BOK Financial Corp (BOKF) 2014 Q2 法說會逐字稿

Good day everyone, and welcome to the BOK Financial Corporation's Second Quarter 2014 Financial Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please also note today's event is being recorded.

At this time, I would like to turn the presentation over to Joe Crivelli, Investor Relations for BOK Financial Corporation. Please proceed.

Good morning everyone and thank you for joining us to discuss BOK Financial Corporation's second quarter 2014 financial results. Today, we'll hear remarks about the quarter and outlook from Steve Bradshaw, CEO; Scott Grauer, EVP, Wealth Management and Steven Nell, CFO. Dan Ellinor, COO, is unable to join today.

Before we begin, I would like to remind everyone that during this conference call, management will make certain forward-looking statements about its outlook for 2014 and beyond that involve risks and uncertainties. Forward-looking statements are generally preceded by words such as believes, plans, intends, expects, anticipates or similar expressions. Forward-looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ from expectations include but are not limited to those factors set forth in our filings with the SEC. BOK Financial is making these statements as of July 30, 2014 and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call.

I will now turn the call over to Steve Bradshaw.

Thanks, Joe. Good morning everyone and thanks for joining us. I trust everyone have seen our earnings release for the second quarter which was issued earlier this morning.

We saw improved execution across the business in the second quarter. Net income for the second quarter was $75.9 million or $1.10 per share, roughly flat with the first quarter. But keep in mind that the first quarter results reflected a one-time $17.2 million pre-tax reversal of various compensation accruals. So, the sequential improvement is actually quite good. We saw strength in key markets, growth opportunities comes to fruition and contributions from recently acquired entities. Most importantly, when we go head to head with competitors for a new customer, we believe we are winning and gaining share.

Loan growth remained strong and in fact accelerated some in the second quarter. Period-end loans grew at a double-digit annualized rate and average loans for the quarter grew at just under 10%. This quarter, traditional C&I customers contributed the bulk of the growth in our energy lending business, which has been flat for several quarters, was up 3.2% or nearly 13% on an annualized basis. That's the strongest growth quarter for energy in nearly two years.

Fiduciary assets were $32.7 billion at quarter end, compared to $31.3 billion at March 31 and $28.3 billion from a year ago. In the second quarter, we closed our acquisition of MBM Advisors in Houston, adding $1.3 billion to that total with the balance coming from organic growth. Our fee-generating businesses all delivered outstanding growth in Q2. Brokerage and trading, which have been muted for the past several quarters, grew 32% on a sequential basis. As we mentioned in our first quarter call, the investment banking business, which is a key component of this revenue line, had a strong pipeline headed into Q2 and ended up having a record quarter. Scott Grauer, who leads our Wealth Management business is on the call today and will provide additional color here in few moments.

Transaction card revenue was up 8.2% sequentially and 5.2% year-over-year. As a seasonal business, the year-over-year comp is really more relevant here. TransFund continues to win new business and move up-market and closed a large new client in the second quarter. That business looks to be poised for continued nice year-over-year revenue growth for the balance of 2014.

Fiduciary and asset management revenue was up 15% sequentially and 19% year-over-year. A full quarter's contribution from GTRUST, as well as two months contribution from the MBM acquisition made a modest contribution to the increase, with the balance coming from organic growth. Again, Scott will provide some additional color here in a moment.

Mortgage banking likewise was a bright spot for us this quarter with revenues of $29.3 million, up 28.4% sequentially. Some of this gain was a result of the typical seasonality in the spring buying season, especially in our footprint, where home ownership is still affordable and desirable. Some of the revenue increase was also due to the continued build-out of our correspondent network in our Home Direct channel. This is our last quarter of a tough year-over-year comparison, as Q2 2013 included two months of revenue from the previous mortgage refi boom, which ended in late May of 2013 when long-term rate spiked. For the balance of the year, the year-over-year comp should be quite favorable.

Total operating expenses were $214.7 million. That's up from $185.1 million in Q1. Keep in mind, first quarter was impacted by the compensation-related accrual reversals I mentioned earlier. In addition, incremental Q2 expenses due to the acquisitions of both GTRUST and MBM Advisors totaled $1.8 million. So the actual sequential increase in expenses was closer to $11 million. Part of this was due to variable expenses tied to higher revenue run rates, and part of it due to consulting and data processing costs related to regulatory compliance and risk management projects. Steven Nell will discuss the expense puts and takes and provide additional details on our forecast here in a moment.

Turning to the loan book, we continue to have very nice sequential growth in the quarter. Commercial loans were up 3.9% or 15.7% annualized, with growth primarily driven by energy, services, and wholesale/retail. While we are continuing to see a lot of paydown activity as property sets change hands, we also had a nice quarter from a competitive standpoint with several big energy client wins in the quarter.

The healthcare business, which paced our growth for several quarters now, had a flat quarter, largely due to a number of large deals where the owner either sold properties or moved to the permanent market upon stabilization, with many of these occurring right at the end of the quarter. Nevertheless, our pipeline of production activity remains strong and we're optimistic about this business for the balance of the year.

Our commercial real estate lending portfolio grew just under 1% in the second quarter, or 3.6% annualized, still healthy, just not the pace we saw last quarter. Multi-family posted 2.2% sequential loan growth and Industrial was the strongest performer with 12.1% sequential growth.

Adding it all up, sequential period-in loan growth was 2.7% or just over 10% annualized. The residential mortgage portfolio was down slightly quarter-on-quarter and total consumer loans were up 5% due to increased activity in our private banking segments.

As we noted in the last quarter's call, the Oklahoma pipeline was very strong headed into Q2, and we were able to capitalize on that with the Oklahoma market driving the majority of our growth in the second quarter. In fact, of our $349 million of loan growth, $317 million was from Oklahoma. And I think this slide gives a nice picture of the diversity of our footprint and the benefit we get from our exposure to some of the best growth markets in the country. If you remember last quarter, our best performing markets were Texas, Colorado and Arizona. In Q2, two of those markets were actually down, but Oklahoma and New Mexico have picked up the pace.

Loan yields, net of allowance, were down 4 basis points, reflecting continued competitive pressure, combined with mix shift in the consumer portfolio toward private banking clients who generally qualify for lower rates. Scott Grauer will now give you a bit more detail on the Wealth Management business. Scott?

Thanks, Steve. I appreciate the opportunity to give more background on our Wealth Management business to investors. Wealth Management is a discipline that is deeply rooted in our culture here at BOK Financial. We first entered the trust business in 1918 to serve the oil men of the day and their families who were plentiful in Oklahoma at that time. We've grown significantly over that last 100-year period, and today we have more than $61 billion in assets under management or custody. That includes $32.7 billion in fiduciary assets. We trade more than $1 trillion of securities annually, and have over 800 employees within the business.

Our sources of revenue are nicely diversified, as indicated by the chart at the bottom of slide 14. We provide a wide range of Wealth Management offerings, as demonstrated by the chart on slide 15. We also have a number of highly differentiated niche businesses within the Group. Our revenue is split between two line items on the P&L. The first being brokerage and trading revenue. This captures four main operations; fixed income securities trading, our derivatives business, which includes primarily foreign currency and energy hedging for customers; retail and institutional brokerage; and finally investment banking.

After a slow start to the year in the first quarter, we saw strength in these businesses in the second quarter, with the shining star being the investment banking group. We have expertise in municipal tax exempt deals, in particular in Texas school bond issues and we closed a number of those transactions in the second quarter. Within the corporate investment banking business, we also have expertise in energy deals. And likewise, had a second quarter that was very strong. Most encouragingly, the pipeline in investment banking is very robust. So we feel good about this business, as we enter the balance of the year.

The trading business improved in the second quarter, as volatility in the market spurred additional activity within our clients. Brokerage fees grew along with the pickup in the market during the second quarter. The one area that's still lagging a bit is derivative fees and commissions. The sequential increase was largely driven by recoveries from Lehman and MF Global bankruptcies. But in general, hedging is fairly muted, especially with our energy customers, because for much of 2014 to-date, the futures market for energy prices has been lower than the current spot market price.

The Trust business, likewise, had a great second quarter with 14.9% sequential growth and 19.1% year-over-year growth. The Trust business is strong across all of our geographies and business lines. And the recent announcement that BNY Mellon is selling its corporate trust business has begun to fuel additional new business activity for BOK Financial. The GTRUST and the MBM acquisitions also contributed just under $2 million of revenue in the second quarter.

I hope that this gives you a good picture of the diversity and strength of our Wealth Management business. The bottom line is that this is a differentiated area of expertise for BOK Financial. And right now we're driving good results and the balance of the year looks strong.

With that I'll pass the call to Steven Nell, who will cover the financial results in greater detail. Steven?

Thanks Scott, and good morning everyone. I'll highlight a few items from the 2014 second quarter financial results and then describe how we see the remainder of the year.

As Steve noted, we earned $75.9 million in the quarter or a $1.10 per share, which is essentially flat from the first quarter of 2014. But normalizing out some of the unusual items in the first quarter, we had double-digit sequential growth in net income.

We're executing our plan to rebalance the earning assets in 2014 and the healthy loan growth, as Steve just discussed, is helping to enhance net interest revenue and net interest margin, while we plan for a rising rate environment in 2015.

We're seeing strong revenue growth from the fee generating businesses and record revenue from a number of them. We did see expense growth in the second quarter, largely from the regulatory compliance and risk management initiatives that we've discussed, but the revenue growth is helping to offset those headwinds. All told, a very good quarter for the Bank.

Net interest revenue was $166.1 million in the quarter, compared to $162.6 million in the first quarter. Loan growth was a big contributor here, as well as one additional day in the second quarter versus the first quarter. Overall, net interest margin likewise expanded due to the improving earning asset mix.

Fees and commission were $164.1 million in the quarter, up 16.5% compared to $140.9 million in the first quarter. As Steve noted, several lines of business delivered record revenues in the second quarter.

From an expense standpoint, we've discussed the investment we're making in risk management and compliance in our previous conference call, and this continued in the second quarter. Personnel expense was $123.7 million, in line with our expectations for the quarter. The GTRUST and MBM acquisitions added approximately $1.1 million to personnel expense. The increase in business promotion was largely tied to seasonality and the higher level of revenues recorded in the second quarter, which impacted variable expenses. Professional fees and services were elevated due to some outsourcing activities in the mortgage business, as well as the compliance-related activity.

Net occupancy and equipment was impacted by the build-out of our risk management and compliance functions, as well as growth in our Wealth Management line of business. The $1.9 million increase in data processing and communication was primarily related to higher sales levels in our TransFund business. Mortgage banking cost increased $4.3 million sequentially during the quarter. Approximately $1.3 million of this increase was due to a first quarter release of reserves related to an acquired mortgage loan servicing portfolio. So the normalized sequential increase is closer to $3 million, primarily due to an increase in reserves related to our growing loan servicing portfolio.

Turning to the balance sheet, the securities portfolio was $9.7 billion at June 30, compared to $9.9 billion at March 31. The amortized cost of this portfolio decreased $305 million from March 31. Our current expectation is to reduce the portfolio in total by roughly $1.2 billion over the 12 months of 2014. Deposits continued to increase. Average deposits were up $262 million over the previous quarter and period-end deposits increased by $182 million.

The Corporation remains extremely well capitalized. The Company and its subsidiary bank exceeded the regulatory definition of well capitalized at June 30, 2014 with a Tier 1 capital ratio of 13.63%, total capital ratio of 15.38% and leverage ratio of 10.26%. BOK Financial's Tier 1 common equity ratio, based on existing Basel I standards, was 13.46% as of June 30, 2014. And based on our interpretation of the new capital rules, our estimated Tier 1 common equity ratio would be approximately 12.35%, nearly 535 basis points above the 7% regulatory threshold.

Credit quality continues to improve from its already pristine levels. The allowance for credit losses was 1.42% of period-end loans and represented 197% of non-accrual loans. Non-performing assets, excluding those guaranteed by government agencies, were 1.09% of period-end loans and repossessed assets. And we recorded net recoveries for the third consecutive quarter.

With the revenue growth, our efficiency ratio improved this quarter to 63.6%, which on a normalized basis is the best it's been in over a year. We paid a regular quarterly cash dividend of $0.40 per share or $28 million in the second quarter and the Board of Directors approved a quarterly dividend of $0.40 per share payable on or about August 29, 2014 to shareholders of record on August 15, 2014.

Okay, now let me spend a little time talking about how we see the balance of the year unfolding. Through six months of the year, period-end annualized loan growth is 10%, at the top of our expected range. Accordingly, with the strength we've seen in our pipelines across the business, we are now calling for 2014 loan growth in the low-double digits.

Net interest margin has stabilized, especially with the shift in earning assets to loans from securities. That said, the competitive market being what it is, we wouldn't be surprised to see 1 basis point or 2 basis points of net interest margin pressure from the loan portfolio.

We expect continued reduction of the securities portfolio, offset by growth in the loan portfolio, and as noted, expect to reduce the securities portfolio by $1.2 billion over the full year. Net of all these factors, we expect net interest revenue to be relatively flat for the balance of the year.

The fee generating businesses all accelerated significantly in the second quarter. It may be difficult to replicate the outstanding sequential growth that we saw in the second quarter, but as noted earlier, our line of business managers feel pretty confident about the balance of the year. Note that the mortgage business benefited from seasonality in the second quarter. It probably won't grow off of this revenue level on a sequential basis. We'll just see favorable year-over-year comparables in the third quarter and the fourth quarter.

Second quarter level of expenses should approximate the levels of the third and fourth quarter, with perhaps a bit more expense build around risk management and compliance. And lastly, we expect continued loan growth to reduce the likelihood of any release of loan loss reserves. In fact, we will likely start building reserves again in 2015.

With that, we'll give you a chance to ask any questions you may have. So, operator, can you please compile the question-and-answer queue.

(Operator Instructions) Jennifer Demba, SunTrust Robinson Humphrey.

It sounds like you're coming close to the expense run rate you're going to have for the compliance and risk management investment. Just wondering if you could give us a little color on what inning you see yourself in, in this kind of cycle?

Yes, I think you're right. We have -- this is Steven Nell -- we are fully staffed, we believe, in the risk management and compliance activities at the moment. We are building some systems to support various components of risk management and compliance and not all of those systems are fully functional, in the sense that they're not being amortized at this point. So you'll pick up a little bit of that in the future. And then there could be some additional professional fees out in the future, but I would say the majority of our build-out of risk management and compliance is complete.

And does that all include AML/BSA compliance, Steven? We've seen a lot of companies hit with specific quarters regarding that topic recently?

Some of our expenditures, yes, are in the BSA/AML systems, as well as personnel and then other components of risk management, as well as audit, we've built out some capability in our audit functions as well.

Michael Rose, Raymond James.

Just wanted to get a little color on this quarter's energy growth that was pretty strong, but a lot of your peers we saw elevated paydown activity. So I just wanted to see maybe if you can talk to the level of paydowns, this quarter what your pipeline looks like in that business as we move into the second half and if you've hired any [vendors] in that area?

Yes, this is Steve Bradshaw. I wouldn't attributed to any new hires. We were pleased to see growth there. It's been a while I think, maybe six to eight quarters since we've seen growth on the energy side. For us we just saw some maturation in some of our relationships, where they've been acquiring property sets and acquiring teams to be able to increase our exploration activities and that calls the funding increase. And from our perspective we see more of that ahead of us, but it's a choppy segment, there is still significant money coming in from the capital markets and other sources. So I don't think we would suggest that we've necessarily turned the corner or that we would see sustained growth there, but we were encouraged by what we saw in the second quarter.

And then just moving to the securities portfolio, you guys said you're going to fund loan growth over the next couple for quarters with further drawdown of the securities portfolio. How should we think about the securities portfolio as we move into '15 and are you doing some of this to enhance your asset sensitivity?

We are -- as we stated, we're going to pull the securities portfolio down a total of $1.2 billion for 2014, the calendar year 2014. We'll likely continue that level of pull-down in part of '15. We'll have to wait and see what the outlook for rates look like, but we are doing that intentionally to better position ourselves from an interest rate risk perspective going into what we think will be a higher rate environment in -- sometime in '15. Currently, we are -- you'll see this in the 10-Q, we are just slightly liability-sensitive, about 1.18% on an up [200 shock] and we'll continue to move that more towards a neutral position as we approach 2015.

Ken Zerbe, Morgan Stanley.

I guess first question in terms of the fee income, it looks like this quarter obviously had a lot of very positive things happening in it, between the investment -- the investment banking and the mortgage banking. I mean it seems that your guidance is saying that, yes, everything was really, really good this quarter and it will continue to get better and I'm just trying to make sure that we can accurately or [properly] count on things like investment banking holding at these levels and getting better. Mortgage banking, which I think you said stays at these levels. Seems like there should be a little more volatility and I guess I'm surprised that it continues to go up. How much confidence you guys have that fees actually rise from second quarter level?

Hi, Ken, this is Steve Bradshaw. Let me handle the mortgage side and then I'll let Scott Grauer talk a little bit about his view of brokerage and trading and investment banking. From a mortgage perspective, this is -- we were able to maintain a lot of our origination capabilities. If you look kind of year-over-year, we were down, I think, 18%, first half of this year versus first half of last year, and it's because we expanded our capabilities in correspondent and also our Home Direct channel. We didn't even have Home Direct a year ago at this point.

So, we've been able to stem the tide, I think, better than most in terms of that production decline year-over-year. Now margins certainly have declined and the mix -- some of that related to the mix, you're not rewarded nearly as well in the correspondent and direct -- in consumer direct market as you are retail origination. But from our standpoint, the pipelines look good. Continuing out through the summer, we would expect some seasonality, we would expect some decline in production, as we kind of head towards the fourth quarter. That would change obviously if we saw a significant decline in mortgage rates and we got below 4% again. But, for us, I think we'll see the ability to maintain production, we may see a little bit of pullback in terms of revenue, just because that production will be more favored towards correspondent, than it will be retail. But I think our goal, as you know, was to build multiple channels inside mortgage, so that we could reduce -- we can't eliminate, but reduce the volatility that comes from that channel. And I think second quarter is probably a pretty good example of that.

Let me let Scott talk a little bit about the IB business and kind of what he thinks going forward. Scott?

Thanks, Steve. Ken, this is Scott. A couple of things that I think I'd note. First of all, when you look at the improvement quarter-to-quarter, we had a relatively slow start on some of those business lines, both the trading and brokerage and investment banking in January. So we really returned more to our anticipated rate of activity in Q2. Our investment banking activity was a solid mix of both energy deals, as well as our municipal activity, primarily in our Texas market, which we see a very good pipeline in that activity. So we are feeling good about that.

In terms of the trading activity, we've seen strong pull-through on both our mortgage TBA activity, with good momentum developing there, as well as the increase in volatility in the market, where we've seen a lot of our institutional clients or financial institutions that have begun to reposition their portfolios, which has created a pickup in activity as well, which is remaining pretty consistent at least at this point.

And then just other question, more theoretically, we heard of the other management teams comment about M&A, how [regulations] are getting much more balanced? I know you guys look at smaller M&A from time to time. Have you guys seen a similar change in regulatory tone or is it just completely different things that you're looking at?

Yes, this is Bradshaw. I don't know that we would suggest that we've seen a real change in the regulatory view. I think from our standpoint, we expect to be successful in M&A and we're actively engaged, especially as we're looking at opportunities throughout our footprint. So, from our standpoint, it's probably a bit of a higher priority for us today than it might have been in the past, but I think we have a lot of strong dialog with our regulators. They understand our strategy there. So we want to make sure that communication is really strong. But I think we're really leading that. I wouldn't suggest that there's been a significant tone change from their perspective.

Matt Olney, Stephens.

I wanted to ask about -- the securities yields moved down modestly. Anything notable behind this upward move?

No, not really. We're not changing the type of securities we're buying. We're sticking to fairly plain vanilla structures in residential mortgage MBS. We're buying some commercial mortgage-backed securities. But we're not in turn, reaching out in terms of duration or anything. Most of our cash flows reinvesting are right around 2%. And so when you compare that to the portfolio yield, it's averaging up just a bit. I think it had about a 2 basis point improvement to our margin for this particular quarter.

On the flip side, the loans, the loan yields were down. They impacted the margin about 2 basis points going the other direction. So kind of canceled each other out. And then the overall mix of the balance sheet, remixing more towards loans, where securities impacted the margin possibly. So you had a nice pick-up in net interest margin of about 4 basis points for the quarter.

And Steven, I guess the forward-looking commentary suggested that the margin could be little bit soft the next quarter due to loan yields. What about as far as the net interest income. It seems like last quarter you talked about that being a little bit flat to down in '14 versus '13, does that still hold true?

I think it does. I mean I feel like flat -- perhaps down just a little, but I really think flat in terms of net interest revenue dollars. We're getting really good solid loan growth. I think we said last quarter, mid to upper single-digit growth. I think we feel comfortable now that we're right at the edge there of double-digit growth and can hopefully sustain that the next couple of quarters and that ought to help maintain a relatively flat net interest revenue dollar amount for the next couple of quarters.

John Moran, Macquarie Capital.

Just a real quick clarification. I want to make sure that I heard correctly, that you guys think that you'd start to build to loan loss reserves in 2015, given the strong growth that you see on the loan side of things?

Perhaps we would. I mean, of course we've had three straight quarters of recoveries, which we know that's not going to -- you're going to be able to sustain that long-term with 10%, roughly, type loan growth moving in for the rest of the year and hopefully that will continue some in 2015. There is going to become a point where we'll need to begin to provide. I don't have any idea when that would be in 2015, but that certainly is something that we'll be looking at when we put our budgets together this fall.

Got it, got it. So yes, I mean, it would make sense that at some point with that kind of growth you're going to have to start putting up provision again, but that reserves could actually be building in terms of percentage of loans or would you expect still some relief in 2015, just given where -- I mean overall levels --

We are at 1.43% loan loss reserve to loans. That's a fairly healthy level comparatively. And I would say that stays fairly stable for the foreseeable future.

Got it. Yes. That's a super healthy level when you put it up against 2 basis points of charge-offs annualized last year and net recoveries through the first half of 2014. Okay, thanks. That's, helpful. The other thing and forgive me if I missed some commentary on this in the prepared remarks, but just if you could comment real quick on behavior in the deposit franchise. I think it looks like the commercial deposits were up a bunch and wealth management and consumer was down. Are you seeing any kind of changes in behavior there and what do you think is sort of driving that?

Well, really on the commercial side that increase is really a continuation of what we've seen for the last year or so, we've had build up in cash from our commercial clients. The consumer and wealth decline, some of that could be seasonality in terms of the tax season and other things. And I think Scott's got a comment perhaps too on that.

Yeah, I think as Steve mentions, there's a little bit of a tax season impact there, but we are beginning to see a little bit of the capitulation in terms of the time that we've had, our balances on the deposit side at historically low rates and a little bit of a spike-up in investor confidence in terms of the performance of the equity markets, which has caused a little bit of a shift there. So I think those two combined are probably what resulted in that. And then we also had a couple of fairly significant liquidity events that we've moved pretty significant relationships into the market gradually.

Brett Rabatin, Sterne, Agee.

I was hoping to get a little color around -- I know you siloed the healthcare business. I was hoping to get maybe a little color or an update on just the initiatives, Steve, you put in place to invigorate to growth and kind of put your stamp on the growth of the franchise going forward?

Sure. To your point, we did create that as a distinct line of business really last fall, and we've been continuing to deploy, in some cases, redeploy our relationship manager staff across the footprint. So we have a bit more of an even coverage now across all of BOKF. I think the healthcare team has -- they've also contributed to some of this deposit growth as well. They've had good success at establishing those relationships, and our loan pipeline is strong and they are optimistic going forward. We had a little bit of a decline quarter versus quarter, but it was really attributable to paydowns right at the end of the quarter, especially in our Texas market, and it's just a recognition of the fact that we had some big relationships. One was an M&A transaction, one was flipping to permanent financing or financing in the permanent market, and a couple of other issues as well.

So, from our standpoint, we weren't concerned or disappointed about the performance between Q2 and Q1, because we can see the pipeline and I think it's working well at this point. We've really developed a lot of internal expertise in healthcare, understand the risks and the underwriting concerns that you have, especially on a state-by-state basis. And I'm pleased really with where we stand today, just kind of nine months into that initiative.

And the other thing I was curious about was, if I got it right, it sounds like you might have some additional pressure on the loan portfolio going forward, and [3.91%] in 2Q. I guess I was curious just to hear how much more pressure you think you might have in that portfolio, originations that much lower than the current portfolio yield, and any of that a mix shift change type issue?

Probably no mix shift change, but it is competitive in the market -- all of our markets on the commercial side. But I think we did see some stabilization there. I don't think the pressure is quite as great as what we saw in some of the previous quarters. If you look back over the past year or so, we've had loan compression, spread compression as little as 6 basis points all the way to 12 basis points, when you go quarter to quarter. And this particular quarter it was about 4 basis points. So, I do think that the pressure is there but I believe it's slowing some. And so -- but I still think the outlook is that you'll see that pressure in the third and fourth quarter, just perhaps not as great of a level.

And I think there was one bit of a mix shift that occurred, in that we saw some pretty strong growth coming out of our private banking group, and typically those are going to be more thinly-priced credits, and -- because of the kind of collateral in that work that you've got behind those borrowers. So, that contributed a little bit to it as well.

Gary Tenner, D.A. Davidson.

My question on healthcare segment was answered. So, I'll just ask a quick question. Steven, I think you'd mentioned as you were going through the expense line items, a more normalized level for mortgage banking cost, but I didn't hear that detail. I wondered if you could just kind of run through that real quickly.

The mortgage banking costs [did] increase about $4.3 million from the previous quarter. $1.3 million of that is, if you recall in the first quarter, we reversed holdback reserves and so that lowered the first quarter expenses $1.3 million compared to this quarter. We did take a pretty hard look at some of the exposure in our servicing area and built a few reserves related to loss mitigation activities or loan modification activities and foreclosure activities. And so, we've built our reserve just slightly in the servicing area, which I think a bit of that would be catch-up reserves from previous quarters.

But I think the other element is we increased the mortgage amortization, the mortgage servicing right. Amortization went up about $1 million to $1.5 million, just because we've got a larger servicing book. So I would say that the majority of that mortgage expenses, at least at the level of revenue continues as it is, will be about that level. That's pretty good run rate, perhaps with maybe a $1 million or so of a buildup of reserves that won't recur.

And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Well, thanks everyone for joining us. If you have any follow-up questions after the call, feel free to give me a call at 918-595-3027 or email me at jcrivelli@bokf.com and will be happy to circle back with you. Thanks for joining and we'll talk to you soon.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.