Columbia Banking System Inc
NASDAQ:COLB
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Columbia Banking System Inc
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Good morning, and welcome to the Umpqua Holdings Corporation's third quarter earnings call. [Operator Instructions]
I will now turn the call over to Ron Farnsworth, Chief Financial Officer.
Okay. Thank you, Corey, and good morning, and thank you for joining us today on our third quarter 2020 earnings call. With me this morning are Cort O'Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, President of Umpqua Bank; and Frank Namdar, our Chief Credit Officer. After our prepared remarks, we will then take questions.
Yesterday afternoon, we issued an earnings release discussing our third quarter 2020 results. We have also prepared a slide presentation, which we will refer to during our remarks this morning. Both of these materials can be found on our website at umpquabank.com, in the Investor Relations section.
During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to Page 2 of our earnings conference call presentation as well as the disclosures contained within our SEC filings.
And I will now turn the call over to Cort O'Haver.
Okay. Thanks, Ron, very much. I'm going to focus my comments on Umpqua Next Gen, but let me first summarize the quarter in a little bit of detail. Ron will talk about financials and then we'll take your questions later in the call.
For the third quarter, we reported earnings of $0.57 per share, an increase of $0.37 per share from the $0.24 per share earned in the prior quarter. It is worth noting that in terms of both earnings per share and net income reported for the quarter, the third results -- third quarter results represent a company record. These earnings were driven by incredible production in our home lending division, a continued decline in our cost of interest-bearing deposits And a reduced provision for credit losses charged as our credit quality remains strong.
Turning to balance sheet items. For the third straight quarter, our robust deposit growth in noninterest bearing DDA, specifically $303 million or 3% this quarter afforded us the opportunity to once again reduce higher cost time deposits, which brought -- which we brought down by $613 million or 16%. On a net basis, deposits were down $175 million or 0.7%. Our cost of interest-bearing deposits went from 67 basis points to 49 basis points, an improvement of 18 basis points from the prior quarter.
Loan balances were down $245 million or 1% during the quarter due to payoffs in commercial real estate, specifically in the multifamily and nonowner-occupied categories as well as credit line paydowns. Regarding capital, we are pleased to announce to our shareholders -- we were pleased to announce to our shareholders in August a dividend of $0.21 per share, remaining consistent with historical payments. We will continue to work collaboratively with our regulators on obtaining the approvals for future dividend payments. As I stated last quarter, we feel confident in our capital levels, our liquidity position, our forward-looking earnings projections and the credit quality of our loan book. We plan to issue a press release discussing our next dividend timing very soon.
Now I would like to spend a moment discussing Next Gen. Three years ago, we announced an ambitious corporate program, Umpqua Next Gen, to provide shareholders a clear view of our plans to transform the company's operations and build a more efficient, nimble and modern organization to create both short and long-term value. Our priorities were to streamline operations, to improve efficiency and fund strategic growth initiatives, to invest in banking talent and products as well as technology infrastructure that would accelerate growth and to introduce our first human digital customer experiences for consumers.
Across all areas, Umpqua Next Gen was a tremendous success. Specifically, since announcing the program, we've grown the company by increasing loans $3.8 billion and deposits by $4.8 billion, introducing the company's first human digital banking platform Umpqua Go-To, which now has more than 70,000 users, increasing our non-mortgage fee income annually by $20 million through the end of last year, reducing our store count by 69, which represents roughly 25% of our total stores. And last but not least, achieving more than $25 million in reoccurring noninterest expense savings.
In addition, we also made significant investments in technology as a part of Next Gen, which we are now -- which are now serving as key building blocks for both new revenue and operational efficiency initiatives. These technology investments include: implementation of a cloud-first strategy in coordination with Microsoft, a strategic partner. As a proof point of the effectiveness of our cloud-first strategy, we're currently consolidating our backup physical data center from 1,600 square feet to a 60 square foot space utilizing the very best data security tools, the transformation of our development processes to follow agile principles that allow us to iterate and respond to customer feedback very quickly.
This shift was a key reason behind our success in launching PPP so early and effectively. Rollout of a paperless initiative that through additional strategic partnerships with FIS and DocuSign means one out of every 2 deposit accounts this year has been opened electronically, saving significant processing time for our frontline and operations associates.
We have built our technology architecture to be scalable at will, a key reason why Umpqua was able to switch to a remote working environment overnight and not miss a beat this past March.
So now let me turn to Next Gen 2.0. Like its predecessor, our Next Gen 2.0 program will also include initiatives to grow revenue, invest in strategic areas for future growth, including technology and digital enhancements and continue to advance operational excellence items to reduce operating costs and invest in strategic growth opportunities.
We're building on the strong foundation established over the past few years to continue streamlining the company's operations in order to accelerate the development of a highly differentiated human digital customer experience. Among our growth initiatives, we've aligned resources internally to take advantage of the great opportunity we see for additional customer growth with businesses large and small. For small businesses, we'll continue to serve this important customer segment through our retail teams, combining their in-store expertise with automated assistance from digital tools, such as mobile banking enhancements, the pilot of Go-To for business and automated credit requests.
For our business and commercial banking segments, which we integrated earlier this fall, we're focusing on delivering a personalized experience that leverages technology to empower and scale our banking teams, where appropriate, with such items as business online banking upgrades, scoring model enhancements and product bundle enhancements.
Within our corporate banking segment, which we've expanded by more than 30 FTE in the past 2 years, we'll continue to attract and deepen full middle market relationships that come with associated deposit and treasury management opportunities. As businesses work to navigate the extraordinary ongoing disruption from the pandemic, they need a bank that's able to scale personalized solutions and expertise. And that's where we'll continue to focus and win. These initiatives are supported by the technology investments we've made and are easy to overlook but are, in fact, critically important in enhancing Umpqua's ability to differentiate and take advantage of strategic opportunities and navigate disruption.
We're able to partner seamlessly with companies that offer best-in-class products that improve our customer experience and streamline our back-office operations. Looking forward, we'll be focusing our continued technology investments on: implementing an industry-leading commercial loan origination system and treasury management onboarding system in 2021; continuing to execute our cloud-first strategy, which, as previously mentioned, gives us the ability to scale at will; leveraging data and analytics to provide our bankers with next best product offers for their customers through Umpqua Smart Leads as well as proactively manage risk through our credit insight analytics; and expanding our current offering of Go- to our business customers by evolving the platform to serve businesses and a platform uniquely matched to current and evolving human digital preferences.
From an operational excellence perspective, we're implementing additional initiatives to not only reduce our reoccurring noninterest expense, but also provide us with additional funds to reinvest. And here are a few examples. First, the COVID-19 global pandemic has clearly accelerated customer adoption of online mobile banking and Go-To.
At the same time, it has dramatically lessened customers' traditional dependency on physical locations. While we've seen in-store transactions rebound a bit from their lows in April and May, store transactions are down 27% compared to a year ago. However, mobile banking daily usage is up 9% year-over-year, indicating accelerated adoption. In addition, utilization of Go-To is up 38%.
In response to these changing preferences, we'll be continuing the store rationalization efforts we've already accomplished, which includes 130 consolidations since 2014. Our plan is to reduce another 30 to 50 locations over the next 2 years. Our target is to get to a total store count between 180 to 200 stores by the end of 2022.
Second. Late last month, we announced the sale of Umpqua Investments to Steward Partners Global Advisory, very much a strategic partner for us going forward. The deal will close in the first quarter next year and reflects our commitment to leverage strategic alliances where they enhance the customer experience and complement our broader business strategy. Currently, Umpqua Investments customers -- current Umpqua Investments customers will transition to the Steward and Raymond James technology platform and have enhanced access to the very highest level of expertise and service. We are currently finalizing a future referral agreement, which will be mutually beneficial to both parties going forward.
Third. No stone is left unturned, and we have made a variety of changes to the company that, in combination, come to a material number. Specifically, we have eliminated our specialty deposit group which focused on higher cost institutional type deposits. We have aligned our marketing and communication teams under a single leader, and we have outsourced our merchant sales teams in a partnership with Worldpay, which we have -- and we have identified procurement -- additional procurement savings. Together, these changes will result in $10 million to $15 million in annualized expense rate reductions.
Last but not least, the transformation on how business across all industries work day-to-day is true here at Umpqua. Based on their strategic tech investments made over the past few years, we were able to pivot rapidly and move the vast majority of our back office teams to remote work in a matter of days without losing productivity. As a result, we're kicking off a transformation of the Umpqua back office workplace that would reflect go-forward working preferences and create new work-life balance combined with in person collaboration spaces that are attractive to top talent. And most importantly, that continues to support best-in-class customer experience, that's our top priority.
After reviewing our facilities' footprint and how non store locations will be utilized in the future, we believe this will have the added benefit of allowing us to reduce back office square footage by 50%, resulting in noninterest expense savings of $5 million to $7 million annually. In aggregate, as shown on Slide 6 of the presentation, these at operational excellence initiatives reduce our efficiency ratio by 4.5% to 7%, when fully implemented, by the beginning of 2023. Even as mortgage revenues begin to normalize in future periods, we will operate this company with a sub-60 efficiency ratio.
In summary, before passing to Ron to review the financials in detail, I hope my enthusiasm for the future of this company is evident. I want to communicate to all of our associates how incredibly proud I am of our resiliency and operating successfully in this ever-changing environment. Our associates have supported each other and our customers through an ongoing global pandemic, through important social justice conversations and most recently, through the wildfires impacting the West Coast. To that end, I want to reiterate the exceptional contributions Umpqua has made to the strength of our local economies. Because of our associates' extraordinary hard work, we've helped more than 17,000 businesses, saved more than 250,000 jobs, and we're continuing that essential work every day.
So now, Ron, on to the financials.
All right. Thank you, Cort. And for those on the call who want to follow along, I will refer to certain page numbers from our earnings presentation. Page 14 of the slide presentation contains our summary quarterly P&L. Our GAAP earnings per share for Q3 was a record $0.57, significantly higher than the $0.24 in the second quarter, driven by continued strength in home lending and no provision for loan loss, offset partially by a 21% tax rate.
Excluding MSR and CVA fair value adjustments, our adjusted earnings were $0.60 per share this quarter. On the PPNR front, excluding fair value charges for both quarters, our PPNR was $170 million in Q3, an increase of 11% from $153 million in Q2.
Turning now to net interest income on Slide 15. Net interest income increased $4 million or 2% from Q2, driven by a decline in interest expense more than interest income. Shown here is the quarterly interest and fee recognized from the PPP loan program.
Taking that to Slide 16. Our total net interest margin was relatively flat, down just 1 basis point from Q2 at 3.08%. The margin excluding discount accretion and PPP effects was 3%, down just 3 basis points from Q2, related entirely to the higher average interest-bearing cash position we held this quarter, which we feel it is imprudent to have more rather than less on balance sheet liquidity in this environment.
Couple of other notes on margin. The bottom of the page shows the impact from the bond premium amortization, which was down slightly from Q2. And given our NIM was flat ex the extra cash we held this quarter, the highlight within NIM for Q3 was the 18 basis points decline in interest-bearing deposit costs ending the quarter at 0.49%. For the month of September, our interest-bearing deposit cost dropped to 0.45%. We expect continued reductions in funding costs over the coming quarters.
Moving now to noninterest income on Slide 17. Home lending continued their strong performance this year, posting the second quarter in a row of record noninterest revenue of $90 million in Q3. Ex mortgage, the other big moving part this quarter was a rebound in service charges and higher other noninterest income. Service charge revenue increased $2.6 million, with $1.1 million of that from TM fees, $900,000 from ATM and interchange fees and the balance due to higher OD fees. And other noninterest income included the gain on store sales delayed from Q2 due to the pandemic.
For more on mortgage banking, as shown on Slide 18, and also in more detail on the last 2 pages of our earnings release, for sale mortgage originations increased 5% from a prior record Q2 level and were up 128% from the third quarter a year ago. This reflects our positioning to capitalize on higher refinancing demand with lower long-term interest rates. The for sale mix increased slightly to 89% this quarter, the third consecutive quarter at or above our 80% target. And the gain on sale margin increased again this quarter to 5.13%, above our long-term trends of the low to mid-3% range based on better pricing with constrained industry capacity and rising log pipelines.
Historically, the second and third quarter represented a high watermark for the year on production volume and pricing with some drop off into the winter quarters. However, given the nature of this downturn, continued low interest rates, strong demand for housing across our markets and quite a bit of room to run and refinance opportunities, we expect overall mortgage activity will remain quite good for the next several quarters. As of quarter end, we serviced $13 billion of residential mortgage loans, and the MSR is valued at 72 basis points.
Turning now to Slide 19. Noninterest expense was $190 million in Q3, up from $182 million in Q2. The moving parts are on the right side of this page, noting the group insurance increase related to folks simply going back to the doctor this quarter; the lower loan origination deferred costs reflect lower demand from our customers for new non-PPP lending expected given the economic environment; other increases related to mortgage commissions on higher volume, along with higher other expense, offset by lower FDIC insurance.
As Cort mentioned earlier, we will remain focused on future expense reductions with Next Gen 2.0 over the coming 2 years and look forward to updating you quarterly. And for a minute, I want to take you back to Slide 14 and talk tax rate. Our effective tax rate this quarter was 21%, higher than the prior quarter but under our 25%, all else being equal level. The reason for the increase in tax rate from Q2 to Q3 was our stronger pretax performance realized in Q3 and forecast for Q4. Year-to-date GAAP tax rate was negative 4%, which should be close to the level we report for Q4 before getting back to the pre-goodwill impairment 25-ish percent level next year.
Okay. Now let's go to the summary balance sheet beginning on Slide 20. We are intentionally holding higher levels of interest-bearing cash given the volatile environment ending the quarter at $1.9 billion, noting the average balance was up 17%, as discussed previously. Loans decreased 1% net for the quarter, but increased 1% on average. Within this, PPP loans were $2 billion, up $60 million for the third quarter. The decline ex PPP loans related to payoffs in CRE and lower line utilization for commercial lines as expected in this environment. Deposits decreased just under 1%, but were up 2% for the quarter on average. The decline was driven by a combination of running off brokered CDs and decreases in public funds for a combined total of $451 million, along with the $100 million combined deposits for the store sale. Ex this, total deposits were up $376 million, mostly in the noninterest-bearing demand category.
Total DDA ended at $9.5 billion, up 3% for the quarter and up 33% year-over-year. And of the $2 billion in PPP loans we funded, we estimate about $250 million of that remains in deposit accounts at the bank. Our total available liquidity, including off-balance sheet sources at quarter end, was $11.2 billion, representing 38% of total assets and 45% of total deposits.
Frank will cover the loan book in a few minutes, but I want to take your attention back to Slide 11 on CECL and our allowance for credit loss. Our CECL process incorporates a life alone reasonable and supportable period for the economic forecast for all portfolios with the exception of C&I, which uses a 12-month reasonable and supportable period, reverting gradually to the output mean thereafter. Hence these forecasts incorporate some level of economic recovery in 2021 and beyond, as most economic forecasts revert to the mean within a 2- to 3-year period. As noted, we used the August Moody's consensus economic forecast. There was no provision for credit loss in the third quarter as the economic forecasts have improved from earlier this year.
Net charge-offs for Q3 remained very low at $13 million, much lower than the models from March and June suggested. Within our ACL as of September 30, we had a qualitative overlay of $41 million above and beyond the model results. The majority of this overlay resulted from $22 million of small ticket leases that are past due greater than 60 days following rolling off their deferral period. These will most likely result in an increase in charge-offs for Q4 and Q1, but have already been fully reserved for in our ACL. The ACL at quarter end was 1.65%, noting this ratio was 1.81% excluding the government-guaranteed PPP loans.
As these are economic forecasts driving the reserve, it will simply take the passage of time to see if net charge-offs follow as modeled. But to date, the models have simply overestimated the actual net charge-offs.
Two final comments on CECL. First, future provisions or recaptures on expected credit loss will be based on changing economic forecasts, which could worsen or improve from the quarter end forecast used. And second, we have elected the full 5-year regulatory capital transition option for CECL.
And lastly, on Slide 25, I want to highlight capital. Noting that all of our regulatory ratios remain in excess of well-capitalized levels and all the regulatory ratios also increased again over the prior quarter. Our Tier 1 common ratio is 11.6%, and our total risk-based capital ratio is 14.9%. The bank level total risk-based capital ratio was 13.9%, which is the basis for our calculation of $423 million in excess capital. That is excess over our 12% in-house floor, which in itself is excess over the well-capitalized 10.5% level. This excess capital increased $100 million over the past quarter with our strong results net of the dividend. We constantly forecast and stress excess capital, both in base and severe scenarios. And with what we know today, based on the economic forecasts, we are very comfortable with our capital and liquidity position given uncertainties over the near to intermediate-term horizon.
The key items I want to reiterate, as I wrap up my prepared remarks, include: first, the significant available liquidity we have of just over $11 billion; second, our allowance for credit loss stands at 1.81% of non-PPP loans; and lastly, our significant level of excess capital, again, with the Tier 1 common ratio of 11.6% and total risk-based capital ratio at 14.9%.
And with that, I'll now turn the call over to Frank Namdar to discuss credit.
Thank you, Ron, and I will also be referring to certain page numbers from our earnings presentation for those who want to follow along. First, a quick update on the wildfires that have impacted the West Coast this past quarter, as we have been actively engaged with all impacted communities. Regarding our customers, we are aware of a very limited number of service residential properties that were damaged or lost. And all were covered by insurance, and thankfully, no commercial properties were impacted. As a company ourselves, we did lose our Phoenix, Oregon store and are working collaboratively with that community on providing essential banking services, where needed, along with community grants mentioned in Slide 28 of the presentation. Most importantly, we're extremely grateful that all of our associates are safe.
Now on to credit quality highlights. We have updated our deferral information as of October 15 on Slide 8. Total loan balances that are currently on deferment represent 2.3% of the loan book, which is a decline from the 5.7% we reported on last quarter's call. We have experienced a total of $1.7 billion that have come off their round 1 deferrals and just $271 million or 15% have been extended to a second deferment. Overall, we are very pleased with the 85% cure rate of total deferrals thus far. On a portfolio basis, we are reporting less than 1% deferral in commercial, 1.4% in commercial real estate, 4.4% in FinPac, 1.1% in consumer and other and 4.2% in residential real estate.
On Slide 8 and 9, we again show specific segment totals and relevant characteristics for portfolios that have been impacted by COVID-19. The following 5 specific segments are highlighted: hospitality at 2.4% of our portfolio; air transportation at 0.5%; oil and gas with essentially no exposure; restaurants at 0.6%; and finally, gaming at 1.6% of our portfolio. Applicable deferral information is also highlighted within these segments.
Hospitality remains an area that we are watching closely. Occupancy levels are currently in the 30-ish percent range and extended stay and limited service properties continue to perform well. As I have stated previously, this portfolio is of low leverage, with very strong overall sponsorship to borrowers we have established history with.
Slide 23 depicts our loan portfolio, its geographic diversification and select underwriting criteria for each major area. The loan book remains granular in nature, and we are confident in our conservative and disciplined underwriting practices.
Slide 24 reflects our credit quality statistics. Our nonperforming assets to total assets ratio increased 2 basis points to 0.27%. And our annualized net charge-off percentage to average loans and leases decreased 5 basis points to 0.24%. Within our FinPac portfolio specifically, our annualized charge-off percentage was within our historical range at 3.28%.
I will now turn the call back over to Cort.
Okay. Thanks so much, Frank, and Ron, for your comments. We will now take your questions.
[Operator Instructions] Your first question comes from the line of Jackie Bohlen.
Starting with the big news of the quarter on your Next Gen 2.0. A quick clarification question, and then I'll hop into something more theoretical. But this slide, as you mentioned, 8% to 12% growth by year-end '22. Is that cumulative growth that you expect? Or is that an annualized number?
Jackie, this is Tory Nixon. That's a cumulative growth number in the C&I space over the next couple of years.
Okay. And when you came up with those? Understanding that you're operating in a very unique time period right now, how would you characterize the growth between now and year-end 2022? I'm assuming that by that point in time, it's a completely different environment than the one that we have right now. But just curious on how you determined that?
Yes. So I think -- this is Tory again. I think there are a couple of things to think about in answering that. First is, as Cort mentioned, we have a very robust, organized strategic plan around Next Gen 2.0, and an element of that in executing the strategy is the expense reduction as well as some investments into technology, into people and continuous process improvement that help us take advantage of the momentum that we've built over the last couple of years, especially in the middle market space, but across all business segments.
And the growth trajectory is really more of a hockey stick. I mean, certainly, we're still in a somewhat of an unknown environment from the pandemic. But I think the pandemic has created some real disruption in the industry. And it is unique by geography and by institution. And certainly, we feel we're very well positioned to leverage that disruption to continue to build on the momentum that we have and to continue to grow market share in small business, in our business community markets and certainly in middle market banking.
Okay. Okay. And then sticking with the revenue theme. How does that -- that balance sheet growth play into the adoption of those, I'm assuming, some new customers into some of the revenue-producing products that you have? And then also, just broadly, how are you thinking about revenue with Next Gen 2.0? I understand different plans than what you had last time, but you had some pretty tangible numbers associated with the first version of Next Gen. And so I'm just curious about how you're thinking of revenue with this particular plan?
Yes. So I can let Ron talk a little bit on the revenue side, but we certainly see this as an opportunity to grow market share, grow net new customers, grow loan balances, grow noninterest-bearing DDA balances, grow core fee incomes, all the same things that we have been working on for a year. I think we're in a unique position where I think that -- a lot of that is accelerated right now because of disruption in the marketplace, and that will give us an opportunity to grow revenue in the company. And with, I think, very prudent expense management, I feel very optimistic about what we can accomplish in the next couple of years.
Jackie, Cort. Let me just throw something on. And with all candor, it's a little different economic environment today than it was in '17 we rolled out. I appreciate your question. And we feel good through our prior efforts that we will grow market share. We attract good quality people. It's just that -- I think we all would agree on this call, we have an uncertain economy. And until some of that works its way through and into the balance sheet and the P&L, it's a little harder to give you guys that type of guidance that we did in Next Gen 1.0. And it's just a little different. So I appreciate your question, and I assure you as we've exhibited, we will grow this company.
Okay. No, I mean, I fully understand the environment -- sorry, Tory, I just cut you off.
No, that's okay. Just one last thing to add on to that is just as one small example, we look at our fee-based business in the commercial and corporate banking space. We've seen a V-shaped recovery in treasury management and commercial card activity for us. And so we've had the 2 best months in the history of the bank in September for both of those products. And it's just a sign of some more robust activity in some of the companies that we have brought into the bank and their kind of usage of the product and service that we're providing.
Okay. And were there any revenue assumptions overlaid into the efficiency improvements on Slide 6?
This is Ron, Jackie. No, there were not. We were just basically looking at the expense levels that we're focused on and what that impact would have on the efficiency ratio.
Okay. Perfect. And then just one last one. Do you have a number behind the 3 store sale that occurred in the quarter? A dollar income.
Dollar income, yes. It was just under $6 million in other noninterest income. And again, that was about $100 million of deposit outflow in the third quarter.
Okay. And I know you have another one coming up this quarter. I believe it was 4 stores. Do you anticipate any income related to that?
A similar number, maybe a bit under, but similar good premium.
Your next question comes from the line of Michael Young.
Cort, I kind of really appreciate all the color. And I think some of the strategic elements you mentioned that are going on behind the scenes that don't necessarily have a number tied to them are important for the story. But I did want to focus in on the comment around operating below 60% efficiency ratio. I just wanted to kind of understand big picture how you're thinking about that in a potentially challenging revenue environment and with a big mortgage business. Is that kind of from here we should not really press above that? Or is there some reinvestment need on the front end of this to achieve kind of this lower mid-50s to upper 50s efficiency ratio in out years?
So Michael, yes, I mean, I think we have made the announcement as a part of Next Gen 1 that we were going to operate the company sub-60. And so we just wanted to recommit to you all our intent on doing that. I appreciate your question. Let me take a couple of different steps. One is with the announced in the deck expense opportunities we have, we feel that the 5% to 7% reduction in our efficiency ratio it puts a big chunk of where we're at today on a more normalized basis less any mortgage activity. I mean, we have a lot of wind in our sales, like Ron mentioned, with mortgage over the next couple to 3 quarters, which gives us an opportunity to look at some reinvestment, which is where you're going with this question, I think. And it obviously will take some level of investment in people, as Tory mentioned, primarily, and some technology, but we wanted to get across to you all with my opening remarks, is we've made significant investments over the last 3 years in our technology architecture and technology stack.
My bet is for a bank our size, we're well ahead of the game what it takes to digitize and mobilize and use data to attract customers. When we buy a team of people that just left Wells Fargo and they need data and they need mobile and digital tools for commercial banking, we've got the basic infrastructure to get there. So I'm probably not exactly answering your question. We are highly keen on making sure we continue to operate this company in the most efficient manner we can. We do understand it will take some reinvestment as we continue to grow not only our technology, but also our people. So hopefully, I'm answering your question.
Yes. No, that's helpful. And Ron, maybe to get a little bit more into the specifics on just kind of expense trajectory. We've had a record blowout mortgage year this year, so expenses related to that are pretty elevated. So I guess we've got sort of the tailwinds of Next Gen 2.0, which looks like it should generally offset expense inflation. And then should we assume that same kind of 2.5% gearing ratio on mortgage expenses going forward? Or will that shift at all?
Yes. I expect it similar. It might be down a couple of basis points, but assuming you're in at range, but it is going to stay strong, though, through the winter quarters, maybe not quite to the level of Q3, but you're not going to see the drop-off you saw in prior Q4s and Q1s. So I expect the elevated level continues. And like I said, I think there's some more room to run on mortgage going on to next year.
Is there any -- I don't want to put too fine of a point on it, but just as we think about next year, I mean, is there a level that we should kind of be thinking about in terms of expenses, maybe either starting the year or throughout the year for next year as a run rate?
Well, pre Next Gen 2.0, we take a look at the level we're at now, recognizing large contributor of that being home lending, higher volume of $2 billion a quarter. And based on your home lending forecast, you can adjust for that. But I think it's going to stay pretty robust going into at least Q1 on that level. So this is probably a pretty good proxy to start working off of.
Okay. And then I guess just a follow-up, maybe, Cort, to what you mentioned in terms of potential lender hires out there. It seems like you guys are in a sweet spot from a size, scale, product availability perspective. I mean, do you see a robust opportunity to hire whether it be teams or individuals over the next year? Maybe just if you could talk about that or the opportunity ahead?
Mike, let me bump that over to Tory. I think he'd be a better person to answer it.
Yes, sure, Mike. So what we -- how we have always kind of positioned this is we are very opportunistic. So we have continued to look for exceptional talent to bring into the company. And we have done that on a -- I think, a fairly regular basis. As I mentioned just a few minutes ago, just the disruption in the marketplace on the West Coast, in particular, it's just providing opportunity for us. So we will continue to look for that talent, continue to bring it into the bank. We feel that the folks that we bring are very accretive to the organization. I think we've talked before a lot about, certainly, in the middle market side of the house, companies bank with bankers. And as those bankers move to a different institution, they tend to want to follow. And to Cort's point, I think we can put a lot of infrastructure into the company that allows us to compete day in and day out, and that will provide us the opportunity to continue to bring good solid people into the company.
I wanted to add a thing. I mean -- and Tory has done a great job with the size of the institution that we operate and the experience level that Tory has brought in and Frank's emphasis on credit management, we are a great alternative for a banker at a large institution, and we've talked to you guys about this for years, who's looking for a different customer experience. They want access to Tory and me and Ron, they can have it yadi-yadi-yada. So we are always the benefactor of good talent when there's disruption in the bigger bank space. And we've never had a problem attracting people when we decide we want to invest in a certain geography or in a certain market.
Your next question comes from Steven Alexopoulos.
So maybe to start sort of follow up on Jackie's question about the 8% to 12% growth. And I think Tory responded that was cumulative over 2 years. Is that materially different than what you would have expected without Next Gen 2.0? It seems like the growth rate you've been doing before -- at least before the pandemic.
Well, I -- this is Tory again. I think it's important to recognize kind of the environment that we have been in the past 6 months and the environment we're still in. And if you look at what we can see in the next 6 months where it's not a really, really robust economy. So there's a -- commercial lending is relatively flat if not down. I mean, I look at our utilization rate for our line of credit borrowers were down year-over-year 9% in terms of utilization. So getting real significant growth for the company in C&I is somewhat of an unknown in the very near term.
So we feel that we can definitely hit the 8% to 12% growth. And some of that will be based on what -- how the economy rebounds in the next 6 months. But -- and that's why we put a 2-year plan together. So I think it's a good plan, and I think it's -- it will stretch the company to continue to grow market share, do it the right way, add full banking relationships into the organization.
Okay. That's helpful. And then on the ultimate expense saves of $39 million to $56 million. Is that what you expect to hit the bottom line? Or do you expect to reinvest a portion of that?
Ron. I expect that will be hitting the bottom line for the full year 2023. And in terms of reinvestment, it will be consistent with what we've done over the last couple of years. So in the run, I would not expect a large chunk of that to be called reinvestment. But that's what we're targeting for reduction out of those categories in 2023.
Okay. So if that's the case, and I guess I was just following up a little bit on the last question. So the efficiency ratio is 55% this quarter. You're telling us you're going to take 4.5 to 7 points off that, but you're committing to staying under 60. What am I missing? Like, it doesn't seem to add up.
Well, I think it'd be hard-pressed to say over the next 3 years, every quarter, we're going to do $2 billion of home lending volume at a 5.13% margin. So if that starts to normalize, maybe second half of '21 into '22, you could see some lift, all else being equal, in the efficiency ratio. Additionally, I think on net interest income, obviously, every bank is going to be challenged when it comes to NIM and net interest income. I think we've got a good shot at holding that relatively flat over the next year, inclusive of PPP effects in a given year.
So trying to take all that into account, but probably in isolation for Q3 home lending, expecting it might look a bit different 2 years from now, it's probably the biggest mover of that question you had.
Okay.
And further, like on -- real quickly, Steve, further like on the net interest income side, we've got significant room still on our cost of funds, right? So we were down 18 bps this quarter to 49 basis points of interest-bearing deposit costs. They're still within our interest-bearing deposits -- or maturity deposits, $3.5 billion of CDs that are close to a 1.8% cost. There's quite a bit of room to run on that as well.
So do you think you're close to a bottom on NIM at this point?
I think with our ability to reprice lower, yes, we are close to that. Absent significant fluctuations in balance sheet volume year out, that would be the wildcard, but all else being equal, yes.
Okay. And then finally, so if we think about trying to put this together for at least 2021, the expense initiatives will help. But is there enough gas in the tank to punch through maybe a mortgage banking headwind and drive total pretax preprovision growth next year?
So it's definitely within the realm of possibility, especially as we start implementing Next Gen 2.0. Again, we expect we'll have roughly half of that in 2021. And again, I think I think mortgage may surprise you over the next couple of quarters and into the first half of '21 as well to the upside.
Your next question comes from Brett Rabatin.
I wanted just to talk about mortgage for a second. And Ron, you've made several comments around it still being pretty robust. And so maybe it doesn't go back to levels you had in prior years. What -- I assume that as the environment swings lower, the gain on sale margin does decline. What are you assuming the gain on sale margins do as we get into the next few quarters?
I think from a long-term standpoint, our gain on sale margin is usually in that low to mid-3% range. I think we're going to be above that over the next couple of quarters. But when you look out 1, 2, 3 years, you've got to assume there's going to be some reversion to the mean over time. But I think just given constrained industry capacity and a significant pipeline of opportunities, you're probably going to see elevated gain on sale margins, maybe not to the 5.13% we had this quarter, but I think it will be north of the historical 3% to 3.5% over the next couple of quarters.
Okay. And then the other thing I wanted to ask was just around the reserve and thinking about the comments that you made about some of the credits that you're going to have to address in the fourth quarter and just thinking about the environment. Assuming we kind of stay baseline here with the current run rate from an economic perspective, it doesn't really seem like you're going to need to add anything meaningful to provision. So I don't know that provisioning will be negative. But I was hoping to get maybe some color around just thinking about provisioning levels relative to new production and how you guys are thinking about the reserves?
Yes. Good question. Again, on the FinPac side, we will have that surge in charge-offs in Q4, but again, fully reserved for. So on CECL, it's going to be dependent upon the economic forecast. So I'll be able to talk to you a lot more intelligently in January off the December forecast. But my gut tells me we're going to stay relatively low on provision for the next couple of quarters. It's just hard to say when either you're going to see an industry credit event start to take hold or we're going to keep kicking the can and realize we don't need as much reserves as we have. Again, I feel very good about where we're at on it, but given a couple more quarters with economic forecast changing.
Okay. And then maybe one last one, if I could. You talked about the dividend briefly and working with regulators. Is there anything you could share in relation to the conversations with them about the dividend?
It's been great. I mean, obviously, we work very closely with the regulators, look at forecasts and actual results and recurring quarterly process now with the negative retained earnings driven by the goodwill impairment. So we look forward to announcing our next dividend here within the next couple of weeks.
Our next question comes from the line of Jared Shaw.
Just circling back again on the Next Gen 2.0 and the 60% efficiency target. So if we look at that, the last 30% of the benefit hits 2023. Cort, are you saying that you think that you'll be able to stay below 60% as this is all being implemented? So I think right now when you look at full year '22 consensus efficiency ratios at 62%. So you think that while you only get 70% of this benefit in '22, that could still stay below 60%?
Yes, that's the plan.
Okay. That is great. And then just circling again on capital here, what you said on the dividends. I guess what -- as you look at 2021, do you think that there can be additional capital management tools employed to manage down some of that excess capital? Or is your plan at this point you want to sit with high levels of excess capital until we're more -- have more clarity on the broader economic impacts?
Yes. Definitely, there's more opportunities on that front. I'd say, historically, our focus on that has been around organic growth and supporting our overall strategy, which will continue to be the focus. But definitely opportunities using elsewhere. It just gives us a lot of optionality looking into the future. But again subject to changing forecasts, which is pretty amazing how fast they've changed over the last couple of quarters.
That could include potentially evaluating a buyback at some point in the next year?
It could also just recognizing that, that would also require us discussing that with our regulators. But it could be. It could be also just outsized growth as you've heard Cort and Tory talk about, again, executing on our strategy.
Okay. And then I guess sort of tying with that, looking at the excess liquidity and hearing that you want to run with some higher levels for the near term. At what point, I guess, should we start thinking that, that can be deployed? Is that really like year-end '21? Or really looking more at '22 for that?
I think with that, it gives us a lot of optionality also on the right side of the balance sheet to continue to reprice lower. So that will be kind of the governor we watch when it comes to demand for new non-PPP lending. So no specific time line on reducing that on balance sheet cash, similar to capital just we've got optionality for us to move as the winds change.
Your next question comes from the line of Jeff Rulis.
Okay. On the -- I want to feather in the expense saves. If we just think about '21, if you're rationalized or you capture 50% of that level. Do we look at that as against a growth rate like a normalized growth rate? So if you're growing at 2% to 3%, does that just negate, call it, $20-something million so that you're just flat year-over-year? Or is it -- just trying to match the cost saves versus what could be normalized expense growth for the rest of the platform?
Jeff, this is Ron. And again, assuming whatever your assumption is on home lending activity and that volume, which could be higher, could be lower. Our goal on that is going to be not to see a 2% to 3% lift in kind of core expenses before and layering this on. So the goal here would be a reduction. Again, ex all else being equal, what happens with home lending.
Okay. Okay. Helpful. And a lot of these ever have been peppered too. The net charge-off level this quarter, 13.5%, what was the makeup of that? Sounded just obviously with the reserve levels, no surprises there? And Ron, I think you mentioned future net charge-offs in the fourth quarter, Q1, if that's FinPac heavy, also assumed in the reserve, but helpful to know what that net charge-off makeup was this quarter?
Jeff, it's Frank Namdar. Yes, this quarter, similar to previous quarters, the makeup was primarily FinPac. I mean, FinPac was roughly about $12 million of that. And about $1 million of it was at the bank. So it was pretty typical levels that we've seen historically.
And Jeff, this is Ron. Yes. So we'll have that elevated surge specific to that tranche we talked about fully reserved for in the ACL. And also, I just want to reiterate, with our leasing group, the $1.5 billion in leases carrying roughly 10% book yield. So pretty good still underlying profitability.
Your next question comes from the line of Matthew Clark.
I just had a question on the -- on Slide 6 about the improvement in the efficiency ratio, particularly along the Umpqua Investment Savings at $12 million to $14 million in that 2% to 3% improvement. I think that business generated about $15 million annually. And if you just strip out the $15 million of revenue, the $14 million at the high end of expenses, that's like a 50 basis point improvement in the efficiency ratio. So I just wanted to get a better sense for what you're assuming for that underlying improvement?
Yes, Jeff, this is -- or Matt, sorry, this is Ron. UI had 12% to 14% of expenses, just a bit above that in terms of revenue. But -- so that's roughly in isolation a close to 100% efficiency ratio business, somewhere in the 90s. When you strip that out on a consolidated basis, it works out to 2% to 3%.
Okay. Okay. Sounds good. And then you may have mentioned it on the call, and I probably missed it, but the amount of the gain on sale of the 3 branches this quarter?
Just under $6 million in other noninterest income.
Your next question comes from the line of Andrew Terrell.
So Slide 6 on the Next Gen 2.0 is extremely helpful. I'm just wondering are there any type of onetime costs that are going to be associated with any of these initiatives?
This is Ron, Andrew. Yes, there could be a couple of million dollars over the next 2 quarters, most likely, related to the facility side as we are going to look at our planning on that front with lease buyouts, et cetera.
Okay. You guys have done an excellent job over the past few years kind of rationalizing the branch count. You've got 30 to 50 more store consolidations to come. I'm wondering are you guys assuming any kind of deposit attrition from closing these branches or getting rid of these branches. And do you think it's a potential risk?
It's Cort, Andy. We were in the active phase because we haven't really closed any or consolidated in the last 6 to 9 months, they're been sales. When we were in the active process a year or so ago, our attrition rates were not all that great. And in some cases, when we consolidated stores, so you've took 2 of making this up 5 miles away and you made 1. We actually saw, in some cases, deposit balances go up. But the attrition rates, using historical perspective, is kind of a guidepost when we look at how we're going to manage this. We were well in excess or did much, much better than any historical attrition rate that we had applied when we were doing the forecasting.
Andrew, this is Tory. I can just add one thing into that. And this is certainly an opportunity where we leverage Go-To as a means to connect with customers, kind of, prior to and closely thereafter on an ongoing basis. I think that the digital element of that serves us really well as we consolidate our stores and certainly feel that, that will continue to be the case.
[Operator Instructions]
Okay. Cory, it looks like we don't have any more questions. So I want to thank everyone for their interest in Umpqua Holdings and their attendance on the call today. This will conclude the call. Goodbye.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.