Q2 2021 BOK Financial Corp Earnings Call
Okay.
Greetings and welcome to the B O K Financial Corporation second quarter 2000, Twenty's on earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to your host Steven now Chief Financial Officer should be OK Financial Corporation.
Yeah.
Good morning, and thanks for joining us today, our CEO, Steve Bradshaw will provide opening comments and Stacy times, 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 or Martin on 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 B O K S Dot com.
We refer you to the disclaimers on slide 2 regarding our forward looking statements we make during this call on.
Now I'll 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 eclipsed $160 million on net income for the first time in the history of our company.
On slide for second quarter net income was a record $166.4 million for $2.40 per diluted share that represents growth in net income of nearly 14% from last quarter on 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 for 5% from last quarter. The contribution from our wealth management team continues to be a differentiator for us offsetting narrowing margins on housing inventory constraints that.
And our mortgage company this quarter net.
Net interest revenue stabilize as a similar amount of triple B 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.
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 triple P 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 refinancing long term markets.
That said, we saw stable loan balances in our core C&I book Stacy is going to cover that momentarily.
We 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 and our wealth management business were also up they were up 5% in this quarter I'll provide additional perspective on our results before starting the Q&A session, but now Stacy kinds will review the loan portfolio and our credit metrics in more detail I'll, just now I'll 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 continued to see borrowers on some specialty lending areas continued to reduce leverage.
That said certain areas of portfolio saw increasing pipelines and real growth that outpaced pay downs.
Energy balances continued to decline, albeit at a slower pace than in previous periods.
Both oil and natural gas prices have moved up swiftly in 2021 lead.
Leading to improved credit metrics and providing material cash flow for energy companies.
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 short organically increased 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.
For middle market C&I today, it's at the lowest level of utilization as 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 same Nebraska on our portfolio begin to stabilize as 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 continued to see borrowers useless low rate environment to refinance for the long term fixed rate non recourse market 2020 was 1 of the real estate lowest years for portfolio turnover as many of the permanent markets were cautious.
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.
Triple B 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 Triple B before 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 on 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 multi year highs and strong economic forecast for GDP growth in 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 triple P loans in the second quarter.
Essentially flat from last quarters, $14.5 million net charge offs average 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 result for the first half.
<unk> of this year.
The combined allowance for loan losses totaled $336 million or $1, 66% of outstanding loans at quarter end, excluding the triple P loans.
Non accruing loans decreased $36.4 million from last quarter, primarily due to a reduction in non accrual energy loans potential problem.
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.
This includes the fee income lines that investors see on our corporate income statement brokerage and trading and fiduciary and asset management.
As well as net interest income from loans and deposits on 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 continued 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 strong growth 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, and 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 were for 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.
Portion of our 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 market, increasing customer account balances sales activity remained strong in this space as well.
Our relationship driven business model is perfectly in touch with our clients' needs today as we continue to see institutions and individuals retain the increased depreciation for financial adviser gain through the last 18 months.
Transaction card revenue was up $2.5 million or 11%. This quarter. This is largely due to the 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 for 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 rate in particular were a factor this quarter as that moves the mix between refi and purchase funding from 65% refi last quarter to 48% refi this quarter.
Industry wide housing inventory constraints and their 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 pre pandemic 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 that 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 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 for $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'll now turn over the call with Steve and to highlight our net interest margin dynamics in the important balance sheet items for the quarter, Steve. 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 help support net interest income.
Net interest margin was 260% down just 2 basis points from the previous quarter. The reinvestment of cash flows from our available for sales securities portfolio was stable this quarter due to prepayments for 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.
Simple P 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 and then interest margin, but do not expect any positive migration there until rates begin to rise again with.
With sooner than anticipated rate hikes now potentially on the horizon. It is 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 on 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.
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 earn 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 loans serviced 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 on.
Also of note last quarter, we made a $4 million charitable contribution <unk> 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 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 remained 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 493000 shares on an average price of $88.8 for per share in the open market.
1 additional thing of note is that we plan to redeem our $150 million subordinated debt issue in June.
2016.
Using existing capital given the strength of our capital levels, we have decided not to reissued 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 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 positioned for positive growth in the second half of the year, if our demand exists.
We expect the overall loan loss reserve as a percentage of loan balances.
10 years to migrate towards pre pandemic levels.
Net interest margin may continue to move down slightly largely from continued downward repricing in our available for sales 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 margins 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 non personnel costs with growth budgeted at low single digits in 2021, our focus will be holding the line a 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 <unk> 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 hindered the company's future and as witnessed by our credit outcomes in the outside.
<unk> 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 on 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.
Pretends well for the future.
With growth returning to our health care book this quarter and pipelines for returning to pre pandemic levels in other areas of C&I, we're 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 is quarter. Our company will also play a role on 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'll be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad.
Estimation tone will indicate your line is in the question queue you.
You May press star 2 if you'd like to remove your question for me Keith for participants using speaker equipment. It may be necessary to pick up on your handset before pressing the star keys..1 for me. Please while we poll for questions.
Our first question is from Peter Winter with Wedbush Securities. Please proceed with your question.
Thanks.
Yeah.
I wanted to ask about the loan growth.
Obviously, some trends are improving.
It seems like there's still some pressure on loan growth and.
Im just wondering if you could talk about the third quarter because it does seem like average loans could still be.
<unk>.
On.
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 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 youre going to see that core C&I began to grow as we get into the latter half of this year.
We saw 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 really reached the point, where those balances are real stable at this point, we're seeing months, where we pop up and have some for some for 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 we've 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've budgeted at.
As we go into the fall.
That's typically when the E&P companies do their capital budgeting I think at these price levels youre going to see more drilling activity, which will create more demand on the energy side.
Commercial real estate for a little bit of a different story and 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 paydowns that created some lumpiness.
And when we looked at looked at the quarter on how 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 is very close to being behind us, but when you talk to the core C&I guys about their pipelines about what theyre seeing about the borrow optimism I can't remember a time when borrowers have been more optimistic about economic growth and thats 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 on our corporate are 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 create organic demand as well.
No.
When the market provides the opportunity to grow I think we're going to get our share our disproportionate share because of how well positioned we are.
Got it.
Really helpful.
Brian helpful.
If I could switch gears about the securities portfolio.
Steve in 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 in it.
If you are planning on replacing maturing securities.
We are Peter.
We will still have around <unk>.
700 million I would say in cash flows off of the <unk> 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.
For the quarter. It was down I think $190 million I think that was just timing really theres no particular.
Our 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.
$1 billion range and they have this portfolio.
And what are new yields going on it today.
125.
Roughly okay.
Okay. Thanks.
Thanks for taking my questions sure.
Our next question is from Jennifer Denver with Truest. Please proceed with your question.
Hey, this is Brandon King on for Jennifer demo and good morning.
Hi, good morning.
Yes, so I wanted to touch on deposit growth average average balances were up.
In the quarter, but on a period end basis.
On the down a little bit and I wanted to know what was going on there are there any seasonal factors to note of and what are your expectations for deposit growth with the second half of the year.
Sure I think 1 of 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. Thank you for you start to look at period end numbers.
Who have benefited from stimulus funds that have come in over the course of the first half of the year. Those will go back half those are going back out we've had some energy customers, who have 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 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 helpful thing for all of US I think the Indus.
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.
<unk> experienced in our career and so the timing of when that begins to flow back out into investment or to.
Consumers pockets.
The stimulus continues to impact for them as well.
It 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 began 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 hasnt happened. The system has grown on and we certainly grown them as well we're not we're not.
Paying above the market rate for sure to be able to do that is just kind of organic relationship driven deposits there.
Okay. Okay.
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. What are you hopeful that loan growth outpaced deposit growth.
Later this year on into next year is that the thought.
I think if you look at our company, 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 <unk>.
Economy, moving again that youre going to have on both sides of the equation youre going to have loan growth and youre going to have deposit outflows. In the result of that is going to be a loan to deposit ratio thats, 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.
<unk>.
1 of the things that Steve 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 theres a lot of.
Net interest revenue that will come back into the forefront theres 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 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 in I think from our perspective.
<unk> been through that I think the actual results are probably a better indicator of the future then how everybody's models are working because theres. So many different assumptions that go into that and so we would we would act.
Community investment community really focus on who performed well the last time, there was an increasing rate cycle and I think youll find that we performed exceptionally well and have pinup earnings that will show up on once rates begin to move.
Okay.
That's all I have for now thanks for taking my questions.
Our next question is from Brady Gailey with <unk>. Please proceed with your question.
Hey, Thank you good morning, guys. Good morning, good morning.
So we've talked about you guys have talked about C&I utilization rate.
He is still pretty low can you just tell us what that percentage is in the quarter and then what a more normalized level would be.
From a core C&I was below 50% and if you look at cash.
And have a history in that in that segment.
Something closer to 55% to 60% and even that's a little bit misleading because youre a lot of our core C&I is borrowing base driven with accounts receivable and inventory. So those borrowing basis those commitment levels can increase and decrease depending up on inventory and receivable levels, which.
So it's not a perfect apples to apples, because I think youll see those commitments increase as well once not just utilization increase but the commitments will organically increase.
Once it's kind of a more normal economic environment exists. So I think there's.
There's a lot of organic opportunity.
Downplaying the customer acquisition process, because we're very focused on that but I think there's a lot of it.
<unk> built up loan growth that will show up on the balance sheet once.
The national economy kind of it looks normal again.
Alright.
And then on the buyback.
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 quarters for sure. So should we expect a step up in the buyback as you guys to potentially get a little more aggressive I mean, you have excess capital. The stock is cheap should we expect more buybacks going forward.
Yes, we will be active.
I don't know if it will end up spending the 40 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 worked together on a daily basis to figure out what we're going to do.
I think we will be active as we were in the second quarter.
Okay and then finally for me we haven't talked about.
On the Accretable yield levels from <unk>.
In the last couple of quarters is that down to a pretty small amount that youre not would be worth mentioning are what what's the cougars accretable yield level nowadays.
Yes, so in the first quarter of 2021, it was for $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, so I would say.
Okay, Alright, great. Thank you guys.
Our next question is from Gary Tenner with D. A Davidson. Please proceed with your question.
Thanks, Good morning.
Just wanted to kind of revisit the discussion about the loan growth outlook.
Limitation of your comments on whats in the debt kind of suggests that the outlook for the back half of the year, maybe a bit more modest than you'd previously expressed is that a fair interpretation for what we're hearing today.
I don't think so I mean I think.
What we're trying to communicate is that theyre seeing stability and even some modest growth from <unk>.
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.
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 and energy customers going to begin to drill in and quick.
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 begun to see some some real positive.
There, we're seeing good new customer acquisition inside of energy today, and we're continuing to originate at a good pace inside of our commercial real estate area healthcare showed good loan growth this quarter.
And so I think 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 make you think its 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 for the fourth quarter.
Or or in July.
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.
But very stable, there, which we saw as a real positive going into the end of the quarter.
Great. Thank you and then just.
On the capital front, you talked about the buyback a few minutes ago.
Ms of kind of the target capital ratios can you just remind us kind of where.
You'd like to optimize the CET 1.
Well I like where they are today that debt, roughly 12% or a little bit lower.
Have any kind of.
Idea there is going to move lower than that I think we have sufficient capital to continue to pay a competitive dividend to be in the market as I mentioned earlier on actively in the market on buyback.
And we will 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.
Great. Thank you.
And our next question is from Matt Olney with Stephens. Please proceed with your question.
Thanks, Good morning, guys I wanted to circle back on the PPP I think you'd mentioned the PPP fees in <unk> were similar to the <unk> levels.
The dollar amount of this I can't find it in my notes from the first.
I'm sorry, the first quarter.
PPP fees were $11.2 million and in the second quarter 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.
Yes.
Continue to see that taper, obviously as those balances are forgiven or.
Pay out over the course of their.
And Stephen what's the remaining dollar amount of those fees to be recognized.
<unk> $27 million remaining.
Okay. Thank you and then I guess switching over to the mortgage side I guess on <unk>, we saw impacted by both volume and gain on sale margin headwinds.
We are at a bottom here in <unk> or do you think we could continue to bleed lower from here.
We are.
There is 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 than the third quarter I think.
Fourth quarter would be different depending on the rate environment and there is there is seasonality that moving against you a little bit in the fourth quarter, there, but I think as <unk>.
Relative to second quarter.
We 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 we 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.
On the adverse fee.
Agencies, we're charging should help I mean, theres. 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 realized gain on sales 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 for intermediate term level, we should think about for our forecast.
The gain on sale margin is awfully influenced by what the pipeline looks like.
Whether you are building a pipeline or whether its its 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 I think.
Everybody was managing the pipeline if you will in a manner that widen the margins I think youre 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 pre pandemic.
But they are moving in that direction.
Yeah.
Okay. Thank you.
And our next question is from Jared Shaw with Wells Fargo. Please proceed with your question.
Hi, Good morning, This is kumar, Brazil filling in for Jared.
Maybe just starting on asset sensitivity, if I remember correctly during the last cycle <unk> remain somewhat asset neutral.
A similar environment, our simple strategy, that's going to be employed in the future rising rate cycle.
<unk> is being added liquidity in the system or I guess, if you could just maybe for that some color on how you are positioning the bank heading into winter months 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.
But we think we're kind of middle of the pack frankly.
And Youll see some numbers when we come out with our 10-Q, I don't know exactly where they will land, but I think we'll be somewhere around 5% asset sensitive and thats on.
Our calculation in our model.
I think in the last cycle, we actually outperformed 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 on the last near zero rate environment.
And in fact, there is an opportunity to even outperform our strong performance last time when rates went up because I think theres 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 once the fed starts to move on a short term rates and so I think that will while the industry or.
Raul 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.
On a period, where you guys can go back and look at how did banks actually performed the last time rates went up and I think thats a better indicator of the future then 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 1 more follow up on the loan growth commentary looking specifically on energy customers.
And small.
Balances could start heading up on the back end of the year I guess, just given how much liquidity are borrowers have as well on 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.
Net growth rather than digging into their own pockets.
For the initial flow.
Well I think I think they are.
Savi financial people, you know a modest amount of leverage can enhance the return on their capital investment and so that's been the case for a long time and so I think that will I believe that we will begin to see that when you look at on the hedging curve is backward dated but you can still hedged above.
$60 for sure.
3 years, and so I think youre going to see folks began to look at hey, I can walk 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 on that first 3 years, because they can hedge at that level.
I'm very optimistic in our energy team is exceptionally strong and theres not a bank in the U S that I would I would I would trade our team for and we're seeing lots of opportunities there and we're going to 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.
<unk> development of our footprint States in Colorado, Texas, and Oklahoma, and we have every expectation to grow energy on the latter half of this year on into next year.
Okay and then just finally for me a more of a modeling question, but looking at trading securities balances period on versus average average balance was.
Couple of million higher than interior on can you just thoughts on the dynamics, there and that's something where balances are higher.
The entirety of the quarter in debt down towards the end on how should we expect that for.
And on.
Got it.
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 Youll see those average balances go up really any higher than that I think they are 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 reap the benefit of that and so we'll evaluate that every quarter, but I don't see it go into much higher on average than that $7.5 billion and this is.
Scott.
As Steven mentioned.
We finished.
Just under 8 billion about 7.8 and that's versus 7 and a half previous quarter.
And it's kind of moderated.
So I think thats 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 we can sustain that in the third quarter.
That is.
As we as we think about the product mix and the customers that we've added we think that thats a level that we can sustain into the third quarter now there is 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.
Okay, great. Thank you for the question.
And our next question is from John Armstrong with RBC capital markets. Please proceed with your question.
Thanks, Good morning, guys.
Hi.
Hey.
Steve question for you.
How would you want us to think about the provision.
Talking about.
Maybe migrating to pre pandemic reserve levels is that you're flagging day, 1 on seasonal as the benchmark for US was there something else going on there.
Yes, I think thats right I mean on that $1.20 to 125 range was pretty much day, 1 seasonal that's kind of pre pandemic level. So I guess, we're using those 2 terms and then 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 non accruals classified criticized all of those areas continue to decline charge offs or 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 than I do think we migrate the percentage downward.
I think we're at $1.66 on a combined reserve when you exclude PPP.
That migrates I don't know how long.
Debt. It takes we will just have to see but year year and a half who knows we'll migrate that direction we believe.
You got my next question so I appreciate that.
On that it's open ended but.
Yeah.
I guess another 1.
We've talked a lot about lines of business in terms of growth for any differences geographically in terms of what youre seeing on in terms of optimism or reopening is maybe the wrong term for your geography, but any any differences that you're seeing now not bitter apparent I think that the same dynamics that exist in their cash.
Kansas City or similar to what is in Dallas.
If you think about just our geographic footprint overall.
We've got a great footprint for long term economic growth do you think about Texas, and Colorado and Arizona.
Absolutely 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 is nothing different that we see.
And in the market for themselves.
Yes.
Okay.
Stacy competitive environment and energy has that changed at all.
<unk> really pulled back or are you seeing new entrants come back in.
You were asking a lot of new entrants at this point I mean.
All the discussion about loan growth and everybody's.
For seeking that I mean, I think at some point youre going to have some folks re look at that and come back on but clearly were seeing good opportunity for us to lead deals we think about energy for them.
Lending perspective, but there's probably not another segment that we have.
Fuller revenue suite than in energy, where we have seen our investment banking dollars go up our syndication revenue go up our hedging revenue go up the portfolio our customer portfolio is the best hedge that I've ever seen in my career here and Theyre doing a lot of that business with us and so from a from a flow business.
This perspective, that's been on 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.
1 last 1 I hate to ask it but then I guess just respectfully, but how do you guys answer the ESG question I know, there's a loans subjectivity to it but how do you how do you think through that for.
For the pure record how should we think through it.
I think there's a couple of things you know most of the ESG analysis, what happens today is kind of at the corporate level.
So what are we doing from an environment what is <unk> doing from an environment 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 R. R.
Relationship to energy do you think about a couple of different ways number 1 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 1 of the most expensive taxes on people and lower income.
<unk> is energy and so on.
Inexpensive source of energy that exist with oil and natural gas is clearly a positive and if you've been in I have been if you've been on rigs with folks who work in the Permian or some of those areas.
And fish on those same plans that they are drilling on and they care deeply about the environment that debt.
They are drilling on and so this will evolve I think that debt.
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 debt and we're a long way away from.
Peak carbon demand, if you will to propel the domestic economy.
<unk>.
There is a place for that and we're happy to provide capital to those who have helped produce that for our country.
Okay. Thanks Casey.
And we have reached the end of on our question and answer session. I will now turn the call over to Stephen now for closing remarks.
Okay. Thanks, everyone again for joining us if you have any further questions. Please call me at $985.90, 530, 30, or you can E mail us at IR at <unk> Dot com.
Everyone have a great day. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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