UMB Financial Corp
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UMB Financial Corp
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Good morning. Thank you for attending today’s UMB Financial Third Quarter 2022 Results Conference Call. My name is Forum [ph] and I will be your moderator for today’s call. All lines will remain muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]
It is now my pleasure to pass the call over to our host, Kay Gregory, UMB Investor Relations.
Good morning, and welcome to our third quarter call. Mariner Kemper, President and CEO; and Ram Shankar, CFO will share a few comments about our results. Jim Rine, CEO of UMB Bank and Tom Terry, Chief Credit Officer will also be available for the question-and-answer session.
Before we begin, let me remind you that today’s presentation contains forward-looking statements, which are subject to assumptions, risks and uncertainties. These risks are included in our SEC filings and are summarized on Slide 43 of our presentation.
Actual results may differ from those set forth in forward-looking statements, which speak only as of today. We undertake no obligation to update them, except to the extent required by securities laws. All earnings per share metrics discussed on this call are on a diluted share basis. Our presentation materials and press release are available online at investorrelations.umb.com.
Now, I’ll turn the call over to Mariner Kemper.
Thank you, Kay, and thanks, everyone for joining us today. Yesterday afternoon we reported our third quarter results reflecting positive momentum across our business lines. Highlights include robust loan growth coupled with strong asset quality and solid core revenue growth.
Net income for the third quarter was $88 million or $1.81 per share. Operating pre-tax, pre-provision income was $131.2 million or $2.70 per share. Net interest income increased 3.9% sequentially driven by a nearly $1 billion increase in average loans, positive asset mix and the impact of rising rates.
This was partially negated by increased deposit costs, largely driven by a transition from DDAs to rate bearing accounts, which is typical in an interest rate cycle such as the one we’re seeing today. The timing of deposit initiatives to attract new to bank customers and each of our business lines, the availability of attractive short tenure investment options and the impact of clients reacting to typical market pressures in a rising rate environment, particularly on our rate sensitive institutional businesses.
This is consistent with what we’re seeing from other trust and custody banks like ourselves. Our cycle-to-date beta on interest-bearing deposits has been 46% and 27% on total deposits. As we’ve noted in the past, our business profile and funding mix is uniquely skewed in favor of our commercial and institutional sources.
These sources experience different pace and timing than many of our peers in the re-pricing environment. Our fee businesses performed well, driving non-interest income growth, excluding the impact of the non-recurring gain from the sale of Visa Class B shares in the second quarter. Additional drivers are included in our slides and Ram will share more detail shortly.
Excluding contributions from PPP and the market related impacts from the gains and losses on investment securities, we’ve generated operating leverage of 4% year-to-date. This continues to be the focus for us and we expect to generate positive operating leverage for the full year.
Pipelines and sales activity continue to be strong across the company and I’ll share a few highlights from the various businesses. In private wealth, our team has surpassed full year 2021 sales bringing it to $874 million in new assets year-to-date. Our institutional banking teams are continuing to perform well.
Year-to-date, new business volumes have increased 16% in corporate trust and escrow services and 35% in specialty trust and public finance has closed 110 deals so far in 2022 on track to exceed 2021 levels. Fund services and institutional custody assets under administration levels have been impacted by equity market valuations in 2022 and AUA levels now stand at $352 billion [ph]. However, the teams continue to bring in new clients including more than 200 new custody accounts year-to-date and the fund services contribution to our trust income has increased 6.2% year-over-year.
In healthcare services, we rank among the top 10 HSA providers in the U.S. We expect the acquisition of the Old National Bancorp’s HSA business to close mid-November. This acquisition will bolster our position with an additional $400 million in expensive deposits and approximately $100 million in investment assets.
Moving to lending. The drivers behind are nearly 22% linked quarter annualized growth in average balances this quarter are on Slide 24. Total top line loan production as shown on Slide 25 remain strong at $1.3 billion for the quarter. Payoffs and pay down represent 4.7% of loans rebounding from the low levels second quarter.
Commercial real estate and construction loans posted 20% annualized growth in the third quarter. While payoffs will fluctuate from quarter-to-quarter, we expect we will see them eventually begin to slow these two general slowdown as anticipated in the rising rate environment.
We saw a continued outperformance in C&I with average balances increasing 27% on a linked quarter annualized basis and making up more than half of this quarter’s total growth. Industrial production continues to be strong and we’re seeing a good mix of new customer acquisition and increased borrowings from existing commercial relationships.
Line increases are moving closer to pre-pandemic levels and general customers comments indicates that draws are largely related to just leading stimulus liquidity, higher inventories and higher prices. Average residential mortgage balances have increased 23% over the third quarter of last year, despite the impact of rising rates.
Our down payment assistance program designed to support first time home buyers in underserved markets has had more than 1,000 new applications there’s old things in $1.6 million in assistance year-to-date.
Looking ahead to the fourth quarter, we see opportunity in our various verticals across the footprint and we expect continued strong growth to round out the year. On the other side of the balance sheet, average total deposits for the quarter decreased 5.7% and fairly the second quarter driven primarily by DDA outflows from elevated second quarter levels primarily in our institutional businesses. Compared to the third quarter of 2021, our DDA balances increased 8.7% led by corporate trust, commercial and investor solution verticals.
Because of the [indiscernible] project based orientation of our corporate trust businesses, we can just as easily see spikes in DDA as we have seen a decline this past quarter. DDA balances represent 42% of average deposits compared to 45% in the second quarter and 39% in the third quarter of last year.
We continue to focus on deposit gathering including the deposit initiatives I mentioned, as well as engaging with our current customers. One area of growth we’re excited about is our business banking and practice finance vertical, which has seen exceptional deposit growth over the past three years.
We continue to invest in this business to drive the future growth on both sides of the balance sheet. What we’ve seen cycle-to-date beta on our interest-bearing deposits of approximately 46%. I think the metric alone gives an incomplete view as it ignores the benefit of DDA balances, which have a zero beta and the impact of our borrowing levels, which have been at 100% beta. I’d encourage you to look at our total cost of funds instead, which have had a beta of 32% thus far this year.
Additionally, we benefit on the earning asset side with cycle-to-date beta of nearly 50%. In this environment, we expect loan growth and improving asset yields will continue to drive above pure growth and net interest income.
Moving to asset quality, net charge offs in the third quarter were just 0.02% of average loans, while non-accrual loans remain steady at 10 basis points of loans. We continue to expect that our full year loss rate will be consistent with our long-term historical averages of approximately 25 basis points to 30 basis points or less.
Provisions for the quarter of $22 million was driven by our continued strong loan growth, portfolio metrics and changes in the macroeconomic outlook. Our reserve coverage is now at 0.93% of total loans. In September, we were successful in raising $110 million in capital through our subordinated notes offering that will help us facilitate our expected balance sheet growth for the remainder of this year and on into 2023.
Our own UMB Capital markets team participated as co-manager, bringing in clients that made up about a third of the total offering. The capital rates favorably impacted our ratios. September 30 total capital and leverage ratios were 13.13% and 8.66% respectively. And in our press release, we announced that the board had approved that 2.7% increase in our dividend, bringing it to $0.38 per share payable in January.
Finally, we’ve seen many changes in the outlook for markets and the economy in the last few months without unprecedented fed tightening and record inflation along with uncharacteristically tight labor market. In geopolitical conflict along with contagion effects from across the [indiscernible] have increased economic uncertainty. We have acted dialogues with our own clients about their businesses and outlooks.
Borrowers are generally optimistic about the rest of 2022 and remained cautiously so looking forward, although most are concerned about rising costs. While our customers were in good shape, we like many others, expect that we may experience a short recessionary environment. Historically, the leading economic index or the LEI has become a good indicator in more than 40 years of history, a drop in the six month rate of the LEI below negative 3% has preceded periods of recession.
As of last week, the index was a negative 5.6%, further decreasing from a negative 5% at the end of August. Unless the previous cycle, banks came into the cycle with stronger capital positions and the consumers came in more liquid and less leverage. Therefore, we don’t expect it to be as destructive, but more of a recess to the economy.
As I mentioned, we see good growth opportunities in the fourth quarter, although we’ll continue to watch closely for early warning signs for deterioration, which at this point, seem to be contained in specific areas such as consumer discretionary. This is where we differentiate ourselves by rolling close to short, which is part of our risk management philosophy that keeps us prepared for all environments. In closing, I’m proud of our teams, as always, as they continue to work together and work hard support our customers and communities.
Now, turn it over to Ram for additional comments. Ram?
Thanks, Mariner. Let me start with some commentary on balance sheet trends starting with our liquidity profile on Page 21. Our Fed account, reverse repo, and cash balances further declined to $1.5 billion and now comprised as 4.3% of average earning assets with a blundered yield of 2.30% compared to 83 basis points in the second quarter. As we’ve done in prior timing cycles, we deployed cash flows from our high quality securities portfolio to fund loan growth opportunities during the third quarter.
As shown on Slide 28, the portfolio roll off the third quarter with $304 million at a yield of 1.96% while we purchase $54 million in securities primarily CLOs with a yield of 4.86%. Additionally, the portfolio is expected and generate over $1.1 billion of cash flow in the next 12 months. The yield of those securities rolling off is approximately 1.83%. While treasury yields present very attractive reinvestment levels, our priority is to fund the opportunities we continue to see at our lending verticals.
In 2022, we reclassified securities to the health and maturity portfolio to help manage tangible capital and reduce the impact of rising rates on our equity. Average HTM balances for the third quarter, excluding the $1.2 billion of revenue bonds we’ve long held in that book, where $4.6 billion. Loan yields increased 74 basis points from the second quarter to 4.46% with a cycle-to-date beta of approximately 37%, 61% or about $12.1 billion of loans are variable rate with 60% of those repricing in the next quarter and 71% repricing within the next 12 months. These are largely tied to indices at the short end of the curve.
The total cost of deposits, including DDA with 65 basis points up from 20 basis points last quarter and the cycle-to-date beta is approximately 27%. Net interest margin expanded 16 basis points from the second quarter, net interest margin benefited by approximately 43 basis points from low repricing and mix, 30 basis points from the benefit of free funds and 24 basis points from reduced liquidity balances and rate.
These were partially offset by negative 81 basis points related to the cost and mix of interest bearing liabilities. As we look ahead, there are a lot of variables at play that’ll impact the trajectory of our net interest margin, including the depth and duration of the fed tightening cycle, outlook for equity market and that impact on deposits expected this intermediation of DDA balances as ECR rates increased as well as our own need to generate deposits through targeted campaigns to fund loan growth.
Based on our own simulations, which includes the mid-quarter onboarding of HSA deposits from all national and the seasonal inflow of index public funds deposits, we expect our fourth quarter net interest margin to be flat to slightly down from third quarter levels. This has seems the fed cost rate of 4.5% at year end.
As Mariner noted, while the focus on deposit beta and NIM is important, we focus primarily on net interest income growth facilitated primarily by loan growth. Additionally, as you’ve heard a say before, another metric that we manage to is a loan to deposit ratio limit of 75%. With our ratio approaching 65%, we will continue to focus on deposit and client acquisition across all our lines of business.
The estimated impact of net interest income in various rate scenarios based on 30 balances is shown on Slide 30. In a rate ramp scenario of plus 100 basis points on a static balance sheet, net interest income is predicted to fall 0.6% in year one and increase by 2.9% in year two. This analysis assumes repricing of our variable rate loans based on underlying changes to LIBOR, SOFR and other indices as well as deposit betas consistent with the prior cycle.
One variable that’s missing in this prescribed analysis is what happens to our growth related net interest income. The ultimate fact of incremental rate hikes on NII will be dependent on the timing and magnitude of interest rate movements, loan growth and balance sheet management strategies.
Back to the income statement, total fee income for the quarter was $128.7 million. The second quarter included a $66.2 million pre-tax gain on the sale of our Visa Class B shares recorded in investment securities gains.
As shown in the commentary on Slide 18 earlier in our presentation, fee income excluding income or loss from equity valuations was $130.1 million compared to $115.6 million in the second quarter. This variance included a $13 million increase in company owned life insurance income and a $1.2 million increase in derivative income related to customer back to back swaps.
Other areas of strong performance include card services income and brokerage fees, the latter of which captures our money market revenue share and 12b-1 fee income. Total brokerage income increased $1.4 million or nearly 12% compared to the second quarter, despite market related compression of approximately 3% in the underlying money market balances. Other drivers are shown on Slide 22 and are discussed in the press release.
Slide 23 shows trends in our non-interest expense. The linked quarter increase was driven primarily by the change in deferred compensation expense, which was $2.3 million in the third quarter versus the credit of $9.2 million in the second quarter. This is related to the increase quarterly income I mentioned previously. We saw a $4.5 million increase in salary and wage expense, reflecting one additional salary day in the quarter as well as selective hiring in some of our lines of businesses.
Additionally, we booked $3.7 million of operational losses, which are not expected to recur. These increases were offset by a decrease of $4.8 million in charitable contributions expense recorded in other expense. A few other items to keep in mind as we look at expenses going forward.
In October, the FDIC announced a 2 basis point increase in the segment rates beginning in the first quarter of 2023. Based on current data, we estimate this will have an approximate impact of $6 million free tax. And fourth quarter expenses will include the yet to be determined pro rata amortization impact for the acquisition of $400 million in HSA deposits expected to close mid-quarter.
Finally, like in prior fourth quarter periods, we will make a $2 million charitable contribution to organizations serving our communities as well as making any needed true up to performance based incentive accruals. As Mariner noted, as we approach our 2023 budgeting phase, our focus remains on generating positive operating leverage while prudently investing in our businesses. Our effective tax rate was 19.1% for the third quarter and 18.8% year-to-date, reflecting a smaller portion of income from tax exempt municipal securities. For the full year 2022, we anticipate it will be approximately 18% to 20%.
That concludes our prepared remarks and then I’ll turn it back to operator to begin the Q&A portion of the call.
Thank you. [Operator Instructions] Our first question comes from the line of Jared Shaw with Wells Fargo. Jared, your line is now open.
Hey, good morning everybody.
Hey, Jared.
Good morning, Jared.
Maybe just starting on deposits, if we look at sort of the DDA levels, pre-COVID, you were around 32%. Should we expect that we sort of trend back towards that level with the pressure on DDA from the ECR and the other items you mentioned. Or do you think there’s some systemic or structural change that could keep that at a higher level?
Well, I think – this is Mariner. Some of the DDA draw down that’s happened over the quarter has been based on obviously the higher rate environment and customers looking to participate in that as well as higher costs and inflation, such as customers that put their money to work in an inflationary environment. I think as you look forward, just specifically thinking about DDAs as you look forward into a recessionary environment or beyond that in a normalized environment DDA should remain at strong levels as they have been in the past.
Okay. And then I guess, as…
And one of – Jared, this is Ram. And I would say, we’ve added a lot of new clients over the last 12 months on the heels of the PPP program that we talked about, the halo effect of the PPP program. So when you think about new clients, right, so yes, right the last grade cycle we did go down to 32% composition, but this time around I think we feel like it’ll be higher than that as the rate cycle peaks, because we’ve been adding new clients with DDA balances as well, particularly in small business, Mariner talk about the efforts in small business and how that has driven some DDA growth. So I would say, we probably end up doing better than last cycle.
Yes. So a temporary short squeeze on that I guess is the way we would describe it.
Okay. Okay. I guess, just following up on that or on the deposit side, how should we be thinking about through the cycle beta now? I think, we saw a little bit of an acceleration on interest bearing deposits costs this quarter. How are we thinking about – how should we think about through the cycle beta, either I guess, on interest bearing or on total since you’re – you seem to focus on that a little more.
Yes. We obviously think total is a way to think about it and the total was in the 30 – low 30 range. I think if you – last quarter or the quarter before we telegraphed that we would be early to go through the cycle as a more commercial and institutionally heavy deposit base for our company, and that’s basically what we’ve produced. We still expect to end whatever cycle we have similar to the last cycle and we don’t have any reason to expect that to be any different. We feel like we’re tracking that way. So we end up in is that around 50, 52 somewhere, a couple clicks one way or the other, we’re around 52 last time. We’ve telegraphed that in the last couple calls. It’s what our expectations are.
We’ll see how that ends up, but don’t have anything telling us it’d be anything other than that, and the way we believe it as it looks at a relative basis, we just go through it earlier. And then you also have to think about obviously total costs, not just the interest bearing, just keep that in mind. And then lastly, you can’t forget the impact of what we’re able to do on the asset side.
So with more than 50% of our loans repricing within 12 months, we’ve got the repricing of the current book, the back book, and then a significant portion of our loan growth is from new customers and all of that new customer growth comes in at a higher yield to our loan asset betas were 54 on a linked quarter basis and 37 cycles a day. We expect to continue to perform well on the asset side and particularly on the loan side.
Okay. And that just to confirm that 52% deposit beta is total, right?
Yes.
Yes. Okay. And then on the BOLI side, with the corresponding expense, is this a third quarter sort of a one-time thing or is this now a new level from additional purchases?
Go ahead, Ram.
No, it’s a – we have it quarter in, quarter out, that’s part of our deferred comp administration. So we try to mimic those assets and any mark-to-market fluctuations get written up or down in fee income, just like we have deferred comp expenses. So we tried to break it out. So last quarter, because of what happened to the equity markets, our deferred comp expense or COLI income came down by about $11 million, and this quarter had recovered to a positive $2 million, creating a $13 million. So this quarter’s impact of fee income and the benefit from COLI was only $2 million. Same thing on the deferred comp side. We had more expenses of about $2.5 million reflected in our $231 million expense base.
That activity happens every quarter.
Yes.
Got it. Thank you.
Thank you for your question. Our next question comes from the line of Chris McGratty with KBW. Chris, your line is now open.
Great. Good morning. Ram, I think you – in your prepared remarks, you talked about a 75 ultimate terminal loan to deposit ratio, so you got plenty of room. I’m kind of interested in, I guess, when and how you get there. Understand the comments on loan growth and also saw that you really didn’t buy any bonds in the quarter. But is the math deposits continue to be positive, but perhaps trail loan growth? Or do we see more down draft in the deposits in securities book?
Well, we fully expect to continue to grow our deposits and we’ve become much more active in the market competing in this environment where our customers have options and as a short end of the curve has come up the way it has, it’s a different environment than we’ve seen it in the past where obviously customers have lots of options in this rate environment. So we’ve been – we’ve remained competitive and more so – recently so that we can keep up with our loan growth. And then the real goal and job of ours is to remain disciplined on our loan pricing and we believe we can do that. So then it’s ultimately about maintenancing our margin and spread more and growing our net interest income than it is worrying about deposit betas, which we really can’t control in this environment.
So we focus on all good stuff, the growth and the drivers. We think we can continue to produce above peer level growth both on the asset side and on the fee side. We’ve done that for a long time in the 20 years I’ve been CEO. We’ve met the expectations and delivered the growth we expect of ourselves and we expect to continue to do that. And when the fed pivots, when we get that announcement, that’ll re-normalize the cost side of our structure. So this is really a short-term problem. We don’t manage this company for the quarter. We manage it for multiple years in advance, and our growth profile remains very strong. And when the fed pivots things will normalize for us.
Great. Thanks for that color, Mariner. Ram, the $1 billion of bonds that come due over the next year. I guess, fair to say that new money, this is just more accretive to put those into the loan book and perhaps shrink the bond portfolio.
That’s right. Yes, we don’t – last three or four months, we have not reinvested other than a very tiny [indiscernible] CLOs. We’ve not reinvested our cash flows and it’s all part of the loan to deposit question that you asked previously managing that. We’ve done this in the past with balance sheet rotation, you tried to talk about it doing last cycle, so it’s same playbook.
And we’ve just become more active pursuing those deposits more recently as the excess liquidity has been absorbed into the market.
Yes. Got it. Maybe just one housekeeping question. The $6 million FDIC that’s a bump on an annual basis, right?
Yeah, that’s the annual number. Yes.
Okay. And then the – I think you said you’re still finalizing the incremental and expense from the deposit deal, but yes, I think old national disclosed, there was a roughly a $95 million premium paid for those 400 deposits. How do I think about just incremental and intangible assets and impact to capital? Is it that full amount of money that goes into intangibles?
No, that’s the part we’re still working on. So it’s hard to give you a number right now, but I just wanted to throw it out there. That expenses will include that. So the classification between business goodwill and the intangibles that gets amortized, we’re still going through the calculations of that.
Okay. But the, but the $95 million is just – it’s just a split, how that’s split, but the $95 million is the right number?
Correct.
Okay. Thanks. Thanks a lot.
Thanks, Chris.
Thanks for your question. [Operator Instructions] Our next question comes from the line of Nathan Race with Piper Sandler. Nathan, your line is now open.
Yes. Hi everyone, good morning. Thanks for taking the questions.
Good morning, Nathan.
Hi, Nathan.
Questions on the operating leverage outlook, obviously, some nice improvement this quarter. Do you think the improvement that we saw in your efficiency ratio here in the third quarter is sustainable in this type of rate environment? Or how you guys kind of think about managing expenses going forward apart from kind of the trip that you had in compensation costs in light of the strong production that you’ve seen so far this year?
Yes. A lot of the expenses as we’ve talked about in the past tend to be variable in nature and driven by overall company performance or widget production, right? So the fact that we’re focused on positive operating leverage for the fourth quarter and for the 2023 budget would suggest that the efficiency ratio will improve from here.
So obviously, we’ll be investing. As we said in the prepared remarks will be investing in our businesses hiring for 2023 and 2024, but at the same time, we’ll react to the in revenue environment and what’s happening in the revenue set of the equation.
Okay. Got it. And then just maybe turn into the outlook for provision going forward. I imagine growth may moderate this macro environment to maybe the high-single digit range kind of consistent with your historical trajectory over time. How are you guys thinking about providing for that type of growth trajectory going forward in apps in any kind of CECL related adjustments on the Q factors?
Well, its hard to do with absent CECL, but – because that’s a big driver. I think a big portion of our third quarter provision was from loan growth. And so that’s – that was the largest number in there. And obviously, our loan quality is incredibly strong. So the combination really going forward for provisioning will be from outside loan growth and macro environment statistics driven by our Moody’s information.
And I suppose your guess is as good as ours. So I would suggest that that data will not be getting any better anytime soon. So if you think about the fourth quarter, we expect to have strong loan growth and at least I don’t – who knows what Moody’s will say, I don’t see it getting – necessarily getting any worse, but it’s not – certainly not going to get any better that data. So it’s an algorithmic deal based on what’s going on in the economy with unemployment and what’s going on with that loan growth.
Okay. Great. And then just on the heels of the sub debt raise recently, obviously it seems like that was supportive of some pretty strong loan growth in the quarter. Just curious if that added capital buffer is perhaps supportive of some increased M&A dialogue of later if you’re feeling kind of more or less optimistic on additional acquisitions outside the deposits that’ll be coming on Board in the fourth quarter.
I – we remain active in pursuit of acquisitions continue to pursue those would like to add solid franchises to the base of our organization when we can find the right deal that fits. And so nothing new there, we’re active in our calling efforts.
Okay. Great. I appreciate you guys taking the questions and all the color.
Thanks, Nate.
Thank you for your question. Our next question comes from the line of John Rodis with Janney. John, your line is now open.
Good morning, everybody.
Good morning, John.
Ram, just back to the expense, looking at expenses for the quarter, what is the right number to back out for this quarter for the COLI impact? Is it the $2 million or is it the $11.5 million just to sort of get a good run rate going forward?
Yes. Just on the deferred comp, I would take out $2.5 million and then we talked about a operating loss for about $4 million, and then there were some $1 million to $2 million of timing related expenses on travel and marketing campaign. So if you started the $231 million of reported expenses there were some one-time items I would’ve put them in the $7 million to $8 million category of things that we don’t control or don’t expect to recur.
So the run rate I would say is closer to $223-ish million. And then it’s all the other items that I talked about in terms of the charitable contribution just for the fourth quarter, the FDIC assessment increase for starting 2023 and then the AMR related to the HSA purchase.
Yes. Okay. So okay, so $223 million for the third quarter. Okay. Thank you.
I thank the third quarter, correct. Yes.
Yes. Okay. Thank you.
Thank you for your question. [Operator Instructions] Our next question comes from the line of David Long with Raymond James. David, your line is now open.
Good morning, everyone.
Hey, good morning, David.
Hey, David.
Looking at the reserve build in the quarter, I know you’re pointing to the loan growth side of things. Was the loans that you added require additional reserves? It just looks to me like the addition if you’re using the – using your overall reserve level loan growth sort of been a smaller contributor. Just curious what maybe loans you added and then what else may have contributed to the build in the quarter?
Well, I mean the loan growth in the quarter was 900…
$90 million.
$990 million. And so it was pretty significant component of it. It’s driven by CECL. It’s a mathematical equation that requires us to do what we do. I don’t know if that answers your question, but that’s – it was a significant quarter in loan growth. And so we provision against it.
Each new loan that comes on the books requires a reserve, a percentage of reserve. So by definition, new loans we’ll add to the reserve requirement right out of the gate.
Sure. Got it. Okay. And then taking this a step for further looking at your total reserve level, when CECLs came out, we thought it was going to be very quantitative in what we’ve heard since then is there’s a good qualitative portion. Can you discern between the two? Is there a portion of your reserve that you’d say is qualitative versus quantitative, and how much of it would be qualitative if so?
It’s hard to give you that specifically, but there is, I would call the qualitative piece on the margin is what I would describe that as. And the majority of it is driven by quantitative mathematical – mathematically driven based on lost history, roll on and roll off, loan growth and macroeconomic environment.
And then you’ve got a piece of it that we can use our own assessment of the environment and our own balance sheet and our own dynamics on a qualitative basis to move that up or down on a margin basis.
Got it. Thank you.
Thank you for your question. There are no more questions leading at this time. So I will pass the call back to our management team for closing remarks. Thank you.
Yes. This is Mariner. I might just wrap it up by reiterating our thesis for where we stand and some of the concerns in the marketplace for the industry around deposit betas and how we see that shaping up for us specifically. As we’ve been saying it for a few quarters, we are largely institutional commercial. That’s not new.
Our base – deposit base is not new and we’ve been here before. I’ve been CEO 20 years, we’ve seen this before. We do have telegraph that we’re going to go through it early. We’ve gone through it early. We still expect to come in right where we thought we would in the 50 – low-50 range on the beta side. And we think that you as analysts and investors should focus more on the whole balance sheet and NII as they are the drivers for our success and performance long-term, our ability to grow our loans, our ability to have strong quality with 2 basis points of charge-offs and 10 basis points on the non-performing side.
So we think that on a risk adjusted basis with the growth that we have, we think you should focus more on the profile of the business and less on the short-term Fed action squeeze. And the Fed will pivot soon, that will normalize our costs. And you will be left with what you normally see with us, which is an outside growth profile with a better than average risk profile.
So that us all remains the same and we expect to see fourth quarter loan growth as strong as it was in the third quarter with the same kind of quality. And so there’s nothing new here on our end. We’ve just got to live through the short squeeze from the fret and we appreciate your continued interest and we’ll keep after it.
Thanks, Mariner, and thanks, everyone for joining us today. If you have further questions, you can reach Investor Relations at 816-860-7106. Thank you and have a good day.
This concludes today’s conference call. Thank you for your participation. You may now disconnect.