UMB Financial - Q3 2023
October 25, 2023
Transcript
Operator (participant)
Hello, and welcome to today's UMB Financial third quarter 2023 financial results conference call. My name is Elliot, and I'll be coordinating your call today. If you would like to register a question during today's event, please press star followed by one on your telephone keypad. I'd now like to hand over to Kay Gregory, Investor Relations. The floor is yours. Please go ahead.
Kay Gregory (SVP, Director of Investor Relations)
Good morning, and welcome to our third quarter 2023 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. 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 46 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.
Mariner Kemper (President and CEO)
Thank you, Kay. Good morning. I'm happy to be here with you today to share the details of our strong third quarter performance. Our results reflect a strong, disciplined loan growth, stable deposits, continued momentum in many of our fee-generating businesses, expense control, stable margin, and solid asset quality. I continue to be extremely proud of the long track record of prudent underwriting that has produced these asset quality metrics. Our loan portfolio remains healthy, with 8 basis points net charge-offs for the third quarter and just 6 basis points year to date. Non-performing loans improved 7 basis points from 9 basis points the prior quarter. Provision for credit losses was $5 million for the quarter, compared to $13 million in the second quarter, driven largely by changes in macroeconomic variables and general improvement in the watch and classified categories.
The average charge-off ratio for the five-quarter period shown in our deck is the lowest in our history, impressive considering the 18% increase in average loan balances during that same time period. We saw improvement in the levels of both past watch loans and classified loans, which declined 13% and 6%, respectively, from the second quarter. Our watch list levels fluctuate from time to time as we manage the book, and historically, we've seen very little migration to loss. Our current historical credit performance has been achieved through our focus on risk management and consistent approach that comes from having the same team working together for multiple cycles and decades. We continue to closely monitor macroeconomic trends and have regular conversations with our clients across our footprint, something we do in all economic environments.
Despite uncertainty from the brewing geopolitical crisis, as well as the volatility in interest rates, our commercial clients remain cautiously optimistic. Now, I'll cover a few highlights from the quarter, and Ram will follow up with a few details and drivers. GAAP net income for the third quarter was $96.6 million, or $1.98 per share. Operating net income was $98.4 million, or $2.02 per share. Net interest income decreased 1.5% from the second quarter as loan growth improved and asset mix and yields were offset by an increase in deposit costs. While net interest income for the industry continues to be impacted by higher funding costs, our net interest margin in the third quarter was essentially flat on a linked quarter basis.
The flexibility on the asset side of our balance sheet helps mitigate the continued impact of liability pricing. We have a loan deposit ratio lower than our peers and industry medians, and largely variable asset base and strategically planned cash flows. In fee income, we saw solid results in several lines of business. Trust and securities processing income increased 8.2%, driven by growth in all businesses contributing to this line: fund services, corporate trust, and private wealth. In fund services, assets under administration reached $400 billion in the third quarter. Year to date, our team has added nearly 50 new clients, which helped drive the 9.2% increase in revenues we saw on a linked quarter basis. Our non-interest expense levels fell by 3.8% and included variances in deferred compensation expense related to the reduced COLI income.
Additionally, severance expense declined, along with salary and wage expense, reflecting the ongoing effort to control operating expenses. Ram will provide more additional color on these various drivers shortly. Turning to the balance sheet, the drivers behind our 10.1% annualized growth in average loan balances this quarter are shown on slide 24. For comparison, the banks that are reporting results through October 20th had a median linked-quarter annualized increase of 5.3%. The Federal Reserve H8 data had predicted an increase in industry-wide average loan balances of just 0.4% or 1.6% annualized. Despite some caution surrounding the current environment, our relationship banking model continues to build a pipeline of quality clients, and given what we've seen today, we expect some continued outperformance relative to the industry and loan growth metrics.
Total top line loan production, as seen on slide 25, was $649 million, with payoffs and paydowns declining slightly, representing 3.2% of loans for the quarter. Credit quality is strong across our book, and the CRE portfolio remains well-diversified by property classification, tenant type, and geography, as shown on the slide on pages 36 and 37. Looking ahead to the fourth quarter, we see opportunity across our various lending verticals and geographic regions. We have continued to evaluate the best use for our capital, and we remain disciplined on pricing, further emphasizing lending opportunities accompanied by meaningful deposit relationships. On the other side of the balance sheet, average total deposits were essentially flat versus the second quarter. Declines in broker CD balances and typical seasonal reductions in public funds were offset by growth in commercial deposit balance.
We expect public fund balances will begin to rebuild again in the fourth quarter. As we've noted previously, deposit balances will naturally ebb and flow as our largely commercial customer base uses funds for typical business purposes, including payroll, dividends, and other activities. Finally, we strengthened our liquidity and capital positions even further during the quarter, as depicted on slide 32. Our quarter-end CET1 and total capital ratios were 10.77% and 12.68%, improved by 12 and 9 basis points, respectively, from June 30. Our CET1 ratio compares favorably to the peer median. In our press release, we announced that the board had approved a 2.6% increase in our dividend, bringing it to $0.39 per share, payable in January.
As we've shown on slide 15 of our presentation, our quarterly dividend has increased 283% over the past 20 years. There were 23 individual dividend increases during that period. To wrap it up, we're pleased with our results this quarter. The pundits have varying opinions, but it seems clear that inflation levels, however you want to measure it, haven't reached the Federal Reserve's expectations. All indications are the data-dependent Fed will pause on further interest rate hikes. The variables now are when rate cuts may begin and how quickly they may happen, but we fully expect a higher for longer scenario at least through 2024. Such a scenario would be favorable for our balance sheet as the pressure on deposit costs largely abates while asset repricing continues through that period.
Additionally, earning asset yields will improve as we use cash flows from our securities portfolio to fund higher-yielding loans. With the uncertainty in the macro and geopolitical environment, we feel that our business model is prepared for a wide range of outcomes. It has proven itself over time as we've adapted to a changing environment and set of circumstances. Now I'll turn it over to Ram for a more detailed look at our results. Ram?
Ram Shankar (CFO)
Thanks, Mariner. I'll share a few additional drivers for our third quarter results, then I'll discuss some key balance sheet items. Net interest margin for the third quarter was 2.43%, a decrease of just 1 basis point from the linked quarter. The largest drivers included positive impacts of approximately 16 basis points from loan repricing and mix, and 11 basis points from the benefit of free funds. These positives were mostly offset by a reduction of 25 basis points from changes in interest-bearing deposit pricing. Cycle to date, our earning asset beta has been 51%, keeping pace with the total cost of funds beta of 51%. Our deposit remix showed some signs of slowing this quarter, and we ended the quarter with 32% of total average deposits in DDA.
This level is in line with the low point during the 2015, 2017 tightening cycle, and although it's difficult to know for certain, we expect we're approaching the bottom. The decline in the DDA balances largely reflects corporate trust activity, which can be episodic. Commercial DDA balances increased approximately 1% over the linked quarter. With the current consensus that the Fed will hold rates for the time being, we continue to expect the terminal beta of approximately 50% for total deposits and 60% for loans through the end of this cycle. Looking ahead to the fourth quarter, we expect NII to trend flat to slightly up, while we'll see some additional modest margin compression driven by mix shift as rate-bearing public funds come on the balance sheet.
Our reported non-interest income of $133.3 million contains some market-related variances to second quarter levels, including a $3.5 million decrease in company-owned life insurance income and a $896,000 decrease in customer-related derivative income, as well as the impact of the $4 million gain on the sale of assets we discussed last quarter. These decreases were offset by a $5.1 million increase in trust and securities processing income, driven largely by the new client acquisition in our fund services and corporate trust businesses. The detailed drivers of our $231.4 million in non-interest expense are shown in our slides and press release. A few items of note.
We recorded $133.4 million in salary and benefits expense, a decrease of $9.9 million compared to the second quarter. Included were just $425,000 in deferred compensation expense, a reduction of $2.8 million from the prior quarter. This is the offset to decreased COLI income. $2.4 million in severance expense, a reduction of $2.5 million, a $1.6 million decrease in salary and wages, and $1.3 million reduction in various other employee benefit costs. These decreases were partially offset by a $1.3 million increase in operational losses.... considering the impact of $2.4 million of severance, along with the deferred compensation expense and typical timing variances, we would put our quarterly starting point for expenses close to $228 million.
Looking ahead, we expect we'll make a typical fourth quarter charitable contribution of approximately $2 million. Our effective tax rate was 18.1% year to date, compared to 18.8% in the same period in 2022. The decrease rate was driven primarily by a larger portion of income from tax-exempt securities and variations in level of COLI income. For the full year of 2023, we continue to expect a tax rate between 17% and 19%. Now turning to more detail on the balance sheet. I'll start with our investment portfolio, shown on slides 28 and 29. Our average investment security balances declined 2.7% from the second quarter to $12.3 billion. The held-to-maturity book included $1.2 billion of industrial revenue bonds.
During the quarter, $240 million of securities with an average yield of 1.90% rolled off. The yield on our total AFS portfolio increased to 2.74% and has a duration of just over 4 years. The held-to-maturity portfolio, exclusive of the IRB bonds I mentioned, had an average yield of 2.31% for the third quarter. Additionally, the portfolio is expected to generate more than $1.6 billion of cash flows in the next 12 months, providing further funding flexibility. The roll off of these securities, which have a blended rate of 2.18%, will also improve our AOCI position over that period. As of September 30th, the unrealized pretax loss on the AFS portfolio was $918 million, or 12.7% of the amortized cost.
For the HTM portfolio, this loss was $876 million, including the IRB bonds. Slide 32 highlights our liquidity position, along with contingent sources of funding. As of September 30th, we had $18.1 billion in available liquidity sources. Liquidity coverage of adjusted uninsured deposits increased to 127% at quarter end. Our tangible common equity ratio was 6.13% at September 30th. When excluding the impact of AOCI, that ratio improved to 8.06%. Tangible book value was $52.06 per share, an increase of 8% compared to the same period a year ago. Since September 30th, 2018, we have experienced a 5.3% annualized growth rate in tangible book value per share.
As we noted last quarter, we maintain our focus as a growth company while positioning our balance sheet to support that growth and provide the flexibility to address uncertainty in the industry. That concludes our prepared remarks, and I will now turn it back over to the operator to begin the Q&A portion of the call.
Operator (participant)
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. First question today comes from Nathan Race with Piper Sandler. Your line is open.
Nathan Race (Managing Director, Senior Research Analyst)
Yep. Hi, everyone. Good morning. Thank you for taking the question. Ram, in terms of kind of the expectations for NII to be kind of flat to slightly down the quarter, curious kind of what that contemplates in terms of the size of the earning asset base into the fourth quarter. You know, it looks like you guys were able to reduce some wholesale sources in the quarter, and you also have about $1.9 billion maturing in the fourth quarter. So just trying to think how we should think about the trajectory of the earning asset base with those-
Ram Shankar (CFO)
Yeah, sure, Nate. No material change in our investment portfolio other than cash flows that will continue to rotate out into the loan portfolio. So you'll see that in one of our slide decks. We have what the expected cash flows from the portfolio is going to be. We still haven't purchased any new securities, as you see in that disclosure as well. And then everything else on the earning asset side is going to be largely loan growth. So no material changes in the Fed account balances. Yes, we did bring down our liquidity balances from the second quarter to the third quarter, but don't expect it to change materially from where it was.
Mariner Kemper (President and CEO)
I would just add that, as we've done in the past, we expect loan growth in the fourth quarter to be, you know, like in strength to the quarter we just ended. It was strong.
Nathan Race (Managing Director, Senior Research Analyst)
Got it. That's helpful. Changing gears, think about the income going forward. You know, obviously you had nice growth in fund services revenue, you know, corporate and institutional asset management. Just curious how that pipeline looks in terms of new client win opportunities and how and if kind of the, the rate of growth that we saw in 3Q versus 2Q is kind of sustainable going forward?
Mariner Kemper (President and CEO)
Yeah, that's the strength remains very good. Fund services in particular, we mentioned in our deck is, you know, we've had 50 new clients year to date, and which is represents, I think it gives it over 10% growth in the segment. The pipeline remains very strong for that business. There's been a lot of dislocation, continues to be a lot of dislocation in the space as the private equity firms have gotten into the business and acquired our competitors. It has been very good for our business, and we expect that to continue to be the case. Corporate trust, you know, the money's been unlocked, projects are getting done, public and private projects are getting done, and that's unlocking value for us there.
Everyone's seen what's happened with airline activity being up and strong and moving again. So there, we continue to and expect in the coming quarters for that revenue to unlock in our aviation vertical within corporate trust. Our healthcare business continues to be strong as we continue to focus more on direct sales with our customer base. Our card spend, we expect to continue to be strong going forward, whether it's healthcare spend or it's commercial. So kind of all cylinders, really. We feel like there's nice profile growth across all of our non-interest income verticals, and continuing to feel good about that. As you know, you know, in the second quarter, we had that art sale of about $4 million.
So if you take that out, the trajectory from quarter to quarter and looking forward is pretty strong.
Nathan Race (Managing Director, Senior Research Analyst)
Okay, great. And then just lastly, turning to credit quality, you know, it's great to see improvement across the board in 3Q. You know, I think one thing that we've seen from some of your peers thus far in earnings season is some greater scrutiny on Shared National Credits. So just curious if you could remind us how large that portfolio is and to what degree you guys agent any club deals or Shared National Credits within the portfolio?
Tom Terry (EVP, Chief Credit Officer)
Yeah. This is Tom, pardon me, Tom Terry, Chief Credit Officer. The Shared National Credits that we have, about $2.5 billion, maybe closer to $3 billion. Almost all of those are related to other businesses. So for example, our fund services business, we have large health insurance companies as clients, and we will participate in their Shared National Credit to support the fee income that we get on the fund services side. So we're not interested in Shared National Credits for the sake of being in them. The lion's share are ones that support other business, and they're high quality. As far as agenting, we're—we agent very, pardon me, very few of those. So did that answer your question?
Nathan Race (Managing Director, Senior Research Analyst)
Yeah, that does.
Mariner Kemper (President and CEO)
I think that was commitment, outstanding. Outstanding is much-
Tom Terry (EVP, Chief Credit Officer)
Correct.
Mariner Kemper (President and CEO)
Outstanding is going to be much, much slower, lower.
Tom Terry (EVP, Chief Credit Officer)
Yeah, the $3 billion is a commitment amount.
Mariner Kemper (President and CEO)
The most I would say a lot of those - the comment on those fund service related lines, they're sort of really backed up lines, you know, doomsday lines, et cetera. You know, they don't really get used for the most part.
Tom Terry (EVP, Chief Credit Officer)
Correct.
Nathan Race (Managing Director, Senior Research Analyst)
So utilization on that $3 billion is like 50% in terms of funded?
Tom Terry (EVP, Chief Credit Officer)
So the balances, Nate, the balances at 9/30 were about just under $500 million. So yes, the utilization tends to be pretty low. As Tom said, these are other clients that we have outstanding lines to, but don't get tapped. Yeah, just make sure commitments are larger and balances are under $500 million.
Nathan Race (Managing Director, Senior Research Analyst)
Got it. And you really haven't seen any negative credit migration within that portfolio recently?
Tom Terry (EVP, Chief Credit Officer)
Not at all.
Mariner Kemper (President and CEO)
None of them are on the watch list.
Tom Terry (EVP, Chief Credit Officer)
Correct.
Nathan Race (Managing Director, Senior Research Analyst)
Okay, great. I'll step back. Thank you for the call.
Tom Terry (EVP, Chief Credit Officer)
Thanks, Nate.
Operator (participant)
Our next question comes from Chris McGratty with KBW. Your line is open.
Chris McGratty (Managing Director, Head of U.S. Bank Research)
Oh, great. Morning,
Tom Terry (EVP, Chief Credit Officer)
Morning, Chris.
Chris McGratty (Managing Director, Head of U.S. Bank Research)
Hey, good morning, everybody. Mariner, maybe a question for you. You've talked and done a really good job historically on operating leverage. Expenses were really well controlled this quarter. How should we be thinking about operating leverage in this increasingly tough environment for revenue?
Mariner Kemper (President and CEO)
Well, I think you kind of hit the nail on the head there to see an environment with really pretty much what's happened with interest costs, right? It's a storyline there. It's more challenging in this environment to accomplish, really, I would guess, what any of us want to accomplish. We are still laser focused on it, and it's you know, obviously, we don't give guidance, but it'd be hard for us to point you in any one direction. It's kind of early in the year to think about the budget for next year to really be able to talk intelligently about where that might head. But we are, you know, operating leverage and as opposed to efficiency ratio is definitely where we put our emphasis, and we'll continue to be focused on it.
Chris McGratty (Managing Director, Head of U.S. Bank Research)
Okay. And then, I think you, I want to make sure I heard you on the fourth quarter loan growth. Was the expectation moderation from this quarter, or I might have missed that?
Mariner Kemper (President and CEO)
Similar, similar in strength.
Chris McGratty (Managing Director, Head of U.S. Bank Research)
Okay, got it. Then finally, in terms of the balance sheet, you know, some of your peers are thinking about retooling some of the investment portfolio, given the moving rates. I mean, any appetite to move things around in the bond portfolio? Obviously, you're not reinvesting, but any kind of restructuring that might be contemplated?
Tom Terry (EVP, Chief Credit Officer)
Hey, Chris, as you know, we, you know, routinely evaluate these kinds of opportunities, but at this time, very little appetite, desire, or need really to do any of that.
Chris McGratty (Managing Director, Head of U.S. Bank Research)
Okay. Thanks for taking the questions.
Tom Terry (EVP, Chief Credit Officer)
Thanks, Chris.
Operator (participant)
... As a reminder, if you'd like to ask a question, please press star one on your telephone keypad now. We now turn to Timur Braziler with Wells Fargo Securities. Your line is open.
Timur Braziler (VP)
Hi, good morning.
Tom Terry (EVP, Chief Credit Officer)
Hey, Timur.
Timur Braziler (VP)
Maybe, hi, just following up on, that last line of questioning, with the seasonal inflow expected on, on the public funds, I guess, what's the expectation for the bond book in size next quarter? Are you gonna be reinvesting some of those proceeds, that are rolling off, or is the bond book gonna remain a source of funds for the loan growth you're seeing?
Tom Terry (EVP, Chief Credit Officer)
It will remain a source of funds through the end of the year and maybe early into next year, and then we'll have to evaluate based on, you know, loan production and deposit goals and whatnot. But at this point, we're still going to let it fund our balance sheet growth, or loan growth, I should say.
Timur Braziler (VP)
Okay, and then looking at the loan growth, the CRE construction growth remains pretty impressive. I'm just wondering how much of that is contractual as some of these loans start to fund up on schedule, and what that pipeline looks like over the next couple of quarters.
Tom Terry (EVP, Chief Credit Officer)
It is a mix. A lot of the funding we've seen certainly are deals that we approved over the last 6 and 12 months that are now hitting the construction phase. There's still activity. We're still seeing loan demand for multifamily and for industrial. Obviously, it's probably slowed a little bit, but there's still demand, still seeing activity. So to answer your question specifically in terms of funding, though, it's a, it's a mix of what we've approved over the last 6 to 12 months. New stuff coming in.
Timur Braziler (VP)
Okay. And then just on the construction component, specifically, any ill effects from the broader environment? Are you hearing that borrowers are taking more of a wait-and-see approach, whether it's rates or just economic uncertainty? I guess any kind of color you can provide on some of the early stage building conversations you're having.
Mariner Kemper (President and CEO)
I think, you know, it'll echo the comments, Timur, that, that Tom said, which is that, there's plenty of opportunity. The mix is changing, right? So, multifamily and industrial remain very strong, while obviously, office and other categories are waning significantly. So, with a higher interest rate environment and a low supply, housing supply in the marketplace, there's, there's still very strong interest and demand for multifamily. There are pockets in the country where that isn't the case. There are places where there's overinvestment. There are places where people are building Class A when the need is, is, is Class B, you know, et cetera. So we pay attention to those kinds of issues to stay away from problems. But there is strong demand that we understand for, for multifamily.
Industrial continues to be strong because there's a real need for last mile distribution and tilt-up buildings to support the Amazonification of America and delivery, and then all of the businesses that either support Amazon or compete with Amazon. So there's a pretty significant build-out underway that we believe and understand still to support the way consumers receive delivery of goods in America. So we think those two things continue to represent strong, high-quality opportunities for us. The real shift in our books going forward in the environment we're in, with excess liquidity gone from the system, is we're more focused on making sure we reserve our capital for customers and people who do business with us and are willing to, you know, put their deposits and broaden their relationship with us.
So that would be the, you know, the only difference as you think about the landscape of opportunity. We still see quite a bit of opportunity, and really about us honing in that and making sure that we're reserving that for people who really want to deepen their relationships with us.
Timur Braziler (VP)
Great, thanks for that. And then just last for me, on the expense side, appreciate the guide for fourth quarter. Maybe as we look into 2024, and again, parlaying on Chris's question, how much of, how much leverage is there on the expense base in order to drive positive operating leverage? Should we expect expenses to grind higher through 2024, or is there confidence that those can be fairly well maintained and be a positive source of operating leverage?
Mariner Kemper (President and CEO)
We certainly think we can continue to maintain, at a minimum, maintain what we've been able to accomplish. You know, it's too early to tell what else, and we don't give any guidance, but, you know, there's always room to improve and to be better. I would think at any company, and we continue to look for those opportunities to be to do business, I would say, to do business smarter. And we're always looking for those opportunities, and I think we'll forever uncover them.
Timur Braziler (VP)
Great. Thanks for the question.
Tom Terry (EVP, Chief Credit Officer)
Thanks, Timur.
Operator (participant)
We have a follow-up question from Nathan Race at Piper Sandler. Your line is open.
Nathan Race (Managing Director, Senior Research Analyst)
Yep. Thanks for taking the follow-up. Just kind of curious, thinking about how you guys are thinking about the margin trajectory next year, you know, in a higher for longer rate environment. You know, obviously, you're seeing less pressure on the index deposits under that scenario, and you have some kind of lag and repricing in terms of the duration of the portfolio in and of itself on the loan side of things. So any kind of preliminary thoughts on how you guys are thinking about the margin and NII trajectory next year under those frameworks?
Mariner Kemper (President and CEO)
We appreciate the opportunity to make our case for our investment thesis. Yeah, we do believe that in under a higher for longer scenario, if the Fed stops, which would, you know, that would be the scenario where we would anticipate. And under that scenario, you know, the deposits - the pressure on the deposits would alleviate, and new and repricing credit would continue to add value along with the roll-up of the investment portfolio into higher yielding assets. So, that is the expectation if the Fed does stop.
Nathan Race (Managing Director, Senior Research Analyst)
Okay, great. And I know it's difficult to predict, you know, future provision impacts under CECL, but just kind of any thoughts on kind of how you guys are thinking about providing for growth and assuming you're not really seeing any, you know, material credit issues on the horizon?
Ram Shankar (CFO)
Yeah, that's a, you know, million-dollar question, Nate. So as you know, as you've seen the last few quarters, given our credit quality, it most of our provision really came from both macroeconomic variables changing in this past quarter because Moody's moved towards more of a soft landing. Our provision was low compared, and then our charge-offs are low as well. So it really depends on what level of loan growth that we have and what happens to the macroeconomic variables. As Mariner said, we have 13% decline quarter-over-quarter on our past due loans and 6% in our classified. So from a portfolio health perspective, there's not a lot of pressure.
As we've said, the magic math that we have to work sometimes is trying to get our coverage ratio at or close to 1%, right? That's kind of what we would like entering any kind of cycle, whether it's good or bad.
Nathan Race (Managing Director, Senior Research Analyst)
Got it. So it sounds like, you know, absent material macro deterioration, the expectation is for you guys to build a reserve close to 1% over the next few quarters, just in support of loan growth and assuming charge-off-
Ram Shankar (CFO)
Yeah, we're at 97, but yeah. We're within spitting distance. We're at 97 basis points coverage, so I'd say, you know, plus or minus a few basis points here and there on what our coverage ratio ends up being. Yeah.
Nathan Race (Managing Director, Senior Research Analyst)
Mm-hmm. Got it. And then just one last one. I know you guys don't pay a ton of attention to end-of-period balances, but I was a little surprised to see the non-interest-bearing attrition accelerate versus last quarter. Any thoughts on kind of when that could bottom, based on what you're seeing in terms of client spending and so forth?
Ram Shankar (CFO)
So if you look at what happened, as we said in the script, our commercial DDA balances, so what you're alluding to about cash usage, that actually was up 1% on an average basis. And the decline in the third quarter DDA balances were more episodic because of some of our corporate trust deals. There's always a seasonal build-up, and tax payments go out. So we know, and it's very predictable from that standpoint. So I would say on the commercial side, things are fairly stabilized. Again, you know, it's really, you know, as we said, we think we're approaching the bottom in terms of our 32%, DDA to total deposits, which was the cycle low from last time.
To your earlier question, that's the biggest X factor on what can change our margin or our net interest income curve from here.
Mariner Kemper (President and CEO)
Yeah, I mean, I would just-- none of us know, right? But I would just suggest that if the Fed is done in the way our income statement is worked and our customer base works, we've said this all summer long, we would go through this first because our customers are largely commercial. We've seen that. We think that's largely done, and we, you know, we predicted that because the last cycle being at 32, that's done. We're at 32 today. So, from here, your guess is as good as ours. Using the history and the behavioral patterns, it seems as though we're near the bottom on that, on that shift.
Nathan Race (Managing Director, Senior Research Analyst)
Okay, great. And then just in terms of overall deposits expectations, you know, average deposits are flat in the quarter. Just curious, based on what you guys see in terms of your pipeline, you know, how you're thinking about overall deposit growth expectations, over the next several quarters?
Mariner Kemper (President and CEO)
You know, we continue to have a strong pipeline. You know, this all comes down to cost at the end of the day. You know, we have a very, very strong ability, I think, in a way that most banks our size don't, to tap deposits. It's really about paying market rate for them, and then really, it's about asset and liability. It's about our disciplined approach to pricing assets, not just the deposits. And so, we don't concern ourselves too much with the ability to grow our deposits.
We just have to make sure that we're disciplined on the way we manage assets and liabilities and making sure, which we've been able to do to date, as we bring on loans, we feel very comfortable about our ability to price them appropriately to maintain, you know, at a respectable margin spread.
Nathan Race (Managing Director, Senior Research Analyst)
Okay, great. I appreciate you guys taking the follow-ups. Thanks again.
Mariner Kemper (President and CEO)
Thanks. Yeah, I might just remind everybody before we're done, just because it has been. You know, you start in April with the way the world looked, and then you get to where we are now. We feel pretty good about where we sit, and just want to remind you of a couple of things. I said a moment ago, UMB said early on in the summer and spring that we would likely get to 32% on non-interest-bearing to total, and that's about where we sit here now. We said we would go through the margin trouble early, and then, while others were seeing the declines, we'd flatten out, and on a linked-quarter basis, you've seen us flatten out margin on a linked-quarter basis.
We continue to tell you we're going to have outsized loan growth. We continue to have outsized loan growth. We continue to tell the street about our ability over time to manage asset quality. While everybody's asset quality looks good right now, ours looked good in the last cycle. So we continue to have excellent asset quality. We've had the best five quarters linked together we've had in our history from an asset quality standpoint. We have the same management team managing credit that we've seen through the last few cycles and still on top of credit this cycle. We expect that we'll continue to manage our company the way we always have.
Lastly, we're one of the few banks this quarter, on a linked quarter basis, to show a reduction in expenses of 3.4% in our case. So really across the board, everything that we can control, we've controlled and have performed. You know, any business, every once in a while, for geopolitical reasons or otherwise, their input costs go up, and it's a business's job to manage how you pass on those costs, or you become more efficient. We're doing our job, and we're pleased with the results, and we hope you are as well.
Kay Gregory (SVP, Director of Investor Relations)
Thanks, Mariner. Thanks everyone for joining us today, and if you have any follow-up questions, you can always reach us at 816-860-7106. Thank you and have a great day. Turn it back to the operator to close the call.
Operator (participant)
Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.