Logo of jester cap with thought bubble.

Image source: The Motley Fool.

BOK Financial Corp (NASDAQ:BOKF)
Q2 2019 Earnings Call
Jul 24, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the BOK Financial Corporation Second Quarter 2019 Earnings Conference Call. [Operator Instructions]

I would now like to turn the presentation over to Steven Nell, Chief Financial Officer for BOK Financial Corporation. Please proceed.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Good morning, and thanks for joining us. Today we'll hear from Steve Bradshaw, our CEO; Stacy Kymes, Executive Vice President of Corporate Banking, and I'll also provide some remarks about the quarter. Scott Grauer, Executive Vice President of Wealth Management, and Marc Maun, our Chief Credit Officer, have also joined us for the question-and-answer session. PDF of the slide presentation and second quarter press release are available on our website at www.bokf.com. We refer you to disclaimers on Slide 2 as it pertains to forward-looking statements we make during this call.

I'll now turn the call over to Steve Bradshaw.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning. Thanks for joining us to discuss the second quarter 2019 financial results. We are pleased to report another strong quarter for BOK Financial. In fact, we achieved the highest level of quarterly earnings in the history of the Company, both from a net income and an EPS perspective. I'm incredibly proud of the effort of the entire BOK financial team. The power of our diversified business model, as well as our efforts to gain greater efficiencies across the Company really showed themselves this quarter.

As shown on Slide 4, second quarter net income was $137.6 million or $1.93 per diluted share, that's up 24% from the previous quarter and up 20% from the same quarter a year ago. The growth was driven by a number of key factors. Low growth continued its strength this quarter, particularly in our specialty lines of business and commercial real estate. Our focus on our energy and healthcare segments continues to deliver above market loan growth for the Company, while a reload in commercial real estate following the wave of paydowns in the first quarter was also a large contributor. Net interest revenue expanded 3% this quarter, though net interest margin remain flat at 3.3%.

Steven will cover the underlying factors in more detail momentarily. We added $1.2 billion of short duration fixed income mortgage backed securities this quarter to help support net interest income as we expect interest rates to continue to decline in the near term. Fee and commission revenue continued its upward trajectory this quarter, expanding nearly 10%. Our brokerage in trading and mortgage banking revenues were the main contributors on strong mortgage backed securities trading and mortgage loan production volumes, all triggered by lower mortgage interest rates during the quarter.

Our multi-year effort to gain greater efficiencies has held expenses in check, which continues to drive earnings leverage across the Company. Following the integration of CoBiz last quarter, expenses returned to a more normal level this quarter. The credit environment continues to be stable, consistent with our results for last several quarters. Our continued loan growth was the primary driver of our $5 million loan loss provision.

Turning to Slide 5, period-end loans were $22.3 billion, an increase of $497 million for the quarter. We continue to feel optimistic about loan growth for the balance of the year due to the strong commitment growth we've seen over the past several quarters, particularly in energy and healthcare. Assets under management or administration were $81.8 billion, that's up $2.9 billion from the last quarter, benefiting from strength in the equity markets along with strong organic asset gathering success across several of our investment and fiduciary lines of business. And we saw an opportunity to further invest in our company at a favorable price this quarter, as we bought back 250,000 BOKF shares to $80.50 per share in the open market.

I'll provide additional perspective on the results at the conclusion of the prepared remarks. But now I'll turn the call over to Stephen Nell to cover the financial results in more detail. Stephen?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Thanks, Steve. As noted on Slide 7, net interest income for the quarter was $285 million, up 3% from the first quarter. While we've been able to significantly expand an interest revenue due to continued loan growth, the change in course of interest rates has impacted net interest margin. Net interest margin was 3.3% flat from the previous quarter.

Second quarter net interest margin was supported by $3.4 million interest recovery and an increase in discount accretion from CoBiz, up from $7.8 million in the first quarter to $13.4 million this quarter. While these items combined to help margin about 10 basis points total, there were pressure points on net interest margin that combined to fully offset these benefits. First, lower loan yields from variable rate loans priced-off of LIBOR, were a factor this quarter.

Second, we continue to see some exception in deposit pricing from our commercial clients, however, at a decreasing pace. And lastly, as Steve mentioned, we expanded our fixed income mortgage backed securities portfolio by $1.2 billion as a measure to protect for a down interest rate environment. These additional securities will be additive to net interest income, but will have a dilutive effect on the net interest margin calculation, which will be fully realized in the third quarter. While we are working to defend net interest margins, significant interest rate cuts will continue to apply pressure. Omitting the interest recovery and accretion benefits, the yield on average earning assets was 4.31%, a 6 basis point decrease, and the yield on the loan portfolio was 5.09%, down 2 basis points. The yield on the available for sale securities portfolio increased 6 basis points to 2.63%. The overall cost of interest bearing liabilities increased 4 basis points to 1.7%, including a 9 basis point increase in interest bearing deposits to 1.13%.

On Slide 8, fees and commissions were $176.1 million, an increase of nearly 10% for the quarter. The growing trends we mentioned last quarter continue to unfold as declining rates fueled activity in wealth management and mortgage. Lower mortgage interest rates coupled with seasonality, led to a $197 million, a 32% increase in mortgage applications and commitments over the previous quarter. Mortgage revenues were up 18% and gain on sale margins increased 18 basis points. Increased operating leverage in the segment from our rightsizing efforts continues to pay dividends. Brokerage and trading revenue increased over 28% for the quarter, primarily driven by strong mortgage backed security trading results. All other fee revenues increased $2.4 million or 2.2% over the previous quarter, largely due to seasonal factors. I'll also mention that our total economic cost of changes in the fair value of mortgage servicing rights net of economic hedges was $7.3 million. This was due primarily to the combination of continued significant mortgage rate volatility that fell outside our hedge protection.

Turning to Slide 9, we continue to carefully manage expenses to drive operating leverage. Total operating expenses were $277 million, down $10 million from the first quarter, which, as you'll remember, contained $12.7 million of CoBiz integration costs. We are proud of the efforts we've made on the expense front, which has brought us through our 60% efficiency ratio target with a second quarter efficiency ratio of 59.5%. Omitting integration expenses from the first quarter, personnel expenses decreased $5.6 million this quarter as we're now realizing the full benefits of cost efficiencies from the CoBiz acquisition. Non-personnel expenses was up $8.3 million, omitting integration expenses from the first quarter. Business promotion expense increased $2.9 million, primarily due to increased seasonal advertisement spending, as well as some remaining advertising and expenses related to marketing our BOK Financial brand in the Colorado and Arizona markets.

Insurance expense was up $1.9 million, largely due to adjustments to deposit insurance expense related to CoBiz integration. Increases in professional fee and services, $1.7 million and mortgage banking costs of $1.6 million were partially offset by a decrease in net losses and expenses repossessed assets of $1.4 million. In addition, a $1 million charitable donation was made to the BOKF Foundation in the second quarter.

Slide 10 has our current outlook for 2019. We expect mid-single digit loan-growth with continued strength and Energy, Healthcare and General C&I lending. Loan loss provision levels will be influenced by loan growth, but will likely run at similar dollar levels when compared to the past few quarters. Interest rate decreases forecasted by the market will continue to put downward pressure on net interest margin. Revenue from fee generating businesses, particularly brokerage and trading and mortgage, could continue to benefit from lower interest rates as we've seen this quarter. We'll attempt to maintain an efficiency ratio at or below 60% as long as the environment remains favorable for revenue.

Our capital strategy going forward will support organic growth and modest opportunistic share repurchases. We expect to improve capital ratios over time. And lastly, a word on CECL. Our CECL implementation team continues to develop the models, processes and controls necessary to implement the new credit standard by January 1, 2020. Currently, we do not expect a material change in our existing allowance for credit losses, primarily due to our loan portfolios relatively short average life. However, we will need to recognize an allowance for expected credit losses on approximately $2.5 billion of acquired loans. Although those loans were marked to fair value at the acquisition date, which included an estimate of expected credit losses. CECL requires duplicate [Phonetic] recognition of expected losses in the allowance.

CECL also requires us to recognize expected credit losses in approximately $3.3 billion, of residential mortgage loans that we transferred in the mortgage backed securities. These loans are guaranteed by the Veterans Administration and we have some exposure to credit losses that exceed the guaranteed amount. As a reminder, initial recognition of CECL will run directly through retained earnings and not the income statement in 2020. While we currently do not expect CECL to significantly affect the Company, the ultimate impact will depend on the composition of loan portfolio as well as economic conditions and forecast at the date of adoption.

Stacy Kymes will now review the loan portfolio in more detail. I'll turn the call over to Stacy.

Stacy C. Kymes -- Executive Vice President, Corporate Banking

Thanks, Steven. As you can see on Slide 12, total loans were $22.3 billion up $497 million for the quarter. Looking at the table, you can see the strength continues to be broad based. Total C&I was up 2.7% for the quarter. Our expertise in energy continues to be the driving factor and was responsible for the bulk of C&I growth this quarter. Energy was up $216 million or 5.8% for the quarter. The lower than normal churn trend in the energy portfolio we've discussed continues, as companies continue to be slower to divest or sell in the current market environment.

Our healthcare channel was up marginally this quarter, but it's not a cause for concern. We had strong production in this base, higher levels of refinancing into the permanent market in the second quarter impacted overall growth rates. We continue our focus in the senior housing space, which is not only a great business from a growth perspective, given current demographic trends, it is also an excellent credit niche given our strong relationships with high quality operators. The commercial real estate portfolio was up 2.4% for the quarter with strong commitment volume following paydowns experienced in the first quarter.

When we continue our discipline around concentration limits in the space, we have a proven ability to reload commitments in this portfolio. More broadly, core loan growth outlook for the back half of 2019 remains optimistic as long as the larger economy continues to show strength.

On slide 14, you can see that credit quality remains strong as it did in the first quarter. Non-accruals were up $31 million during the quarter, primarily due to three energy loans in the late stages of resolution. These are isolated situations and do not point to anything systemic in the overall portfolio. Net charge-off moved to 14 basis points, the lowest level we've seen over the last five quarters. Potential problem loans, which are defined as performing loans that based on known information, caused management concern as to the borrower's ability continue to perform, totaled $161 million at June 30, down from $169 million at March 31.

Based on an evaluation of all credit factors, including overall loan portfolio growth, changes in nonaccruing and potential problem loans and net charge-offs, the Company determined that a $5 million provision for credit losses was appropriate for the second quarter of 2019. We remain appropriately reserved with a combined allowance of 0.92% of period-end loans and leases.

I'll now turn the call back over to Steve Bradshaw for closing commentary.

Steven G. Bradshaw -- President and Chief Executive Officer

Thank you, Stacy. Again, it was another record quarter for BOK Financial. I think this quarter really showcase not only our diversified business capabilities, but also our ability to execute well across all lines of business and markets. Many of our fee businesses performed just as we would expect in a falling rate market as we added $15.6 million in revenue on a linked quarter basis. We remain convinced that our unique business mix and geographic focus will position us for continued strength, no matter what economic environment is on the horizon.

At the halfway point of 2019, we remain optimistic about the outlook for the remainder of the year. We continue to deliver strong loan growth. Fee revenues are accelerating and our expense discipline is driving leverage and has moved us through our 60% efficiency ratio target and credit quality remain strong. In closing, I also mentioned that the overall momentum we are building in Colorado and Arizona on the back of the final systems integration of CoBiz last quarter is growing. We are now very focused on realizing the synergies and bringing our two companies together and are seeing traction in several areas of the organization. It's obvious that the expense efficiencies have been achieved, but ultimately we will realize our return for the investment we've made in the Colorado and Arizona markets, by growing our share and serving our customers with a highly competitive array of products, services and advice across the market.

With that, we will take your questions. Operator?

Questions and Answers:

Operator

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. Good morning.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Good morning.

Kenneth Zerbe -- Morgan Stanley -- Analyst

I was hoping you would start-off just in terms to the CECL commentary, that you had on Slide 10. I think you're on the first banks to at least even address it in a kind of printed form. But are you guys able to quantify what level of reserve you might need on that $5.8 billion of combined CoBiz and guaranteed loans?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

I think we'll do that in the third quarter. We'll continue to work our modeling, our estimation. But we did want to give you all a little bit of an indication of two areas where CECL requires additional allowance above our current allowance. So that's the idea, it give you a bit of a magnitude of the number of loans or the amount of loans that fall in those two buckets. And then we'll be prepared after the third quarter to give some guidance around the range for the entire reserve.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got it. Okay. And then is it fair at least directionally to assume that because you bring down the CoBiz loans and because not all the guarantee loans are -- only a portion is not guaranteed that the reserve is going to be something so far less than your 90 basis points that you currently have in your existing portfolio?

Steven G. Bradshaw -- President and Chief Executive Officer

For those two particular bucket, particularly the second bucket, certainly it's not going to carry on a full reserve, if you will, because there is only the tail, as you mentioned, that we're exposed to.

Kenneth Zerbe -- Morgan Stanley -- Analyst

That's OK. I guess, and then maybe shifting gears a little bit, this kind of accretion from CoBiz obviously very high this quarter. Keep providing guidance in terms of where you think that might trend in 3Q and beyond?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Yeah, that's difficult to do. I tried to provide a little bit of guidance last quarter on the level turned out to be a little higher. So I'm not providing any guidance around what we think it will be in the third quarter. Although, I tell you that I think around 20% of the accretion has been recognized so far. And so we've got a pretty big bucket of dollars left, that will flow into income sometime over the next couple of years.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Okay. And then they say maybe if you break up that $13-ish million, how much that was sort of casual, their expected accretion versus unscheduled?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

I would say about $4 million or so was a little bit higher than we expected. And, it was generated from some accelerated payoffs in the real estate portfolio, as well in the public finance arena. But I'll tell you that, not all of those are loans that paid-off and left the bank. Many of those loans are reunderwritten and end up in our kind of portfolio going forward.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got you. Okay. And then sorry if I could squeeze in one last question. In terms of the MSR valuation adjustment, I thought I heard the number was $7.3 million. Just want to make sure that was a negative this quarter and that offset within your derivatives or is your sort of security gain type line? Is that right?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Yeah. Actually the mortgage servicing rise themselves declined $29 million and then we covered through our hedging activity about 75% of that or net $7.3 million negative.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got it. Okay, perfect. Thank you very much.

Operator

Our next question comes from the line of Peter Winter with Wedbush Securities. Please proceed with your question.

Peter J. Winter -- Wedbush Securities -- Analyst

Good morning.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Good morning, Peter.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning, Peter.

Peter J. Winter -- Wedbush Securities -- Analyst

The efficiency ratio came down nicely this quarter. And I'm just wondering if we do get, let's call it two or three fed rate cuts. Is it still sustainable to keep it that 60% level in the back half of this year?

Steven G. Bradshaw -- President and Chief Executive Officer

Well, I think I'll provide. This is Steven, Peter, I've provided the guidance that we're sure going to try, but it really depends on the denominator, the revenue growth. I think as the environment changes drastically where revenue growth opportunities are less because of a lower rate environment, which certainly is going to put some pressure on NIM and some pressure on net interest income. I think our fee businesses are going to do quite well in a lower rate environment, but part of it depends on the revenue side of that equation. But definitely we're going to attempt to maintain that, that 60% or better.

Peter J. Winter -- Wedbush Securities -- Analyst

Does your forecast assume rate cuts?

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah, I think what I'm really looking at is kind of what the market's building in. That's anywhere from two rate cuts to three rate cuts and so on. I'm telling you all that if we get that, we will have pressure on our NIM. And of course we're going to continue to grow loans, we believe, and that's going to generate some opportunity for net interest income growth but part of that will be offset by a lower overall net interest margin, if rates -- if we get rate cuts throughout the rest of the year.

Peter J. Winter -- Wedbush Securities -- Analyst

Is there any way to quantify what the impact to margin is for each 25 basis point rate cut?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

You can break -- I'm not good -- I haven't provided guidance around what I think the NIM will be in the third and fourth quarter if we get rate cuts, but I'll tell you that given our LIBOR based loans and the asset repricing on the loan side, it's usually 80% of rate cut, because of all the ones that are variable. On the wholesale funding side, all of that will roll-down pretty much 100% with rate cuts. I think the wildcard in the margin probably for us and everyone is really what happens on the deposit side. And whether or not deposit betas will be higher on the way down compared to on the way up. And frankly, I'm not sure that will be the case. So there is -- I think that's the wild card. But those are some components that you can think about for our balance sheet and how that plays out in our net interest margin calculation.

The other one I'll point out is that we did add that $1.2 billion on securities portfolio to guard a little bit against the economic and economic outcome if rates do go down. It takes the edge off, a little bit, but it also dilutes our net interest margin given that those securities are at a much lower spread then, say, for instance, our other earning assets in the loan category.

Peter J. Winter -- Wedbush Securities -- Analyst

Okay. If I could just squeeze in one more question, just on the expenses, I would have thought on a core basis they would have come down quarter-to-quarter, just with the cost saves which you got from CoBiz. But there was some other items that cost it to increase. I'm just wondering are there are any of those kind of one time events and the expenses could decline in the third quarter?

Steven G. Bradshaw -- President and Chief Executive Officer

Well, I will say, and I pointed to this in our first quarter call, is that we were going to spend some additional dollars on business promotion to promote our BOK Financial brand in Colorado and Arizona, and we did that. And you'll notice that business promotion, I think, went up $2.9 million. So I don't expect that category to be as high in the third quarter. You also had a few extra expenses there related to mortgage. But again, the mortgage revenue side was much higher. So, again Peter, I think we're going to try to maintain a 60% or better efficiency ratio. I don't know of any extraordinary expenses that are coming our way in the third and fourth quarter. So, I think we have a good shot of achieving that. But I think it matters certainly on the revenue side.

Peter J. Winter -- Wedbush Securities -- Analyst

Okay. Thanks a lot.

Operator

Our next question comes from the line of Brady Gailey with KBW. Please proceed with your question.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Hey, good morning, guys.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning, Brady.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

First, if you look at kinds of reasons why you guys beat estimates this quarter, a lot of it was in the fee income lines. And if you look at it, your brokerage and trading, I mean, over $40 million of revenue just in 2Q, that's got to be a record. Yeah, I know in your guidance, you talk about brokerage and trading could continue to see benefit from lower rates. Is that $40 million number sustainable or do you think that you'll see some downside to that number going forward?

Scott B. Grauer -- Executive Vice President, Wealth Management

Hi, this is Scott Grauer. We have -- we clearly in the first quarter, because of the composition of our product mix on the institutional trading side, have benefited from the mortgage environment with lower rates. And so that was a catalyst, really that began in the first quarter and is pushed on through second quarter. That being said, regardless of the movement, within the range here in mortgage rates sector, because of our mortgage securities trading, we're well-positioned because of work that we've done to restructure our institutional trading desks and capitalize in that segment. So we feel pretty confident about the product set that we have, the staff that we have in our positioning in the market. So we're -- we are dependent upon mortgage rates to outpace, but we feel pretty good about how we're positioned in the segment today.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

All right. And then just a little more color on the $1.2 billion of bonds that were purchased. What was the timing on that at your quarter? And look at the average balances, it looks like repurchase that kind of [Indecipherable] in the middle of the quarter. And what was the average yield on that? And if you look just at the impact in 3Q from those additional bond balances, seeing the full impact, look, what's the NIM dilution just from those bond purchases?

Steven G. Bradshaw -- President and Chief Executive Officer

For this particular quarter, it would only be a basis point or so. It's not a lot. It's part of the kind of 10 basis points that I try to highlight. But it's not a big component. It'll be a bigger component in the third quarter from a dilutive impact because to your point, we didn't buy those securities all at the beginning of the second quarter. We bought them, kind of throughout the second quarter, so we averaged a bit lower than what we'll average in the third quarter.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Right. What was the average yield that those were purchased?

Steven G. Bradshaw -- President and Chief Executive Officer

You know, 250, 260, I'm not sure exactly Brady, but somewhere in that range. There are some, certainly they have a spread to the cost of funds and of course, if rates go down and our wholesale borrowing that support those bonds, if that reprice is down and of course we'll gain spread as we move down to help protect a little bit of that downside from lower rates.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

All right. And then finally, for me, in case you were up a little bit, it looks like most of the increase was related to energy? I know some of your peers have also seen similar trends with energy non-performance. Maybe just an update on the health of your energy loan portfolio?

Steven G. Bradshaw -- President and Chief Executive Officer

Well, I think from our perspective, we still feel very good about the health of the portfolio. I think we have three credits that we moved to non-accrual this quarter. You know, really late cycle, really all deals that probably the economic outcome could be different. But you've got management teams and equity sponsors and frankly other banks who are just kind of done and have some fatigue. And so you may end up with some modest non-economic outcomes as a result of that. So we recognize that loss content through impairments and charge-off, certainly recognize that in our allowance evaluation. And we're not seeing new problems really come through, these are all kind of late cycle from the depth of the downturn. So we still feel very good about where our energy is. The broader issues from a macro-perspective and energy really are the closing of the capital markets and the effect of that's having in some respects a positive effect, because we see stickier loans on the energy side. But the broader issue is going to be long-term exit strategies for a lot of these companies, as they work through -- that there aren't a lot of buyers, because of the capital markets being closed. But the health of the portfolio we feel very good about, as we move through now and going forward.

Marc C. Maun -- Executive Vice President, Chief Credit Officer

Yeah, Brady, this is Marc Maun, one thing I would add is that, we did that Stacy mentioned we identified our key problem loan. We also recently ran our stress test on the portfolio where we ran with the oil in the flat -- low 40 environment and gas and kind of a 210, 215 range. And our results didn't identify any significant issues that we weren't already aware of. So they've already been accounted for.

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Got it. Thanks guys.

Steven G. Bradshaw -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Brett Rabatin with Piper Jaffray. Please proceed with your question.

Brett Rabatin -- Piper Jaffray -- Analyst

Hey guys, good morning.

Steven G. Bradshaw -- President and Chief Executive Officer

God morning.

Brett Rabatin -- Piper Jaffray -- Analyst

Wanted to just talk about energy a little more. You know, a lot of other banks you mentioned capital markets, a pullback from energy somewhat, can you just talk about your differentiated strategy there? And if energy continues to be one of the bigger segments for growth? Or do you have limits on how much more energy you want to do? And then just kind of why you're still growing energy and how you think that's different than some banks that have pulled back from energy lending?

Stacy C. Kymes -- Executive Vice President, Corporate Banking

You know, it's the same story. I feel like maybe I'm a broken record, maybe it's boring at this point. But we're not underwriting energy today any differently we always have. And we were committed to the space when oil and gas were under water and the energy industry was going -- undergoing a lot of stress. We felt confident about our process. We have more engineering and engineers on -- engineering tech on staff, than most of the largest banks who are providers of capital in this space. We think it's a core competency, and it's important to a lot of our broad-based businesses, not just energy lending, but across the Company there is a lot of places where we have tentacles into the energy space. So we're exceptionally committed there. And we think we've done better than most in terms of identifying borrowers and customers who are a good fit for our underwriting.

I don't -- I think as we look forward and think about the growth rate, some of that growth has been because there hasn't been exit strategies for these private equity companies, the loans have been stickier. I look that relative growth rate sort of couple of years ago, we were lamenting [Phonetic] the fact that commitments were growing at 15% to 20%, but outstandings were growing low to mid single-digits.

Now you have a little bit of the inverse. The outstandings are coming up utilization is inching up period-to-period. Our commitment growth annualized through the first six months of the year is about 6.5%. So that's different than the 20%-plus you're seeing on the year-to-year on the energy side. The other piece of that is if you look at energy as a percent of the portfolio, it's almost identical to what it was a year ago. So we've seen good growth in energy, but we've seen growth in other areas too that has helped energy continue to be balanced segment of our portfolio.

Marc C. Maun -- Executive Vice President, Chief Credit Officer

One other note I would make is that during the 2014-'18 energy downturn, which is really the worse since the '80s, we had net charge-offs averaging only 37 basis points across that whole period. And in a 10-year, 15-year period our charge-offs in the energy have been 25 basis point. So it's been fairly consistent and it's not like we won't maybe have additional charge-offs on energy in the future, they wouldn't be out of line with our historical performance.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. I appreciate the color there. And the other thing I wanted to just go back to was the margin and DDA has obviously been a challenge. Do you guys -- as you think about the back half of the year, can you just talk about what you -- what you're expecting from a DDA perspective? Do you have any insights into whether those balances might flatten out? And then specifically can you talk maybe about Kansas City and -- or Kansas? I know you've had some changes at Mobank, just that market in particular seem to have a little lower DDA this quarter any thoughts on that market?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Well, we have -- we saw this quarter a continued migration of DDA and the interest-bearing in our commercial clients. Now your question, is rates go down or if they're expected to go down latter part of the year, will we see that flatten out? Perhaps, they will. There is volatility in that portfolio. There are some big balances in there that move in and out. But yeah, I would expect some -- maybe some stabilization of the DDA balances as we go forward. I don't know if you got any...

Stacy C. Kymes -- Executive Vice President, Corporate Banking

No, I agree with Steven there. I think as rates begin to go down, you'll have earnings credits that will respond to that. And so you'll have commercial folks who will have to have more in DDA to cover services related to that. But it's hard to know order of magnitude, which I think is maybe the heart of the question that you're trying to ask there. And until we kind of experience that and see how the market responds, it's going to be tough to answer that. Steven's earlier analysis around the real question is deposit betas is exactly the right one. I mean, that's the unknown as we go through a modest downtick in short-term rates what happens to deposit betas.

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah. This is Steven. As it relates to your question about Kansas City, we've got kind of a handful of -- relative to their portfolio in Kansas City larger customers on the DDA side. And so we always see more volatility in that particular market. So I don't think it's particularly indicative of anything other than the fact that you get a large depositor who is using funds or moving funds and it moves the needle there disproportionate to the impact of the company.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. Great. Appreciate all the color.

Operator

Our next question comes from the line of Gary Tenner with D.A. Davidson. Please proceed with your question.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good morning.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Gary Tenner -- D.A. Davidson -- Analyst

I wanted to follow-up on the brokerage and trading business. In terms of the rate environment, is it more important to be thinking about the absolute level of rates or directional movement within a quarter in terms of driving volume in that business?

Steven G. Bradshaw -- President and Chief Executive Officer

I would say that it's directional. It's also spread in the various categories that influence that. Because we -- I've talked in earlier when I responded to the question, I talked specifically about the mortgage-backed securities area and our activities there. The reality is we've seen kind of a stabilization and somewhat of a pickup even in the municipal sector. So we have an opportunity given our product set and our diversification of the segments and sectors there to really benefit as spreads move whether from mortgage backs to treasuries or in the corporate sector or as we've seen a little bit of an improvement in the municipal side in this second quarter. So it's probably more directional than absolute.

Gary Tenner -- D.A. Davidson -- Analyst

Okay. Thanks. And it looks like there was some further expansion of the unsettled securities purchases on the balance sheet this quarter, one from about $450 million last quarter to over $800 million this quarter. Any thoughts about growing it? I don't know to what degree you'd grow it further, but I'm curious what the kind of relative margin drag was this quarter versus the first quarter from that?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Yeah. It wasn't incrementally that much more. If you're looking at the receivable balance that went up on average a couple of hundred million. And that's the real balance that impacts the margin. So it went up $200 million, but it wouldn't have that significant additional impact on the margin.

Gary Tenner -- D.A. Davidson -- Analyst

Okay. Great. And if I could ask just one more question on oil and gas. I appreciate your comments earlier, I'm really more curious on a macro basis. There is been a lot of talk about why oil prices haven't responded more to some of the geopolitical issues. And I'm just curious if you have any thoughts on kind of what that means from a demand perspective and if you have any concerns there?

Stacy C. Kymes -- Executive Vice President, Corporate Banking

No, I think it's awfully hard for us to be in the prognostication business on oil prices. And so that's why when we underwrite, we underwrite to the forward strip. When we evaluate our book, we do it according to the forward strip, our customers can hedge that. There is volatility. I mean, you think back a year ago we were in the mid to upper-60s as we went into the third quarter. The first quarter prices were down; second quarter, they've come up. This is a long-lived asset, and part of the reason the portfolio performs well over time is because it self -- the industry self corrects as prices come down, rig counts come down, oil supply comes down and it takes a little while for that equilibrium to surface but it does happen that way and that's part of why we like it.

Obviously, the volatility that creates heartburn from time-to-time, but if you really evaluate the portfolio like a total return and look at losses over time, relative to the revenue, it is a fantastic business for us to be in. That's a core competency, we have a strong history there. Our performance through the downturn, that to me is a very difficult stress and our performance there, I think created outperformance from that portfolio's perspective and I think we continue to maintain the discipline associated with that.

Gary Tenner -- D.A. Davidson -- Analyst

Thank You.

Operator

Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.

Michael Rose -- Raymond James -- Analyst

Hey, guys. Just wanted to go back to deposits, it looks like Colorado was the big driver of decline. So, do you think those CoBiz balances are going to start to stabilize here? And then how -- where do you get uncomfortable as it relates to the loan-to-deposit ratios continues to move higher?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Yeah, I will point out that there is a pretty significant decline on DDA in Colorado. A big chunk of that is one client, and they're in kind of the funds administration business, so they move a lot of balances around. And so I don't read a lot into that particular drop. But yeah, they -- we have stability there. I think we're going to view CoBiz acquisition. We're going to view it both on the loan deposit as well as their full performance at the Colorado level and the Arizona level. So we've completely incorporated all of the CoBiz businesses into our businesses. And so the -- what we're going to manage and watch closely is the full market impact that we have and the results that we get from the market view. Second part of your question was -- what?

Michael Rose -- Raymond James -- Analyst

Loan-to-deposit ratio, it's obviously continued to provide us...

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Yeah, I mean it's creeping up to 90%. We've had it higher than that at this Company before. None of us probably wanted to go much above 95%. And again, I think it's a matter of how well can we gather deposits. I've stated before that one of our goals leading into 2019 was to try to fund the majority of our loan growth with deposit growth that we haven't done that so far this year. So we'll continue to look at that. And I would say, mid-90s is not that uncomfortable for us, but certainly I think we would address, I don't want to keep it somewhere below that 95% range.

Michael Rose -- Raymond James -- Analyst

Okay, and any concern if the debt and equity capital markets for the energy companies remain kind of seized up or dry. If you could see some outflows in deposits since they draw down to support their business growth?

Stacy C. Kymes -- Executive Vice President, Corporate Banking

I think that's absolutely one of the outcomes that you could see if they -- if prices stay at this level or go a little bit lower, they're going to use cash flow to help them drill because equity may not be there. And frankly, the banks aren't going to be really excited about funding entirety of drilling programs if borrowing bases are pretty full. So they're going to have to do that out of cash flow. I think seeing energy deposit volumes impacted by that is a very good analytical see-through there.

Michael Rose -- Raymond James -- Analyst

Okay. And then maybe just one more for me. Can you disclose what the impact on the margin was from premium amortization this quarter? And maybe what it was last quarter? Thanks.

Steven G. Bradshaw -- President and Chief Executive Officer

It's pretty small for us. We don't, we don't have a lot of premium amortization on the regular bond portfolio that we're pushing through in any given quarter. So, I would say it's insignificant.

Michael Rose -- Raymond James -- Analyst

Okay. Thanks for taking my questions.

Operator

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Thanks. Good morning, everyone.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Good morning.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Okay. Stephen, do you have the percentage of the loan portfolio that's LIBOR based? You may have said it, but I'm just curious.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Well, let me put it this way. So, 70% of our loan portfolio is variable. 80% actually reprices within a year, but 70% is variable. And I would say a pretty high majority of that is LIBOR based. It used to be more split between LIBOR and Prime, but it's certainly migrated much higher toward the LIBOR side. And of the LIBOR-based loans 90% of them are 30 day. So it's pretty short on the curve.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

That's the entire portfolio or just the commercial piece?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

That's the entire portfolio.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Okay.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

70% [Indecipherable]

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Okay. And then offsetting that, you mentioned the wholesale funding piece with 100% beta, what is the size of that?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

It's -- the $10 billion. $10 billion of our funding is from that -- from the wholesale categories that we will reprice quickly.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

And that's the piece you're saying as 100% beta?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Yeah, thereabout, I mean it's going to track very, very closely down.

Stacy C. Kymes -- Executive Vice President, Corporate Banking

Keep in mind that larger securities portfolio than most peers. It's been how we've managed this bank forever. And the result of that over time has been a much more stable net interest margin and net interest revenue base than our peers, but also a lower NIM to some extent because of that -- the size of the securities portfolio, but that's a real buffer in times of falling interest rates.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Yeah. Yeah. I guess we're all trying to figure out what kind of an impact lower rates would have. And I guess it sounds like it's reasonably manageable from your point of view. I mean some of the big step downs here?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

I don't think we have ever positioned a balance sheet where we get hammered on the way down or gain significantly on the way up. I mean we've always stated we try to manage relatively neutral. Now that's not a definition of 0.5% one way or the other, it could be as wide as 3% to 5% one way or the other, but that's relatively neutral when you compare to other banks.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Okay. That helps a lot. I appreciate that. Stacy for you, you made a comment about core loan growth as long as the economy continues to show strength. Are you seeing anything that's changing your view on the economy showing strength?

Stacy Kymes -- Executive Vice President

Not at this point. I think you see growth really over the last couple of quarters really across the Board in all segments, C&I, real estate, healthcare. Energy is obviously been exceptionally strong. I think just because you think about these things as you get into '20, you worry about things like the presidential election and how the uncertainty around that process could impact borrower's ability to -- or borrowers desire to create more leverage. And so you worry a little bit about that headwind as you think about 2020 from a -- how will borrowers respond to that. But in terms of just what's happening day-to-day in the economy, it's actually pretty good, and borrowers are doing the things you would do in a good economy, but there is still good discipline both from the borrower perspective. And I would even tell you this late cycle on the banking side, I'm impressed with general discipline across the Board in the sector.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Okay, good. And then just one on mortgage -- sustainability of mortgage, I guess. The way it looks you may not have an MSR hit this coming quarter like you did the last quarter, hopefully. But anything else to call out in terms of the sustainability of the top line mortgage revenues?

Steven G. Bradshaw -- President and Chief Executive Officer

Yes, this is Steve. I've -- we've done a lot to take expense out of that business unit, the last 18 months or so. So, we've caught kind of a nice sweet spot here as we've seen application volumes drive pretty strong or seen gain on sale margins increase as well. They grew up 18 basis points in the second quarter. I think as long as we see rates kind of below that 4%, 4.25% threshold on a 30-year, we're going to continue to see good volume. We're certainly in the middle of the season right now. So, we haven't seen anything that would suggest that it's going to wane over the course of second half of the year, but it's a much more profitable segment for us because of our expense work. So, this is good timing for us, I think, on the mortgage side.

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Yeah, OK. Thanks a lot, guys. Nice job.

Steven G. Bradshaw -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Matt Olney with Stephens. Please proceed with your question.

Matthew Olney -- Stephens Inc -- Analyst

Hey, great. Thank you. Good morning, guys.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Good morning.

Matthew Olney -- Stephens Inc -- Analyst

Thinking more about the loan growth, one of the portfolios as you pointed toward was healthcare, as far as seeing some good strong pipelines and good growth at the back half of the year. Any more details you can give us on that? And any specific sector you can point to within healthcare that you're seeing some good pipeline growth?

Stacy C. Kymes -- Executive Vice President, Corporate Banking

Our real business development focus inside of healthcare is around senior housing, assisted living, skilled nursing, memory care, independent living, as well. We think that that's a really good opportunity, we've had great credit outcomes there historically. You have some risk inside that portfolio around reputation risk, you have some risk inside that portfolio around reimbursement risk, but that has been something that we've managed for 20 years inside of senior housing and something we understand and can work through, and that's really where the segment that we're focused on inside of healthcare. The healthcare risk that we've seen and frankly over the last year seen a few losses related to that, that we worked through is when you look at out-of-network things or you work -- look at areas where you don't have doctor guarantees embedded with the credit on a stand-alone styled facility, those have been the areas of healthcare that have underperformed and we've really worked through that. So, our business development focus is really on the senior housing side. We've added talent in that space in the last 90 days or so, that we're really excited about. We think we'll help augment our growth there as well, and so we continue to be extremely optimistic about our strategies inside healthcare.

Matthew Olney -- Stephens Inc -- Analyst

And Stacy, from a macro standpoint that there are some data points that point toward the overbuilding of some of the senior housing facilities. Is this something that your borrowers are being impacted by right now?

Stacy C. Kymes -- Executive Vice President, Corporate Banking

They can be. We're awfully careful when we look at construction of new facilities and things like that where -- what the capacity for a particular area, even sub-areas inside of larger metro areas is. There has been pockets where that certainly have been the case. And I think that we've done a good job of avoiding those. Our teams broadly do a really good job of analyzing where there has been overbuilding, and so we really try to stay away from that. We look at areas where there is -- some states are certificate of need states, so that creates a barrier, particularly on the skilled nursing side. So, we're -- we feel pretty good about that. Where the -- some of the healthcare senior housing pressure has come from is really on the big players who say the REITs have gobbled up facilities and they haven't paid as much attention to the operators and the operations of the facilities, so they've underperformed. We're seeing some divestiture from those big players which is not where we play in the space and which is we think will over the next 12 months or so create outsized opportunities for the regional players and local players which is really where our sweet spot is to acquire some facilities and improve the operations of those. Because that really is the most important part about the senior housing spate as the quality of operations and the ability to have good outcomes and good experiences for the residences.

Matthew Olney -- Stephens Inc -- Analyst

Okay. Thanks to the color, Stacy. And then, Steven Nell, I guess lots of moving parts from the balance sheet here. I'm trying to appreciate what the average earning assets may look like in the back half of the year? You've got the $1.2 billion increase at the NBS book you mentioned. We see higher security -- higher trading securities, the strong loan growth toward the back half of 2Q. It feels like that the average earning assets could be up in 3Q, almost $2 billion versus 2Q. Am I speaking about that growth right from 2Q to 3Q on average earning assets?

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Yeah. You're probably pretty close. I mean, we'll continue to grow loans. On average, they should continue to grow in that kind of mid single-digit or so level. I don't think we'll incrementally add that much more securities portfolio. So, you'll get the effect of the average -- full quarter average on the securities portfolio in average earning assets, but we won't incrementally be adding that much more to the available-for-sale portfolio. And then the funding of all of that will just follow. I mean, we'll either fund it through some sort of deposit gathering activity, or in the case of those average securities they kind of self-fund through the wholesale borrowing categories. Is that helpful?

Matthew Olney -- Stephens Inc -- Analyst

Yeah. That is helpful, I appreciate it. Thank you, guys.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Jennifer Demba with SunTrust. Please proceed with your question.

Jennifer H. Demba -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good morning. I think all the topics have been covered this morning, but just wanted to ask about your M&A interest at this point. I know CoBiz has been on the books too long.

Steven G. Bradshaw -- President and Chief Executive Officer

Yeah. Jennifer, this is Steve. I think our focus is still squarely on making sure that we generate investment return and growth in the Colorado and Arizona markets. We clearly got the expense saves that we had targeted and did a lot of hard work there, but really the -- the real work now is grow in those markets. So, I'd say our appetite for further M&A is pretty muted at this point. I think we're focused on making that be absolutely successful for us going forward.

Jennifer H. Demba -- SunTrust Robinson Humphrey -- Analyst

Okay, great. Thank you.

Steven G. Bradshaw -- President and Chief Executive Officer

Thank you.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Thanks, Jennifer.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Steven Nell for closing remarks.

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Okay. Thanks again everyone for joining us this morning. If you have any other further questions, please call me at 918-595-3030 or you can email our IR site at ir@bokf.com. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Steven E. Nell -- Executive Vice President, Chief Financial Officer

Steven G. Bradshaw -- President and Chief Executive Officer

Stacy C. Kymes -- Executive Vice President, Corporate Banking

Scott B. Grauer -- Executive Vice President, Wealth Management

Marc C. Maun -- Executive Vice President, Chief Credit Officer

Stacy Kymes -- Executive Vice President

Kenneth Zerbe -- Morgan Stanley -- Analyst

Peter J. Winter -- Wedbush Securities -- Analyst

Brady Gailey -- Keefe, Bruyette & Woods -- Analyst

Brett Rabatin -- Piper Jaffray -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

Michael Rose -- Raymond James -- Analyst

Jon Arfstrom -- RBC Capital Markets Corp. -- Analyst

Matthew Olney -- Stephens Inc -- Analyst

Jennifer H. Demba -- SunTrust Robinson Humphrey -- Analyst

More BOKF analysis

All earnings call transcripts

AlphaStreet Logo