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Umpqua Holdings Corp (NASDAQ:UMPQ)
Q2 2020 Earnings Call
Jul 23, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Umpqua Holdings Corporation Second Quarter 2020 Earnings Call. I will now turn the call over to Ron Farnsworth, Chief Financial Officer.

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Okay. Thank you, Ryan, and good morning and thank you for joining us today on our second 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; Dave Shotwell, our Chief Risk Officer 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 second 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.

Cort L. O'Haver -- President and Chief Executive Officer

Hey thanks, Ron and good morning everyone. The second quarter presented a unique set of challenges as well as opportunities, and I couldn't be prouder of the resilience our associates demonstrated supporting each other, our customers and our communities. Our stores have remained open and operational adapting quickly as needed to the changing local and state requirements, and our back office teams have adapted smoothly to remote working, maintaining strong productivity.

Our commitment to our customers and communities was evident in Umpqua's early and active participation in the Paycheck Protection Program. A cross-functional team of associates worked in shifts around the clock to get these much needed dollars into the hands of small businesses across the West Coast as quickly as possible. To date, we produced more than 15,000 PPP loans totaling more than $2 billion. We estimate our efforts helped these businesses protect more than 225,000 jobs in the communities we serve.

This included serving both existing Umpqua customers as well as non-customers with approximately 20% of our PPP loans going to businesses that weren't yet Umpqua customers. We will be converting those customers into full relationships throughout the remainder of the year. Business communities up and down the West Coast have taken notice of our associates' extraordinary commitment through PPP, and I firmly believe their work will create a powerful opportunity for Umpqua to grow and attract even more new customers in the future.

At this point, our digital PPP forgiveness portal is operational and we are ready to assist our customers through the forgiveness process. Based on customer conversations, we anticipate that a majority of these business owners will apply for forgiveness in the second half of this year. We have also been working diligently with customers who qualify for payment deferrals, as a result of COVID-19 impacts.

As of earlier this week, our current deferral totals equate approximately to 5.7% of our portfolio. Frank will discuss deferral trends in portfolio distribution later in the call, as well as other important credit quality metrics. But I'm pleased to report that our portfolio continues to perform well, despite the economic upheaval.

Our digital initiatives including Umpqua Go-To continue to be leveraged as a unique and safe way for customers to bank digitally and safely while preserving a human connection. This is particularly valuable to customers, given the current combination of required social distancing and economic uncertainty, and our Go-To adoption makes that clear. Go-To enrollment has now reached more than 63,000 customers and Go-To usage increased 48% from the prior quarter levels.

As we operate in a low interest rate environment for the foreseeable future, in addition to the increased adoption and usage of digital tools, we are finalizing our analysis for additional store rationalization. We will provide a full update on next quarter's call, but I do want to highlight that our transaction to sell three stores in Eastern Oregon will close this quarter.

Now onto the financial results. For the second quarter of 2020, we reported earnings of $0.24 per share. Due to COVID-19's continuing impact on economic forecasts, we recorded an $87 million provision for credit losses charge. Two consecutive quarters of sizable provisions grew our allowance for credit losses to over $383 million or 1.69% of our total portfolio. Ex-PPP loans, the allowance for credit losses would be 1.85% of our total portfolio.

Turning to the balance sheet items, we had a strong quarter of both loan and deposit growth fueled by the PPP work previously mentioned. Loan and lease growth for the quarter was $1.4 billion or 7%. Deposit growth for the quarter was $2.1 billion or 9%. Deposit growth in non-interest bearing DDA afforded us the opportunity to again reduce higher cost time deposits in the quarter.

These moves assisted us in moving out our cost of interest bearing deposits from 103 basis points to 67 basis points, an improvement of 36 basis points from the prior quarter amount. Regarding capital, our capital levels improved from the prior quarter and remain well above regulatory well capitalized levels and internal policy floors.

Before I pass back to Ron, I want to close by saying we are working diligently with each respective regulatory agency on obtaining the necessary approvals prior to declaring our dividend of our second quarter earnings. We feel confident with our capital levels, our liquidity position, our forward-looking earnings projections and ultimately, the credit quality of our loan book. We plan to issue a press release soon to discuss declaration and record date timing.

Now back to Ron to cover additional financial results.

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Okay. Thank you, Cort. And for those on the call who are going to follow along, I'll be referring to certain page numbers from our earnings presentation. Page 11 of the slide presentation contains our summary, quarterly P&L. Our GAAP earnings per share for Q2 was $0.24 compared to the net loss in the first quarter, driven by the goodwill impairment resulting from the pandemic driven economic fallout.

Our provision for credit loss remain elevated, but dropped 26% from Q1, while our higher non-interest income was fueled by strong mortgage banking results given the lower rate environment. Excluding MSR and CVA fair value adjustments, our adjusted earnings were $0.26 per share this quarter. On the PPNR front, excluding the Q1 goodwill impairment and fair value charges for both quarters, our PPNR was $153 million in Q2, an increase of 26% from $121 million in Q1.

Turning now to net interest income on Slide 12. Net interest income decreased 3% from Q1, driven by the impact of a full quarter of fed funds rate declines back in March. Shown here is the quarterly interest and fee recognized from the PPP loan program. Taking that to Slide 13, our net interest margin declined to 3.09% in Q2. The margin excluding discount accretion and PPP effects was 3.03%. The bottom of the page shows the impact from the expected higher bond premium amortization, which was up $7 million and led the 10 basis points of the NIM contraction this quarter.

Also, our higher interest bearing cash balances compared to a year ago is reducing the current NIM by 7 basis points, but we feel it is prudent to have more rather than less on balance sheet liquidity in this environment. Also in the quarter, we lowered our interest bearing deposit costs from 1.03% in Q1 to 0.67% in Q2, noting that amount was 0.59% in the month of June. We expect continued reductions in funding costs in the second half of the year.

Moving now to non-interest income on Slide 14. Home lending has been an absolute home run this year, posting record non-interest revenue of $84 million in Q2. Ex-mortgage, the other big moving part this quarter was a much lower swap derivative loss compared to Q1. And for more on mortgage banking, as shown on Slide 15 and also in more detail in the last few pages of our earnings release, for-sale mortgage originations increased 59% from a strong Q1 and were up 162% from the second 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 to 87% this quarter, the second consecutive quarter at or above our 80% target. And the gain on sale margin increased to 4.75% above our long-term trends of the low to mid 3% range based on better pricing with constrained industry capacity and rising log pipelines. We expect mortgage activity to remain robust in the second half of 2020, but would expect the gain on sale margin to be lower than realized in Q2. As of quarter end, we serviced $12.7 billion of residential mortgage loans and the MSR is valued at 76 basis points.

Turning now to Slide 16, non-interest expense was $181.9 million in Q2. Q1 of course included the goodwill impairment, and ex this, our Q1 expense was $177.7 million. This includes home lending direct expense, which based on the significantly higher than expected volume just discussed was $42 million or $10.4 million higher than Q1.

Also, we had a $3 million increase this quarter on pandemic related costs and a smaller increase in FDIC assessments. These increases were mostly offset by higher deferred origination costs, lower medical costs and lower other expense. As mentioned earlier, we will remain focused on expense management moving forward, and provide updates for the next year on our October earnings call.

Turning now to the summary of balance sheet, beginning on Slide 17. We are intentionally holding higher levels of interest bearing cash, given the volatile environment ending the quarter at $1.9 billion. The increase in cash was driven by much stronger deposit growth exceeding the loan growth in Q2. Loans increased $1.4 billion net for the quarter. Within this, PPP loans were $1.9 billion, leaving the rest of the book down $500 million related to our purposeful slowdown in portfolio resi, commercial line of credit pay downs and lower new originations given the recession.

Deposits increased $2.1 billion or 9% this quarter driven by a combination of PPP loan funding, seasonal factors, economic slowdown and an extension of tax payment timing. Within total deposits, we also had a reduction of $270 million in broker deposits and $57 million in public funds. And of the $1.9 billion in PPP loans funded, we estimate that a little over $1 billion of that remains in deposit accounts at the bank.

Our total available liquidity including off balance sheet sources at quarter end was $11.7 billion, representing 39% of total assets and 47% of total deposits. Frank will cover the loan book in a few minutes, but I want to take your attention back to Slide 9 on CECL in our allowance for credit loss. Our CECL process incorporates the life of loan, 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 two to three-year period. As noted, we use the June Moody's consensus economic forecast. Total provision for the quarter was $87 million with the ACL for the CRE segments increasing 50% this past quarter, driven by continued high unemployment.

Net charge-offs for Q2 remained low at $16 million, much lower than the models from March suggested. The ACL increased to 1.69% in Q2, noting this ratio is 1.85% 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.

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 five-year regulatory capital transition option for CECL. Lastly, on Slide 22, I want to highlight capital, noting that all of our regulatory ratios remain in excess of well-capitalized levels, and all the regulatory ratios increased over the past quarter.

Our Tier 1 common ratio was 11.1% and our total risk-based capital ratio was 14.4%. The bank level total risk based capital ratio was 13.5% which is the basis for our calculation of $330 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. We constantly forecast and stress the excess capital both in base and severe scenarios, and with what we know today, based on the economic forecast, we are very comfortable with our capital and liquidity position, given uncertainties over the near to intermediate term horizon.

Key items I want to reiterate as I wrap up my prepared remarks include, first, the significant available liquidity we have of just under $12 billion. Second, our increased allowance for credit loss at 1.85% of non-PPP loans, and lastly, our significant level of excess capital with our Tier-1 common ratio of 11.1%. And again, total risk based capital ratio at 14.4%.

And I will now turn the call over to Frank Namdar to discuss credit.

Frank Namdar -- Executive Vice President and Chief Credit Officer

Thank you, Ron. I will also refer to certain page numbers from our earnings presentation for those who want to follow along. As noted on the prior call, we've been diligently working with our customers on any needed loan payment deferrals. We have updated our deferral information as of July 20th on Slide 6. Total loan balances that are currently on deferment represent 5.7% of the loan book.

Within the quarter, deferral request picked up in velocity in April and the first part of May. Subsequent to that time period, deferral request have slowed substantially. Starting in early July, our first deferral agreements expired, and we experienced normally scheduled payments, which dropped total loan amounts on deferral from their mid June peak of about 9%.

On a portfolio basis, we are reporting 2.8% deferrals in commercial, 5.9% in commercial real estate, 16.8% in FinPac, 1.3% in consumer and 6.2% in residential real estate. On the FinPac portfolio, it's worth noting that during the July 1 and July 15 bill cycles, we have seen more than half of the customers that were on deferral make regularly scheduled payments and are working with customers who may need to apply for an additional 90-day deferral.

On Slide 7 and Slide 8, we continue to show specific segment totals and relevant characteristics for portfolios that have been impacted by COVID-19. The following five specific segments are highlighted. Hospitality at 2.4% of our portfolio, Air Transportation at 0.6%, Oil and Gas with essentially no exposure, Restaurants at 0.6% and finally, Gaming at 1.8% of our portfolio. Applicable deferral information is also highlighted within these segments. The associated PPP loans granted to these segments are not included in the portfolio percentage calculation, but are highlighted at the bottom of each section for visibility.

Hospitality remain directly tied to the various economies opening up and people traveling for business or leisure. That being said, occupancy remains at generally 50%-ish overall with extended stay and limited service higher, and full service hotels lower than that.

The majority of our portfolio is in the limited service or extended stay space. This sector will just take some time to recover, but our portfolio as stated previously and depicted on the slides here, is of low leverage with very strong overall sponsorship to borrowers we have history with.

As to gaming operations, we have been collecting high level data from properties, as it becomes available that reveal positive results. Many clients are reporting seeing increases in gaming revenues, post reopening attributable to pent-up demand or lack of other entertainment venues being open.

Liquidity positions for these borrowers also remain very strong. Generally speaking, about half of the portfolios operating at pre-COVID levels, with the other half at or above breakeven due to the effective expense reduction measures. Slide 20 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 23 reflects our credit quality statistics. Our non-performing assets to total asset ratio decreased 6 basis points to 26 basis points. Our classified loans to total loans decreased 7 basis points to 0.68% and finally our annualized charge-off percentage to average loans and leases decreased 12 basis points to 0.29%. Within our FinPac portfolio specifically, our annualized charge-off percentage was within our historical range at 3.05% down from 3.33% last quarter.

I will now turn the call back over to Cort.

Cort L. O'Haver -- President and Chief Executive Officer

Okay. Thanks Frank and Ron for your comments. We will now turn to questions.

Questions and Answers:

Operator

[Operator Instructions]. And do we have the first question coming in, our first question is from the line of Michael Young from SunTrust.

Michael Young -- SunTrust Robinson -- Analyst

Hey, thanks for taking the question. Wanted to -- maybe just start with a kind of bigger picture question, Cort, on capital. You've earned the dividend basically every quarter, except for the goodwill impairment, which is non-cash in 1Q and the outlook looks decent with the reserve built up to a pretty high level now and mortgage still kicking along pretty fast. So, just wanted to see if you had any updated thoughts on the dividend level and what we should expect as we see that announcement maybe this quarter?

Cort L. O'Haver -- President and Chief Executive Officer

Well, like I mentioned in my opening comments, we covered our historical dividend over the last eight quarters or so. We feel highly confident of our ability to continue to cover that over the near-term. Obviously, we're still in the beginning of this recession and potentially an economic for credit cycle. And I'd be the first to tell you that, I think a lot of the stimulus deferrals and other things that were necessary, have probably potentially kicked the can on issues at all banks, not just Umpqua, we'll see relative to credit performance.

So I can tell you on a near-term basis, to answer your question as clearly as I can, with as much as I know today, that we feel comfortable. But until we get beyond deferrals and enhanced unemployment benefits and other things that do trickle into our credit portfolio, it's hard to be -- for me to give you a guidance more than that, which we don't give guidance on, but hopefully you can appreciate my position.

So we feel comfortable today, with what we see. But there's a lot of unknown.

Michael Young -- SunTrust Robinson -- Analyst

Okay. That makes sense. And then maybe Ron, more specifically just on the net interest income outlook, obviously a lot of moving pieces and we had the premium amortization pretty high this quarter, should we kind of assume based on current CPR speeds that that's going to drop back down to a more normalized $4-ish million? And then maybe kind of the outlook on PPP fee recognition through NII.

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Hey, back more [Phonetic] Michael, I'd say, specific to premium amortization, keep in mind there is usually a probably two-month lag from when you see the refi occur on the mortgage to when it hits the bond. So we'll probably have another quarter at least relatively high premium and based on speeds. And you know, so it's a strong Q3 that might actually also extend then into Q4.

As I did say that we do expect funding cost to continue to drop and it was good to see in the month of June, roughly 10 bps lower than the second quarter on that front. For PPP fee income, yeah, we do see significant level of forgiveness in the fourth quarter than will accelerate the remaining unamortized fee income at that point.

Right now, it's all set up to accrete into interest income over the life of the two-year loans, but we see -- again, we see a big level of forgiveness in Q4, then there'll be a pop there for it.

Michael Young -- SunTrust Robinson -- Analyst

And then maybe just a follow-up on NII relative to kind of balance sheet size. You mentioned, Ron, I think in the prepared remarks that you do want to maintain some higher levels of liquidity and I imagine investing in securities isn't that attractive right now, but maybe just on the loan growth side, are there any areas that you think will be growth drivers over the next couple of quarters or is it really just kind of hold what you've gotten batten down the hatches right now?

Tory Nixon -- President of Umpqua Bank

Hey, Michael, this is Tory Nixon. I think that in late Q1 and throughout most of Q2, we turned the attention of all of our RMs inward to focus and help our customers work on deferrals, work through the PPP program. And toward the end of quarter two, we started to kind of push it back out again. So we've seen an uptick in pipeline, in commercial and corporate banking, actually $350 million or so over the last month, which is a really good sign. There is some activity. We also -- we have 3,400 PPP customers who are not Umpqua Bank customers. And as Cort mentioned earlier, we're going to -- we're making a very strong effort to approach and discuss and bring those folks into the Bank to become Umpqua Bank customers and certainly some of them will be borrowers and some of them will be not, will not be borrowers, but good activity for us are starting to kind of creep up there.

Michael Young -- SunTrust Robinson -- Analyst

And just one last quick one, just retail CRE loan exposure. Have you guys disclosed that or could you provide that information?

Cort L. O'Haver -- President and Chief Executive Officer

Retail exposure is about $485 million, so I think that is about 5-ish, 5% to 6% of the portfolio.

Frank Namdar -- Executive Vice President and Chief Credit Officer

A lot of that retail is grocery and drug anchor, Cort?...

Cort L. O'Haver -- President and Chief Executive Officer

Not big box, right?

Frank Namdar -- Executive Vice President and Chief Credit Officer

Not big box. Yeah, we don't have a lot of big box, it's mostly grocery and drug.

Michael Young -- SunTrust Robinson -- Analyst

Okay, thanks. That's all from me.

Cort L. O'Haver -- President and Chief Executive Officer

Yeah. Thank you.

Operator

Thank you. And yes, we do have more questions. The next question comes the line of Jeff Rulis from D.A. Davidson. Again, Jeff, your line is open.

Jeff Rulis -- D.A. Davidson & Co. -- Analyst

Thank you. Good morning, everyone. Question on the deferral chart in the slide deck. It's a great picture, I wanted to get a sense for the amount of loan -- the percent of deferrals that have yet to reach expiration, is any figure that you've got on that end?

Frank Namdar -- Executive Vice President and Chief Credit Officer

Roughly -- it's roughly about -- we've got about roughly half to go that have not yet run their course. But we are seeing a great deal thus far, those deferrals that have expired of borrowers resuming regular payments. So, we are encouraged by that thus far.

Jeff Rulis -- D.A. Davidson & Co. -- Analyst

Got it. And the -- I guess the mix of, if you look at risk of those, is it a pretty, I don't know if you put deferral timelines on different segments, but the half to still see expiration, any thought that those are any riskier than the first half that you saw?

Frank Namdar -- Executive Vice President and Chief Credit Officer

No, I would not make that statement, no.

Jeff Rulis -- D.A. Davidson & Co. -- Analyst

Okay.

Frank Namdar -- Executive Vice President and Chief Credit Officer

No difference.

Jeff Rulis -- D.A. Davidson & Co. -- Analyst

Got you. And Cort, you had mentioned the sort of the expectation for the second half of PPP or the second half of the year to see forgiveness, any finer tune on that in terms of -- I don't know, 80% forgiveness by year end or anything that you'd assign is Q3 a step-up and then the bulk is in Q4, any thoughts on how you think that plays out?

Cort L. O'Haver -- President and Chief Executive Officer

It's a great question, Jeff, and we talk about it a lot. I can remember talking about the first week PPP rolled out. I think you'll see a step up in Q3. You'll probably see the bulk in Q4. There is going to be some that are going to take it as -- as non-PPP eligible forgiveness and use it as long term 2% debt. I mean, there's going to be a percentage, I just don't know. I can tell you this, there's a lot of small businesses in Portland that have all new shiny equipment in them. So -- and they may not be Umpqua customers. So I really don't know. I think you know assuming it's all going to be forgivable this year is probably not accurate. I just can't give you a total percentage.

Jeff Rulis -- D.A. Davidson & Co. -- Analyst

Got it. Okay. And then lastly, just I guess what's left on the next gen expense saves or is this sort of molded or shifted into a general operating efficiency focus? You touched on the store closures, but is there any tangible numbers to assign still what you've achieved or still to come?

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Hey, Jeff, this is Ron here. In the ex-home lending, you can see we've achieved more than our goal from originally laid out three plus years ago, but we will talk more about that in October as we finalize plans looking in '21 and give some targets at that point.

Jeff Rulis -- D.A. Davidson & Co. -- Analyst

Okay, all right, thanks.

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

You bet. Thank you.

Operator

Yes. And at this time, we do have more questions on our line. Next question comes from the line of Jackie Bohlen from KBW.

Jacquelynne Bohlen -- KBW -- Analyst

Hi, good morning everyone.

Cort L. O'Haver -- President and Chief Executive Officer

Good morning, Jackie.

Jacquelynne Bohlen -- KBW -- Analyst

Ronald, during the last interest rate cycle, you didn't want to reinvest at low interest rates, and so you held a pretty high cash position. Have you changed your viewpoint on that at all, this cycle?

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Well, I think the cash position we sit on now is given the quick move and timing, I think it makes more sense than sticking them into a 1%, yielding mortgage-backed securities. Still some wild card in terms of how much of that $1 billion of estimated PPP deposits, what the life on that looks like over the balance of this year and early next.

So as of now, I'm comfortable with this level of cash and maintain somewhere in that $1 billion to $2 billion range on balance sheet for the second half of the year. And if we see it creep above that, then yeah, we would look at potentially putting into bonds. But as you heard Tory talk about, we're starting to see some more activity on the new loan funding side. So that'd be the first spot for it.

Jacquelynne Bohlen -- KBW -- Analyst

Okay. And are there -- if some of that liquidity does stick around, would you look at potentially reducing other sorts of higher cost funding sources rather than deploying it into bonds or would you be more inclined to deploy the bonds and just keep some elevated cash?

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Yeah. No, actually, that's what we've been doing here over the last six months, really in terms of reducing broker deposits still resulting in higher cash balance on the balance sheet. So, no, I would definitely look at reducing higher cost funding sources being -- be it select deposits and/or borrowings versus sticking them into bonds.

Jacquelynne Bohlen -- KBW -- Analyst

Okay. And then I understand that there is a lot of push and pull, and a lot of unpredictable items such as the timing of PPP related deposit outflows and everything else that's impacting the balance sheet size. I mean, how are you thinking about temporary balance sheet size versus what's longer-term growth.

Cort L. O'Haver -- President and Chief Executive Officer

Sorry, just to clarify. Temporary balance sheet size, I mean, I guess [Speech Overlap]

Jacquelynne Bohlen -- KBW -- Analyst

Meaning...

Cort L. O'Haver -- President and Chief Executive Officer

The wild card in the second half of the year will be -- the wild card in the second half of the year will be how much of the remaining $1 billion of PPP deposits run out and get utilized. That's probably the larger balance. We do expect to see continued strong deposit growth, non-PPP related, generally Q3 is very strong on that front. So, but not, we're not in a position to say we think assets will be X by the end of the year, just given some of the moving parts.

Jacquelynne Bohlen -- KBW -- Analyst

Yeah, yeah, definitely understood. And then just one clarification question that I had. You've mentioned in prepared remarks that there was some stores in Eastern Oregon that we're closing, can you just provide some added detail on that? Sorry if I missed that somewhere else.

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

This is Ron. Yeah, actually Cort mentioned it. It was actually three we have under contract to sell. So about a $100 million in total deposits, how that sale completed in the third quarter and then again we'll talk on the October call about plans as we look into '21.

Jacquelynne Bohlen -- KBW -- Analyst

Okay, great. Look forward to that. Thank you.

Cort L. O'Haver -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. And our next question does come from the line of Jared Shaw from Wells Fargo Securities.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, good morning.

Cort L. O'Haver -- President and Chief Executive Officer

Hi.

Jared Shaw -- Wells Fargo Securities -- Analyst

I guess just following back up on the deferrals. When you look at the loans that are coming due and will likely stay on deferral, how are you approaching that, are you able to get any concessions from borrowers? Are you able to get any type of sort of restructuring in to your advantage? Or are you just, if they are under pressure, you're just giving them the second round?

And then I guess there is a follow-up to that. When you look at some of the most troubled loans that are on deferral, is your thought that you would be comfortable just keeping a longer-term deferral as you go into 2021 or would you really look to try to do more of an official restructuring at the end of the year and then have a new structure going into '21?

Frank Namdar -- Executive Vice President and Chief Credit Officer

Yeah, good question. We -- a second deferral is not an automatic. There is a defined process and analysis we go through among other things. Cash burn analysis, a survivability analysis, and at the end of that analysis, we do absolutely look for shoring up our position via a payment reserve, guarantees where we may not have them initially, some form of credit enhancement in return for the second deferral. And we have had good luck with that initially thus far. And to the second half of your -- the second half of your question, no, we would not simply just grant the deferral. We would look to structure a workout that is both to the benefit of the bank and also to benefit of the customer. Realizing that in a lot of cases if you kick the can down the road, it's just going to get more difficult to work out of any situation both for the bank and for the customer. So that's the strategy we're employing here.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, that's great color. Thanks. And then obviously Portland has been in the news a lot lately. Can you comment on how that's impacting sort of day-to-day operations of either the bank or your customers or is that really more a bigger headline issue than it is a day to day issue on the ground?

Cort L. O'Haver -- President and Chief Executive Officer

It's not a day to day issue, Jared here. I mean it's -- we're downtown headquarters is and it's not around our buildings. So it's an issue, but it doesn't affect the operations of the bank.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. I think that's it, thanks.

Cort L. O'Haver -- President and Chief Executive Officer

Thank you.

Operator

And we do have more questions on the line. This next question comes from the line of Steven Alexopoulos. Please go ahead with your question.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hi, everyone.

Cort L. O'Haver -- President and Chief Executive Officer

Hey Steve.

Frank Namdar -- Executive Vice President and Chief Credit Officer

Good morning.

Steven Alexopoulos -- J.P. Morgan -- Analyst

I wanted to first follow-up on the dividend. Can you comment on this shift in timing to declare the dividend?

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Yeah. Well, based on the 8-K we put out about a month or so back, based on the goodwill impairment in Q1 retained earnings are negative. Even though the credit that led to goodwill is not in the common stock account. But with that under Fed FDIC and state rules, we have to now go through a process to seek approval or non-objection on the level of dividend. And so that is why the dividend was not announced in mid-June. But we're looking to do it here following earnings for the quarter announcement.

Steven Alexopoulos -- J.P. Morgan -- Analyst

So Ron, is this one-time or is this -- will this be an ongoing practice?

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

This will be an ongoing quarterly cadence.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Got you. Okay. That's helpful. And then if we look at the reserve build this quarter, how much of that was purely model driven? Do you have a material amount of qualitative overlays now built into the reserve, in addition to what the model is telling you?

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

The vast majority of this is model driven and, you know, the unemployment rate increase in the June forecast compared to the March forecast was -- really had a more outsized impact on the commercial real estate component of the portfolio, which is what you're seeing in terms of our presentation, the highest increase in reserve on that front. So not charge off based.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. Got it. And then if we look at FinPac, the deferrals are very high there. And I'm curious, one, did that -- do deferrals in FinPac follow the same trajectory that you're showing it was at peak, I think it was in June. And maybe can you give us a little bit of a deeper dive in terms of what you're seeing in that book? Thanks.

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Yeah. First, I mean the FinPac deferrals have, they are at about what market is in that tiny ticket leasing space. That being said, it is following the same cadence, so about 60% of those customers that had the first round of deferral have resumed making payments, some portion of the first round, small portion, have actually paid off their leases. And the remainder, we are currently working with really to ascertain whether or not they need another deferral or when they can resume their regular payments as structured.

And the great majority of deferrals in that space were centered around the transportation, medical and restaurant space. And, we are seeing those numbers come down as the economies have opened up thus far. We're seeing transportation improve, we're seeing the restaurant space improve and we're seeing more elective procedures in the medical spaces which is therefore resulting in a lot of those medical-related deferrals resuming back to regular payments.

It's a good story really at FinPac to this point.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay, that's helpful. And maybe just one final one for Cort. I know you'll give updated thoughts on expenses next year in NextGen, I'm curious what are you learning from this period in terms of efficiency improvements that you could potentially apply longer-term?

Cort L. O'Haver -- President and Chief Executive Officer

How much time do you have? I mean, it's been interesting and I think it's moved around. I mean the initial thought that we all could work virtually which we can, the bank is doing an exceptional job of working virtually. However, the loss of some -- of productivity by not being in a same room, you have to kind of value that. So there'll be savings there, and we're already looking at how we can work virtually permanently with people that can work remotely and then doing a long-term kind of forecast on how we can stair-step down our hard real estate cost. I would tell you originally, I thought maybe the whole bank could work virtually, I'm not so sure, it can work that virtually anymore.

Our stores, I think we're really proving to ourselves that our Digital NextGen or our investment in our digital product delivery was the right move that we made three, four, five years ago. And it will set us up very, very well both right now, and clearly as we go into '21. I mean, you've heard from all the banks you cover about the amount of traffic that's down and continuing to be down. For me actually, the value has been, is that customers are self-training themselves to become digitally and mobily functional, and there -- and get used to the technology.

Sometimes it has been a challenge in some of our communities to get our customers to find value in using a remote or digital type application, because quite frankly they like coming in our stores and our people are really good and enjoy seeing them. But now they are forced to use technology and with our investment in technology, I mean I think is an exceptional delivery for banks our size. There is a real opportunity here to continue to invest in our digital NextGen, which we'll talk about in October. And then really look more at our store delivery and how we do it. And some of that has changed. I'll be honest with you.

We rolled out three years ago that we would reduce our store by 30% or 100% and we're probably slightly behind that. But, I'm OK with that because some of the things that we thought 2.5 years, 3 years ago, are not as obvious now with what we've gone through with the pandemic.

So we will have more color for you in October. It's a great question, and actually it's a lot of fun in a good way to talk about how we -- how our customers are changing the way they shop, how we serve, and how we function as a fairly large employer here in the state of Oregon.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. Thanks for all the color.

Cort L. O'Haver -- President and Chief Executive Officer

Yeah.

Operator

And we do have one last question on the line, it is a follow-up from Michael Young from SunTrust.

Michael Young -- SunTrust Robinson -- Analyst

Hey, thanks for the follow-up. We didn't touch on the biggest revenue driver mortgage this quarter. So just wanted to, Ron get kind of an outlook on the gain on sale margin, obviously I think that usually tracks with the highest volume quarters, which likely was this quarter. So should we expect that to kind of trail off through the back half of the year or is it, will it be more of a step function down as what you think?

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Hey, Michael. Yeah. We expect home lending volumes to remain very robust in the second half of the year, probably more so in Q3, drop off a bit in Q4, just from typical seasonal factors and in terms of the gain on sale margin, I did make a comment earlier, we don't expect it to be at that 4.75% level. My guess is it will be just slightly above our most recent historical levels in that low to mid 3% range to probably just a bit above those in the third quarter.

Michael Young -- SunTrust Robinson -- Analyst

Okay. And sorry if I missed it, was there anything one-off or special in 2Q that drove increased gain on sale margin or was it just wider spreads on originations?

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Wider spreads on originations, ability to price forward, and obviously capacity within the industry has been constrained just given the level of rates and increase in volume and so we price for it.

Frank Namdar -- Executive Vice President and Chief Credit Officer

And we're really good at it.

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Right.

Michael Young -- SunTrust Robinson -- Analyst

Got it. Okay, great, thanks.

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

You bet, thank you. And thank you, Ryan. Any other questions on the line?

Operator

No other questions at this time.

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Okay. Well, I want to thank everyone for their interest in Umpqua Holdings and attendance on the call today. This will conclude the call. Goodbye.

Operator

[Operator Closing Remarks].

Duration: 44 minutes

Call participants:

Ronald L. Farnsworth -- Executive Vice President, Chief Financial Officer

Cort L. O'Haver -- President and Chief Executive Officer

Frank Namdar -- Executive Vice President and Chief Credit Officer

Tory Nixon -- President of Umpqua Bank

Michael Young -- SunTrust Robinson -- Analyst

Jeff Rulis -- D.A. Davidson & Co. -- Analyst

Jacquelynne Bohlen -- KBW -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

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