Valley National Bancorp (VLY) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fourth-quarter 2009 earnings conference call. (Operator Instructions). Also as a reminder this teleconference is being recorded. At this time we will turn the conference call over to your host, Ms. Dianne Grenz.

Thank you, Tony. Good morning. I would 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 Shareholder Relations link.

Also, before we start, I would 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 on the Form 8-K, 10-K and 10-Q, for a complete discussion of forward-looking statements.

Now I would like to turn the call over to Valley's Chairman, President and CEO, Gerald Lipkin.

Thank you, Dianne. Good morning and welcome to our fourth-quarter and year-end 2009 earnings conference call. 2009 marked a 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 approach, focusing on sustained and recurring earnings, coupled with a consistent and conservative approach to underwriting credit, differentiates us from many of our competitors. Valley is a super community bank with a dual mission of providing outstanding returns to its shareholders, while simultaneously facilitating the expansion and development of each community in which we operate.

At Valley 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, teaser 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 lifeblood 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 into TARP was appropriate -- 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 Treasury's 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 31, 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 marketplace 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 marketplace. While overall sales activity remains light on a comparative basis, the improved floor traffic reflects the changing economic sentiment among many consumers in our marketplace.

Holiday 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 or 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 $141 million, although we originated approximately $330 million of new and refinanced loans. The quarterly contraction in the portfolio was primarily attributable to declines of $84 million in the automobile portfolio and $68 million in the residential mortgage portfolio. We anticipate the decline in 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 auto 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 did not meet our internal interest rate threshold. At this point in the economic cycle restraint 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 remained relatively flat on a linked quarter basis, as scheduled amortization and maturities were replaced with either new loans through expanding existing customer relationships, or through opportunities which presented themselves as many of our competitors continued to be preoccupied 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 creditworthy borrowers seeking to expand or leverage their companies in our marketplace at this time.

Our credit quality metrics for the quarter are once again excellent, both on an absolute basis and relative to our peers. Total loans loan delinquencies remained very well controlled. Although our nonaccrual loans increased on a linked quarter basis, as Alan will discuss shortly, categorizing a loan as nonaccrual 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 help mitigate losses from nonperforming loans. Unfortunately, under present accounting and regulatory guidelines none of these factors are taken into account when placing a loan into nonperforming status.

We are also fortunate in the fact that we operate in a very affluent and densely populated market. Having learned a 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 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 to date 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.

For the fourth quarter Valley reported net income available to common shareholders of $28.6 million or $0.19 per share. During the quarter Valley exited 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 to common shareholders was negatively impacted by an acceleration of the original discount. Including dividends and accretion of the discount, the impact on the fourth quarter was $3.5 million. For the year 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 guaranteed financial instruments reflect 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 noninterest-bearing deposits, declined to 1.84% from 1.96% in the prior quarter. However, the 25 basis point contraction in earning asset yields outweighed the decline in funding costs.

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 runoff 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 mitigate the declining earning asset yields we continue to reduce deposit rates late in -- continued to reduce deposit rates late in the fourth quarter and into January of 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 in 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 results may be negative due to the short-term duration strategy. As we have stated before, restraint 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 line 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 lines by approximately $30 million.

Consumer Lending accounted for the lion's share of the decline in loans, as auto originations lagged portfolio amortization by approximately $84 million, reflecting the general state of auto sales in our marketplace. We continue to underwrite large volumes of applications; however, most do not need our stringent underwriting standards.

In the fourth quarter we declined over 9,600 auto loans or $208 million in application volume. Of the declamations, nearly $65 million had credit scores in excess of 700. In addition, we approved another $62 million of auto originations, however the borrowers elected alternative financing sources as our interest rate and/or terms were more stringent than our competitors.

At Valley our credit decisions involve more than just a credit score. We look for significant down payment 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.

Nonperforming loans increased approximately $18 million due to the transfer of $18 million of loans classified at September 30 as 90 days past due and still accruing. The transfer was mainly due to the anticipated timing of collection, not due to non-collectibility of principal. As we have stated before, at Valley merely the classification of a nonaccrual loans does not automatically imply a total 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 may be between 1 to 3 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 nonaccrual loans balance increased from the third quarter, total delinquent loans, including non-accruals, actually declined on a linked quarter basis from $152.7 million to $150.7 million at December 31, 2009.

Net charge-offs increased on a linked quarter basis by approximately $3.6 million, as linked quarter declines in C&I and 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 in our allowance for credit losses as of September 30.

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 reserves remains consistent with prior periods. We continuously review our loss factors and incorporate any changes in the model. At December 31, 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% by the entire reserve balance. This reserve build 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 ratios are strong. We are poised for expanded lending opportunities in 2010 as the economy and our marketplace improves, and we can leverage the Valley name and traditional approach to community banking to improve net income and enhance shareholder value.

This concludes my prepared remarks, and now opens the conference call for questions.

(Operator Instructions). Craig Siegenthaler, New York.

This is actually [Basil Vaslik] filling in for Craig. Just a couple of questions. First, around the results decline, I just wanted some clarity. Does this imply that we have seen a peek in reserves for this cycle, or is the bleed mostly because of the partial specific reserves and the $4.4 million charge-off?

No, I don't think -- I don't know that we have 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.

Got it. Thank you. Then second, just wanted 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 -- in the context of de novo expansion? I know you commented that you are slowing it down in the next year.

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 would 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.

Matthew Clark, New York.

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-risking the portfolio -- the securities portfolio, how much from excess liquidity, and maybe how much from the loan shrinkage?

I know some of that is going to be partly offset by lower deposit costs. But just trying to get a sense -- I don't know if you have gone through that exercise or not.

We have gone through some of it. We had about $900,000 of reversal of both the loan interest and 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 and/or investments at higher rates and going into lower rates. So that was about 18 basis points. Then positively we saw about a 10 basis point pickup based on the decline in the cost of deposits.

Great. Then can you talk to some of these headwinds going forward, some of these pressures that you have witnessed this quarter? I guess what is left in that investment portfolio? I know what is in there, but what is left in terms of your desire to de-risk that portfolio as it relates to private label -- MBS maybe, or even some of the TruPS.

Then just as a follow-on to that, if you could 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 got some of the -- we already got a comment on the CD side, on the deposit side going into the quarter. But just trying to get a sense for how you think about these things going forward.

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

You might point out that we did see paydowns in the last calendar year of approximately $40 million on a portfolio that started the year at $185 million, $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 preferreds, most of those are to the largest institutions around the country. Values have come back dramatically and we continue to be satisfied with what we hold in most of the trust preferreds that we have. But then I lost a lot of your other question, (multiple speakers).

Just thinking about the balance sheet and on the loan book side, it sounds like we might see some continued shrinkage here. I guess, how much are your expectations for growth is dependent on a macro economic recovery here in the second half maybe?

We are doing a full court community press to grow the portfolio. But as I commented in my remarks, the volume of creditworthy borrowers who are actually seeking to expand their businesses at this time has shrunk dramatically. We do see a lot of credits. We 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. It is just that you want to make sure that you are on terra firma before you put your foot down today when you're making a loan. We got through a very, very difficult economic period with relatively low levels of losses. We don't want to create a problem now that we are coming out of this cycle.

Then lastly, if I may, on the CRE 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 would assume, rather than a refinance issue?

It comes to an issue of appraisals more than anything else. The appraisers in the past were I think a little too liberal. And today the pendulum has swung 108 degrees where they're actually coming in with ridiculous appraisals. 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 appraiser comes in with that level, we are going to have to live with that appraisal and we write the property down accordingly.

I will give you an example. We have an a particular building that has had recently robust sales. They sold a dozen units in the last 6 to 8 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 appraiser comes in at 10%, 15% lower than the purchase price.

But nevertheless that is what we have to go by. If a loan becomes delinquent we have to go by that appraisal and write down the property accordingly. Actual losses on sale we really haven't seen at this point. These are against appraisers.

I think we kind of said this last quarter when we went through this FAS 114 analysis, and it continued on into this quarter. And that is that you do need to do, as Gerry said, write these down to appraised value. But in many cases -- and I think I specifically used an example last quarter of a project where we are writing it down to a value as-is, not necessarily as completed. And in many cases these projects will be completed and we will come out of these holes. However, the requirements are such that today you may have to take a write-down on that project. That doesn't mean it is going to be a loss.

I think that is what both Gerry and I have been trying to get across to everybody is that just because we have taken some charge-offs it doesn't necessarily mean we are going to have losses. We have a lot of personal guarantees. We have a lot of collateral value out there. And we are doing what the requirements of the regulators, etc., are out there. But in the end we believe we are adequately reserved and our losses will likely be less than we seem to be taking right now.

[Stephen Dawon], Portland, Maine.

This is Gerard. Alan, can you share with us the duration of the investment portfolio or the average life? Would you have that?

I think it is around -- five years is the -- I am sorry, the duration is four years at this point, not five. The average life is about 5.9. Again, it is going to show longer numbers than what we have been telling you. And a lot of the reason for that is based upon obviously interest rate movement, but largely the trust preferreds that we hold, which have 30 year durations. So that being said, it is going to always make our portfolio look a lot longer.

If you carve the trust preferreds out for a second, what would the duration of the rest of the -- about be, excluding the trust preferreds?

We don't really have it broken out. It's got to be a lot shorter -- a lot shorter.

In fact, if you could remind us, I know it is in your Q, but what was the total trust preferreds portfolio at the end of the year in terms of dollar size?

It is probably close to $400 million.

$400 million?

Yes.

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

Almost all of them are single issue. I think we have disclosed we only had three pooled trust preferreds. I don't know -- the total of them are maybe $20 million to $25 million.

In the aggregate.

In the aggregate.

That's good.

By the way, I am seeing here that it looks like our duration without those trust preferreds may be down about around two years.

Okay, good. In terms of the trust preferred portfolio, the single issuers, about how much of that portfolio would you define as investment-grade versus non-investment-grade?

It is 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 just don't have it in front of me right now.

Okay, that is fine. It is interesting, because some of your peers, or the regional banks, are reporting big increases in the net interest margin. I am suspicious of the increase, because I think they're taking interest rate risk. And keeping your duration down on the securities portfolio is, of course, very defensive in case we get rising rates, which I think everybody expects.

It is interesting, Gerard, and for everybody else listening in, there was an article this morning in The New York Times on page 2 of the Business section, which John Stumpf from Wells Fargo talked exactly about that issue, and about how there really aren't a lot of great loans out there at the moment. And by extending your maturities 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 down the road.

Sure. Gerry, you mentioned in your remarks as well as in the press release that the auto loan portfolio continues 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?

I think so. You know 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. Second of all, we learned 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. If you're lending 125% or 150% of the purchase price, because they're taking what they are -- they are underwater on the car they are trading in and they're adding that into the loan -- if you start lending that way, you have a great deal of risk in the portfolio. You know Valley, we are risk adverse, so we just tightened our belts a little bit. I think you're going to have to see the economy get stronger before we can get the volumes we want.

Sure. I notice you saw a little bit of growth in the commercial real estate mortgage portfolio.

Yes.

And there has obviously been much written about the second shoe being commercial real estate problems. I found it interesting in that same wonderful newspaper, The New York Times about two weeks ago, they had a story about New Jersey where the suburban office market in -- 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 are seeing in the commercial real estate markets that you're lending into?

Our delinquencies still remain very, very low right from 30 days on out. So that is usually an indication of what is coming down the road. As you know, in the late '80s 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 there has been virtually 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 ago, 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.

I think one of the things relative to what Gerry just mentioned, I will throw out these statistics. In our CRE portfolio our delinquencies are now running at just under 1%. It is 0.99%, and that is lower than it was last quarter at 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.

Not to put you guys on the spot too much, but I know commercial real estate is location, location and New York City versus New Jersey, etc. Do you think there is a possibility that the whole fear on commercial real estate being a debacle of the nature of what happened with the residential market may be overblown in certain cases?

I think it has been overblown 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 some of this speculation by the doomsayers that this market is going to collapse. And as a result we are getting some opportunities on commercial real estate that are really very, very appealing to us, where the borrower has a really strong tenant. It could be a state agency or a state government is renting. One -- I am 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 does would lend the money on real estate period. Well, that is an opportunity that we like to take advantage of. And that is one of the reasons we are seeing some growth in there is because we are seeing some of those opportunities.

You (technical difficulty) change though with calling the State of New Jersey a strong tenant though.

I didn't say -- I said a state agency. I didn't say what type of agency.

Okay, you're right.

I didn't say which state.

You're right; you're right; you're right. Gerry, thank you for your insights (multiple speakers).

Erika Penala, New York.

This is actually [Lana Kemp] stepping in for Erika. Just really a quick question. I know you guys were earlier speaking to interest rate risk. So is it safe to assume moving forward with your excess liquidity that you will probably keep it in lower yielding, short duration securities?

That would probably be the bulk of our investments here going forward. We are not going to start pumping all of our liquidity into thirty-year paper. For sure we are not.

We have made some investments during the year that I think we talked about it. We own a fair amount of Ginnie Mae securities that we bought that are providing low yields at the moment, because they 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 on the security, which will be in the 5% or so range. So that will help us as rates begin to rise. That is a little bit of our 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. It is really a matter of when will interest rates rise, and what this does is it poises us for interest rate movements both into the loan portfolio as well as into the investment portfolio.

One really quick question. Is it safe to assume about a $77 million run rate per quarter for expenses?

That number I think we indicated was high. Right off 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. It was an OREO prop, or another repossessed asset, if you will.

And the other was there was a high cost for the -- not a high cost, but an additional cost in there for restricted stock awards that was a large -- you have to recognize a large -- all of that expense for retirement eligible people in the quarter in which it is given out. That was about a $1 million number. That number normally would have been spread out over a number of years.

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 you've got about $2.5 million in there that is not -- should not be included in an annual run rate.

Okay, so about $75 million then?

It sounds more like it.

Jason O'Donnell, Philadelphia.

Listen, I am just going back on the margin, given the runoff you are seeing in the taxable investment portfolio, do you think we could see another 50 basis point drop in the yield in the first quarter, or is that something that you just don't expect going forward?

No, we don't expect it.

So the runoff in the first quarter versus the fourth quarter is moderated somewhat?

I think we have some sales in the fourth quarter. So the sales are not there going forward, so that moderates it right off the bat.

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?

Oh, yes.

Yes.

We are, right now, we are at 1% (multiple speakers).

Our longer-term CDs are over 2%, but that gets into the 3 to 5 year range. Everything else is way underneath that 2% range. It is under 1% in many cases.

Our most popular product is the one year CD, and that is under 1%.

Great. Then just one more question. On the -- going back to the private-label MBS portfolio, can you just tell us what the remaining amortized cost is? Maybe I missed it. And then how much of that portfolio is currently related -- how much of that portfolio is currently related below investment grade?

It is about $140 million of principal remaining on that. How much is below investment grade -- there is a couple of issues that are. I don't think it is -- I don't think I know the answer to that offhand. I don't want to give you the wrong information, so right now I don't have the answer.

Okay, great. Listen, thanks a lot.

Collyn Gilbert, [Florin Park], New Jersey.

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

I am seeing it -- when I talk about the economy, you know I really only speak about the greater metropolitan New York/New Jersey area. So I can't talk about what is happening in Florida or California, I don't know.

But we are seeing development. Listen, I know you live in Summit. I have seen you drive around Summit. You can see several projects that are coming up that people are building. They have confidence again in the economy. By the railroad station, I dropped my son off there the other day, there is a large apartment house -- a large office complex is going up.

There is a large -- we have a large -- relatively large townhouse project going up in Summit. A year ago nobody would have been even talking about this, and today they're actually doing it.

But yet -- sorry, go ahead.

I think there is a lot more confidence in the marketplace.

But, Alan, I think you mentioned that line usage is still flat, right? So you're not necessarily --?

Yes, right now it is. Of course -- yes.

Keep in mind (multiple speakers) we have very, very strong clients, at least the bulk of our client base is very strong. They have a lot of their own money. They don't like to leverage themselves, and when there is a lot of economic uncertainty, they tend to deleverage.

Okay. I guess I am just putting together -- the strategy on the securities portfolio is it a much -- an interest rate call or is it a bullish call which would suggest that you really do anticipate the need for liquidity to be there? So just trying to gauge what the motivating factor was.

Remember, one of the big issues is the credit issue. I think Gerry mentioned that before about (inaudible), and I know I said it. We are coming through a cycle in which it is the wrong time to be putting money into things that you're not going to guarantee you're getting your money back. We have all been through a pretty harsh timeout here, and I think -- so we have been very cautious about where we are putting money today. I think on the borrowing side, the same thing. We want to make sure we are going to get repaid. So that is a big thing that we are looking at.

More specifically, Alan, on the NIM it seems like this question has been asked a number of different ways, but can you give us specific guidance as to a potential NIM range?

We don't give that. You know that.

Well, I can ask again.

You can ask.

All right.

The question [now] you'll get the answer.

Then just one other question on the credit quality front. Did you say, Alan, that the nonaccruals, a lot of what was driving that was just the timing of the collections, so --?

Yes, absolutely.

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

No, no, no. That is not what my point is. And I think we have talked about this. To the extent -- let's just use residential loans here. Residential loans, we may be -- we may know that we have sufficient collateral to get paid back. However, if you go through a foreclosure in New Jersey it could take 1 to 3 years (multiple speakers). You are not allowed to carry it as a performing loan if it is going to take two years to get your money back.

Right.

We could have a loan -- and I use the example that we believe it is -- has an appraisal of $800,000. The borrower owes you $100,000. The borrower dies. And the children have to sell the house, and then they are going to pay you off. And they decide, well, when I sell the house I will pay you off. There is plenty of equity here. We are going to get paid. We are going to get all our accrued interest. In the meantime that is carried as a nonperforming loan today.

Okay. That was it. Thanks.

[Whitney Young], New York.

Actually all my questions were surrounding the margin, so I think I'm just going to spare you guys (multiple speakers).

(Operator Instructions). [Laura Line] in Buck Hill Falls, Pennsylvania.

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

No idea. Your guess would be as good as mine.

What about the tax, will that affect the price of the stock?

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].

All right. That is -- I have had -- I don't know if you remember my husband or not, [Charlie Line and Morris Hill]. They were on the Board for many years.

Oh, sure.

But are most -- well, I am Charlie's widow. I have a few shares of Valley National, and I have stuck with it for 30 years.

We appreciate that.

It is has always done well by me, and I know it will continue.

All right, thank you.

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

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

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