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Executives

George Engelke, Jr. – Chairman & CEO

Frank Fusco – EVP, Treasurer & CFO

Monte Redman – President and COO

Analysts

Matthew Clark – KBW

Mark Fitzgibbons – Sandler O’Neill

Tom Alonso – Macquarie

Christopher Nolan – CRT Capital

Collyn Gilbert – Stifel Nicolaus

Rick Weiss – Janney Montgomery Scott

Matthew Kelley – Sterne, Agee & Leach

Bruce Harting – Barclays Capital

David Hochstim – Buckingham Research Group

David Darst – Guggenheim Partners

Edwin Groshans – Height

Astoria Financial Corporation (AF) Q3 2010 Earnings Conference Call October 21, 2010 10:00 AM ET

Operator

Good day and welcome to Astoria Financial Corporation’s Third Quarter 2010 Earnings Conference 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 Exchange Act of 1934 as amended.

A discussion of the risk factors associated with the use of forward-looking statements is outlined on pages six of our third quarter 2010 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 Engelke, Jr.

Thank you and good morning. Welcome to our review of Astoria Financial Corporation’s 2010 third quarter results. Joining me this morning are Monte Redman, President and Chief Operating Officer; Frank Fusco, CFO and Peter Cunningham, our Investor Relations Officer. Following my brief remarks we will entertain any questions you may have.

Last evening we reported third quarter earnings of $25.5 million or $0.23 per share. Earnings for the nine months of this year totaled $49.9 million or $0.53 per share. This represents per share increases of 156% and 152% respectively. The improvement was due primarily to lower credit costs. For the third quarter, we reported a $20 million provision for loan losses, $15 million lower than the previous quarter and $30 million lower than last year’s third quarter.

With respect to credit quality, non-performing loans decreased $15.5 million from the previous quarter to just under $400 million, and overall loan delinquencies decreased $72 million or 10% from the previous quarter. It’s important to note that the loss potential remaining in the non-performing loan portfolio has been greatly reduced. We have already reviewed markdown and charged off as necessary over $247 million or 72% of current residential non-performing loans to their adjusted fair value less selling costs.

We also reported a net interest margin of 2.32% for the third quarter, 5 basis points lower than the linked quarter and 25 basis points higher than the 2009 third quarter. The linked quarter decrease was primarily due to the effective one extra day of interest expense in the third quarter. The year-over-year increase was due to the cost of interest bearing liabilities declining more rapidly than the yield on interest on earning assets.

During the third quarter, the balance sheet contracted $733 million from the previous quarter as loan prepayments continued to outpace loans productions. The combination of historically low rates for conforming 30-year fixed rate mortgages and high conforming rate state limits has had a negative impact on the jumbo hybrid arm portfolio lenders, such as Astoria and has contributed to the decrease in our loan portfolio and balance sheet. With respect to liabilities, deposits decreased a $141 million from the previous quarter and 705 year to year – year-to-date primarily in CD headcounts as we continued to let high cost CDs run off. Low cost pass book, money market and checking accounts on the other hand increased $231 million year-to-date or 8% annualized. Borrowings declined $600 million from the previous quarter and $665 million from the December 31, 2009 to $5.2 billion.

With respect to the recent headlines alleging problems with foreclosure processing at several of the larger mortgage servicers, we have conducted a review of our forward closure process and have not found it necessary to interrupt and foreclosures. This notwithstanding the problems concerning faulty foreclosures could cause a further delay in the processes already in some states, a two-to-three year process and will only add to the cost of foreclosing.

Finally, although we remain cautiously optimistic with respect to the outlook for credit quality and expect credit costs will continue to decline over the next several quarters resulting in improved financial performance, i.e., operating environment for residential mortgage portfolio lenders nevertheless remains challenging. The government continues to subsidize the residential mortgage market more – mortgage market with programs designed to keep the 30-year fixed rate conforming loan below normal market rate levels. In addition, Congress recently extended the expanding conforming loans limits in many markets we operate in through September 2011. Therefore, we anticipate that elevated levels of mortgage prepayment activity will continue to outpace our loan production.

This will will likely result in the loan portfolio and balance sheet declining somewhat further. We anticipate maintaining a relatively stable net interest margin, which when coupled with lower credit costs should mitigate the earnings impact from a smaller balance sheet. In the meantime, we will continue to strengthen the balance sheet by continuing to originate quality residential mortgage loans for portfolio. We expect capital levels will continue to increase as earnings continue to improve, which should position us to take advantage of further balance sheet growth opportunities when they arise.

With that as an overview, I would like to open the phone lines for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question come from Matthew Clark of KBW.

Matthew Clark – KBW

Can you just also update us on the repricing that’s going on in the second half of 2010 for the non-liquid CDs and hybrid ARMs and also the related rates they are rolling off?

George Engelke, Jr.

The second half of 2011? We are past the fourth quarter of 2010 in the first half of 2011. One thing I would say we did put in the press release the CDs as well as the assets repricing. In addition to the CDs, we have $350 million of borrowings in the fourth quarter repricing at about 3.81. And we have about $640 million of borrowings at 3.85 in the first half of next year. If we take a look at CDs in the third quarter, taking a look at it, in the third quarter of next year, we only have about $500 million of CDs at about 1.81 repricing. I don’t have quarter to quarter, so I can’t give you the fourth quarter of 2011. But we have that.

Matthew Clark – KBW

Then the hybrid ARMs in the third, at least?

George Engelke, Jr.

Quite frankly, we don’t have it broken down by quarter by quarter here. We usually put out nine months ahead of time, that’s where our numbers go out. But I would imagine they were probably similar in the third and fourth quarter as we do have in the first half of the year.

Frank Fusco

Yes, they are. It’s roughly the same number.

Matthew Clark – KBW

Can you just update us on your plans for your TruPS and as those get phased out what you might plan to do?

George Engelke, Jr.

Well, we don’t have immediate plans. We have the trust preferreds, it’s only $125 million. They are at 9.75. They do count as tier 1 capital for a number of years between three and five. So we are taking a look at alternatives, what we want to do with that but we don’t have any immediate plans on that.

Operator

Your next question comes from Mark Fitzgibbons of Sandler O’Neill.

Mark Fitzgibbons – Sandler O’Neill

On the $894 million of hybrid ARMs that you have scheduled to reprice in the fourth quarter, how much of those do you think will refi and how much do you think will roll into one-year ARMs based on what you are seeing?

George Engelke, Jr.

What we are seeing is that 75% to 80% of the ARMs that are coming due for repricing are either staying as one year ARMs or going into one year ARMs. So with interest rates low there, they are staying there.

Frank Fusco

There is also probably about $100 million of that total that are multi-family that will not reprice down, they are existing rates.

Mark Fitzgibbons – Sandler O’Neill

I guess I am curious in terms of how much more balance sheet shrinkage would you guys allow before you might start to grow the securities portfolio again. I mean do you have sort of a target for the capital ratio getting to or balance sheet size or something?

George Engelke, Jr.

We do expect the balance sheet to shrink, hopefully not as much as the third quarter going forward. And we are starting a retail residential mortgage advertising program to beef up our jumbo mortgages in the retail area as well using our same good quality underwriting. The securities, when you take a look at securities, that the quality and the structure that we like, the solid structures, short average lives, short extension period, if rates rise, because at some point they will. When you are taking a look at those type of structures and you are getting 2% and you are paying a premium to get that, it really doesn’t give you a lot of great comfort to buy a lot of that just to have your balance sheet growth there.

So at this point we don’t have any plans to grow securities. Our plans are to concentrate on the residential loan portfolio and beefing up that using our good underwriting but working on that and price. Our current 5/1 ARM is now at three and three eighths zero point loan and we have a 15-year fixed go-to rate at 4% for jumbo products.

So we are making a little headway but clearly not enough at this point to stop the asset reduction but we are concentrating on that.

Mark Fitzgibbons – Sandler O’Neill

Okay. In terms of the originations in the third quarter, it was roughly $650 million of those. Was most of it in 5/1s, 7/1s? What was the split, would you guess, Monte?

Monte Redman

I think the ARMs are probably 75% 5/1, 7/1 and there was some 15-year fixed product. The 15-year fixed product which may have an average life of four years now may extend to six, six and a half years if rates rise, have great – actually have better credit metrics than the 5/1s. So that’s why we are looking at that in this kind of market right now.

Mark Fitzgibbons – Sandler O’Neill

Is most the production in the Tri-State area?

Monte Redman

I would say more than 50% is in the Tri-State area.

Operator

Your next question comes from Tom Alonso of Macquarie.

Tom Alonso – Macquarie

On the borrowings you guys paid down in the quarter, was that later in the quarter because I’m just trying to get a sense of what kind of benefit there might be?

George Engelke, Jr.

Yes, that was mostly in – a little bit in August, mostly September.

Tom Alonso – Macquarie

So there should be some follow-through in terms of liabilities repricing lower on that as we move into the fourth quarter then?

George Engelke, Jr.

It should be and on the opposite side, the CDs maturing in the third quarter, we really – we had about $900 million maturing of which only about $740 million rolled over. So we didn’t have a lot of carryover benefit that go into the fourth on the CD. We do have over $2 billion in the fourth quarter, which should have a good benefit since the majority of that is in October, November, which should have the benefit in the fourth quarter as well as the first on that.

On the $740 million we rolled over, almost 40% was extended beyond two years or longer in terms of CDs. Our interest rate sensitivity gap, which was probably over 20% at December ‘08 is now down less than 1%. So we worked hard. While we have been growing our core deposits, we worked hard in reducing interest rate sensitivity as well.

Frank Fusco

I also wouldn’t overestimate the benefit on the borrowings, because you are taking off assets to.

Mark Fitzgibbons – Sandler O’Neill

No, agreed, I just wanted to see if it’s –

Frank Fusco

It’s not like on refinancing on lower, I am taking off a high yielding asset.

Mark Fitzgibbons – Sandler O’Neill

I just wanted to see if that would sort of help keep things flattish going forward.

George Engelke, Jr.

Well, I think when you take a look at the fourth quarter where we have $2 billion of CDs and $350 million of borrowings, compared to about $900 million of loans repricing, that’s where we feel comfortable about keeping the margins stable for the next couple of quarters.

Tom Alonso – Macquarie

I missed when you guys were talking about the ARMs repricing. I think Frank, you mentioned there was a piece of that that was multi-family, that wouldn’t be priced lower? How much was that number? I’m sorry.

Frank Fusco

For the quarter, probably about $100 million.

Operator

The next question comes from Christopher Nolan of CRT Capital.

Christopher Nolan – CRT Capital

Has the company’s interest rate sensitivity changed much since the second quarter?

George Engelke, Jr.

Since the second quarter, we have been proving, as I mentioned earlier, as of the end of September, it is down less than 1% negative and the way things are going, where it probably ends up somewhat positive given this current interest rate environment. But our goal is to keep it in single digits and close to zero. So it’s gotten a little less sensitive since the end of the second quarter.

Christopher Nolan – CRT Capital

Since there was a little bit of reserve runoff in the quarter, could you tell us what’s driving that in terms of, are you looking just at declining non-performing asset volumes, or was there something else? How should we look at the reserves going forward vis-à-vis?

George Engelke, Jr.

I wouldn’t say there was a runoff. We provided $20 million of allowance in there. The key is that when you take a look at our coverage ratios, they actually went up as compared to the second quarter, when you take a look at the portfolio, the decrease in non-performing, the decrease in 30 and 60 days, the decrease in the portfolio in general. And overall, we provided for the portfolio, especially the ‘05, ‘06 and ‘07 production, since the last – since ‘08, the last two or three quarter years, 40% to 50% of our portfolio has been originated at LTVs under 60% at these current levels in ‘08, ‘09, and ‘10.

So we feel very strong about the portfolio, the portfolio was getting better and non-performers and the early delinquencies are actually lower. So the $20 million provision actually provided an increase in the coverage ratios.

Christopher Nolan – CRT Capital

So if the balance sheet continues to decline and assuming the MPAs and so forth remain relatively stable, we should see the overall volume of the loan loss reserve actually to decrease slightly?

George Engelke, Jr.

Yes, all things being equal, the trend continue, we would see that trend continuing as well.

Operator

Your next question comes from Collyn Gilbert of Stifel Nicolaus.

Collyn Gilbert – Stifel Nicolaus

Could you just give a little bit of color as to the drivers behind the increase in the multi-family commercial real estate loan yield on a linked quarter basis? Is that a function of prepays or, just trying to understand where that’s going to go?

Frank Fusco

Again, that’s a combination of loans that have paid off, whatever prepay and penalties we get and the fact that on a repriced basis, they are just not – that floor is their initial note rate. So I mean it hasn’t moved a lot but any difference in yield has more to do with whatever prepayments we collect during the quarter.

Collyn Gilbert – Stifel Nicolaus

Just a question on – Monte maybe, I know you had indicated that you are expecting the NIM to be sort of stable here over the next couple quarters. Any sense of where it could go in 2011 assuming the rate environment does not change?

Monte Redman

Well, we said where we are today is probably the highest since the last 10 years. So we are not looking at the NIM going much higher. But we feel comfortable going out the next several quarters that we would be able to – will be a stable NIM, assuming interest rates stay where they are. That’s based on the CDs pricing. During September the CDs have repriced, were actually repriced. The non-liquid CDs were at 0.71 basis points. So taking a look at where CDs are maturing and where we are repricing where borrowings are coming off and I mentioned the borrowing rates before $350 million at 3.81 in the fourth quarter and $640 million in the second half at 3.35, you can have a five year borrowing today and under 2%. So clearly, there is a value there.

So when we talk about stable, we think that we should be able to keep about 230, which would be, again, as I said, one of the highest margins we have had in the last 10 years for a while. It will be a little lower – short of the balance sheet but it should be stable margin with better credit performance going forward.

Operator

The next question comes from Rick Weiss of Janney Montgomery Scott.

Rick Weiss – Janney Montgomery Scott

I was wondering if you could talk a little bit about mortgage banking. I saw some other banks have reported. So a big uptick in the mortgage banking income over this quarter, but yours seems kind of flattish. So I was just wondering what your thoughts are on the mortgage banking line item.

George Engelke, Jr.

The mortgage banking is not a big part of our fee income base if you will, it’s something we do in our retail offices. It really is a function of conforming loans and it’s a matter of loan sales. So I don’t really have a big comment at that, we do make 30-year loans that we sell to Freddie and Fannie in that. We also, I think had a – in MSR, we have a small mortgage servicing for all the portfolio and the MSR was a little piece of that actually as well as compared to a year ago.

Rick Weiss – Janney Montgomery Scott

I guess there are no plans to step that up in this current environment?

George Engelke, Jr.

No, that is something that we do as part of our retail mortgage operation but it’s not something that is – it’s not a portfolio enhancement. So it’s not something we are looking to increase at.

Rick Weiss – Janney Montgomery Scott

Also are there any developments on the regulatory front with the upcoming, I guess, it’s a merger with the OCC and OTS?

George Engelke, Jr.

Well, I guess if you talk to the OTS, it’s a merger. If you talk to the OCC, it’s probably an acquisition. No, I think we have talked to – our own OTS in Jersey City and in DC and they are working out the different parameters and most of the regulations that we have seen recently are joint agencies. So we don’t have anything that is particular coming out of that. We have been told that there will be a forum for larger OTS, OCC shops sometime in the first quarter to get a better handle on their integration process and that’s really the key whether – how fast they can move up in terms of dealing with the large integration that’s in front of them. But no, we don’t have any specific from them.

Operator

Your next question comes from Matthew Kelley of Sterne, Agee & Leach.

Matthew Kelley – Sterne, Agee & Leach

In the hybrid ARM portfolio, what percentage of that has now become a one year ARM of the total?

Monte Redman

I would say close to a third of that portfolio. By the end of 2011, if interest rates are where they are, that number probably is up in the 40%, 45% range.

Matthew Kelley – Sterne, Agee & Leach

On the balance sheet growth or shrinkage, I should say, what will change going forward that would allow the balance sheet to shrink at a slower rate compared to what we saw in Q3?

George Engelke, Jr.

I think the key is going to be given rates where they are, we wouldn’t expect – at some refis are going to slow down a little bit because that’s all the business that’s out there. Ninety percent of our applications is coming in our refi. So at some refis are slowing down. The other thing is we are making an effort building up our retail and working in correspondent and trying to beef up, getting a bigger piece of the jumbo pie, if you will. Clearly, the thing that’s going to be the major change is the resolution of Freddie and Fannie. And as taxpayers, I am not sure why we are subsidizing million dollar homeowners and why the conforming limit had to increase to $729,000 and change in most markets. So until that makes a major change, it’s going to be hard for us to grow and right now we are just trying to work around the edges in terms of beef up our residential production.

Matthew Kelley – Sterne, Agee & Leach

What was the prepayment rate on your loan portfolio in the quarter and how did that compare to recent quarters?

George Engelke, Jr.

The average balance of our loan origination in the fourth quarter?

Matthew Kelley – Sterne, Agee & Leach

No, the prepayment rates on your – the amortization rates on your existing portfolio.

Monte Redman

It’s been consistent – it’s maybe a little bit slighter near the end of the quarter. But you are still talking up in the high teens prepayment rate on residential. But nothing significantly different than prior quarters.

Matthew Kelley – Sterne, Agee & Leach

On the a securities portfolio, it came down to 5% in the current quarter. It was down 14% in the second quarter. What should we expect going forward on that book of business? What’s kind of the monthly cash flow there?

George Engelke, Jr.

Well, in the second quarter we had said that there was securities that were called, which is why the cash flow is up higher. But I think the third quarter cash flow is a reasonable estimate for the fourth quarter and at some point depending on where rates go, you are going to hit a little bit of a wall of refi. We saw that when the 30-year fixed was about 4.75% to 5%, it’s slowed down. Now that the 30-year fixes are around 4.25%, it’s speed up a little bit. But at some point, it will actually slow down unless we see 30-year fixed conforming under 4%.

Matthew Kelley – Sterne, Agee & Leach

Just looking at the total balance sheet reduction, go back to kind of the end of 2008, I mean peak to trough here, I think we’re already down like 15% in total assets or earning assets and if this pace is maintained, I mean the balance sheet could be down 20% but the expenses compared to that timeframe are up pretty significantly. So how do you feel about the core earnings power of the bank coming out of this once this deleveraging has reached an inflection point, presumably sometime late ‘11, early ‘12 and you’ve raised the capital you need but you’re sitting on a much smaller bank?

George Engelke, Jr.

Well, I think the core earnings power is going to be very good. We have the capacity to be a larger bank. We are just waiting for the opportunity to take advantage of that. When you take a look at G&A expense going up, a major, major portion of that is the FDIC insurance, which is out of our control. We have been working very hard to maintain our G&A expense ratios as best we can. Unfortunately our FDIC insurance premium is going to be there for a number of years. But absent that, the bank is very strong to maybe support a larger bank in terms of infrastructure.

Matthew Kelley – Sterne, Agee & Leach

Is there any other expense savings initiatives that are planned if the balance sheet and earning asset levels come down so you have a commensurate expense reduction?

George Engelke, Jr.

We have plans, we have a few things all the time. We don’t have any plans at this point in time. Again, we are not getting rid of FDIC insurance. So it’s more than $30 million, but that was $2.5 million in 2008, if you are comparing timeframes.

Operator

Your next question comes from Bruce Harting of Barclays Capital.

Bruce Harting – Barclays Capital

In your last table, there is such a clear difference between full income and Alt-A loans. I forget it, are most of the Alt-A purchased through brokers and out of state and how are you doing on any putbacks? And can you just remind us about your foreclosure policies and if you’re doing that in-house?

I see today there’s a story out saying that here in New York, New York State court system has instituted a new filing requirement. Lender’s counsel are now required to file an affirmation with the court. So just any commentary you have on those processes and if there’s any positive potential from putbacks to brokers? Thanks.

Monte Redman

Well, first off, the Alt-A are now about 16% of our total portfolio. We haven’t made an Alt-A since sometime 2007. So we haven’t made one in all the three years. The underwriting was the same, whether it was through a broker, whether a correspondent or through retail. There were mostly stated income, full asset and there was a full asset review and full appraisal process, which were good processes. In fact, as we have said several times, the loss severity on our Alt-A versus full income is right on top of each other. So the process was good. The difference is that the Alt-A is more cash business than construction, home improvement, mortgage brokers themselves, and that business has been hurt a lot.

But the non-performers you are seeing out there are loans for people that were paying for three, four and five years. So again, it wasn’t faulty originations. These were loans that we did and we are not looking at putting any of these back. These are loans that are going through the foreclosure process. Our biggest problem with the foreclosure process is how long it takes.

We have four states where our non-performing loans are in the pipeline – more than 50% of those loans are in the pipeline for greater than a year. So I think what we see is whether it be judges or whatever it is looking at anything to prolong the process, in New York it’s already close to three, the foreclosure process. The good news about our portfolio is that 72% of our residential loans have already been marked to market and reviewed and charged off as necessary. So although we are not able to turn those non-earning assets into earning assets as quick as we like, our loss potential has been greatly reduced on those loans.

Bruce Harting – Barclays Capital

And Monte, at this point on as you said – as you look through that very last table in your press release, take a State like Illinois where the Alt-As, the non-performers might be 10% or 15% but in dollars only $30 million combined in that State. Are there bids for those loans? I mean is there any way to accelerate or is it just better to work through these yourself or through your designated third parties?

Monte Redman

Well, the key thing with states like Illinois or New York or New Jersey is that it takes a long time to actually get title to those loans. Those loans have been in that process for a long time. We do take – look from time to time selling non-performers, we have done that successfully with some of our non-performing multi-family commercial real estate. The pricing there has been a little more reasonable actually perhaps in selling the notes. We do look from time to time and every quarter, we will take a look at pricing of the non-performing loans. For the most part, those pricing has not been as reasonable as we would think we would expect.

So we don’t have any plans at the moment but we currently look at where the market is. I think this foreclosure mess that’s going on is actually hurting that process in terms of people not sure where they are. It’s hurting the pricing in terms of selling non-performing loans in their residential loans anyway.

Operator

The next question comes from David Hochstim of Buckingham Research Group.

David Hochstim – Buckingham Research Group

As you continue to monitor the multi-family market, are you seeing any improvement in conditions or anything that would make you more interested in starting to make some new loans as an alternative to the runoff in the single family portfolio?

Monte Redman

Yes, I think the way we are looking at this, we will probably be back in that market in 2011. But it’s not going to be a panacea . We are primarily a residential lender and although we will go through the process and make quality multi-family loans but even the loans are multi-family are somewhere in the 4.5 to 4.25 rate and the cap levels and other things are – I don’t think it’s a booming market at this of time, but we will be in there in 2011 in the New York area making multi-family loans. But if we are looking at slowing or stopping the decrease in the balance sheet, clearly that’s going to come from the residential mortgage market.

David Hochstim – Buckingham Research Group

Do you think the multi-family volume could help slow that?

Monte Redman

Yes, we do. And we think that to be one of the things that will help slow the decrease.

David Hochstim – Buckingham Research Group

Do you have a rough idea of how much you might be able to originate next year and you get back –

Monte Redman

Not at this time, no.

David Hochstim – Buckingham Research Group

Could you just talk about, I think you mentioned that about half of your originations are in the Tri-State area?

Monte Redman

Yes.

David Hochstim – Buckingham Research Group

Single family. Can you talk about the other half and kind of what the characteristics are relative, and if there are any state concentrations now?

Monte Redman

Well, I think if you take a look at our press release, we have current portfolio and most of the portfolio is shrinking. But I think we are in 17 states. If you go back to – in New York, we are about 40%, New Jersey, Connecticut about 12% combined; so it’s about 52%. The other states that would be more than 5% are would be Massachusetts and Illinois.

David Hochstim – Buckingham Research Group

The LTVs in those states, are those higher on average than you’re getting in New York and New Jersey?

Monte Redman

No, on average our LTVs are about 62% across the board. We have the same underwriting across the board. We are not looking at enhancing or decreasing underwriting in any of the states we are in. That is the reason we reduced states from a couple of years ago down to only 17 states originating now, and in some of those states only a certain counties.

As I said just a last piece, 43% of our portfolio has been originated since 2008 with LTVs were about 60%, a little lower than 60% actually. And those are at values where there is a lot value still in that property, which means if somebody does lose a job, then there’s a problem in that we are back to where we have collateral to protect us in terms of that loss.

David Hochstim – Buckingham Research Group

Would over half that 43% also be in the Tri-State area?

Monte Redman

I would imagine yes. That’s where we have been originating last couple of years, yes.

Operator

The next question comes from David Darst of Guggenheim Partners.

David Darst – Guggenheim Partners

Are you doing anything to tweak the business model? It seems that a lot of your customers with low LTVs would have the optionality to refinance and are you trying to maybe capture or tweak the business model to maybe sell some of that production in the secondary market on a conforming basis.

Monte Redman

In terms of tweaking the model, I don’t think we are looking at that. If one of our customers who had a $500,000 loan, which was jumbo several years ago and wants to refinance into a conforming 30-year, we will do that and we will sell that conforming 30-year to Fannie Mae or Freddie Mac. So that’s been part of our business model if you will all along. So that no need to tweak that, we will do that. One of the things we do when you get on a 5/1 after four years where it’s less than a year before they start repricing, we will contact the customer and let them know what alternatives are there. Let them know that they can stay as one year ARM and that rate probably goes down, they can refinance it into a new 5/1 or 7/1 or whatever they are looking to do we can do with them. And if that happens to be, they want to go over 30-year fixed, we will do that and we will originate that and sell that to Fannie Mae.

David Darst – Guggenheim Partners

On the multi-family portfolio, are you getting any sense the prepayment speeds are picking up or will pick up?

George Engelke, Jr.

No, I mean that portfolio is down, but a lot of those loans have stayed with this on the repricing rates or the floors that are the current coupons. So that’s one of the reasons that our portfolio, although the portfolio has shrunk, the average yield year-over-year hasn’t decreased.

Operator

Next question comes from Edwin Groshans of Height.

Edwin Groshans – Height

So I just have kind of a big picture level. I think everybody is talking about the runoff of assets and things along those lines, and it seems Congress generously decided that they don’t want you to have loans under $729,000. Again, they are going to do that for another year.

At what point is it going to be pushed back to keep their involvement to what used to be the conforming levels of $417,000 or so? Or do you think that that’s completely gone and you need to now just compete in the ARM space and continue to give up share to the government?

George Engelke, Jr.

I think at some point they want to resolve Fannie and Freddie. And whether it’s nationalized or privatized or some combination, I don’t think it’s in anybody’s best interest to keep the loan to do 95% of the country’s loan portfolio. I haven’t heard anything other than mortgage bankers out there, who are doing, who are pushing this, that makes sense. It doesn’t make sense for taxpayers to subsidize million dollar homeowners. And so, I think it’s a political question and it’s going to be dealt with politically in the right time whether it be in 2011 or the awaited 2012. I am sure that will be one of the issues that the Obama administration needs to deal with whether they want to have that open out there or not. But in any case, at some point it’s going to be dealt with and I believe that it will not remain this high when they determine whether it’s going to be privatized or government or a nationalized or something like that. That doesn’t make sense to have a loss leader continuing on the budget with deficits that we have.

So we are looking at the various things where we are an ARM lender, that’s our primary thing, the 5/1 hybrid ARMs, but ultimately when the 30-year fixed rate becomes a more realistic rate in terms of the marketplace, we should be able to do more of that.

Edwin Groshans – Height

So I mean do you feel like you’re losing share here? I was talking to a person the other day who was buying a house down in Maryland and has an FHA loan for $725,000. Is that impacting your business model? Is that part of the struggles that you’re facing here?

George Engelke, Jr.

Yes. I mean not sure of the credit quality where the FHA requirements but we have people who have $500,000, $600,000 to $700,000 loans on the books that when we made those loans, they were jumbo borrowers and they now can refinance into a 30-year conforming loan. I think the biggest thing that we see is that if you are a $600,000 loan, and your rate was about 5% and you have a chance to refinancing, you have a choice of refinancing now to a conforming 30-year fixed at 4% in a quarter or a 5/1 jumbo hybrid at 3 3/8% and there are people out there sayings, “Ah, why should I be that greedy? Let me lock it in, forget about it.” And I think that’s what we are doing and as a government, I don’t think that as a national policy doesn’t make sense but that’s what we are doing. How long that keeps up, I think at some point that’s resolved. I am not pundit to tell you when but I think it’s going to get real. It will be resolved as part of that issue whether it’s national, whether Freddie and Fannie are nationalized or privatized.

Operator

Your next question comes from Matthew Kelly of Sterne, Agee & Leach.

Matthew Kelly – Sterne, Agee & Leach

Just a follow-up to Ed’s questioning there. If the GSEs were out of the business, where do you think yields would be today relative to treasuries and just in absolute terms? I mean how much yield compression is there in your view because of their complete dominance of the US mortgage financing complex.

Monte Redman

That’s a good question, I am not sure, I will tell you this. When we price our product, we reprice it over borrowing or alternatives in terms of making sure we get a good yield. So our 5/1 at 3 3/8% is a good rate. The question is a 30-year fixed rate conforming is a lot longer duration, a lot harder to properly match interest rate riskwise. So I am not sure where that rate is, I would imagine it’s higher than 4.25. You can take a look at jumbo, 30-year conforming rates, those levels are around 5% and I would imagine that the – if it wasn’t for the agencies that raising the limits and doing what they are doing to encourage refinances, I would think the conforming rate would be summed around that.

Matthew Kelly – Sterne, Agee & Leach

How would that compare to your 5/1 and 15-year fixed at 3 3/8% and 4%? Where would those have to go before you started to go into growth mode?

Monte Redman

I think if you get a 30-year conforming at 5%, we are growing. I think people are looking at that. Right now they are looking at the rates being – our absolute level is low. So it’s two things. It’s one is the spread over alternatives and two is the absolute level is low. If you have the 30-year conforming back at 5%, a lot of the refinances taking place today would not take place. Which means not only would we make – our production would be higher but our repayments, our loss would be a lot lower. And therefore you get the growth.

Matthew Kelly – Sterne, Agee & Leach

So I mean current 30-year conforming are what 4.20%, 4.25%, something like that. So 75, 80 basis points is what you’re saying then in 30-year fixed loans?

Monte Redman

That’s a start, yes.

Operator

As 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 Engelke, Jr.

Well, thank you very much for being with us this morning. I think we had a nice quarter and hope to continue. Thank you.

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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