BOK Financial Corp (BOKF) 2021 Q2 法說會逐字稿

Greetings. Welcome to the BOK Financial Corporation Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will 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 2 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 preprovision earnings by 10% on a linked-quarter basis and eclipsed $160 million in net income for the first time in the history of our company.

Shown on Slide 4, 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 and 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 impacted our mortgage company this quarter.

Net interest revenue stabilized as a similar amount of PPP forgiveness was recognized again this quarter as it was in Q1. Additionally, deposit cost reduction outpaced rate compression on loan yields and in our available-for-sale portfolio. The increasingly favorable economic outlook combined 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 charitable contribution we made in the first quarter that did not reoccur in the second quarter.

Turning to Slide 5. Total loans are down $1.1 billion for the quarter, but PPP 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 or refinance in long-term markets.

That said, we saw stable loan balances in our core C&I book. Stacy is going to cover that momentarily, which reaffirm 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've seen 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 metrics in more detail. I'll just now turn the call over to Stacy.

Thanks, Steve. Turning to Slide 7. Period-end loans in our core loan portfolio were $20.3 billion, down just under 2% for the quarter as we continue to see borrowers in some specialty lending areas continue to reduce leverage. That said, certain areas of the portfolio saw increasing pipelines and real growth that outpaced paydown.

Energy 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 energy companies. U.S. 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 that we'll begin to see more drilling activity if 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 segment this quarter. Health care 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 standpoint in this portfolio as it remains a leader for us.

Core middle market C&I today is at the lowest level of utilization at any measured 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 into next year. Commercial real estate balances contracted 5.7% this quarter. We continue to see borrowers use this low rate environment to refinance to the long-term fixed rate nonrecourse market. 2020 was one of the real estate's lowest years for portfolio turnover as many of the permanent markets were cautious. As those have opened back up, we see some catch-up activity that's inherently a sign of a healthy portfolio but can create some quarter-to-quarter volatility.

PPP loan balance forgiveness was 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 of PPP before it slows 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 needs for working capital. We are hopeful the stability in our C&I book this quarter signals we are turning the corner on loan demand in our core markets.

Turning to Slide 8. 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 nonperforming assets and potential 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 and labor markets led us to release $35 million in reserves this quarter.

Net charge-offs were $15.4 million or 30 basis points annualized, excluding PPP 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 4 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.

The combined allowance for loan losses totaled $336 million or 1.66% of outstanding loans at quarter end, excluding the PPP loans. Nonaccruing loans decreased $36.4 million from last quarter, primarily due to a reduction in nonaccruing 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 will continue to set our reserve at the appropriate level as we always have. We are 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 9. 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 lines that investors see in our corporate income statement, brokerage and trading and fiduciary and asset management as well as net interest income 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 bordering on $2 billion grew 3% linked quarter and 12% compared to the same quarter a year ago. The deposit portfolio ending the quarter at $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 focused 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 tax fees that are charged in the second quarter, but we still saw strong growth in assets under management. When we have seen the benefit of favorable equity markets increasing customer account balances, sales activity remains strong in this space as well. Our relationship-driven business model is perfectly in touch with the clients' needs today as we continue to see institutions and individuals retain the increased depreciation for financial advice gained through the last 18 months.

Transaction card revenue was up $2.5 million or 11% this quarter. This is largely due to stimulus measures and the broader reopening of the U.S. 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 centered 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 a factor this quarter as that moved the mix between refi and purchase funding from 65% refi last quarter to 48% refi this quarter. Industry-wide housing inventory constraints and the recent preferred stock purchase agreement, delivery limits on second homes and investment properties imposed on Fannie and Freddie, both impacted the quarter. In addition to volume, the increased competition for inventory impacted gain on sale margins, which were closer to prepandemic levels this quarter.

We expected mortgage revenues to dip this year due to the 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 nonbank competitors as the market shifts to more of a home purchase financing. While this quarter's contribution was down from the record levels we saw throughout the past year, the rate pressure did ease as the quarter unfolded. We still expect this business to be a significant contributor to our diversified fee revenue strategy going forward.

Although not included on Slide 9, I will also note 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 from 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'll now turn over the call to Steven to highlight about 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. Noninterest deposits grew $877 million this quarter, which also helped support net interest income.

Net interest margin was 2.60%, down just 2 basis points from the previous quarter. The reinvestment of cash flows from our available-for-sale securities portfolio was stable this quarter due to prepayments from commercial mortgage-backed securities. However, the expectation is that there will be continued slight pressure due to the reinvestment of this low rate environment. Additionally, we had continued success driving interest-bearing deposit costs down 3 basis points to 14 basis points on average for the quarter. PPP loans supported net interest margin by 2 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 margin since early 2020 is beginning to wane.

We think we could be nearing a bottom in net 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 quartile of 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% linked quarter. Personnel expense was essentially flat this quarter. A regular compensation decrease of $1.1 million was mostly offset by an increase in incentive compensation expense. All told, we are very happy with our ability to hold the personnel cost efficiencies earned through the pandemic and expect to do so going forward. Nonpersonnel 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 a 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 through BOKF 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 30, largely due to the significant decline in PPP 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 of 12%, well ahead of our internal operating minimum. With such strong capital levels, we once again were active with share repurchase, opportunistically 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 will save the company approximately $8 million annually on a go-forward basis.

On Slide 14, I'll leave you with some general outlook for the near and midterm. We believe net activity and loan growth will continue to improve with our company positioned 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 prepandemic levels. Net interest margin may continue to move down slightly largely from continued downward repricing in our available-for-sale securities portfolio. We believe we are close to the bottom in our interest-bearing deposit pricing at 14 basis points. That said, we believe the significant pressure on net interest margin seen in past quarters is largely behind us now.

Our diverse portfolio of fee revenue streams should continue to provide some mitigating impact to overall revenue pressure being felt in our spread businesses. We expect most fee revenue categories to grow modestly for the remainder of 2021. We will continue our disciplined approach to controlling personnel and nonpersonnel costs, with growth budgeted at low single digits in 2021. Our focus will be holding the line on manageable expenses without sacrificing multiyear 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 foregoing 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 and diversified way.

While this quarter was once again about the contribution from our fee-based businesses, the vastly improving outlook for growth in our footprint as we emerge 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 portends well for the future. With growth returning to our health care book this quarter and pipelines returning to prepandemic levels in other areas of C&I, we are 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 that's core to our 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?

(Operator Instructions) Our first question is from Peter Winter with Wedbush Securities.

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 because 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 the story for us as you think about the second quarter and then going into the third quarter was really stability in our core C&I book. We've had growth in our wealth lending platform 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 paydowns in energy and commercial real estate, I think you're going to see that core C&I begin to grow as we get into the latter half of this year. We actually saw it in May, we're hoping we could string 2 months together and then have something really fun to talk about this quarter, but we backed up a little bit in C&I in the month of June.

And so -- but we've really reached the point where those balances are real stable at this point. We're seeing months where we pop up and have some poor growth in the C&I.

Energy paydowns, it's hard to know when we've reached the bottom there. I think we're awfully close. But we've worked through a lot of the issues there from a credit perspective that have created some of the paydown activity. Those borrowers are flush 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 E&P 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 is a little bit of a different story. We've had real consistent loan generation there even through the downturn. But 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 nonrecourse side of things have done that. And so it's created some paydowns that created some lumpiness. And when we looked at the quarter and how it was unfolding, I mean, really, the story for us was the C&I balances were very stable. It was really the headwind from energy and commercial real estate, which we think if it's not behind us, it's very close to being behind us.

But when you talk to the core C&I guys about their pipelines, about what they're seeing, about the borrower optimism, I can't remember a time when borrowers have 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 C&I portfolio. We mentioned in the prepared remarks about utilization rates. Utilization rates in our corporate are the lowest we've seen in a long, long time. So as we begin to get borrower need for capital, that's going to have an opportunity to grow and create organic demand as well. So when the market provides the opportunity to grow, I think we're going to get our share, disproportionate share because of how well positioned we are.

Got it. That's really helpful. 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 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 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 billion to $13 billion kind of range in the AFS portfolio.

And what are new yields going on at today?

1.25%, roughly.

Our next question is from Jennifer Demba with Truist.

This is Brandon King on for Jennifer Demba. Yes, I wanted to touch on deposit growth. I saw average balances were up in the quarter, but on a period-end 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 entire industry is seeing 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-end numbers, you get a lot of fluctuation between deposit balances and things that happen 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've done things where we've had an influx of cash for a period of time. It goes back out to -- at some place other than the balance sheet.

And so really, the focus for us is kind of the average balances because that really is more representative of kind of the core growth there. I think if we knew the answer to what deposit balances were going to do in 2022, that would be a helpful thing for all of us. I think the industry is going to struggle with that as we begin 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 move out of the banking system. That hasn't happened. The system has grown them. We've certainly grown them as well. We're not paying above the 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 on how you just answered my previous question. But are you hopeful that loan growth could outpace deposit growth later this year and into next year? Is that the thought?

I think if you look at our company, I mean, we've typically been kind of closer to 85% loan-to-deposit ratio over time. And I think what happens when you get the economy moving again, that you're going to have -- on both sides of the equation, you're going to have loan 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 the current period is. And so clearly, the opportunity for that is 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 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 begin to move a little bit. And there's been a lot of analysis that we've seen that kind of seems to focus on, how everybody is modeling an increasing rate environment when that day does come.

And I think from our perspective, 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 are so many different assumptions that go into that. And so we would ask the community -- investment community to really focus 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 pent-up earnings that will show up once rates begin to move.

Our next question is from Brady Gailey with KBW.

We've talked about -- you guys have talked about C&I 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?

The core C&I was below 50%. And if you look at kind of the history in that segment, something closer to 55% to 60%. And even that's a little bit misleading because you're -- a lot of our core C&I is borrowing base driven with accounts receivable and inventory. So those borrowing bases, those commitment levels can increase and decrease depending upon inventory and receivable levels, which -- 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 because 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 national economy kind of looks normal again.

All right. And then on the buyback. It was great to see some buybacks this quarter. The stock is cheaper today than kind of where you guys bought it back in the second quarter. So 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, should we expect more buybacks going forward?

Yes, we'll be active. I don't know if we'll end up spending the $40 million or $45 million that we did -- like we did this quarter. But 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 accretable yield levels from CoBiz in the last couple of quarters. Is that down to a pretty small amount that it's not even worth mentioning? Or what's the CoBiz accretable yield level nowadays?

Yes. So in the first quarter of 2021, it was $4.5 million, and this quarter, it was $3.8 million, and we have about $38 million remaining of accretable yield that will come in over the course of a couple of years, I would say.

Our next question is from Gary Tenner with D.A. Davidson.

Just wanted to kind of revisit the discussion about the loan growth outlook. My interpretation of your comments on what's in the deck kind of suggests that the outlook for the back half of the year may be a bit more modest than you'd previously expressed. 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 in some of the months intra-quarter inside of C&I was a real positive for us. And the total loan growth headwind was really driven by kind of specific factors inside of energy, 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 higher level of capital markets activity within our commercial real estate portfolio. It's hard to predict when an energy customer is going to begin to drill and quit paying down debt or when borrowers will not use the third party or the public nonrecourse financing markets. I think absent those headwinds, I think you would have begun to see some real positive growth there.

We're seeing good new customer acquisition inside of energy today. And we're continuing to originate a good pace inside of our commercial real estate area. Health care showed good loan growth this quarter. And so I think that it's just hard 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 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 quarter or the fourth quarter or July. It certainly seems like we're awfully close. And the biggest thing to me was the real core stability in those C&I balances. And in fact, we were up a little bit in May, down a little bit in June, but very stable there, which we saw as a real positive going into the end of the quarter.

Great. And then just on the capital front. You talked about the buyback a few minutes ago. Just in terms of kind of the target capital ratios, can you just remind us kind of where you would like to optimize the CET1?

Well, I 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 we'll build to support loan growth that comes back. So I don't see a pull down in the capital ratios. I think they stay relatively level.

And our next question is from Matt Olney with Stephens.

I want to circle back on the PPP. I think you mentioned the PPP fees in 2Q were similar to the 1Q 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 were $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 over the course of their term.

And Steven, what's the remaining dollar amount of those fees to be recognized?

I think there's $27 million remaining.

Okay. And then, I guess, switching over to the mortgage side. I guess in 2Q, we saw it 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 bleed lower from here?

Well, there's seasonality embedded in mortgage. And so I think third quarter tends to be a good quarter. Second quarter and third quarter tend to be your better quarters there. And I think we'll have a better quarter in the third quarter. I think the fourth quarter would be different depending on the rate environment, and there's seasonality that moves against you a little bit in the fourth quarter there. But I think as relative to second quarter, I would expect third quarter to be similar or better.

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 in rates, which will help. We've seen some changes around the adverse fee that the agencies were charging should help. I mean there's 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 realized gain on sale margin was around 2.75%, which was obviously higher than the 1.55%. Are you trying to signal this is more of a longer term or more of an intermediate-term level we should think about for our forecast?

The gain on sale margin is awfully influenced by what the pipeline looks like and whether you're building the pipeline or whether it's net over net declining. And so I think what we are signaling the broader is that margins last year and early this year were much wider than what is typical for the industry. And I think everybody was managing the pipeline, if you will, in a manner that widened the margins. I think you're seeing margins coming down as rates began to go up, and that's what we're signaling is that margins are not where they were prepandemic, but that they are moving in that direction.

And our next question is from Jared Shaw with Wells Fargo.

This is Timur Braziler filling in for Jared. Maybe starting on asset 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 rising rate cycle? Would the kicker just be added liquidity in the system? Or I guess if you could just maybe provide some color on how you're positioning the bank heading into the next rising rate environment?

Well, I mean, I think as Stacy said, we did -- we were asset sensitive in the -- coming out of the last cycle. And we don't really see any reason to believe we'd be much different. I mean our modeling 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'll land, but I think we'll 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 a 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 of the last near 0 rate environment.

And in fact, there's an opportunity to even outperform our strong performance last time when rates went up because I think there's more inherent 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 on 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's 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 than everybody's varied assumptions around deposit modeling. And so I think that's what I would certainly continue to point people to.

Okay. That's helpful. And then if I can just have one more follow-up on the loan growth commentary. Looking specifically at your energy customers and the confidence that balances could start heading up in the back end of the year. I guess, just given how much liquidity your borrowers have as well and the fact that energy customers 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, or at least through the initial period?

Well, I think they're 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 we'll -- I believe that we'll begin to see that. I mean you look out on the hedging curve, it's backward dated, but you can still hedge above $60 for sure, out almost 3 years.

And so I think you're going to see folks begin to look at, hey, I can lock in my cash flow. I know what it's going to cost me to drill. And I know how much of that I'm going to get back in that first 3 years because I can hedge at that level. I'm very optimistic.

Our energy team is exceptionally strong. There's not a bank in the U.S. that I would trade our team for. And we are seeing lots of opportunities there. And we're going to get our disproportionate share because we remain very committed to this space. And it's core to who we are. It's a big part of the economic development of our footprint states in Colorado, Texas and Oklahoma. And we have every expectation to grow energy in the latter half of this year and into next year.

Okay. And then just finally for me, more of a modeling question. But looking at trading securities balances period end versus average, average balance was a couple of billion higher than period end. Can you just talk to the dynamics there? And is that something where balances are higher during the entire year to 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 allowed those trading balances to be, on average, a 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 in terms of the balance sheet that that group could use and reaped 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 that $7.5 billion.

Yes. And this is Scott. So as Steven mentioned, we finished just under $8 billion, so about $7.8 billion, and that's versus a $7.5 billion previous quarter. And it's kind of moderated since. So I think that's a level that we feel pretty good about. I wouldn't look for that to increase as we move forward.

But I think the big takeaway from that for us is we had a really strong quarter there, and we believe that 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 a level that we can sustain into the third quarter. Now there's 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.

Steven, a question for you, just on how you want us to think about the provision, talking about migrating to prepandemic reserve levels. Is that -- are you flagging day 1 CECL as the benchmark for us? Is there something else going on there?

Yes, I think that's right. I mean in that 1.20% to 1.25% range was pretty much day 1 CECL, that's kind of prepandemic level. So I guess we're using those 2 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, classified 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 it, 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 1 year, 1.5 years, who knows. We'll migrate that direction, we believe.

You got my next question, so I appreciate that, that it's open ended. But I guess another one. We've talked a lot about lines of business in terms of growth. Any differences geographically in terms of what you're seeing in terms of optimism? Reopening is maybe the wrong term for your geography. But any differences that you're seeing?

No, not that are apparent. And I think that the same dynamics that exist in Kansas City are similar to what is in Dallas. I mean if you think about just our geographic footprint overall, well, we've got a great footprint for long-term economic growth. If you think about Texas and Colorado and Arizona, awfully well positioned in those states that are going to have disproportionate economic growth, we think, over the next 10 years. So -- but in terms of the near term, there's nothing different that we see in the markets themselves.

Okay. Stacy, competitive environment in energy, has that changed at all? People really pulled back, are you seeing new entrants come back in?

We're not seeing a lot of new entrants at this point. I mean, all the discussion about loan growth and everybody's seeking that. I mean, 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 there's probably not another segment that we have a fuller revenue suite than in energy where we've seen our investment banking dollars go up, our syndication revenue go up, our hedging revenue go up. I mean, 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 left come back yet. You may, but clearly, we're seeing opportunities, and we're being rewarded for our consistency in this space.

One last one. I hate to ask it, but -- and I ask this respectfully, but -- how do you guys answer the ESG question. I know there's a lot of subjectivity to it. But how do you think through that? And for the part of record, how should we think through it?

Sure. I think there's a couple of things. Most of the ESG analysis that happens today is kind of at the corporate level. So what are we doing from an environment -- what is BOKF doing from an environmental perspective, not necessarily what are your customers doing, and that is where ESG is today for the most part. But certainly, as it evolves, there'll be more in terms of what your customers are doing.

But as we think about ESG and our relationship to energy, you think about it 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 exists with oil and natural gas is clearly a positive. And if you've been -- and I have been, if you've been on rigs with folks who work in the Permian or some of those areas, they hunt and fish on those same lands 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 whether 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's a place for that, and we're happy to provide capital to those who help produce that for our country.

And we have 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 any further questions, please call me at (918) 595-3030 or you can e-mail 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.