Valley National Bancorp in Wayne, N.J., became the first banking company to make a partial repayment of Treasury Department funds, slicing the government's investment by a quarter Wednesday.

Gerald H. Lipkin, the $14.4 billion-asset Valley National's chairman, president and chief executive officer, said in an interview that it could get by just fine if it returned all the $300 million it received under the Troubled Asset Relief Program, though it wanted to be cautious.

"There is still some uncertainty in the economy," Lipkin said. "I won't suggest that I have a crystal ball. So we felt paying it back piecemeal over the next so many months makes sense."

Observers said the strategy is bound to become more common.

David Darst, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets Corp., said many community banking companies are reluctant to raise dilutive capital, even if they would like to exit Tarp.

"A lot of them have cut dividends, so when their earnings power returns, it's likely, rather than reinstating their dividends, they may use that increase in earnings power to repay the government over a quarter or two," Darst said. "It's a reasonable route."

As of Monday, 20 companies had redeemed all the preferred shares they sold to the government, with none making partial repayments, according to the Treasury's most recent transaction report.

But Valley National, which received its Tarp investment in November, said it would return $75 million of it Wednesday.

Lipkin said the time frame for completing its Tarp exit is flexible. "If the economy shows improvement, we'd probably pay it off that much faster. If it doesn't, that much slower."

Though Lipkin cited increased flexibility on executive compensation as a benefit of Tarp repayment, he said it did not factor into Valley National's decision.

Congress tiered the executive compensation limits it imposed on Tarp recipients. For companies with $250 million to $500 million of government capital, the limits apply to senior executives and the 10 next most highly paid employees. For companies with between $25 million and $250 million of government capital, the limits apply only to the five employees with the highest pay.

With Valley National shrinking its Tarp investment to $225 million, fewer executives would be subject to the restrictions, said Rob Klingler, an associate at Bryan Cave LLP.

Some companies might consider that motivation enough to make partial repayments, Klingler said.

"You may see partial redemptions from time to time, to go from one tier of executive compensation restrictions to another," he said.

Still, Klingler said the expense of the government capital is a consideration.

"I think this redemption more than any of the others shows the pure economic cost of the Tarp capital," he said. "By redeeming only a part of their investment, they're not getting out of the political implications of being involved in the program or all of the executive compensation restrictions or the dividend restrictions. They're simply getting out of the cost of having $75 million of preferred stock and the dividend payments associated with that. I think that demonstrates this is not free money for the banks."

Lipkin said Valley National would have paid about $18 million annually in dividends on the $300 million of capital. He said the partial repayment would shave about $4 million annually from the dividends.

The company would remain "highly capitalized" without any of the Tarp funds, so it is comfortable siphoning off some of the excess, he said.

"We are now seeing that the economy seems to be turning itself around," Lipkin said. "Unemployment, while still high, has not soared to the levels that the doomsayers were thinking. I think the economic activity among our customers is starting to show improvement. … Our auto loan production in the bank has shown a nice increase each of the last five weeks."

But it is prudent not to repay all the money now, he said.

Joseph Fenech, an analyst at Sandler O'Neill & Partners LP, called Valley National's repayment strategy smart.

"I'm not sure why there is such an urgency on the part of some of these community banks to repay Tarp funds all at once, given the uncertainty out there," Fenech said. "Most, if not all of them that have paid back Tarp so far, are not nearly as well positioned as Valley to withstand whatever may lie ahead."

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