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Monday, June 29, 2009

Guaranty Financial: Last Hope is FDIC

by Calculated Risk on 6/29/2009 06:39:00 PM

In a 8-K regulatory filing today, Guaranty Financial stated the only "only remaining means by which the Company might possibly raise sufficient capital" is with the help of the FDIC. The Company expects current shareholders to be wiped out.

According to the Houston Business Journal (ht Tim), Guaranty has $14.4 billion in assets, and would be the largest bank to fail this year.

From the SEC filing:

Based on the current status of discussions involving its principal stockholders, other sources of financing, and certain regulatory authorities, the Board of Directors and management of the Company believe that the only remaining means by which the Company might possibly raise sufficient capital for it and its wholly-owned subsidiary, Guaranty Bank (the “Bank”), to comply with the Orders to Cease and Desist issued by the Office of Thrift Supervision (“OTS”) described in the Company’s Current Report on Form 8-K filed on April 8, 2009, is through a plan for open bank assistance (“Open Assistance”). The Open Assistance plan, which the Company is discussing with the Federal Deposit Insurance Corporation (“FDIC”) and the OTS, would involve a significant equity capital infusion from private investors, including the Company’s current principal stockholders, and an agreement under which the FDIC would absorb a portion of any losses associated with a pool of certain of the Company’s assets.

An Open Assistance plan must be approved by the FDIC. Before the FDIC can provide Open Assistance to the Bank, it must establish that the assistance is the least costly to the deposit insurance fund of all possible methods for resolving the financial condition of the Bank. The FDIC may deviate from the least cost requirement only in limited circumstances to avoid “serious adverse effects on economic conditions or financial stability” or “systemic risk” to the banking system. An additional condition to Open Assistance is that the OTS and FDIC must also determine that the Bank’s management is competent, has complied with all applicable laws, rules, and supervisory directives and orders, and has not engaged in any insider dealings, speculative practices, or other abusive activity. The FDIC may not approve an Open Assistance plan if it would benefit any stockholder or affiliate of the Company. As a result, the Company expects that the implementation of any Open Assistance plan would essentially eliminate the value of any of the Company’s currently outstanding equity interests, including shares of the Company’s common stock.

Open Assistance has historically been used extremely rarely by the FDIC, and there is no assurance that it would be available to the Company or the Bank in this case. In addition, while the Company has received expressions of interest from private investors with respect to the necessary capital infusion from private investors, it has not received capital commitments from any of these investors. Accordingly, the Company has not yet formally submitted to the FDIC its plan for Open Assistance, and it may ultimately not be able to do so. If a plan is formally submitted, the FDIC may choose not to approve it.

If the FDIC does not approve a plan for Open Assistance, the Company will no longer have the intent and ability to hold its mortgage-backed securities portfolio to recovery of unrealized losses, and, consequently, there would be substantial doubt that the Company would be able to continue as a going concern. In such case, the Company would be required to take material charges relating to the impairment of assets, in which case the preliminary financial information provided by the Company in previous Forms 12b-25 for the periods ended December 31, 2008 and March 31, 2009 should not be relied upon.