Ladies and gentlemen, thank you for standing by and welcome to the Fulton Financial Fourth Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you depress star one on your telephone. If you require any further assistance, please press star zero. I would now like to turn the call over to your host, Matt Jozwiak. You may begin.
Good morning, and thanks for joining us for Fulton Financial's Conference Call and Webcast to Discuss Earnings for the Fourth Quarter of 2021. Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer. Joining Phil are Curt Myers, President and Chief Operating Officer, and Mark McCollom, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcements, which were released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News. The slides can also be found on the presentations page under Investor Relations on our website. On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations, and business.
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially. Please refer to the safe harbor statement on forward-looking statements in our earnings release and on slide two of today's presentation for additional information regarding these risks, uncertainties, and other factors. Fulton undertakes no obligation other than as required by law to update or revise any forward-looking statements. In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcements released yesterday and on slides 10 and 11 of today's presentation for reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Now, I would like to turn the call over to your host, Phil Wenger.
Well, thanks, Matt, and good morning, everyone. As usual, I'll begin the call with some high-level thoughts on the quarter and the year. Then Curt will discuss our business performance, and Mark will share the details of our financial performance, and then we'll take your questions. As you saw in our press release, Fulton had a solid fourth quarter and a very good year overall in 2021. Our fourth quarter earnings per share were $0.37, and for the year, earnings per share were $1.62, which was a record year for Fulton. Key drivers for 2021 included solid loan growth for the year and increasing loan growth during the second half of the year. Strong performance from our commercial and consumer fee income businesses. A record year for our wealth management business.
Strong returns from our efforts related to the Paycheck Protection Program or PPP. Credit costs were down significantly during the year as asset quality remained stable. Operating expenses, which we managed aggressively. We achieved all this due to a tremendous effort by our team during times that continues to be challenging. These items offset continued pressure on our net interest margin. However, we're seeing some encouraging signs as well. Curt and Mark will share more details on those. Despite the world's ongoing COVID-related struggles, the economy and the markets we serve show signs of acceleration. Unemployment continues to decline, business activity continues to expand, and the communities we serve continue to move forward. Similar to last quarter, M&A activity and discussions remain active. As I've shared previously, Fulton is interested in select opportunities that will support further growth within our current markets.
As always, we will take an active but disciplined approach to opportunities to grow by acquisition. During the quarter, we were able to take advantage of a dip in our stock price and have now utilized approximately 60% of our $75 million share repurchase authorization. We will continue to repurchase stock under that authorization if it makes financial sense to do so. We also declared a special cash dividend of $0.08 per share in 2021, double what we declared the previous year. As we begin the new year, we appreciate the continued partnership we have with our shareholders, our customers, and our team members. They're helping to grow our company, to achieve operational excellence, and to change lives for the better. Now I'll turn things over to Curt to discuss our business performance.
Well, thank you, Phil, and good morning, everyone. As Phil noted, we continued to produce solid results in the fourth quarter. I want to share some additional detail on several key areas. Unless I note otherwise, the quarterly loan and deposit balances I will discuss are on an ending balance basis. First, we saw loan growth accelerate during the quarter. We experienced strong loan growth from residential mortgages, commercial and residential construction, and commercial real estate. This was further enhanced by modest growth in C&I and consumer loans. Total loan growth was approximately $345 million, or about 7.8% annualized, up from 4.5% annualized in the third quarter when excluding PPP loans. In our consumer lending business, loan balances grew $136 million or 9.9% on an annualized basis.
This was driven primarily by strong growth in residential mortgages. Residential mortgage banking activity remains solid as we continue to experience elevated originations as compared to prior to the beginning of the pandemic. We continue to have opportunities to either sell our conforming originations in the secondary market at historically healthy spreads or increase our balance sheet at beneficial yields. With the recent change in the interest rate outlook, we will continue to evaluate adding to the portfolio versus originating for gain on sale income. Residential mortgage originations for the quarter were $582 million. This is a decrease of 12% from the prior quarter and a decrease of 28% from the year ago period. Purchase originations of $390 million accounted for approximately 67% of total residential mortgage originations during the quarter.
At December 31, the mortgage pipeline sits at $372 million after another solid quarter of originations. As I mentioned last quarter, our recent Fintech partnership for student loan refinance business continues to progress, adding growth to the overall commercial loan portfolio as well. Offsetting overall consumer loan growth is a modest decline in home equity portfolio, predominantly based on line utilization. Turning to commercial lending, the commercial loan portfolio grew $209 million or 6.9% on an annualized basis, an increase from last quarter's annualized growth rate of 1.4%. Commercial mortgages grew $134 million or 7.5% on an annualized basis due to increased originations. I would also note that growth was at higher yields on a linked quarter basis.
C&I loans increased $44 million or 4.5% annualized, driven by a modest increase in line utilization. This is the second quarter in a row where we've seen increases in line balances which drove C&I growth for the quarter. Last, commercial construction loans grew $18 million or 7.7% annualized. We are encouraged by our ability to grow loan originations this quarter and by our customers' increased business activity. The commercial pipeline ended the year down slightly after strong originations during the fourth quarter. Our pipeline typically builds back in the first quarter, and we expect that trend to continue. Turning to deposits, we saw an overall decline for the quarter. However, core commercial and consumer deposits increased modestly during the quarter. The overall decline was driven by the expected seasonal outflow of municipal balances.
Total deposit balances declined $501 million or 2.3% linked-quarter. We were able to continue to reduce our overall cost of deposits from 12 basis points to 11 basis points for the quarter. Moving to our fee income businesses, we were pleased with another strong quarter as fee income increased $1.3 million or 2.1% linked-quarter. We generated growth in core commercial fees, capital markets, consumer banking, and in wealth management. This growth was offset by a seasonal decline in mortgage banking income. Turning to the commercial line of business, total commercial fees were up $1.7 million or 10.4% linked-quarter. We saw strong linked-quarter increases in capital markets and SBA income, while merchant banking and cash management were consistent contributors.
Capital markets activity, which is primarily commercial loan interest rate swaps, increased in the fourth quarter as a result of increased originations. We expect capital markets revenue to track this more historic trend over time. However, this will continue to be dependent on customer preferences, commercial loan demand, and interest rate expectations. SBA gain on sale fees increased linked quarter and delivered a record year for us. This SBA income is separate from the PPP program and is generated by our dedicated SBA team. Overall, we remain encouraged by the performance of our commercial business and the increased business activity of our customer base during the quarter. Our wealth management business had an outstanding year, producing record results. This performance was driven by strong sales efforts, client retention, and the cumulative effect of several small acquisitions.
Our recurring fee business also benefited from the strength in the equity markets throughout the year. Assets under management and administration grew to $14.6 billion in the fourth quarter, up from $14 billion at the end of the third quarter and $12.8 billion at the end of the prior year. Turning to our consumer banking line of business, residential mortgage banking delivered a solid quarter on a modest decline in loan sales. However, gain on sale margins continued to remain elevated as compared to historic levels. With interest rates moving higher during the quarter, a portion of our mortgage banking revenues were driven by a reduction in the mortgage servicing rights valuation allowance, which Mark will discuss in more detail.
In addition to mortgage banking fee income, consumer transactional fees were up 2.8% linked quarter or 11.1% annualized as customer activity continues to expand. Moving to credit, asset quality remains stable, delinquency low, and deferrals and forbearance continue to decline. Non-performing loans remain relatively flat and within a very narrow range since prior to the beginning of the pandemic. During the quarter, we booked net charge-offs of $3 million or seven basis points annualized. This compares to $2.3 million or five basis points of annualized net recoveries in the third quarter. For the year, we booked $13.8 million or seven basis points of net charge-offs. Our fourth quarter provision for credit losses was -$5 million and -$14.6 million for the year.
The allowance for credit losses excluding PPP loans stands at 1.38%. We feel this reserve is appropriate given our credit outlook. As always, our allowance for credit losses trends could change in future periods based on new loan origination volumes, loan mix, net charge-off activity, and longer-term economic projections. Overall, our credit outlook remains stable heading into 2022. Now I'll turn the call over to Mark to discuss our financial results and outlook in a little more detail.
Thanks, Curt, and good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the third quarter of 2021. Starting on slide three, earnings per diluted share this quarter were $0.37 on net income available to common shareholders of $59.3 million. Our solid fourth quarter performance included a decline in net interest income, an increase in non-interest income, a negative provision for the quarter, and higher operating expenses, which I'll cover more detail on all of these items later in my comments. Moving to slide four, our net interest income was $166 million, a $5 million decline linked quarter. This was primarily due to an $8 million decrease in fees earned on PPP loans forgiven during the fourth quarter as compared to the third quarter.
This decrease was offset by strong loan growth, relatively stable yields on earning assets, and a modest decline in interest expense. With respect to our PPP program, at the end of the third quarter, we had $590 million of outstanding PPP loans and $18 million of unearned fees. During the fourth quarter, PPP loan forgiveness was $289 million, and the fees earned on that were $10 million, down from $18 million in the third quarter. Since the start of the program, the SBA has forgiven approximately 88% of our PPP loans, and at year-end, we had $301 million of PPP loans on our books with approximately $8 million of PPP loan fees yet to be recognized.
Turning to the investment portfolio, balances grew modestly during the period, increasing $167 million to end the quarter at $4.2 billion. We also saw a sizable decrease in deposits that we keep with other institutions during the quarter, which helped to slow our decline in earning asset yields during the period. Turning to deposits, total deposits declined approximately $500 million on an ending balance basis. We lowered our cost of deposits for the quarter from 12 basis points to 11 basis points, and we would expect this to go slightly lower in the future. During the quarter, we saw seasonal outflows of municipal deposit balances and anticipate that to continue into this year. Non-municipal deposits increased approximately $35 million during the quarter, whereas municipal deposit outflows represented $536 million.
Our ending loan to deposit ratio increased from 82.8% in the third quarter to 84.9% at year-end due to a combination of increased loans outstanding and a decline in deposits. Our net interest margin for the fourth quarter was 2.77% versus 2.82% in the third quarter. The five basis points of linked quarter decline resulted primarily from declining PPP loan fee recognition, offset by an improvement in the mix of interest earning assets and continued decline in deposit costs. Turning to slide six, non-interest income, I'll provide some additional detail on the business results Curt discussed.
Mortgage banking revenues were driven by solid mortgage loan sales and historically elevated gain on sale spreads, which were 174 basis points this quarter versus 194 basis points last quarter. During the quarter, we also recorded a reduction to the valuation allowance of our mortgage servicing rights asset of $2.5 million due to higher interest rates and slower prepayment speeds. Our MSR asset was $35.4 million on balance sheet at December 31. This balance is net of a $600,000 mortgage servicing rights valuation allowance, which remains as of year-end. Other fee income increased $1.8 million linked quarter.
This was primarily due to gains of $3.8 million from equity method investments as our investment in a fintech fund again generated very strong increases in valuation during the quarter. Moving to slide seven, non-interest expenses were approximately $154 million in the fourth quarter, up $9.4 million linked quarter. This increase was driven by the following factors, many of which are not expected to repeat in 2022. Total salaries and benefits were up $2.8 million linked quarter, driven by a vaccine bonus of $1.3 million for our team members, as well as providing additional bonus pay of $2.3 million for team members who do not participate in other bonus programs.
We had higher occupancy costs of $1.4 million due to changes in the useful lives of certain leasehold assets, which accelerated depreciation by approximately $1 million. We had higher outside services costs due to the timing of certain technology projects, which totaled $1.7 million. Lastly, we had higher other expenses of $2.5 million, that was due in part to an additional $1 million contribution to our Fulton Forward Foundation. Turning to taxes, our effective tax rate was 23% for the quarter, higher than normal, and due to supply chain challenges which caused project delays in certain tax credit investments which we expect to come online in 2022. We also saw increases in allocated revenues to higher tax jurisdiction states and also higher overall revenue for the year contributed to the higher effective tax rate.
Slide eight gives you more detail on our capital ratios. As of December 31, we maintained solid cushions over the regulatory minimums, and our bank and parent company liquidity remained very strong. During the quarter, we repurchased approximately 1.1 million shares at an average price of $15.98, and have utilized approximately 60% of our $75 million share repurchase authorization. On slide nine, we provide our updated guidance for 2022. Our guidance assumes two 25 basis point rate increases occurring in March and September. We expect our net interest income to be in the range of $660 million-$680 million. We expect our non-interest income, excluding securities gains, to be in the range of $230 million-$245 million.
We expect operating expenses to be in the range of $580 million-$600 million for the year. Lastly, we expect our effective tax rate to be in the range of 16.5%-17.5% for the year. Many of you look at pre-provision net revenue or PPNR as a key metric to assess the profitability of core operations. We also know that many of you calculate this metric differently. We've included our version of this metric in the financial tables of our press release. We would also like to point out a couple of additional items to consider as you assess our PPNR results. First, PPP fees earned have declined $8 million from the third quarter to the fourth quarter.
MSR valuation allowance adjustments resulted in an additional $2.5 million decrease in the allowance in the fourth quarter. Our fourth quarter contains several expense items which we do not expect to continue in future periods. When removing the impact of these items, we believe our PPNR has shown continued improvement each quarter in 2021 as a result of our first quarter balance sheet restructuring, earning asset growth, core margin stabilization, fee income business results, and continued cost containment efforts. With that, we'll now turn the call over to the operator for questions. Devin?
Hello, ladies and gentlemen. If you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. Our first question comes from Frank Schiraldi with Piper Sandler.
Morning.
Morning, Frank.
Thank you, Frank.
Just curious on the guide. You know, obviously higher rates here. We've seen the 10-year move significantly higher over the quarter. Just wondering how that plays into strategy and if that NII guide anticipates, you know, meaningful securities purchases or not.
Yeah. No, Frank, it doesn't. You know, we would anticipate that our investment portfolio, you know, which again is now at $4.2 billion, we'd expect that to stay relatively consistent as a percent of the balance sheet. You know, as you see loan growth in 2022, you could expect to see a commensurate increase in our investment portfolio. I don't see with, you know, and I think most expectations are for the curve to probably flatten a little bit in 2022. You know, with the 10-year up, I don't see that materially, you know, changing our near-term strategy in terms of securities purchases. Instead, you know, we would expect to see that excess liquidity soaked up by loan growth in 2022.
Gotcha. Okay. Then, on the... Mark, I know you mentioned some of the one-time costs that are unlikely, that are not gonna repeat in the first quarter. Still seems like the non-interest expense guide, you know, growth is pretty contained there. Given the inflationary, the, you know, the inflation numbers, just wondering your thoughts on, you know, how have you baked that in and does that guide include, you know, specific cost cuts in terms of, you know, legacy infrastructure?
Yeah. Yeah, Frank, it wouldn't include any, you know, new cost cuts. As you know, back in the fourth quarter of 2020, we announced some cost reduction initiatives. So really what you're seeing in the 2022 guide is kind of the first full-year impact of all of those. When you look at our categories, you know, in a year-over-year basis from 2020 to 2021, you know, we did contain salary and benefits expense. You know, where you saw larger increases were in data processing and software and outside services, which is consistent with the guidance we gave a year ago, that we would be, you know, reducing headcount. B ack in the fourth quarter of 2020, but then reinvesting a portion of those proceeds for technology related projects.
For 2022, you can expect to you know, see the fruits of some of that, you know, sort of come to roost. In that guide, you know, would acknowledge that there is definitely inflationary pressure.
Great. Okay. If I could just sneak in one more. Just sorry. Back to NII. Just, you mentioned the two rate hikes for 2022 baked in. Any color or guidance on, you know, if you get an additional rate hike, what that does for NIM?
Yeah. If you think about our balance sheet right now, we have about $10 billion of loans that are either tied to prime, SOFR or one-month LIBOR. And that's $10 billion that are unhedged. We have $11 billion total. There was $1 billion of hedges that were put on in 2021. $10 billion unhedged. You know, 25 basis points on that is, you know, an easy number to calculate, $25 million annually. The question then becomes what the deposit beta is going to be on that. When you look back over the last up-rate cycle, for most of the mid-sized banks for the first couple of increases, deposit betas were under 10%.
They were between 5% and 10%, which would just be then a couple of basis points, you know, move. Most of that, you know, these early rate increases, we would expect to be able to drop to the bottom line. What's also changed, but also an unknown, is that on the deposit side, you know, will these surge deposits act similarly to other non-interest-bearing DDAs? Or will they, you know, move off the bank's books faster?
Great. Thank you for all the color. I appreciate it.
Thank you.
You bet.
Our next question comes from Chris McGratty with KBW.
Hey, how's it going? This is Andrew Leischner on for Chris McGratty.
How you doing?
thinking about the margin going forward, can you provide your deposit growth assumptions?
We don't typically provide. W e provide an NII guide. We don't provide you know assumptions you know specifically on loans or to tie the categories. What I can provide is to give you some color on you know we have a municipal book, which obviously has some volatility throughout the year. The high point of that is typically in the third quarter, then tends to run off in the fourth quarter and first quarter and then start to build back up again. We also have a CD book which in the first half of 2022 you have about $600 million of CDs that come due. The weighted average rate on those is about 25 basis points.
In the back half of the year, we have $700 million of CDs that mature at a weighted average rate of 1.25%. We're seeing replacement yields on the new CDs coming in at about 12 or 13 basis points.
Okay, great. Thanks for that color. I just on a similar subject, can you just provide the securities reinvestment yields versus what's rolling off the books right now? Thanks.
Yeah. I would say, and again, we're just growing the investment portfolio commensurate with our growth in other earning assets. You know, but versus what's rolling off and what's rolling on, you're probably seeing a pickup right now of about 20-25 basis points.
All right. Thank you. If I can just squeeze one more in, on loan growth. Can you provide any comments on, you know, the C&I demand that you're seeing and, utilization? Thanks.
Sure. This is Curt. I'll give you some additional color on that. We saw growth in all of our markets, which was a positive sign. We saw accelerated growth in Baltimore, Washington, Delmarva region, as well. We continue to see, you know, pretty strong demand in those markets. That's where we saw good growth in the prior quarter. The other thing I would mention is it was pretty much across the board, most loan categories grew, as well.
That's useful color. Thanks for the questions.
Our next question comes from Erik Zwick with Boenning & Scattergood.
Good morning, guys.
Good morning, Erik.
Hey, Curt, maybe one quick follow-up on the C&I line utilization. Do you have that number today, as well as kind of what the historical percentage would be?
Yeah. We increased in the third quarter overall just 4 basis points or 40 basis points, and then in this quarter, 40 basis points. Really, it's just started to increase. We think we have continued momentum for 2022 as that utilization continues to normalize. We're essentially about 8% below historical levels.
What would that historical kind of average level be?
Yeah, mid-30s.
Mid-30s. Great. Thanks.
Turning to capital a little bit. You were active in the fourth quarter with share repurchases, and I think that the current authorization, about 40% left, that would expire at the end of this first quarter, if I'm correct. Curious about your, you know, inclination to continue buying back shares today, and would you expect the board to approve another authorization going forward?
How we use what's remaining really is gonna be driven by our stock price. I do expect us to have a buyback in place going forward.
Thanks. Just last one for me. In the opening comments you mentioned that you're still interested in, you know, select opportunities, for M&A. Just curious if you could remind us what you would look for, what type of characteristics you would look for in a partner bank, as well as what size, you know, bank you would consider undertaking an acquisition of.
Yeah. Well, we would be looking at institutions that have similar operating models to ours, have similar cultures to ours, that are located within our existing footprint. You know, we'd probably be looking at banks between $1 billion and $8-$10 billion.
Thanks for taking my questions today.
Sure.
Thanks.
Our next question comes from Russell Gunther with D.A. Davidson.
Hi. Good morning, guys. I had a question on the NII guide. Wondering if you could share a range of organic growth expectations for 2022 and, you know, what that might mean from a mix perspective as well. I know you talked about the give and take within portfolio and resi bre, but just any thoughts on, you know, magnitude and mix of organic growth for this year.
Yeah, Russell, as you know, we don't give out, you know, specific growth targets for loans or segments. I mean, instead, you know, we're electing to give guidance, you know, related to the components of PPNR. W e're happy to talk more about NII, but specific categories for loans, I mean, you can start to develop your own trends, you know, based off, you know, what you're seeing over the last couple of quarters.
Gotcha. Would you expect that then, Mark, to accelerate from the fourth quarter pace that was strong? I mean, you guys have demonstrated some positive momentum in the back half of this year. You know, is the comment that is sustainable around the current range, or is there an outcome that could see that accelerate?
I think that's gonna largely be contingent, Russell, on the continued reopening of the economy, the smoothing out of supply chain issues, which are impacting, you know, multiple sectors.
Okay, great. I appreciate the color. Just to clarify, the NII guide includes, I think you said $18 million of remaining unearned PPP fees. Is that right?
No, it's $8 million.
$8 million.
Eight-
Okay, great.
Yeah, $8 million, you know, of which we would expect most of that to be recognized, you know, by mid-second quarter.
Okay. Thank you for the clarification there. Then just lastly on the expense side of things. You talked about some of the moving pieces in the quarter. On the occupancy side of things, that accelerated depreciation of $1 million you would expect to normalize. Then similar question on the $1.7 million within outside services. That was just a timing issue that might step back before growing as you continue to invest? I would just appreciate any additional directional guidance on those two items.
Yeah. On the occupancy, yes, you know, and I would expect that to normalize. With respect to outside services, that's always gonna be a little bit more sensitive to the timing of certain technology projects. You will see certain quarters where that line item is going to tend to be a little bit more choppy than some others. O verall, we feel, you know, pretty good again about our expense containment year-over-year. W hen you strip out our debt restructuring costs, you know, and look at what our guide is, you know, we think we've had now a couple of years in a row where we've had, you know, under 2%, you know, expense growth.
Yeah, that's very helpful. Then just last one. Apologize if I could sneak this one in. Any color you can share in terms of the nature of the tech initiative spend that any particular objectives to accomplish for 2022?
Russell, on for the fourth quarter, those costs are predominantly related to doing a full implementation of Salesforce, that we did launch across the entire company in the fourth quarter. We have a project plan this year that we're investing in some core technology upgrades that add client benefit and efficiency. We're investing in some upgraded origination systems in certain business lines to again focus on customer capability as well as internal efficiency.
I appreciate it, guys. Thanks for taking all of my questions.
Thank you.
You bet. Thanks, Russell.
Our next question comes from Matthew Breese with Stephens Inc.
Good morning.
Hey, Matt.
Morning, Matt.
I wanted to discuss the mix of the loan portfolio just a little bit. You know, the last couple of years, resi has been a big driver of loan growth. It's up to 21% of total loans and just, you know, having discussed with you guys this topic for a while now. You know, I understand that the framework was we can give up a little bit of asset sensitivity just given the balance sheet's positioning, interest rate positioning. Where do you get to the point where resi is enough, quote-unquote, or too much? Is it 25% on total loans? Is it 30%? Maybe just some color there.
Yeah. I think it's gonna be, you know, not weighted on a particular percentage, but obviously our outlook on interest rates and what our overall interest rate risk position looks like. You know, with where rates and the shape of the curve and forecasts look like right now, I would think that's gonna be probably closer to 25% than 35%. I f we expect, you know, the economy to, you know, open as, you know, Moody's and other, you know, economic forecasts are saying, you know, I would expect you to start to see more quarters similar to this past one, where commercial growth was, you know, more than, you know, 50% of our overall earning asset growth.
I would expect to see, you know, if rates do continue to rise and as that translates into the ten-year, you know, you'd expect to see just overall, mortgage volumes come down a little bit, you know, across the industry, which the MBA is predicting for 2022 as well.
Got it. Okay. I also wanted to discuss the liquidity position of the balance sheet. You know, you still have, you know, over $1.5 billion of cash. At this point, how much of that do you assign a bit more of a, you know, a more volatile label to, just given COVID-related deposit flows? How much do you expect to use this year? Maybe, you know, a year from now, what do you think the cash position of the balance sheet looks like?
I think that is a great question for the entire industry, right? You know, so how do these surge deposits and government stimulus deposits, you know, do they react the same, you know, as other non-interest bearing DDA money? But you know, I think it's, if you look back to where we were pre-pandemic, we like to run our overnight cash position between $50 million-$100 million. T hat gives you a sense of the magnitude. That current excess liquidity on our balance sheet right now, you know, is actually about 20 basis points to margin. I t's a big number. You know, we would expect that to start to come down a little bit in the first quarter.
You know, again, if you see more loan growth, that will also obviously drive that number down, as well.
Okay. Last one for me is just, you know, on M&A and all the reasons why you might participate in M&A. You know, what are kind of the top three priorities you're looking to accomplish strategically? You know, it sounded like market share gains in existing markets are one of them, but what else are you looking to accomplish strategically? Then maybe just a reminder of some of the financial metrics you'd look to check off in any given transaction.
Yeah, increase market share in areas that we are currently in but don't have the level of market share we want is our top priority. Building some scale to pay for the, you know, back office things that we've built over the years would be another priority. Picking up talent and, you know, growth. I'll let Mark McCollom go over the financial metrics.
Yeah. The financial metrics, you know, accretive to earnings in the first year combined operations, first full year of combined operations. We, you know, typically want to see a tangible book value dilution to earn back of three years or less. We want to see an internal rate of return in excess of our cost of capital. You know, those are the three primary ones we look at. You know, the trade-off sometimes, some folks tend to look at tangible book value dilution out of the gate, but you can't really look at that without looking at the EPS accretion in concert. You can accept a little bit more out of the gate dilution if you've got a little bit more accretion of earnings to you know, keep the earn back in check.
Got it. Okay. I appreciate all the comments. That's all I had. Thank you.
Thank you.
Thanks, Matt.
I'm not showing any further questions at this time. I'd like to turn the call back over to our host.
Well, thank you again, everyone, for joining us today. We hope you'll be able to be with us when we discuss our first quarter results in April.
Well, ladies and gentlemen, this concludes today's presentation. You may now disconnect. Have a wonderful day.