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Fulton Financial (NASDAQ:FULT)

Q4 2010 Earnings Call

January 19, 2011 10:00 am ET

Executives

E. Wenger - President, Chief Operating Officer, Director, Ex-officio Member of Trust Committee, Ex-officio Member of Executive Committee, Ex-officio Member of Human Resources Committee and Ex-officio Member of Risk Management Committee

Charles Nugent - Chief Financial Officer and Senior Executive Vice President

R. Smith - Chairman, Chief Executive Officer, Member of Executive Committee, Member of Risk Management Committee and Member of Trust Committee

Laura Wakeley - Media Contact

Analysts

Eric Beardsley - Barclays Capital

Frank Schiraldi - Sandler O’Neill

Craig Siegenthaler - Crédit Suisse AG

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Kyle Kavanaugh - Palisade Capital

Richard Weiss - Janney Montgomery Scott LLC

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

Bob Ramsey - FBR Capital Markets & Co.

Operator

Good day, ladies and gentlemen and welcome to the Fulton Financial Corporation Fourth Quarter and Year End 2010 Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Laura Wakeley, Senior Vice President.

Laura Wakeley

Good morning, and thank you for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the fourth quarter and year end 2010. Your actual host for today's conference call is Scott Smith, and Scott is Chairman and Chief Executive Officer of Fulton Financial Corporation. Joining Scott are Phil Wenger, President and Chief Operating Officer; and Charlie Nugent, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement, which we released at 4:30 yesterday afternoon. These documents can be found on our website at www.fult.com by clicking on Investors Relations and then on News. On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations and business. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond Fulton's control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Fulton undertakes obligation other than required by law to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In our earnings release, we've included our Safe Harbor statement on forward-looking statements. We refer you to this statement in the earnings release and the statement is incorporated into this presentation. For a more complete discussion of risks and uncertainties affecting Fulton, please see the sections entitled Risk Factors and Management Discussion and Analysis of financial condition and results of operations set forth in Fulton's filings with the SEC. Now, I'd like to turn the call over to your host, Scott Smith.

R. Smith

Thanks, Laura, and good morning, everyone. Thank you for joining us. After Phil, Charlie and I conclude our prepared remarks, we'll be happy to respond to your questions. For the fourth quarter, we reported diluted net income per share of $0.16, even with the third quarter. For all of 2010, we reported diluted net income per share of $0.59, up 90% over the $0.31 we reported in 2009. Before addressing the fourth quarter specifically, I would like to share a few comments about the past year.

2010 was a year of significant improvement in our financial performance. It was also a year of continuous challenges, as well as important opportunities. The markets responded positively to our common stock offering in the spring, enabling us to repay our TARP funds in full and repurchase the Treasury warrant. Our recognition by Forbes as one of America's Most Trustworthy Companies also created opportunities to leverage that designation throughout our markets. Continued business and consumer deleveraging enabled us to grow our low-cost core deposit base, resulting in an expansion of our net interest margin. But as we all know, growth in the asset side of the balance sheet was not brisk. The slow pace of economic activity was not conducive to meaningful earning asset growth. New loans originated in 2010 were largely offset by normal run-offs, higher charge-offs and a planned reduction in our construction book. Net interest income ended the year with an increase despite legislative headwinds on overdraft fees. We experienced good growth in mortgage banking income for the year-over-year as a result of continued strong refinancing activity and improved spreads. Overall expenses were well-controlled and lower for the year.

With that capsule summary of the 2010 as a backdrop, let's look more specifically at the fourth quarter performance. Looking first at credit, we saw a decrease in our nonperforming assets and overall delinquencies linked quarter, which we find encouraging. However, we also saw increase in charge-offs. Credit costs, as we have indicated in prior calls, remain elevated. The provision was slack linked quarter, as we are comfortable with our overall loan loss provision. With what is currently being predicted to be a slow rebound in economic activity, we believe credit costs will remain at higher levels than we had experienced before the financial crisis. We expect growth in earning assets and net interest income to be a challenge until we see more rapid economic expansion. Adding to this challenge will be increased price competition for quality new credit opportunities as all banks aggressively seek to grow earning assets. Phil will give you more color on credit in a few minutes.

As the economy picks up steam, we believe we are positioned well to meet the credit needs of our customers. Aided by industry trends, promotional efforts and growing awareness of our relationship banking strategy and brand, core deposit growth has been good and liquidity is strong. In the fourth quarter, we continued to see some margin pick up, partially as a result of certificate of deposit repricing. However, our pace of margin expansion was tempered somewhat by increased pressure on earning asset yields. Noninterest income, while up for the year, was down for the quarter. Mortgage banking income, an area of very strong performance in the third quarter, slowed somewhat toward the end of the year. While noninterest income growth will continue to face challenges as a result of current and future regulatory changes, a great deal of time and energy is being invested by our people to meet those challenges. We are closely monitoring developments in the Durbin interchange amendment and the repeal of the prohibition to pay interest on business accounts, while simultaneously exploring the pros and cons of a number of strategic options.

This company has a long-standing reputation for tightly controlling expenses. In the fourth quarter, our expenses were higher than normal. As I mentioned earlier, in April of last year, Forbes named us as one of the 100 Most Trustworthy Companies in the country, and since we were one of only four banks on the list, we felt it was important to leverage this designation across all of our markets at a time when industry perception was at a low point. As a result, we significantly increased our marketing, promotional and media expenses to use this recognition to enhance our brand. We also believe these efforts contributed to strong core deposit growth that we generated in 2010. Charlie will cover our financial performance in more detail in a few minutes.

Other notable items in the fourth quarter included the completion of our merger of Delaware National Bank into Fulton Bank, reducing the number of affiliates from eight to seven. We have been monitoring developments around the mortgage foreclosure and secondary sale putbacks from Fannie Mae and Freddie Mac, no material concerns exist at this time. And of course we, along with the industry, are working to stay abreast of the 16 titles under the Dodd-Frank legislation. We believe our appointment of a high-level Dodd-Frank steering committee and specifically appointed title chairs is an effective organizational response. Our capital position remains strong and exceeds current regulatory and Basel Guidelines.

For 2011, we believe growth in earning assets will be both our greatest challenge and our greatest opportunity. While we sense that the pace of business activity is improving somewhat, most economists expect stable to modest growth. We, along with some of our business customers remain hopeful that 2011 will bring with it a meaningful uptick in business activity and economic expansion. Now, I'd like to turn the call over to Phil Wenger for his discussion on credit. Phil?

E. Wenger

Thank you, Scott. As Scott indicated, we were pleased to see reductions in the level of both our delinquencies and our nonperforming loans. Our charge-off pace was higher than prior periods. The level of charge-offs had been previously recognized within our reserves. Without prospects for full repayment from liquidity or cash flow in these assets, we took the necessary charges. Having said that, there are indications that credit quality is showing signs of improving. While one quarter is not a trend, we are pleased with the results.

Let me give you some specifics. My comments will be linked quarter unless I indicate otherwise. First, with regard to delinquency, as you saw on the chart on Page 6 of the press release, we had a 28 basis point or $34 million decline in overall delinquency, which was reflected across the board in each of the loan categories. 30-day delinquencies declined 13 basis points or $15 million, 60-day delinquencies declined four basis points or $4 million and 90-day and over delinquencies declined 12 basis points or $14 million. Delinquencies declined in every loan type, with the largest decline in dollars in the commercial loan category, $13 million. Overall, delinquency declined or remained flat in each of the five states by territory. Total delinquency at quarter end is the lowest it has been since December of 2009. Further, 30 and 60-day delinquencies are at the lowest quarterly level they have been since June of 2008.

Nonperforming loans also declined. Dollars decreased $14 million or 4% to $329 million from $343 million. The decline occurred in all loan types, with the exception of CNI, which increased modestly by $2 million. Nonperforming loans declined in all five states as well. Construction nonperforming loans declined the most with a $7 million reduction. Charge-offs, payoffs, reduction in balances through customer payments, as well as a slowing of additions to nonaccrual during the fourth quarter drove this reduction in nonperforming loans.

Despite the increase in net charge-offs, we determined that a provision of $40 million was appropriate for the quarter based on the results of our allowance allocation procedures. Net charge-offs were $49 million, an increase of $14 million from last quarter. Charge-off mix changed from last quarter with commercial mortgage charge-offs representing $17.5 million versus $3.7 million last quarter. Our largest commercial mortgage charge-offs were on a hotel, a mixed-use project and a hospitality company in Pennsylvania, Virginia and New Jersey, respectively. These loans were underwater on value and did not have sufficient cash flow to service the debt. Charge-offs on construction loans represent the next largest category at $13.2 million, a significant decline from $22.9 million in the third quarter. CNI charge-offs were $12 million, up from $4.5 million last quarter, and are comprised of a number of loans with the largest individual charge at $1.5 million, the remainder all under $750,000.

Construction loans, as we have mentioned in the past, have been a significant challenge for us. We continue to make meaningful progress in reducing our exposure to troubled borrowers within this industry. In December 2006, our Construction portfolio was $1,440,000,000. At the end of 2010, the balance was at $801 million. Balances declined $33 million in the fourth quarter, further reducing the risk in this portfolio. Other real estate increased from $30 million to $33 million. The increase was driven by the addition of several commercial properties in Maryland. Troubled debt restructurings totals increased to $95 million from $87 million, with residential TDRs increasing $4 million to $56 million. The remainder of the increase is spread among all loan types. $29 million of the TDR portfolio is nonaccrual. All commercial TDRs are current in payment. Delinquencies in the accruing TDR portfolio is 6.1%.

2010 was a robust year for mortgage activity. We closed over $1.8 billion in loans, resulting in mortgage banking income of $29.3 million. With regard to mortgage activity going forward, the pipeline is down from last year currently at $154 million versus $237 million last year at this time. There has been discussion in the press regarding repurchase activity and I can report that our outstanding repurchase requests are less than $5 million and are appropriately reserved for. Generally, loan demand remains modest. We are beginning to see signs that customers are less pessimistic and are undertaking projects that have been deferred, which should lead to increased spending. Commercial loan closings were 25% higher in the fourth quarter of 2010 than they were in the fourth quarter of 2009. And despite charge-offs, construction reductions and regular amortization, we continue to hold outstandings relatively level. Now, I will turn this discussion over to Charlie Nugent for his comments. Charlie?

Charles Nugent

Okay, thank you, Phil and good morning, everyone. Thank you for joining us today. Unless otherwise noted, comparisons are of this quarter's results to the third quarter. As Scott mentioned, we reported net income available to common shareholders of $31.5 million or $0.16 per share in the fourth quarter, unchanged from the third quarter. Net income, which excludes preferred stock costs, was also $31.5 million in the fourth quarter as compared to $37.5 million for the third quarter, a $6.2 million or 16% decline. In the third quarter, preferred stock costs were $6.2 million, as a result of redeeming the preferred stock, there was no cost in the fourth quarter. The decline in net income resulted mainly from a $4.4 million increase in operating expenses, a $2.6 million decrease in noninterest income and a $1.6 million reduction in net security gains. Net interest income showed a moderate improvement of $710,000. Our net interest margin was 3.85% for the fourth quarter as compared to 3.81% for the third quarter. Our total cost of interest-bearing liabilities decreased to 1.35% from 1.48% in the third quarter.

Time deposit cost declined to 1.74% in the fourth quarter as compared to 1.82% in the third quarter. During the fourth quarter, $1.2 billion of time deposits matured at a weighted average rate of 1.38%, while $1 billion of certificates of deposits were issued at a rate of 0.83%. In the first quarter of 2011, $884 million of time deposits are scheduled to mature at a rate of 1.28%. Federal Home Loan Bank advances totaling $81 million matured in the fourth quarter at a weighted average rate of 3.74%, while $84 million scheduled to mature in the first quarter of 2011 and the rate on those are 3.44%.

Yields on average earning assets decreased eight basis points to 4.93% in the fourth quarter as compared to 5.01% in the third quarter. Interest-earning-assets declined $59 million and average investments decreased $45 million, while ending balances increased $99 million. During the fourth quarter, purchases of investment securities, primarily agency collateralized mortgage obligations exceeded sales and maturities by approximately $140 million as rates increased slightly, making such investments more attractive than they had been during the first nine months of the year. Average loans declined $13 million as a $50 million decrease in construction loans was partially offset by $24 million increase in commercial mortgages and a $12 million increase in commercial loans.

General average deposits grew $108 million or 1% from the third quarter. While this growth is reflective of the industry trend of consumers and businesses saving, we also believe our customer experience and our promotional initiatives had contributed to this growth. We continue to experience good growth in core demand and savings accounts, with average balances increasing $334 million or 4.5%. This growth was partially offset by $226 million or a 4.5% decrease in average time deposits. Noninterest-bearing demand deposits increased $78 million or 4%, almost entirely in business accounts. Interest-bearing demand deposits grew $133 million or 6%, primarily in municipal accounts. Savings deposits grew $123 million or 4%, of this amount, $66 million was in municipal accounts, $35 million was in personal accounts and $21 million was in business accounts. Excluding net security gains, our other income for the fourth quarter declined $2.6 million or 5%. The reduction in other income was driven mainly by mortgage banking income, which decreased $3.5 million or 29%.

During the third quarter, we revised our methodology for determining the fair value of our mortgage banking pipeline to properly recognize expected gains in the period when mortgage rates are locked with the borrowers. This revision resulted in acceleration of mortgage sale gains in the third quarter totaling $3.3 million. Service charges on deposits decreased $661,000 or 4.5%, due mainly to the impact of Reg E, which we began to see during the third quarter.

Other service charges and fees grew $309,000 or 3%, mainly as a result of debit card fee income and foreign exchange income, both as a result of a higher transaction volume. The Federal Reserve recently issued proposed pricing guidelines regarding interchange income on certain debit card transactions as required under the Dodd-Frank Act. In 2010, our debit card interchange income that will be subject to these regulations totaled $15.7 million. If the regulations are enacted as proposed, this interchange income would decline by approximately $9.7 million annually. We will continue to monitor our fee structure to identify changes that could be implemented to mitigate the proposed reductions in this interchange income.

Investment management and trust services income improved $222,000, 3% as a result of growth in trust commissions. Net security gains were $194,000 in the fourth quarter compared to $1.8 million in the third quarter. Other than temporary impairment charges of $2.5 million on pooled trust preferred securities and $170,000 on bank stocks were more than offset by realized gains on sales of debt and equity securities of $2.2 million and $660,000 respectively. Our investments in pooled trust preferred securities have a cost basis of $34 million and a carrying value of $8.3 million at the end of the fourth quarter. Operating expenses increased $4.4 million or 4% in comparison to the third quarter, though most significant increase was seen in marketing expenses, which increased $1.9 million or 72% as a result of various promotional campaigns. Other categories seeing expense adding increases were: Operating risk loss, which increased $541,000 or 81%; salaries and benefits increased by $422,000 or 1%; and our other expense category increased $725,000 or 4%, mainly due to outside services.

Okay, thank you for your attention and for your continued interest in Fulton Financial Corporation. Now, we will be glad to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bob Ramsey with FBR Capital Markets.

Bob Ramsey - FBR Capital Markets & Co.

First question for you has to do with commercial real estate charge-offs. I know you noted three larger credits. How big were those relative to the total amount of net charge-offs? And then sort of what is the status of those loans? Now that they’re charged down are they still a nonperforming? Or were they restructured? Or have they been worked off the books? Or sort of what's going on there?

E. Wenger

Yes, I'll answer that Bob, Phil Wenger. The size of the charge-offs were $3 million, two were $3 million and one was $2.4 million. And two of them have been restructured, and one is a nonperforming.

Bob Ramsey - FBR Capital Markets & Co.

And, I guess, also the CNI is sounded pretty granular but was certainly up from last quarter and from sort of recent run rates. Is that just normal quarterly lumpiness? Or is any of that seasonal, sort of year-end more thorough review? Or any other factors in the CNI jump?

E. Wenger

Yes, our largest charge off in the CNI was $1.5 million. So I would say it's normal lumpiness, but we had a lot of small charge-offs this quarter. Our largest charge off in general was $3.1 million. We actually had a total of 405 accounts. This is for all charge- offs, but would certainly be representative of CNI also. We had 405 accounts in the quarter that we had a charge against. In the third quarter, for example, we only had 275. So the average size was down quite a bit but we took charges on more accounts.

Bob Ramsey - FBR Capital Markets & Co.

Okay. And is the increase in the number of accounts, is that just sort of problems working their way through the normal pipeline or would you read into that any sort of pickup or sort of what are the thoughts?

E. Wenger

I think it was a normal work through the pipeline.

Bob Ramsey - FBR Capital Markets & Co.

Okay, great. You guys mentioned that in terms of loan demand, you are seeing some signs of some borrowers beginning to, I guess, enter projects that had been previously deferred. What are you guys seeing sort of in terms of line utilization? Is that still flat to down or has there been any pickup there?

R. Smith

It's been very flat. We're actually, if you look year-over-year, we're up from 41% to 43%. But it's been at that 43% level over the past three quarters.

Operator

Our next question comes from Matthew Clark with KBW.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

On the reserve releases this quarter, can you give us a sense for, we obviously see kind of the net new problem trends and the delinquency trends. But can you give us a better sense for the migration maybe of criticized classified credits, whether or not that's also improving. I'm just trying to get a better sense for whether or not this reserve release might continue assuming you see kind of a sustained improvement?

E. Wenger

There was improvement in the fourth quarter. We are not ready to say that, that is a trend. So I guess I hate to be wishy-washy but I would not say that the release of reserves at this point is definitely a trend.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

Okay. And then the comment on the TDRs again, can you just reiterate that number again? I missed it. In terms of the, I guess the total TDRs, and then I think got the piece that is, in nonaccrual, just $29 million?

E. Wenger

Yes, the total TDRs went from $87 million to $95 million. And $29 million is in nonperforming.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

Okay. And then just lastly, on the Construction portfolio, would you mind just giving us an update on the mix of that portfolio by type? I think you've given us in the past, raw land and other categories, I think developed lots is another one. And then as a follow on to that, if you can just update us on whether or not there was any change in the performance of your commercial borrowers that are in the construction industry that we've talked about in the past?

E. Wenger

Yes, I don't know that I have those numbers totally in front of me, but I do remember some of them. Raw land is at $80 million and then land development, which would be developments that have been improved, is about $360 million. And then the balance would be vertical. And then, I'm sorry, I didn't catch the rest of your question.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

Just wondering how the performance of your Commercial portfolio is doing that is exposed to the construction industry. It’s an exposure that, I think we've talked about in the past as being about $350 million.

E. Wenger

I would say we have challenges in that portfolio and it certainly is an area that we're watching very closely.

Operator

Our next question comes from Frank Schiraldi with Sandler O'Neill.

Frank Schiraldi - Sandler O’Neill

Just a couple of higher-level questions. Given the credit in the quarter and maybe it's not a trend yet but it looks like credit, maybe, has stabilized here. How do we think about a potential dividend raise? Is it likely or do you think it could be a 2011 event? And what sort of payout ratio do you ultimately expect to target?

R. Smith

Well, Frank, as we've been saying for some time now, there's a series of events needed to take place before we could consider a dividend increase. One was repaying TARP and of course, that's done. Another which to begin to improve our earnings and we've done that. And then this clarity on capital from regulatory agencies, I think it's clearer but not complete. As you know, they're going through this round with the 19 and stress testing all of them. We're getting very little information about what that stress test is and how it's being performed. We've done our own stress testing and we think our capital is in good shape. But we don't have the final, if you will, clarity on that from regulators. And then to your comment, while we feel good about the way credit looks right now, as I mentioned earlier, this economy is stable but growing modestly. So we have to kind of watch earnings as the year unfolds. But we are a dividend -- have always been a dividend-paying company. And I think the board will look at that in a more positive vein than they have in the past as we go through the quarters this year. I think it'll be a little more clarity on capital, and then whether the earnings can support it. As far as the payout ratio, that's one of the areas where I think there's a lot of fogginess right now. You hear this 30% turnaround in the press as the big bank's looking at where the payout ratio should be. I think that will depend on the recovery and how robust it is or isn't and how sustainable everybody thinks it will be. So I think we're going to be, all of us are going to be very careful about paying out too large a portion of earnings until we get a little more convinced that the economy really will rebound the way it is expected in '12 and on out. I guess to sum all that up, I think there are reasons to look at positively at a potential dividend increase. But we're not declaring one yet.

Frank Schiraldi - Sandler O’Neill

Okay. And then I guess on the other side of the coin, M&A, obviously organic growth has been somewhat hard to come by, and obviously in the past, Fulton has grown through M&A. And so I'm sure there's opportunities out there. So do you see Fulton jumping back into that M&A mix anywhere in the short term or is that sort of maybe even further out than the potential dividend increase?

R. Smith

Well, I think we are looking at and we'll continue to look at opportunities and if we think they strategically fit us, and if we can make a return to our shareholders on them, you're going to see us doing M&A going forward. To date, primarily the banks that have been available are what I'll call stressed and in some situations, we have been involved with looking at those and at least at this point in time, haven't been successful in being the final candidate. But we continue to look at all opportunities. My assessment is that short-term opportunities will continue to be the stressed banks. I think as we proceed through the year, if it goes the way all of us hope it will, we'll see some more consolidation in the more typical kinds of normal consolidations with healthier banks.

Frank Schiraldi - Sandler O’Neill

Okay. And just, I guess, a follow-up on that, with the TCE [tangible common equity], is there sort of a tangible common equity ratio that you have in mind in terms of you don't want to get below here? Or I guess if M&A does come up, if something does come up, where could we see that migrate downwards to where you'd still be comfortable?

E. Wenger

Frank, is this tangible common equity the risk -weighted assets or tangible assets?

Frank Schiraldi - Sandler O’Neill

Just off tangible assets.

E. Wenger

Tangible assets, our ratio is around 8.5% and we think that's more than adequate. And that would be above the fully phased in Basel III requirements. So I think...

R. Smith

That's good.

Frank Schiraldi - Sandler O’Neill

So there's maybe some room there, okay.

E. Wenger

Maybe, we used to be about 7%, maybe, we'd keep it at least 8%, I would think.

R. Smith

Frank, it will be individualized by deal, depending on the strength of the company we're buying and our potential to grow it and all of that. So that becomes a very specialized decision as opportunities present themselves.

Operator

Our next question comes from Craig Siegenthaler with Crédit Suisse.

Craig Siegenthaler - Crédit Suisse AG

First, just on the FASB guidance for TDRs, is there any potential for increases in the first half of this year just due to change in the definition?

R. Smith

I don't think so, no.

Craig Siegenthaler - Crédit Suisse AG

Got it. Just a follow up here, you mentioned there's kind of three credits, two of them charged around $3 million, the other one around $2.2 million. What was the notional size of the loan of each of those credits?

Charles Nugent

They varied from $7 million to $9 million.

Craig Siegenthaler - Crédit Suisse AG

Got it. And then, just a final here, what was the addition to nonaccrual in the fourth quarter in aggregate? So not just commercial mortgage but the total bulk and how did that compare to the third quarter?

Charles Nugent

Fourth quarter was at $64 million and third quarter was $73 million.

Operator

Our next question comes from Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Could you just give a little bit of color, Scott or anyone else who if you want to field it? On the sort of the nature of the commercial loan credits for use, I think if the percentage is right, you said there was a 20% increase this quarter in commercial loan closings versus what you saw same period last year. Anything in particular that you're seeing within that segment, where demand is coming back?

R. Smith

Part of it was new customers, Collyn. And I don't know that I could identify one industry that’s been [indiscernible]…

E. Wenger

Certainly, it wouldn't be housing, okay? I mean, autos are doing better than they were. And what I'm hearing anecdotally, Collyn, is that customers who had mothballed projects are starting to talk about them again. And I think there's just more optimism now with some of the uncertainties have been resolved for folks with the tax changes and some of that. It gives us hope but as far as short-term growth is concerned, we have to have a lot more projects in process to be telling you that you're going to see a nice pop in outstandings first quarter, but things can happen rather quickly. But we certainly feel better about loan growths now than we did a year ago.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Just as, Phil, back on the question about kind of the reserve and managing the credit recovery process, you said you're not ready to say that there's a trend quite yet. What would need to happen for there to be a definitive trend? Is it just another quarter or do you need to see sort of change in customer behavior? I mean, what are you kind of looking for to say, "Okay, the trend is there, we now legitimately feel comfortable"?

E. Wenger

I think we'd like to see what happened in the fourth quarter be sustained for a period of time. One, two quarters more, I think would be very positive...

R. Smith

What's more important, Collyn is what you think is a trend, not what we think is a trend.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Just one thing, and Charlie you may have touched on it, but did you give an update as to what the full Reg E impact is going to be for the year?

Charles Nugent

We said that when we compared the quarters, it was down about $641,000. So it's hard to gauge. I think Joe said on the last conference call, he thought it was between $400,000 to $500,000 a month. But we have also growth in accounts still, so...

E. Wenger

It's actually been less than that. And I think we're looking somewhere around $2 million.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

For the full-year impact?

E. Wenger

Yes.

Operator

Our next question comes from Eric Beardsley with Barclays Capital.

Eric Beardsley - Barclays Capital

You briefly alluded to competition in your prepared remarks. I was just wondering if you could add any color to what you're seeing out there.

R. Smith

Well, what we're seeing is as we are struggling for loan growth, so is everybody else. And we all want the quality credits that are available and there are some available. But we're seeing some pricing pressure as a result of that, not to the extent it was pre-crisis, but it certainly picked up from where it was six, nine months ago.

Eric Beardsley - Barclays Capital

In terms of your operating expenses, are we going to see the marketing expense higher going forward? Or is that something that's just one quarter?

R. Smith

I think it was one quarter primarily. I think we will see it drop back.

Operator

[Operator Instructions] Our next question comes from Rick Weiss with Janney.

Richard Weiss - Janney Montgomery Scott LLC

I was wondering if you could talk a little bit about interest rate sensitivity? Has there been any material change since you filed the Q for the September quarter?

Charles Nugent

No, it’s almost exactly the same. The static gap is a 106, and we haven't updated our testing based on rates but I would think it would be exactly the same.

Richard Weiss - Janney Montgomery Scott LLC

And also, with regards to, a lot of news stories on Marcellus Shale in Pennsylvania, how does that impact Fulton?

R. Smith

We are in State College and we are in Williamsport. And both of those are kind of at the edge of where that's all happening. I would say to date it has not had significant impact on our growth, although we are seeing some investment management opportunities and some growth in some of our customers, particularly the State College customers who were involved with this. It looks like some decent revenue growths for them and potential loan growth in some of those, but it's not something that I think is going to move the needle short-term here. Anybody have anything to add to that?

E. Wenger

I would agree.

Richard Weiss - Janney Montgomery Scott LLC

Do you think it could have an impact on the M&A activity within Pennsylvania?

E. Wenger

Well, there are some banks in that market who might become attractive to some folks. We are looking to get some branching opportunities there and also what's available there from an M&A standpoint. But that remains to be seen, I guess.

Operator

Our next question is a follow-up from Matthew Clark with KBW.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

Just a follow up, really, on the long end of the curve and the relief that we've seen on that end. Can you just talk to how that may have helped you with your quarter? Obviously, reinvesting at better rates on the securities front, sounds like pricing pressures still persists though on the loan side, but just also on the deposit front, any change in kind of your ability to lower rates? If you could comment on that, I'd appreciate it.

E. Wenger

Matt, we mentioned this $1.2 billion in CDs that matured in the fourth quarter. And we've replaced them. The billion in new CDs were generated and they went along at 83 basis points. So there was a pickup there a nice reduction in cost of funds that helped us move down 12 basis points in total. And in the first quarter of this year, we have $884 million in of CDs maturing. The weighted average maturity is 128 [basis points]. So if we could keep it at that 83 basis point that we’ve keeping the CDs at, we would improve by 45 basis points. We also have some Federal Home Loan Bank advances maturing it's $84 million and the weighted average maturity on those advances are 3.44%. But we think we'll see some more reductions in our cost of funds.

Operator

Our next question comes from Kyle Kavanaugh with Palisade Capital.

Kyle Kavanaugh - Palisade Capital

Charlie, I think you mentioned that Durbin amendment could have an effect on debit card? You said it would reduce the current $15.7 million to $9.7 million or it would reduce it by $9.7 million?

Charles Nugent

Reduce it by 9.7%. And Kyle, that was on our revenue last year. And what the effect would've been on last year's income if what was proposed actually happens. And that would reduce the income by $9.7 million and that $15.7 million would’ve been $6 million.

Operator

Our next question is a follow-up from Bob Ramsey with FBR Capital Markets.

Bob Ramsey - FBR Capital Markets & Co.

Just to follow up on that question, I think you gave some good information about the funding costs, a near-term outlook. Sort of as you factor that through, is that offset by the pressure on asset yields when you think about marginal security and loan yields? Or kind of how does it all fall out in terms of your margin outlook?

Charles Nugent

We've been pretty good at holding asset yields. We're down a little bit more than we expected. I think we were down eight basis points in total. Loan yields were only down six [basis points]. The investment portfolio the yields were down 20 basis points. A lot of that was early repayments on the mortgages and the mortgage-backed securities and some of those had a premium on it, so we had to take that premium off. But I think the cost of our funds are going to keep on going down a lot faster than our asset yields.

Operator

And next we have a follow-up from Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Just quickly, could you give -- Charlie, could you give us a little bit of color into your Municipal Bond portfolio and kind of -- has the management strategy of that portfolio changed at all in the last six months or just kind of run through a little bit more detail on the book?

Charles Nugent

In the municipal bond portfolio, Collyn, we have, it's around $340 million and that's $341 million in bonds. The market value surely deteriorated on those from quarter to quarter and went down from $14 million net gain to $4.5 million. We look at that very carefully. When we bought them, we looked at the insurance rating, and then also the underlying rating of the municipality. I think they're all highly rated and over 96% of those bonds are backed by the general obligation, the ability to increase taxes. We feel pretty comfortable with it.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

What about just the geographic nature of them? Where are they?

Charles Nugent

I don't have the breakdown but I would think the majority would be in Pennsylvania and New Jersey. I’ll have to look to make sure.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

But given all that's going on in the market, I mean, should we not expect any kind of fundamental change in your willingness to hold them and have be part of the tax strategy?

Charles Nugent

No, we still continue to buy them. And we look at the ratings and then the insurance, and we're still comfortable with them.

Operator

At this time, I'd like to turn the call back over to Scott Smith for any closing remarks.

R. Smith

Thank you. We'll end the call by thanking everyone for joining us today. We hope you'll be able to be with us again when we discuss first quarter earnings in 2011 on April 20 at 10:00 a.m. We will talk to you then. Thank you again.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.

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