BOK Financial Corp
NASDAQ:BOKF
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BOK Financial Corp
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Greetings. Welcome to BOK Financial Corporation Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded.
I'll now turn the conference over to your host Steven Nell, Chief Financial Officer for BOK Financial Corporation. You may begin.
Good morning and thanks for joining us. Today, our CEO, Steve Bradshaw, will provide opening comments; and Stacy Kymes, our Chief Operating Officer, will cover our loan portfolio, credit metrics and fee income businesses. Lastly, I'll provide details regarding net interest income, net interest margin, expenses and our overall balance sheet position from a liquidity and capital standpoint.
Joining us for the question-and-answer session are Marc Maun, our Chief Credit Officer, who can answer detailed questions regarding credit metrics; and Scott Grauer, Executive Vice President of Wealth Management, who can expand on our wealth management activities. PDFs of the slide presentation and first quarter press release are available on our website at bokf.com. We refer you to the disclaimers on Slide two, regarding our forward-looking statements we make during this call.
I'll now turn the call over to Steve Bradshaw.
Good morning and thanks for joining us to discuss the second quarter 2021 financial results. This quarter was another in which our diversified revenue strategy was a key differentiator for us as we grew pretax, pre-provision earnings by 10% on a linked quarter basis and includes $160 million in net income for the first time in the history of our company.
Shown on Slide four, second quarter net income was a record $166.4 million or $2.40 per diluted share that represents growth in net income of nearly 14% from last quarter as a result of our long-term commitment to our balanced earnings model and our breadth of business capabilities. The key items that drove our success this quarter were another outstanding contribution from our fee-based business units with total fees and commissions up $7.3 million or 4.5% from last quarter. The contribution from our wealth management team continues to be a differentiator for us, offsetting narrowing margins and housing inventory constraints that impact our mortgage company this quarter.
Net interest revenue stabilized as a similar amount of BBB forgiveness was recognized again this quarter as it was in Q1. Additionally, deposit cost reduction outpaced rate compression on loan yield and are available for sale portfolio. The increasingly favourable economic outlook combined mind with improving credit trends allowed us to release $35 million of our loan loss reserve. And lastly, expense management remains excellent with total expenses relatively flat linked quarter when you exclude the $4 million term loan contribution we made in the first quarter that did not reoccur in the second quarter.
Turning to Slide five, total loans are down $1.1 billion for the quarter. The BBB loan forgiveness accounts for $727 million of that contraction. Core loan growth did remain a challenge this quarter as our energy and commercial real estate customers continue to pay down debt refinancing long-term markets. That said, we saw stable loan balances in our core C&I book. Stacy is going to cover that momentarily, which we are from our belief that we are poised for growth opportunities as the economy continues to rebound.
Average deposits were up nearly 3% this quarter and nearly 15% from the same quarter a year ago as the growth trend we see there for the past 18 months continues. Assets under management or in custody in our Wealth Management business were also up. They were up 5% in this quarter. I'll provide additional perspective on the results before starting the Q&A session, but now Stacy Kymes will review the loan portfolio and our credit metric in more detail.
I'll just now turn the call over to Stacy.
Thanks Steve. Turning to Slide Seven, period-end loans in our core loan portfolio were $20.3 million down just under 2% for the quarter as we continue to see borrowers in fund specialty winning areas continue to reduce leverage. That said certain areas of the portfolio saw increase in pipeline and growth that outpaced pay downs. Synergy balances continue to decline albeit at a slower pace than in previous periods.
Both oil and natural gas prices have moved up swiftly in 2021 leading to improved credit metrics and providing material cash flow for integral companies. US rig counts are moving up very modestly and are just a little over half of what they were before the pandemic. As we move into the fall when capital budgets are established, I suspect we'll begin to see more drilling activity as prices remain near current levels. This should organically increase loan demand.
Ancillary business from hedging, investment banking and treasury were all very good for this quarter. Healthcare balances grew 2.8% this quarter driven by our senior housing sector. Looking forward, we remain very confident in our ability to perform both from a growth and credit portfolio in this portfolio as it remain a leader for us. Core mill market C&I today is at the lowest level of utilization at any measure period back to March of 2015, which shows we have capacity to move up as demand starts to come back online without it being predicated on new customer acquisition.
Overall seeing the broad C&I portfolio begin to stabilize is a real positive coming out of this quarter and bodes well for our outlook for returning loan growth later this year and in the next year. Commercial real estate balances contracted 5.7% this quarter. We continue to see borrowers use this low rate environment to refinance for the long-term fixed rate non-recourse market. 2020 was one of the real estate lowest years for portfolio turnover as many of the permanent markets were cautious. As those who have opened back up, we see some catch up activity that's inherently a sign of a healthy portfolio which can create some quarter-to-quarter volatility
BBB loan balance forgiveness was the substantial this quarter with $727 million forgiven, shrinking the portfolio by nearly 40%. We expect to have another period of forgiveness activity early in the third quarter from the 2020 vintage in BBB before it's closed in the remainder of 2021.
Looking ahead, we remain positioned well for loan growth later this year and next year when economic activity creates borrowing these for working capital. We're hopeful the stability in our C&I book this quarter signals we're trying the core among demand in our core markets.
Turning to Slide Eight, you can see that credit quality continues to improve as we move further out from the pandemic. We saw meaningful credit quality improvement across the broader loan portfolio, with non-performing assets and problem loans both down significantly this quarter. These factors coupled with the rebound in commodity prices to multiyear highs and strong economic forecast for GDP growth in labor markets with us to release $35 million in reserves this quarter. Net charge-offs were $15.4 million or 30 basis points annualized excluding BBB loans in the second quarter, that's essentially flat from last quarter's $14.5 million.
Net charge-offs averaged 32 basis points over the last four trailing quarters which is at the lower end of our historic loss range. As we look forward to the latter half of 2021, we expect net charge-offs to be at or modestly better than the results of the first half of this year.
From a combined allowance for loan losses totalled $336 million a 1.66% of outstanding loans at quarter end excluding the BBB loans. Non-accruing loans decreased $36.4 million from last quarter, primarily due to a reduction in non-accruing energy loans. Potential problem loans totaled $384 million at quarter end down significantly from $422 million on March 31. Potential problem energy, services and general business loans, all decreased compared to the prior quarter.
We'll continue to set our reserve at the appropriate level as we always have. We're generally positive about the credit outlook for the remainder of the year. Future allowance levels will be impacted by economic activity, commodity prices, asset quality and loan growth.
Turning to Slide Nine, you can see that our wealth management team had another outstanding quarter. Total wealth management revenues were $131.1 million up nearly 15% from the previous quarter. This includes the fee income line that investors see in our corporate income statement, brokerage and trading and fiduciary and asset management as well as net interest loans from loans and deposits in our private wealth group and net interest income generated as part of our brokerage and trading group.
Banking products and services for private wealth clients continue to be a particular area to highlight. The total loan portfolio holding [ph] on $2 billion through 3% linked quarter and 12% compared to the same quarter a year ago. The deposit portfolio ending the quarter and $3.7 billion grew 5% linked quarter and was up 13% compared to the same quarter a year ago. Total net interest income also saw a strong growth in this quarter up 7%.
Total brokerage and trading revenues increased $10.5 million or 20% linked quarter. This is largely due to a shift in product strategy this quarter in our institutional trading and sales business coupled with adding new financial institution clients. Importantly, as we look forward, we believe the revenue from this shift in product focus and expanded customer base is sustainable in the third quarter before modest seasonal declines as you get into the fourth quarter.
Also in the wealth management space, fiduciary and asset management fees were up nearly 9% linked quarter as well as from the same quarter a year ago. A portion of the linked quarter growth is due to the annual fact fees that are charged in the second quarter, but we still saw strong growth in assets under management. We have seen the benefit of favourable equity market increasing customer cap balances, sales activity remained strong in this space as well.
Our relationship-driven business model is perfectly in touch with the client's needs today as we continue to see institutions and individuals retain the increased depreciation from initial advised gains in the gain the last 18 months.
Transaction card revenue was up $2.5 million or 11% this quarter. This is largely due to the seamless measures and the broader reopening of the US economy as we saw both merchant and ATM transaction volumes increase this quarter. Deposit service charges were up $1.7 million or nearly 7%this quarter. Primarily standard in our commercial businesses, lower earnings credit rates due to lower interest rates resulted in higher service charges this quarter.
Mortgage banking revenue decreased $15.9 million linked quarter due to the broader economic factors currently impacting the industry. Increasing average mortgage interest rates in particular were our factors this quarter. Is that move to the mix between rebuy and purchase funding from 65% rebuy last quarter to 48% rebuy this quarter.
Industry-wide housing inventory constraints and their recent preferred stock purchase agreement, deliberate limits on second homes and investment properties imposed on both Fannie and Freddie impacted the quarter.
In addition to volume, the increased competition for inventory impacted gain on sale margins, which were closer to pre pandemic levels this quarter. We expected mortgage revenues to dip this year, due to changing environment, but our mortgage team is doing a good job managing the transition to a purchase market.
We are better positioned than most of our non-bank competitors as the market shifts to more of a home purchase financing. While this quarters contribution was down from the record levels we saw throughout the past year, the rate of pressure did ease as the quarter unfolded.
We still expect this business to be a significant contributor to our diversified, the revenue strategy going forward. Although not included on slide 9, I will also know that the net economic hedges in the fair value of mortgage servicing rights and related economic hedges were a positive $4.4 million during the quarter.
Other revenue increased $6.9 million this quarter, due to higher production level for repossessed oil and gas properties, which was largely offset by increased operating expenses. Looking forward, this level of revenue and expense will diminish as these properties are sold.
I will now turn over the call to Steven to highlight our net interest margin dynamics and the important balance sheet items for the quarter. Steven?
Thanks Stacy. Turning to Slide 11, second quarter net interest revenue was $280 million largely unchanged compared to last quarter. Average earning assets decreased $354 million compared to the first quarter and average loan balances decreased $590 million.
Available for sale securities decreased $190 million as we continue to reinvest most of the quarterly cash flows from the portfolio. Average trading securities grew by $467 million to support our brokerage and trading business.
Non-interest deposits grew $877 million this quarter, which also helps support net interest income. Then interest margin was 2.6, 0% down just two basis points from the previous quarter. The reinvestment of cash flows from our available for sale security portfolio was stable as quarter due to prepayments from commercial mortgage backed securities.
However, the expectation is that there will be continued slight pressure due to the re-investment of this low rate environment. Additionally, we had continued success driving interest bearing deposit costs down three basis points to 14 basis points on average for the quarter.
Triple BBB loan supported net interest margin by two basis points this quarter, unchanged from last quarter, there are many moving parts to consider, but we believe the extensive pressure felt on net interest margins since early 2020 is beginning to wane.
We think we could be nearing a bottom and then interest margin, but do not expect any positive migration there until rates begin to rise again. With sooner than anticipated rate hikes now potentially on the horizon, it's important to recall how well we performed during the last rate hike cycle from 2015 to 2019 in the top four town regional banks.
While we can't be assured to repeat that experience, we don't see much that would lead us to believe the experience will be significantly different. In fact, there's even more liquidity in the system today than before the last increase cycle, which should diminish the need for the market to move rates up quickly.
Turning to Slide 12, expense management remains prudent with total expenses down 1.6% link quarter personnel expense was essentially flatthis quarter.A regular compensation decrease a $1.1 million was mostly offset by an increase in incentive compensation expense.
All told, we're very happy with our ability to hold the personnel cost efficiencies earned through the pandemic and expect to do so going forward. Non-personnel expense was down $3.7 million. This quarter mortgage banking costs decreased $2.8 million due to the decrease in prepayments combined with lower accruals related to default servicing and loss mitigation costs on loan service for others.
Data processing and communication expense decreased $1 million as a result of reduction of system conversion expenses. Other expense increased $3.6 million primarily due to increased operating expense on repossessed assets.
Also of note last quarter, we made a $4 million charitable contribution drill BOK's foundation that did not reoccur this quarter. On slide 13, our liquidity position remains very strong. Our loan to deposit ratio declined from nearly 60% last quarter to just over 57% at June 30th, largely due to the significant decline in triple P balances this quarter.
This significant on balance sheet liquidity leaves us, very well positioned to meet future customer needs. Our capital position levels remain strong as well with a common equity Tier 1 ratio at 12% well ahead of our internal operating minimum.
With such strong capital levels, we once again, were active with share repurchase optimistically repurchasing, nearly 493,000 shares at an average price of $88.84 per share in the open market. One additional thing of note is that we plan to redeem our $150 million subordinated debt issue in June of 2016, using existing capital.
Given the strength of our capital levels, we have decided not to reissue this debt. This will impact only the total capital ratio at the holding company level by 42 basis points, but we'll save the company approximately $8 million annually on a go-forward basis.
On slide 14, I leave you with some general outlook for the near and mid-term. We believe net activity and loan growth will continue to improve with our company position for positive growth in the second half of the year, if borrow demand exists.
We expect the overall loan loss reserve as a percentage of loan balances to continue to migrate towards pre pandemic levels. Then there's margin may continue to move down slightly, largely pro continued downward repricing in our available for sale securities portfolio.
We believe we are close to the bottom in our interest bearing deposit price and get 14 basis points that said, we believe that significant pressure on net interest margin seen in past orders is largely behind us now.
Our diverse portfolio of fee revenue streams should continue to provide some mitigating impact, the overall revenue pressure being felt in our spread businesses. We expect most of the revenue categories to grow modestly for the remainder of 2021.
We will continue our disciplined approach to controlling personnel and non-personnel costs with growth budgeted at low single digits in 2021.Our focus will be holding the line of manageable expenses without sacrificing multi-year technology commitments to improve customer service and our competitive position.
As I mentioned a moment ago, we feel good about our capital strength. We will continue looking for share buyback opportunities and plan to maintain our current quarterly cash dividend level.
I'll now turn the call back over to Steve Bradshaw for closing commentary.
Thanks Steven. As I mentioned at the top of the call, it was another exceptional quarter for BOK financial. We continue to do the right things the right way for the benefit of our long-term investors, adding shareholder value without compromising credit discipline or forgoing investment that might hinder the company's future.
And as witnessed by our credit outcomes and the outsized wealth management contribution this quarter, we continue to do that in a prudent diversified way. While this quarter is once again about the contribution from our fee-based based businesses, the vastly improving outlook for growth and our footprint as we emerged from the pandemic is driving customer confidence in a way we haven't seen for quite some time.
While supply chain and workforce disruptions might be hampering some areas in the near term, economic indicators remain strong, which pretends well for the future. With growth returning to our healthcare book this quarter and pipelines returning to your pre pandemic levels. In other areas of CNI, we were very optimistic about the restart of some of our largest growth drivers in the company.
Additionally, we were pleased to welcome back our remote workers this quarter and believe that the energy and teamwork as quarter or company will also play a role in our growth expectations in the second half of the year.
With that, we're pleased to take your questions. Operator?
And at this time, we we'll be conducting a question-and-answer session. [Operator instructions] Our first question is from Peter Winter with Wedbush Securities, please proceed with your question.
Thanks. Good morning. I wanted to ask about the loan growth. Obviously some trends are improving, but it seems like there's still some pressure on loan growth. And I'm just wondering if you could talk about the third quarter, cause it does seem like average loans could still be down in the third quarter, I'm just wondering if you could talk about some of the puts and takes?
Peter this is Stacy. I think, you know, the story for us as you think about the second quarter and then going into the third quarter was really stability in our coursing and I book we've had growth in our wealth lending platform for --for a while now. And that was a real strong story for this quarter. And we think that will continue into next year.
But if we can get past the pay downs in energy and commercial real estate, I think you're going to see that core CNI began to grow as we get into the latter half of this year. We actually saw in May we're hoping we could string two months together and then have something really fun to talk about this quarter, but we backed up a little bit in CNI in the month of June.
And so but we're -- we're, we really reached the point where those balances are real stable at this point. We're seeing months where we pop up and have some more growth in the CNI. Energy pay downs, it's hard to know when we've reached the bottom there.
I think we're awfully close. But, but we worked through a lot of the issues there from a credit perspective that have created some of the pay down activity. Those borrowers are flushed with cash flow with prices, much higher than what they would have budgeted at, as we go into the fall.
That's typically when the EMP companies do their capital budgeting, I think that at these price levels, you're going to see more drilling activity, which will create more demand on the energy side, commercial real estate's a little bit of a different story.
We've had real consistent loan generation there, even through the downturn, but the -- the capital markets in many respects were closed last year with COVID. And so a lot of those stabilized properties that can move to the permanent non-recourse side of things have done that. And so it's created some pay downs that created some lumpiness.
And when we looked at, looked at the quarter and how it was bowling, and we really, that the story for us was to see an eye balances were very stable. The, it was really the, the headwind from energy and commercial real estate, which we think if it's not behind it, it's very close to being behind us.
But when you talk to the coursing and I guys about their pipelines, about what they're seeing about the borrow optimism, I can't remember a time when borrowers had been more optimistic about economic growth and that's going to create organic demand.
But I think we're close. We're optimistic about the latter half of this year, certainly optimistic about next year in terms of the ability to grow that core CNI portfolio. We mentioned in the prepared remarks about utilization rates, utilization rates in our corporate or the lowest we've seen in a long, long time.
So as we began to get borrowed need for capital, that's going to have an opportunity to grow and crave organic demand as well. So when, when the market provides the opportunity to grow, I think we're going to get our, our share or disproportionate share because of how well positioned we are.
All right, that's really helpful. Right, very helpful. If I could switch gears about the securities portfolio, Steven average securities were down this quarter and I just assume with rates even lower, not really a lot of interest moving excess cash into securities. I was just wondering if you could talk about the outlook for the securities and --and if you're planning on replacing maturing securities?
We are Peter. We will still have around $700 million, I would say in cash flows off of the AFS portfolio of each quarter. And our plan is to continue to reinvest that now rates have moved down a little bit here, but we'll continue to look for opportunities.
The quarter was down, I think $190 million. I think that was just timing really. There's no particular strategy to move that balance down. I think we want to continue to reinvest those cash flows on a go-forward basis and keep the portfolio relatively level around that $12.8 to $13 kind of billion dollar range. And they have this portfolio.
And what are new yields going on it today?
And what are new yields going on at today?
125, roughly.
Our next question is from Jennifer Demba with Truist, please proceed with your question.
Hey, this is Brandon King off for Jennifer Demba. Good morning. Yes. So I wanted to touch on deposit growth. I saw averages, average balances were up in the quarter, but on a period in basis, balances were down a little bit. And I wanted to know what was going on there. If there are any seasonal factors to note of and what is the expectation for deposit growth for the second half of the year?
Sure. I think one of the -- that the entire industry has seen enormous liquidity in the system, and we've certainly benefited from that enormous deposit growth for us year-over-year and quarter-over-quarter. I think if you start to look at period and numbers, you get a lot of fluctuation between deposit balances and things that happened there.
We have a lot of customers who have benefited from stimulus funds that have come in over the course of the first half of the year. Those will go back out. Those are going back out. We've had some energy customers who who've done things where we've had an influx of cash for a period of time that goes back out to some place other than the balance sheet.
And so really the focus for us is kind of the average balances because that -- that really is more representative of kind of the core growth there. I think if we knew the answer to what the positive balances were going to do in 2022, that'd be a helpful thing for all of us.
I think the industry is going to struggle with that as the weekend to formulate plans for 2022 specifically, we just -- we have so much liquidity in the system today, it's beyond what any of us have experienced in our career.
And so the timing of when that begins to flow back out into investment or to out of consumers' pockets, as the stimulus continues to impact them as well is a fair question to ask. And I don't think our crystal ball is much different than anybody else's.
I mean, it clearly will begin to go probably not as fast as we think that it will. It tends to be stickier. We've been this time last year, third quarter, fourth quarter, we were predicting a lot of those deposit balances would, would move out of the banking system that hasn't happened.
The system has grown them and we certainly grown them as well. We're not -- we're not paying above a market rate for sure, to be able to do that. It's just kind of organic relationship driven deposits there.
Okay. Okay. And I know the loan to deposit ratio is sub 60% now. And I know this is hard to gauge based off how you just answered my previous question. What are you hopeful that loan growth outpaced deposit growth later this and into next year? Is that the thought?
I think if you look at our company mean, we we've typically been kind of closer to 85% loan to deposit ratio over time. And I think what happens when, when you get the economy moving again, that you're going to have my both sides of the equation, you're going to have long growth and you're going to have deposit outflows.
And the result of that is going to be a loan to deposit ratio. That's probably much more reflective of our history than, than the current period is. And so clearly the opportunity for that, it's going to create positive momentum around earnings.
One of the things that Steven alluded to in his remarks, I think that's very important is you know, how well positioned we think we are when the fed does begin to move. I think there's a lot of net interest revenue that will come back into the forefront.
There's a lot of fee revenue in Scott's wealth world that will come back into the forefront, whenever rates began to move a little bit. And you know, there's been a lot of analysis that we've seen that kind of seems to focus on how everybody is modelling an increasing rate environment when that day does come.
And I think from our perspective, we we've been through that. I think the actual results are probably a better indicator of the future than how everybody's models are working, because there's so many different assumptions that go into that.
And so we would, we would ask the community investment community really focused on who performed well, the last time there was an increasing rate cycle, and I think you'll find that we performed exceptionally well and have pinup earnings that will show up once rates began to move.
Okay. That's all I have for now. Thanks for answering my questions.
Our next question is from Brady Gailey with KBW. Please proceed with your question.
Hey, thank you. Good morning guys. So we've talked about, or you guys have talked about CNI utilization rates being still pretty low. Can you just tell us, what that percentage is in the quarter? And then what a more normalized level would be?
Core CNI was below 50%. And if you look at kind of the history in that, in that segment, something closer to 55 to 60%, and even that's a little bit misleading because you're, you're a lot of our core CNI is barring based, driven with accounts receivable and inventory.
So those borrowing basis, those commitment levels can increase in decrease depending upon inventory and receivable levels, which you know, so it's not a perfect apples to apples because I think you'll see those commitments increase as well once not just utilization increase, but the commitments will organically increase, once kind of a more normal economic environment exists.
So I think there's a lot of organic opportunity. I'm not downplaying the customer acquisition process cause we're very focused on that, but I think there's a lot of built up loan growth that will show up on the balance sheet once the, the national economy kind of looks normal again.
All right. And then on the buyback you know, it's great to see some buybacks this quarter and the stock is cheaper today and then kind of where you guys bought it back in the second quarter should, so it, should we expect a step up in the buyback as you guys potentially get a little more aggressive when you have excess capital, the stock is cheap, you know, should we expect more buy backs going forward?
Yeah, we'll be active. I don't know if we'll end up spending the $40 or $45 million that we did, like we did this quarter, but I, we ha we do have the capacity. We stay opportunistic with it, Scott and I work together on a daily basis to figure out what we're going to do. And I think we'll be active as we were in the second quarter.
Okay. And then finally for me, we haven't talked about any creatable yield levels from CoBiz in the last couple of quarters, is that down to a pretty small amount that it's, you're not even worth mentioning or what's the CoBiz accredit able yield level? Now-a-days?
Yeah. So in the first quarter of 2021, it was $4.50 million and this quarter it was $3.8 million and we have about $38 million remaining of accredit able yield that will come in, over the course of couple of years, I would say.
Okay. All right. Great. Thank you guys.
All right. Next question is from Gary Tenner with D.A. Davidson. Please proceed with your question.
Thanks. Good morning. Wanted to kind of revisit the discussion about the loan growth outlook, .it might be my interpretation of your comments on what's in the deck kind of suggests that the outlook for the back half of the year, maybe a bit more modest than you'd previously expressed it is, is that a fair interpretation from what we're hearing today?
I don't think so. I mean, I think, what we're trying to communicate is that seeing stability and even some modest growth from, in some of the months into quarter inside of seeing I was a real positive for us and the total loan growth headwind was really driven by kind of specific factors inside of energy, you where they are have a higher level of cash flow than what they would have anticipated, probably when they were setting their budgets and plans and, and higher level capital markets activity within our commercial real estate portfolio.
It's hard to predict, when an energy customer's going to begin to drill and, and you know, quit paying down debt or when borrowers will not use the third party or the public non-recourse financing markets.
I think absent those headwinds, I think you would have began to see some, some real positive growth there. We're seeing good new customer acquisition inside of energy today. And we were continuing to originate a good pace inside of our commercial real estate area.
Healthcare shoot -- showed a good long growth this quarter. And so I think that, that, it's just hard to, to tell you with great certainty, what quarter is going to show the loan growth, but the underlying activity that you would expect to see, so that that would, that would make you think it's certainly close.
We're seeing, and I'm optimistic. We're going to see that, but, I don't, I can't tell you that it's going to be the third or the fourth quarter or, or July. It certainly seems like we're awfully close. And the biggest thing to me was the real core stability in those CNI balances.
And in fact, we were up a little bit in may down a little bit in June but, but very stable there, which, which we, we saw as a real positive going into the end of the quarter.
Great. Thank you. And then just on, on the capital front, or you talked about the buy back a few minutes ago, just in terms of kind of the target capital ratios. Can you just remind us kind of where we're you would like to optimize Q1?
Well, like where they are today at that roughly 12% or a little bit lower. I don't have any kind of idea that it's going to move lower than that. I think we have sufficient capital continue to pay a competitive dividend to be in the market.
As I mentioned earlier on actively in the market on buyback and we'll have, I think plenty of capital that will build to support loan growth that comes back. So I don't see a pull down in the, in the capital ratios. I think they stay relatively level.
And our next question is from Matt Olney with Stephens. Please proceed with your question.
Thanks. Good morning guys. I want to circle back on the PPP. I think you've mentioned the PPP fees in 2Q were similar to the one Q levels. What's the dollar amount of this?
I can't find that in my notes from, well, the first I'm sorry, the first quarter PPP fees, $11.2 million. And in the second quarter it was $11.1 million.
The interest that we recorded net interest revenue on the PPP dollars was $2.4 million in the first quarter and about $1.7 million in the second quarter. So you'll, continue to see that taper, obviously as those balances are forgiven or pay out of the force of their.
And Steven what's the remaining dollar amount of those fees to be recognized?
I think there's $27 million remaining.
Okay. Thank you. And then I guess switching over to the, the mortgage side, I guess in Q2 cubits impacted by both volume and gain on sale margin headwinds, do you think we're at a bottom here in 2Q or do you think we could continue to believe lower from here?
Well, you know, there's seasonality embedded in mortgage. And so I think, you know, a third quarter tends to be a good quarter, second quarter, third quarter tend to be your better quarters there. And I think we'll have a better quarter in the third quarter. I think, you know four quarter would be different depending on the rate environment.
And there's, there's a seasonality that moves against you a little bit in the fourth quarter there, but I think is relative to second quarter, I would expect third quarter to be similar or better. And, and frankly, a little bit better based on kind of what we're seeing early in the quarter and believe will transpire there obviously rates make a big difference there, but we've seen some backup there and rates with which will help.
We've seen some changes around the adverse fee that the agencies were charging should help. I mean, there's some, some things that are creating a bit of a modest tailwind for the third quarter, in addition to some positive seasonality impacts that will happen there as well.
And I think the press release mentioned that the, the realized G&A margin was around $2 75, which was obviously higher than you know, the $1 55. Yeah. Are you trying to signal, this is more of a longer term or more of an intermediate term level. We should think about it for a forecast?
The gain on sale margin is awfully influenced by, you know, what the pipeline looks like and, and whether you're building the pipeline or whether it's net over net declining. And so I think, you know, I think what we are signalling the broader is that margins last year and early this year were much wider than what is typical for the industry. I think the everybody was managing the pipeline.
If you will, in a manner to widen the margins, I think you're seeing margins coming down as your rates began to go up and, and, you know, that's what we're signalling is that margins are not where they were pre pandemic but that they are moving in that direction.
Okay. Thank you.
And our next question is from Jeremy Shaw with Wells Fargo, please proceed with your question.
Hi, good morning. This is Timor Brazil, filling in for Jeremy. Maybe starting on assets sensitivity, if I remember correctly during the last cycle BOK employed hedges to remain somewhat asset neutral. Is that a similar environment or similar strategy? That's going to be employed in the future right now each cycle where that being added liquidity in the first term how you can call around how you're positioning the bank outside new environment?
I think as Stacy said, we did -- we were asset sensitive coming out of the last cycle and we don't really see any reason to believe would be much different. Our modelling is hard to compare to other banks, but we think we're kind of middle of the pack frankly and you'll see some numbers when we come out with our 10-Q. I don't know exactly where they will land, but I think will be somewhere around 5% asset sensitive and that's on our calculation and our model.
I think in the last cycle we actually outperformed that little bit, but I'm not predicting that will happen, but I don’t see any reason to believe that it will be a lot different than it was coming out over the last near zero rate environment.
There is an opportunity to even outperform our strong performance last time when rates went up because I think this is more inherent liquidity in the system today and so the morning Arun liquidity in the system today and so the banks overall are not going to feel as compelled to move rates up as quickly once the fed starts to move our short-term rates and so I think that will allow the industry overall to lag deposit rates perhaps even more than they did in the last time that rates went up.
So I continue to focus on actual results because there is a near-term period where you guys can go back and look at how did banks actually perform the last time rates went up and I think that's a better indicator of the future then everybody's varied assumptions around deposit modelling and so I think that's what I would certainly continue to point to.
That's helpful. And then if I just have one more follow-up on the loan growth commentary, looking specifically at your energy customer and the confidence that balances could start heading up in the back end of the year. I guess just given how much liquidity borrowers have as well and the fact that energy customer are still paying down debt and refinancing, I guess what gives you confidence that when the capital budgets are established later this year that borrowers are going to choose to lever up and borrow to drive that growth rather than digging into their own pockets at least the initial period?
Well I think they are savvy financial people, a modest amount of leverage can enhance the return of their capital investment and so that's been the case for a long time and so I think that I believe that we'll begin to see them. You look out from the hedging curve, it's backward dated but you can still hedge above $60 for sure out almost three years and so I think you're going to see folks begin to look at hey, I can walk in my cash flow. I know what's going to cost me to drill and I know how much of that money gets back in that first three years because I can hedge at that level.
I am very optimistic and our energy team is exceptionally strong. There's not a bank in the US that I would trade our team for and we're seeing lots of opportunity there and we're going to get our disproportionate share because we remain very committed to the space and it's core that who we are. A big part of the economic development of our footprint state in Colorado, Texas and Oklahoma where we have every expectation to grow energy in the latter half of this year and into next year.
Okay. And just finally for me a more of a modelling question, but looking at trading security balances period end versus average, average balance was a couple million higher in period end. Can you just talk of the dynamic there and is that something where balances are higher during the entire quarter and then dip down towards the end and how should we expect that to impact NII in the coming quarter?
Yes so, yes we allow those trading balances to be on average little bit higher during the quarter. We did that intentionally to take advantage of the market and allow Scott and the traders in that group to generate some revenue. I don't think you see those average balances go up really any higher than that. I think they're around $7.5 billion and we're comfortable with that level, but we always look at the market. We look at the opportunities. We look at the balance sheet and we decide how much capital we want to allocate towards businesses.
This particular quarter, we allowed a little bit more terms of the balance sheet that that group could use and reap the benefit of that and so we'll evaluate that every quarter, but I don’t see it going too much higher on average than the $7.5 billion.
As Steven mentioned, we finished just under $8 billion. So about $7.8 and that versus a $7.5 billion previous quarter and it's moderated cents. So I think that's a level that we feel pretty good about. I would vote for that to increase as we move forward.
But I think the big takeaway from that for us is we had really strong quarter there and we believe we can sustain that in the third quarter, that as we think about the product mix and the customers that we've added, we think that that's the level that we can sustain into the third quarter and there was some seasonality in the fourth quarter that will impact that, but certainly we think we can sustain that level of revenue into the third quarter.
And our next question is from Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Steven, a question for you on how you manage to think about the provision, talking about migrating the pandemic reserve levels. Is that are you flagging one CECIL as the benchmark for us? Is there something else going on there?
Yeah I think that's right. In that 120 to 125 range was pretty much day one CECIL that's kind of pre-pandemic level. So yes , we're using those two terms in the same light. I think we migrate that direction. So long as the economy continues to improve, we're very comfortable with our credit quality continues to get better. All of the metrics internally from potential problem loans, nonaccruals, criticized, all those areas continue to decline. Charge-offs are right at the lower end of historical levels and don't really see any change in all of that.
So and if you get loan growth added to the mix, then I do think we migrate the percentage downward. I think we're at 1.66 on a combined reserve when you exclude PPP and that migrates I don't know how long that it takes. We'll just have to see but year, year and a half, who knows we'll migrate that direction out we believe.
You got my next question, so I appreciate that, that's it's open ended, but I guess another one, we talked about a lot about lines of business in terms of growth. Any differences geographically in terms of what you're seeing on in terms of optimism or the opening is maybe the long-term for you geography, but any differences that you're seeing?
No, not that apparently. I think that the same dynamic that exists in a Kansas City or similar to what is in Dallas, when you think about just our geographic footprint overall, well we've got a great footprint for long-term economic growth. You think about Texas and Colorado and Arizona, we're awfully well-positioned in those states that are going to have disproportionate economic growth we think over the next 10 years, but in terms of the near-term, there's nothing different that we see in the market themselves.
Okay. Stacy competitive environment in energy, has that changed at all, people really pull back, are you seeing new entrants come back in?
You're asking a lot of new entrants at this point. All the discussion about loan growth and everybody's speaking that, I think at some point you're going to have some folks relook at that and come back in, but clearly we're seeing good opportunity for us to lead deals. We think about energy from a lending perspective, but just probably not another segment that we fuller revenue suite that in energy where we've seen our investment banking dollars go up or syndication revenue go up or hedging revenue go up, the portfolio -- our customer portfolio is the best hedged that I've ever seen in my career here and they're doing a lot of that business with us.
And so from a full business perspective, that's been and continues to be a wonderful business for us. We're not seeing some of the folks who have to come back, you may, but clearly we're seeing opportunities and we're being rewarded for consistency in the space.
One last one, I hate to ask it, but I am going to ask this respectfully, but how do you guys answer ESG question? I know there is a lot of subjectivity to it, but how do you think through that for [indiscernible] you're seeing through it?
There is a couple of things. Most of the ESG analysis that happens today, it's kind of at the corporate level. So what are we doing from an environment, what is BOKF doing from an environment perspective? Not necessary what your customers are doing and that is where ESG is today for the most part, but certainly as it evolves, there will be more in terms of what your customers are doing, but as we think about ESG in our relationship [indiscernible] you think about a couple of different ways.
Number one, we exist in large respect to provide capital to help those in our state do well. So you think about where our footprint is, energy is a big part of that in Colorado Texas and Oklahoma, but one of the most expensive taxes on people in lower income brackets is energy and so an inexpensive source of energy that exist with oil and natural gas is clearly a positive and if you’ve been and I've been if you’ve been on rigs with folks who work in the Permian or some of the areas, they hunt and fish on those same plans that they're drilling on. They care deeply about the environment that they're drilling on and so this will evolve.
I think that a lot of the technology that we think about with respect to energy will also impact carbon-based energy. So weather it's methane capture, technology or things like that, I think that we're a long way away from peak carbon demand if you will to propel the domestic economy and there is a place for that and we're happy to provide capital to those who produce that for our country.
And we've reached the end of our question-and-answer session. I'll now turn the call over to Steven Nell for closing remarks.
Okay. Thanks everyone again for joining us. If you have a further questions, please call me at 918-595-3030 or you can email us at ir@bokf.com. Everyone have a great day, thank you.
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.