Guaranty Financial Group Q1 2008 Earnings Call Transcript

Guaranty Financial Group (GFG)

Q1 2008 Earnings Call Transcript

April 29, 2008 2:00 pm ET

Executives

Rusty LaForge – Director of IR

Ken Dubuque – President and CEO

Ron Murff – CFO

Analysts

Terry McEvoy – Oppenheimer

Brian Clark – KBW

Shelby Norman - Stephens Inc.

Brad Milsap – Sandler O'Neill

Al Sebastian – Al [ph] Capital Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Guaranty Financial Group first quarter 2008 financial highlights conference call. My name is Karen and I would be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn presentation over to host for today's call, Mr. Rusty LaForge, Director of Investor Relations. Please proceed, sir.

Rusty LaForge

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

Here with me this morning are Ken Dubuque, President and CEO and Ron Murff, Chief Financial Officer. I want to call your attention to the side deck which we post inn our Website, guarantygroup.com, and we will be referring to this over the course of the call. With that, I’ll turn the call over to Ken.

Ken Dubuque

Thanks, Rusty. Good afternoon, welcome to our first quarter conference call to discuss financial results. Thank you for joining us. Our first quarter as an independent publicly traded company has been a very challenging time, as it has been for many in our industry. We still benefit from our place in Texas as the second largest publicly traded financial institution headquartered there. However, the continued decline in housing market conditions and liquidity in securities markets as demanded that we focused our short-term strategy on key elements of our business and align our organization to support these critical objectives. To this end we completed an internal organization and initiated a comprehensive business assessment program. I will explain these changes in more detail in a moment.

When we discussed our year 2000 results back in February, one of our goals was ensure that our audience understood our history, who we are now and what we saw for the company going forward. We discussed in detail our areas of business and the different assets that we own. If you were not able to listen to that conference call or otherwise have not fully heard our story, please consider obtaining transcript of that conference call or review our past investor presentation or other SEC filings or contact our Investor Relations department for more information.

In sum, we have had a large successful history in retail and commercial banking and our spinoff afforded us new opportunities for enhancing growth and profitability. We do not – we do have an interesting and exciting story of how we got to where we today and who we are now. But today, we will keep our focus on results and financial position for the first quarter 2008 and where we are going from here. At this time I will briefly cover our financial results as Ron will be discussing this in greater detail. After Ron's comments, I will close with some final words.

Turning to our income statement, earlier today we released our financial results for the first quarter 2008. For the first quarter, we are reporting a net after-tax loss of $10 million or $0.28 a share. Compared to that – to impaired after-tax net income of $6 million last quarter and $27 million in the first quarter of 2007. The primary reason for the loss this quarter was a sharp increase in loss provision. During all of 2007, we recorded a provision for credit losses of $50 million, $33 million of which was recorded in the fourth quarter. This compares to only $1 million recorded in all of 2006; however, in the first quarter 2008, we booked a provision of $58 million, primary because of continued weakness in the single family construction market.

The primary driver of the increase in our provision was the increase in our nonperforming loans from $166 million at year-end 2007 to $261 million at the end of first quarter 2008. But it also included increases in reserve for loans that we already – that were already in our nonperforming category as well. On the other hand, during the first quarter 2008, we only had $2 million in net charge-offs. Ron will discuss these results in further detail in just a moment.

Let me turn to our balance sheet. We will not go over our entire balance sheet again this quarter, I do want to provide a quick overview of those areas of most interest to our investors. Within our $16 billion balance sheet, our loan portfolio totals approximately $10 billion and we hold just over $5 billion in mortgage backed securities. As I mentioned a moment ago, we have $261 million in nonperforming loans within our $10 million portfolio loans of which $182 million or approximately two-thirds are from our homebuilder construction loan portfolio. The current amount of outstanding loans to homebuilders on our books is down from approximately $1.8 billion two quarters to go to $1.3 billion today.

After this quarter's $58 million loan loss provision, our total allowance for loan loss is $172 million. More than half, $89 million of these reserves are against homebuilder loans. Our ratio reserves as a percentage of all loans is 1.67% up from 1.17% at the end of the previous quarter. Our reserves as a percentage of nonperforming loans is 69%. The ratio as a percentage of NPLs is low compared to prior years as we have historically experienced low levels of NPLs. However, we have often explained that our nonperforming loans are primary secured loans. We do not have a material number of secured loans that are nonperforming. We feel they are appropriate reserved through the consistent application of our loan loss reserve methodology.

As to mortgage backed securities. With respect to the amortized cost basis of $5.3 billion in mortgage backed securities this is a relatively large proportion of our assets. All its securities are collateralized by adjustable rate single-family mortgages, none of which are subprime. Approximately one-third of the securities are agency underwritten with a remaining two-thirds being private issuers. All of the securities were rated AAA at the time of purchase and continue to be rated AAA today. It is worth noting that the rating agencies began a wave of downgrades for the mortgage backed securities several months ago and have downgraded a very substantial number of securities mostly secured by subprime collateral and many of which are even more complex collateralized debt obligations or CDOs. Today all our securities are still AAA rated. This is consistent with the story that we’ve been telling for many months now.

Securities that we purchased had standard structures with very high subordination levels. Not only have we not invested in subprime securities, none of the securities are collateralized debt organizations or subordinated truancies. Of course, we cannot predict with certainty whether securities that we own will be downgraded by one or more of the rating agencies in the future but we continue to monitor developments (inaudible) are working diligently to ascertain the market value and intrinsic value of these securities which Ron will discuss in greater detail. We still have the intent and ability to hold these mortgage backed securities to maturity and based upon our current analysis, we do not expect any credit losses within these securities.

I want to talk about our short-term goals. Last quarter, I outlined our long-term strategy, a key component of which includes growth in various areas of our business. However, it’s very clear that current economic conditions require short-term strategy that’s focused on the issues that have arisen in the banking market, as well as the particular issues that we are confronted with a guaranty. In this regard, we have taken substantial measures to address what we call the three Cs that are critical factors to success to our business: Credit, cost and capital. Our Board of Director is proactive in support of this focus as well. We have a very strong and experienced Board of Directors that understand these issues well.

Our management team discussed these issues and during the fourth quarter, I led an internal management reorganization and include in the following major changes to address these highlight areas. First, with respect to credit, as reported this morning and I have since – I have briefly outlined, we saw another substantial increase both in nonperforming loan and loan loss provisions during the first quarter. More than two-thirds of the increase in nonperforming loans and provisions comes out of our loans to homebuilders, which we report as part of our single family construction loans.

We had zero accrual [ph] charge-offs, this in homebuilder loans during the first quarter, which followed charge-off is only $4 million homebuilder loans in the fourth quarter of 2007. However, charge-offs typically lag a rise in NPAs. I’M trying to predict what amount of our NPAs may be charged off in the future, you should keep in mind that the make-up of our nonperforming loans is primarily secured loans, in particular homebuilder loans secured by land, (inaudible) and houses. And thus the reserve levels have been set based in large part upon the value of the collateral behind them. Clearly we have witnessed a decrease in the value of property in certain markets in particular in California, but there is still value to property even in California, the underlying land and is collateral for homebuilder loans in California is predominantly entitled, which is a long process to complete in that state. We continuously monitor our loan portfolio and update the valuation of collaterals necessary to ensure that our reserve levels are appropriate. As a result, a large portion of our increase in reserves this quarter was for loans that were already included as nonperforming loans but we determined it was appropriate that the amount of reserves against these loans should be increased. With (inaudible) and loan loss provision as a result of these developments and new information during the first quarter, we feel we are appropriately reserved.

With respect to charge offs. Our charge-off rate from 2001 to 2007 was less than 10 basis points per year on average, excluding asset-based lending, a business we did in 2006. This has been less than half our peer average. This low charge-off history in our lending areas is testament to our strong underwriting standard, our relationships, our experience and our understanding of our products and markets.

With respect to our underwriting, all of our loans are underwritten at a central location in our Dallas office. We have a sophisticated underwriting operation and very experienced members of the Executive Management that average 25 years to 30 years of experience.

On the construction side, we chose to business with top tier developers. We focus on institutional quality projects. We underwrite to multiple scenarios and our underwriting criteria is consistent with our risk appetite with clear risk and pricing policy and top down communication. None the less, real estate markets are cyclical such that even well conceived and underwritten projects can be stressed during the older rebuilding cycles that characterize these markets. Mark Crawford, our Chief Risk Officer has responsibility for our credit function, and (inaudible) are among others who reports to Mark. Mark came to Guaranty more than 14 years ago with several years of regulatory experience with both the Federal Reserve and the OTS prior to joining Guaranty.

In addition, we took steps during the first quarter to move ten of our best lenders in a group to focus solely on loans that needed special attention. This team and our normal credit team are very focused on aggressively identifying emerging problem loans early, internally classifying them were appropriate and taking action where we can to mitigate risks. This group is looking for innovative solutions to move many of these assets from the bank’s balance sheet (inaudible) take the credit. They are working diligently and we expect them to be successful in maximizing collections.

We put most in action plans on the loans that need the most attention. We will continue to put great emphasis on this effort. We’ve also added a couple of new season bankers from outside Guaranty, one to lead our homebuilding division to bring a fresh perspective to the loans on our books and one in our credit group providing additional manpower to monitor. These moves are clearly intended to put an even greater emphasis on credit to Guaranty.

In addition, as part of our heightened focus on credit, we’ve looked and underlying standards is on a go-forward basis prior to the market disruptions that occurred during 2007. We saw competitors making pricing concessions and structural concessions. And we saw rationalizing in credit decisions. Banks naturally became very competitive in the easy credit environment of the past several years. As a result of (inaudible) in credit, we’ve looked at every line of business and taking standards were appropriate. We are now requiring higher equity level, demanding greater levels of personnel recourse with higher pricing including interest rate floors.

We will carefully manage our syndication risk. We’ll also take in covenant structures, and we are now being more insistent on obtaining borrowing account or operating accounts through our borrowers, and the number of positive relationships with our new borrowers is increasing.

Now let me turn to costs, which have always been a focus at Guaranty. That 18 months ago, we conducted a review of our organization. We reduced our annual expenses by $14 million. However, as result of the spin off from Temple-Inland, and as we created new departments and processes to ensure smooth operations as an independent public company, we have experienced increasing costs. In today’s economic environment and as a newly independent public company accountable to a broad based with shareholders instead of just one, efficiency and productivity is more important than ever. Accordingly, as part of the reorganization I mentioned before during the first quarter, we named a new Chief Administrative Officer with immediately evaluating areas of the company, where we can eliminate excess cost.

Robert Greenwood who has been with Guaranty for 17 years and most recently served as our Chief Lending Officer was named to this newest position. And in this function, he is overseeing our cost cutting and efficiency improvements efforts as well as managing our administrative and operational function. Kevin Hanigan, who is our Senior Executive Vice President in Retail Bank is now overseeing Retail and Commercial at the title of Chief Banking Officer, and Kevin continues to keep our team focused on the business of banking and revenue generation.

In the past couple of months, Robert and his team took in a new official inventory of the entire company including our banking and insurance function and talked with our executive officers in order to identify opportunities for cost reduction that would not impact our high level of customer service. A number of these initiatives are under way, including the elimination of 135 jobs announced this week. This is more than a 5% reduction in our workforce. Job cuts are never easy to implement but unfortunately became necessary in light of the difficult economic environment. Additional long-term cost saves are expected to reduce through improvements in efficiency and productivity and we will update you in future quarters.

Financial services is just that. Thus, we do not intend to allow these cost reductions to lower the quality of our service provided to our customers. Our goal is to continue to out product the local and also out service the national providing distinct customer service is still one of our core strategy. Now as to our third important short-term focus, capital. We intend to manage our capital position appropriately. It is always been our intent to take whatever actions are necessary to maintain capital ratios above the minimal levels required to be deemed well capitalized by regulatory standards. As of March 31, all our capital ratios exceeded the minimum standards to be considered well capitalized and we continue to keep a sharp focus on this issue.

So given market conditions, we are being very proactive by implementing these short-term strategies that I’ve outlined. Even still, we have a very attractive franchise with a great branch of network, experienced Senior Management, lenders and staff, distinctive customer service in great markets with great demographics supporting them which should lead to improved results over time. In a moment I will close our prepared remarks with some thoughts regarding our long-term strategy. For now I will turn things over to Ron to discuss financial results in further detail.

Ron Murff

Thanks, Ken and hello everyone. My remarks today will cover our financial results and some of the items on balance sheet. If you have accessed our slides, I will be referencing those. Let’s first go to slide number three, Ken noted for that for the first quarter we were reporting an after-tax net loss of $10 million or $0.28 loss per share on a basic and diluted basis, compared to $6 million after-tax net income in the fourth quarter of 2007, and $27 million in net income in the first quarter of 2007.

Net interest income was $98 million for the quarter – first quarter of 2008 down $4 million from the previous quarter but up $3 million compared to the first quarter of 2007. The decrease from the prior quarter was principally due to a decrease in average earning assets resulting from a decrease in single-family mortgage loans, single family construction loans and mortgage backed securities as well as a 10 basis point reduction in our net interest margin. Net interest margin for the first quarter of 2008 was 2.49% compared to 2.61% for the previous quarter and 2.56% in the first quarter of 2007.

Net interest margin decreased because of margin compression caused by the unprecedented sudden sharp interest rate cuts by the Federal Reserve, which prevented our deposits from adjusting downward as fast as our assets, not withstanding that we are an adjustable rate lender. And the increase in our nonperforming loans has also put down with pressure on our net interest margin, which is discussed in more detail in our later slide. Provision for credit losses was $58 million in the first quarter of 2008 compared to $33 million in the previous quarter and a net recovery of $2 million in the first quarter of 2007.

Provisions for credit losses increased again principally because of weakness in single family construction. Provisions for single family construction loans during this quarter totaled $41 million and the other $17 million increase in provisions was spread fairly evenly throughout the other loan portfolios and are unallocated. We experienced $2 million in net charge-offs during the first quarter of 2008 compared to $6 million in net charge-offs during the previous quarter and net recoveries of $8 million during the first quarter of 2007. As Ken mentioned though we have not yet experienced a significant amount of charge-offs related to recent credit loss provisions, we anticipate it will become necessary for us to acquire the underlying collateral for a number our loans to home builders and it is likely we will record charge-offs when we acquire collateral on those loans.

Non interest income was $42 million for the quarter, a 10% increase over both the previous quarter and first quarter of 2007, principally as a result of increased fix annuity sales commissions and fees and service charges on deposits. Insurance commissions and fees including fixed annuity sales increased nearly 20% to $19 million for the quarter compared to the first quarter of '07. The decrease in fixed annuity sales – this increase in fixed annuity sales was due in part to declining deposit rates thereby leading some deposers to purchase these fixed annuities. And service charges on deposits increased 8% to $13 million for the quarter compared to $12 million in the first quarter of '07.

These increases more than offset a decline in commercial loan facility fees from $6 million in the first quarter of '07 to only $4 million this quarter. The decrease this commercial loan facility fees were primarily a result of decreases in fees from home builders as a result of decreases in activity levels by those customers. Non interest expense was $99 million during the quarter, an increase of 4% compared to the previous quarter and 6% increase compared to the first quarter of '07. This increase was driven in large part by increases in many of our direct costs and expense categories because we began to perform them, many activities ourselves following our recent spinoff from Temple-Inland. And finally as a result of the loss of the quarter, we had an income tax benefit of $7 million resulting in net after-tax loss of $10 million for the quarter.

As I mentioned a moment ago, our net interest margin declined from 2.59 in the fourth quarter of '07 to 2.49 this quarter. The decline from the previous quarter is a result of both margin compression in the first quarter, as well as our increase in nonperformers. If you will turn to slide number four, you’ll see our annual net interest margin dating back to 1998 and on this slide we’ve shown the changes to the fed fund rates during this period as well. Clearly on a long-term historical basis, we have maintained a very stable net interest margin, which is a result of our balance sheet consisting of nearly all adjustable rate assets.

Historically, the strategy in place was to be interest rate neutral and maintain this stable net interest margin without the use of derivatives. We also recognize that our net interest margin is below our peers and in that regard, we have previously mentioned we don't have plans to purchase additional mortgage backed securities and we expect that runoff to have some benefit to our net interest margin. However, continued margin compression and an increase in non performing assets will negatively affect our net interest margin and we expect to continue – the continued decreases in our net interest margin until interest rates stabilize and credit performance improves.

Now please, turn to slide number five which is a summary of our balance sheet. We allowed our balance sheet to decrease from $16.8 billion at the end of '07 to $16.4 billion the end of the fourth quarter due in large part to runoff in single-family mortgage portfolios, runoff in our mortgage backed securities and the unrealized losses recognized in our mortgage backed securities portfolio. Some of this decline was offset by increases in areas of our commercial lending portfolios which is shown as slide that I will cover in a moments. The level of our federal bank borrowings ask did not change since the end of the prior period.

Our total deposits decreased from $9.4billion to $9.2 billion now. The decrease in deposits from the end of the prior period was caused primarily by small amount of deposit outflow during a period where we saw a disproportionately large number of CDs mature during February and March of '08. In a moment, I will discuss the bubble in our CD maturities that we manage fairly well during the quarter to limit the overall decrease in total deposits and I will discuss our deposit mix. We’ve also shown a decrease in our level of stockholder’ equity from approximately $1.1 billion to about $900 million.

Our Board of Directors made the decision to not pay a dividend in the first quarter, a reflection of the Board's focus to ensure the bank remains well capitalized and loss of the quarter was only $10 million. Accordingly, the decrease in shareholders’ equity of a little over $200 million is instead a reflection of the increase and accumulated other comprehensive loss from $35 million to $272 million during the first quarter, which is the effect of further unrealized losses in our available-for-sale securities net of tax benefits, which I will discuss in greater detail in a moment. These unrealized losses on mortgage backed securities also impacted our book value per share as noted here.

Now turn to slide number six. The vast majority of these deposits are gathered through our retail franchise and we have recently focused on increasing checking accounts which have increased to 20% of total deposits. We also have a tremendous opportunity for growth in deposits through our commercial operations. We would consider most of our deposits to be core deposits. We don't have any broker deposits which tend to be more transient and our CDs are almost exclusively held by long-term customers.

As I mentioned we saw a disproportionately large number of CDs maturing in February and March of '08. Slide number seven shows details of this CD bubble. $1.7 billion of our $4.5 billion in CDs or about a third was up for maturity in February and March of '08. Our team recognized this upcoming bubble well ahead of the maturity dates and several initiatives were put in place to in order to both maximize the amount of the deposits retained simultaneously decreasing the average annual percentage rate on the deposits. We equipped our sales force with client CD renewal lists, initiated an active calling program and we empowered our branch managers to make exceptions on rate when appropriate.

We were successful in renewing the $1.4 billion of the $1.7 billion in CDs and the average APY decreased from 4.98 to 3.19. Even more importantly, we also made an effort to retain customers with multiple accounts, and as a result of the approximately 2500 customers that we did not retain, 84% of those customers were single-service CD-only households. And accordingly of the total deposit relationship from the customers with maturing CDs during this bubble which totaled $3.1 billion, we retained approximately $3 billion in some form of deposit with Guaranty, meaning that a portion of the CDs not renewed then transferred into other deposit accounts. And other $100 million decrease in the total deposit relationships from these customers because we were proactive in referring maturing CD holders to our annuity sales professionals we believe that a significant portion of the $67 million in incremental annuity sales during the quarter was a result – a direct result of these referrals.

One additional goal during this process was to also smooth out this bubble so this is not an issue again next year and we were successful in doing so. Overall, this successful effort in retaining customers while accomplishing these goals is evidence of the tremendous customer service provided by Guaranty. On the next slide, we have included a chart showing the results of the annual American customer satisfaction index. This year we engaged ACSI to conduct further research in the same methodology as the independent research of the largest US retail banks and asked them to benchmark our position as compared to the other banks included in the index.

You can see here that Guaranty ranks significantly above the ACSI banks industry average and the larger banks in the ACSI research. While we have a number of other examples of distinctive customer service including our success in handling the recent CD bubble, we are also – we are glad to also to be able to present this hard evidence of research produced by ACSI.

Turning to slide number nine, we show our loan mix. Here we show our loan portfolios as a percent of total loans. You can also see the total dollar amount of loans in our earnings release. We built our loan portfolio to $10 billion comprised of adjustable rate loans. The loan mix is also been changing in recent quarters. This since last quarter both the single-family mortgage and construction portfolios had decreased by 2% of total loans each and multifamily and senior housing portfolios – single-family mortgage warehouse portfolio and our commercial real estate portfolio have each increased since the end of year.

We sold our single-family mortgage company and servicing assets in 2004 and 2005 and we completed exit from the segment in early 2006, and as a result, that is a runoff portfolio getting smaller each quarter. In a moment I will get to a slide providing more details on the single-family mortgage portfolio. We anticipate our commercial real estate loans will continue to increase for the remainder of 2008 as refund draws on committed construction loans.

On the next slide, you can see the change in mix of our commercial loans and overall, we have seen another strong yet conservative increase in our commercial lend from $8.2 billion at year end '07 to $8.5 billion at the end of the first quarter. You can see the decrease in single family construction lending and the increase in multifamily and senior housing single-family warehouse and CRE. Energy loans on the other hand remain relatively flat during the quarter and in our energy lending department we have our own experienced engineers employed within the bank to ensure conservative loan structures that continues to be a very strong performing portfolio.

Please turn to slide number 11. This shows our historical net charge-offs as a percentage of loans and show how it compares to our peers. As you can see, we take a very disciplined approach to credit risk management. This is translated into favorable net charge-off performance both on an absolute basis and relative to our peers. We adopted a comprehensive enterprise-wide Risk Management system before it was popular to do so. Examples of this we are implementing a two-dimensional risk rating program in place of our prior one-dimensional rating system and to assess risk within each bank unit including subsidiaries. The bank uses a sophisticated computer modeling program which includes assessment of global information technology, compliance and operational risk.

Slide number 12, however, shows the recent increase we have experienced in our norm performing loan levels. We have compared favorability to our peers historically as shown in this slide. Clearly we have seen a significant increase in nonperforming loans which you can see is driven by dramatic increase in homebuilder loans. On the next slide, we have broken down nonperformers in even greater detail so you can see where non performing assets increased from $36 million at the end of the first quarter of '07 to $179 million at the end of '07 and $284 million at the end of the first quarter. Clearly the spike was caused primarily by our home builders.

Of the $284 million in nonperforming assets, $182 million is home builders and $69 million is single-family mortgage loans within the $33 million of other, $23 million is foreclosed real estate which is the difference between our $261 million in nonperforming loans versus $284 million in nonperforming assets at the end of the first quarter.

On slide number 14, we recorded another $58 million in provision for loan losses during the quarter which raised our allowance for loan loss at $172 million. The increase to $172 million at the end of this quarter is an increase of over %100 million since the '07. You can see on this slide that a disproportionately large amount of allowance for single family construction loans, which is consistent with the level of nonperforming loans in this area. We have shown that we experienced an increase in nonperforming loans but most of our additional provision for loan losses resulted from further provisioning necessary for loans that were already included in nonperforming status.

This is resulted in our ratio of reserve to nonperforming loans relatively stable compared to the previous quarter is now 69%. But our ratio of reserves to total loans increase want 6%,7% at the end of the year ’06 to 1.17 at the end of 2007 to 1.67% at the end of this quarter. We have identified $170 million of impaired loans and we have established $57 million or 33% in reserves against those loans. It is important to note that our nonperforming assets consistent primarily of real estate secured loans, the underlying of which is the primary determinant of the required reserve level. With this increase in loan loss provision, we feel we are appropriately reserved.

On slide number 15, you can see the declining outstanding balances of our homebuilder portfolio, which we report under the name single-family construction loans. This portfolio consistent of loans to finance home building activities including construction and acquisition of developed (inaudible) and undeveloped land. Our total home before lending portfolio at the end of the fourth quarter of '08 is $1.3 billion down from $1.5 billion at the end of 2007 and down from $1.8 billion three months before that. Single family construction loans decrease because of payoffs and because we have exited a number of credit relationships to reduce our risk, it is likely this trend will continue.

This portfolio can also be further divided into two groups, national builders and regional builders. We now have approximately $150 million at outstanding loans to National home builders some of which are unsecured lines of credited but typically governed by a borrowing base of unencumbered assets. Previously all of our nonperforming loans have been contained within what we call our regional homebuilder group, and I now have one loan out of what we consider our National homebuilders on nonperforming loans stats and we may see continued deterioration even in this portfolio.

The outstanding balance of the homebuilder loan that is now on nonperforming status is about $16 million. Our regional homebuilder portfolio is down to $1.2 billion in outstanding loans from just $1.5 billion to six months ago. It is in this portfolio where we continue to seat most difficulty. We are not taking on new homebuilder customers at this time. Utilization rates by the National builders were reasonably low. The only advances to the regional builders would be the rare new product in a market where demand is stable and we would also have advances to regional home builders to complete projects already under way.

Our loans to regional builders are typically what we called 'guidance line.' Request for additional advances are certainly looked at closely and additional funds are advanced only when appropriate. As a result, the aggregate amount of our loans to home builders is decreasing.

On the next slide, slide number 16, an update to the slide that we presented last quarter which breaks out our regional homebuilder loans by collateral, type and by geography. For those who do not have these slides we show the our regional homebuilder loans approximately 19% are in northern and central California. Another 19% in Southern California. 10% in Texas. 10% in Florida. 7% in Colorado. 5%, Arizona, and remaining 30% spread out in other states. Again I would direct your attention to the amount of exposure in California where we have seen the most deterioration. We are seeing weakness throughout the other areas of the country including Florida, Chicago and Arizona. Relatively speaking, Texas is holding up well, and we continue to monitor it as we do all of our markets.

We have added a new column on the far right of this page, which shows the nonperforming loans out of this portfolio and gives you more information as to the geography of those nonperforming loans. As we have stated before this shows that northern and central California is where we are experiencing the most difficulty with regional homebuilder loans, but in Southern California, our borrowers at least have not experienced as much difficulty as those in northern and central California.

On slide number 17, we’ve provided an update to the slide we presented last quarter which details our single-family mortgage portfolio broken down to show the different types of single- family mortgage loans and our portfolios, some LTV numbers, current FICO scores, delinquency rate by product and state of origination of the mortgages. Again our single-family mortgage portfolio is primarily runoff portfolio at this time. We sold our mortgage origination servicing businesses in '04 and '05 and since that time we’ve added very little single-family mortgages through our correspondent program.

In '07, we added only added about $60 million to single-family mortgage portfolio and in the first quarter of '08 we added less than $10 million. As you can see at the bottom of the slide, approximately 93% of our single-family mortgage portfolio was originated prior to '06 and as we have discussed before we have not originated or purchased sub-prime loans. We have underwritten option ARMs to the fully indexed rate, the original loan-to-value on first length was 71%., and considering the vintage of these loans that current LTVs are even less than they were at origination.

Average current FICO stores on our first lien loans is estimated at 707. Last quarter we reported 90-day plus delinquency rate for our first liens was 3.2% and total delinquency at that time was 7.5%. Certainly there has been continuing stress on mortgage holders. However, another reason for increase in our delinquency rate is going to be caused by shrinking portfolio since this is a runoff portfolio. Starting slide number 18, we have included a few slides with respect to our mortgage-backed securities portfolio. This first slide is a high-level overview that shows of our $5.3 billion in securities, $3.4 billion or about two-thirds is categorized as held to maturity and the rest are available for sale and it also shows that about one-third are agency securities. The rest are non-agency.

On slide 19, we have prepared this slide to give an understanding of the type of securities we own. You can see that approximately 83% are traditional, option ARMs. 13 are hybrid option ARMs and the remaining 5% are hybrid ARMs. With respect to vintage we show our security vintage, the percentage that is 2007 vintage is reflection of the approximately $1.1 billion in non-agent securities that we purchased in late '07 after we saw market disruptions in the securities market driver turns to a level that we included were attractive at that time.

The next slide is an update to the slide we used previously showing the amortized cost and fair values of our mortgage backed securities as of March 31, 2008. In round numbers, the combined agencies securities available for sale and held to maturity have an amortized cost totaling approximately $1.64 billion and their total fair value is the same. Of the non-agency securities, those held to maturity have an amortized cost of approximately $2.35 billion and a fair value of approximately $1.7 billion for a difference of $650 million. The non-agency securities held available for sale have an amortized cost of approximately $1.36 billion and a carrying value of approximately $0.94 billion for a difference of $420 million.

Total difference between the amortized cost and the fair value of all these securities is $1.07 billion. In particular, however the appropriate – the approximately $421 million unrealized loss and available for sale securities is recorded net of tax benefits as accumulated other comprehensive income on our balance sheet and as mentioned before decreases our back equity by such amount in our case $272 million. As Ken mentioned each of these securities are adjustable rate backed by single-family mortgages. Each of the (inaudible) securities were AAA rated at the time of purchase and continue to be so. We have not invested in subprime, securities collateralized debt obligations or subordinated tranches.

At March 31st, the average delinquency rate for our non-agency securities was 15.6%. We have also shown you the current LTVs and the average original credit score for these securities. None of these securities have an insurance wrapper rather the AAA rating, we feel remains on each these securities primarily as a result of the underwriting criteria of the underlying loans in high level of subordination. On slide number 21, we’ve shown that the subordination levels at issue date for all of the private issue, private label securities was an average of 10.7%. We have seen significant and growing subordination levels primarily as a result of prepayments that pay off our senior tranches first and the average subordination level of these private securities has increased to 15.5% at March 31st, 2008.

These soluble and growing subordination levels provide protection from credit losses because other investors absorb the losses first. As we look at our securities only $199 million of our $3.7 billion of non-agency securities by unpaid principal balance have subordination levels below 10%. We continue to believe that our high subordination levels will result in no credit losses in our securities. On the next slide, we’ve prepared a brief discussion of the evaluation of these securities in particular the source of the valuations. With respect to agencies, estimated values are provided by vendor sources. With respect to non-agencies, we obtained bids on benchmark bonds from several Wall Street dealers and market participants. We utilized the median bid for each benchmark security to determine the market yield for the segment and we utilized market yields and discount cash flow analysis on each of the remaining 37 securities to estimate their fair value.

As also noted on this slide, there have been four sales in the market that have contributed to a further decline in non-agency MBS market values during the quarter. However since the end of the quarter, we have seen estimated fair values get somewhat better up approximately five points which would reduce total unrealized losses to in the neighborhood of $900 million.

Notwithstanding these fluctuations because we are a buy and hold investor with the intent and ability to hold these securities to maturity and we expect to receive all principal and interest on all of them, none of the unrealized losses are considered other than temporary impairments which means that the unrealized losses do not run through our income statement.

On slide 23, we showed an example of what is going on in the market by look agent one particular security. We have listed all securities by queues up in our 10-K and 10-Q. There is a disparity within the market price for AAA rated option or mortgage backed securities and their intrinsic value. Clearly there are only modest bank purchases in today’s market. For example, looking at this particular security, the balance we own is $127 million. Our basis 102. The market bid during the first quarter could have been as low as 60. From a credit perspective, an investor should expect to receive full principal which costs the purchaser $0.60 on the dollar at this price and should expect to receive all stated interest with no expected losses of principal and interest in this bond in large part due to the high subordination levels.

We listed the subordination level of this bond in our 10-Q is17%. Of all that particular bond shows current 60-day delinquencies at 21%, you have to remember that actual charge-offs would have to exceed the 17% subordination level before this senior tranch will experience loss. In other words, 40% of the underlying homeowners defaulted at a weighted average 40% loss rate, that is 16% so this bond at 17% subordination level would still not experience loss.

Moving on to efficiency on slide number 24, noninterest expense was $99 million during the quarter, which on a run rate of $396 million for the year is about 6% increase from 2007. The increase was driven in large part by increases in many of our direct costs and expense categories because we began to perform many activities ourselves following our separation from Temple-Inland. In addition, our marketing costs increased as we implemented initiatives relating to increasing consumer lending throughout our branch network and a new checking product. Our efficiency ratio increased to 71% for the quarter due in part to this increase in cost but it was also negatively affected by a low amount of average assets and a smaller spread.

Net noninterest expense of $57 million was actually flat from the fourth quarter of '07 and is only $3 million increase from the first quarter of '07 and with respect to particular line items shown on this slide, many of the increases are a result of reclassification from what was previously labeled shared service allocations from Temple-Inland. Those costs are now portioned out and on to the separate line items such as compensation occupancy and information system.

If you turn slide number 25, we’ll outline the effort recently initiated to analyze and implement substantial cost reduction which Ken discussed earlier. This week, we are cutting 135 jobs or approximately 5% of the company's work force which results in $10 million total annualized expense reduction. Additional initiatives that we are looking at include limiting new hires, including not filling open positions, reducing travel expenditures, evaluating all of our operating units, evaluating our real estate and other nonearning assets. Reduction in planned expenditures and rationalizing our branch system. We plan to update you on our progress in these areas in the future.

Our last slide is slide number 26. We have shown our capital ratios as of March '08 and you can see that we remain well capitalized pursuant to OTS standards. Ken, with that I will turn it back over to you.

Ken Dubuque

Thanks, Ron. Clearly this quarter was another very difficult period. These results, however, did not take us by surprise. I stated last quarter that we expected conditions to continue to be unfavorable for the bank throughout 2008 and that that this current cycle will not likely end soon. We were appropriately reserved at the end last quarter based on developments in economic conditions up to that point. And at this point, as a result of conditions that continue to deteriorate during the quarter, especially with our homebuilder borrowers, we felt that it was appropriate to set aside these additional reserves.

We are not, and I repeat, not, seeing broad-based weakness beyond our homebuilder construction. Our other portfolios are still performing quite well. We have not seen significant (inaudible) over to commercial real estate, so we are monitoring for potential weaknesses. We have conducted a correlation analysis of potential declines in consumer spending to test other portfolios such as corporate and middle market borrowers. For example, with respect to our borrowers in the building products business or electronics business. After that analysis, we are still not expecting significant credit deterioration spread to our other portfolio.

As to the economy and the industry in general, visibility on when the housing market will improve and homebuilder MPAs will(inaudible) decline is still difficult. As mentioned in our conference call last quarter, we expect general economic conditions to continue to be unfavorable for the bank throughout 2008. We also continue to expect that housing should bottom out this year. Lower rates would take some of the pressure off the mortgage market. And again while the deterioration in the housing and credit markets is clearly significant, (inaudible) it is important to reiterate that we do not originate the purchase of sub prime loans.

We have very few 2006 and 2007 vintage single-family mortgage loans. We bought standard structured mortgage backed securities and lending to home builders is a core competency for us that we have been doing for a long time and understand well. We believe it is highly likely that we are in a recession already, and unlike recent recessions this one can drag on while the financial markets correct. We expect that concern inside the fed over inflation and the dollar, though legitimate will be set aside for the time being.

Most of the burden will fall on the fed to follow the liquidity freeze and is likely to involve other central banks, sovereign well funds and more engineered mergers among commercial banks and investment banks. Clearly hedge funds and private equity are already setting up distressed asset function waiting for a perceived bottom. A confident bid will need to materialize in the mortgage market to perceive the chain of events necessary to cause home prices to stabilize and the economy begins to improve. The economy, jobs, assumption, industrial production (inaudible) will follow housing and housing is the catalyst. In the meantime, we will continue to do our best work with our borrowers to minimize losses. The rollout of our consumer lending throughout our retail branches continues to go well and is functioning smoothly.

We expect to be able to report substantive results of this customer acquisition strategy in a later quarter when we have more history to report on. Long term, our strategy is still to grow our commercial lending franchise, grow our retail franchise in Texas and California, increase fee income, provide distinctive customer service and improve our operating efficiency while maintaining strong credit and risk standards. During the short term, however, we are very much focused on the three Cs: credit, cost and capital. At the same time, we remain focused on customer service, quality growth and a conservative risk process. I want to thank you for your attention and interest in Guaranty Financial Group. While we have tried to anticipate many of your questions and provide candid and complete answers, we will be glad to answer any additional questions.

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from the line of Terry McEvoy from Oppenheimer, please proceed.

Terry McEvoy – Oppenheimer

Good afternoon. Many other banks with good size homebuilder portfolios have been recording, call it elevated charge-offs and they’ve been building up their reserve for the past couple of quarters, whereas you guys, you’ve been building your reserves but we really haven't seen a lot of charge-offs. I know you addressed it today and I did see somewhere in the 10-Q that you probably will acquire some of the underlying collateral from some of these loans to home builders, which will trigger I think significant charge-offs is the way you guys put it. It just seems with the $1.003 billion of homebuilder loans and reserves of $172 million, it would be quite easy to burn through that reserve. Could you tell me where I am wrong in that thinking?

Ron Murff

Well certainly as we indicated we will – we do expect that charge-offs will occur in their natural progression as we discuss. But we will continue to but we will continue to look at our loan portfolios and increase reserves during the quarters as we go forward where we feel it’s necessary. So, certainly there will be some potential decrease in our overall reserves as we experience charge-offs. We will look at our reserve position each reporting period and add to those reserves as we feel it’s necessary and appropriate at that time.

Ken Dubuque

And while most of the issue is with our regional home builders, it’s been primarily focused in a limited number of geographies. So we have not seen it go everywhere in the country. California – Northern California being the biggest problem area but there’s been others as well, but again it hasn't gone across every regional builder in every geographic region.

Terry McEvoy – Oppenheimer

And another question. Just looking at capital levels you provide four different ratios. Which one do you pay the most amount of attention internally and we have seen other banks that are well capitalized in terms of regulatory requirements over the last month or so go out there and take advantage of market conditions and raise capital, what needs to happen for you guys to take that path?

Ken Dubuque

Well, we clearly look at capital and all the ratios are important to us. We are well capitalized in virtually every category and we feel comfortable with it but, I should say, yes, comfortable as you can be in this environment but it is something we are looking at constantly.

Terry McEvoy – Oppenheimer

Then one small question. The job cuts in April, should we anticipate some sort of charge in Q2 associated with the cost cutting initiative?

Ken Dubuque

Go ahead.

Ron Murff

Yes, there will be some severance cost that would be reported during the second quarter.

Terry McEvoy – Oppenheimer

Meaningful in nature or?

Ron Murff

I think we disclosed in the Q that it’s between $2.5 million and $3 million.

Terry McEvoy – Oppenheimer

Okay. I missed that, great.

Ron Murff

Thank you.

Operator

The next question comes from the line of Brian Clark with KBW, please proceed.

Brian Clark – KBW

Hey, guys, can you hear me. Yes, I guess obviously the single family construction issue that you have been talking for a while. I guess, I don't know if you have the information handy but with the NPLs that you listed on slide 16, do you have an idea sort of roughly along the value of those NPAs?

Ron Murff

I don't know that we missed – have those – I don’t have those statistics with me, Brian. Certainly, I think we’ve – I think as I mentioned particularly as those loans that we have designated as impaired, and that was about $170 million of our nonperforming assets. We indicated that we had about a 33% reserve already against those loans. So, that would be – that reserve would be in addition to the equity or the perceived equity that was in those credits at the beginning, which would depending on the type of collateral could have been anywhere from 50% loan-to-value initially for a piece of land up to about 80% on a house under construction. So I know that’s a lot of different numbers but I think what we focused on more closely is that make sure we have the reserves established appropriately today based upon the perceived value of that – of those – of the collateral today and that has resulted in the – as I said particularly on that $170 million worth of loans that we consider quote impaired that we have established about 33% reserves.

Brian Clark – KBW

Okay. Okay, that's helpful. I guess on the private labels security portfolio, can you give us an idea of sort of duration or what kind of expected cash flow will be coming out of those – that bond portfolio here in the next quarter or two?

Ron Murff

We have continued to see – certainly prepays have slowed as would imagine from what we would have seen during the year of '07. But currently we are experiencing around $70 million to $80 million a month in cash flow. Out of that portfolio, I think the aggregate for the quarter was about $230 million. So, again, it’s somewhere about $75 million to $80 million a month is what we saw in the first quarter. We expect that to stay in line as we go through the near term anyway.

Brian Clark – KBW

Okay. And just a quick question on that. I am not sure how easy it is to explain. I know it is a pretty complicated analysis, but when you do the other than temporary impairment test, I guess what's – what’s the most important factor in determining that there haven't been either a temporary impairment. Is it the cash flow, the risk to cash flow or where the bonds are trading fair value and maybe you can help shed some color on that analysis?

Ron Murff

Yes. I think probably the most important analysis would be the recoverability of the principal in interest that we have on each of those bonds. As we do that test, we continue to believe that we will collect all of the principal and contractual interest on each of those securities. We do, as you said, some fairly detailed analysis on a bond-by-bond basis and trying to analyze on each bond whether or not the – and have come to the conclusion that the subordination levels that support each of the bonds that we have is more than sufficient to cover the expected losses that would occur or expected charge-offs that would occur on the underlying collateral of those bonds. As would you imagine, we do update those analyses monthly and quarterly, but they do – we do take into consideration projected delinquencies, projected foreclosures, and projected losses upon foreclosures and all of those factor are taken into consideration in coming to the conclusion as we have at 331 that we believe we will collect all of our principal in contractual interest.

Brian Clark – KBW

Okay. I appreciate that color. And just one last question. Obviously the loan portfolio looks like it grew about 9% (inaudible) annualized this, you had single-family runoff, the construction portfolio was down, but yet good growth in commercial real estate and the multifamily senior housing sectors. I’m not sure, I guess Ken may can may be can comment on total capital being at 10.6%. Would you expect the loan growth to be pulled back a little bit to keep capital levels a little stronger or would it all sort of offset themselves like it did here in the first quarter with paydowns and growth?

Ken Dubuque

The answer is, no, I would see it shrinking a bit. We are pulling back in certain businesses. We will be announcing some of that down the road as we do some further evaluation, but some of the portfolios we are very comfortable with, businesses we have been for a long time and those do make sense to grow a bit where appropriate, but some of the sectors we are pulling back on our own to has been very, very valuable capital.

Brian Clark – KBW

Okay. Appreciate it. I will let someone jump on. Thanks, guys.

Ken Dubuque

Thank you.

Operator

And your next question comes from the line of Shelby Norman with Stephens Inc. Please proceed.

Shelby Norman - Stephens Inc.

Hi guys, how are you?

Ken Dubuque

Hey, Shelby.

Shelby Norman - Stephens Inc.

Just a couple of quick questions. One follow up on the securities issue that Brian touched on. So, are you guys having any dialogue – like much dialogue with regulators as far as the securities portfolio? Or do they focus much on that? Basically, are they comfortable with everything that is going on or is that something they don't really look at quite as much?

Ron Murff

Well, as you can imagine, I mean, I think the regulators are – we have a very open and continuing dialogue with our regulatory agency and a lot of the individuals within the OTS. So we are talking to them often about various subjects. So to say anything particular about that one particular category I don't think would be appropriate, but I would just say that we are in continuous conversation and update as to the status of the institution as we have these periodic conversations with the OTS.

Shelby Norman - Stephens Inc.

Okay. And did you give 90 days past due for your total loan portfolio? I know you broke out the single-family mortgage. Do you have one for the total portfolio?

Ron Murff

No, I don't think we put that in the Q, but it would not be a much larger number than what we would have just for the single family. Most of our commercial portfolios, very few of them are past due. That will be in our TFR, and Shelby, we’ll make sure – I know you have access to that, but it wouldn't be a significant larger number than what we’ve shown you.

Shelby Norman - Stephens Inc.

Okay, thanks a lot.

Ron Murff

Thank you.

Operator

Your next question comes from the line of Brad Milsap with Sandler O'Neill. Please proceed.

Brad Milsap – Sandler O'Neill

Hey, good afternoon.

Ron Murff

Good afternoon.

Brad Milsap – Sandler O'Neill

Ron, just I know you mentioned last quarter that December you went through the process of getting essentially a lot of new updated appraisals on a lot of your home builders projects, et cetera. And I assume you got even more during the first quarter. Just curious what those revealed and what type of loss rates you are assuming to derive your provision for the quarter?

Ron Murff

Well we are continuously updating those as we go along, and then we make whatever adjustments we need to in terms of reserves as we see. So you are seeing some of that reflected in our numbers.

Ken Dubuque

But I would also add that it is not out of the ordinary, I mean we are continually updating those appraisals. It would not be out of the ordinary for us to – dependent upon the market, dependent upon the market conditions and the borrower that we might update those appraisals fairly often, once a quarter, once every six months. That just continues to be a process that is ongoing given some of the difficulties that are in some of these markets.

Brad Milsap – Sandler O'Neill

Just kind of curious what the appraisals are actually revealing, what LTVs, things like that?

Ron Murff

Yes, I don't know that I could give you. I think someone else asked that same question a little earlier. It’s really hard to give a specific rate because that doesn't necessarily apply to each of the – it wouldn't be fair to apply that to the whole portfolio. As I said, maybe the best metric that I can give is that related to some of the loans that we have classified as impaired, we've – and we disclosed this in the Q. We have indicated we have about a 33% reserve factor against those loans.

Brad Milsap – Sandler O'Neill

Okay. And then – on the option ARM portfolio. I know the delinquency numbers are really starting to tick up. Is it really the vintage that gives you comfort there. You have about a $12 million reserve against the entire mortgage one to four family portfolio. Is that really what you are hanging your head on there despite those delinquency numbers beginning to move higher?

Ron Murff

Yes. I would say that is correct. It would be the vintage. On a average we are probably seeing in that portfolio about four years worth of seasoning. So even though home prices have declined and some of those markets probably on a net-net basis, you are still have seen net home appreciation from when those homeowners might have originated those loans. So in the end that’s a long way to answer your question of, yes, it is still primarily the vintage that is giving us the most comfort. We are seeing some increase in our – or closed homes, but we have not seen any significant increases in our losses for those foreclose homes.

Ken Dubuque

And in fact those customers and their underlying asset we like a lot. And where we have opportunities to refinance with those customers, we are actively doing so because we indeed like that portfolio.

Brad Milsap – Sandler O'Neill

Okay. Final two questions. Just curious and I’m sorry someone asked this already and I missed it, but just curious where your internal watch list number was at March 31? And then secondly, I know there’s really weren’t any NPAs regarding the homebuilder portfolio out of Florida. Just curious what your thoughts there and things you might be doing differently than others? Yeah.

Ken Dubuque

Go ahead.

Ron Murff

As to the watch list, that’s not really anything I we can disclose. That is more of an internal classification. So that's nothing that we have indicated, and I don’t want to get into that here. As it relates to Florida and Ken may want to add on, but I think that's – our experience in Florida is primarily a result of the customers that we have in Florida. And their geographic location and their strength of those particular borrowers, they generally have lower leverage ,they are generally in good markets, and generally have pretty strong networks. So I think it is for us it would be more of a function of the borrowers, specific borrowers that we have in that particular geography.

Ken Dubuque

Yes, and the only other thing I would add, we really didn't get to the apartment condo flips in Florida, which was where an awful a lot of the problems were.

Brad Milsap – Sandler O'Neill

Okay, great, thank you.

Ken Dubuque

Thank you.

Operator

And your final question comes from the line of Al Sebastian from Al [ph] Capital Management. Please proceed.

Al Sebastian – Al Capital Management

Thank you. Good afternoon, gentlemen. Just on your – can you hear me? Okay?

Ron Murff

Yes, we can.

Al Sebastian – Al Capital Management

Okay. Just on your capital ratios, the one that’s deteriorated the most is your tangible common equity to tangible assets. I know that when you were spun out and you gave your investor presentations, you had a target there of – I think about 6%, is that correct is that?

Ron Murff

I don't think we ever disclosed any particular target. I think we did say that was about whatever the capital levels were at that time.

Al Sebastian – Al Capital Management

Okay. Well, I guess do you have any thoughts on what you are comfortable with, what would be a minimal level, and what actions you might take to improve the tangible common equity to tangible asset ratio?

Ken Dubuque

Yes. I guess the best way to answer that is, we intend to manage our capital position appropriately. It’s always been our intent to take whatever actions are necessary to maintain these capitals above the minimum levels to be well capitalized by any and all standards. So it is something that we are watching real closely, and we will monitor and adjust accordingly.

Ron Murff

Yes, just – the one thing I would add to that is as you could see one of the or the reason for the tangible capital being at the level that is because of the unrealized losses on the available-for-sale mortgage backed securities that get included as other comprehensive income in our stockholder equity section and therefore served – in fact reduced our tangible capital levels. So, again, we view those as temporary, as we have talked about the securities valuations. So that will be one other factor that I would add to Ken's answer.

Al Sebastian – Al Capital Management

Well, with regard to the available for sale category, what determines what and the amount that you put in that particular category as opposed held to maturity?

Ron Murff

That is a designation that per all of the accounting literature and certainly per our investment policy as a part of how we manage the bank. That is done at the time the securities are acquired, so it is a designation that is made at acquisition and does not change. Those particular – the largest part of those securities were ones that we acquired at the end of the third quarter of '07. And we were – we wanted to make sure that we had significant flexibility within our balance sheet because of the upcoming spinoff. And, again, it’s – we would reiterate that we generally – are a long-term holder of these securities. That has been our general philosophy to be a buy and hold investor. But short answer is, it is a designation that is made at acquisition, and, again, for the majority of what is available for sale was made – that designation was done at the end of the third quarter of '07.

Al Sebastian – Al Capital Management

One last question. In terms of purchasing these securities, what was the reason to at the end of the third quarter to purchase private agency securities as opposed to the agency securities.

Ken Dubuque

Well, just a general comment on that. The reason we purchased as many securities in general as we did is because of the THRIFT charter that we have. Because that was a way to allow us to increase our back skit [ph] limit to grow our energy and C&I portfolios as well. So it was a good alternative. Now home loans at the time just didn’t have the spreads and returns and the risk seemed to be higher. So, we went that route as opposed to buying home loans. Then as far as agency versus non-agency, the latter was just having significantly higher returns with seemingly little additional risk.

Ron Murff

Yes, the only thing I would add to that Al is just a – as we looked at the structure that surrounded those securities, particularly the subordination levels that were part of those bonds as we purchased them at the end of the third quarter of '07 and compared those to other available alternatives. Again, we felt like the risk adjusted returns were the ones that were the most attractive to us given the risk and the equity were needed to be invested. We just felt like that was best alternative that was available to us.

Al Sebastian – Al Capital Management

Okay. Thank you.

Ken Dubuque

Thank you. Hopefully – so hopefully we have answered some of your questions, your key questions, particularly in this kind of environment around credit and capital. We believe we are well-positioned to continue to execute both on a short-term and long-term strategy. And we continue to provide distinctive customer service to our customers. We again thank you for joining us on this conference call. Have a great day and if you are down our way, come visit us. Thanks.

Operator

Thank you for your participation in today's conference. This concludes your presentation under a may now disconnect. Good day.

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