Treasury, corporate and other. |
We evaluate performance based on income before taxes and unallocated expenses. Unallocated
expenses represent expenses managed on a company-wide basis and include share-based compensation,
charges related to asset impairments and severance, and prior to 2008, other expenses allocated to
us by Temple-Inland Inc. but not directly attributable to us. In third quarter 2008, we began
internally reporting and measuring all of our non-deposit investment sales business within our
Retail Banking segment. The following segment information reflects those activities in the Retail
Banking segment for all periods presented.
13
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury, |
|
|
|
|
|
|
Commercial |
|
|
Retail |
|
|
Insurance |
|
|
Mortgage |
|
|
Corporate |
|
|
|
|
|
|
Banking |
|
|
Banking |
|
|
Agency |
|
|
Banking |
|
|
and Other |
|
|
Total |
|
|
|
(In millions) |
|
For the Three Months Ended
September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
65 |
|
|
$ |
20 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
83 |
|
(Provision) credit for credit losses |
|
|
(71 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(5 |
) |
|
|
(78 |
) |
Noninterest income |
|
|
7 |
|
|
|
19 |
|
|
|
10 |
|
|
|
|
|
|
|
(55 |
) |
|
|
(19 |
) |
Noninterest expense |
|
|
(18 |
) |
|
|
(55 |
) |
|
|
(11 |
) |
|
|
(1 |
) |
|
|
(20 |
)(a) |
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income/(loss)
before taxes |
|
$ |
(17 |
) |
|
$ |
(17 |
) |
|
$ |
(1 |
) |
|
$ |
(2 |
) |
|
$ |
(82 |
) |
|
$ |
(119 |
) |
Average assets |
|
$ |
10,023 |
|
|
$ |
691 |
|
|
$ |
79 |
|
|
$ |
30 |
|
|
$ |
4,960 |
|
|
$ |
15,783 |
|
Goodwill |
|
|
|
|
|
|
107 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
135 |
|
Depreciation and amortization |
|
|
1 |
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
8 |
|
Capital expenditures |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
5 |
|
For the Three Months Ended
September 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
69 |
|
|
$ |
32 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
99 |
|
(Provision) credit for credit losses |
|
|
(17 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(19 |
) |
Noninterest income |
|
|
7 |
|
|
|
21 |
|
|
|
13 |
|
|
|
1 |
|
|
|
|
|
|
|
42 |
|
Noninterest expense |
|
|
(15 |
) |
|
|
(55 |
) |
|
|
(12 |
) |
|
|
(2 |
) |
|
|
(6 |
)(a) |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income/(loss)
before taxes |
|
$ |
44 |
|
|
$ |
(3 |
) |
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
(9 |
) |
|
$ |
32 |
|
Average assets |
|
$ |
9,654 |
|
|
$ |
605 |
|
|
$ |
95 |
|
|
$ |
43 |
|
|
$ |
5,508 |
|
|
$ |
15,905 |
|
Goodwill |
|
|
|
|
|
|
107 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
144 |
|
Depreciation and amortization |
|
|
1 |
|
|
|
5 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Capital expenditures |
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
202 |
|
|
$ |
61 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18 |
|
|
$ |
281 |
|
(Provision) credit for credit losses |
|
|
(209 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(22 |
) |
|
|
(235 |
) |
Noninterest income |
|
|
21 |
|
|
|
62 |
|
|
|
33 |
|
|
|
|
|
|
|
(52 |
) |
|
|
64 |
|
Noninterest expense |
|
|
(55 |
) |
|
|
(171 |
) |
|
|
(35 |
) |
|
|
(3 |
) |
|
|
(39 |
)(a) |
|
|
(303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income/(loss)
before taxes |
|
$ |
(41 |
) |
|
$ |
(51 |
) |
|
$ |
(2 |
) |
|
$ |
(4 |
) |
|
$ |
(95 |
) |
|
$ |
(193 |
) |
Average assets |
|
$ |
10,100 |
|
|
$ |
653 |
|
|
$ |
85 |
|
|
$ |
32 |
|
|
$ |
5,336 |
|
|
$ |
16,206 |
|
Goodwill |
|
|
|
|
|
|
107 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
135 |
|
Depreciation and amortization |
|
|
5 |
|
|
|
13 |
|
|
|
2 |
|
|
|
|
|
|
|
4 |
|
|
|
24 |
|
Capital expenditures |
|
|
2 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
18 |
|
For the Nine Months Ended
September 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
207 |
|
|
$ |
92 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(10 |
) |
|
$ |
289 |
|
(Provision) credit for credit losses |
|
|
(15 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
Noninterest income |
|
|
24 |
|
|
|
56 |
|
|
|
38 |
|
|
|
1 |
|
|
|
|
|
|
|
119 |
|
Noninterest expense |
|
|
(51 |
) |
|
|
(163 |
) |
|
|
(34 |
) |
|
|
(10 |
) |
|
|
(19 |
)(a) |
|
|
(277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income/(loss)
before taxes |
|
$ |
165 |
|
|
$ |
(17 |
) |
|
$ |
4 |
|
|
$ |
(9 |
) |
|
$ |
(29 |
) |
|
$ |
114 |
|
Average assets |
|
$ |
9,623 |
|
|
$ |
606 |
|
|
$ |
93 |
|
|
$ |
47 |
|
|
$ |
5,417 |
|
|
$ |
15,786 |
|
Goodwill |
|
|
|
|
|
|
107 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
144 |
|
Depreciation and amortization |
|
|
5 |
|
|
|
12 |
|
|
|
2 |
|
|
|
|
|
|
|
3 |
|
|
|
22 |
|
Capital expenditures |
|
|
4 |
|
|
|
19 |
|
|
|
1 |
|
|
|
|
|
|
|
5 |
|
|
|
29 |
|
|
|
|
(a) |
|
Includes unallocated expenses of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
$ |
(5 |
) |
|
$ |
(5 |
) |
Charges related to asset impairments and severance |
|
|
(14 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
Expenses allocated to us by Temple-Inland Inc.
but not directly attributable to us |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(7 |
) |
Other |
|
|
(5 |
) |
|
|
(3 |
) |
|
|
(17 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(20 |
) |
|
$ |
(6 |
) |
|
$ |
(39 |
) |
|
$ |
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 10 Noninterest Expense
We paid severance of $1 million in third quarter 2008, and expensed and paid $3 million
through first nine months 2008, related to a reduction in our work force. Additionally, in third
quarter 2008, we determined the goodwill and other intangible assets related to our insurance
agency were impaired and recorded a $14 million impairment charge to reduce the carrying amounts of
those assets to their estimated fair value.
Other noninterest expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and promotional |
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
16 |
|
|
$ |
11 |
|
Furniture, fixtures, and equipment |
|
|
5 |
|
|
|
5 |
|
|
|
16 |
|
|
|
13 |
|
Professional services |
|
|
5 |
|
|
|
3 |
|
|
|
13 |
|
|
|
7 |
|
Travel and other employee costs |
|
|
2 |
|
|
|
2 |
|
|
|
8 |
|
|
|
7 |
|
Postage, printing, and supplies |
|
|
2 |
|
|
|
2 |
|
|
|
6 |
|
|
|
6 |
|
Litigation charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Depreciation of assets leased to others |
|
|
1 |
|
|
|
2 |
|
|
|
4 |
|
|
|
5 |
|
Other |
|
|
11 |
|
|
|
9 |
|
|
|
38 |
|
|
|
34 |
|
Shared services allocation from Temple-Inland Inc. |
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31 |
|
|
$ |
34 |
|
|
$ |
101 |
|
|
$ |
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11 Share-Based Compensation
We have stockholder approved share-based compensation plans permitting awards to key employees
and non-employee directors of stock-based awards, including restricted stock and options to
purchase shares of our common stock.
Share-based compensation expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock |
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
1 |
|
Cash-settled awards |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Stock options |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-settled award compensation expense is dependent on the price of the underlying shares and
can vary significantly. The fair value, and related compensation expense, of restricted stock and
stock options are determined at the date of grant and do not typically change for subsequent
changes in share price. The amount of expense will change, however, as a result of actual and
estimated forfeitures. Additionally, the amount of expense recognized for awards subject to a
performance condition will depend on whether it is probable the condition will be satisfied. In
third quarter 2008, we reversed approximately $2 million in previously recorded expense related to
grants with performance conditions we no longer expect will be satisfied.
Cash-settled awards
During third quarter 2008, we granted 105 thousand shares of restricted stock units payable in
cash, valued at less than $1 million, to our directors as compensation for meeting attendance.
These awards vested immediately and are payable in cash.
15
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
A summary of cash-settled awards outstanding to our employees and directors follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent Shares |
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Aggregate |
|
|
|
September 30, 2008 |
|
|
September 30, 2008 |
|
|
Current Value |
|
|
|
(In thousands) |
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards indexed to Guaranty stock at beginning of period |
|
|
81 |
|
|
|
88 |
|
|
|
|
|
Granted |
|
|
105 |
|
|
|
105 |
|
|
|
|
|
Settled |
|
|
(25 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards indexed to Guaranty stock at September 30, 2008 |
|
|
161 |
|
|
|
161 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards indexed to Temple-Inland Inc. stock at
September 30, 2008 |
|
|
244 |
|
|
|
244 |
|
|
|
4 |
|
Awards indexed to Forestar Real Estate Group Inc.
stock at September 30, 2008 |
|
|
81 |
|
|
|
81 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and stock-settled units
During first quarter 2008, we granted 1.6 million shares of restricted stock to our directors
and employees, valued at $23 million at the date of grant. We recognize the value of shares
granted to employees in expense over vesting periods ranging from three to four years. Shares
granted to directors are immediately vested and we include them in expense at the grant date.
The following information summarizes outstanding restricted stock awards on our stock held by
our directors and employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Aggregate |
|
|
|
September 30, 2008 |
|
|
September 30, 2008 |
|
|
Current Value |
|
|
|
(In thousands) |
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding beginning of period |
|
|
1,671 |
|
|
|
26 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
1,703 |
|
|
|
|
|
Settled |
|
|
(35 |
) |
|
|
(57 |
) |
|
|
|
|
Cancelled |
|
|
(8 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards indexed to Guaranty stock at September 30, 2008 |
|
|
1,628 |
|
|
|
1,628 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
16
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Stock Options
The following information summarizes outstanding stock option awards held by our directors and
employees at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
(Current Value |
|
|
|
|
|
|
|
Exercise Price |
|
|
Contractual |
|
|
Less Exercise |
|
|
|
Shares |
|
|
Per Share |
|
|
Term |
|
|
Price) |
|
|
|
(In thousands) |
|
|
|
|
|
|
(In years) |
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on Guaranty stock |
|
|
306 |
|
|
$ |
14 |
|
|
|
6 |
|
|
$ |
|
|
Outstanding on Temple-Inland Inc. stock |
|
|
921 |
|
|
|
17 |
|
|
|
6 |
|
|
|
2 |
|
Outstanding on Forestar Real Estate
Group Inc. stock |
|
|
307 |
|
|
|
22 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable on Guaranty stock |
|
|
194 |
|
|
$ |
12 |
|
|
|
5 |
|
|
$ |
|
|
Exercisable on Temple-Inland Inc. stock |
|
|
584 |
|
|
|
14 |
|
|
|
5 |
|
|
|
2 |
|
Exercisable on Forestar Real Estate
Group Inc. stock |
|
|
195 |
|
|
|
18 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12 Benefit Plans
We recorded $1 million in expense in third quarter 2008 and $5 million in first nine months
2008 for contributions to our 401(k) plan.
Note 13 Fair Value of Financial Instruments
The carrying value and estimated fair value of financial instruments not carried at fair value
in our balance sheet were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
|
(In millions) |
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
10,081 |
|
|
$ |
9,655 |
|
|
$ |
9,928 |
|
|
$ |
9,940 |
|
Mortgage-backed securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and U.S. Government
Sponsored Enterprises |
|
|
719 |
|
|
|
719 |
|
|
|
1,229 |
|
|
|
1,230 |
|
Non-agency: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internally valued |
|
|
2,015 |
|
|
|
1,234 |
|
|
|
2,214 |
|
|
|
2,002 |
|
Market quotes |
|
|
150 |
|
|
|
146 |
|
|
|
199 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,884 |
|
|
|
2,099 |
|
|
|
3,642 |
|
|
|
3,431 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
9,210 |
|
|
$ |
9,193 |
|
|
$ |
9,375 |
|
|
$ |
9,381 |
|
Federal Home Loan Bank borrowings |
|
|
4,464 |
|
|
|
4,472 |
|
|
|
5,743 |
|
|
|
5,747 |
|
Subordinated notes payable to trust |
|
|
314 |
|
|
|
278 |
|
|
|
314 |
|
|
|
277 |
|
Subordinated debt of subsidiary |
|
|
237 |
|
|
|
227 |
|
|
|
|
|
|
|
|
|
Subordinated debentures and other borrowings |
|
|
31 |
|
|
|
31 |
|
|
|
101 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other off-balance sheet instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
(8 |
) |
|
$ |
(8 |
) |
|
$ |
(7 |
) |
|
$ |
(7 |
) |
17
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SFAS No. 157 establishes a hierarchy of fair value determination methods reflecting the
observability of the information underlying the determination:
|
|
|
Level 1 is observable prices in active markets. |
|
|
|
Level 2 is observable prices in less than active markets or for different, but similar
products, or valuation methodologies using observable data. |
|
|
|
|
Level 3 is valuation methodologies using data not observable in the markets. |
Very little actual trading is occurring in non-agency securities. We have not been able to
identify specific transactions for instruments similar to our internally valued non-agency
securities for several months. Securities dealer market value estimates for these types of
securities are generally accompanied by statements that the estimates do not reflect actual market
transactions, and other disclaimers. As a result, we estimate the fair value of most of the
non-agency securities we own using internal valuation techniques. We incorporate observable data
to the extent it is available, including obtaining sample indicative value estimates from
securities dealers. At September 30, 3008, the dealer indicative value estimates for the same
securities varied widely among dealers, with differences of as much as 50%. As a result, beginning
in third quarter 2008, in addition to considering dealer indicative value estimates, we
incorporated the results of a multiple-path valuation approach prepared for us by a third-party as
a significant input in our determination of the fair value of our internally valued non-agency
securities. We believe the third party valuation approach incorporates market participant
assumptions, including required return. We consider our fair value estimates for non-agency
securities to be Level 3. The estimated market values of our non-agency securities would result in
yields to maturity from 12% to 56% based on our estimates of the most probable future cash flows on
those securities. Our estimated loss severity includes our estimate that some of the loans which
default will be modified by the servicer, which we believe will reduce the losses on those modified
loans.
The fair value of financial instruments measured at fair value on a recurring basis,
categorized in terms of SFAS No. 157 valuation criteria, at September 30, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In millions) |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and U.S. Government
Sponsored Enterprises mortgage-backed
securities |
|
$ |
228 |
|
|
$ |
|
|
|
$ |
228 |
|
Non-agency mortgage-backed securities |
|
|
|
|
|
|
919 |
|
|
|
919 |
|
Equity securities |
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
228 |
|
|
$ |
923 |
|
|
$ |
1,151 |
|
|
|
|
|
|
|
|
|
|
|
Changes in the fair value of financial instruments measured at fair value on a recurring basis
using Level 3 information are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2008 |
|
|
September 30, 2008 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
Recorded amount at beginning of the period |
|
$ |
837 |
|
|
$ |
1,316 |
|
Change in unrealized losses for the
period included in other
comprehensive loss |
|
|
99 |
|
|
|
(360 |
) |
Principal payments |
|
|
(13 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
|
Recorded amount at end of period |
|
$ |
923 |
|
|
$ |
923 |
|
|
|
|
|
|
|
|
18
GUARANTY FINANCIAL GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
We measure certain assets at fair value on a nonrecurring basis. Fair value measurement for
those assets usually results from asset impairment or lower-of-cost-or-market accounting. The fair
value of assets measured at fair value on a nonrecurring basis, categorized in terms of SFAS No.
157 valuation criteria, at September 30, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
192 |
|
|
$ |
|
|
|
$ |
192 |
|
Impaired mortgage-backed security |
|
|
|
|
|
|
79 |
|
|
|
79 |
|
Foreclosed assets |
|
|
50 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
242 |
|
|
$ |
79 |
|
|
$ |
321 |
|
|
|
|
|
|
|
|
|
|
|
Note 14 Transactions with Temple-Inland Inc. and Other Related Parties
A summary of transactions with Temple-Inland Inc. during 2007 when it was a related party (we
do not consider Temple-Inland Inc. to be a related party following our spin-off), all of which were
allocated expenses, follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
Information technology support |
|
$ |
3 |
|
|
$ |
11 |
|
Legal, human resources, and other administrative costs |
|
|
2 |
|
|
|
5 |
|
Accounting, finance, and other |
|
|
2 |
|
|
|
6 |
|
Share-based compensation (included in compensation expense) |
|
|
1 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
$ |
8 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
We charge Temple-Inland Inc. for rent, taxes, insurance, and utilities in accordance with the
terms of an operating lease agreement, and for insurance management services. We billed
Temple-Inland Inc. $2 million for these services during third quarter 2007 and $6 million in first
nine months 2007.
At September 30, 2008, we had $43 million in loans and $7 million in unfunded commitments, to
entities which members of our board of directors control. We entered into each of these
transactions prior to those directors joining our board of directors.
19
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements 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 believe, anticipate,
could, estimate, likely, intend, may, plan, project, expect, and similar
expressions, including references to assumptions or our plans and goals. 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:
|
|
|
general economic, market or business conditions; |
|
|
|
|
demand for new housing; |
|
|
|
|
competitive actions by other companies; |
|
|
|
|
changes in laws or regulations and actions or restrictions of regulatory agencies; |
|
|
|
|
deposit attrition, customer loss, or revenue loss in the ordinary course of business; |
|
|
|
|
our ability to borrow funds, maintain or increase deposits or
raise capital could be limited which could adversely affect our
liquidity and earnings; |
|
|
|
|
costs or difficulties related to transitioning as a stand-alone public company
following our spin-off from Temple-Inland Inc. in December 2007; |
|
|
|
|
inability to realize elements of our strategic plans; |
|
|
|
|
changes in the interest rate environment that expand or reduce margins or adversely
affect critical estimates and projected returns on investments; |
|
|
|
|
unfavorable changes in economic conditions affecting housing markets, credit markets,
real estate values, or oil and gas prices, either nationally or regionally; |
|
|
|
|
natural disasters in primary market areas that may result in prolonged business
disruption or impair the value of collateral securing loans; |
|
|
|
|
assumptions and estimates underlying critical accounting policies, particularly
allowance for credit losses, mortgage-backed securities valuation and impairment
assessments, ability to realize deferred tax assets, and goodwill and other intangible
impairment assessments, that may prove to be materially incorrect or may not be borne out
by subsequent events; |
|
|
|
|
current or future litigation, regulatory investigations, proceedings or inquiries; |
|
|
|
|
strategies to manage interest rate risk, that may yield results other than those
anticipated; |
|
|
|
|
a significant change in the rate of inflation or deflation; |
|
|
|
|
changes in the securities markets; |
|
|
|
|
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; |
|
|
|
|
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 Inc. and Forestar Real Estate Group
Inc.; |
|
|
|
|
the ability to maintain capital ratios acceptable to the Office of Thrift Supervision;
and |
|
|
|
|
changes in the value of real estate securing our loans. |
Other factors, including the Risk Factors described in Part II of this Form 10-Q and those
included in Item 1A Risk Factors of our Annual Report on Form 10-K, 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.
20
Selected Ratios and Other Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in millions, except per share) |
|
For the period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
83 |
|
|
$ |
100 |
|
|
$ |
98 |
|
|
$ |
102 |
|
|
$ |
99 |
|
|
$ |
281 |
|
|
$ |
289 |
|
Provision for credit losses |
|
|
(78 |
) |
|
|
(99 |
) |
|
|
(58 |
) |
|
|
(33 |
) |
|
|
(19 |
) |
|
|
(235 |
) |
|
|
(17 |
) |
Net (loss) income |
|
|
(162 |
) |
|
|
(85 |
) |
|
|
(10 |
) |
|
|
6 |
|
|
|
21 |
|
|
|
(257 |
) |
|
|
72 |
|
Net (charge-offs) recoveries |
|
|
(100 |
) |
|
|
(19 |
) |
|
|
(2 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(121 |
) |
|
|
9 |
|
Return on average assets |
|
|
(4.11 |
)% |
|
|
(2.08 |
)% |
|
|
(0.24 |
)% |
|
|
0.15 |
% |
|
|
0.53 |
% |
|
|
(2.11 |
)% |
|
|
0.61 |
% |
Return on average stockholders equity |
|
|
(61.13 |
)% |
|
|
(37.12 |
)% |
|
|
(3.65 |
)% |
|
|
2.28 |
% |
|
|
8.06 |
% |
|
|
(33.01 |
)% |
|
|
9.31 |
% |
Net interest margin |
|
|
2.14 |
% |
|
|
2.54 |
% |
|
|
2.49 |
% |
|
|
2.59 |
% |
|
|
2.65 |
% |
|
|
2.39 |
% |
|
|
2.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
10,081 |
|
|
$ |
9,995 |
|
|
$ |
10,099 |
|
|
$ |
9,928 |
|
|
$ |
9,561 |
|
|
|
|
|
|
|
|
|
Non-performing assets |
|
|
520 |
|
|
|
406 |
|
|
|
284 |
|
|
|
179 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
Non-performing assets ratio |
|
|
5.02 |
% |
|
|
3.95 |
% |
|
|
2.76 |
% |
|
|
1.78 |
% |
|
|
1.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital/Equity (actual): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty Bank tier 1 leverage ratio |
|
|
8.99 |
% |
|
|
7.63 |
% |
|
|
7.58 |
% |
|
|
7.74 |
% |
|
|
7.79 |
% |
|
|
|
|
|
|
|
|
Guaranty Bank tier 1 risk-based ratio |
|
|
9.75 |
% |
|
|
9.36 |
% |
|
|
9.38 |
% |
|
|
9.63 |
% |
|
|
9.94 |
% |
|
|
|
|
|
|
|
|
Guaranty Bank total risk-based
capital ratio |
|
|
12.65 |
% |
|
|
10.60 |
% |
|
|
10.61 |
% |
|
|
10.54 |
% |
|
|
10.68 |
% |
|
|
|
|
|
|
|
|
Tangible equity/tangible assets |
|
|
5.55 |
% |
|
|
3.90 |
% |
|
|
4.45 |
% |
|
|
5.82 |
% |
|
|
5.36 |
% |
|
|
|
|
|
|
|
|
Tangible equity/per common share |
|
$ |
18.92 |
|
|
$ |
13.85 |
|
|
$ |
19.38 |
|
|
$ |
27.36 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital/Equity (proforma)(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity/per common share |
|
$ |
7.82 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
231 |
|
|
$ |
250 |
|
|
$ |
172 |
|
|
$ |
118 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total
loans |
|
|
2.24 |
% |
|
|
2.44 |
% |
|
|
1.67 |
% |
|
|
1.17 |
% |
|
|
0.94 |
% |
|
|
|
|
|
|
|
|
Allowance for loan losses to
non-performing loans |
|
|
49 |
% |
|
|
69 |
% |
|
|
66 |
% |
|
|
71 |
% |
|
|
75 |
% |
|
|
|
|
|
|
|
|
Direct reduction of recorded
investment in impaired loans
(principal charged off) |
|
$ |
84 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Allowance and direct reductions to
recorded investment as a percentage
of non-performing loans before direct
reductions to recorded investment |
|
|
57 |
% |
|
|
69 |
% |
|
|
66 |
% |
|
|
72 |
% |
|
|
75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
9,210 |
|
|
$ |
9,160 |
|
|
$ |
9,248 |
|
|
$ |
9,375 |
|
|
$ |
9,376 |
|
|
|
|
|
|
|
|
|
Average interest-bearing deposits |
|
|
8,551 |
|
|
|
8,405 |
|
|
|
8,588 |
|
|
|
8,609 |
|
|
|
8,794 |
|
|
$ |
8,515 |
|
|
$ |
8,735 |
|
Total branches |
|
|
162 |
|
|
|
162 |
|
|
|
158 |
|
|
|
158 |
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Proforma tangible equity/per common share at September 30, 2008 reflects the effect
of the conversion of our convertible preferred stock and accrued dividends to common stock as if it
had been converted prior to September 30, 2008. |
Current Market Conditions
Current conditions in the credit markets are difficult and volatile. Liquidity for non-agency
investment securities is virtually non-existent, and there is a lack of price transparency for most
non-agency securitized assets. As a result, credit availability for many potential borrowers has
been dramatically reduced. In addition, and partly as a result, current conditions in residential
housing markets are poor and worsening. In many markets there is an oversupply of housing,
including significant increases in foreclosed properties being marketed, and decreasing demand.
Homebuilders have found it difficult to sell new homes and many local and regional homebuilders are
facing severe liquidity challenges resulting in their inability to complete land development
projects and homes under construction. Declining economic conditions are increasing the number of
homeowners unable to make required payments on loans, and 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. Foreclosures on collateral underlying single-family mortgage loans and homebuilder properties are increasing, particularly in the state of
California where we have a significant concentration of our single-family mortgage and homebuilder
loan portfolios.
21
These conditions have negatively affected our investment securities and loan portfolios,
particularly non-agency mortgage-backed securities, loans to homebuilders, and single-family
mortgage loans. At September 30, 2008, the estimated fair value of the non-agency securities we
own was below amortized cost by approximately $1.2 billion, or 34%. At September 30, 2008, we
categorized 28% of our loans to homebuilders and 8% of our single-family mortgage loans as
non-performing. As a result, we recorded $78 million in provision for credit losses in third
quarter 2008 and $235 million for first nine months 2008.
We expect these market conditions will continue throughout 2008 and 2009.
To address these uncertainties, in third quarter 2008 we raised $562 million (before offering
costs of $21 million) through the sale of 6.2 million shares of convertible preferred stock and
$275 million face value of subordinated debt of Guaranty Bank in the Private Placements. On October
1, 2008, the convertible preferred stock was converted to common shares. Substantially all of the
net proceeds qualify as regulatory capital for Guaranty Bank.
Analysis of Third Quarter 2008 and 2007
Performance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Return on assets
(net (loss) income
divided by average
total assets) |
|
|
(4.11) |
% |
|
|
0.53 |
% |
|
|
(2.11) |
% |
|
|
0.61 |
% |
Return on equity
(net (loss) income
divided by average
stockholders
equity) |
|
|
(61.13) |
% |
|
|
8.06 |
% |
|
|
(33.01) |
% |
|
|
9.31 |
% |
Dividend payout
ratio (dividends
declared divided by
net income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49 |
% |
Equity to asset
ratio (average
stockholders
equity divided by
average assets) |
|
|
6.72 |
% |
|
|
6.55 |
% |
|
|
6.41 |
% |
|
|
6.53 |
% |
Net interest margin
(net interest
income divided by
average earning
assets) |
|
|
2.14 |
% |
|
|
2.65 |
% |
|
|
2.39 |
% |
|
|
2.59 |
% |
Significant aspects of our results of operations for third quarter 2008 follow:
|
|
|
Net loss was $162 million, a decline of $183 million from third quarter 2007, primarily
a result of credit loss provisions, an other-than-temporary-impairment charge on one of our
non-agency mortgage-backed securities, impairment of goodwill and intangible assets of our
insurance agency, and a deferred income tax asset valuation allowance. |
|
|
|
|
Net interest income decreased 16% compared to third quarter 2007. Our average earning
assets did not change significantly, but our net interest margin decreased because we
issued subordinated debt of Guaranty Bank in the Private Placements that has an effective
yield of approximately 15%. Net interest margin was also negatively impacted by a
significant increase in nonaccrual homebuilder loans. |
|
|
|
|
We recorded $78 million in credit loss provisions in third quarter 2008, compared to
$19 million in third quarter 2007. Approximately half of the third quarter 2008 provision
for credit loss related to homebuilder loans, with the majority of the remainder related to
single-family mortgage loans. |
|
|
|
|
We recorded a $53 million other-than-temporary-impairment charge related to a
non-agency mortgage-backed security. |
|
|
|
|
We increased our valuation allowance against deferred tax assets by $85 million,
because of uncertainty regarding our ability to realize those assets. |
|
|
|
|
We determined the goodwill and other intangible assets related to our insurance agency
were impaired and recorded a $14 million impairment charge to reduce the carrying amounts
of those assets to their estimated fair value. |
22
Results of Operations
Net Interest Income
Our net interest income decreased because we issued subordinated debt of Guaranty Bank in the
Private Placements that had an effective yield of approximately 15%. We recorded $7 million in
interest expense on the Guaranty Bank subordinated debt in third quarter 2008 and expect to record
approximately $9 million per quarter in the future. Net interest margin was also negatively
impacted by a significant increase in nonaccrual homebuilder loans. Interest income we would have
recorded in third quarter 2008 had our nonaccrual loans been performing would have been
approximately $8 million. During the month of October, deposits increased by $1.8 billion
primarily from certificates of deposits issued to our customers in our branches and to commercial
customers. Approximately $630 million in this deposit increase was attributable to the issuance of
brokered deposits. We used these funds to reduce our FHLB borrowings. As a result, this
additional funding capacity will reduce our future net interest margin. Our commercial and
business and commercial real estate portfolios continued to increase in balance, while our
single-family mortgage and homebuilder portfolios declined in balance.
If interest rates decrease further, our net interest margin is likely to decline. Please read
Item 3. Quantitative and Qualitative Disclosure about Market Risk of this quarterly report on Form
10-Q for further quantitative information about the sensitivity of our earnings to potential
changes in interest rates.
Average balances, interest income and expense, and rates by major balance sheet categories
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
2008 |
|
2007 |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
(Dollars in millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
83 |
|
|
$ |
2 |
|
|
|
1.78 |
% |
|
$ |
73 |
|
|
$ |
1 |
|
|
|
5.14 |
% |
Loans held for sale |
|
|
1 |
|
|
|
|
|
|
|
4.93 |
% |
|
|
15 |
|
|
|
1 |
|
|
|
6.71 |
% |
Loans |
|
|
10,172 |
|
|
|
123 |
|
|
|
4.85 |
% |
|
|
9,582 |
|
|
|
178 |
|
|
|
7.45 |
% |
Securities |
|
|
4,952 |
|
|
|
58 |
|
|
|
4.74 |
% |
|
|
5,047 |
|
|
|
69 |
|
|
|
5.46 |
% |
Investments in Federal Home Loan Bank stock |
|
|
233 |
|
|
|
1 |
|
|
|
2.32 |
% |
|
|
209 |
|
|
|
2 |
|
|
|
5.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
15,441 |
|
|
$ |
184 |
|
|
|
4.76 |
% |
|
|
14,926 |
|
|
$ |
251 |
|
|
|
6.73 |
% |
Net unrealized losses on
available-for-sale securities |
|
|
(430 |
) |
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
Other assets |
|
|
772 |
|
|
|
|
|
|
|
|
|
|
|
1,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,783 |
|
|
|
|
|
|
|
|
|
|
$ |
15,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
$ |
3,913 |
|
|
$ |
18 |
|
|
|
1.80 |
% |
|
$ |
3,748 |
|
|
$ |
28 |
|
|
|
2.94 |
% |
Savings deposits |
|
|
181 |
|
|
|
|
|
|
|
0.76 |
% |
|
|
180 |
|
|
|
|
|
|
|
0.72 |
% |
Certificates of deposit |
|
|
4,457 |
|
|
|
39 |
|
|
|
3.51 |
% |
|
|
4,866 |
|
|
|
60 |
|
|
|
4.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
8,551 |
|
|
|
57 |
|
|
|
2.67 |
% |
|
|
8,794 |
|
|
|
88 |
|
|
|
3.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Federal Home Loan Bank borrowings |
|
|
4,369 |
|
|
|
26 |
|
|
|
2.36 |
% |
|
|
3,813 |
|
|
|
49 |
|
|
|
5.19 |
% |
Long-term Federal Home Loan Bank borrowings |
|
|
656 |
|
|
|
7 |
|
|
|
4.31 |
% |
|
|
795 |
|
|
|
7 |
|
|
|
3.56 |
% |
Subordinated notes payable to trust |
|
|
314 |
|
|
|
3 |
|
|
|
4.58 |
% |
|
|
314 |
|
|
|
6 |
|
|
|
7.18 |
% |
Subordinated debt of subsidiary |
|
|
185 |
|
|
|
7 |
|
|
|
14.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debentures and other borrowings |
|
|
61 |
|
|
|
1 |
|
|
|
7.29 |
% |
|
|
103 |
|
|
|
2 |
|
|
|
8.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
5,585 |
|
|
|
44 |
|
|
|
3.16 |
% |
|
|
5,025 |
|
|
|
64 |
|
|
|
5.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
14,136 |
|
|
$ |
101 |
|
|
|
2.86 |
% |
|
|
13,819 |
|
|
$ |
152 |
|
|
|
4.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
1.90 |
% |
|
|
|
|
|
|
|
|
|
|
2.32 |
% |
Noninterest-bearing demand deposits |
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
646 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
398 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
1,060 |
|
|
|
|
|
|
|
|
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
15,783 |
|
|
|
|
|
|
|
|
|
|
$ |
15,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of noninterest-bearing funds |
|
|
|
|
|
|
|
|
|
|
0.24 |
% |
|
|
|
|
|
|
|
|
|
|
0.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/margin |
|
|
|
|
|
$ |
83 |
|
|
|
2.14 |
% |
|
|
|
|
|
$ |
99 |
|
|
|
2.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2008 |
|
2007 |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
(Dollars in millions) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
76 |
|
|
$ |
2 |
|
|
|
2.39 |
% |
|
$ |
82 |
|
|
$ |
3 |
|
|
|
5.08 |
% |
Loans held for sale |
|
|
4 |
|
|
|
|
|
|
|
3.61 |
% |
|
|
19 |
|
|
|
1 |
|
|
|
7.27 |
% |
Loans |
|
|
10,156 |
|
|
|
405 |
|
|
|
5.32 |
% |
|
|
9,536 |
|
|
|
524 |
|
|
|
7.33 |
% |
Securities |
|
|
5,187 |
|
|
|
201 |
|
|
|
5.18 |
% |
|
|
5,057 |
|
|
|
204 |
|
|
|
5.37 |
% |
Investments in Federal Home Loan Bank stock |
|
|
247 |
|
|
|
6 |
|
|
|
3.24 |
% |
|
|
214 |
|
|
|
9 |
|
|
|
5.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
15,670 |
|
|
$ |
614 |
|
|
|
5.23 |
% |
|
|
14,908 |
|
|
$ |
741 |
|
|
|
6.63 |
% |
Net unrealized losses on
available-for-sale securities |
|
|
(298 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
Other assets |
|
|
834 |
|
|
|
|
|
|
|
|
|
|
|
886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
16,206 |
|
|
|
|
|
|
|
|
|
|
$ |
15,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
$ |
3,802 |
|
|
$ |
58 |
|
|
|
2.03 |
% |
|
$ |
3,640 |
|
|
$ |
77 |
|
|
|
2.82 |
% |
Savings deposits |
|
|
177 |
|
|
|
1 |
|
|
|
0.75 |
% |
|
|
188 |
|
|
|
1 |
|
|
|
0.71 |
% |
Certificates of deposit |
|
|
4,536 |
|
|
|
134 |
|
|
|
3.95 |
% |
|
|
4,907 |
|
|
|
179 |
|
|
|
4.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
8,515 |
|
|
|
193 |
|
|
|
3.02 |
% |
|
|
8,735 |
|
|
|
257 |
|
|
|
3.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Federal Home Loan Bank borrowings |
|
|
4,736 |
|
|
|
93 |
|
|
|
2.61 |
% |
|
|
3,634 |
|
|
|
142 |
|
|
|
5.22 |
% |
Long-term Federal Home Loan Bank borrowings |
|
|
723 |
|
|
|
23 |
|
|
|
4.26 |
% |
|
|
941 |
|
|
|
25 |
|
|
|
3.56 |
% |
Subordinated notes payable to trust |
|
|
314 |
|
|
|
12 |
|
|
|
5.15 |
% |
|
|
264 |
|
|
|
14 |
|
|
|
6.97 |
% |
Subordinated debt of subsidiary |
|
|
62 |
|
|
|
7 |
|
|
|
14.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debentures and other borrowings |
|
|
90 |
|
|
|
5 |
|
|
|
8.09 |
% |
|
|
104 |
|
|
|
7 |
|
|
|
8.43 |
% |
Preferred stock issued by subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126 |
|
|
|
7 |
|
|
|
7.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
5,925 |
|
|
|
140 |
|
|
|
3.15 |
% |
|
|
5,069 |
|
|
|
195 |
|
|
|
5.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
14,440 |
|
|
$ |
333 |
|
|
|
3.08 |
% |
|
|
13,804 |
|
|
$ |
452 |
|
|
|
4.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
2.15 |
% |
|
|
|
|
|
|
|
|
|
|
2.27 |
% |
Noninterest-bearing demand deposits |
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
1,038 |
|
|
|
|
|
|
|
|
|
|
|
1,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
16,206 |
|
|
|
|
|
|
|
|
|
|
$ |
15,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of noninterest-bearing funds |
|
|
|
|
|
|
|
|
|
|
0.24 |
% |
|
|
|
|
|
|
|
|
|
|
0.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/margin |
|
|
|
|
|
$ |
281 |
|
|
|
2.39 |
% |
|
|
|
|
|
$ |
289 |
|
|
|
2.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses
We recorded $78 million in provision for credit losses in third quarter 2008 compared to $19
million in provision for credit losses in third quarter 2007. We recorded $235 million in
provision for credit losses in first nine months 2008 compared to $17 million in provision for
credit losses in first nine months 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 our third quarter 2008 provision for credit losses. We
recorded net charge-offs of $100 million in third quarter 2008, principally related to impaired and
foreclosed homebuilder loans. We foreclosed on a number of homebuilder loans in third quarter
2008, and anticipate it will become necessary for us to foreclose on additional homebuilder loans
during the remainder of 2008. It is likely we will record significant charge-offs and foreclosed
real estate when we acquire collateral on those loans.
Please read Credit Risk of this report on Form 10-Q for a discussion of our allowances for
credit losses.
24
Noninterest Income
Noninterest income consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
|
(Dollars in millions) |
|
|
|
|
|
Insurance commissions and fees |
|
$ |
10 |
|
|
$ |
13 |
|
|
$ |
(3 |
) |
|
$ |
33 |
|
|
$ |
38 |
|
|
$ |
(5 |
) |
Service charges on deposits |
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
42 |
|
|
|
39 |
|
|
|
3 |
|
Non-deposit investment sales
commissions |
|
|
6 |
|
|
|
7 |
|
|
|
(1 |
) |
|
|
22 |
|
|
|
17 |
|
|
|
5 |
|
Commercial loan facility fees |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
11 |
|
|
|
13 |
|
|
|
(2 |
) |
Operating lease income |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
Other-than-temporary-impairment
on mortgage-backed security |
|
|
(53 |
) |
|
|
|
|
|
|
(53 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
(53 |
) |
Loss on sale of mortgage-backed
securities |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
Other |
|
|
2 |
|
|
|
4 |
|
|
|
(2 |
) |
|
|
8 |
|
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(19 |
) |
|
$ |
42 |
|
|
$ |
(61 |
) |
|
$ |
64 |
|
|
$ |
119 |
|
|
$ |
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent decrease for the period |
|
|
|
|
|
|
|
|
|
|
(145 |
)% |
|
|
|
|
|
|
|
|
|
|
(46 |
)% |
Insurance commissions and fees decreased because market rates for policy premiums, and the
resulting commissions, for property and casualty insurance, the bulk of the business of our
insurance agency, have decreased significantly.
In third quarter 2008, we sold U.S. Government Sponsored Enterprise-issued securities totaling
$412 million in amortized cost, including securities classified as available-for-sale and held-to-maturity. Each of the held-to-maturity securities and substantially all of the available-for-sale securities
had a remaining
principal balance less than 15% of the amount outstanding when we acquired the security. As
allowed by GAAP, we have deemed such sales to be maturities for purposes of classification of our
remaining securities. The remaining available-for-sale securities sold were sold at prices close to par value.
25
Noninterest Expense
Noninterest expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
$ |
46 |
|
|
$ |
45 |
|
|
$ |
1 |
|
|
$ |
145 |
|
|
$ |
136 |
|
|
$ |
9 |
|
Occupancy |
|
|
9 |
|
|
|
7 |
|
|
|
2 |
|
|
|
26 |
|
|
|
20 |
|
|
|
6 |
|
Information systems and technology |
|
|
5 |
|
|
|
4 |
|
|
|
1 |
|
|
|
14 |
|
|
|
11 |
|
|
|
3 |
|
Advertising and promotional |
|
|
5 |
|
|
|
4 |
|
|
|
1 |
|
|
|
16 |
|
|
|
11 |
|
|
|
5 |
|
Furniture, fixtures, and equipment |
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
16 |
|
|
|
13 |
|
|
|
3 |
|
Professional services |
|
|
5 |
|
|
|
3 |
|
|
|
2 |
|
|
|
13 |
|
|
|
7 |
|
|
|
6 |
|
Travel and other employee costs |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
8 |
|
|
|
7 |
|
|
|
1 |
|
Postage, printing, and supplies |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
|
|
Litigation charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
(5 |
) |
Depreciation of assets leased to
others |
|
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
4 |
|
|
|
5 |
|
|
|
(1 |
) |
Other |
|
|
11 |
|
|
|
9 |
|
|
|
2 |
|
|
|
38 |
|
|
|
34 |
|
|
|
4 |
|
Shared services allocation from
Temple-Inland Inc. |
|
|
|
|
|
|
7 |
|
|
|
(7 |
) |
|
|
|
|
|
|
22 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
90 |
|
|
|
1 |
|
|
|
286 |
|
|
|
277 |
|
|
|
9 |
|
Charges related to asset
impairments and severance |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
105 |
|
|
$ |
90 |
|
|
$ |
15 |
|
|
$ |
303 |
|
|
$ |
277 |
|
|
$ |
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent increase for the period,
excluding charges related to
asset impairments and severance |
|
|
|
|
|
|
|
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
3 |
% |
Increases in a number of our direct costs and expense categories in 2008 compared to 2007 were
because we began to perform many activities ourselves following our separation from Temple-Inland
Inc. Increases in compensation costs resulting from performing these activities were offset by
cost reductions we achieved from our recent reduction-in-force. Additionally, in third quarter
2008, we reversed approximately $2 million in previously recorded expense related to stock-based
compensation awards with performance conditions we no longer expect will be satisfied.
Our marketing costs increased in third quarter 2008 as we implemented initiatives related to
increasing consumer lending through our branch network and a new checking product. Professional
services expenses increased in third quarter 2008 because of activities we undertook to register
stock purchase rights and related shares we proposed, but decided against, issuing.
We paid severance of $1 million in third quarter 2008, and expensed and paid $3 million
through first nine months 2008, related to a reduction in our work force. Additionally, in third
quarter 2008, we recorded $14 million in impairments related to our insurance agency.
Income Tax Expense
Our effective tax rate was negative 36% in third quarter 2008 and 36% in third quarter 2007.
In third quarter 2008, we increased our valuation allowance against deferred tax assets by $85
million. Excluding the valuation allowance, our effective tax rate in third quarter 2008 was 30%.
The decrease in effective rate, excluding valuation allowance, from 2007 is a result of the impact
of state margin taxes, particularly Texas, for which we do not receive a tax benefit from our net
loss.
26
Segment Performance Summary
Segment operating income (loss), which we measure exclusive of taxes, consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
Commercial banking |
|
$ |
(17 |
) |
|
$ |
44 |
|
|
$ |
(41 |
) |
|
$ |
165 |
|
Retail banking |
|
|
(17 |
) |
|
|
(3 |
) |
|
|
(51 |
) |
|
|
(17 |
) |
Insurance agency |
|
|
(1 |
) |
|
|
1 |
|
|
|
(2 |
) |
|
|
4 |
|
Mortgage banking |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
Treasury, corporate and other |
|
|
(82 |
) |
|
|
(9 |
) |
|
|
(95 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(119 |
) |
|
$ |
32 |
|
|
$ |
(193 |
) |
|
$ |
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking
Third quarter 2008 segment operating results decreased $61 million compared to third quarter
2007. The principal cause of the decrease was $71 million in provision for credit losses in the
segment in third quarter 2008. The provision for credit losses was predominantly related to
increases in non-performing homebuilder loans, which increased from $233 million at June 30, 2008
to $295 million at September 30, 2008.
Retail Banking
Third quarter 2008 segment operating results decreased $14 million compared to third quarter
2007. Segment net interest income decreased because earnings credits on deposits decreased as
wholesale interest rates declined, but deposit pricing did not decrease proportionately with
wholesale price declines.
Insurance Agency
In third quarter 2008, insurance agency commissions and fees decreased $3 million compared to
third quarter 2007 because market rates for policy premiums, and the resulting commissions, for
property and casualty insurance, the bulk of the business of our insurance agency, have decreased
significantly.
Treasury, corporate and other
Segment operating results in third quarter 2008 decreased $73 million compared to third
quarter 2007, principally because of an other-than-temporary-impairment charge on a mortgage-backed
security, goodwill and intangible impairment charges related to our insurance agency, and
provisions for credit losses not allocated to our other segments.
27
Financial Condition
Loans
The composition of our loans at September 30, 2008 follows:
The loan portfolio consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Balance |
|
|
Total Loans |
|
|
Balance |
|
|
Total Loans |
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage |
|
$ |
1,397 |
|
|
|
14 |
% |
|
$ |
1,672 |
|
|
|
17 |
% |
Single-family mortgage warehouse |
|
|
924 |
|
|
|
9 |
% |
|
|
695 |
|
|
|
7 |
% |
Single-family construction (homebuilders) |
|
|
1,060 |
|
|
|
10 |
% |
|
|
1,510 |
|
|
|
15 |
% |
Multifamily and senior housing |
|
|
2,044 |
|
|
|
20 |
% |
|
|
1,541 |
|
|
|
15 |
% |
Commercial real estate |
|
|
1,837 |
|
|
|
18 |
% |
|
|
1,674 |
|
|
|
17 |
% |
Commercial and business |
|
|
1,432 |
|
|
|
14 |
% |
|
|
1,340 |
|
|
|
13 |
% |
Energy |
|
|
1,399 |
|
|
|
14 |
% |
|
|
1,470 |
|
|
|
15 |
% |
Consumer and other |
|
|
219 |
|
|
|
1 |
% |
|
|
144 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
10,312 |
|
|
|
100 |
% |
|
|
10,046 |
|
|
|
100 |
% |
Less allowance for loan losses |
|
|
(231 |
) |
|
|
|
|
|
|
(118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
10,081 |
|
|
|
|
|
|
$ |
9,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of our commercial real estate, multifamily, and senior housing loans are
construction-related. The single-family construction portfolio consists of loans to finance
homebuilding activities, including construction and acquisition of developed lots and undeveloped
land. Single-family construction loans decreased in 2008 because we exited a number of credit
relationships to reduce our risk, and we have begun to foreclose on some of the loans. Please read
Credit Risk of this report on Form 10-Q for further information regarding credit risk
characteristics of our single-family construction loan portfolio.
28
We did not acquire a significant volume of mortgage loans through our correspondent mortgage
operations and have decided not to pursue this business. As a result, we expect our single-family
mortgage loan portfolio will continue to decrease.
Commercial real estate and multifamily loans continue to increase as a result of further
development and funding on loan commitments in those portfolios. We anticipate our commercial real
estate loans outstanding will continue to increase for the remainder of 2008 as we fund draws on
committed construction loans, partially offsetting decreases in single-family mortgage loans.
Information about our single-family mortgage loans, by category follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Unpaid |
|
|
Total |
|
|
Unpaid |
|
|
Total |
|
|
|
Principal |
|
|
Delinquency |
|
|
Principal |
|
|
Delinquency |
|
|
|
Balance |
|
|
> 30 days |
|
|
Balance |
|
|
> 30 days |
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option ARMs |
|
$ |
377 |
|
|
|
25.80 |
% |
|
$ |
502 |
|
|
|
10.80 |
% |
Intermediate ARMs |
|
|
476 |
|
|
|
7.27 |
% |
|
|
709 |
|
|
|
3.27 |
% |
Other first liens |
|
|
406 |
|
|
|
9.12 |
% |
|
|
279 |
|
|
|
8.00 |
% |
Repurchased loans |
|
|
32 |
|
|
|
42.12 |
% |
|
|
35 |
|
|
|
41.64 |
% |
Second liens |
|
|
106 |
|
|
|
1.88 |
% |
|
|
147 |
|
|
|
1.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,397 |
|
|
|
13.21 |
% |
|
$ |
1,672 |
|
|
|
6.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of other first lien loans are intermediate ARMs that have reached the monthly
variable rate period of their contracts.
Beginning in third quarter 2007 and through second quarter 2008, we solicited for modification
performing single-family mortgage loan borrowers whose loans were nearing the end of a fixed rate
accrual period and would soon enter the floating rate period of their loan contracts. We also
solicited for modification Option ARM borrowers we expected would soon reach a payment reset
threshold. We obtained updated credit scores for the borrowers, and offered them five-year
extended fixed rate accrual periods at the then-current market rate for borrowers with similar
credit scores. Our objective in making these offers was to retain performing loans, for which we
expected the borrowers would likely otherwise refinance with other lenders offering fixed rate
terms. We only offered these terms to performing borrowers who had not previously been delinquent
and had not inquired of us to reduce payment terms. At September 30, 2008, 89% of these borrowers
were current on their loan payments, and we estimate approximately 80% of the loans have a current
loan-to-value ratio below 80%. We anticipate offering modification terms to most of our remaining
single-family mortgage loan borrowers to reduce credit risk and to increase borrower flexibility.
29
Investment Securities
The following charts summarize the fair value distribution of our mortgage-backed securities
portfolio at September 30, 2008.
|
|
|
By Issuer |
|
By Type |
|
|
|
|
|
![(PIE CHART)](d65123d6512303.gif) |
All of the mortgage-backed securities we own have single-family residential mortgage loans as
the underlying assets. None of the securities include sub-prime loans. All of the non-agency
securities are credit-enhanced by subordinate tranches not owned by us, that will absorb credit
losses of the underlying loans until those tranches are depleted. At September 30, 2008,
subordinated tranches averaged 16% of the outstanding balances of the loan pools underlying the
securities, and on average 25% of the loans in the loan pools were delinquent on their payments.
At September 30, 2008, we determined it probable we would not recover all principal and stated
interest on one of the non-agency securities we own. As a result, we recorded a charge to other
noninterest income of $53 million to reduce the carrying amount of the security to the estimated
fair value of $79 million.
The current environment in the housing and credit markets has resulted in almost no liquidity
for non-agency securities backed by mortgage assets. Though all of the non-agency securities we
own carried AAA ratings from two different nationally recognized securities rating organizations
when we acquired them, most were downgraded by one or both of those rating organizations in third
quarter 2008. Eight securities, comprising approximately $947 million in carrying value, were
rated below BBB by at least one of the rating agencies at September 30, 2008. Determining the fair
value of non-agency securities is currently difficult because very little actual trading is
occurring. Information about our valuation techniques, significant inputs to valuation models, and
calibration of those models is included in Note 13 to our unaudited financial statements in Item 1
and in Note 18 to our financial statements included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007.
Our estimate of fair value, as defined in SFAS No. 157, of the non-agency mortgage-backed
securities was $1.2 billion less than our amortized original cost at September 30, 2008. We have
recorded $414 million of this unrealized loss in the carrying value of securities we classify as
available-for-sale. We reduced the amortized cost for one security $53 million through
other-than-temporary-impairment because we determined it probable we would not recover all
principal and stated interest. The remaining $785 million in unrealized losses relate to
securities we classify as held-to-maturity. We continue to expect to recover those unrealized
losses by holding those securities to maturity and therefore we have not recorded them in the
carrying value of the related securities.
We do not have any plans to sell any of the non-agency securities and have the intent and
ability to hold them until repayment. Our consideration of whether the unrealized losses are
other-than-temporary includes many factors including the length of time a security has had an
unrealized loss, the severity of the unrealized loss and the ratings assigned by rating
organizations. If the unrealized losses persist or further increase, the securities ratings were
to be further downgraded, or our estimates of cash flows decrease, we might conclude some or all of
the remaining unrealized losses were other-than-temporary, which would result in further charges to earnings and
corresponding decreases in regulatory capital of Guaranty Bank.
30
In third quarter 2008, we received $195 million in principal paydowns on mortgage-backed
securities, an annualized rate of 16%.
Information about our mortgage-backed securities portfolio at September 30, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Losses on |
|
|
|
|
|
|
|
|
|
|
Losses on |
|
|
|
|
|
|
Held-to- |
|
|
|
|
|
|
Amortized |
|
|
Available-for- |
|
|
Carrying |
|
|
Maturity |
|
|
|
|
|
|
Cost |
|
|
Sale Securities |
|
|
Value |
|
|
Securities |
|
|
Fair Value |
|
|
|
(In millions) |
|
U.S. Government
and U.S.
Government
Sponsored
Enterprises |
|
$ |
947 |
|
|
$ |
|
|
|
$ |
947 |
|
|
$ |
|
|
|
$ |
947 |
|
Non-agency: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internally valued |
|
|
3,344 |
|
|
|
(414 |
) |
|
|
2,930 |
|
|
|
(781 |
) |
|
|
2,149 |
|
Market quotes |
|
|
154 |
|
|
|
|
|
|
|
154 |
|
|
|
(4 |
) |
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,445 |
|
|
$ |
(414 |
) |
|
$ |
4,031 |
|
|
$ |
(785 |
) |
|
$ |
3,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Information about our non-agency securities at September 30, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subord- |
|
|
|
Unpaid |
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency% |
|
ination |
|
|
|
Principal |
|
|
Amortized |
|
|
|
|
Issuer and Underlying Asset Type |
|
Tranche |
|
Cusip |
|
Total |
|
>60 day |
|
% |
|
Loan Originator |
|
Balance |
|
|
Cost |
|
|
Fair Value |
|
(Dollars in millions) |
|
12MTA Option ARMs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Asset Mortgage
Investment II Trust 2007-AR6 |
|
Class A2 |
|
86364RAB5 |
|
|
22 |
% |
|
|
16 |
% |
|
|
12 |
% |
|
American Home Mortgage Corp. |
|
$ |
407 |
|
|
$ |
407 |
|
|
$ |
267 |
* |
RALI 2007-QO5 Trust |
|
Class A |
|
74924AAA3 |
|
|
25 |
% |
|
|
18 |
% |
|
|
11 |
% |
|
Homecomings Financial |
|
|
204 |
|
|
|
204 |
|
|
|
137 |
* |
Alternative Loan Trust 2005-81 |
|
Class A-4 |
|
12668BBR3 |
|
|
30 |
% |
|
|
24 |
% |
|
|
13 |
% |
|
Countrywide Home Loans |
|
|
142 |
|
|
|
143 |
|
|
|
88 |
|
Structured Asset Mortgage
Investment II Trust 2005-AR8 |
|
Class A-5 |
|
86359LSB6 |
|
|
34 |
% |
|
|
28 |
% |
|
|
13 |
% |
|
Countrywide Home Loans |
|
|
133 |
|
|
|
135 |
|
|
|
60 |
|
Alternative Loan Trust 2006-OA2 |
|
Class A-7 |
|
126694V88 |
|
|
39 |
% |
|
|
32 |
% |
|
|
15 |
% |
|
Countrywide Home Loans |
|
|
128 |
|
|
|
79 |
|
|
|
79 |
|
Alternative Loan Trust 2005-76 |
|
Class 1-A-2 |
|
12668BDD2 |
|
|
35 |
% |
|
|
29 |
% |
|
|
18 |
% |
|
Countrywide Home Loans |
|
|
125 |
|
|
|
127 |
|
|
|
76 |
|
Alternative Loan Trust 2005-58 |
|
Class A-3 |
|
12668AWK7 |
|
|
34 |
% |
|
|
28 |
% |
|
|
14 |
% |
|
Countrywide Home Loans |
|
|
122 |
|
|
|
123 |
|
|
|
70 |
|
Alternative Loan Trust 2005-51 |
|
Class 3-A-1 |
|
12668ACW3 |
|
|
30 |
% |
|
|
24 |
% |
|
|
17 |
% |
|
Countrywide Home Loans |
|
|
123 |
|
|
|
124 |
|
|
|
78 |
|
Alternative Loan Trust 2005-62 |
|
Class 1-A-2 |
|
12668ATP0 |
|
|
35 |
% |
|
|
29 |
% |
|
|
17 |
% |
|
Countrywide Home Loans |
|
|
116 |
|
|
|
117 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RALI Series 2005-QO5 Trust |
|
Class A-3 |
|
761118QP6 |
|
|
34 |
% |
|
|
26 |
% |
|
|
14 |
% |
|
Homecomings Financial Network, SCME, Mortgage IT, Other |
|
|
97 |
|
|
|
99 |
|
|
|
33 |
|
RALI Series 2005-Q01 Trust |
|
Class A-4 |
|
761118ER5 |
|
|
28 |
% |
|
|
21 |
% |
|
|
17 |
% |
|
Homecomings Financial Network, Other |
|
|
87 |
|
|
|
89 |
|
|
|
49 |
|
Alternative Loan Trust 2005-38 |
|
Class A-2 |
|
12667GZ22 |
|
|
30 |
% |
|
|
25 |
% |
|
|
19 |
% |
|
Countrywide Home Loans |
|
|
69 |
|
|
|
70 |
|
|
|
41 |
|
Alternative Loan Trust 2005-41 |
|
Class 2-A-1 |
|
12667GR96 |
|
|
33 |
% |
|
|
26 |
% |
|
|
21 |
% |
|
Countrywide Home Loans |
|
|
65 |
|
|
|
66 |
|
|
|
44 |
|
Structured Asset Mortgage
Investments II Trust 2006-AR3 |
|
Class 12A4 |
|
86360KAH1 |
|
|
37 |
% |
|
|
30 |
% |
|
|
15 |
% |
|
Countrywide Home Loans, Bank of America, and other |
|
|
68 |
|
|
|
70 |
|
|
|
25 |
|
Harborview Mortgage Loan Trust
2005-8 |
|
Class 2A3 |
|
41161PRT2 |
|
|
25 |
% |
|
|
22 |
% |
|
|
20 |
% |
|
Countrywide Home Loans |
|
|
60 |
|
|
|
62 |
|
|
|
41 |
|
Greenpoint Mortgage Funding
Trust 2005-AR5 |
|
Class I-A-2 |
|
39538WEC8 |
|
|
40 |
% |
|
|
34 |
% |
|
|
21 |
% |
|
Greenpoint Mortgage Funding |
|
|
52 |
|
|
|
53 |
|
|
|
36 |
|
Structured Asset Mortgage
Investments II Trust 2005-AR4 |
|
Class A2 |
|
86359LMA4 |
|
|
35 |
% |
|
|
28 |
% |
|
|
23 |
% |
|
Countrywide Home Loans |
|
|
53 |
|
|
|
54 |
|
|
|
34 |
|
WaMu Mortgage Pass-Through
Certificates, Series 2005-AR9 |
|
Class A2A |
|
92922FU97 |
|
|
10 |
% |
|
|
7 |
% |
|
|
19 |
% |
|
One or more approved institutions |
|
|
49 |
|
|
|
50 |
|
|
|
36 |
|
Structured Asset Mortgage
Investments II Trust 2005-AR7 |
|
Class 5A2 |
|
86359LQT9 |
|
|
25 |
% |
|
|
21 |
% |
|
|
17 |
% |
|
Southstar Funding LLC/Opteum Financial Services LLC, First Horizon, BOA, other |
|
|
40 |
|
|
|
40 |
|
|
|
25 |
|
Greenpoint Mortgage Funding
Trust 2006-AR3 |
|
Class 4A3 |
|
39538WHH4 |
|
|
32 |
% |
|
|
28 |
% |
|
|
15 |
% |
|
Greenpoint Mortgage Funding |
|
|
37 |
|
|
|
38 |
|
|
|
19 |
|
Harborview Mortgage Loan Trust
2005-16 |
|
Class 4A1B |
|
41161PZD8 |
|
|
28 |
% |
|
|
24 |
% |
|
|
19 |
% |
|
Countrywide Home Loans |
|
|
32 |
|
|
|
32 |
|
|
|
23 |
|
IndyMac INDX Mortgage Loan
Trust 2005-16IP |
|
Class A3 |
|
45660LUF4 |
|
|
26 |
% |
|
|
21 |
% |
|
|
20 |
% |
|
IndyMac Bank, F.S.B. |
|
|
26 |
|
|
|
26 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,235 |
|
|
|
2,208 |
|
|
|
1,332 |
|
|
|
|
* |
|
Security designated as available-for-sale, thus carrying value for available-for-sale securities
is equal to fair value. |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subord- |
|
|
|
Unpaid |
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency % |
|
ination |
|
|
|
Principal |
|
|
Amortized |
|
|
|
|
Issuer and Underlying Asset Type |
|
Tranche |
|
Cusip |
|
Total |
|
>60 day |
|
% |
|
Loan Originator |
|
Balance |
|
|
Cost |
|
|
Fair Value |
|
(Dollars in millions) |
|
Hybrid Option ARMs (5Y
Fixed/12MTA) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RALI 2007-QH8 Trust |
|
Class A |
|
74924EAA5 |
|
|
23 |
% |
|
|
16 |
% |
|
|
13 |
% |
|
Homecomings Financial |
|
|
476 |
|
|
|
476 |
|
|
|
331 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COFI Option ARMs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WaMu Mortgage
Pass-Through Certificates 2007-OA4 |
|
Class 2A |
|
93364CAC2 |
|
|
20 |
% |
|
|
14 |
% |
|
|
30 |
% |
|
Washington Mutual Bank |
|
|
134 |
|
|
|
134 |
|
|
|
99 |
* |
Washington Mutual Mortgage
Pass-Through Certificates WMALT
2007-OA3 Trust |
|
Class 5A |
|
939355AE3 |
|
|
25 |
% |
|
|
18 |
% |
|
|
14 |
% |
|
Washington Mutual Bank or others, Mortgage IT |
|
|
118 |
|
|
|
118 |
|
|
|
88 |
|
WaMu Mortgage Pass-Through
Certificates 2007-OA5 |
|
Class 2A |
|
93364BAC4 |
|
|
20 |
% |
|
|
16 |
% |
|
|
30 |
% |
|
Washington Mutual Bank |
|
|
107 |
|
|
|
107 |
|
|
|
80 |
* |
WaMu Mortgage Pass- Through
Certificates 2006-AR9 |
|
Class 2A-1B |
|
93363DAC1 |
|
|
13 |
% |
|
|
8 |
% |
|
|
10 |
% |
|
Washington Mutual Bank |
|
|
83 |
|
|
|
83 |
|
|
|
62 |
|
WaMu Mortgage Pass -Through
Certificates 2006-AR9 |
|
Class 2A |
|
93363DAB3 |
|
|
13 |
% |
|
|
8 |
% |
|
|
36 |
% |
|
Washington Mutual Bank |
|
|
52 |
|
|
|
52 |
|
|
|
42 |
|
WaMu Mortgage Pass- Through
Certificates 2006-AR11 |
|
Class 2A-1B |
|
93363TAC6 |
|
|
15 |
% |
|
|
11 |
% |
|
|
10 |
% |
|
Washington Mutual Bank |
|
|
41 |
|
|
|
42 |
|
|
|
28 |
|
WaMu Mortgage Pass Through
Certificates 2006-AR13 |
|
Class 2A-1B |
|
93363RAC0 |
|
|
15 |
% |
|
|
10 |
% |
|
|
10 |
% |
|
Washington Mutual Bank |
|
|
36 |
|
|
|
36 |
|
|
|
24 |
|
WaMu Mortgage Pass- Through
Certificates 2006-AR15 |
|
Class 2A-1B |
|
93363QAD0 |
|
|
12 |
% |
|
|
9 |
% |
|
|
10 |
% |
|
Washington Mutual Bank |
|
|
31 |
|
|
|
31 |
|
|
|
23 |
|
WaMu Mortgage Pass- Through
Certificates 2006-AR17 |
|
Class 2A-1B |
|
92925DAE0 |
|
|
16 |
% |
|
|
11 |
% |
|
|
10 |
% |
|
Washington Mutual Bank |
|
|
23 |
|
|
|
23 |
|
|
|
16 |
|
WaMu Mortgage Pass- Through
Certificates 2006-AR19 |
|
Class 2A |
|
933638AD0 |
|
|
13 |
% |
|
|
10 |
% |
|
|
39 |
% |
|
Washington Mutual Bank |
|
|
20 |
|
|
|
20 |
|
|
|
15 |
|
WaMu Mortgage Pass- Through
Certificates 2006-AR19 |
|
Class 2A-1B |
|
933638AE8 |
|
|
13 |
% |
|
|
10 |
% |
|
|
9 |
% |
|
Washington Mutual Bank |
|
|
13 |
|
|
|
13 |
|
|
|
9 |
|
Home Savings of America |
|
1988-7A |
|
436904AG1 |
|
|
|
|
|
|
|
|
|
|
102 |
% |
|
Not Available |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
* |
Home Savings of America |
|
1988-8A |
|
436904AJ5 |
|
|
|
|
|
|
|
|
|
|
102 |
% |
|
Not Available |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
* |
Home Savings of America |
|
1988-10A |
|
436904AK2 |
|
|
|
|
|
|
|
|
|
|
103 |
% |
|
Not Available |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
* |
Home Savings of America |
|
1988-11A |
|
436904AL0 |
|
|
|
|
|
|
|
|
|
|
103 |
% |
|
Not Available |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
663 |
|
|
|
664 |
|
|
|
491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/1 LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banc of America Mortgage
Securities, Inc. Mortgage
Pass-Through Certificates, Series
2004-H |
|
Class 2A1 |
|
05949ARD4 |
|
|
4 |
% |
|
|
2 |
% |
|
|
7 |
% |
|
Bank of America, N.A. |
|
|
38 |
|
|
|
38 |
|
|
|
37 |
|
GSR Mortgage Loan Trust 2004-11 |
|
Class 2A1 |
|
36242DFS7 |
|
|
5 |
% |
|
|
5 |
% |
|
|
9 |
% |
|
Various Lenders |
|
|
39 |
|
|
|
40 |
|
|
|
36 |
|
Banc of America Mortgage
Securities, Inc. Mortgage
Pass-Through Certificates, Series
2003-K |
|
Class 2A2 |
|
05948XZH7 |
|
|
1 |
% |
|
|
|
|
|
|
6 |
% |
|
Bank of America, N.A. |
|
|
27 |
|
|
|
27 |
|
|
|
27 |
|
Banc of America Mortgage
Securities, Inc. Mortgage
Pass-Through Certificates, Series
2003-H |
|
Class 2A2 |
|
05948XTH4 |
|
|
1 |
% |
|
|
|
|
|
|
6 |
% |
|
Bank of America, N.A. |
|
|
21 |
|
|
|
21 |
|
|
|
21 |
|
GSR Mortgage Loan Trust 2003-9 |
|
Class A2 |
|
36228FWS1 |
|
|
3 |
% |
|
|
1 |
% |
|
|
8 |
% |
|
Various Lenders |
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
Banc of America Mortgage
Securities, Inc. Mortgage
Pass-Through Certificates, Series
2003-D |
|
Class 2A3 |
|
05948XBU4 |
|
|
2 |
% |
|
|
1 |
% |
|
|
7 |
% |
|
Bank of America, N.A. |
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
Banc of America Mortgage
Securities, Inc. Mortgage
Pass-Through Certificates, Series
2003-A |
|
Class 2A1 |
|
05948LAE7 |
|
|
5 |
% |
|
|
1 |
% |
|
|
9 |
% |
|
Bank of America, N.A. |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149 |
|
|
|
150 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
% |
|
|
20 |
% |
|
|
16 |
% |
|
|
|
$ |
3,523 |
|
|
$ |
3,498 |
|
|
$ |
2,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Security designated as available-for-sale, thus carrying value for available-for-sale securities
is equal to fair value. |
Information at September 30, 2008 about the geographic distribution of the mortgage loans
underlying the non-agency securities we own follows:
|
|
|
|
|
California |
|
|
60 |
% |
Florida |
|
|
12 |
% |
Arizona |
|
|
3 |
% |
Other |
|
|
8 |
% |
Not available |
|
|
17 |
% |
|
|
|
|
|
|
|
100 |
% |
|
|
|
|
33
Deposits
Deposits consist of:
|
|
|
September 30, 2008
|
|
December 31, 2007 |
|
|
|
|
|
![(PIE CHART)](d65123d6512305.gif) |
Included in transaction accounts are interest-bearing checking accounts totaling $1.1 billion
at September 30, 2008 and September 30, 2007. We recorded interest expense on interest-bearing
checking accounts at an average rate of 0.4% for third quarter 2008 and 0.5% for third quarter
2007. Total deposits decreased by 2% at September 30, 2008 compared to December 31, 2007.
In third quarter 2008, we began accepting brokered deposits from a number of dealers. At
September 30, 2008, we had $45 million in brokered
deposits, and in October accepted an
additional $630 million.
At
September 30, 2008, approximately $1.1 billion (12%) of our
deposits, excluding those of our subsidiaries and affiliates, exceeded the
then-current federal deposit insurance limit of $100,000 per
individual. Subsequent to September 30, 2008, a change to
federal law temporarily increased insured deposit coverage to $250,000 per individual. At September 30, 2008,
approximately $174 million (2%) of our non-commercial deposits at September 30, 2008 exceeded
$250,000 per individual, and $401 million of our commercial deposits (excluding those of our
subsidiaries and affiliates) exceeded $250,000.
Borrowings
Our FHLB borrowings consist of both short-term and long-term borrowings. Short-term
borrowings are generally 7 to 30 days in maturity, and we use them to meet daily liquidity needs.
We utilize longer-term FHLB borrowings at times to match the interest rate characteristics of some
of our assets, such as those repricing after three to five years. Please read Liquidity, Capital
Resources, Off-Balance Sheet Arrangements, and Contractual Obligations of this report on Form 10-Q
for information about collateral we have pledged for FHLB borrowings.
We allocated $237 million of the proceeds from the Private Placements to the Guaranty Bank subordinated debt. The Guaranty Bank subordinated debt accrues interest at 12%
on its $275 million face amount, resulting in an effective interest rate of approximately 15% after
accretion of the discount and amortization of offering costs we allocated to the subordinated debt.
34
Credit Risk
Asset Quality and Allowance for Credit Losses
Various asset quality measures we monitor are:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
Accruing loans past-due 90 days or more |
|
$ |
27 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans |
|
$ |
470 |
|
|
$ |
166 |
|
Foreclosed real estate |
|
|
50 |
|
|
|
13 |
|
|
|
|
|
|
|
|
Non-performing assets |
|
$ |
520 |
|
|
$ |
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a percentage of total loans |
|
|
4.56 |
% |
|
|
1.65 |
% |
Non-performing assets divided by total loans and foreclosed real estate |
|
|
5.02 |
% |
|
|
1.78 |
% |
Allowance for loan losses as a percentage of non-performing loans |
|
|
49 |
% |
|
|
71 |
% |
Allowance and direct reductions to recorded investment as a percentage
of non-performing loans before direct reductions to recorded
investment |
|
|
57 |
% |
|
|
72 |
% |
Allowance for loan losses as a percentage of total loans |
|
|
2.24 |
% |
|
|
1.17 |
% |
Single-family mortgage loan delinquencies as a percentage of
single-family mortgage loans |
|
|
13.21 |
% |
|
|
6.97 |
% |
Information about our allowances for credit losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
261 |
|
|
$ |
79 |
|
|
$ |
125 |
|
|
$ |
72 |
|
Provision for credit losses |
|
|
78 |
|
|
|
19 |
|
|
|
235 |
|
|
|
17 |
|
Net (charge-offs) recoveries |
|
|
(100 |
) |
|
|
|
|
|
|
(121 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
239 |
|
|
$ |
98 |
|
|
$ |
239 |
|
|
$ |
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
231 |
|
|
$ |
91 |
|
|
$ |
231 |
|
|
$ |
91 |
|
Commitment-related reserves |
|
|
8 |
|
|
|
7 |
|
|
|
8 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
239 |
|
|
$ |
98 |
|
|
$ |
239 |
|
|
$ |
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (credit) for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan losses |
|
$ |
81 |
|
|
$ |
19 |
|
|
$ |
234 |
|
|
$ |
17 |
|
Commitment-related credit losses |
|
|
(3 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined provision for credit losses |
|
$ |
78 |
|
|
$ |
19 |
|
|
$ |
235 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) as a
percentage of average loans
outstanding |
|
|
3.93 |
% |
|
|
|
|
|
|
1.59 |
% |
|
|
(0.11 |
)% |
Conditions in the residential housing and credit markets continue to deteriorate. Our
non-performing loans to homebuilders increased $62 million in third quarter 2008. Our
non-performing single-family mortgage loans also increased in third quarter 2008 by $11 million.
As a result, our asset quality measures have deteriorated substantially, including an increase in
non-performing assets and much higher provisions for credit losses than over the previous several
years. Until conditions in the housing and credit markets improve, it is likely we will continue
to report significant non-performing assets, charge-offs, and provisions for credit losses.
35
The allowance for loan losses by loan category was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
Allowance |
|
|
|
|
|
|
|
as a % of |
|
|
|
|
|
|
as a % of |
|
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
Allowance |
|
|
Category |
|
|
Allowance |
|
|
Category |
|
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage |
|
$ |
42 |
|
|
|
3.01 |
% |
|
$ |
9 |
|
|
|
0.54 |
% |
Single-family mortgage warehouse |
|
|
4 |
|
|
|
0.43 |
% |
|
|
6 |
|
|
|
0.86 |
% |
Single-family construction (homebuilders) |
|
|
98 |
|
|
|
9.25 |
% |
|
|
48 |
|
|
|
3.18 |
% |
Multifamily and senior housing |
|
|
17 |
|
|
|
0.83 |
% |
|
|
6 |
|
|
|
0.39 |
% |
Commercial real estate |
|
|
10 |
|
|
|
0.54 |
% |
|
|
6 |
|
|
|
0.36 |
% |
Commercial and business |
|
|
21 |
|
|
|
1.47 |
% |
|
|
15 |
|
|
|
1.12 |
% |
Energy |
|
|
9 |
|
|
|
0.64 |
% |
|
|
6 |
|
|
|
0.41 |
% |
Consumer and other |
|
|
1 |
|
|
|
0.46 |
% |
|
|
|
|
|
|
|
|
Incurred but not yet identified losses |
|
|
29 |
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
231 |
|
|
|
2.24 |
% |
|
$ |
118 |
|
|
|
1.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration
Information about the underlying collateral and geographic location of our single-family
construction loans, including local, regional, and national homebuilders at September 30, 2008
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lots and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
|
|
|
|
|
|
|
Single-Family |
|
|
and |
|
|
|
|
|
|
|
|
|
Houses |
|
|
Development |
|
|
Other |
|
|
Total |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
$ |
106 |
|
|
$ |
200 |
|
|
$ |
53 |
|
|
$ |
359 |
|
Texas |
|
|
77 |
|
|
|
21 |
|
|
|
|
|
|
|
98 |
|
Florida |
|
|
15 |
|
|
|
20 |
|
|
|
44 |
|
|
|
79 |
|
Arizona |
|
|
21 |
|
|
|
46 |
|
|
|
14 |
|
|
|
81 |
|
Colorado |
|
|
39 |
|
|
|
27 |
|
|
|
|
|
|
|
66 |
|
Other |
|
|
60 |
|
|
|
97 |
|
|
|
220 |
(a) |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
318 |
|
|
$ |
411 |
|
|
$ |
331 |
|
|
$ |
1,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Principally unsecured loans to national homebuilders |
Our commercial real estate construction loans are diversified geographically, and across a
number of different property types. Information about those loans at September 30, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
% of Total |
|
|
|
Commercial |
|
|
Loan |
|
|
|
Real Estate |
|
|
Portfolio |
|
Office |
|
|
48 |
% |
|
|
9 |
% |
Retail |
|
|
27 |
% |
|
|
5 |
% |
Industrial |
|
|
14 |
% |
|
|
2 |
% |
Land |
|
|
11 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
36
We originate and maintain large credit relationships with a number of customers in the
ordinary course of business as a result of the types of lending in which we engage. Information
about our 25 largest relationships, by amount of loan commitment, at September 30, 2008, follows:
|
|
|
|
|
|
|
|
|
|
|
Commitment |
|
|
Outstanding |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
Commercial real estate and senior housing construction |
|
$ |
1,629 |
|
|
$ |
1,185 |
|
Energy and commercial and business |
|
|
652 |
|
|
|
441 |
|
Single-family construction |
|
|
175 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
$ |
2,456 |
|
|
$ |
1,646 |
|
|
|
|
|
|
|
|
Liquidity, Capital Resources, Off-Balance Sheet Arrangements, and Contractual Obligations
Our principal operating cash requirements are for interest, compensation, and taxes.
The change in our borrowings generally moves in tandem with the amounts invested in loans and
securities less changes in deposits because we use borrowings to fund our investments in excess of
deposits. The amount of borrowing will decrease as opportunity to invest decreases and will
increase as opportunity to invest increases. In first nine months 2008, we used cash flow from
operations and principal payments on securities to fund increases in loans and decreases in
deposits and borrowings.
Our liquidity needs are associated with cash flow requirements of our deposit and loan
customers, our other commitments (including borrowing costs and maturities), and our operating
activities. We have a variety of liquidity sources including:
|
|
|
Cash on hand and deposits at the Federal Reserve; |
|
|
|
|
Operating cash flows; |
|
|
|
|
New deposits; |
|
|
|
|
Ability to borrow from the FHLB; and |
|
|
|
|
A portfolio of assets, including marketable mortgage-backed securities, which we can
pledge as borrowings or sell or securitize if necessary. |
We continue to have sufficient funds availability, principally borrowing capacity at the
Federal Home Loan Bank of Dallas, to meet our anticipated loan funding and operating requirements.
Our borrowings from the FHLB are secured by a blanket floating lien on certain of our loans, and by
securities we maintain on deposit at the FHLB. At September 30, 2008, $12 billion in principal
balance of our loans and securities were pledged as collateral for FHLB borrowings. The FHLB lends
to us at varying advance rates for differing types of collateral. Based upon this eligible
collateral, we had the ability to borrow an additional $2.2 billion from the FHLB at September 30,
2008. Additionally, we have other assets not pledged as collateral on FHLB borrowings, which we
could pledge as collateral with other lenders, including the Federal Reserve, and unsecured
commitments, which provide an additional $2.2 billion in borrowing capacity at September 30, 2008.
During the month of October, deposits increased by $1.8 billion primarily from certificates of
deposit issued to customers in our branches and to commercial customers, and brokered deposits. We used
these funds to reduce our FHLB borrowings, increasing our unfunded borrowing capacity with the
FHLB. Our unfunded borrowing capacity at the FHLB and Federal Reserve are essentially uncommitted
and, in general, could be decreased at their discretion.
FHLB Dallas currently limits our ability to pledge non-agency mortgage-backed securities as
collateral against our borrowings from them to securities rated BBB or higher by at least one
nationally recognized securities rating organization. At October 31, 2008, two of our securities
had been downgraded below BBB by both rating organizations which rate them. As a result, they are
no longer eligible as collateral against borrowings from FHLB Dallas. Seven additional securities
are rated below BBB by one rating organization at October 31, 2008. If the other rating
organization were to downgrade all of these securities below BBB, it would further reduce our
borrowing capacity by approximately $500 million. Additionally, the FHLBs regulator issued an
advisory bulletin in third quarter 2008 regarding acceptability of mortgage-backed securities
issued after July 10, 2007 as collateral. Several of our securities may be subject to that advisory. If FHLB were to exclude these
securities from eligible collateral, it would reduce our borrowing capacity by approximately $600
million. If FHLB were to reduce our borrowing capacity because of further market value changes or
further downgrades of our collateral, and we were not able to replace the financing on similar
terms or replace the downgraded securities with other eligible collateral, our liquidity could be
materially adversely affected. It would likely be difficult to secure replacement financing in the
current credit markets.
37
Contractual Obligations
At September 30, 2008 our contractual obligations consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due or Expiring by Period |
|
|
|
|
|
|
Total |
|
|
2008 |
|
|
2009-10 |
|
|
2011-12 |
|
|
Thereafter |
|
|
Indeterminable |
|
|
|
(In millions) |
|
Items on our balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction and savings
deposit accounts |
|
$ |
4,347 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,347 |
|
Certificates of deposit |
|
|
4,818 |
|
|
|
1,505 |
|
|
|
3,179 |
|
|
|
114 |
|
|
|
20 |
|
|
|
|
|
Brokered certificates of
deposit |
|
|
45 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
borrowings |
|
|
4,464 |
|
|
|
4,030 |
|
|
|
309 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
Subordinated notes payable
to trust |
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314 |
|
|
|
|
|
Subordinated debt of
subsidiary |
|
|
275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items not on our balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual interest payments |
|
|
981 |
|
|
|
27 |
|
|
|
202 |
|
|
|
126 |
|
|
|
626 |
|
|
|
|
|
Operating leases |
|
|
42 |
|
|
|
2 |
|
|
|
16 |
|
|
|
14 |
|
|
|
10 |
|
|
|
|
|
Processing contracts |
|
|
16 |
|
|
|
4 |
|
|
|
10 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,302 |
|
|
$ |
5,568 |
|
|
$ |
3,761 |
|
|
$ |
381 |
|
|
$ |
1,245 |
|
|
$ |
4,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
In the normal course of business, we enter into off-balance sheet arrangements, such as
commitments to extend credit for loans, leases, and letters of credit. Since many commercial and
business loan commitments expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Additionally, we generally require collateral upon
funding of loan commitments, and once funded, they generally increase our borrowing capacity
(referred to as pledgeable below). Our off-balance sheet unfunded credit arrangements consist of:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
Single-family mortgage loans |
|
$ |
94 |
|
|
$ |
87 |
|
Unused lines of credit |
|
|
1,718 |
|
|
|
1,959 |
|
Unfunded portion of credit commitments pledgeable |
|
|
2,881 |
|
|
|
3,866 |
|
Unfunded portion of credit commitments non-pledgeable |
|
|
612 |
|
|
|
621 |
|
Commitments to originate loans pledgeable |
|
|
184 |
|
|
|
337 |
|
Commitments to originate loans non-pledgeable |
|
|
181 |
|
|
|
417 |
|
Letters of credit |
|
|
292 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
$ |
5,962 |
|
|
$ |
7,646 |
|
|
|
|
|
|
|
|
38
Capital Management
At September 30, 2008, Guaranty Bank was well-capitalized under the federal capital adequacy
regulations. The following table sets forth actual capital amounts and ratios for Guaranty Bank,
along with the minimum capital amounts and ratios required of all federally insured financial
institutions in order to meet capital adequacy requirements and to be categorized as
well-capitalized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Categorization as |
|
Regulatory |
|
|
Actual |
|
Well Capitalized |
|
Minimum |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
(Dollars in millions) |
Total Risk-Based
Ratio (Risk-based
Capital/Total
Risk-weighted
Assets) |
|
$ |
1,804 |
|
|
|
12.65 |
% |
|
$ |
1,426 |
|
|
|
³10.00 |
% |
|
$ |
1,141 |
|
|
|
³ 8.00 |
% |
Tier 1 (Core)
Risk-based Ratio
(Core Capital/Total
Risk-weighted
Assets) |
|
$ |
1,390 |
|
|
|
9.75 |
% |
|
$ |
856 |
|
|
|
³ 6.00 |
% |
|
$ |
570 |
|
|
|
³ 4.00 |
% |
Tier 1 (Core)
Leverage Ratio
(Core
Capital/Adjusted
Tangible Assets) |
|
$ |
1,390 |
|
|
|
8.99 |
% |
|
$ |
773 |
|
|
|
³ 5.00 |
% |
|
$ |
619 |
|
|
|
³ 4.00 |
% |
Tangible Ratio
(Tangible Capital/
Tangible Assets) |
|
$ |
1,390 |
|
|
|
8.99 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
$ |
309 |
|
|
|
³ 2.00 |
% |
We did not pay or declare a dividend on our common stock in third quarter 2008. Our ability
to pay dividends, which is limited by regulatory capital requirements at Guaranty Bank, has
historically depended to a great extent on our after-tax earnings and our asset growth.
Recent Accounting Standards
Please see Note 1 to our unaudited financial statements in Item 1 of this report on Form
10-Q for information about new and pending accounting pronouncements.
Effects of Inflation
Inflation has had minimal effect on our operating results the past three years because
substantially all of our assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our results than general levels of inflation.
Litigation Matters
We are involved in various legal proceedings that arise from time to time in the ordinary
course of doing business and believe we have established adequate reserves for any probable losses.
We do not believe the outcome of any of these proceedings should have a significant adverse effect
on our financial position, long-term results of operations, or cash flow. It is possible, however,
charges related to these matters could be significant to our results or cash flow in any one
period.
A class action in California, related to our former mortgage banking operations, was dismissed
but remains under appeal by the plaintiff. We have established reserves we believe are adequate
for this matter, and do not anticipate the outcome will have a significant adverse effect on our
financial position or results of operations or cash flow.
As a result of our participation in the Visa USA (Visa) network, principally related to ATM
and debit cards, we own 33 thousand Class B common shares of Visa for which we have no carrying
value. As a former member of Visa, we participate in an indemnification provision in Visas
bylaws. We are not a named defendant in any of Visas litigation matters, and have no access to
any non-public information about the matters. Visa recently
announced it had reached settlement on one of the indemnified
matters. Based on the information we have obtained we do not believe
our indemnification obligation for that matter is significant.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The following table illustrates the estimated effect on our pre-tax income of hypothetical
immediate, parallel, and sustained shifts in interest rates for the next 12 months at September 30,
2008, compared to information at December 31, 2007. This estimate considers the effect of changing
prepayment speeds, repricing characteristics, and expected average balances over the next 12
months.
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in |
|
|
|
Income Before Taxes |
|
Change in |
|
September 30, |
|
|
December 31, |
|
Interest Rate |
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
+1% |
|
$ |
24 |
|
|
$ |
(6 |
) |
1% |
|
|
(28 |
) |
|
|
(12 |
) |
39
The change in our interest rate sensitivity from December 31, 2007 is principally because of
the decrease in single-family mortgage loans and mortgage-backed securities. These assets have
interest rates, which are less responsive to changes in interest rates than our commercial loans.
As the mortgage portfolios decrease, our overall asset yields become more responsive to changes in
interest rates.
Additionally, our funding costs are less sensitive to changes in interest rates at September
30, 2008 because of two factors:
|
|
|
the average time to maturity of our certificates of deposit lengthened during the
first half of the year, delaying the responsiveness of the costs of those deposits to
market rate changes; and, |
|
|
|
|
we expect the interest rates on our money market and checking account deposit
liabilities will be less responsive to changes in interest rates because of the current
low level of interest rates. |
Reporting the effect of immediate and parallel rate changes is common industry practice;
however, such changes are unlikely to occur. More typically, rates increase gradually, change in
different amounts across the term structure, and change differently across products.
While the analysis strives to model accurately the hypothetical relationships being tested,
there are numerous assumptions and estimates associated with these simulations which may not
reflect the manner in which actual yields and costs respond to changes in market interest rates.
Assumptions about interest rate changes, balance sheet growth, depositor behavior, or prepayment
rates are by nature highly subjective, involve uncertainty and, therefore, are only estimates.
Foreign Currency Risk
We have no exposure to foreign currency fluctuations.
Commodity Price Risk
We have no direct exposure to commodity price fluctuations.
Item 4T. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures are effective in recording, processing, summarizing,
and reporting, on a timely basis, information required to be disclosed by us in the reports that we
file or submit under the Exchange Act and are effective in ensuring that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because of inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company have been detected. Accordingly, our disclosure
controls and procedures are designed to provide reasonable, not absolute, assurance that the
objectives of our disclosure control system are met and, as set forth above, our chief executive
officer and chief financial officer have concluded, based on their evaluation as of the end of the
period covered by this report, that our disclosure controls and procedures were effective to
provide reasonable assurance that the objectives of our disclosure control system were met.
40
There have not been any changes in our internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to
which this report relates that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Since we filed our Annual Report on Form 10-K for the year ended December 31, 2007, there have
been no material developments in pending legal proceedings.
We do not expect that the eventual outcome of any or all of our pending legal matters will
have a significant adverse effect on our financial position, long-term results of operations, or
cash flow. However, it is possible that charges related to these matters could be significant to
the results of operations or cash flows in any one accounting period.
Item 1A. Risk Factors
There are no material changes from the risk factors as previously disclosed in our Annual
Report on Form 10-K for 2007, except as set forth below:
Volatility in the credit and residential housing markets could result in further losses on our
mortgage-backed securities and loans.
Credit markets in many sectors have experienced dramatic reductions in liquidity and increases
in required returns by investors in credit-sensitive assets. These conditions began in 2007 in the
sub-prime mortgage market but have expanded in 2008 to include virtually all non-agency
mortgage-backed securities and many other asset-backed markets. Mortgage-backed securities comprise
a higher percentage of our assets than they do for many other financial institutions. At September
30, 2008, approximately 26% of our assets were mortgage-backed securities and approximately
three-fourths of those securities were non-agency securities. Recent transactions by distressed
sellers, and expectations of further distressed sales, have exacerbated market discounts for
mortgage-backed securities and generally removed the majority of typical participants from
transactions in non-agency securities. As a result, it is difficult to determine fair values for
those securities and would likely be difficult to sell securities in the current market at all. We
estimate the fair value of the non-agency securities we own was below amortized cost by
approximately $1.2 billion, or 34%, at September 30, 2008. Though we currently have the intent and
ability to hold the securities until repayment, if it became necessary for us to sell non-agency
securities, any sales would almost certainly be at a significant discount to par value which would
have a negative effect on our operating results and capital position.
Current market conditions include a severe over-supply of land, lots, and finished homes in
many markets including those where we do business. At September 30, 2008, approximately 7% of our
assets were loans to homebuilders and 9% of our assets were single-family mortgage loans. Many of
our homebuilder borrowers are experiencing decreased sales and pricing and some are facing
significant financial difficulty. We had approximately $295 million in non-performing homebuilder
loans and approximately $108 million of non-performing single-family mortgage loans at September
30, 2008. The percentage of our single-family mortgage loans delinquent in their payments has
increased from 7% to 13% since year-end 2007. If housing markets, particularly in California,
continue to deteriorate, we will experience a further increase in non-performing loans, provisions
for loan losses, and charge-offs. While it is difficult to predict how long these conditions will
exist and which markets, products or other segments of our loan and securities portfolio might
ultimately be affected, these factors could adversely affect our ability to grow earning assets,
return to profitability, or meet our financial obligations.
Declining real estate values may cause borrowers to default on loans underlying
mortgage-backed securities we own, reducing the likelihood of recoverability of our investments.
Deterioration in the value of single-family homes may cause borrowers to default on the
mortgages underlying the mortgage-backed securities we own. If credit losses on the underlying
loans were to exceed the subordinated tranches, we would not receive the full stated interest due on the securities or our full
principal balance, or both. If we were to conclude unrealized losses on the mortgage-backed
securities were other-than-temporary which we evaluate by considering estimates of
recoverability, as well as the duration and severity of the unrealized loss we would be required
under generally accepted accounting principles to reduce the cost basis of the security to fair
value and record a corresponding charge to earnings, which would also reduce our regulatory
capital.
41
Many of the loans underlying the non-agency mortgage-backed securities we own have one or more
characteristics increasing the risk of default by the borrowers. These characteristics include
various monthly payment options, referred to as Option ARMs, and limited underwriting
documentation. At September 30, 2008, over 95% of the loans underlying the non-agency
mortgage-backed securities we own are Option ARMs. Additionally, approximately 60% of the loans
underlying the non-agency mortgage-backed securities we own are secured by real estate in
California.
If a significant portion of our non-agency mortgage-backed securities portfolio were to be
downgraded below investment grade by both of the securities rating organizations which rate the
securities, or the market value of those securities further declined, it would negatively affect
our liquidity.
At September 30, 2008, we had outstanding indebtedness to FHLB Dallas in the amount of $4.5
billion. FHLB Dallas currently limits our ability to pledge non-agency mortgage-backed securities
as collateral against our borrowings from them to securities rated BBB or higher by at least one
nationally recognized securities rating organization. Seven of our non-agency securities are rated
below BBB by one rating organization at October 31, 2008, but BBB or higher by another. If the
other rating organization were to downgrade all of these securities below BBB, it would reduce our
borrowing capacity by approximately $ 500 million.
If FHLB were to reduce our borrowing capacity, and we were not able to replace the financing
on similar terms, our liquidity could be materially and adversely affected. It may be difficult to
secure replacement financing in the current credit markets.
Regulatory ownership limits and market conditions may prevent us from raising needed equity
capital in the future.
We are required to maintain minimum levels of capital at Guaranty Bank under federal capital
adequacy standards applicable to financial institutions. Under federal law, the Office of Thrift
Supervision, or OTS, has broad authority to set and modify capital adequacy standards, to determine
whether we have satisfied those standards, to require us to take remedial actions to meet the
standards, and to take regulatory action if we do not comply. Acting pursuant to this broad
authority, the OTS has wide powers to require us to take actions that it determines to be necessary
to protect depositors of Guaranty Bank or the federal deposit insurance fund or to cause us to meet
any capital standards that it imposes.
We may, at some point, need to raise additional capital as a result of regulatory requirements
to improve our capital, to support our business as a result of losses. Our ability to raise
additional capital, if needed, will depend on conditions in the capital markets at that time, which
are outside our control, and on our financial performance and prospects. Moreover, federal laws
and regulations currently require persons or entities that acquire 25% or more of our voting
securities to register as a thrift holding company. In particular, we have raised a significant
amount of equity capital from our two largest stockholders, TRT Financial Holdings, LLC and Icahn
Partners LP along with entities related to Icahn Partners LP. As of October 31, 2008, those
parties held more than 19% and 17%, respectively, of our outstanding Common Stock. If either of
these stockholders were to purchase additional significant amounts of our voting equity securities,
they might have to file applications with the OTS to register as holding companies. Because
holding companies are subject to significant regulation and oversight by the OTS, either or both of
these stockholders may be unwilling to become a thrift holding company. Even if they make an
application, it may be rejected or delayed by the OTS.
Accordingly, we may not be able to raise additional capital if needed on terms acceptable to
us, or at all. Stockholders from whom we have recently raised significant amounts of equity
capital may be unwilling or unable to purchase more of our equity securities if a purchase would
result in them having to register as a thrift holding company. If we cannot raise additional
capital when needed, our ability to further expand our operations through
42
internal growth and operate our business could be materially impaired, our creditors could
exercise their remedies, or the OTS could exercise its broad regulatory powers described above.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At a Special Meeting of Stockholders held on September 29, 2008, the following proposal was
submitted to our stockholders with the following results:
1. |
|
Approval of conversion of Series B Mandatory Convertible Perpetual Cumulative Preferred Stock
into common stock |
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For |
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Against |
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Abstain |
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|
|
|
29,918,335 |
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|
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282,526 |
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70,983 |
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Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit |
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Number |
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Exhibit Description |
|
3.1 |
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|
Certificate of Designations, Preferences and Rights of
Series B Mandatory Convertible Perpetual Cumulative
Preferred Stock (incorporated herein by reference to
Exhibit 3.1 to the Companys Form 8-K as filed with the
Commission on July 11, 2008) |
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|
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3.2 |
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Certificate of Elimination of Series A Junior Participating
Preferred Stock (incorporated herein by reference to
Exhibit 3.1 to the Companys Form 8-K as filed with the
Commission on October 28, 2008) |
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4.1 |
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Form of Subordinated Note (incorporated herein by reference
to Exhibit 4.1 to the Companys Form 8-K as filed with the
Commission on September 9, 2008) |
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4.2 |
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First Amendment to Rights Agreement (incorporated herein by
reference to Exhibit 4.1 to the Companys Form 8-K as filed
with the Commission on October 28, 2008) |
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|
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|
10.1 |
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|
Investment Agreement, dated May 26, 2008, between the
Company and TRT Financial Holdings, LLC (incorporated
herein by reference to Exhibit 10.1 to the Companys Form
8-K as filed with the Commission on May 27, 2008) |
|
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10.2 |
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|
First Amendment to Investment Agreement, dated May 29,
2008, between the Company, the Investor and the Investor
Affiliates (incorporated by reference to Exhibit 10.18 to
Amendment No. 4 to the Companys Registration Statement on
Form S-1 as filed with the Commission on May 30, 2008) |
43
|
|
|
|
|
Exhibit |
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|
Number |
|
Exhibit Description |
|
10.3 |
|
|
Investment Agreement dated June 7, 2008 by and between the
Company and TRT Financial Holdings, LLC (incorporated
herein by reference to Exhibit 10.1 to the Companys Form
8-K as filed with the Commission on June 9, 2008) |
|
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|
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|
10.4 |
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|
Investment Agreement dated June 7, 2008 by and between the
Company and Icahn Partners, LP (incorporated by reference
to Exhibit 10.2 to the Companys Form 8-K as filed with the
Commission on June 9, 2008) |
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10.5 |
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Form of Investment Agreement entered into by the Company
and investors other than Icahn Partners and TRT
(incorporated herein by reference to Exhibit 10.3 to the
Companys Form 8-K as filed with the Commission on June 9,
2008) |
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10.6 |
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Purchase Agreement dated June 7, 2008 by and among the
Company and the purchasers named therein (incorporated
herein by reference to Exhibit 10.4 to the Companys Form
8-K as filed with the Commission on June 9, 2008) |
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10.7 |
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Letter Agreement dated June 7, 2008 by and between the
Company and Icahn Partners, LP (incorporated herein by
reference to Exhibit 10.5 to the Companys Form 8-K as
filed with the Commission on June 9, 2008) |
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10.8 |
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Letter Agreement dated June 7, 2008 by and between the
Company and TRT Financial Holdings, LLC (incorporated
herein by reference to Exhibit 10.6 to the Companys Form
8-K as filed with the Commission on June 9, 2008) |
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10.9 |
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Agency Agreement between the Company, Guaranty Bank and
Keefe, Bruyette & Woods, Inc. (incorporated herein by
reference to Exhibit 10.7 to the Companys Form 8-K as
filed with the Commission on June 9, 2008) |
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31.1 |
* |
|
Certification of Kenneth R. Dubuque pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act, as amended |
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|
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31.2 |
* |
|
Certification of Ronald D. Murff pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as
amended |
|
|
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|
32.1 |
* |
|
Certification of Kenneth R. Dubuque pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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32.2 |
* |
|
Certification of Ronald D. Murff pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Guaranty Financial Group Inc.
(Registrant)
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By: |
/s/ Ronald D. Murff
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Senior Executive Vice President and |
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Chief Financial Officer
(Principal Accounting Officer) |
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|
Date: November 13, 2008
45