Umpqua Holdings (NASDAQ: UMPQ) Q1 2020 Earnings Call Transcript

Umpqua Holdings (UMPQ) Q1 2020 earnings call dated April 23, 2020

Corporate Participants:

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Cort O’Haver — President and Chief Executive Officer

Frank Namdar — Executive Vice President and Chief Credit Officer

Tory Nixon — Senior Executive Vice President and Chief Banking Officer

Analysts:

Michael Young — SunTrust Robinson Humphrey — Analyst

Jared Shaw — Wells Fargo Securities — Analyst

Steven Alexopoulos — J.P. Morgan — Analyst

Tyler Stafford — Stephens — Analyst

Jeffrey Rulis — DA Davidson — Analyst

Jacquelynne Bohlen — KBW — Analyst

David Chiaverini — Wedbush — Analyst

Presentation:

Operator

Good morning and welcome to Umpqua Holding Corporation’s First Quarter 2020 Earnings Call.

I will now turn the call over to Ron Farnsworth, Chief Financial Officer.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Okay. Thank you, Cheryl, and good morning and thank you for joining us today on our first quarter 2020 earnings call. With me remotely this morning, are Cort O’Haver, the President and CEO of Umpqua Holdings Corporation; Tory Nixon, our Chief Banking Officer; 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 first 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 O’Haver — President and Chief Executive Officer

Okay. Thanks Ron. Before jumping into the financial results for the quarter, I want to spend a few minutes addressing the COVID-19 global pandemic. We’re living through an extraordinary period of disruption and uncertainty. As a company, we’ve been focused on protecting the health and safety of our associates, while continuing to deliver the essential service of banking to our customers. I want to acknowledge our incredible associates who have adapted quickly and courageously to minimize disruption to our customers and our communities. I’m proud to lead an institution that’s so uniquely able to service in a moment like this. I also want to acknowledge the bravery and service of those on the frontlines, particularly, our country’s healthcare workers, who are risking their lives daily to protect and care for so many.

Early in the quarter, Umpqua began implementing our pandemic response plans to adapt our operations, as the COVID-19 crisis accelerated. The first phase was stabilization and our top priority was protecting the health and safety of our associates and customers. As an essential service, we promptly modified operations to comply with state level and CDC guidance. As a result of modernization efforts of the past few years, we implemented our remote workforce plan across our footprint, quickly deploying 90% of our non-store associates to work remotely. In addition, we’ve adjusted our retail store operations, moving to appointment-only and enhancing the scope and frequency of store cleanings. As a result, we’ve been successful in keeping more than 95% of our locations open at any given time during the past 90 days.

To support our associates, we created a pandemic pay bank, that’s providing additional paid-time off for those impacted by COVID-19. We’re also providing supplemental frontline pay, and quickly activated a flex work program, that’s making it possible for higher risk associates to continue working and contributing to our overall efforts. In addition, we’ve put in place a customer relief program, and have been working with customers to defer payments, where applicable and necessary.

Slide 3 in our presentation deck has our most recent statistics, as well as details on our other customer support programs. Umpqua has also taken a proactive approach in supporting our communities during these challenging times. We’ve committed more than $2 million in combined grants and investments to organizations providing COVID-19 community relief and small business micro loans. We’ve also introduced a new virtual volunteerism program, as part of our industry leading connect volunteer network, and have augmented augmented our associate giving program to a 3-to-1 match for all Associate donations made to COVID-19 relief organizations.

As we transition to a recovery phase, we are working with associates and customers on multiple levels. Most pressing, is supporting the small businesses, that are the lifeblood of the U.S. economy and a vital source of innovation, diversity and commerce, in the communities we serve. I couldn’t be more proud of how our company has responded to the payroll protection program that’s a part of the Cares Act. As it was signed into law, we put a team of associates together, to build out a process for operationalizing the program. They worked around the clock, and as a result, we began accepting applications on the very first day of the program that went live on April 3.

Since then, we’ve had shifts of teams working in eigh-hour increments to process applications 24 hours a day; because of their extraordinary commitment and hard work, as of this morning, we’ve approved and received SBA-PLP numbers to be able to fund more than 6,700 loans for a total of more than $1.4 billion in balances under PPP. To put that production into context, in a normal year Umpqua generates approximately $140 million in SBA loans. In less than two weeks, Umpqua produced more than 10 times a typical year’s production, and our communities are starting to take notice. I truly believe reputations are built in times such as these, a relentless commitment to small business is being recognized in business communities up and down the West Coast, creating powerful opportunities for Umpqua to grow and attract new customers in the future.

In addition, our Umpqua Go-To application was developed to deliver a human digital approach to banking that connects people through technology and this period of social distancing has provided a unique and safe way for customers to continue banking with a human connection. Our Go-To enrollment numbers continue to climb, and daily message volume is up three times during this period, compared to a quarter ago.

As we look ahead to recovering together and transitioning to a post COVID-19 operating environment, I’m pleased with the progress we have made through our Next-Gen Strategy thus far. Although much is still unknown, we’ll continue to grow our customer base in a balanced manner, by providing strong relationships, continuing to innovate and deliver our unique human digital approach to banking, and effectively managing costs through operational excellence initiatives.

So now to the financial results; for the first quarter of 2020, we reported a loss of $0.13 per share. This is compared to $0.38 earned in the previous quarter and $0.34 earned in the first quarter of 2019. The most significant item that impacted this quarter’s financial results, was the $118 million provision for credit losses charge. This is the direct result of adopting the new CECL accounting standard during the quarter, which incorporated a COVID-19 economic forecast. The shape of an economic recovery is still unknown, however, this as a strong level of provision, grew our allowance for credit losses to over $312 million or 1.47% of our total portfolio.

In addition, primarily due to the sharp reduction in long-term interest rates that occurred during the quarter, we recorded a $25.4 million negative adjustment related to the fair value change of the MSR asset and a $14.3 million negative adjustment related to the swap derivative. The combined total of the increased provision for credit losses, MSR and swap CVA fair value charges equated to $0.47 per share of impact this quarter.

Turning to the balance sheet items; we had a strong quarter of deposit growth. Our customer deposit growth in commercial, retail and wealth of $459 million, allowed us the opportunity to reduce higher cost to public and brokered deposits, ultimately leading to growth of $218 million or about 4% annualized. Deposit growth came primarily from the non-interest bearing category, which was a combination of new customer acquisition, and growth in average balances of current accounts. We also grew loan balances by $56 million or 1% annualized, primarily in the C&I portfolio.

Regarding capital, we entered this crisis with capital ratios well above regulatory well capitalized levels, and internal policy floors. Our Tier 1 common ratio of 10.9% and total risk-based capital of 14% will be important advantages going forward. Our liquidity is in the strongest position it has been in, since I took over as CEO in 2017, and with the cash on our balance sheet plus additional liquidity sources, our total available liquidity was $11.2 billion at quarter end.

Before I pass back to Ron, I will close by saying we forecasted our capital and dividend payout ratios for the remainder of the year, and with what we know today about current and forecasted economic conditions, we remain comfortable, maintaining our dividend at its current level, subject to normal regulatory approval.

Now, I’ll turn it back over to Ron, to cover additional financial results.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

OK, thank you, Cort. And for those on the call who want to follow along, I’ll be referring to certain page numbers from our earnings presentation. Before I get into the numbers, there are two items I want to cover upfront. First, based on market volatility and consensus forecasts for a prolonged low interest rate environment, coupled with the drop in price of the company’s common stock during the quarter, we are completing the impairment evaluation of goodwill with our auditors, and do expect significant impairment. It’s important to note that while any potential goodwill impairment will be material to reported earnings, it would be a non-cash charge and would have no impact on our cash balances, liquidity, tangible book value or regulatory capital ratios. We expect to complete the impairment analysis before filing our quarterly report on Form 10-Q with the SEC in early May.

And second, given the dramatic turn-ins over the past quarter and extreme economic volatility, we remain focused on expense management to help offset expected revenue pressure. We continue to make good progress on our expense containment priorities, but forward-looking statements made on the January call are no longer applicable. I hope to provide detailed estimates later this year, assuming we start to see a recovery on the back end of this pandemic.

With that, now turning to page 12 of the slide presentation, which contains our summary quarterly P&L. Our GAAP loss per share for Q1 was $0.13 compared to net earnings per share of $0.38 in the prior quarter, and $0.34 in the same quarter a year ago. The most significant item this quarter was an elevated provision for loan loss of $118.1 million, of which approximately $100 million was directly related to the economic fallout from the COVID-19 pandemic. In addition, the decline in interest rates led to the $25 million fair value loss on the MSR asset, along with a $14 million fair value loss on the swaps CVA derivatives.

Turning to net interest income on slide 13; net interest income decreased 4% from Q4, driven entirely by the 150 basis points of Fed funds rate declines in March. As reflected on slide 14, our net interest margin declined to 3.41% this past quarter. The margin excluding discount accretion was 3.36%. Obviously, the quarterly amounts were impacted by decline in rates in the second half of the quarter. For expanded visibility, our margin for the month of March was 3.28%, with the yield on loans held for investment at 4.41% and our cost of interest bearing deposits of 0.94%.

Moving now to non-interest income on slide 15, the decline this quarter was driven by the fair value loss on the MSR asset, along with a swap derivative. At the bottom of this page, we detail out the various commercial fee income components within other non-interest income, noting our commercial product revenue increased 56% compared to the first quarter a year ago, which is reflective of the great work our teams have accomplished as part of our Next-Gen initiatives.

For mortgage banking, as shown on slide 16, and also in more detail on the last page of our earnings release, for sale mortgage originations were flat from the fourth quarter, but up 74% compared to the first quarter a year ago, with total volume of $1.4 billion. This reflects our positioning to capitalize on the higher refinancing demand, with lower long-term interest rates. The for-sale mix increased 80% this quarter as discussed back in January, and the gain on sale margin increased to 3.43%. As of quarter end, we serviced $12.5 billion of residential mortgage loans and the MSR is valued at 75 basis points. The potential sale of $3 billion in service loans discussed last quarter was terminated in late March by our counterparty, due to the extreme volatility in the secondary market.

Turning now to slide 17; non-interest expense was $177.7 million, down 3% from Q4. This includes home lending direct expense, which based on a significantly higher than expected volumes just discussed, was $31.6 million or $12.5 million higher than expected, when we last spoke in January. I’m pleased to report that this higher expense came with $24 million of higher non-interest revenue, compared to earlier expectations. Excluding the home lending surge above expectations, our total expense would have been $165 million or $660 million on a full-year annualized basis, which reflects the company’s focus on operational excellence efficiency. As mentioned earlier, we will remain focused on expense management moving forward. The bridge on the right side shows the moving parts from the fourth quarter. The only higher category is the expected seasonal increase in payroll taxes.

Turning now to the summary balance sheet, beginning on slide 18. We intentionally increased our interest bearing cash on balance sheet in March, and in the quarter at $1.25 billion. This increase was driven by additional term borrowings under a year, along with deposits increasing more than loans. Our total available liquidity, including off balance sheet sources at quarter end, was $11.2 billion, representing a 38% of total assets and 49% of total deposits.

I want to highlight that total deposits increased $218 million in the first quarter or 7% year-over-year. Within the quarter, we saw a reduction of $173 million in brokered deposits, along with a reduction of $69 million in public deposits, meaning total commercial wealth and retail customer deposits increased $459 million.

Frank will cover the loan book in a few minutes, but I want to take your attention back to slide 6 on CECL, and our allowance for credit loss. We adopted CECL [Indecipherable] on January 1st, increased new allowance to 1.02% of loans, as noted in the table at the bottom of the page, through retained earnings adjustment. Under CECL, we were using consensus economic forecast through the month of February and then the pandemic hit in full force. The economic projections have worsened each week since then and our Q1 allowance calculation and resulting provision for credit loss, was based on the end of March. Moody’s updated baseline forecast. This updated forecast included a 18.3% drop in GDP in the second quarter of 2020, along with unemployment increasing to near 9%, with full year GDP down 2.2%.

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 is 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.

Based on the recessionary near-term forecast; our allowance for credit loss increased to 1.47% as of quarter end, a 90% increase from year-end 2019. This resulted in a $118.1 million provision for credit loss in Q1. Of this amount, $100 million again is related to COVID-19 pandemic, broken down as an $80 million increase for estimated future credit losses not yet incurred, $8 million for a specific COVID-19 related impairment, and $12 million to increase the reserve for unfunded commitments. 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 we based on changing economic forecasts, which could worsen or improve from the quarter end forecast used. And second we will elect the full five year regulatory capital transition option for CECL.

Lastly, on slide 24, I want to highlight capital, noting that all of our regulatory ratios remain in excess of well-capitalized levels. As Cort mentioned, our Tier 1 common ratio is 10.9%, and our total risk-based capital ratio is 14%. We’ve broken out the mix of each ratio, with regulatory well capitalized minimums, our in-house policy floors incorporating the cushion over well capitalized levels, and what we consider excess capital. That excess capital increased to $280 million in the quarter, providing heightened stability in these volatile times.

As Cort mentioned, we constantly forecast and stress excess capital, and with what we know today based on the economic forecast, we are very comfortable maintaining our current quarterly dividend of $0.21 per share. Our excess capital of $280 million would afford us $400 million of pre-tax loss before we dip below our in-house policy floors, which by themselves incorporates an additional cushion over regulatory well capitalized levels.

The key items I want to reiterate as I wrap up my prepared remarks include, first the significant available liquidity we have of more than $11 billion. Second, our increased allowance for credit loss, at just under 1.5% of total loans. And lastly, our significant level of excess capital, with our Tier 1 common ratio at 10.9% and total risk based capital ratio at 14%.

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 be referring to certain page numbers from our earnings presentation, for those who want to follow along. We have been diligently working with our customers on any needed loan payment deferrals. The average timeframe of these deferrals has been in the 60 to 90 day range, across all of our lines of business.

On slide 3, to be transparent, we’ve listed deferral information by line of business, highlighting the percentage of accounts electing deferment, the payment amounts deferred, and the percent of those amounts in comparison to the total payments amounts for loans and leases in each line of business. This information is as of April 19th. I do want to point out that the Cares Act, including the personal stimulus dollars and programs such as PPP, will obviously play a critical role in supporting our small business portfolios.

On slides 5 and 6, we show specific segment totals and associated relevant underwriting characteristics. Overall, our entire loan portfolio is very granular, and that holds true within these segments. Operationally, we have enhanced our credit monitoring on the entire loan and lease portfolios and have chosen to highlight the following five segments for you today. Hospitality at 2.3% of our portfolio; air transportation at 0.6%; oil and gas with essentially no exposure; restaurants at 0.7%; and finally gaming at 1.7% of our portfolio.

On slide 9, we indicate our our line of credit utilization statistics across the entire product set, including commercial lines of credit, small business lines and home equity lines of credit. Given the inherent granularity of the portfolio combined with the high caliber credit quality of some of the larger relationships within the portfolio, utilization has remained stable over the past 90 days. Most of these credit facilities have characteristics associated with asset based lines, as specific advances are backed by qualified accounts receivable and inventory.

Slide 21 depicts our loan portfolio, its geographic diversification and select underwriting criteria for each major area. We are pleased with the composition of our loan book, along with our conservative and disciplined underwriting practices.

Slide 22, shows Umqua’s historically strong credit quality by comparing our ratio of annualized charge-offs to total loans and leases to the entire FDIC-insured population, covering more than 5,000 institutions. For the past 10 years, Umqua’s net charge-off rates have averaged 86% lower than the FDIC-insured institution average.

Slide 23 reflects our credit quality statistics. Ron covered the provision and CECL comments, and I would like to point out that included in the provision and the net charge off numbers for this quarter, was a single $8 million impairment attributable to an air transportation lessor, that was COVID-19 related.

I will now turn the call back over to Cort.

Cort O’Haver — President and Chief Executive Officer

OK. Thanks Frank and Ron for your comments, and now we will take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from Michael Young SunTrust Robinson. Please go ahead, your line is open.

Michael Young — SunTrust Robinson Humphrey — Analyst

Hey everyone, thanks for the question.

Cort O’Haver — President and Chief Executive Officer

Good morning Michael.

Michael Young — SunTrust Robinson Humphrey — Analyst

Wanted to maybe just start on the CECL reserve. The Day-2 reserve build was maybe a little bit higher than what we’ve seen for other banks, and it looks like CRE was maybe a big component of that. Can you — I don’t know if you can compare in contrast what you guys did, I know you gave some detail, but maybe what you did versus what peers did, did you guys just take the straight Moody’s forecast, and you feel like other people have taken kind of blended forecasts or any contrast you could draw there?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

This is Ron. Yeah, hard to speak specifically to what other banks are doing on that, I will point out that within CRE, of course you’ve got multifamilies and owner occ and non-owner occ, and multifamily was very low, it’s still low, but it was a larger piece of an increase, in terms of that reserve build. And no, there were no — we actually had about $4 million of additional reserve we booked over and above what the model suggested on some of the smaller categories, like consumer and HELOC, where the sensitivity wasn’t moving as much as we expected. So no downward adjustments to the model resolve. And I guess back to one of the issues with CECL and banks, I will be comparing economic forecasts used, because they’re all going to be slightly different. But ours is a straight up, that in a month. Moody’s updated baseline.

Michael Young — SunTrust Robinson Humphrey — Analyst

OK, thanks. And then just maybe moving over to the lease and equipment finance portfolio. There is a 6% reserve against that portfolio now. How does that compare to maybe historical losses, maybe through the last cycle and should we kind of consider that as COVID impacted portfolio as well, in addition to the five relatively small portfolios you guys outlined?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Yeah, good question. The 6% reserve obviously, we feel comfortable with it. For the last couple of years, that reserve level has been in that probably 2% to 3% range. And keep in mind about a little over half of that portfolio is in the traditional B and C quality paper space. So back during the last recession, their loss levels were probably upper single digits. But the other half of the portfolio is in the more A quality stuff, which will have a lower than 6% reserve. So I feel pretty good about where it is, compared to prior recessions.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay, great. And maybe just one last one. I think, Frank, you mentioned the line utilization, obviously was — we didn’t see a big uptick like we’ve seen in other banks, and it sounds like that was just because a lot of these are secured, so borrowers weren’t able to increase their line utilization. Is that the right characterization, or is there something else that we should infer about, maybe the durability or wherewithal here, your clientele, based on that statistic?

Frank Namdar — Executive Vice President and Chief Credit Officer

Yeah, I think it’s — as I said, I mean I think that the majority of our facilities are true asset based lending facilities. We do not have a lot of liquidity focused facilities. So unsecured, uncontrolled facilities or facilities secured by the total asset base of the company, thereby remaining — thereby being uncontrolled as well. So most of it’s formulaic and I think that’s truly a main reason why we have not seen the surge in line utilization that some of our other peers may have.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay, thanks for all the color. I’ll step back.

Cort O’Haver — President and Chief Executive Officer

Thanks, Michael.

Operator

Thank you. Our next question comes from Jared Shaw from Wells Fargo Securities. Your line is open.

Jared Shaw — Wells Fargo Securities — Analyst

Hi, good afternoon and good morning.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Good morning Jared

Jared Shaw — Wells Fargo Securities — Analyst

With the MSR sale being postponed or delayed or terminated in March, I guess, what are your thoughts for future MSR on potential sales there?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Hey Jared, this is Ron. We’ll stay opportunistic on that. But for the time being we don’t see those particular counterparties come back, just given the extended volatility. What the Fed has done over the last month, has helped with some of that secondary mortgage market volatility, but it’s probably going to take some time.

Jared Shaw — Wells Fargo Securities — Analyst

Okay. And then on the PPP loans that were funded, what was the average blended fee on that?

Tory Nixon — Senior Executive Vice President and Chief Banking Officer

Jared, this is Tory Nixon. As Cort mentioned, we had just over 6,700 applications approved by the SBA, while money was still available for about a — roughly $1.460 billion and the average loan size there is about — so it makes about $215,000. The fee generators roughly around 3% looking at the — kind of the scale that was provided.

Jared Shaw — Wells Fargo Securities — Analyst

Okay, great. Thanks, for the color.

Operator

Thank you. And our next question comes from Steven Alexopoulos from J.P. Morgan. Your line is open.

Steven Alexopoulos — J.P. Morgan — Analyst

Hi, everyone.

Cort O’Haver — President and Chief Executive Officer

Good morning, Steve.

Steven Alexopoulos — J.P. Morgan — Analyst

Wanted to start, just to follow up on the deferrals. Could you guys provide the balance of the loans in each of the segments you’re calling out on slide 3? Looks like you have the payments that were deferred, but can you tell us the balances associated with those payments?

Frank Namdar — Executive Vice President and Chief Credit Officer

This is Frank Namdar. As of as of April 19th, in the commercial space, $35 million; commercial real estate about $201 million; consumer about $10.3 million; FinPac, $125 million; and residential, $340 million.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay. And those are the balances of loans associated with these?

Frank Namdar — Executive Vice President and Chief Credit Officer

That is the book balance of those loans.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay.

Frank Namdar — Executive Vice President and Chief Credit Officer

About $715 million.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay. On FinPac, which seems to have the most requests for deferment, can you walk through which segments were seeing the greatest pressure within FinPac?

Frank Namdar — Executive Vice President and Chief Credit Officer

FinPac, Yeah. So we’ve seen a lot of activity in the the freight hauling space. So FinPac has got some smaller trucking operations, and those have been impacted, just — it’s really just more difficult to find loads to haul for some of those smaller operators at this point in time. Doctors, dentist offices, obviously any of the verticals that we cited in the slide presentation has also carried over into FinPac. And I would say that those are the main areas at present.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay. Do you have the aggregate size of those?

Frank Namdar — Executive Vice President and Chief Credit Officer

These will be in aggregate balances, if you will, as opposed to payment amount. Trucking space, about $53 million; doctors, dentists, for the healthcare space, about $36 million; restaurants, about $20 million, and I think that about covers it.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay, that’s helpful. Appreciate that. To shift directions a bit for Ron, if we look at the goodwill impairment, I mean all banks are under the same pressure as you guys are, and I have not heard of anybody else talking about impairing goodwill. Is this something unique to Umqua that you’re considering this year?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Yes, Steve, good morning. There was actually one yesterday announced, as well, and I think it’s something that just came on so fast late in the quarter, that my guess is, if you’re not going to see it in Q1, in the regional bank space, you might see it later in the year, depending on the economic forecast.

Steven Alexopoulos — J.P. Morgan — Analyst

Okay and then, sorry, just one final one, to follow up on Frank’s comment about PPP helping your small business customers. If you look at your $1.4 billion that was approved, how much of that are you finding is actually going to your most distressed customers? It seems like there is a bit of a crowding out going on?

Tory Nixon — Senior Executive Vice President and Chief Banking Officer

Yes, Steven. This is Tory Nixon again. If you look at what we have funded as of this morning, roughly 95% of that is to Umpqua Bank customers and about 5% of it is to non-Umpqua Bank customers. And we were very strict in the ability to process and support the customer base through a kind of first-in first-out mentality. So we have just been very broad based, supportive in the PPP process, and have not broken it out by distressed industry or any kind of other risk classification. It has been strictly those that have applied, we have been working diligently to get them through the process and get them funded.

Steven Alexopoulos — J.P. Morgan — Analyst

Yeah, that’s what I figured. Okay.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Hey Tory, before Steve hangs up, it might be worth letting Steven know what we’ve got, since the money ran out in kind of pending applications for the next round of stimulus is probably worth mentioning.

Tory Nixon — Senior Executive Vice President and Chief Banking Officer

So we have — as we’ve talked about earlier, we actually did 6,784 before the money was exhausted. And we have today, about 4,000 additional applications that we’ve received, that we have processed as far as we could process, and we’re ready to the minute that money is available again. And so — and the numbers are — from a dollar amount, are relatively close. I think it might be a little bit less than — on an average at $215,000, but relatively close from what we can see today. So there is a healthy pipeline sitting there today. And we’ve done what we can do and we’ll move it forward as soon as we can.

Steven Alexopoulos — J.P. Morgan — Analyst

Yeah, got you. Thanks for taking my questions.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Sure. Thank you.

Operator

Thank you. And our next question comes from Tyler Stafford from Stephens. Your line is open.

Tyler Stafford — Stephens — Analyst

Hey, good morning guys.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Good morning Tyler.

Tyler Stafford — Stephens — Analyst

I wanted to start on credit here. There seems to be a lot of focus on the charge-off this quarter, which I am a little bit surprised about, considering the now new reserve is over seven times your non-accruals and I think well in excess where other banks are. But it was a little surprising that there was a COVID related charge-off this quickly. So I was wondering, if you could just talk a little bit more specifically about what drove that so early, was it already having problems or any details you could give us?

Frank Namdar — Executive Vice President and Chief Credit Officer

This is Frank Namdar. It was a weaker credit to begin with and had some exposure to some smaller airlines that were out there. But with the shared national credit as well and there was a defined work out in place, but in March, once the pandemic accelerated, if you will, like so many of these types of situations, the workout plan that was in place kind of fell apart, and Umpqua has is historically been extremely aggressive in their workout strategies and recognizing risk and we view the situation as one, in which we had to take an impairment at this time.

Tyler Stafford — Stephens — Analyst

Got it, okay. Appreciate that. And just going back to FinPac for a moment, Ron, can you just go over again what those losses were last cycle? I think I missed it. And just thinking about it in relation to the 6% reserve you have on the book?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Yeah, you bet. Again the time last cycle was — it was all made up of BC quality paper, and that would have been in the high single digits in that 7% to 9% charge off rate range. Keep in mind though, the yield is on the BC stuff is in that kind of high teens to low 20s. And so when I characterize the back of the 6% reserve level today, half the portfolio — a little over half the portfolio now is in A paper, its a much higher quality lower yield, probably closer to 10% yield, but also lower losses.

Tyler Stafford — Stephens — Analyst

Perfect. Okay. And then just going back to the expense comments you made. I think you said the higher mortgage expense drove the run rate or the expense — absolute expense level this quarter up $12 million. So it would have been $165 million I believe, expenses for the quarter. So how are you thinking about, I guess one, mortgage production for the near term and for full-year ’20, and then how we should be thinking about the run rate expenses as well, in relation to that?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Yeah. Mortgage is going to stay strong obviously, just given where billable rates. What I try to back into though, was X that surge compared to the prior commentary. We’re targeting in that 6.60% range for the year. So absent that, I would expect mortgage to remain strong. But then again too, we’re deploying guidance, if you will, for the full year amount. So we’ll leave it at that.

Tyler Stafford — Stephens — Analyst

OK. And maybe parlaying on that last comment just about guidance, I fully appreciate that RoTC guidance is impossible to predict at this point, just given provisions and charge-off unknowns. But I was hoping you could comment maybe just around how you’re viewing the efficiency ratio? Obviously, we’ve got 150 basis points of Fed cut since January, but any color you can share on how you’re viewing that mid 50s prior efficiency ratio guidance?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Yeah. Again, I am going to have to fall back on that prior guidance we have to withdraw, just given the environment and the range of potential economic forecasts.

Tyler Stafford — Stephens — Analyst

Fair enough. Thanks.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

You bet. Thank you.

Operator

Thank you. And our next question comes from Jeff Rulis from DA Davidson. Your line is open.

Jeffrey Rulis — DA Davidson — Analyst

Thanks, good morning.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Good morning, Jeff.

Jeffrey Rulis — DA Davidson — Analyst

Ron on the margin, similar maybe discussion here, kind of the old math goes out the window, we rush to zero on the Fed cuts pretty quickly. Previously, I think you kind of outlined for every 25 basis point cut, there was a 5 to 7 basis point impact to margin. Helpful to know that March, 3.28%, some puts and takes there outside of specific guidance. How do you think the balance of that further pressure and/or I guess you could layer in if there is PPP pressure on that yield, any any readjusted kind of comments on margin. would be helpful?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Maybe just a couple without providing again, detailed guidance. On the PPP loans, assuming the vast majority of those turn into grants or forgiven, the net fee will be recognized that quarter and net interest income in the 1% coupon, if you will, and the loan will be reversed. So you’ll see a surge related to the PPP fee income recognition for all banks, not just Umpqua. The net effect from that, the other item we’re obviously focused on, is reducing the cost of deposits. The standard 0.94% in the month of March, shows you the extent of the move late in the quarter.

Jeffrey Rulis — DA Davidson — Analyst

Got it. So the my — to interpret the deposit work is, you hope to clamp back some efforts on the margin or the puts and takes on earning asset yields versus funding costs, where would you peg that through 3.28%?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

I’d say, given the fact that rates are at zero, there is room to move lower on the customer deposits.

Jeffrey Rulis — DA Davidson — Analyst

Okay, great. And on the CECL, the election to delay the impact on regulatory capital, do you have an estimated impact, that you could share?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Yeah, it’s ballpark 10 to 15 bps.

Jeffrey Rulis — DA Davidson — Analyst

10 to 15. Okay. Great. And then just a housekeeping, just want to confirm that, net charge-off was was out of the FinPac Division, correct?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

No, that was out of the core bank. The SNC.

Jeffrey Rulis — DA Davidson — Analyst

Okay. Yeah. Got it. All right. That’s it from me. Thanks.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

You bet. Thank you.

Operator

Thank you. Our next question comes from Jacqui Bohlen from KBW. Your line is open.

Jacquelynne Bohlen — KBW — Analyst

Hi, good morning everyone.

Cort O’Haver — President and Chief Executive Officer

Good morning, Jacqui.

Jacquelynne Bohlen — KBW — Analyst

Ron, in terms of that 3.28% margin, is that core or GAAP?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

That will be the GAAP number. I’d say that that delta between GAAP and core is narrow and pretty small, it’s going to be a 1 basis point or two pretty quick.

Jacquelynne Bohlen — KBW — Analyst

Okay, thank you. And I wondered if you could just provide some color on your remaining SNC exposure, and if there is any industry exposure in there, that may be included in some of the other disclosures that you provided. I mean, just how you’re thinking about the rest of that portfolio?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

We’ve got about $1.2 billion in that portfolio remaining and all of that is pass-rated. None of it is an issue and stable overall. Nothing [Multiple Speakers] sensitive industries.

Jacquelynne Bohlen — KBW — Analyst

Nothing in sensitive industries? Okay. That’s really helpful. Thank you. And when…

Tory Nixon — Senior Executive Vice President and Chief Banking Officer

Jacqui, this is Tory. Just one thing real quick on the SNC pieces from Frank’s comment; I would say that our commitments are — the number he gave you, our outstandings are about $750 million or so. So just from a book balance.

Jacquelynne Bohlen — KBW — Analyst

Okay, that’s helpful. Thank you. And then just lastly, that 95.5% breakdown between customers and non-customers in terms of the PPP, is that a function of specifically prioritizing your existing customers? Meaning that, did you get a lot more inquiries from customers that aren’t included in that number, or did you process that, as they came in?

Cort O’Haver — President and Chief Executive Officer

Hey Jacqui, this is Cort, let me answer that. So we made a decision early on that we weren’t going to exclude — like Tory said, in the first-in first-out sense of the way we handle, that we weren’t going to exclude non-customers from applying here at the bank. We felt somewhat of a moral obligation to the communities we serve, to process applications. Most people went to their primary banks. We didn’t get a lot of it, but that was a decision that Umpqua, to make sure we were serving all of our communities.

Jacquelynne Bohlen — KBW — Analyst

So that 95.5, is that indicative of the 6,784 that have been processed, or is it the overall — almost 1,100 that you’ve received? Maybe not with that, but with the the additional 4,000?

Tory Nixon — Senior Executive Vice President and Chief Banking Officer

Yeah. So this is Tory again. So the 95.5% is actually as of this morning what we have actually funded, which is just over $850 million of the $1.460 billion. From what we see, though that 95.5% will stay — should stay fairly close to those levels as we fund the remaining balance of the original $1.460 billion. To Cort’s point as we — as the process grew, we are trying very hard to support non-customers, as well as customers, but made the — at times, decided to support our existing customer bases best that we could.

So my gut instincts tell me that, as we kind of get through the remaining 4,000 which then will equal roughly 11,000 in total or so, we should stay close to probably the 95.5 split.

Jacquelynne Bohlen — KBW — Analyst

Okay. And I guess where I’m getting at with my line of questioning, and understanding that on a relative basis 5% is very low, but when you look at the sheer volume of applications, 5% of 11,000 is not an inconsequential number. How are you viewing this in terms of relationship development, and might you see associated deposit growth from new customers alongside it?

Cort O’Haver — President and Chief Executive Officer

Let me start and then Tory can put on the back end. Once again, the decision was made mostly by me, that because we were seeing some non-customers in the intake process, the online intake process that Tory created three, four weeks ago, and truly believing in the foundation that the small business segment provides the economy, we made the decision to support those businesses as the primary reason for making that decision. As opposed to, we were going to try to cross-sell them products and services, but I’m not saying, you’re saying that, I will tell you that, yes, knowing what the percentage is, Tory can tell you those customers, when those PPP loans or grants were funded, opened the deposit accounts here, which we welcome and clearly I think and like in my opening comments, where Umpqua from my perspective, is one of the few banks and maybe I am being somewhat naive to this statement, one of the few banks that has taken in some non-customers, and has been pretty open about that. That maybe there is an opportunity to gain some customers in the future. But I want to be clear, that we did it mostly or primarily to support these businesses, and the fact that they root and the economic livelihood of all the communities we serve. We are pretty much still a rural bank. A lot of our stores, a lot of our customers are in non-metro markets, and we feel a strong obligation to support these communities. And Tory if you want to add something on there, you can.

Tory Nixon — Senior Executive Vice President and Chief Banking Officer

No, I don’t think there is a lot to add. I mean the idea of — we would love to be able to do all of — everyone that we possibly can and capacity issues just reach a certain limit, and there is some that we want customers — hopefully not customers, but there’d be some non-customers we just won’t be able to assist. But we’re doing the best we can to help as many as possible. Certainly, for those that we supported through the PPP, that are not Umpqua Bank customers today, we hope that they will become Umpqua Bank customers tomorrow. But there is no outward reach in that regard.

Jacquelynne Bohlen — KBW — Analyst

Okay, great. Thank you for the added color. Appreciate it.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Thanks Jacqui.

Operator

Thank you. And our next question comes from David Chiaverini from Wedbush. Your line is open.

David Chiaverini — Wedbush — Analyst

Hi, thanks. I had a follow-up question on credit in your gaming portfolio. There has been some concern by investors this earning season for banks that have exposure to gaming companies, that particularly tribal customers and 80% of your gaming portfolio is to tribal, and granted it’s a pretty small portfolio exposure for you, at less than 2%. But could you walk through what — if it came to that, what a workout would entail in some of the measures you could take?

Cort O’Haver — President and Chief Executive Officer

Interesting question. Yeah. Obviously it would involve a lot of attorneys and working through the tribal attorneys on both sides. Our portfolio is — at the time of underwriting, extremely strong, still as displayed in the slide presentation. The great majority of them have over 12 months of liquidity. So we have great confidence in the strength of that portfolio. And to date, we have only received one request for deferral in that space.

David Chiaverini — Wedbush — Analyst

Great, thanks for that. And then shifting gears to expenses, it sounds like it’s a good news kind of story, given that you guys are trending at the lower end of that prior guidance. But I was a little surprised when you said that you kind of pulled the guidance for it, as opposed to just adjusting it, if needed because usually that’s a line item that banks have the most control over. Could you discuss just why you pulled the guidance on that?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Hey David, this is Ron. Yeah, I mean obviously mortgage is going to be a wildcard over the course of the year, strong in Q1, we expect it to be strong again in Q2, based on market conditions. But underlying that the nice thing about the next-gen initiatives is, not really market specific drivers of the drops and costs were down. So feel good about, ex the mortgage surge, which comes with much revenue above expectations, and that will be in that range.

I think it’s just in terms of overall guidance, there is enough moving parts over the course of the year that, I don’t think anybody can tell you what Q3 or Q4 are going to look like specifically, just given the range of outcomes.

Cort O’Haver — President and Chief Executive Officer

Hey, David, Cort. We’ve continually driven down our core operating expenses over the last couple of three years. And we did end the quarter, I understand your question. Obviously with the pandemic hitting as fast is it did, our primary focus has been on serving our customers, and we have already taken initial initiatives in the company, to restrict expenses, and we are looking at right now, how to — in the future, reduce expenses. But to Ron’s point, it’s kind of — it happened so quickly, focus on the customer, and we’ll get to the expense saves, we’ve shown The Street before that we can control expenses. We get it and we’ll get that information to you as soon as we kind of [Indecipherable] exactly how we are going to deliver on that.

David Chiaverini — Wedbush — Analyst

That’s helpful. Makes sense. Thanks very much.

Cort O’Haver — President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Michael Young, SunTrust Robinson. Please go ahead, your line is open.

Michael Young — SunTrust Robinson Humphrey — Analyst

Hey, thanks for the follow-up question. Just wanted to touch on the mortgage banking business real quick. Just gain on sale margins obviously were quite strong, good to see this quarter, obviously with the high volume. But could you maybe just talk about what you’re seeing in terms of how much volume you’ve been able to process, versus kind of the pipeline and should we expect a continued surge or even a larger surge in 2Q? Just kind of what you’re seeing in terms of activity levels, and then what that may mean for gain on sale margins? Yeah Michael, this is Ron. Historically, it was like a bell curve through the year, right. So you typically had higher purchase activity, Q2, Q3. We’ll see how that plays out in the light of the pandemic. But we’ve been able to obviously manage the volume — significant levels of volume though, also with better pricing. Hence, the gain on sale margin, with that 3.43% range with the increase in loan pipeline. So we feel good about utilizing that as a clutch if you will, to manage volume. Okay. But no comments or updates on kind of what you’ve seen late in 1Q or in the early 2Q, in terms of have you had to delay closings or anything like that, that may further increase or sustain kind of the surge in volume?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Nothing significant outside of the historical pattern, I mean other than rates are zero. So we’re starting to see more refi activity. But mortgage rates — spreads on mortgages haven’t — have actually gapped out, compared to the move in the tenure, right. So it’s not a refi bonanza, as one would expect, if you just follow the tenure move.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay. And then one last one, this would be true for anyone, but just on the servicing side, there is a lot of chatter about people — servicers basically having to fund payments, even if there is forbearance for maybe up to four months. Does that — can you talk about any impacts that would have on you all?

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Hey, this is Ron again. Yeah, we’ve got significant liquidity. So we don’t see that as an issue here over the coming couple of quarters.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay, thanks.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

You bet. Thank you.

Operator

Thank you. And that concludes the questions in the queue. I’ll turn the call back to management for their closing remarks.

Ron Farnsworth — Executive Vice President and Chief Financial Officer

Okay. Well, this is Ron. I want to thank you all for your interest in Umpqua Holdings and your attendance on the call today. This will conclude the call. Goodbye.

Operator

[Operator Closing Remarks]