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Valley National Bancorp (NYSE:VLY)

Q4 2009 Earnings Call

January 21, 2010 11:00 a.m. ET

Executives

Dianne Grenz - Director of Shareholder and PR

Gerald Lipkin - Chairman, President and CEO

Alan Eskow - SEVP and CFO

Analysts

Vaibhav Bajpai

Matthew Clark

Jason O'Donnell

Collyn Gilbert

Whitney Young

Operator

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). Also as a reminder, this teleconference is being recorded. At this time, I’ll turn the conference call over to your host, Miss Dianne Grenz. Please go ahead.

Diane Grenz

Thank you, Tony. Good morning, I'd like to thank everyone for participating in Valley’s fourth quarter 2009 earnings conference call both by telephone and through the webcast. If you have not read the earnings release we issued early this morning, you may access it along with the financial tables and schedules from our website at valleynationalbank.com, and by clicking on the Shareholders Relation link.

Also, before we start, I’d like to mention that comments made during this call may contain forward-looking statements relating to the banking industry and to Valley National Bancorp. Valley encourages participants to refer to our SEC filings including those found in Form 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements.

And now I'd like to turn the call over to Valley's Chairman, President and CEO, Gerald Lipkin.

Gerald Lipkin

Thank you, Dianne. Good morning and welcome to our fourth quarter and year-end 2009 earnings conference call. 2009 marked the challenging year for all of us within the banking industry. The low interest rate environment coupled with a weak economic growth and high unemployment levels created an atmosphere where every banker was forced to be more cognizant of each and every strategic decision.

At Valley our traditional Community banking approached focusing on sustained and recurring earnings, coupled with a consistent and conservative approach to underwriting credits, differentiates us from many of our competitors. Valley is a super-community bank with a [dual] ambition of providing outstanding returns to its shareholders while simultaneously facilitating the expansion and development of each community in which we operate.

At Valley, it is our goal to provide appropriate lending facilities to creditworthy customers in our communities. Our long-term approach and focus on the economic well being of our customers is one of the reasons we did not originate negative amortizing residential mortgages. (Inaudible) rate mortgage loans or other alternative lending products. As always we have the consumer's long-term best interest in mind.

Our customers are the white blood of the bank by establishing a banking environment in which each can prosper both the community and Valley win. During late 2008, and throughout the course of 2009, we took measures to ensure the long term viability of our organization.

We entered into the government's capital purchase program as an insurance policy at a time when there was great uncertainty about the economy. During 2009 this insurance policy reduced net income available to common shareholders by $19.5 million and negatively impacted diluted earnings per share by $0.14. While entering it through TARP was an appropriate response at the time the cost was extremely expensive to Valley both from an earnings and public relations perspective.

During June and September of 2009, we repurchased portions of the preferred stock and in December of 2009, we repurchased the remaining preferred stock from the government, effectively ending our participation in the capital purchase program. We are currently negotiating with treasury with regard to the outstanding warrants issued in connection with the program. The 2.4 million warrants have a strike price of $18.66 and expire in 2018. We have calculated an internal value as to what we believe the warrants are worth. If treasuries perceived value is greater than our internal value, it is our understanding the warrants will be sold at public auction. We do not have a timeframe in which, we anticipate the negotiations will be concluded.

During 2009, we sold 10.7 million new common shares increasing our common equity position by approximately $135 million. The new equity builds upon Valley's solid capital base. As of December 31st 2009 Valley's tangible common equity to tangible asset ratio stood at 6.68%, an increase of 45 basis points from just the prior quarter end.

As our regulators continue to modify their requirements for capital composition with a strong emphasis on common equity, we have positioned Valley to expand its loan portfolio or acquire other franchises should the opportunities present themselves.

Although the economic environment in our market place has significantly improved from just 12 months ago, unemployment remains elevated and many of our commercial borrowers remain cautious about expanding operations. However, as I indicated last quarter, a number of our builders continue to report to us increased sales in our market place. While overall sale activity remains right on a comparative basis, the improved floor traffic reflects the changing economic sentiment among many consumers in our market place. All of these sales exceeded analyst expectations and we anticipate the improving consumer outlook to positively impact lending opportunities in 2010.

However until economic conditions fully take hold, we must remain restrained, we will not leverage the balance sheet, merely to enhance immediate interest income only to return the gains in the form of credit losses, impairment in the investment portfolio or price sensitivity which at a minimum would impact our equity when interest rates rise.

During the fourth quarter our total loans outstanding declined by a $141 million, although we originated approximately $330 million of Newland refinanced loans. The quarterly contraction in the portfolio was primarily attributable to declines of $84 in the automobile portfolio and $68 million in the residential mortgage portfolio we anticipate the declining consumer automobile lending to continue for at least the next quarter. We do not intend to expand the geographic area in which we generate our order loans nor will we relax our credit standards to grow this portfolio. Alternatively the decline in the residential mortgage loan portfolio is attributable to Valley’s outlook on the future direction of interest rates.

During the quarter, we originated and sold approximately $90 million of high quality residential mortgage loans which we did not meet our internal interest rate threshold at this point in the economic cycle re-strength is the key word. Rushing to build income by taking undue interest rate risk can cause far more damage in the long run than the gains could produce in the near term.

The commercial lending portfolio remains relatively flat on a linked quarter basis as schedule the amortization and maturities will replace with either new loans to expanding existing customer relationships or through opportunities which presented themselves as many of our competitors continue to be pre occupied with internal issues caused by the economic recession or poor past lending practices.

However, demand for commercial and industrial loans remains tepid as we see few credit worthy borrowers seeking to expand or leverage their companies in our market place at this time. Our credit quality metrics for the quarter are once again excellent, both on an absolute basis and relative to our piers.

Total loan delinquencies remain very well controlled, although our non-accrual loans increased on a linked quarter basis, as Alan will discuss shortly categorizing a loan as non-accrual as mandated by accounting and regulatory guidelines should not automatically imply a principal or even an interest loss.

Our approach to underwriting, which emphasizes high levels of borrower equity collateral and personal guarantees ultimately helped mitigate losses from non-performing loans.

Unfortunately on the present accounting and regulatory guidelines, none of these factors are taken into account when placing a loan into non-performing status. We are also fortunate in the fact that we operate in a very affluent and densely populated market. Having learned the lesson from the late 80s speculative levels of real estate development were kept at relatively low levels during the past two decades within our markets.

The vast majority of our loan portfolio is geographically situated within a 100 miles of our headquarters. Almost all projects are within an area familiar to at least one member of our senior management team in addition to the lender. While this is not a guarantee that credits will not deteriorate, we do not anticipate problems reaching the levels that we see are being reported in other markets across the nation.

In spite of one of the worst economic environments I have witnessed during my banking career Valley's strong balance sheet and consistent approach to traditional community banking provided the foundation for a profitable year.

In 2009, the bank continued its streak of never posting a loss for a quarter. Let alone a year. While future dividends will be determined by our board on a quarterly basis, we are proud of the fact that today we have not been forced to reduce the dividends throughout this challenging time. Our focus has always been on the long-term viability of the organization and delivering consistent positive returns for our shareholders. Alan Eskow will now provide a little more insight into the financial results.

Alan Eskow

Thank you, Gerry. For the fourth quarter, Valley reported net income available to common shareholders were $28.6 million or $0.19 per share. During the quarter, Valley existed the government’s capital purchase program by redeeming our remaining $100 million of preferred stock.

As a result of the repurchase, fourth quarter net income available for common shareholders was negatively impacted by an acceleration of the original discounts including dividends and accretion of the discount, the impact on the fourth quarter was $3.5 million. For the year totaled, total TARP expense exceeded $19 million and negatively impacted 2009 earnings per share by $0.14. On a sequential quarter basis, net income of $32.1 million excluding preferred dividends and accretion increased approximately $500,000 largely the result of increased gains on security transactions.

The sale of investment securities and subsequent reinvestment of the proceeds in short term 100% government guarantees financial instruments reflects management’s desire to shorten the duration on the portfolio while simultaneously improving the credit quality and reducing the regulatory capital required for each asset. Long-term we view this strategy to be beneficial as many expect interest rates to rise and the regulators to impose new stricter capital requirements.

However, this strategy coupled with Valley’s investment approach during the third and fourth quarters of 2009 negatively impacted the current period net interest margin as compared to the sequential quarter of 2009. The linked quarter decline in net interest income was nearly $3.5 million. Although Valley's cost of funds including non-interest bearing deposits declined to 1.84% from 1.96% in the prior quarter. However, the 25 basis points contractions in earning asset yield outweighed the decline in funding cost. Valley is an asset sensitive institution with tremendous cash flow due to scheduled amortization and maturities.

During the fourth quarter, this cash flow in conjunction with the aforementioned asset sales generated reinvestment opportunities of over $700 million and a run off asset yield in excess of 6.25%. To maintain Valley's asset sensitivity, the majority of this cash was reinvested in short duration mainly risk-free financial instruments which yielded only 2.87% on average. While higher yielding longer-term and riskier credit investment opportunities were available, we elected to pass on yield in favor of liquidity and enhanced credit quality. To help medicate the decline in earnings asset yields, we continue to reduce deposit rates late in the fourth quarter and in to January 2010.

We expect the impact of these reductions to help us in the first quarter of 2010 in conjunction with our expectations of increased loan growth. We anticipate the economic conditions and our operating environment to improve in 2010. Maintaining sufficient liquidity to meet forecasted loan demand will enhance the long-term net interest margin although on an immediate basis, the roll of results may be negative due to the short-term duration strategy. As we stated before, re-strength is an important ingredient during credit cycles like this. It is imperative that we pick and choose our investments and loans wisely to protect our balance sheet and our shareholders.

As Gerry indicated earlier, total sequential quarter loan balances declined $141 million although we originated approximately 330 million of new and refinanced loans. Based on Valley's desired asset liability mix, we sold approximately $90 million of residential mortgage originations. In addition, although Valley's commercial loan usage remained flat from the third quarter of 2009, commitments declined by approximately $100 million which in part resulted in a decline of total outstanding commercial loans by approximately $30 million. Consumer lending accounted for the lion share of the decline in loans as order originations lagged portfolio amortization by approximately $84 million reflecting the general state of auto sales in our market place. We continue to underwrite large volumes of applications. However, most do not meet our stringent underwriting standards. In the fourth quarter, we declined over 9,600 auto loans while $208 million in application volume. Of the declinations, nearly $65 million had credit scores in excess of 700. In addition, we approved another $62 million of auto loan originations however, the borrowers elected alternative financing sources as our interest rate and returns were more stringent than our competitors.

At Valley, our credit decisions involved more than just a credit score. We look for significant down payments from our borrowers. In 2010, as the economy begins to improve, we anticipate additional volume with our automobile portfolio.

Credit quality for the quarter deteriorated slightly, yet our metrics remain solid compared to many of our peers. This is largely the result of our traditional banking community bank approach to lending, which differs greatly from the strategies employed by large regional and money center institutions.

Non-performing loans increased approximately $18 million due to the transfer of $18 million of loans classified at September 30th as 90 days past due and still accruing. The transfer was mainly due to the anticipated timing of collection not due non-collectibility of principal. As we have stated before at Valley, merely the classification a non-accrual loan does not automatically imply it's over loss.

For the majority of our loans, we have substantial collateral values and personal guarantees from almost all commercial customers. With the current foreclosure process in New Jersey, the time for collection maybe between one to three years. As a result, for some loans the collection of principal may take longer than our initial term, but for most we will get paid.

Although the non-accrual loan balance increased from the third quarter, total delinquent loans, including non-accruals actually declined on a linked quarter basis from a $152.7 million to a $150.7 million at December 31st, 2009. Net charges-offs increased on a linked quarter basis by approximately $3.6 million as linked quarter declines in C&I in consumer net charge-offs were mitigated by increases in mortgage net charge-offs.

The loan loss provision declined slightly from the third quarter of 2009 to $12.2 million for the fourth quarter of 2009. The net charge-off figure for the quarter was slightly greater than the loan loss provision. As gross charge-offs included $4.4 million during the quarter related to collateral dependent impaired loans that were partially covered by specific valuation reserves and our allowance for credit losses as of September 30th. In addition during the quarter a large number of loans were upgraded in classification reducing the current period required reserve. Valley's methodology for calculating the loan loss reserve remains consistent with prior periods. We continuously review our loss factors and incorporate any changes in the model. At December 31st 2009, we believe we are adequately reserved. For the year of 2009, our net charge-offs were $39.1 million and our loan loss provision was $48 million reflecting a reserve build of approximately $9 million or nearly 10% of the entire reserve balance. This reserve bill was during a time in which our loan portfolio contracted by nearly $775 million or 7.6% of the December 2008 actual outstanding loan balance.

As Gerry alluded to earlier, our capital ratio's are strong. We are poised for expanded lending opportunities in 2010 as the economy in our marketplace improves and we can leverage the Valley name and traditional approach in community banking to improve net income and enhance shareholder value. This concludes my prepared remarks and now opens the conference call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question will come from Craig Siegenthaler in New York, your line is open.

Vaibhav Bajpai

Hi, yes. Good morning. This is actually Vaibhav Bajpai filling in for Craig. Just a couple of questions. First around the reserve decline, I just wanted some clarity. Does this imply that we've seen a peak in reserves for this cycle or is that it mostly because of the partial specific reserves in the $4.4 million charge-off?

Alan Eskow

Yeah, no, I don’t know that we've necessarily seen a peak in charge-offs at this point but I think that they seem to have been relatively stable. Actually if you look at the charge-offs in the current quarter compared to the prior quarter while they were higher, many of those once again were actually loans that we had provided for in the prior period.

Vaibhav Bajpai

And then second, just want to get a sense of what your outlook is on M&A. I know there was some commentary in the press release but are you seeing any assisted deals coming through the pipeline? And if not, do you have any interest in non-FDIC assisted deals? And how do you think about that when you're in the context of kind of de novo expansion? I know you commented that you are slowing it down in the next year.

Alan Eskow

As I said in my remarks, we have built our capital position to the point where we are poised to do M&A acquisitions. We'd be receptive to it. There I believe will be some opportunities coming up within the next 12 months, within our general footprint. But I have nobody specific at this time.

Operator

Next question (inaudible) comes from Matthew Clark in New York and your line is open.

Matthew Clark

Just a few questions, first on the margin and the 14 basis point drop here incrementally. Can you try to quantify how much of that came from interest income reversals? How much from de-risk in the portfolio, the securities portfolio? How much from access liquidity and maybe how much from the loan shrinkage. I know some of that’s going to be partly offset by low deposit cost but just trying to get a sense. I don’t know if you've gone through that exercise or not?

Alan Eskow

Well we have gone through some of it we had about $900,000 of reversal of both the loans interest ad some investment interest that accounted for about 3 basis point decline in the margin. 18 basis points were really the impact of dollars coming out of the loan portfolio, enter our investment at higher rates and going into lower rates so that was about 18 basis point and then positively, we saw about a 10 basis point pick up based on the decline in the cost of deposits.

Matthew Clark

And then can you talk through some of these headwinds going forward, some of these pressure that you’ve witnessed this quarter. I guess what’s left in an investment portfolio, I mean I know what's in there, but what's left in terms of your desire to de-risk that portfolio as it relates to private label MBS maybe or just some of the troughs and then just as a follow on to that, if you would continue with your expectation for what the balance sheet might look like in the next couple of quarters if we see a slow recovery, a desire to hold excess liquidity and I think we already got a comment of the CD side on the deposit cycle going into this quarter, but just trying to get a sense for how you think about this things going forward?

Alan Eskow

We had a lot of questions there, but we'll try to answer some of them. In terms of investment portfolio, we have some PMBS as we’ve indicated that before. We see them paying down quite a bit quarter-over-quarter, we see some very nice pay downs in those and we don’t see a lot of risk remaining. There may be some potential OTTI and those going forward but we continue to monitor every quarter. It's not going to decline other than based on the fact that we see pay downs. So there is some risk. We do continue to take some small amounts of OTTI. It has been declining but that’s not a guarantee for the future.

Gerald Lipkin

You might point out that we did see pay downs in the last calendar year of approximately $40 million on a portfolio that started the year at $185 - $186 million. So it is coming down rather rapidly. And I think it speaks to some degree as to the quality of the private label mortgages that we hold. They are in a position to take advantage of the refinance market. In terms of the regular trust preferred most of those are to the largest institutions around the country, values have come back dramatically and you know we continue to be satisfied with what we hold the most for the trust preferred that we have. But then I lost all your other questions. There was a lot of other…

Matthew Clark

Just thinking about the balance sheet on the loan book side. I think it sounds like we might see some continued shrinkage here. I guess how much are your expectation for growth is dependent on kind of a macro economic recovery here in the second half may be.

Gerald Lipkin

Yeah, we are doing a full court community press to grow the portfolio but as I commented in my remarks the volume of credit worthy borrowers who are actually seeking to expand their businesses at this time has shrunk dramatically. We do see a lot of credits and probably turned down at least two or three for every one we approve on the commercial side. That doesn’t mean we are not anxiously looking to grow the commercial side just that you want to make sure that you are on Terra Firma before you put your foot down today when you are making a loan. I mean we got to a very, very difficult economic period with relatively low levels of losses. We don’t want to create a problem now that we're coming out of this cycle.

Matthew Clark

Okay. And then lastly if I may on the serious losses that we saw this quarter. Can you give us a better sense of what that related to? Was it more of a performance issue I assume rather than a refinance issue?

Gerald Lipkin

It comes to an issue of appraisals more than anything else. The appraisers in the past were I think they were little too liberal and today the pendulum has swung 180 degrees where they are actually coming in with ridiculous appraisals. And nevertheless under the current guidelines from the regulators you have to live with those appraisals and that causes write downs on properties that we believe are not really necessary. However, if the appraisal comes in with that level, we are going to have to live with that appraisal and we write those properties down accordingly.

I'll give you an example; we have a particular building that has had recently robust sales that he sold a dozen units in the last six to eight months. Not one of the units came in with an appraisal equal to the purchase price. Every appraisal on every unit sold came in below the purchase price. It seems a little ridiculous to me that people are willing to pay one price for a building and the appraisal comes in at 10%, 15% lower than the purchase price. But nevertheless, that’s what we have to go by if the loan becomes delinquent. We have to go by that appraisal and write down the property accordingly. Actual loses on sale we really haven’t seen at this point these are against the prices.

Alan Eskow

Yeah I think we kind of said this last quarter when we went through this FAS 114 analysis and continued on in to this quarter and that is that you do need to do as Gerry said, write these down to appraise value but in many cases, I think I specifically used an example last quarter of a project where we're writing it down to a value as is, not necessarily as completed and in many cases, these projects will be completing and we will come out of these hole. However, the requirements are such that today you may have to take a write down in that project, that doesn’t mean its going to be a loss and I think that’s what both Gerry and I have been trying to say get across to everybody is that just because we've taken some charge-offs doesn’t necessarily mean we're going to have loses. We have a lot of personal guarantees, we have a lot of collateral value out there and we're doing what the requirements of the regulators etcetera are out there but in the end we believe we're adequately reserved and our loses will likely be less than we seem to be taking right now.

Operator

Thank you and our next question in queue that will come from the line is Steven (inaudible) aided by the company.

Unidentified Analyst

Hi Gerry, hi Alan, this is Gerard. How are you? Alan can you share with us the duration of the investment portfolio or the [amateur] life? Would you have that?

Alan Eskow

Yeah the duration is four years at this point. Not a lot, the average life's about 5.9. Again, it's going to show longer numbers than what we have been telling you and a lot of the reason for that is based on obviously interest rate movements but largely the trust preferreds that we hold which have 30 year durations. So that being said its going to always make our portfolio look a lot longer.

Unidentified Analyst

If you carve this trust preferreds out for a second, what would the duration about be excluding the trust preferreds.

Gerald Lipkin

No we don’t really have it broken out, that will be a lot shorter.

Unidentified Analyst

Yeah. In fact if you could remind us, I know it’s in your queue but what was the total of trust preferred portfolio at the end of the year in terms of dollar size?

Gerald Lipkin

It's probably close to $400 million.

Gerald Lipkin

And out of the $400 million, how much of this single issue for trust preferreds versus pools or is it all single issue?

Gerald Lipkin

Almost all of them are single issues. I think we've disclosed they only had three pool trust preferreds, I don’t know, they probably are maybe $20-$25 million in the aggregate. By the way, I am seeing here that it looks like a duration without those trust preferreds maybe down around two years.

Unidentified Analyst

In terms of the trust preferred portfolio, the single issues about how much of that portfolio would you define is investment grade versus non-investment grade?

Gerald Lipkin

It's in our 10-Q I don’t have that in front of me at the moment. We disclose that each quarter what it is. I don’t have it front of me right now Gerard.

Unidentified Analyst

Okay, that’s fine. It's interesting because some of it appears or in the regional banks are reporting big increases in the net interest margin and I am suspicious of the increase because I think they are taking interest rate risk in keeping your duration down, and the securities portfolio is of course very defensive, I think based on the rising rates which I think everybody expects so…

Alan Eskow

May be we could…

Gerald Lipkin

Yeah. It's interesting right in for everybody else listening in. there was an article this morning in the New York Times on page two of the business section which John Stumpf from Wells Fargo talked exactly about that issue and about how they're really aren’t a lot of great loans out there at the moment and by extending your maturities and in a timeframe, where we have a steep yield curve may or may not be the best thing to do if in fact interest rates begin to rise in a shorter period than later than on the road.

Unidentified Analyst

Sure and Gerry you mentioned in your remarks as well as in the press release that the auto loan portfolio continued to shrink. Is it a matter of we need to see the economy start to grow and employment come back before you really get to see a growth in that portfolio, do you think?

Gerald Lipkin

I think so, Gerard. The demand has been weak. The volume of applications that come in through over the door are way, way down from prior levels two, three years ago. That begins the story, and second of all, we learn that it isn’t necessarily the FICO that determines whether or not a person pays you back. It has more to do with how much money they have into the car, and if you are lending a 125% or a 150% of the purchase price because they are taking what they are underwater on a car they are trading in and they are adding that into the loan. If you start learning that way, you have a great deal of risk in the portfolio, and you know Valley, we're risk adverse, so we just tighten the bar belt a little bit. I think you're going to have to see the economy get stronger before we can get the volumes we want.

Unidentified Analyst

Sure. I noticed you saw a little bit of growth in the commercial real estate mortgage portfolio and there's obviously been much written about the second shoe being commercial real estate problems. I found it interesting in that same wonderful newspaper Alan in New York Times about two weeks ago. There is a story about New Jersey where the suburban office market and I forget which area of New Jersey was actually picking up in commercial real estate and maybe the second shoe may not be as big as people think. Do you guys have any thoughts on what you're seeing in the commercial real estate markets that you're lending into?

Gerald Lipkin

Our delinquencies still remain very, very low right from 30 days on out. So that’s usually an indication of what's coming down the road. As you know Gerard in the late 80's there was a lot of speculative office building that took place in the Northern New Jersey marketplace and a lot of banks got burned very badly by it. Subsequent to that over the last 20 years is perpetually zero in the way of speculative office building taking place here. So I think that helped us. I know a lot of the banks in the Southeast got burned pretty badly this time on speculative real estate but they didn’t get burned 20 years. So maybe our people finally did learn a lesson when it comes to that speculative real estate. We are seeing our real estate developers; they seem to be doing pretty well. Look at their cash flow. We only lend on projects that have a reasonable cash flow and that seems to be holding up.

Alan Eskow

I think one of the things Gerard relative to what Gerry just mentioned, let us not throw out this statistics. In our CRE portfolio, our delinquencies are now running at just under 1%. Its 0.99% and that’s lower than it was last quarter on 1.05%. So, I think as Gerry is saying in our particular case, I think both the way we lend the liquidity that many of our borrowers have, the types of projects that we lend on really are still showing a lot of strength.

Unidentified Analyst

Not to put you guys on the spot too much, but I know commercial real estate's location and New York City versus New Jersey etcetera. Do you think there is a possibility that the whole field and commercial real estate being a debacle of the nature of what happened with the residential market, maybe over blown in certain cases?

Gerald Lipkin

I think it’s been over blown to some degree. The big hesitation on my part is I can't speak for the rest of the country, you know that geographically we only operate in the Northern New Jersey, New York City area but the one area that seems to be helpful to us is somehow this speculation by the doomsayers that this market is going to collapse and as a result we're getting some opportunities on commercial real estate that are really very, very appealing to us. Where the borrower has a really strong tenant, could be a state agency or state government is renting when I’m thinking of one particular loan that we made, where it was a very low loan to value and he was having difficulty finding anybody who just would lend the money on real estate period. Well that’s an opportunity that we like to take advantage of and that’s one of the reasons we're seeing some growth in there is because we are seeing some of those opportunities.

Unidentified Analyst

You have to change those, calling the state of New Jersey a strong tenant though?

Gerald Lipkin

I didn’t say, I said estate agency. I didn’t say (inaudible)

Unidentified Analyst

Okay, you’re right. You're right. You're right. You're right. Gerry thank you for your insights though.

Operator

Thank you our next question in queue that will come from Erika Penala in New York and your line is open

Unidentified Analyst

Hello, this is Ashley [Laney] sitting in for Erica.

Unidentified Analyst

Just really quick question I know you guys earlier speaking to interest rate risk so is it safe to assume moving forward with your excess liquidity that you'll probably keep it in lower yielding short duration security?

Gerald Lipkin

The (inaudible) probably be the bulk of our investments going forward, we are not going to start pumping all of our liquidity into 30 year paper, we are sure with that.

Yeah I mean we made some investments during the year that, I think we talked about, we on a (inaudible) managing these securities that we bought that are providing low yields at the moments because there are higher coupons so we are writing off premiums there so right now what we are seeing is we are seeing lower returns on those however if and when interest rates rise those will go back closer to the coupon rate of security which will be in the 5% or so range, so that will help us as rates begin to rise, hence a little bit of natural hedge there in addition, right now we are seeing huge cash flow out of that which is exactly what we anticipated to keep our asset sensitivity, its really a matter of when will interest rate rise and what this does, is it places us for a interest rate movements both into the long portfolio as well as into the investment portfolio.

Unidentified Analyst

And one really quick question, is it safe to assume about a $77 million run-rate per quarter for expenses?

Gerald Lipkin

No that number I think we indicated was high right of the bat there were some unusual items in there this quarter, the two that I can think of is there was an airplane write off of $1.4 million that went through was already (inaudible) where other repossessed asset if you will. And the other was there was a high cost for the, not a high cost, but a additional cost and therefore restricted stock awards that was a large you have to recognize a large part all of that expense for retirement eligible people in the quarter in which its given out. That was about $1 million number that number normally would have been spread out over a number of years. So and in addition to that we saw some rise in our medical expense. The only one I could say that might stay up there would be more than medical, but I think the you got about $2.5 million in there that is not, should not be included in an annual run rate.

Unidentified Analyst

Okay, so about 75 then.

Gerald Lipkin

Sounds more like it.

Unidentified Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question in queue that will come from Jason O'Donnell in Philadelphia. Please go ahead.

Jason O'Donnell

Just going back on the margin given the run out you are seeing in the taxable investment portfolio do you think we can see another 50 basis points drop in the yield in the first quarter or is that something that you just don’t expect going forward.

Alan Eskow

No we don’t expect it.

Jason O'Donnell

Okay, so the run off in the first quarter versus the fourth quarter is moderated somewhat.

Alan Eskow

Yeah, well I think you know we had some sales in the fourth quarter. So the sales are not there going forward. So that moderates it right off the bat.

Jason O'Donnell

Okay, great and then what are the current rates on your most popular time deposit products and do you think the average yield that you have on your time deposits will get below 2% in the near term.

Gerald Lipkin

Yes. We are right now we are at 1% ---

Alan Eskow

Well, our longer term CDs are over 2% but that gets into the three to five year range, everything else is way underneath that 2% range. Under one and many.

Gerald Lipkin

Yeah, our most popular product is the one year CD and that’s under 1%.

Jason O'Donnell

Okay, great. And then just one more question on the going back to the private label [NBS] portfolio, you just tell us what the remaining amortized cost is maybe I missed it and then how much of that portfolio is currently related below investment grade?

Alan Eskow

It’s about $140 million of principle remaining on that. How much is in below investment grade there was couple of issues that are I don’t think I know the answer to that. I don’t want to give you the wrong information, so right now just [not on that] be the answer.

Operator

Thank you next in queue in the line of Collyn Gilbert from New Jersey. Please go ahead.

Collyn Gilbert

Just a macro question. Gerry to your point and Alan you said it as well that your expectations for 2010 is that a stronger economic environment is that being driven by what we are seeing just kind of macro metrics or you seeing something going on with in the bank and within your customers that give you that confidence?

Gerald Lipkin

I am seeing it and when I talk about the economy Collyn I really only speak about the greater metropolitan New York, New Jersey areas.

Collyn Gilbert

Yes.

Gerald Lipkin

So, I mean I can’t talk about what’s happening in Florida, California I don’t know. But we are seeing development and you listen, I know you live in (inaudible) I have seen you drive around some of you can see several projects that are coming up there are people who are building they have confidence to get in the economy by the real estate I dropped my son off the other day these are large apartments house that too large (inaudible) complexes going on. There is in [large] where we have a large relatively large pent house project going up in some I mean a year ago nobody would have even been talking about this and today they're actually doing it so

Collyn Gilbert

Okay but I'm sorry go ahead.

Gerald Lipkin

I think there's a lot more competence in the market place.

Collyn Gilbert

Okay so you're saying but Alan I think you mentioned that line usage is so flat right so you're not

Alan Eskow

Right now it is I mean

Collyn Gilbert

Okay

Gerald Lipkin

We have very-very strong clients at least the bulk of our client base is very strong and they have a lot of their own money, they don’t like to leverage themselves and when there is a lot of economical uncertainty they tend to deleverage.

Collyn Gilbert

Yeah, okay I guess I'm just putting together what the strategy on the securities portfolio is that is it a much in interest rate call or is it a bullish call to suggest that you really do anticipate the need for liquidity to be there to just try and engage sort of what the motivating factor was.

Alan Eskow

Well remember one of the big issues is the credit issue I think Gerry mentioned that before about and I know I said it we're coming through a cycle in which it’s the wrong time to be putting money in to things that you're not going to guarantee you're getting your money back I mean we've all been through a pretty harsh time out here and I think so we've been very cautious about where we are putting money today, I think on the borrowing side the same think we want to make sure we're going to get repaid, so that’s a big thing that we're looking at.

Collyn Gilbert

Okay and more specifically Alan on the [nim] I mean it seems like this question has sort of been asked in a number of different ways but can you give us specific guidance as to a potential [nim] range?

Alan Eskow

We don’t give that Collyn you know that.

Collyn Gilbert

Well I can ask again Alan. And then just one other question on the credit quality front did you say Alan that the non-accruals a lot of what was driving that was just the timing of the collection so

Alan Eskow

Yeah absolutely.

Collyn Gilbert

So we could see a reversal of those numbers then in the first quarter?

Alan Eskow

No that’s not what my point is and I think we talked about this. To the extent lets just use residential loans, you know residential loans we may know that we have sufficient collateral to get paid back however if you go through a foreclosure part in New Jersey it could take 1-3 years.

Collyn Gilbert

Oh I see you are talking on the mortgage side.

Alan Eskow

You are not allowed to carry it as a performing loan if it's going to take two years to get your money back. You know we can have a loan and I'll use the example that we believe (inaudible) has an appraisal of $800,000 the borrower owes you a $100,000 the borrower dies and the children have to sell the house and then they going to pay you off and they decide well when I sell the house I will pay you up there is plenty of equity here. We are going to get paid we are going to get all our accrued interest meantime that’s carried as a non-performing loan today.

Operator

Thank you and next in queue is the line of Whitney Young in New York and your line is open.

Whitney Young

Actually all my questions were surrounding the margin so I think I am just going to spare you guys.

Operator

(Operator Instructions). And next in queue is Laura [Line] in Barkeyville, Pennsylvania. Please go ahead.

Unidentified Analyst

Two questions. Why is the stock off so much today? Is it because of the tax situation that President Obama spoke about this morning?

Gerald Lipkin

No idea. And your guess should be as good as mine.

Unidentified Analyst

Okay. And what about the tax, will that affect the price of the stock?

Gerald Lipkin

Well, in our case based upon the initial read that we had on the tax, we would not be one of the recipients of the blow.

Unidentified Analyst

Okay. All right, that is I've had I don't know if you remember my husband or not Charlie (inaudible), they were on the board for many years.

Gerald Lipkin

Sure.

Unidentified Analyst

Well, I'm Charlie's widow, and I've a few shares of Valley National and I've stuck with it for 30 years so

Gerald Lipkin

We appreciate that.

Unidentified Analyst

It's always done well by me and I know it will continue.

Gerald Lipkin

All right, thank you.

Unidentified Analyst

Thank you. Bye.

Operator

Thank you. At this time, there are no additional questions in queue. Please continue.

Dianne Grenz

Okay, thank you Tony and thank you everyone for attending our fourth quarter conference call. Have a good day.

Operator

Thank you and ladies and gentleman this conference will be available for replay after 1 p.m. Eastern time today running through February 11, 2010 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 128-918. Once again that phone number is 1-800-475-6701 using the access code of 128-918. That does conclude your call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: Valley National Bancorp Q4 2009 Earnings Call Transcript
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