UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30, 2008
  o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Transition Period From  to
  Guaranty Financial Group Inc.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    74-2421034
(I.R.S. Employer
Identification Number)
 1300 MoPac Expressway South, Austin, Texas 78746
 (512) 434-1000
 Not Applicable
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Number of common shares outstandingClass
    
    as of June 30, 2008Common Stock (par value $1.00 per share)
    
    44,630,751




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##### 



PagePART I. FINANCIAL INFORMATION
    
    1Item 1. Financial Statements
    
    1Guaranty Financial Group Inc. and Subsidiaries
    
    1Consolidated Balance Sheets
    
    1Consolidated Statements of Income
    
    2Consolidated Statements of Cash Flow
    
    3Consolidated Statements of Stockholders Equity
    
    4Notes to the Consolidated Financial Statements
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    37Item 4T. Controls and Procedures
    
    38PART II. OTHER INFORMATION
    
    39Item 1. Legal Proceedings
    
    39Item 1A. Risk Factors
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    40Item 3. Defaults Upon Senior Securities
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    40Item 5. Other Information
    
    41Item 6. Exhibits
    
    41SIGNATURES
    
    43




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##### 



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
  
  UnauditedJune 30,
    
    
    December 31,2008
    
    
    2007(In millions)ASSETSCash and cash equivalents
    
    $
    184
    
    
    $
    277Restricted cash
    
    
    79
    
    
    
    107Loans held for sale
    
    
    1
    
    
    
    16Loans, net of allowance for losses of $250 at
June 30, 2008 and $118 at December 31, 2007
    
    
    9,995
    
    
    
    9,928Securities available-for-sale
    
    
    1,357
    
    
    
    1,882Securities held-to-maturity
    
    
    3,241
    
    
    
    3,642Investment in Federal Home Loan Bank stock
    
    
    264
    
    
    
    256Property and equipment, net
    
    
    235
    
    
    
    233Accounts, notes, and accrued interest receivable
    
    
    81
    
    
    
    97Goodwill
    
    
    144
    
    
    
    144Other intangible assets
    
    
    24
    
    
    
    26Deferred income taxes
    
    
    235
    
    
    
    72Other assets
    
    
    191
    
    
    
    116TOTAL ASSETS
    
    $
    16,031
    
    
    $
    16,796LIABILITIES AND EQUITYDeposits
    
    $
    9,160
    
    
    $
    9,375Federal Home Loan Bank borrowings
    
    
    5,553
    
    
    
    5,743Other liabilities
    
    
    142
    
    
    
    125Subordinated notes payable to trust
    
    
    314
    
    
    
    314Subordinated debentures and other borrowings
    
    
    76
    
    
    
    101TOTAL LIABILITIES
    
    
    15,245
    
    
    
    15,658STOCKHOLDERS EQUITYPreferred stock, par value $0.01 per share, 25
million shares authorized, none issued
    
    
    
    
    
    
    Common stock, par value $1 per share, 200
million shares authorized, 44.6 million shares
at June 30, 2008 and 35.4 million shares at
December 31, 2007 issued and outstanding
    
    
    45
    
    
    
    35Additional paid-in-capital
    
    
    934
    
    
    
    902Retained earnings
    
    
    141
    
    
    
    236Accumulated other comprehensive loss, net
    
    
    (334
    )
    
    
    (35
    )TOTAL
STOCKHOLDERS EQUITY
    
    
    786
    
    
    
    1,138TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    16,031
    
    
    $
    16,796
  1




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##### 



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions, except per share)INTEREST INCOMELoans and loans held for sale
    
    $
    131
    
    
    $
    175
    
    
    $
    282
    
    
    $
    346Securities available-for-sale
    
    
    28
    
    
    
    10
    
    
    
    55
    
    
    
    18Securities held-to-maturity
    
    
    41
    
    
    
    57
    
    
    
    88
    
    
    
    117Federal Home Loan Bank stock dividends
    
    
    2
    
    
    
    3
    
    
    
    5
    
    
    
    7Other earning assets
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Total interest income
    
    
    202
    
    
    
    247
    
    
    
    430
    
    
    
    490INTEREST EXPENSEDeposits
    
    
    (60
    )
    
    
    (86
    )
    
    
    (136
    )
    
    
    (169
    )Borrowed funds
    
    
    (42
    )
    
    
    (66
    )
    
    
    (96
    )
    
    
    (131
    )Total interest expense
    
    
    (102
    )
    
    
    (152
    )
    
    
    (232
    )
    
    
    (300
    )NET INTEREST INCOME
    
    
    100
    
    
    
    95
    
    
    
    198
    
    
    
    190(Provision) credit for credit losses
    
    
    (99
    )
    
    
    
    
    
    
    (157
    )
    
    
    2NET INTEREST INCOME AFTER (PROVISION) CREDIT FOR
CREDIT LOSSES
    
    
    1
    
    
    
    95
    
    
    
    41
    
    
    
    192NONINTEREST INCOMEInsurance commissions and fees
    
    
    17
    
    
    
    16
    
    
    
    36
    
    
    
    32Service charges on deposits
    
    
    15
    
    
    
    13
    
    
    
    28
    
    
    
    25Operating lease income
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    4Other
    
    
    8
    
    
    
    7
    
    
    
    16
    
    
    
    16Total noninterest income
    
    
    41
    
    
    
    38
    
    
    
    83
    
    
    
    77NONINTEREST EXPENSECompensation and benefits
    
    
    (48
    )
    
    
    (43
    )
    
    
    (99
    )
    
    
    (91
    )Occupancy
    
    
    (9
    )
    
    
    (7
    )
    
    
    (17
    )
    
    
    (13
    )Information systems and technology
    
    
    (4
    )
    
    
    (4
    )
    
    
    (9
    )
    
    
    (7
    )Charges related to asset impairments and severance
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    
    Other
    
    
    (35
    )
    
    
    (40
    )
    
    
    (70
    )
    
    
    (76
    )Total noninterest expense
    
    
    (99
    )
    
    
    (94
    )
    
    
    (198
    )
    
    
    (187
    )(LOSS) INCOME BEFORE TAXES
    
    
    (57
    )
    
    
    39
    
    
    
    (74
    )
    
    
    82Income tax expense
    
    
    (28
    )
    
    
    (15
    )
    
    
    (21
    )
    
    
    (31
    )NET (LOSS) INCOME
    
    $
    (85
    )
    
    $
    24
    
    
    $
    (95
    )
    
    $
    51(LOSS) EARNINGS PER SHAREBasic and diluted
    
    $
    (2.24
    )
    
    
    n/a
    
    
    $
    (2.59
    )
    
    
    n/aAVERAGE NUMBER OF SHARES OUTSTANDINGBasic and diluted
    
    
    38.0
    
    
    
    n/a
    
    
    
    36.8
    
    
    
    n/a
  2




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##### 



Six Months Ended June 30,2008
    
    
    2007(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet (loss) income
    
    $
    (95
    )
    
    $
    51Adjustments:Depreciation and amortization
    
    
    11
    
    
    
    9Depreciation of assets leased to others
    
    
    3
    
    
    
    3Amortization of core deposit and other intangible assets
    
    
    2
    
    
    
    3Amortization and accretion of financial instrument discounts
and premiums and deferred loan fees and origination costs, net
    
    
    (2
    )
    
    
    10Provision (credit) for credit losses
    
    
    157
    
    
    
    (2
    )Deferred income taxes
    
    
    (2
    )
    
    
    (6
    )Changes in:Loans held for sale
    
    
    15
    
    
    
    3Other
    
    
    (20
    )
    
    
    (7
    )69
    
    
    
    64CASH PROVIDED BY (USED FOR) INVESTINGSecurities available-for-sale:Purchases
    
    
    
    
    
    
    (425
    )Principal payments and maturities
    
    
    66
    
    
    
    64Securities held-to-maturity:Purchases
    
    
    
    
    
    
    (142
    )Principal payments and maturities
    
    
    396
    
    
    
    790Federal Home Loan Bank stock:Purchases
    
    
    (11
    )
    
    
    Redemption
    
    
    8
    
    
    
    58Loans originated or acquired, net of collections
    
    
    (262
    )
    
    
    125Sale of loans
    
    
    14
    
    
    
    22Capital expenditures
    
    
    (13
    )
    
    
    (23
    )Other
    
    
    8
    
    
    
    (3
    )206
    
    
    
    466CASH PROVIDED BY (USED FOR) FINANCINGDeposits, net
    
    
    (215
    )
    
    
    46Repurchase agreements and short-term borrowings, net
    
    
    (112
    )
    
    
    (60
    )Payments of long-term Federal Home Loan Bank and other borrowings
    
    
    (78
    )
    
    
    (434
    )Issuance of subordinated notes payable to trust
    
    
    
    
    
    
    172Redemption of preferred stock issued by subsidiaries
    
    
    
    
    
    
    (305
    )Proceeds from sale of common stock
    
    
    38
    
    
    
    Dividends paid to Temple-Inland Inc.
    
    
    
    
    
    
    (35
    )Other
    
    
    (1
    )
    
    
    (368
    )
    
    
    (616
    )Net decrease in cash and cash equivalents
    
    
    (93
    )
    
    
    (86
    )Cash and cash equivalents at beginning of period
    
    
    277
    
    
    
    372Cash and cash equivalents at end of period
    
    $
    184
    
    
    $
    286Interest paid
    
    $
    228
    
    
    $
    303
  3




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##### 



AccumulatedOtherCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Comprehensive
    
    
    TotalShares
    
    
    
    
    
    
    Paid-in
    
    
    Retained
    
    
    (Loss) Income,
    
    
    StockholdersOutstanding
    
    
    Common Stock
    
    
    Capital
    
    
    Earnings
    
    
    net
    
    
    Equity(In millions)Balance at December 31, 2007
    
    
    35
    
    
    $
    35
    
    
    $
    902
    
    
    $
    236
    
    
    $
    (35
    )
    
    $
    1,138Net loss  first quarter 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )Other comprehensive loss:Unrealized losses on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (365
    )
    
    
    (365
    )Associated deferred taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    128Comprehensive loss for three
months ended March 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (247
    )Share-based compensation,
share-settled awards
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Issuance of shares upon
vesting of restricted stock units
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Restricted stock grants
    
    
    2
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Balance at March 31, 2008
    
    
    37
    
    
    $
    37
    
    
    $
    901
    
    
    $
    226
    
    
    $
    (272
    )
    
    $
    892Net loss  second quarter 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    (85
    )Other comprehensive loss:Unrealized losses on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94
    )
    
    
    (94
    )Associated deferred taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    32Comprehensive loss for three
months ended June 30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147
    )Sale of common stock
    
    
    8
    
    
    
    8
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    38Share-based compensation,
share-settled awards
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Balance at June 30, 2008
    
    
    45
    
    
    $
    45
    
    
    $
    934
    
    
    $
    141
    
    
    $
    (334
    )
    
    $
    786Comprehensive loss for six months
ended June 30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (394
    )
  4




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##### 



Note 1  Summary of Significant Accounting Policies
 Background
  Basis of Presentation
  New Accounting Pronouncements
 Fair Value Measures The Fair Value Option for Financial Assets and Financial
Liabilities Note 13
 Pending Accounting Pronouncements
 Business Combinations
 Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of
FASB Statement No. 133
 5




---



##### 



Note 2  Loans
  June 30,
    
    
    December 31,2008
    
    
    2007(In millions)Single-family mortgage
    
    $
    1,485
    
    
    $
    1,672Single-family mortgage warehouse
    
    
    971
    
    
    
    695Single-family construction (homebuilders)
    
    
    1,223
    
    
    
    1,510Multifamily and senior housing
    
    
    1,877
    
    
    
    1,541Commercial real estate
    
    
    1,774
    
    
    
    1,674Commercial and business
    
    
    1,384
    
    
    
    1,340Energy
    
    
    1,334
    
    
    
    1,470Consumer and other
    
    
    197
    
    
    
    144Total loans
    
    
    10,245
    
    
    
    10,046Less allowance for loan losses
    
    
    (250
    )
    
    
    (118
    )Loans, net
    
    $
    9,995
    
    
    $
    9,928
    6




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##### 



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Allowance for loan losses:Balance at beginning of period
    
    $
    172
    
    
    $
    71
    
    
    $
    118
    
    
    $
    65Provision (credit) for loan losses
    
    
    97
    
    
    
    
    
    
    
    153
    
    
    
    (2
    )Charge-offs
    
    
    (20
    )
    
    
    (2
    )
    
    
    (23
    )
    
    
    (3
    )Recoveries
    
    
    1
    
    
    
    3
    
    
    
    2
    
    
    
    12Balance at end of period
    
    
    250
    
    
    
    72
    
    
    
    250
    
    
    
    72Unfunded credit commitments:Balance at beginning of period
    
    
    9
    
    
    
    7
    
    
    
    7
    
    
    
    7Provision for commitment-related credit losses
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    Balance at end of period
    
    
    11
    
    
    
    7
    
    
    
    11
    
    
    
    7Combined allowances for credit losses at end of period
    
    $
    261
    
    
    $
    79
    
    
    $
    261
    
    
    $
    79Provision (credit) for:Loan losses
    
    $
    97
    
    
    $
    
    
    
    $
    153
    
    
    $
    (2
    )Commitment-related credit losses
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    Combined provision (credit) for credit losses
    
    $
    99
    
    
    $
    
    
    
    $
    157
    
    
    $
    (2
    )
  June 30,
    
    
    December 31,2008
    
    
    2007(In millions)Accruing loans past due 90 days or more
    
    $
    5
    
    
    $
    6Recorded investment in nonaccrual loans
    
    
    364
    
    
    
    166Restructured troubled loans included in nonaccrual loans
    
    
    1
    
    
    
    1Impaired loans included in nonaccrual loans
    
    
    245
    
    
    
    118Allowance for loan losses on impaired loans
    
    
    104
    
    
    
    20Performing restructured troubled loans
    
    
    3
    
    
    
    
   7




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##### 



Note 3  Securities
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    (Losses)
    
    
    Fair Value(In millions)At June 30, 2008:Available-for-saleMortgage-backed securities:U.S. Government
    
    $
    12
    
    
    $
    
    
    
    $
    
    
    
    $
    12U.S. Government Sponsored Enterprises (FNMA,
FHLMC)
    
    
    507
    
    
    
    4
    
    
    
    (3
    )
    
    
    508Non-agency
    
    
    1,347
    
    
    
    
    
    
    
    (514
    )
    
    
    8331,866
    
    
    
    4
    
    
    
    (517
    )
    
    
    1,353Equity securities
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4$
    1,870
    
    
    $
    4
    
    
    $
    (517
    )
    
    $
    1,357Held-to-maturityMortgage-backed securities:U.S. Government
    
    $
    50
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    49U.S. Government Sponsored Enterprises (FNMA, FHLMC)
    
    
    908
    
    
    
    6
    
    
    
    (1
    )
    
    
    913Non-agency
    
    
    2,283
    
    
    
    
    
    
    
    (902
    )
    
    
    1,381$
    3,241
    
    
    $
    6
    
    
    $
    (904
    )
    
    $
    2,343At December 31, 2007:Available-for-saleMortgage-backed securities:U.S. Government
    
    $
    14
    
    
    $
    
    
    
    $
    
    
    
    $
    14U.S. Government Sponsored Enterprises (FNMA,
FHLMC)
    
    
    552
    
    
    
    4
    
    
    
    (4
    )
    
    
    552Non-agency
    
    
    1,366
    
    
    
    
    
    
    
    (54
    )
    
    
    1,3121,932
    
    
    
    4
    
    
    
    (58
    )
    
    
    1,878Equity securities
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4$
    1,936
    
    
    $
    4
    
    
    $
    (58
    )
    
    $
    1,882Held-to-maturityMortgage-backed securities:U.S. Government
    
    $
    57
    
    
    $
    
    
    
    $
    
    
    
    $
    57U.S. Government Sponsored Enterprises (FNMA, FHLMC)
    
    
    1,172
    
    
    
    4
    
    
    
    (3
    )
    
    
    1,173Non-agency
    
    
    2,413
    
    
    
    1
    
    
    
    (213
    )
    
    
    2,201$
    3,642
    
    
    $
    5
    
    
    $
    (216
    )
    
    $
    3,431
 8




---



##### 




    
    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, therefore,
our securities will not incur credit losses.
 Note 13
 Note 4  Deposits
  June 30,
    
    
    December 31,2008
    
    
    2007(In millions)Noninterest-bearing demand
    
    $
    566
    
    
    $
    779Interest-bearing demand
    
    
    4,058
    
    
    
    3,648Savings deposits
    
    
    179
    
    
    
    172Certificates of deposit
    
    
    4,357
    
    
    
    4,776$
    9,160
    
    
    $
    9,375
  9




---



##### 



Note 5  Borrowings
  June 30, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageInterest
    
    
    
    
    
    
    InterestBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in millions)Short-term FHLB borrowings
    
    $
    4,837
    
    
    
    2.2
    %
    
    $
    4,949
    
    
    
    4.3
    %Long-term FHLB borrowings
    
    
    716
    
    
    
    4.3
    %
    
    
    794
    
    
    
    4.2
    %Subordinated notes payable to trust
    
    
    314
    
    
    
    4.5
    %
    
    
    314
    
    
    
    7.2
    %Subordinated debentures and other borrowings
    
    
    76
    
    
    
    5.9
    %
    
    
    101
    
    
    
    8.5
    %
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Short-term FHLB borrowings
    
    $
    28
    
    
    $
    48
    
    
    $
    67
    
    
    $
    93Long-term FHLB borrowings
    
    
    8
    
    
    
    8
    
    
    
    16
    
    
    
    18Subordinated notes payable to trust
    
    
    4
    
    
    
    5
    
    
    
    9
    
    
    
    8Subordinated debentures and other borrowings
    
    
    2
    
    
    
    3
    
    
    
    4
    
    
    
    5Preferred stock issued by subsidiaries
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    7$
    42
    
    
    $
    66
    
    
    $
    96
    
    
    $
    131
   Note 6  (Loss) Earnings Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions, except per share)Net (loss) income
    
    $
    (85
    )
    
    $
    24
    
    
    $
    (95
    )
    
    $
    51Weighted average shares outstanding  basic and
diluted
    
    
    38.0
    
    
    
    n/a
    
    
    
    36.8
    
    
    
    n/a(Loss) earnings per common share  basic and diluted
    
    $
    (2.24
    )
    
    
    n/a
    
    
    $
    (2.59
    )
    
    
    n/a
 . (proforma)
 10




---



##### 



Weighted
    
    
    AggregateWeighted
    
    
    Average
    
    
    Intrinsic ValueAverage
    
    
    Remaining
    
    
    (CurrentExercise Price
    
    
    Contractual
    
    
    Value LessShares
    
    
    Per Share
    
    
    Term
    
    
    Exercise Price)(In thousands)
    
    
    
    
    
    
    (In years)
    
    
    (In millions)Outstanding
    
    
    1,609
    
    
    $
    12
    
    
    
    5
    
    
    $
    Exercisable
    
    
    1,278
    
    
    
    11
    
    
    
    5
    
    
    
    
 Note 7 Income Taxes
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Federal statutory rate
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %State taxes, net of federal benefit
    
    
    (2
    )%
    
    
    3
    %
    
    
    
    
    
    
    3
    %Valuation allowance on deferred tax assets
    
    
    (80
    )%
    
    
    
    
    
    
    (62
    )%
    
    
    Other
    
    
    (2
    )%
    
    
    
    
    
    
    (1
    )%
    
    
    (49
    )%
    
    
    38
    %
    
    
    (28
    )%
    
    
    38
    %
   June 30,
    
    
    December 31,2008
    
    
    2007(In millions)Deferred tax assets:Allowance for loan losses
    
    $
    85
    
    
    $
    41Unrealized losses on available-for-sale securities
    
    
    179
    
    
    
    19Other
    
    
    47
    
    
    
    39311
    
    
    
    99Deferred tax liabilities:Investment in FHLB stock
    
    
    (19
    )
    
    
    (18
    )Other
    
    
    (11
    )
    
    
    (9
    )(30
    )
    
    
    (27
    )Net deferred tax asset before valuation allowance
    
    
    281
    
    
    
    72Valuation allowance
    
    
    (46
    )
    
    
    Net deferred tax asset
    
    $
    235
    
    
    $
    72
  Note 8  Litigation
  11




---



##### 



Note 9  Segment Information
  
    
    Commercial banking,
    
    Retail banking,
    
    Insurance agency, and
    
    Treasury, corporate and other.
  12




---



##### 



Treasury,Commercial
    
    
    Retail
    
    
    Insurance
    
    
    Mortgage
    
    
    CorporateBanking
    
    
    Banking
    
    
    Agency
    
    
    Banking
    
    
    and Other
    
    
    Total(In millions)For the Three Months Ended June 30,
2008:Net interest income
    
    $
    68
    
    
    $
    20
    
    
    $
    
    
    
    $
    
    
    
    $
    12
    
    
    $
    100(Provision) credit for credit losses
    
    
    (86
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (99
    )Noninterest income
    
    
    7
    
    
    
    15
    
    
    
    17
    
    
    
    
    
    
    
    2
    
    
    
    41Revenues from other segments
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    Noninterest expense
    
    
    (19
    )
    
    
    (55
    )
    
    
    (16
    )
    
    
    (1
    )
    
    
    (8
    )(a)
    
    
    (99
    )Segment operating income/(loss)
before taxes
    
    $
    (30
    )
    
    $
    (17
    )
    
    $
    1
    
    
    $
    (1
    )
    
    $
    (10
    )
    
    $
    (57
    )Average assets
    
    $
    10,287
    
    
    $
    647
    
    
    $
    89
    
    
    $
    31
    
    
    $
    5,309
    
    
    $
    16,363Goodwill
    
    
    
    
    
    
    106
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    144Depreciation and amortization
    
    
    2
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    7Capital expenditures
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    5For the Three Months Ended June 30,
2007:Net interest income
    
    $
    69
    
    
    $
    30
    
    
    $
    
    
    
    $
    
    
    
    $
    (4
    )
    
    $
    95(Provision) credit for credit losses
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Noninterest income
    
    
    8
    
    
    
    14
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    38Revenues from other segments
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    Noninterest expense
    
    
    (18
    )
    
    
    (53
    )
    
    
    (14
    )
    
    
    (7
    )
    
    
    (2
    )(a)
    
    
    (94
    )Segment operating income/(loss)
before taxes
    
    $
    58
    
    
    $
    (8
    )
    
    $
    2
    
    
    $
    (7
    )
    
    $
    (6
    )
    
    $
    39Average assets
    
    $
    9,656
    
    
    $
    609
    
    
    $
    94
    
    
    $
    47
    
    
    $
    5,387
    
    
    $
    15,793Goodwill
    
    
    
    
    
    
    107
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    141Depreciation and amortization
    
    
    2
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    8Capital expenditures
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    4
    
    
    
    10For the Six Months Ended
June 30, 2008:Net interest income
    
    $
    137
    
    
    $
    41
    
    
    $
    
    
    
    $
    
    
    
    $
    20
    
    
    $
    198(Provision) credit for credit losses
    
    
    (138
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (157
    )Noninterest income
    
    
    14
    
    
    
    30
    
    
    
    36
    
    
    
    
    
    
    
    3
    
    
    
    83Revenues from other segments
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    Noninterest expense
    
    
    (37
    )
    
    
    (114
    )
    
    
    (34
    )
    
    
    (2
    )
    
    
    (11
    )(a)
    
    
    (198
    )Segment operating income/(loss)
before taxes
    
    $
    (24
    )
    
    $
    (37
    )
    
    $
    2
    
    
    $
    (2
    )
    
    $
    (13
    )
    
    $
    (74
    )Average assets
    
    $
    10,139
    
    
    $
    634
    
    
    $
    89
    
    
    $
    32
    
    
    $
    5,529
    
    
    $
    16,423Goodwill
    
    
    
    
    
    
    106
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    144Depreciation and amortization
    
    
    4
    
    
    
    9
    
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    16Capital expenditures
    
    
    1
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    13For the Six Months Ended
June 30, 2007:Net interest income
    
    $
    138
    
    
    $
    60
    
    
    $
    
    
    
    $
    
    
    
    $
    (8
    )
    
    $
    190(Provision) credit for credit losses
    
    
    2
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    2Noninterest income
    
    
    17
    
    
    
    28
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    77Revenues from other segments
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    Noninterest expense
    
    
    (36
    )
    
    
    (106
    )
    
    
    (28
    )
    
    
    (8
    )
    
    
    (9
    )(a)
    
    
    (187
    )Segment operating income/(loss)
before taxes
    
    $
    121
    
    
    $
    (15
    )
    
    $
    4
    
    
    $
    (8
    )
    
    $
    (20
    )
    
    $
    82Average assets
    
    $
    9,607
    
    
    $
    606
    
    
    $
    93
    
    
    $
    48
    
    
    $
    5,372
    
    
    $
    15,726Goodwill
    
    
    
    
    
    
    107
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    141Depreciation and amortization
    
    
    4
    
    
    
    7
    
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    15Capital expenditures
    
    
    3
    
    
    
    15
    
    
    
    1
    
    
    
    
    
    
    
    4
    
    
    
    23
 
 (a)
    
    Includes unallocated expenses of: Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Share-based compensation
    
    $
    (3
    )
    
    $
    (1
    )
    
    $
    (4
    )
    
    $
    (4
    )Charges related to asset impairments and severance
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    
    Expenses allocated to us by Temple-Inland Inc.
but not directly attributable to us
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (5
    )Other
    
    
    (2
    )
    
    
    1
    
    
    
    (4
    )
    
    
    $
    (8
    )
    
    $
    (2
    )
    
    $
    (11
    )
    
    $
    (9
    )
 13




---



##### 



Note 10  Noninterest Expense
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Advertising and promotional
    
    $
    4
    
    
    $
    3
    
    
    $
    11
    
    
    $
    7Furniture, fixtures, and equipment
    
    
    5
    
    
    
    4
    
    
    
    11
    
    
    
    8Professional services
    
    
    5
    
    
    
    2
    
    
    
    8
    
    
    
    4Travel and other employee costs
    
    
    4
    
    
    
    3
    
    
    
    6
    
    
    
    5Postage, printing, and supplies
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    4Litigation charge
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Depreciation of assets leased to others
    
    
    2
    
    
    
    1
    
    
    
    3
    
    
    
    3Other
    
    
    13
    
    
    
    13
    
    
    
    27
    
    
    
    25Shared services allocation from Temple-Inland Inc.
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    15$
    35
    
    
    $
    40
    
    
    $
    70
    
    
    $
    76
 Note 11  Share-Based Compensation
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Restricted stock
    
    $
    3
    
    
    $
    (1
    )
    
    $
    4
    
    
    $
    Cash-settled awards
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    2Stock options
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2$
    3
    
    
    $
    1
    
    
    $
    4
    
    
    $
    4
  14




---



##### 



Cash-settled awards
  Equivalent
    
    
    AggregateShares
    
    
    Current Value(In thousands)
    
    
    (In millions)Awards indexed to Guaranty stock
    
    
    81
    
    
    $
    Awards indexed to Temple-Inland Inc. stock
    
    
    244
    
    
    
    3Awards indexed to Forestar Real Estate Group Inc. stock
    
    
    81
    
    
    
    2$
    5
 Restricted stock and stock-settled units
   AggregateShares
    
    
    Current Value(In thousands)
    
    
    (In millions)Outstanding at December 31, 2007
    
    
    26Granted
    
    
    1,647Cancelled
    
    
    (22
    )Outstanding at March 31, 2008
    
    
    1,651Granted
    
    
    56Cancelled
    
    
    (36
    )Outstanding at June 30, 2008
    
    
    1,671
    
    
    $
    9
 Stock Options
  Weighted
    
    
    AggregateWeighted
    
    
    Average
    
    
    Intrinsic ValueAverage
    
    
    Remaining
    
    
    (Current ValueExercise Price
    
    
    Contractual
    
    
    Less ExerciseShares
    
    
    Per Share
    
    
    Term
    
    
    Price)(In thousands)
    
    
    
    
    
    
    (In years)
    
    
    (In millions)Outstanding on Guaranty stock
    
    
    313
    
    
    $
    14
    
    
    
    6
    
    
    $
    Outstanding on Temple-Inland Inc. stock
    
    
    947
    
    
    
    17
    
    
    
    6
    
    
    
    1Outstanding on Forestar Real Estate
Group Inc. stock
    
    
    310
    
    
    
    22
    
    
    
    6
    
    
    
    1$
    2Exercisable on Guaranty stock
    
    
    201
    
    
    $
    12
    
    
    
    6
    
    
    $
    Exercisable on Temple-Inland Inc. stock
    
    
    610
    
    
    
    14
    
    
    
    5
    
    
    
    1Exercisable on Forestar Real Estate
Group Inc. stock
    
    
    198
    
    
    
    18
    
    
    
    6
    
    
    
    1$
    2
 15




---



##### 



Note 12  Benefit Plans
  Note 13  Fair Value of Financial Instruments
  June 30, 2008
    
    
    December 31, 2007Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value(In millions)Financial assetsLoans, net
    
    $
    9,995
    
    
    $
    9,722
    
    
    $
    9,928
    
    
    $
    9,940Mortgage-backed securities held-to-maturity:U.S. Government and U.S. Government
Sponsored Enterprises
    
    
    958
    
    
    
    962
    
    
    
    1,229
    
    
    
    1,230Non-agency:Internally valued
    
    
    2,116
    
    
    
    1,217
    
    
    
    2,214
    
    
    
    2,002Market quotes
    
    
    167
    
    
    
    164
    
    
    
    199
    
    
    
    1993,241
    
    
    
    2,343
    
    
    
    3,642
    
    
    
    3,431Financial liabilitiesDeposits
    
    $
    9,160
    
    
    $
    9,168
    
    
    $
    9,375
    
    
    $
    9,381Federal Home Loan Bank borrowings
    
    
    5,553
    
    
    
    5,562
    
    
    
    5,743
    
    
    
    5,747Subordinated notes payable to trust
    
    
    314
    
    
    
    277
    
    
    
    314
    
    
    
    277Subordinated debentures and other borrowings
    
    
    76
    
    
    
    76
    
    
    
    101
    
    
    
    101Other off-balance sheet instrumentsCommitments to extend credit
    
    $
    (11
    )
    
    $
    (11
    )
    
    $
    (7
    )
    
    $
    (7
    )
  
    
    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.
  16




---



##### 



Level 1
    
    
    Level 3
    
    
    Total(In millions)Available-for-sale securities:U.S. Government and U.S. Government
Sponsored Enterprises
mortgage-backed securities
    
    $
    520
    
    
    $
    
    
    
    $
    520Non-agency mortgage-backed securities
    
    
    
    
    
    
    833
    
    
    
    833Equity securities
    
    
    
    
    
    
    4
    
    
    
    4$
    520
    
    
    $
    837
    
    
    $
    1,357
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2008
    
    
    June 30, 2008(In millions)Recorded amount at beginning of the period
    
    $
    942
    
    
    $
    1,316Change in unrealized losses for the period included in other comprehensive loss
    
    
    (94
    )
    
    
    (459
    )Principal payments
    
    
    (11
    )
    
    
    (20
    )Recorded amount at end of period
    
    $
    837
    
    
    $
    837
  Level 2(In millions)Impaired loans
    
    $
    141Foreclosed assets
    
    
    42$
    183
 Note 14  Transactions with Temple-Inland Inc.
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2007
    
    
    June 30, 2007(In millions)Information technology support
    
    $
    4
    
    
    $
    8Legal, human resources, and other administrative costs
    
    
    1
    
    
    
    3Accounting, finance, and other
    
    
    2
    
    
    
    4Share-based compensation (included in compensation expense)
    
    
    1
    
    
    
    4$
    8
    
    
    $
    19
  17




---



##### 



Note 15  Subsequent Events
 Capital Raising Activities
     
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  
    
    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;
    
    costs or difficulties related to transitioning as a stand-alone public company
following our spin-off from Temple-Inland Inc. in December 2007;
 18




---



##### 




    
    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.
   19




---



##### 



Selected Ratios and Other Data
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    March 31,
    
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in millions, except per share)For the period:Net interest income
    
    $
    100
    
    
    $
    98
    
    
    $
    102
    
    
    $
    99
    
    
    $
    95
    
    
    $
    198
    
    
    $
    190(Provision) credit for credit losses
    
    
    (99
    )
    
    
    (58
    )
    
    
    (33
    )
    
    
    (19
    )
    
    
    
    
    
    
    (157
    )
    
    
    2Net (loss) income
    
    
    (85
    )
    
    
    (10
    )
    
    
    6
    
    
    
    21
    
    
    
    24
    
    
    
    (95
    )
    
    
    51Net (charge-offs) recoveries
    
    
    (19
    )
    
    
    (2
    )
    
    
    (6
    )
    
    
    
    
    
    
    1
    
    
    
    (21
    )
    
    
    9Return on average assets
    
    
    (2.08
    )%
    
    
    (0.24
    )%
    
    
    0.15
    %
    
    
    0.53
    %
    
    
    0.61
    %
    
    
    (1.16
    )%
    
    
    0.65
    %Return on average stockholders equity
    
    
    (37.12
    )%
    
    
    (3.65
    )%
    
    
    2.28
    %
    
    
    8.06
    %
    
    
    9.38
    %
    
    
    (18.43
    )%
    
    
    9.94
    %Net interest margin
    
    
    2.54
    %
    
    
    2.49
    %
    
    
    2.59
    %
    
    
    2.65
    %
    
    
    2.55
    %
    
    
    2.51
    %
    
    
    2.55
    %Period-end:Loans, net
    
    $
    9,995
    
    
    $
    10,099
    
    
    $
    9,928
    
    
    $
    9,561
    
    
    $
    9,470Non-performing assets
    
    
    406
    
    
    
    284
    
    
    
    179
    
    
    
    130
    
    
    
    36Non-performing assets ratio
    
    
    3.95
    %
    
    
    2.76
    %
    
    
    1.78
    %
    
    
    1.35
    %
    
    
    0.38
    %Capital/Equity(actual):Guaranty Bank tier 1 leverage ratio
    
    
    7.63
    %
    
    
    7.58
    %
    
    
    7.74
    %
    
    
    7.79
    %
    
    
    8.07
    %Guaranty Bank tier 1 risk-based ratio
    
    
    9.36
    %
    
    
    9.38
    %
    
    
    9.63
    %
    
    
    9.94
    %
    
    
    10.00
    %Guaranty Bank total risk-based
capital ratio
    
    
    10.60
    %
    
    
    10.61
    %
    
    
    10.54
    %
    
    
    10.68
    %
    
    
    10.61
    %Tangible equity/tangible assets
    
    
    3.90
    %
    
    
    4.45
    %
    
    
    5.82
    %
    
    
    5.36
    %
    
    
    5.60
    %Tangible equity/per common share
    
    $
    13.85
    
    
    $
    19.38
    
    
    $
    27.36
    
    
    
    n/a
    
    
    
    n/aCapital/Equity(proforma)(1):Guaranty Bank tier 1 leverage ratio
    
    
    9.49
    %
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aGuaranty Bank tier 1 risk-based ratio
    
    
    11.64
    %
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aGuaranty Bank total risk-based
capital ratio
    
    
    14.62
    %
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aTangible equity/tangible assets
    
    
    5.86
    %Tangible equity/per common share
    
    $
    8.74
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aCredit reserves:Allowance for loan losses
    
    $
    250
    
    
    $
    172
    
    
    $
    118
    
    
    $
    91
    
    
    $
    72Allowance for loan losses to total
loans
    
    
    2.44
    %
    
    
    1.67
    %
    
    
    1.17
    %
    
    
    0.94
    %
    
    
    0.75
    %Allowance for loan losses to
non-performing loans
    
    
    69
    %
    
    
    66
    %
    
    
    71
    %
    
    
    75
    %
    
    
    248
    %Total deposits
    
    $
    9,160
    
    
    $
    9,248
    
    
    $
    9,375
    
    
    $
    9,376
    
    
    $
    9,532Average interest-bearing deposits
    
    
    8,405
    
    
    
    8,588
    
    
    
    8,609
    
    
    
    8,794
    
    
    
    8,777
    
    
    $
    8,496
    
    
    $
    8,704Total branches
    
    
    162
    
    
    
    158
    
    
    
    158
    
    
    
    159
    
    
    
    156
 
 (1)
    
    Proforma capital/equity ratios at June 30, 2008 reflect the effect we anticipate of the proceeds from our issuance of mandatorily convertible preferred stock and subordinated debt in July 2008, and
present those amounts as if the preferred stock had been converted to common stock. Current Market Conditions
  20




---



##### 



Analysis of Second Quarter 2008 and 2007
 Performance Ratios
 Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Return on
assets (net (loss)
income divided by
average total
assets)
    
    
    (2.08
    )%
    
    
    0.61
    %
    
    
    (1.16
    )%
    
    
    0.65
    %Return on equity
(net (loss) income
divided by average
stockholders
equity)
    
    
    (37.12
    )%
    
    
    9.38
    %
    
    
    (18.43
    )%
    
    
    9.94
    %Dividend payout
ratio (dividends
declared divided by
net income)
    
    
    
    
    
    
    146
    %
    
    
    
    
    
    
    69
    %Equity to asset
ratio (average
stockholders
equity divided by
average assets)
    
    
    5.60
    %
    
    
    6.48
    %
    
    
    6.28
    %
    
    
    6.52
    %Net interest margin
(net interest
income divided by
average earning
assets)
    
    
    2.54
    %
    
    
    2.55
    %
    
    
    2.51
    %
    
    
    2.55
    %
  
    
    Net loss was $85 million, a decline of $109 million from second quarter 2007, primarily
a result of credit loss provisions and a deferred income tax asset valuation allowance.
    
    Net interest income increased 5% compared to second quarter 2007. Net interest margin
was approximately the same as second quarter 2007, with decreases in lower-margin
single-family mortgage loans and mortgage-backed securities offsetting an increase in
nonaccrual loans.
    
    We recorded $99 million in credit loss provisions compared to an insignificant net
provision expense in second quarter 2007. Approximately half of the second quarter 2008
provision for credit loss related to homebuilder loans, with the majority of the remainder
related to single-family mortgage loans and an energy loan.
    
    We recorded a $46 million valuation allowance against deferred tax assets, principally
associated with allowances for credit losses, because of uncertainty regarding our ability
to realize those assets.
    
    We recorded $3 million in severance costs related to a 135 person reduction-in-force.
 21




---



##### 



Results of Operations
 Net Interest Income
   Item 3. Quantitative and Qualitative
Disclosure about Market Risk
  Three Months Ended June 30,2008
    
    2007Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in millions)ASSETSCash equivalents
    
    $
    82
    
    
    $
    
    
    
    
    2.27
    %
    
    $
    79
    
    
    $
    2
    
    
    
    5.08
    %Loans held for sale
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    7.31
    %Loans
    
    
    10,332
    
    
    
    131
    
    
    
    5.09
    %
    
    
    9,573
    
    
    
    175
    
    
    
    7.32
    %Securities
    
    
    5,187
    
    
    
    69
    
    
    
    5.26
    %
    
    
    5,024
    
    
    
    67
    
    
    
    5.31
    %Investments in Federal Home Loan Bank stock
    
    
    259
    
    
    
    2
    
    
    
    3.07
    %
    
    
    208
    
    
    
    3
    
    
    
    5.61
    %Total earning assets
    
    
    15,861
    
    
    $
    202
    
    
    
    5.10
    %
    
    
    14,903
    
    
    $
    247
    
    
    
    6.61
    %Unrealized (losses) gains on
available-for-sale securities
    
    
    (405
    )
    
    
    
    
    
    
    
    
    
    
    1Other assets
    
    
    907
    
    
    
    
    
    
    
    
    
    
    
    889Total assets
    
    $
    16,363
    
    
    
    
    
    
    
    
    
    
    $
    15,793LIABILITIES AND EQUITYInterest-bearing deposits:Interest-bearing demand
    
    $
    3,817
    
    
    $
    18
    
    
    
    1.88
    %
    
    $
    3,699
    
    
    $
    26
    
    
    
    2.81
    %Savings deposits
    
    
    178
    
    
    
    1
    
    
    
    0.78
    %
    
    
    190
    
    
    
    1
    
    
    
    0.72
    %Certificates of deposit
    
    
    4,410
    
    
    
    41
    
    
    
    3.75
    %
    
    
    4,888
    
    
    
    59
    
    
    
    4.87
    %Total interest-bearing deposits
    
    
    8,405
    
    
    
    60
    
    
    
    2.84
    %
    
    
    8,777
    
    
    
    86
    
    
    
    3.91
    %Short-term Federal Home Loan Bank borrowings
    
    
    5,112
    
    
    
    28
    
    
    
    2.22
    %
    
    
    3,645
    
    
    
    48
    
    
    
    5.27
    %Long-term Federal Home Loan Bank borrowings
    
    
    735
    
    
    
    8
    
    
    
    4.27
    %
    
    
    934
    
    
    
    8
    
    
    
    3.51
    %Subordinated notes payable to trust
    
    
    314
    
    
    
    4
    
    
    
    4.54
    %
    
    
    315
    
    
    
    5
    
    
    
    7.04
    %Subordinated debentures and other borrowings
    
    
    100
    
    
    
    2
    
    
    
    8.15
    %
    
    
    105
    
    
    
    3
    
    
    
    8.34
    %Preferred stock issued by subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    2
    
    
    
    8.01
    %Total borrowings
    
    
    6,261
    
    
    
    42
    
    
    
    2.67
    %
    
    
    5,073
    
    
    
    66
    
    
    
    5.16
    %Total interest-bearing liabilities
    
    
    14,666
    
    
    $
    102
    
    
    
    2.77
    %
    
    
    13,850
    
    
    $
    152
    
    
    
    4.37
    %Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.33
    %
    
    
    
    
    
    
    
    
    
    
    2.24
    %Noninterest-bearing demand deposits
    
    
    641
    
    
    
    
    
    
    
    
    
    
    
    703Other liabilities
    
    
    140
    
    
    
    
    
    
    
    
    
    
    
    217Stockholders equity
    
    
    916
    
    
    
    
    
    
    
    
    
    
    
    1,023Total liabilities and stockholders equity
    
    $
    16,363
    
    
    
    
    
    
    
    
    
    
    $
    15,793Impact of noninterest-bearing funds
    
    
    
    
    
    
    
    
    
    
    0.21
    %
    
    
    
    
    
    
    
    
    
    
    0.31
    %Net interest income/margin
    
    
    
    
    
    $
    100
    
    
    
    2.54
    %
    
    
    
    
    
    $
    95
    
    
    
    2.55
    %
 22




---



##### 



Six Months Ended June 30,2008
    
    2007Average
    
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in millions)ASSETSCash equivalents
    
    $
    73
    
    
    $
    
    
    
    
    2.74
    %
    
    $
    86
    
    
    $
    2
    
    
    
    5.06
    %Loans held for sale
    
    
    5
    
    
    
    
    
    
    
    3.49
    %
    
    
    20
    
    
    
    
    
    
    
    7.47
    %Loans
    
    
    10,147
    
    
    
    282
    
    
    
    5.56
    %
    
    
    9,514
    
    
    
    346
    
    
    
    7.27
    %Securities
    
    
    5,306
    
    
    
    143
    
    
    
    5.38
    %
    
    
    5,062
    
    
    
    135
    
    
    
    5.32
    %Investments in Federal Home Loan Bank stock
    
    
    255
    
    
    
    5
    
    
    
    3.66
    %
    
    
    217
    
    
    
    7
    
    
    
    5.94
    %Total earning assets
    
    
    15,786
    
    
    $
    430
    
    
    
    5.45
    %
    
    
    14,899
    
    
    $
    490
    
    
    
    6.57
    %Unrealized (losses) gains on
available-for-sale securities
    
    
    (231
    )
    
    
    
    
    
    
    
    
    
    
    1Other assets
    
    
    868
    
    
    
    
    
    
    
    
    
    
    
    826Total assets
    
    $
    16,423
    
    
    
    
    
    
    
    
    
    
    $
    15,726LIABILITIES AND EQUITYInterest-bearing deposits:Interest-bearing demand
    
    $
    3,745
    
    
    $
    40
    
    
    
    2.15
    %
    
    $
    3,585
    
    
    $
    49
    
    
    
    2.75
    %Savings deposits
    
    
    176
    
    
    
    1
    
    
    
    0.75
    %
    
    
    191
    
    
    
    1
    
    
    
    0.71
    %Certificates of deposit
    
    
    4,575
    
    
    
    95
    
    
    
    4.16
    %
    
    
    4,928
    
    
    
    119
    
    
    
    4.83
    %Total interest-bearing deposits
    
    
    8,496
    
    
    
    136
    
    
    
    3.20
    %
    
    
    8,704
    
    
    
    169
    
    
    
    3.88
    %Short-term Federal Home Loan Bank borrowings
    
    
    4,922
    
    
    
    67
    
    
    
    2.72
    %
    
    
    3,543
    
    
    
    93
    
    
    
    5.24
    %Long-term Federal Home Loan Bank borrowings
    
    
    757
    
    
    
    16
    
    
    
    4.23
    %
    
    
    1,015
    
    
    
    18
    
    
    
    3.56
    %Subordinated notes payable to trust
    
    
    314
    
    
    
    9
    
    
    
    5.44
    %
    
    
    238
    
    
    
    8
    
    
    
    6.85
    %Subordinated debentures and other borrowings
    
    
    104
    
    
    
    4
    
    
    
    8.32
    %
    
    
    106
    
    
    
    5
    
    
    
    8.23
    %Preferred stock issued by subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    7
    
    
    
    7.30
    %Total borrowings
    
    
    6,097
    
    
    
    96
    
    
    
    3.14
    %
    
    
    5,093
    
    
    
    131
    
    
    
    5.12
    %Total interest-bearing liabilities
    
    
    14,593
    
    
    $
    232
    
    
    
    3.18
    %
    
    
    13,797
    
    
    $
    300
    
    
    
    4.34
    %Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.27
    %
    
    
    
    
    
    
    
    
    
    
    2.23
    %Noninterest-bearing demand deposits
    
    
    657
    
    
    
    
    
    
    
    
    
    
    
    712Other liabilities
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    191Stockholders equity
    
    
    1,031
    
    
    
    
    
    
    
    
    
    
    
    1,026Total liabilities and stockholders equity
    
    $
    16,423
    
    
    
    
    
    
    
    
    
    
    $
    15,726Impact of noninterest-bearing funds
    
    
    
    
    
    
    
    
    
    
    0.24
    %
    
    
    
    
    
    
    
    
    
    
    0.32
    %Net interest income/margin
    
    
    
    
    
    $
    198
    
    
    
    2.51
    %
    
    
    
    
    
    $
    190
    
    
    
    2.55
    %
  Provision for Credit Losses
  Credit Risk
 23




---



##### 



Noninterest Income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,Increase
    
    
    
    
    
    
    
    
    
    
    Increase2008
    
    
    2007
    
    
    (Decrease)
    
    
    2008
    
    
    2007
    
    
    (Decrease)(Dollars in millions)Insurance commissions and fees
    
    $
    17
    
    
    $
    16
    
    
    $
    1
    
    
    $
    36
    
    
    $
    32
    
    
    $
    4Service charges on deposits
    
    
    15
    
    
    
    13
    
    
    
    2
    
    
    
    28
    
    
    
    25
    
    
    
    3Commercial loan facility fees
    
    
    3
    
    
    
    4
    
    
    
    (1
    )
    
    
    7
    
    
    
    10
    
    
    
    (3
    )Operating lease income
    
    
    1
    
    
    
    2
    
    
    
    (1
    )
    
    
    3
    
    
    
    4
    
    
    
    (1
    )Mutual fund and variable annuity
sales commissions
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    3
    
    
    
    Other
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    6
    
    
    
    3
    
    
    
    3$
    41
    
    
    $
    38
    
    
    $
    3
    
    
    $
    83
    
    
    $
    77
    
    
    $
    6Percent increase for the period
    
    
    
    
    
    
    
    
    
    
    8
    %
    
    
    
    
    
    
    
    
    
    
    8
    %
   Noninterest Expense
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,Increase
    
    
    
    
    
    
    
    
    
    
    Increase2008
    
    
    2007
    
    
    (Decrease)
    
    
    2008
    
    
    2007
    
    
    (Decrease)(Dollars in millions)Compensation and benefits
    
    $
    48
    
    
    $
    43
    
    
    $
    5
    
    
    $
    99
    
    
    $
    91
    
    
    $
    8Occupancy
    
    
    9
    
    
    
    7
    
    
    
    2
    
    
    
    17
    
    
    
    13
    
    
    
    4Information systems and technology
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    9
    
    
    
    7
    
    
    
    2Advertising and promotional
    
    
    4
    
    
    
    3
    
    
    
    1
    
    
    
    11
    
    
    
    7
    
    
    
    4Furniture, fixtures, and equipment
    
    
    5
    
    
    
    4
    
    
    
    1
    
    
    
    11
    
    
    
    8
    
    
    
    3Professional services
    
    
    5
    
    
    
    2
    
    
    
    3
    
    
    
    8
    
    
    
    4
    
    
    
    4Travel and other employee costs
    
    
    4
    
    
    
    3
    
    
    
    1
    
    
    
    6
    
    
    
    5
    
    
    
    1Postage, printing, and supplies
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    4
    
    
    
    Litigation charge
    
    
    
    
    
    
    5
    
    
    
    (5
    )
    
    
    
    
    
    
    5
    
    
    
    (5
    )Depreciation of assets leased to
others
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    3
    
    
    
    Other
    
    
    13
    
    
    
    13
    
    
    
    
    
    
    
    27
    
    
    
    25
    
    
    
    2Shared services allocation from
Temple-Inland Inc.
    
    
    
    
    
    
    7
    
    
    
    (7
    )
    
    
    
    
    
    
    15
    
    
    
    (15
    )96
    
    
    
    94
    
    
    
    2
    
    
    
    195
    
    
    
    187
    
    
    
    8Charges related to asset
impairments and severance
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    3$
    99
    
    
    $
    94
    
    
    $
    5
    
    
    $
    198
    
    
    $
    187
    
    
    $
    11Percent increase for the period,
excluding charges related to
asset impairments and severance
    
    
    
    
    
    
    
    
    
    
    2
    %
    
    
    
    
    
    
    
    
    
    
    4
    %
  24




---



##### 



Income Tax Expense
  Segment Performance Summary
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)Commercial banking
    
    $
    (30
    )
    
    $
    58
    
    
    $
    (24
    )
    
    $
    121Retail banking
    
    
    (17
    )
    
    
    (8
    )
    
    
    (37
    )
    
    
    (15
    )Insurance agency
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    4Mortgage banking
    
    
    (1
    )
    
    
    (7
    )
    
    
    (2
    )
    
    
    (8
    )Treasury, corporate and other
    
    
    (10
    )
    
    
    (6
    )
    
    
    (13
    )
    
    
    (20
    )$
    (57
    )
    
    $
    39
    
    
    $
    (74
    )
    
    $
    82
 Commercial Banking
  Retail Banking
  Insurance Agency
  Treasury, corporate and other
  25




---



##### 



Financial Condition
 Loans
  
 26




---



##### 



June 30, 2008
    
    December 31, 2007Percent of
    
    
    
    
    
    Percent ofBalance
    
    
    Total Loans
    
    Balance
    
    
    Total Loans(Dollars in millions)Single-family mortgage
    
    $
    1,485
    
    
    
    14
    %
    
    $
    1,672
    
    
    
    17
    %Single-family mortgage warehouse
    
    
    971
    
    
    
    9
    %
    
    
    695
    
    
    
    7
    %Singe-family construction (homebuilders)
    
    
    1,223
    
    
    
    12
    %
    
    
    1,510
    
    
    
    15
    %Multifamily and senior housing
    
    
    1,877
    
    
    
    18
    %
    
    
    1,541
    
    
    
    15
    %Commercial real estate
    
    
    1,774
    
    
    
    17
    %
    
    
    1,674
    
    
    
    17
    %Commercial and business
    
    
    1,384
    
    
    
    14
    %
    
    
    1,340
    
    
    
    13
    %Energy
    
    
    1,334
    
    
    
    13
    %
    
    
    1,470
    
    
    
    15
    %Consumer and other
    
    
    197
    
    
    
    3
    %
    
    
    144
    
    
    
    1
    %Total loans
    
    
    10,245
    
    
    
    100
    %
    
    
    10,046
    
    
    
    100
    %Less allowance for loan losses
    
    
    (250
    )
    
    
    
    
    
    
    (118
    )Loans, net
    
    $
    9,995
    
    
    
    
    
    
    $
    9,928
 Credit Risk
    June 30, 2008
    
    December 31, 2007Unpaid
    
    
    Total
    
    Unpaid
    
    
    TotalPrincipal
    
    
    Delinquency
    
    Principal
    
    
    DelinquencyBalance
    
    
    > 30 days
    
    Balance
    
    
    > 30 days(Dollars in millions)Option ARMs
    
    $
    407
    
    
    
    21.04
    %
    
    $
    502
    
    
    
    10.80
    %Intermediate ARMs
    
    
    589
    
    
    
    5.53
    %
    
    
    709
    
    
    
    3.27
    %Other first liens
    
    
    342
    
    
    
    8.86
    %
    
    
    279
    
    
    
    8.00
    %Repurchased loans
    
    
    33
    
    
    
    42.00
    %
    
    
    35
    
    
    
    41.64
    %Second liens
    
    
    114
    
    
    
    1.86
    %
    
    
    147
    
    
    
    1.54
    %$
    1,485
    
    
    
    11.09
    %
    
    $
    1,672
    
    
    
    6.97
    %
  27




---



##### 



Investment Securities
  By Issuer
    
    By Type(PIE CHART)

    (PIE CHART)
     28




---



##### 



NetUnrealized
    
    
    
    
    
    
    Net UnrealizedLosses on
    
    
    
    
    
    
    Losses on Held-Amortized
    
    
    Available-for-
    
    
    Carrying
    
    
    to-MaturityCost
    
    
    Sale Securities
    
    
    Value
    
    
    Securities
    
    
    Fair Value(In millions)U.S. Government
and U.S.
Government
Sponsored
Enterprises
    
    $
    1,477
    
    
    $
    1
    
    
    $
    1,478
    
    
    $
    4
    
    
    $
    1,482Non-agency:Internally valued
    
    
    3,459
    
    
    
    (514
    )
    
    
    2,945
    
    
    
    (899
    )
    
    
    2,046Market quotes
    
    
    171
    
    
    
    
    
    
    
    171
    
    
    
    (3
    )
    
    
    168$
    5,107
    
    
    $
    (513
    )
    
    $
    4,594
    
    
    $
    (898
    )
    
    $
    3,696
 29




---



##### 



Subord-
    
    
    
    UnpaidDelinquency%
    
    ination
    
    
    
    Principal
    
    CarryingIssuer and Underlying Asset Type
    
    Tranche
    
    Cusip
    
    Total
    
    >60 day
    
    %
    
    Loan Originator
    
    Balance
    
    Value
    
    Fair Value(Dollars in millions)12MTA Option ARMsStructured Asset Mortgage
Investment II Trust 2007-AR6
    
    Class A2
    
    86364RAB5
    
    
    16
    %
    
    
    12
    %
    
    
    11
    %
    
    American Home Mortgage Corp
    
    $
    412
    
    
    $
    206
    
    
    $
    206
    *RALI 2007-QO5 Trust
    
    Class A
    
    74924AAA3
    
    
    18
    %
    
    
    11
    %
    
    
    11
    %
    
    Homecomings Financial
    
    
    206
    
    
    
    140
    
    
    
    140
    *Alternative Loan Trust 2005-81
    
    Class A-4
    
    12668BBR3
    
    
    26
    %
    
    
    21
    %
    
    
    13
    %
    
    Countrywide Home Loans
    
    
    143
    
    
    
    145
    
    
    
    79Structured Asset Mortgage
Investment II Trust 2005-AR8
    
    Class A-5
    
    86359LSB6
    
    
    29
    %
    
    
    23
    %
    
    
    13
    %
    
    Countrywide Home Loans
    
    
    136
    
    
    
    137
    
    
    
    68Alternative Loan Trust 2006-OA2
    
    Class A-7
    
    126694V88
    
    
    35
    %
    
    
    29
    %
    
    
    16
    %
    
    Countrywide Home Loans
    
    
    131
    
    
    
    134
    
    
    
    65Alternative Loan Trust 2005-76
    
    Class 1-A-2
    
    12668BDD2
    
    
    32
    %
    
    
    27
    %
    
    
    17
    %
    
    Countrywide Home Loans
    
    
    127
    
    
    
    129
    
    
    
    64Alternative Loan Trust 2005-58
    
    Class A-3
    
    12668AWK7
    
    
    29
    %
    
    
    23
    %
    
    
    15
    %
    
    Countrywide Home Loans
    
    
    123
    
    
    
    125
    
    
    
    72Alternative Loan Trust 2005-51
    
    Class 3-A-1
    
    12668ACW3
    
    
    27
    %
    
    
    22
    %
    
    
    17
    %
    
    Countrywide Home Loans
    
    
    126
    
    
    
    127
    
    
    
    60Alternative Loan Trust 2005-62
    
    Class 1-A-2
    
    12668ATP0
    
    
    33
    %
    
    
    28
    %
    
    
    18
    %
    
    Countrywide Home Loans
    
    
    118
    
    
    
    119
    
    
    
    79RALI Series 2005-QO5 Trust
    
    Class A-3
    
    761118QP6
    
    
    29
    %
    
    
    23
    %
    
    
    15
    %
    
    Homecomings Financial Network, SCME, Mortgage IT, Other
    
    
    99
    
    
    
    100
    
    
    
    46RALI Series 2005-Q01 Trust
    
    Class A-4
    
    761118ER5
    
    
    21
    %
    
    
    15
    %
    
    
    17
    %
    
    Homecomings Financial Network, Other
    
    
    90
    
    
    
    92
    
    
    
    53Alternative Loan Trust 2005-38
    
    Class A-2
    
    12667GZ22
    
    
    27
    %
    
    
    23
    %
    
    
    19
    %
    
    Countrywide Home Loans
    
    
    71
    
    
    
    73
    
    
    
    50Alternative Loan Trust 2005-41
    
    Class 2-A-1
    
    12667GR96
    
    
    27
    %
    
    
    21
    %
    
    
    21
    %
    
    Countrywide Home Loans
    
    
    68
    
    
    
    69
    
    
    
    38Structured Asset Mortgage
Investments II Trust 2006-AR3
    
    Class 12A4
    
    86360KAH1
    
    
    33
    %
    
    
    27
    %
    
    
    14
    %
    
    Countrywide Home Loans, Bank of America, and other
    
    
    70
    
    
    
    71
    
    
    
    44Harborview Mortgage Loan Trust 2005-8
    
    Class 2A3
    
    41161PRT2
    
    
    22
    %
    
    
    19
    %
    
    
    20
    %
    
    Countrywide Home Loans
    
    
    61
    
    
    
    63
    
    
    
    39Greenpoint Mortgage Funding
Trust 2005-AR5
    
    Class I-A-2
    
    39538WEC8
    
    
    37
    %
    
    
    30
    %
    
    
    22
    %
    
    Greenpoint Mortgage Funding
    
    
    54
    
    
    
    56
    
    
    
    35Structured Asset Mortgage
Investments II Trust 2005-AR4
    
    Class A2
    
    86359LMA4
    
    
    31
    %
    
    
    26
    %
    
    
    23
    %
    
    Countrywide Home Loans
    
    
    55
    
    
    
    57
    
    
    
    33WaMu Mortgage Pass-Through
Certificates, Series 2005-AR9
    
    Class A2A
    
    92922FU97
    
    
    8
    %
    
    
    6
    %
    
    
    19
    %
    
    One or more approved institutions
    
    
    51
    
    
    
    52
    
    
    
    30Structured Asset Mortgage
Investments II Trust 2005-AR7
    
    Class 5A2
    
    86359LQT9
    
    
    22
    %
    
    
    18
    %
    
    
    18
    %
    

Southstar
FundingLLC/Opteum FinancialServices LLC, First
Horizon, BOA, other
    
    
    41
    
    
    
    41
    
    
    
    19Greenpoint Mortgage Funding
Trust 2006-AR3
    
    Class 4A3
    
    39538WHH4
    
    
    28
    %
    
    
    23
    %
    
    
    15
    %
    
    Greenpoint Mortgage Funding
    
    
    38
    
    
    
    39
    
    
    
    26Harborview Mortgage Loan Trust
2005-16
    
    Class 4A1B
    
    41161PZD8
    
    
    25
    %
    
    
    22
    %
    
    
    20
    %
    
    Countrywide Home Loans
    
    
    32
    
    
    
    32
    
    
    
    19IndyMac INDX Mortgage Loan
Trust 2005-16IP
    
    Class A3
    
    45660LUF4
    
    
    20
    %
    
    
    16
    %
    
    
    20
    %
    
    IndyMac Bank, F.S.B.
    
    
    27
    
    
    
    28
    
    
    
    182,279
    
    
    
    2,035
    
    
    
    1,283
 *
    
    Security designated as available-for-sale
 30




---



##### 



Subord-
    
    
    
    UnpaidDelinquency %
    
    ination
    
    
    
    Principal
    
    
    CarryingIssuer and Underlying Asset Type
    
    Tranche
    
    Cusip
    
    Total
    
    >60 day
    
    %
    

Loan
Originator
    
    Balance
    
    
    Value
    
    
    Fair Value(Dollars in millions)Hybrid Option ARMs (5Y Fixed/12MTA)RALI 2007-QH8 Trust
    
    Class A
    
    74924EAA5
    
    
    15
    %
    
    
    10
    %
    
    
    12
    %
    
    Homecomings Financial
    
    
    482
    
    
    
    313
    
    
    
    313
    *COFI Option ARMsWaMu Mortgage Pass-Through Certificates2007-OA4
    
    Class 2A
    
    93364CAC2
    
    
    14
    %
    
    
    10
    %
    
    
    30
    %
    
    Washington Mutual Bank
    
    
    135
    
    
    
    94
    
    
    
    94
    *Washington Mutual Mortgage Pass-Through Certificates WMALT 2007-OA3 Trust
    
    Class 5A
    
    939355AE3
    
    
    19
    %
    
    
    14
    %
    
    
    14
    %
    
    Washington Mutual Bank orothers, Mortgage IT
    
    
    120
    
    
    
    120
    
    
    
    87WaMu Mortgage Pass-Through Certificates2007-OA5
    
    Class 2A
    
    93364BAC4
    
    
    14
    %
    
    
    11
    %
    
    
    30
    %
    
    Washington Mutual Bank
    
    
    107
    
    
    
    75
    
    
    
    75
    *WaMu Mortgage Pass- ThroughCertificates 2006-AR9
    
    Class 2A-1B
    
    93363DAC1
    
    
    8
    %
    
    
    6
    %
    
    
    10
    %
    
    Washington Mutual Bank
    
    
    85
    
    
    
    84
    
    
    
    51WaMu Mortgage Pass -ThroughCertificates 2006-AR9
    
    Class 2A
    
    93363DAB3
    
    
    8
    %
    
    
    6
    %
    
    
    36
    %
    
    Washington Mutual Bank
    
    
    53
    
    
    
    53
    
    
    
    37WaMu Mortgage Pass- ThroughCertificates 2006-AR11
    
    Class 2A-1B
    
    93363TAC6
    
    
    11
    %
    
    
    8
    %
    
    
    10
    %
    
    Washington Mutual Bank
    
    
    42
    
    
    
    43
    
    
    
    26WaMu Mortgage Pass Through Certificates2006-AR13
    
    Class 2A-1B
    
    93363RAC0
    
    
    11
    %
    
    
    7
    %
    
    
    10
    %
    
    Washington Mutual Bank
    
    
    37
    
    
    
    37
    
    
    
    25WaMu Mortgage Pass- ThroughCertificates 2006-AR15
    
    Class 2A-1B
    
    93363QAD0
    
    
    10
    %
    
    
    8
    %
    
    
    10
    %
    
    Washington Mutual Bank
    
    
    31
    
    
    
    31
    
    
    
    19WaMu Mortgage Pass- ThroughCertificates 2006-AR17
    
    Class 2A-1B
    
    92925DAE0
    
    
    10
    %
    
    
    7
    %
    
    
    10
    %
    
    Washington Mutual Bank
    
    
    24
    
    
    
    24
    
    
    
    15WaMu Mortgage Pass- ThroughCertificates 2006-AR19
    
    Class 2A
    
    933638AD0
    
    
    10
    %
    
    
    9
    %
    
    
    39
    %
    
    Washington Mutual Bank
    
    
    20
    
    
    
    20
    
    
    
    14WaMu Mortgage Pass- ThroughCertificates 2006-AR19
    
    Class 2A-1B
    
    933638AE8
    
    
    10
    %
    
    
    9
    %
    
    
    9
    %
    
    Washington Mutual Bank
    
    
    13
    
    
    
    13
    
    
    
    8Home Savings of America
    
    1988-7A
    
    436904AG1
    
    
    
    
    
    
    
    
    
    
    103
    %
    
    Not Available
    
    
    1
    
    
    
    1
    
    
    
    1
    *Home Savings of America
    
    1988-8A
    
    436904AJ5
    
    
    
    
    
    
    
    
    
    
    99
    %
    
    Not Available
    
    
    2
    
    
    
    2
    
    
    
    2
    *Home Savings of America
    
    1988-10A
    
    436904AK2
    
    
    
    
    
    
    
    
    
    
    102
    %
    
    Not Available
    
    
    1
    
    
    
    1
    
    
    
    1
    *Home Savings of America
    
    1988-11A
    
    436904AL0
    
    
    
    
    
    
    
    
    
    
    102
    %
    
    Not Available
    
    
    1
    
    
    
    1
    
    
    
    1
    *672
    
    599
    
    4565/1 LIBORBanc of America Mortgage Securities, Inc.Mortgage Pass-Through Certificates,Series 2004-H
    
    Class 2A1
    
    05949ARD4
    
    
    3
    %
    
    
    2
    %
    
    
    7
    %
    
    Bank of America, N.A.
    
    
    40
    
    
    
    40
    
    
    
    38GSR Mortgage Loan Trust 2004-11
    
    Class 2A1
    
    36242DFS7
    
    
    4
    %
    
    
    3
    %
    
    
    9
    %
    
    Various Lenders
    
    
    42
    
    
    
    43
    
    
    
    41Banc of America Mortgage Securities, Inc.Mortgage Pass-Through Certificates,Series 2003-K
    
    Class 2A2
    
    05948XZH7
    
    
    1
    %
    
    
    1
    %
    
    
    6
    %
    
    Bank of America, N.A.
    
    
    33
    
    
    
    33
    
    
    
    32Banc of America Mortgage Securities, Inc.Mortgage Pass-Through Certificates,Series 2003-H
    
    Class 2A2
    
    05948XTH4
    
    
    1
    %
    
    
    1
    %
    
    
    6
    %
    
    Bank of America, N.A.
    
    
    25
    
    
    
    26
    
    
    
    24GSR Mortgage Loan Trust 2003-9
    
    Class A2
    
    36228FWS1
    
    
    2
    %
    
    
    2
    %
    
    
    8
    %
    
    Various Lenders
    
    
    18
    
    
    
    18
    
    
    
    18Banc of America Mortgage Securities, Inc.Mortgage Pass-Through Certificates,Series 2003-D
    
    Class 2A3
    
    05948XBU4
    
    
    3
    %
    
    
    2
    %
    
    
    7
    %
    
    Bank of America, N.A.
    
    
    7
    
    
    
    7
    
    
    
    7Banc of America Mortgage Securities, Inc.Mortgage Pass-Through Certificates,Series 2003-A
    
    Class 2A1
    
    05948LAE7
    
    
    5
    %
    
    
    2
    %
    
    
    8
    %
    
    Bank of America, N.A.
    
    
    2
    
    
    
    2
    
    
    
    2167
    
    169
    
    16220
    %
    
    16
    %
    
    16
    %
    
    $
    3,600
    
    $
    3,116
    
    $
    2,214
 *
    
    Security designated as available-for-sale
  California
    
    
    60
    %Florida
    
    
    12
    %Arizona
    
    
    3
    %Other
    
    
    8
    %Not available
    
    
    17
    %100
    %
 31




---



##### 



Deposits
  June 30, 2008
    
    December 31, 2007(PIE CHART)
    
    (PIE CHART)
  Borrowings
 Liquidity, Capital
Resources, Off-Balance Sheet Arrangements, and Contractual Obligations
 32




---



##### 



Credit Risk
 Asset Quality and Allowance for Credit Losses
  June 30,
    
    
    December 31,2008
    
    
    2007(Dollars in millions)Non-performing loans
    
    $
    364
    
    
    $
    166Foreclosed real estate
    
    
    42
    
    
    
    13Non-performing assets
    
    $
    406
    
    
    $
    179Non-performing loans as a percentage of total loans
    
    
    3.55
    %
    
    
    1.65
    %Non-performing assets divided by total loans and foreclosed real estate
    
    
    3.95
    %
    
    
    1.78
    %Allowance for loan losses as a percentage of non-performing loans
    
    
    69
    %
    
    
    71
    %Allowance for loan losses as a percentage of total loans
    
    
    2.44
    %
    
    
    1.17
    %Single-family mortgage loan delinquencies as a percentage of
single-family mortgage loans
    
    
    11.09
    %
    
    
    6.97
    %
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in millions)Balance at beginning of period
    
    $
    181
    
    
    $
    78
    
    
    $
    125
    
    
    $
    72Provision (credit) for credit losses
    
    
    99
    
    
    
    
    
    
    
    157
    
    
    
    (2
    )Net (charge-offs) recoveries
    
    
    (19
    )
    
    
    1
    
    
    
    (21
    )
    
    
    9Balance at end of period
    
    $
    261
    
    
    $
    79
    
    
    $
    261
    
    
    $
    79Allowance for loan losses
    
    $
    250
    
    
    $
    72
    
    
    $
    250
    
    
    $
    72Commitment-related reserves
    
    
    11
    
    
    
    7
    
    
    
    11
    
    
    
    7$
    261
    
    
    $
    79
    
    
    $
    261
    
    
    $
    79Provision (credit) for:Loan losses
    
    $
    97
    
    
    $
    
    
    
    $
    153
    
    
    $
    (2
    )Commitment-related credit losses
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    Combined provision (credit) for credit losses
    
    $
    99
    
    
    $
    
    
    
    $
    157
    
    
    $
    (2
    )Nonaccrual loans
    
    $
    364
    
    
    $
    29
    
    
    $
    364
    
    
    $
    29Accruing loans past-due 90 days or more
    
    $
    5
    
    
    $
    6
    
    
    $
    5
    
    
    $
    6Net charge-offs (recoveries) as a percentage
of average loans outstanding
    
    
    0.74
    %
    
    
    (0.03
    )%
    
    
    0.41
    %
    
    
    (0.18
    )%
  33




---



##### 



June 30, 2008
    
    
    December 31, 2007Allowance
    
    
    
    
    
    
    Allowanceas a %
    
    
    
    
    
    
    as a %of Loan
    
    
    
    
    
    
    of LoanAllowance
    
    
    Category
    
    
    Allowance
    
    
    Category(Dollars in millions)Single-family mortgage
    
    $
    24
    
    
    
    1.62
    %
    
    $
    9
    
    
    
    0.54
    %Single-family mortgage warehouse
    
    
    5
    
    
    
    0.51
    %
    
    
    6
    
    
    
    0.86
    %Single-family construction (homebuilders)
    
    
    136
    
    
    
    11.12
    %
    
    
    48
    
    
    
    3.18
    %Multifamily and senior housing
    
    
    9
    
    
    
    0.48
    %
    
    
    6
    
    
    
    0.39
    %Commercial real estate
    
    
    6
    
    
    
    0.34
    %
    
    
    6
    
    
    
    0.36
    %Commercial and business
    
    
    22
    
    
    
    1.59
    %
    
    
    15
    
    
    
    1.12
    %Energy
    
    
    19
    
    
    
    1.42
    %
    
    
    6
    
    
    
    0.41
    %Consumer and other
    
    
    1
    
    
    
    0.51
    %
    
    
    
    
    
    
    Incurred but
not yet identified losses
    
    
    28
    
    
    
    
    
    
    
    22
    
    
    
    $
    250
    
    
    
    2.44
    %
    
    $
    118
    
    
    
    1.17
    %
 Concentration
  Lots and LandSingle-Family
    
    
    Acquisition andHouses
    
    
    Development
    
    
    Other
    
    
    Total(In millions)California
    
    $
    120
    
    
    $
    250
    
    
    $
    48
    
    
    $
    418Texas
    
    
    91
    
    
    
    24
    
    
    
    
    
    
    
    115Florida
    
    
    46
    
    
    
    41
    
    
    
    1
    
    
    
    88Arizona
    
    
    17
    
    
    
    28
    
    
    
    38
    
    
    
    83Colorado
    
    
    47
    
    
    
    28
    
    
    
    
    
    
    
    75Other
    
    
    121
    
    
    
    164
    
    
    
    159
    (a)
    
    
    444$
    442
    
    
    $
    535
    
    
    $
    246
    
    
    $
    1,223
 
 (a)
    
    Principally unsecured loans to national homebuilders  % of
    
    
    % ofCommercial
    
    
    Total LoanReal Estate
    
    
    PortfolioOffice
    
    
    47
    %
    
    
    8
    %Retail
    
    
    27
    %
    
    
    5
    %Industrial
    
    
    14
    %
    
    
    2
    %Land
    
    
    12
    %
    
    
    2
    %100
    %
    
    
    17
    %
 34




---



##### 



Distribution ofCreditRelationshipsExceedingCommitment
    
    
    Outstanding
    
    
    $100 Million(Dollars in millions)Commercial real estate construction
    
    $
    641
    
    
    $
    400
    
    
    
    6Energy
    
    
    259
    
    
    
    215
    
    
    
    2$
    900
    
    
    $
    615
    
    
    
    8
 Liquidity, Capital Resources, Off-Balance Sheet Arrangements, and Contractual Obligations
    
    
    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.
   35




---



##### 



Contractual Obligations
  Payments Due or Expiring by PeriodTotal
    
    

2008
    
    

2009-10
    
    

2011-12
    
    

Thereafter
    
    
    Indeterminable(In millions)Items on our balance sheet:Transaction and savings
deposit accounts
    
    $
    4,803
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,803Certificates of deposit
    
    
    4,357
    
    
    
    2,681
    
    
    
    1,557
    
    
    
    105
    
    
    
    14
    
    
    
    Federal Home Loan Bank
borrowings
    
    
    5,553
    
    
    
    5,119
    
    
    
    309
    
    
    
    125
    
    
    
    
    
    
    
    Subordinated notes payable
to trust
    
    
    314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314
    
    
    
    Items not on our balance sheet:Contractual interest payments
    
    
    548
    
    
    
    49
    
    
    
    103
    
    
    
    51
    
    
    
    345
    
    
    
    Operating leases
    
    
    44
    
    
    
    4
    
    
    
    16
    
    
    
    14
    
    
    
    10
    
    
    
    Processing contracts
    
    
    17
    
    
    
    6
    
    
    
    9
    
    
    
    2
    
    
    
    
    
    
    
    $
    15,636
    
    
    $
    7,859
    
    
    $
    1,994
    
    
    $
    297
    
    
    $
    683
    
    
    $
    4,803
 Off-Balance Sheet Arrangements
  June 30,
    
    
    December 31,2008
    
    
    2007(In millions)Single-family mortgage loans
    
    $
    107
    
    
    $
    87Unused lines of credit
    
    
    1,854
    
    
    
    1,959Unfunded portion of credit commitments  pledgeable
    
    
    2,876
    
    
    
    3,866Unfunded portion of credit commitments  non-pledgeable
    
    
    941
    
    
    
    621Commitments to originate loans  pledgeable
    
    
    95
    
    
    
    337Commitments to originate loans  non-pledgeable
    
    
    185
    
    
    
    417Letters of credit
    
    
    338
    
    
    
    359$
    6,396
    
    
    $
    7,646
 Capital Management
   36




---



##### 



For Categorization as
    
    RegulatoryActual
    
    Well Capitalized
    
    MinimumAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in millions)Total Risk-Based Ratio (Risk-based 
Capital/Total Risk-weighted Assets)
    
    
    $1,391
    
    
    
    10.60
    %
    
    $
    1,311
    
    
    310.00%
    
    $
    1,049
    
    
    3 8.00%Tier 1 (Core) Risk-based Ratio (Core 
Capital/Total Risk-weighted Assets)
    
    
    $1,228
    
    
    
    9.36
    %
    
    $
    787
    
    
    3 6.00%
    
    $
    525
    
    
    3 4.00%Tier 1 (Core) Leverage Ratio (Core 
Capital/Adjusted Tangible Assets)
    
    
    $1,228
    
    
    
    7.63
    %
    
    $
    805
    
    
    3 5.00%
    
    $
    644
    
    
    3 4.00%Tangible Ratio (Tangible Capital/Tangible Assets)
    
    
    $1,228
    
    
    
    7.63
    %
    
    
    n/a
    
    
    n/a
    
    $
    322
    
    
    3 2.00%
  Recent Accounting Standards
 Note 1 to our unaudited financial statements in Item 1
 Effects of Inflation
  Litigation Matters
    Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk
  37




---



##### 



Increase (Decrease) inIncome Before TaxesChange in
    
    June 30,
    
    
    December 31,Interest Rate
    
    2008
    
    
    2007(In millions)+1%
    
    $
    14
    
    
    $
    (6
    )-1%
    
    
    (17
    )
    
    
    (12
    )
   
    
    
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.
   Foreign Currency Risk
  Commodity Price Risk
  Item 4T. Controls and Procedures
     38




---



##### 



PART II. OTHER INFORMATION
 Item 1. Legal Proceedings
   Item 1A. Risk Factors
  Volatility in the credit and residential housing markets could result in further losses on our
mortgage-backed securities and loans.
   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.
  39




---



##### 



If a significant portion of our non-agency mortgage-backed securities portfolio were to be
downgraded below investment grade, or the market value of those securities further declined, it
would negatively affect our liquidity.
   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
   Proposal No. 1:
 Election of directors to three year terms, expiring 2011
    
    For
    
    
    Against
    
    
    WithheldDavid W. Biegler
    
    
    28,701,406
    
    
    
    1,723,769
    
    
    
    2,786,215Leigh M. McAlister
    
    
    26,869,720
    
    
    
    3,558,083
    
    
    
    2,783,587Edward R. McPherson
    
    
    30,050,444
    
    
    
    375,798
    
    
    
    2,785,148Raul R. Romero
    
    
    26,957,444
    
    
    
    3,469,458
    
    
    
    2,784,488Bill D. Walker
    
    
    26,982,086
    
    
    
    3,446,050
    
    
    
    2,783,254
  
    
    Kenneth R. Dubuque,
    
    Kenneth M. Jastrow, II,
    
    Larry R. Faulkner,
    
    Robert V. Kavanaugh,
    
    Robert D. McTeer,
    
    John T. Stuart, and
    
    Larry E. Temple.
 40




---



##### 



Proposal No. 2:
 For
    
    Against
    
    
    Abstain
    
    
    Non-Votes30,316,692
    
    
    120,090
    
    
    
    2,774,608
    
    
    
    
 Item 5. Other Information
  Item 6. Exhibits
 ExhibitNumber
    
    Exhibit Description3.1
    
    
    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 Companys Form 8-K as filed with the
Commission on July 11, 2008)4.1
    
    
    Form of Subordinated Note (incorporated herein by reference
to Exhibit 4.1 to the Companys Form 8-K as filed with the
Commission on June 9, 2008)10.1
    
    
    Investment Agreement, dated May 26, 2008, between the
Company and TRT Financial Holdings, LLC (incorporated
herein by reference to Exhibit 10.1 to the Companys Form
8-K as filed with the Commission on May 27, 2008)10.2
    
    
    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 Companys Registration Statement on
Form S-1 as filed with the Commission on May 30, 2008)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 Companys Form
8-K as filed with the Commission on June 9, 2008)10.4
    
    
    Investment Agreement dated June 7, 2008 by and between the
Company and Icahn Partners, LP (incorporated by reference
to Exhibit 10.2 to the Companys Form 8-K as filed with the
Commission on June 9, 2008)10.5
    
    
    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
Companys Form 8-K as filed with the Commission on June 9,
2008)10.6
    
    
    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 Companys Form
8-K as filed with the Commission on June 9, 2008)10.7
    
    
    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 Companys Form 8-K as
filed with the Commission on June 9, 2008)
 41




---



##### 



ExhibitNumber
    
    Exhibit Description10.8
    
    
    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 Companys Form
8-K as filed with the Commission on June 9, 2008)10.9
    
    
    Agency Agreement between the Company, Guaranty Bank and
Keefe, Bruyette & Woods, Inc. (incorporated herein by
reference to Exhibit 10.7 to the Companys Form 8-K as
filed with the Commission on June 9, 2008)31.1
    
    
    Certification of Kenneth R. Dubuque pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act, as amended31.2
    
    
    Certification of Ronald D. Murff pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as
amended32.1
    
    
    Certification of Kenneth R. Dubuque pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    
    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
 42




---



##### 



SIGNATURES
  Guaranty Financial Group Inc.
(Registrant)By:
    /s/    Craig E. GiffordExecutive Vice President andDate: August 11, 2008
    
    Principal Accounting Officer 43