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Executives

George L. Engelke, Jr- Chairman and CEO

Monte Redman - President and COO

Frank Fusco - EVP, Treasurer and CFO

Peter Cunningham - IRO

Analysts

Gary Gordon - Portales Partners

Andrew Wessel - JPMorgan

Mark Fitzgibbon - Sandler O'Neill

Ken Bruce - Bank of America

Ted Rosinus - KBW

Collyn Gilbert - Stifel Nicolaus

James Abbott - FBR

Matthew Kelley -Sterne Agee

Dean Choksi - Barclays Capital

Matthew Mark - Jet Capital

Astoria Financial Corporation (AF) Q4 2008 Earnings Call January 29, 2009 10:00 AM ET

Operator

Welcome to Astoria Financial Corporation's fourth quarter and full year 2008 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator Instructions). Today's call is being recorded.

Today's conference call includes several forward-looking statements, which are intended to be covered under the Safe Harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are within the meaning of Section 27-A of the Securities Act of 1933 as amended, and Section 21-E of the Securities and Securities Exchange Act of 1934 as amended.

A discussion of the risk factors associated with the use of forward-looking statements is outlined on page seven of our fourth quarter 2008 Earnings Release, which is available on our website or may be obtained from the company upon request.

It is now my pleasure to turn the conference over to Mr. George L Engelke Jr, Chairman and Chief Executive Officer of Astoria. Sir, you may begin.

George L. Engelke, Jr

Thank you. Good morning and welcome to a review of our 2008 fourth quarter and full year financial results. Joining me this morning are Monte Redman, President and Chief Operating Officer; Frank Fusco, CFO and Peter Cunningham, our Investor Relations Officer.

Last evening we reported net income of $29.4 million or $0.33 per diluted share for the quarter ended December 31, 2008, compared to $19.7 million or $0.22 per diluted share for the 2007 fourth quarter.

On an operating basis, operating income totaled $22.1 million or $0.24 per diluted share for the 2008 fourth quarter, compared to operating income of $33 million or $0.36 per diluted share for the year-ago fourth quarter.

For the year ended December 31, 2008, net income totaled $75.3 million, or $0.83 per diluted share, compared to $124.8 million or $1.36 per diluted share for 2007. On an operating basis, operating income totaled $125.8 million or $1.39 per diluted share for 2008, compared to operating income of $138.1 million or $1.50 per diluted share for 2007.

The 2008 fourth quarter operating results exclude a tax benefit of $7.4 million or $0.08 per diluted share due to the recognition of the 2008 third quarter OTTI as an ordinary loss for tax purposes, rather than a capital loss for tax purposes, relating to Freddie Mac preferred stock. 2008 year-end results reported yesterday include an OTTI of $50.5 million or $0.56 per diluted share, relating to Freddie Mac preferred stock.

A reconciliation of GAAP income to non-GAAP operating income earnings is detailed on page 14 of yesterday's earnings release. I will now review several key operating highlights, including a focus on asset quality trends as well as a look towards the future expectations, after which I will entertain any questions you may have.

The non-interest margin for the fourth quarter increased to 2.18%, 12 basis points above the 2008 third quarter and 61 basis points above the 2007 fourth quarter. The net interest rate spread for the 2008 fourth quarter increased to 2.08%, from 1.96% for the previous quarter and 1.45% for the 2007 fourth quarter. The increases were primarily due to decreases in the cost of interest bearing liabilities.

During the 2008 fourth quarter, $1.8 billion of CDs, excluding Liquid CDs with a weighted average of 4.07% matured, and $2.2 billion of CDs were issued or repriced with a weighted average rate of 3.59%.

For 2008, the net interest margin increased to 1.91% from 1.62% for 2007, due to the cost of interest-bearing liabilities declining more rapidly, than the yield on interest-earning assets.

We are pleased with our fundamental operating performance during the fourth quarter and the year, including an improvement in the net interest income and the net interest margin. Unfortunately, these improvements were achieved against a backdrop of a severely deteriorating economy, including continued and growing weakness in the national housing market, which negatively impacted our overall results.

During the fourth quarter, job losses accelerated more rapidly than expected, resulting in higher loan delinquencies, foreclosures, credit costs and loan loss provisions. For the quarter, a $45 million provision for loan losses was recorded, compared to $13 million for the previous quarter, and $2 million for the 2007 fourth quarter.

For the year, the provisions for loan losses totaled $69 million, compared to $2.5 million for 2007. The increase recognizes the rise in loan delinquencies, non-performing loans and charge-offs directly related to the continued deterioration in the housing market, and increasing weakness in the overall economy, particularly the accelerating pace of job losses.

Non-interest income for the quarter totaled $19.2 million, compared to $22.6 million, excluding a pre-tax OTTI non-cash charge of $20.5 million, for the comparable 2007 period. For the year, non-interest income totaled $88.9 million, excluding a pre-tax OTTI non-cash charge of $77.7 million, compared to $96.3 million for the comparable 2007 period, excluding the 2007 fourth quarter OTTI charge I just noted.

General and administrative expense for the fourth quarter declined $2.6 million from the 2008 third quarter, and decline $2.7 million from the 2007 fourth quarter, to $56.2 million. The linked quarter decrease is primarily due to decreased compensation and benefits expense and the year-over-year decrease is due to lower compensation and benefits expense, which is partially offset by increased advertising expense. For the year ended December 31, 2008, G&A increased just $2.0 million from 2007, or less than 1%, to $233.3 million.

With respect to the balance sheet, total assets decreased $191 million from the previous quarter and increased $263 million from December 31, 2007, to $22 billion at December 31, 2008. Mortgage loan productions for the quarter totaled $616 million and for the year totaled $4.3 billion. The loan portfolio remained essentially flat from the previous quarter and increased $557 million or 3.5% to $16.7 billion at December 31, 2008.

The one-to-four family loan production totaled $449 million for the quarter and $3.8 billion for the year. The one-to-four family portfolio increased $721 million, or 6.2% for the year, and totaled $12.3 billion at year-end. The loan-to-value ratio for the 2008 one-to-four family loan production averaged 57% and the loan balance averaged $675,000.

With respect to the multi-family and commercial real estate portfolio, loan originations totaled $166 million for the quarter and the portfolio remained relatively flat, from the third quarter and totaled $3.9 billion or 23% of total loans at year-end. The loan-to-value ratio on the 2008 production averaged 56% and loan amounts averaged approximately $2 million.

With respect to retail banking, although deposit gathering remained very competitive in our markets during the quarter and the year, deposits increased $370 million from the previous quarter and $430 million from the year-end 2007, and totaled $13.5 billion.

With respect to asset quality, as a residential lender, we are vulnerable to the impact of a severe job loss recession. The significant increase in job losses and unemployment in the fourth quarter had a negative impact on the financial condition of prime residential borrowers and their ability to remain current on their mortgage loans.

Our overall asset quality, however, remains strong, with non-performing loans representing just 109 basis points of total assets at year-end. Non-performing loans totaled $239 million at December 31, 2008, an increase of $74 million from the previous quarter at December 31st, 2008.

One-to-four family non-performing loans totaled $178 million and multi-family CRA non-performing loans totaled $51 million, compared to $127 million and $34 million respectively at September 30th, 2008.

With respect to capital management, as we announced yesterday, we have elected not to participate in the US Treasury's capital purchase program, after fully evaluating the related costs and benefits, as well as the potential impact on the long-term value of our shares.

As previously disclosed, on December 8th, 2008, we received preliminary approval to issue up to 355 million of preferred stock and related warrants to the US Treasury under the program. However, based on the well-capitalized position of the bank with core tangible and risk based capital ratios of 6.39%, 6.39% and 12.02%, respectively, the Board determined that the TARP would provide no material benefit to our shareholders and therefore it would be in the best interest of shareholders to decline the opportunity to participate.

The company has no plans to access the capital markets with the sale of either equity or debt securities. We are still comfortable and expect to maintain the company's tangible capital ratio between 4.50% and 4.75% and the bank's core and tangible capital ratios in excess of 6%.

The statement in the press release regarding possible other capital alternatives was only meant to construe that in these uncertain times prudent capital management dictates that, in the event of the weakness in the economy, and, in particular, that job losses accelerate at a faster rate than we anticipate, we are prepared to consider other capital alternatives, should the need arise.

We also announced last night a reduction in the quarterly cash dividend to $0.13 per share. The decision was based on, among other things, fourth quarter operating EPS and the dividend payout ratio, coupled with our desire to retain capital during this challenging economic environment. The dividend is payable on March 2nd, 2009, to shareholders of record as of February 17th, 2009.

In closing, the year ahead presents us with both opportunities and challenges. With respect to our fundamental operating performance, we expect that loan growth will continue in 2009, as the opportunity for portfolio lending remains strong. Tighter upper underwriting standards coupled with wider spreads present us with an opportunity to increase the loan portfolio with top quality loans. We expect the deposit growth in 2009 will continue, particularly as the intense competition for core community deposits in 2008 has recently abated.

Industry-wide increases in pension costs and FDIC Insurance premiums, coupled with potentially reduced dividends on Federal Home Loan Bank of New York stock, will reduce 2009 earnings.

Additionally, continued weakness in the real estate market exacerbated by a severe downturn in the economy presents challenges for all financial institutions in the year ahead. Although our mortgage loan delinquencies and foreclosures have increased, the portfolio remains strong with non-performing loans representing just 109 basis points of total assets.

However, continued job losses, coupled with declining real estate values, will put increased pressure on the loan portfolio, which more than likely will result in higher delinquencies and non-performing loans in 2009.

With that all said, I would like to open the lines now to any questions you may have. Julianne?

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions). Thank you. Our first question comes from the line of Gary Gordon with Portales Partners.

George L. Engelke, Jr

Hi, Gary.

Gary Gordon - Portales Partners

How are you?

George L. Engelke, Jr

Good.

Gary Gordon - Portales Partners

Question about lending outlook for '09. It would look like on the single-family side, there is more competition to your ARM product from fixed rate and the government is obviously trying to promote a lower fixed rate. On the other hand, we hear more spread widening on apartment or commercial lending. You have been pretty disciplined on balancing those two opportunities in the past. What is your view on where the likely growth would come from in '09?

Monte Redman

Gary, this is Monte. In the fourth quarter, our rates were a little higher. Our pipeline shrunk a little bit. As of the end of the year, our pipeline is about $860 million. I will tell you this. Over the last five or six weeks, in single-family applications, we have been averaging anywhere between $125 million and $150 million a week in applications and our rate has not gone, hybrid ARM has not gone below 5%. That is for amortizing loan. It is 5.25 for an interest only loan.

I think that our growth in 2009 is going to come from single-family. Talking about the rates, we are talking about a 5% floor on terms of 5/1 ARMs. In terms of spread, our go-to CD rate right now one year is 305. We are looking for increased spreads in terms of new production going forward.

Gary Gordon - Portales Partners

Okay, thanks. One follow-up question on capital; you said, obviously, you have no plans to raise capital today, but you would definitely think about it if things got worse. Are you allowed to go back and reconsider TARP later in the year, if you decide that you want more capital?

Monte Redman

I do not know whether you have an opportunity to go back to there later or not. I am not really sure. I do not think so at the moment. If things get extra terrible for everybody in the business, as time goes by, there will be TARP 2, TARP 3, TARP 4, and who knows what else. We are not concerned with that and we think we have the opportunity to, do what we need to do to, for us to get through this thing on our own.

George L. Engelke, Jr

Yeah, Gary, we looked at the economy accelerating down and unemployment increasing and we still looked at the fact that we are comfortable where our capital is. All we meant to say in the press release is that in the future, we are just leaving options open. We have no plans now and that is really the reason why we said no to TARP. It did not make any sense in terms of the expense and the dilution part of that, especially where we are comfortable with our capital levels.

Gary Gordon - Portales Partners

Thank you.

Operator

Our next question comes from the line of Andrew Wessel with JPMorgan.

Andrew Wessel - JPMorgan

Hey, guys, good morning.

George L. Engelke, Jr

Morning, Andrew.

Andrew Wessel - JPMorgan

Thanks for taking my question. Just I think one follow-up on the TARP question, I think that maybe even the market misconstrued the comment in the press release a little bit about potential of additional capital being raised. I mean at this point the stock is trading south of tangible book value and you have got in the option for 5% preferred issuance against a cost of debt that would likely be at least 500 basis points over treasury at this point for a five-year financial debt placement.

Just kind of what were the other thoughts around, I think that kind of leads us to believe that that loss reserve build won't be as great or as accelerated as we saw from third to fourth quarter going through '09 or at least that is what kind of the plan is or otherwise maybe TARP look a little bit more attractive?

George L. Engelke, Jr

The first thing to recognize here is, when you spend your life working on what are the downsides, the upsides, with everything we go through, and of course, you stress to see that you are covered and have opportunities. We have been through this.

Our delinquencies, although they are up and they are very high for this company, or a peanut versus a whole bunch of people that are out there that are against us. We look at stressing this quality portfolio, before we make any kind of decisions on this kind of thing and I think we are in line.

Andrew Wessel - JPMorgan

Okay. My other question has to do with whether you have any kind of estimate in your plan of what the increase in pension expense will be or do to your expense line in '09?

Monte Redman

Yes, I do. Our pension expense increase, we are looking about $13 million increase in 2009 versus 2008, just that alone.

Andrew Wessel - JPMorgan

Okay. Regarding the other FDIC insurance premiums; is that pretty straightforward?

Monte Redman

Pretty straightforward, that is probably in excess of $20 million more in 2009 than 2008, based on the current proposal out there, which would include paying additional premium on collateralized borrowing from the home loan bank in such.

Andrew Wessel - JPMorgan

Great. Okay. Thank you very much, I appreciate it.

Monte Redman

You are welcome.

Operator

Our next question comes from Mark Fitzgibbon with Sandler O'Neill.

Mark Fitzgibbon - Sandler O'Neill

Good morning, gentlemen.

Monte Redman

Good morning, Mark.

George L. Engelke, Jr

Morning, Mark.

Mark Fitzgibbon - Sandler O'Neill

Wondering if in past quarters you have given us a sense for some of the higher cost funding that you had rolling down, what the rates on that were. Could you update us for the first quarter on how much you have in higher cost CDs or borrowings?

George L. Engelke, Jr

Yes, Mark. Actually, in the first quarter we do not have a lot of high cost, the average CD rate rolling off is about 3.32 and I said our current go-to rate right now is 305. We are looking for some benefit on that. Going forward though, in the second quarter we are looking at 371, 404, in this next and 387. Based on where rates are, we are looking for some benefit on that as we go forward.

Mark Fitzgibbon - Sandler O'Neill

Would it be fair to say then, with that in the pricing you are seeing on the asset side of the balance sheet that the rate of increase in the margin or the margin continues to go up but the rate of increase slows?

George L. Engelke, Jr

I think that is a fair estimate, that is the margin and the spread, both increase going forward, but we don't have a lot of the 4% CDs that we had coming due in '08, although, we are still getting some benefit going forward.

Mark Fitzgibbon - Sandler O'Neill

Okay. In terms of loan loss provisioning, should we assume in the fourth quarter provision was sort of a catch-up, if you will, to build reserve levels? Is it likely that we will see a lower level of provisioning in future quarters?

Monte Redman

I do not think we are able to say that. We are rightfully saying as we thought the allowance for loan losses was adequate at the end of the year. Clearly, with the increase we felt it was appropriate to do it at this time.

Mark Fitzgibbon - Sandler O'Neill

Okay. Last question. How much of the new production that you have is coming from the Metro New York market? I think of the total portfolio you broke out the detail in the press release, but what about new production? Is it skewed toward the Metro New York market?

Monte Redman

It is about 40% of the production is coming from the metropolitan area. It has not changed that much over the last couple of months so it is in the low 40s.

Mark Fitzgibbon - Sandler O'Neill

Okay. Thank you.

George L. Engelke, Jr.

You are welcome.

Operator

Our next question comes from Ken Bruce with Bank of America/Merrill Lynch.

Ken Bruce - Bank of America

Good morning. Monte, could you give us some sense as to what your early experience on loss severity is in your major markets, please?

Monte Redman

I would probably say that more of the loans that are going through the REO process; our average LTV of past loans have been 65%, but that includes some loans at a 75% or between 75% and 80% original LTV. We have received loss severity in the 30% to the 40% range, depending on the neighborhood and the state that it is in.

Again, we have not had that much in terms of that has actually gone through the foreclosure process into REO and to get us a countrywide statement but that 30% to 40% seems a relative number.

Ken Bruce - Bank of America

Is there any disparity or deviation amongst markets. I mean in California obviously a quicker foreclosure state, are you seeing larger losses in that particular market versus, say, New York, which is obviously slower?

Monte Redman

Actually, no. California has not been the biggest part. The bigger problems have been on the East Coast. I would say Virginia and maybe Maryland here.

Ken Bruce - Bank of America

Okay. Great. Thank you very much.

Monte Redman

You are welcome.

Operator

Our next question comes from Ted Rosinus with KBW.

Ted Rosinus - KBW

Good morning, guys.

George L. Engelke, Jr.

Good morning.

Ted Rosinus - KBW

Hi, George, how are you? Quick question on the reduced stock portfolio. Can you guys maybe give us an update at the end of the fourth quarter on delinquency trends and maybe kind of loss rates you are seeing in that portfolio and maybe the size as it stood as of fourth quarter?

Monte Redman

An interesting thing, the average LTV of both the full income and the Alt-A were both about 65%. The difference being, the Alt-A being more of a cash business people. We have seen more of the Alt-A be going to a foreclosure. Once they have actually gone through the process in the REO, we have not seen a greater loss on that particular portfolio versus the full income.

Our Alt-A is under $2.5 billion as of the end of the year. The amount of loans in foreclosure is probably about, I would say, about three, three and-a-half times greater than the full income. Actually, I am sorry, it is about four times greater than the full income. Does that answer your question?

Ted Rosinus - KBW

Yeah, that was it. Every other question was hit on. I appreciate it.

Monte Redman

Okay.

Ted Rosinus - KBW

Thanks a lot.

Monte Redman

You are welcome.

Operator

Our next question comes from Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert - Stifel Nicolaus

Thanks, good morning, gentlemen.

George L. Engelke, Jr.

Good morning, Collyn.

Collyn Gilbert - Stifel Nicolaus

Just a follow-up to some of the questions that have just been asked and then I will get to a few others. Do you have the LTVs for each of the regions, the way you guys do the delinquency levels, do you have that information and can you disclose it?

Monte Redman

You mean original LTVs by state?

Collyn Gilbert - Stifel Nicolaus

Yes.

Monte Redman

I mean, we have it. When we do our analysis in terms of stressing, we break down. It is Alt-A, it is full income, it is interest only, it is amortizing, it is by year and we have a lot of information. We do try to put as much information as possible. I will say this. Original LTVs going back to 2005 and 2006 will be questionable anyway, so the vast majority of our portfolio, whether it be Alt-A or full income, had original LTVs of under 70%, averaging about 58%.

George L. Engelke, Jr.

Just interjecting, one thought here is, we don't really have different LTVs for different parts of the country. We have a basic plan that we have that, takes care of all the regions. It is not that we go for high LTVs in State A and low LTVs in State B. We have lending quality controls that include as part of that LTVs. There's not one place that is favored over another.

Collyn Gilbert - Stifel Nicolaus

Okay.

Monte Redman

Let me just tell you, right now, our total portfolio original LTV in California was just under 65%. Our total portfolio of original LTV in Maryland was about 67%. In Florida, it was just under 67%. Basically, they are all consistent.

Collyn Gilbert - Stifel Nicolaus

Okay.

Monte Redman

I mean, we have the same loan, underwriting standards around the country. They still have to meet our standards no matter where they are.

Collyn Gilbert - Stifel Nicolaus

Okay. All right. Another question that I thought was interesting. In the press release you had cited that your current or that the originations you did in 2008 were, I think, the one number I wrote down was 57%, the LTVs on the new originations. That was a surprisingly low number to me. I guess that means that the borrowers were much more liquid than I had thought or that the values are still higher than I would have thought. I mean maybe could you talk a little bit about what you are seeing in terms of the product that is being put on the books this year?

Monte Redman

I think when you take a look at an average, our average loan of $675,000 and a 57%, you are talking about an average home of $1.1 million to $1.2 million, that somebody had a very low-mortgage to begin with. Most of our originations in this past year and even more our applications going forward have been refinanced.

Collyn Gilbert - Stifel Nicolaus

Just to resize. Okay, all right, that makes sense.

Monte Redman

They are people who have very low debt on their homes, looking to take advantage of the lower rates.

Collyn Gilbert - Stifel Nicolaus

Okay.

Monte Redman

Clearly with the jumbo lending, we are there for them.

Collyn Gilbert - Stifel Nicolaus

Okay. Are some of those and I think, I could be confused on this. When doing the resize if it's, you guys will reappraise right, in terms of what the value is on that home, because I think in some cases that you don't actually reappraise and you use the original value. I don't know if you guys?

Monte Redman

If it's a new loan, and we are refinancing from somebody else, yes, we are doing appraisals.

Collyn Gilbert - Stifel Nicolaus

Okay.

Monte Redman

We were evaluating those appraisals as to the comps and as how long they are and we have an automated system to, as a control, but we are doing actual appraisals.

Collyn Gilbert - Stifel Nicolaus

Right. Okay, for a new loan. What if it's a current customer? Do you go through that or do you just still use the same value of what the original loan was underwritten to?

Monte Redman

If it's a current customer again, we take a look at their payment history, which is a bigger piece of that whole deal in terms of the reunderwriting.

Collyn Gilbert - Stifel Nicolaus

Okay. Okay.

Monte Redman

Even we do have a modification program. We do have other programs to work with people, but we go through that a little differently.

Collyn Gilbert - Stifel Nicolaus

Okay, because obviously they are not under stressed if it's a 57% LTV. Okay. Just some housekeeping things, I would imagine that in that mortgage banking line, the $2.2 million loss, was that due to MSR impairments or what was in there?

Monte Redman

It is an MSR of I think 2.4, 2.5.

Collyn Gilbert - Stifel Nicolaus

Okay. Okay. On the expense side, obviously there are a lot of variables as we look into 2009.

Monte Redman

One second, Collyn. One second.

Collyn Gilbert - Stifel Nicolaus

Okay.

Monte Redman

That is $2.6 million.

Collyn Gilbert - Stifel Nicolaus

2.6, okay, that is okay.

Monte Redman

Just trying to be accurate.

Collyn Gilbert - Stifel Nicolaus

Okay. Could you just sort of give us a sense of what we can expect in terms of a quarterly run-rate on expenses for this year?

George L. Engelke, Jr

Take a look at expenses in 2008 versus 2007, less than 1% increase. I think the key thing in 2009 is going to be the increased FDIC insurance, which I talked about earlier and the increased pension expense. I mean, those are the key things. Other than that, we have a very low increased run-rate.

Collyn Gilbert - Stifel Nicolaus

Okay. They're not intentional declines that could be in there to offset some of the pension in the FDIC, it's going to be probably a flat run-rate and then an additional with the FDIC and pension?

George L. Engelke, Jr

Yeah. I mean we run very lean in terms of the operation, so we always look and see if we can reduce expenses in different spots, but we run a very lean operation to begin with.

Collyn Gilbert - Stifel Nicolaus

Okay.

George L. Engelke, Jr

Clearly the FDIC insurance increased no matter what they finally come up with and the pension expense are out of our control and that is something we'll have to live with.

Collyn Gilbert - Stifel Nicolaus

Okay.

George L. Engelke, Jr

At least for 2009.

Collyn Gilbert - Stifel Nicolaus

Right. Got you. Okay, that is helpful. Thank you.

George L. Engelke, Jr

Okay. You're welcome.

Operator

Our next question comes from James Abbott with FBR.

James Abbott - FBR

Yeah. Hi, good morning.

George L. Engelke, Jr

Good morning.

James Abbott - FBR

Couple of quick questions on the Alt-A versus conforming losses, you did give a multiple that it was four times greater loss. Could you tell us what the loss was?

George L. Engelke, Jr

It was four times greater amount in non-performing, not loss.

James Abbott - FBR

I'm sorry. Okay. Can you breakout what the loss is on the Alt-A versus the loss on the conforming? What I'm trying to do is comparing this to the last time a story went through a cycle in the early '90s, losses were 25 basis points on the resi portfolio in the peak year.

I'm trying to split out and see if I can try to understand what's going on there between Alt-A versus conforming. Do you have the losses on conforming; that would be helpful? I mean not conforming, but losses Alt-A is what I meant?

Monte Redman

I'm going to try to give an example. If I have a loan that was a full income loan that has an average LTV of 65% at origination and the same year, and same place, I have a loan that was an Alt-A that was 65% LTV at origination.

What I'm saying is the Alt-A at this point has a higher chance of defaulting and going through the foreclosure process. Once we take a look at loss severity, there really isn't really that bigger difference. There is some difference, we are seeing more of that, but in terms of the Alt-A. You're still getting a loss on that property.

James Abbott - FBR

Got you. Do have you the dollar amount of charge-offs for the Alt-A versus the dollar amount charge-offs for the non-Alt-A?

Monte Redman

No, I don't. I mean, in the quarter, we had $12.2 million of charge-offs in the fourth quarter. A lot of that has to do with our appraisal process, what our one-to-four family loan goes six-month delinquent, 180 days, we do a new evaluation of using on our appraisal because there are people still in the homes, but we'll do a broker opinion or something else.

We'll get a new value of that property and write that down and charge-off the difference, if there is a loss there. Some of our loss relates to not to a sale of an ROE, but actually a write-down, taking into account the loss of value of that loan already, even at six-months.

James Abbott - FBR

Got you.

George L. Engelke, Jr

I think, though, Jim, you have to go back to Monte's first comment, was the leader here. If you have a $500,000 loan that is made to a great credit or a lesser credit, your losses will be more prevalent in the ones that that have a better –a low or worse borrower. You're going to have more delinquencies, more problems, but it's the property value that you are dealing with in constructing the loss and you are just going to have the same situation, the house is a house is a house.

James Abbott - FBR

Okay. That helps answer that question quiet a bit, probably keep looking into that a little bit more. On the expense side, is there any reversal of accrued compensation in that number and/or if that is a good run rate for compensation going into the year?

Monte Redman

In the fourth quarter there is a reversal of some anticipated bonuses that were not. I can tell you that executive management received no bonus related to 2008.

James Abbott - FBR

Okay, so there was a reversal in there. How much should we unwind? I'm assuming you guys aren't planning on, no bonuses in 2009 either.

Monte Redman

Continuing, as I said, executive management received no bonus in 2008. Salaries were frozen in for 2009. No raises. In addition, the executive office expects to receive no bonus for 2009.

James Abbott - FBR

Okay. That is a good run rate.

Monte Redman

These decisions are taken in because we understand the tough times that we are in.

James Abbott - FBR

The compensation expense is a good run rate and will it grow based on small amounts for FY ’10?

Monte Redman

When you take a look at the annual compensation and throw in a couple of percent in terms of staff increase, that will be a good run rate.

James Abbott - FBR

Okay. Last question is on the margin. If the re-fi environment is having an extra adverse effect on the premium amortization; we haven't seen that in a long time, but are we starting to see more of that?

Monte Redman

I think the lower rates you'll see somewhat but nothing like last year. I can tell you that the mortgage amortization for the fourth quarter was just under $4 million, which is actually less than the third quarter, which was 5.2 million. This compares to the first and second quarter of this year, were a lot higher, 9.7 and 8.7 million. We are at a lower level. It may increase slightly but we are not looking at a lot of people going elsewhere in terms of us having additional mortgage premium.

James Abbott - FBR

Okay. That is all very helpful. Thank you again.

Monte Redman

Okay.

George L. Engelke, Jr

Okay.

Operator

Our next question comes from Dean Choksi with Barclays Capital.

George L. Engelke, Jr

Hi. Hello? Okay. I think next one.

Operator

Dean, your line is open.

George L. Engelke, Jr

Hello? I think you have to go to the next person. If there's anybody else there.

Operator

Our next question is from the line of Matthew Kelley with Sterne Agee.

George L. Engelke, Jr

Hi, Matt.

Matthew Kelley -Sterne Agee

On loan growth, what do are you anticipating for net loan growth?

George L. Engelke, Jr

I can’t hear your Matt.

Monte Redman

Hey Matt can you start over? We missed the first part of your statement.

Matthew Kelley -Sterne Agee

Sure, now just looking at the total loan growth, what's your anticipation for total loan growth for the year? I know that originations are decent here. How much net growth should we be looking at in total loans?

Monte Redman

It is hard to say. I will say that with our pipeline starting a little lower than the third quarter, the first quarter might be a little slow, but we are looking for good growth. As I said, the last five or six weeks we have been averaging between $125 million and $150 million in terms of new applications. I think where interest rates are, and the fact that there is not a lot of competition for jumbo lenders out there, the spreads are wider. We are looking for good growth for the year in total.

Matthew Kelley -Sterne Agee

I mean, mid single digits? Low single digits or?

Monte Redman

I think I said good growth.

Matthew Kelley -Sterne Agee

Will the securities portfolio continue to come down at the same rate?

Monte Redman

Yes.

Matthew Kelley -Sterne Agee

I am trying to get to at how much net balance sheet growth we are going to have as it pertains to capital growth?

Monte Redman

The securities portfolio should come down again like it has in the past and, balance sheet growth will be dependent upon what's going on in the economy.

Matthew Kelley -Sterne Agee

It looks like…

Monte Redman

Clearly we can manage that. That would come a lot sooner than the capital market activity.

Matthew Kelley -Sterne Agee

Okay. Cranking down net growth the build capital, you are saying?

Monte Redman

That would come first, yes.

Matthew Kelley -Sterne Agee

Okay. On the subject of capital, I mean, why not be proactive? I mean, if things turn tout be nasty, it's really too late, because it's a vicious cycle and you'll be trading at a very big discount tangible book. It is tough to get yourself out of that hole. You're really kind of making a bet here that things will get modestly better or that your assumptions on losses are contained to the point of having enough retained earnings growth to actually build capital with the balance sheet flat?

Monte Redman

Are you talking about TARP capital?

Matthew Kelley -Sterne Agee

No, common equity.

Monte Redman

I mean, common equity is dilutive. You need to make decisions, especially at these prices. It is one thing to take a look at it as an insurance policy, but that would be a very expensive insurance policy. It does not make sense at these levels, in these times. I think we have done a very severe stress test of our balance sheet, of our portfolio.

As I said earlier, we break down our portfolio in a lot of different ways. We've taken a very hard look at it, and we feel very comfortable with the capital as it is right now.

Matthew Kelley - Sterne Agee

Okay. I mean, it may not turn out to be really dilutive if 12 months from now you trade at low-single digits or something like that and you are 50% of book, that is why I'm saying it's too late then.

Monte Redman

Matt, when you take a look at the bank that we are able to grow our loan portfolio, grow deposits in this market, increase the, both the spread and the margin dramatically, there's a major part of this business that is going very well.

Matthew Kelley - Sterne Agee

Right.

Monte Redman

The opportunities are extremely good in terms of that. What we are doing is we are working through some of the asset problems. We feel very comfortable with our capital level where it is now.

Matthew Kelley - Sterne Agee

Okay.

Monte Redman

As I said, we have stressed the balance sheet very hard.

Matthew Kelley - Sterne Agee

That implies that you are not going to lose money. That is your belief, then, under that. That capital will actually continue to grow, now that you have cut the dividend, you believe that there will be net earnings and.

Monte Redman

Yes.

Matthew Kelley - Sterne Agee

And capital retention and growth?

Monte Redman

Yes.

Matthew Kelley - Sterne Agee

Okay. All right.

Monte Redman

One more time, yes.

Matthew Kelley - Sterne Agee

Got it. All right. Thank you.

Monte Redman

Okay.

Operator

Our next question comes from Dean Choksi with Barclays Capital.

Monte Redman

Now there we go. Hi, Dean.

Dean Choksi - Barclays Capital

Hello, gentlemen. Can you hear me?

Monte Redman

Yes. Now we do, yes.

Dean Choksi - Barclays Capital

I'm sorry about that. I will try my question again. Can you talk about what your deposit strategy is and any plans to take advantage of consolidation in your markets either through acquiring branches or expanding?

George L. Engelke, Jr

What we have been able to do overtime is organic growth. We've talked about the fact that we have a great retail franchise and we have a great strategy in terms of in place with community involvement, customer service, and strong incentives and strength of incentive program. What, that has worked to drive organic growth. We haven't had an acquisition or a de novo branch in over 10 years, yet, we have I think the third or the fourth largest growth in our marketplace, over other companies that have actually added branches.

Our strategy is to continue with the community involvement, customer service and strong incentive program that we have. The sales program brings them in. The customer service keeps them there. These are easy words for me to say, but our numbers prove it and our entire presentation that we normally do, in our investor presentation that describes it.

Over the last nine years, or the last year, any period you want to look at, we have been able to grow that franchise. Our go-to rate right now, one-year CD is 3.05, which is our high-rate. We also have our liquid CD at lower to 1.75% and a nine-month CD at 2.5. We are taking advantage of the market. We are adding on the mortgage signs great loans, 50% LTV over the last year and able to grow that portfolio. The bank itself is thriving and doing very well.

Dean Choksi - Barclays Capital

Thank you. In the release you mentioned that core, community, deposit competition has decreased; can you just kind of elaborate a little bit more on that?

George L. Engelke, Jr

I would say a couple of months ago there were competition with some of the large money center banks in terms of very high-rates. What has happened is that I think the markets have opened up for them. As a result, the Citi's and the Chases and the Bank of America and so forth are able, and, in fact, that WaMu and Wachovia and some of those people are no longer around, those rates, they are no longer paying the high and the irrational pricing on that part. We are actually gaining deposits with a high-rate of 305. We can support that 305 in this market, when we are originating 5% quality mortgage loans.

Dean Choksi - Barclays Capital

Thanks.

George L. Engelke, Jr

Okay.

Operator

Our next question comes from Matthew Barnett with Jet Capital.

Matthew Mark - Jet Capital

Hi, it is Matthew Mark speaking for Matt Barnett. You just made a comment about what has happened to deposit pricing in the last month or two. If you look back a month or two, from where we are today, has the credit performance of the loan portfolio, overall meaningfully deteriorated or has it been sort of steady?

Monte Redman

I do not think meaningful is right. I think the non-performers have increased over the last quarter and that trend has not stopped, if that is what you are asking. It has not meaningfully accelerated during December versus November or October, if that is what you are talking about. I am not sure, I understand the question.

Matthew Mark - Jet Capital

I guess what I am trying to get at is, some understanding of what the thinking was with regard to the capital position of the bank back when the stock was trading, in the kind of high-teens in the kind of November, December timeframe. Was the decision not to provocatively raise capital back then, a sign of your comfort back then being consistent with what it sounds like it is today? Or is there any potential regret looking back? Have things gotten meaningfully worse or are you kind of as confident today as you were back then?

Monte Redman

We are still very confident with our capital position. We were then, we are now.

Matthew Mark - Jet Capital

Thanks, I appreciate it.

Operator

If there are no further questions, I would like to turn the conference back over to Mr. George Engelke, for any additional or closing remarks.

George L. Engelke, Jr

Thank you all for being with us this morning. We look forward to better performance as the year moves on.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. Please disconnect your lines at this time and have a wonderful day.

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