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BOK Financial Corporation (NASDAQ:BOKF)
Q2 2021 Earnings Call
Jul 21, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the BOKF Financial Corporation Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I'll now turn the conference over to your host, Steven Nell, Chief Financial Officer for BOK Financial Corporation. You may begin.

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

Good morning and thanks for joining us. Today, our CEO, Steve Bradshaw will provide opening comments and Stacy Kymes, our Chief Operating Officer will cover our loan portfolio, credit metrics and fee income businesses. Lastly, I'll provide details regarding net interest income, net interest margin, expenses and our overall balance sheet position from a liquidity and capital standpoint.

Joining us for the question and answer session are Marc Maun, our Chief Credit Officer, who can answer detailed questions regarding credit metrics and Scott Grauer, Executive Vice President of Wealth Management, who can expand on our wealth management activities. PDFs of the slide presentation and first quarter press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 regarding our forward-looking statements we make during this call.

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

Steven G. Bradshaw -- President and Chief Executive Officer

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 pre-tax, pre-provision earnings by 10% on a linked quarter basis and eclipsed $160 million in net income for the first time in the history of our company.

Shown on Slide 4, second quarter net income was a record $166.4 million or $2.40 per diluted share. That represents growth in net income of nearly 14% from last quarter and a result of our long-term commitment to our balanced earnings model and our breadth of business capabilities. The key items that drove our success this quarter were another outstanding contribution from our fee-based business units with total fees and commissions up $7.3 million or 4.5% from last quarter.

The contribution from our Wealth Management team continues to be a differentiator for us, offsetting narrowing margins and housing inventory constraints that impacted our mortgage company this quarter. Net interest revenue stabilized as the similar amount of PPP forgiveness was recognized again this quarter as it was in Q1. Additionally, deposit cost reduction outpaced rate compression on loan yields and now are available for sale portfolio.

The increasingly favorable economic outlook combined with improving credit trends, allowed us to release $35 million of our loan loss reserve. And lastly, expense management remains excellent with total expenses relatively flat linked quarter when you exclude the $4 billion charitable contribution we made in the first quarter that did not reoccur in the second quarter.

Turning to Slide 5. Total loans are down $1.1 billion for the quarter, but PPP loan forgiveness accounts for $727 million of that contraction. Core loan growth did remain a challenge this quarter as our energy and commercial real estate customers continue to pay down debt or refinance in long-term markets. That said, we saw a stable loan balances in our core C&I book, Stacy is going to cover that momentarily, which reaffirm our belief that we are poised for growth opportunities as the economy continues to rebound.

Average deposits were up nearly 3% this quarter and nearly 15% from the same quarter a year ago as the growth trend we've seen there for the past 18 months continues. Assets under management that were in custody in our Wealth Management business were also up. They were up 5% in this quarter. I'll provide additional perspective on the results before starting the Q&A session.

But now Stacy Kymes will review the loan portfolio and our credit metrics in more detail. I'll just now turn the call over to Stacy.

Stacy C. Kymes -- Executive Vice President and Chief Operating Officer

Thanks, Steve. Turning to Slide 7. Period end loans in our core loan portfolio over $20.3 billion, down just under 2$for the quarter, as we continue to see borrowers in some specialty lending areas continue to reduce leverage. That said certain areas of portfolio saw increasing pipelines and real growth that outpaced pay down. Energy balances continue to decline, albeit at a slower pace than in previous periods. Both oil and natural gas prices have moved up swiftly in 2021, leading to improved credit metrics and providing material cash flow for energy companies. U.S. rig counts are moving up very modestly and are just over half of what they were before the pandemic.

As we move into the fall and capital budgets are established, I suspect that we'll begin to see more drilling activity if prices remain near current levels. This would organically increase loan demand. Ancillary business from hedging, investment banking and treasury were all very good for this segment this quarter. Health care balances grew 2.8% this quarter driven by our senior housing sector. Looking forward, we remain very confident in our ability to perform both from a growth and credit standpoint in this portfolio as it remains a leader for us.

Core middle market C&I today is at the lowest level of utilization 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, seeing the broad C&I portfolio begin to stabilize is the real positive coming out of this quarter and bodes well for our outlook for returning loan growth later this year and in the next year. This contracted 5.7% this quarter.

We continue to see borrowers use this low rate environment to refinance for the long-term fixed rate non-recourse market. 2020 was one of the real estate's lowest years for portfolio turnover as many of the permanent markets were cautious. As those have opened back up, we see some catch-up activity that's inherently a sign of a healthy portfolio, but can create some quarter-to-quarter volatility.

PPP loan balance forgiveness was substantial this quarter, with $727 million forgiven, shrinking the portfolio by nearly 40%. We expect to have another period of forgiveness activity early in the third quarter from the 2020 vintage of PPP before it slows in the remainder of 2021. Looking ahead, we remain positioned well for loan growth later this year and next year when economic activity creates borrowing needs for working capital. We are hopeful the stability in our C&I book this quarter signals we are turning the corner on loan demand in our core markets.

Turning to Slide 8. You can see that credit quality continues to improve as we move further out from the pandemic. We saw meaningful credit quality improvement across the broader loan portfolio with non-performing assets and [Technical Issues] down significantly this quarter. These factors coupled with the rebound in commodity prices to multi-year highs and strong economic forecast for GDP growth and labor markets led us to release $35 million in reserves this quarter.

Net charge-offs were $15.4 million or 30 basis points annualized excluding PPP loans in the second quarter. That's essentially flat from last quarter's $14.5 million. Net charge-offs averaged 32 basis points over the last four trailing quarters, which is at the lower end of our historic loss range. As we look forward to the latter half of 2021, we expect net charge-offs to be at or modestly better than the result of the first half of this year.

The combined allowance for loan losses totaled $336 million or 1.66% of outstanding loans at quarter end excluding the PPP loans. Non-accruing loans decreased $36.4 million from last quarter, primarily due to a reduction in non-accruing energy loans. Potential problem loans totaled $384 million at quarter end, down significantly from $422 million on March 31. Potential problem energy services and general business loans all decreased compared to the prior quarter.

We 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 level 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 $31.1 million, up nearly 15% from the previous quarter. This includes the fee income lines that investors see in our corporate income statement, brokerage and trading and fiduciary and asset management, as well as net interest income from loans and deposits in our private wealth group and net interest income generated as part of our brokerage and trading group.

Banking products and services for private wealth clients continue to be a particular area to highlight. The total loan portfolio bordering on $2 billion grew 3% linked quarter and 12% compared to the same quarter a year ago. The deposit portfolio, ending the quarter at $3.7 billion grew 5% linked quarter and was up 13% compared to the same quarter a year ago. Total net interest income also saw strong growth in this quarter, up 7%. Total brokerage and trading revenues increased $10.5 million or 20% linked quarter. This is largely due to a shift in product strategy this quarter in our institutional trading and sales business coupled with adding new financial institution clients.

Importantly, as we look forward, we believe the revenue from this shift in product focus and expanded customer base is sustainable in the third quarter before modest seasonal declines as you get into the fourth quarter. Also in the Wealth Management space, fiduciary and asset management fees were up nearly 9% linked quarter, as well as from the same quarter a year ago. A portion of the linked quarter growth is due to the annual [Indecipherable] fees that are charged in the second quarter, but we still saw a strong growth in assets under management.

When we have seen the benefit of favorable equity markets increasing customer account balances, sales activity remained strong in this space as well. Our relationship driven business model is perfectly in touch with the client's needs today as we continue to see institutions and individuals retain the increased appreciation for financial advise gained through the last 18 months.

Transaction card revenue was up $2.5 million or 11% this quarter. This is largely due to stimulus measures and the broader reopening of the U.S. economy, as we saw both merchant and ATM transaction volumes increase this quarter. Deposit service charges were up $1.7 million or nearly 7% this quarter, primarily centered in our commercial businesses. Lower earnings credit rates due to lower interest rates resulted in higher service charges this quarter.

Mortgage banking revenue decreased $15.9 million linked quarter due to the broader economic factors currently impacting the industry. Increasing average mortgage interest rates in particular were a factor this quarter as that moves the mix between refi and purchase funding from 65% refi last quarter to 48% refi this quarter. Industrywide 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 changing environment, but our mortgage team is doing a good job managing the transition to a purchase market. We are better positioned than most of our non-bank competitors as the market shifts to more of a home purchase financing. While this quarter's contribution was down from the record levels we saw throughout the past year, the rate pressure did ease as the quarter unfolded. We still expect this business to be a significant contributor to our diversified fee revenue strategy going forward.

Although not included on Slide 9, I will also note that the net economic hedges in the fair value of mortgage servicing rights and related economic hedges were a positive $4.4 million during the quarter. Other revenue increased $6.9 million this quarter due to higher production level from repossessed oil and gas properties, which was largely offset by increased operating expenses. Looking forward, this level of revenue and expense will diminish as these properties are sold.

I'll now turn over the call to Steven to highlight our net interest margin dynamics and the important balance sheet items for the quarter. Steven.

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

Thanks, Stacy. Turning to Slide 11. Second quarter net interest revenue was $280 million, largely unchanged compared to last quarter. Average earning assets decreased $354 million compared to the first quarter and average loan balances decreased $590 million. Available for sale securities decreased $190 million, as we continue to reinvest most of the quarterly cash flows from the portfolio. Average trading securities grew by $467 million to support our brokerage and trading business. Non-interest deposits grew $877 million this quarter, which also helped support net interest income.

Net interest margin was 2.60% down just 2 basis points from the previous quarter. The reinvestment of cash flows from our available for sale securities portfolio was stable this quarter due to prepayments from commercial mortgage backed securities. However, the expectation is that there will be continued slight pressure due to reinvestment of this low rate environment.

Additionally, we had continued success driving interest bearing deposit costs down 3 basis points to 14 basis points on average for the quarter. PPP loan supported net interest margin by 2 basis points this quarter, unchanged from last quarter. There are many moving parts to consider, but we believe the extensive pressure felt on net interest margin since early 2020 is beginning to wane. We think we could be nearing a bottom in net interest margins, but do not expect any positive migration there until rates begin to rise again.

With sooner than anticipated rate hikes, now potentially on the horizon, it's important to recall how well we performed during the last rate hike cycle from 2015 to 2019 in the top quartile 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 is even more liquidity in the system today than before the last increased cycle, which should diminish the need for the market to move rates up quickly.

Turning to Slide 12, the expense management remains prudent with total expenses down 1.6% linked quarter. Personnel expense was essentially flat this quarter. A regular compensation decrease of $1.1 million was mostly offset by an increase in incentive compensation expense. All told, we're very happy with our ability to hold the personnel cost efficiencies earned through the pandemic and expect to do so going forward.

Non-personnel expense was down $3.7 million this quarter. Mortgage banking costs decreased $2.8 million due to the decrease in prepayments combined with lower accruals related to default servicing and loss mitigation cost on loan service for others. Data processing and communication expense decreased $1 million as a result of reduction of system conversion expenses. Other expense increased $3.6 million, primarily due to increased operating expense on repossessed assets. Also of note, last quarter, we made a $4 million charitable contribution through BOKF Foundation that did not reoccur this quarter.

On Slide 13, our liquidity position remains very strong. Our loan-to-deposit ratio declined from nearly 60% last quarter to just over 57% at June 30, largely due to the significant decline in PPP balances this quarter. This significant on-balance sheet liquidity leaves us very well positioned to meet future customer needs. Our capital position levels remain strong as well with a common equity Tier 1 ratio of 12%, well ahead of our internal operating minimum. With such strong capital levels, we once again were active with share repurchases, opportunistically repurchasing nearly 493,000 shares at an average price of $88.84 per share in the open market.

One additional thing of note is that we plan to redeem our $150 million subordinated debt issue in June of 2016 using existing capital. Given the strength of our capital levels, we have decided not to reissue this debt. This will impact only the total capital ratio at the holding company level by 42 basis points, but will save the company approximately $8 million annually on a go forward basis.

On Slide 14. I'll leave you with some general outlook for the near and 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 borrower demand exists. We expect the overall loan loss reserve as a percentage of loan balances to continue to migrate toward pre-pandemic levels. Net interest margin may continue to move down slightly, largely from continued downward repricing in our available for sale securities portfolio. We believe we are close to the bottom in our interest bearing deposit pricing at 14 basis points. That said, we believe the significant pressure on net interest margin seen in past quarters is largely behind us now.

Our diverse portfolio of fee revenue streams should continue to provide some mitigating impact to overall revenue pressure being felt in our spread businesses. We expect most fee revenue categories to grow modestly for the remainder of 2021. We will continue our disciplined approach to controlling the personnel and non-personnel costs with growth budgeted at low-single digits in 2021.

Our focus will be holding the line on manageable expenses without sacrificing multiyear technology commitments to improve customer service and our competitive position. As I mentioned a moment ago, we feel good about our capital strength. We will continue looking for share buyback opportunities and plan to maintain our current quarterly cash dividend level.

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

Steven G. Bradshaw -- President and Chief Executive Officer

Thanks, Steven. As I mentioned at the top of the call, it was another exceptional quarter for BOK Financial. We continue to do the right things the right way for the benefit of our long-term investors, adding shareholder value without compromising credit discipline or forgoing investment that might hinder the company's future and as witnessed by our credit outcomes in the outsized wealth management contribution this quarter, we continue to do that in a prudent and diversified way.

While this quarter was once again about the contribution from our fee-based businesses, the vastly improving outlook for growth in our footprint as we emerge from the pandemic is driving customer confidence in a way we haven't seen for quite some time. While supply chain and workforce disruptions might be hampering some areas in the near term, economic indicators remain strong, which pertains well for the future.

With growth returning to our healthcare book this quarter and pipelines returning to pre-pandemic levels in other areas of C&I, we are very optimistic about the restart of some of our largest growth drivers in the company. Additionally, we were pleased to welcome back our remote workers this quarter and believe that the energy and teamwork as core to our company will also play a role in our growth expectations in the second half of the year.

With that, we're pleased to take your questions, operator.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Peter Winter with Wedbush Securities. Please proceed with your question.

Peter Winter -- Wedbush Securities -- Analyst

Thanks, good morning. I wanted to ask about the loan growth. Obviously, some trends are improving, but it seems like there is still some pressure on loan growth and I'm just wondering if you could talk about the third quarter because it does seem like average loans could still be down in the third quarter. I'm just wondering if you could talk about some of the puts and takes?

Stacy C. Kymes -- Executive Vice President and Chief Operating Officer

Peter, this is Stacy. I think the story for us, as you think about the second quarter and then go into the third quarter was really stability in our core C&I book. We've had growth in our wealth lending platform for a while now and that was a real strong story for this quarter and we think that will continue into next year, but if we can get past the pay downs in energy and commercial real estate, I think you're going to see that core C&I begin to grow as we get into the latter half of this year. We actually saw it in May. We're hoping we could string two months together and then have something really to fine to talk about this quarter, but we backed up a little bit in C&I in the month of June and so -- but we're -- we've really reached the point where those balances are real stable at this point.

We are seeing months where we pop up and have some core growth in the C&I. Energy pay downs, it's hard to know when we've reached the bottom there. I think we're awfully close, but we worked through a lot of the issues there from a credit perspective that have created some of the pay down activity. Those borrowers are flushed with cash flow, with prices much higher than what they would have budgeted at as we go into the fall. That's typically when the E&P companies do their capital budgeting. I think that, at these price levels, you're going to see more drilling activity, which will create more demand on the energy side.

Commercial real estate is a little bit of a different story. We've had real consistent loan generation there, even through the downturn, but the capital markets in many respects were closed last year with COVID and so a lot of those stabilized properties that can move to the permanent non-recourse side of things have done that and so it's created some pay downs that created some lumpiness and when we looked at the quarter and how it was unfolding, I mean, really the story for us was the C&I balances were very stable. The -- it was really the headwind from energy and commercial real estate, which we think, if it's not behind us, it's very close to being behind us.

But when you talk to the core C&I guys about their pipelines, about what they're seeing, about the borrower optimism, I can't remember a time when borrowers have been more optimistic about economic growth and that's going to create organic demand. But I think we're close. We're optimistic about the latter half of this year, certainly optimistic about next year in terms of the ability to grow that core C&I portfolio.

We mentioned in the prepared remarks about utilization rates. Utilization rates in our corporate are the lowest we've seen in a long, long time. So, as we began to get borrower need for capital that's going to have an opportunity to grow and create organic demand as well. So, when the market provides the opportunity to grow, I think we're going to get our share, disproportionate share because of how well positioned we are.

Peter Winter -- Wedbush Securities -- Analyst

Got it. That's really helpful, very helpful. If I could switch gears about the securities portfolio, Steven average securities were down this quarter. And I just assume with rates even lower, not really a lot of interest moving excess cash into securities, I was just wondering if you could talk about the outlook for the securities and if you're planning on replacing maturing securities.

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

We are Peter. We will still have around $700 million, I would say, in cash flows off of the AFS portfolio each quarter. And our plan is to continue to reinvest that. Now, rates have moved down a little bit here. But we'll continue to look for opportunities. The quarter was down, I think $190 million. I think that was just timing really. There is no particular strategy to move that balance down. I think we want to continue to reinvest those cash flows on a go forward basis and keep the portfolio relatively level around that $12.8 billion to $13 billion range in the AFS portfolio.

Peter Winter -- Wedbush Securities -- Analyst

And what are new yields going on at today?

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

1.25% roughly.

Peter Winter -- Wedbush Securities -- Analyst

Great. Okay. Thanks for taking my questions.

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

Sure.

Operator

Our next question is from Jennifer Demba with Truist. Please proceed with your question.

Brandon King -- Truist Securities -- Analyst

Hey, this is Brandon King on for Jennifer Demba. Good morning.

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

Hi, good morning.

Brandon King -- Truist Securities -- Analyst

Yes. I wanted to touch on deposit growth. I saw averages -- average balances were up in the quarter, but on a period-end basis, balances were down a little bit. And I wanted to know what was going on there? Are there any seasonal factors to note of and what is the expectation for deposit growth for the second half of the year?

Steven G. Bradshaw -- President and Chief Executive Officer

Sure. I think one of the -- the entire industry is seeing the enormous liquidity in the system and we've certainly benefited from that enormous deposit growth for us year-over-year and quarter-over-quarter. I think if you start to look at period end numbers, you get a lot of fluctuation between deposit balances and things that happen there. We have a lot of customers who have benefited from stimulus funds that have come in over the course of -- in the first half of the year. Those will go back out. 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. If we knew the answer to what deposit balances were going to do in 2022 that would be a helpful thing for all of us.

I think the industry is going to struggle with that as we begin to formulate plans for 2022 specifically. We just-- we have so much liquidity in the system today, it's beyond what any of us have experienced in our career and so the timing of when that begins to flow back out into investment or to -- out of consumer's pockets as the stimulus continues to impact them as well, is a fair question to ask. And I don't think our crystal ball is much different than anybody else's.

I mean, it clearly will begin to go probably not as fast as we think that it will, it tends to be stickier. We've been -- at this time last year. third quarter, four quarter, we were predicting a lot of deposit balances would move out of the banking system that hasn't happened. The system is growing them and we certainly growing them as well. We're not paying above a market rate for sure to be able to do that. It's just kind of organic relationship driven deposits there.

Brandon King -- Truist Securities -- Analyst

Okay. Okay. And I know that loan to deposit ratio is sub 60% now. And I know this is hard to gauge based on how you just answered my previous question, but are you hopeful that loan growth could outpaced deposit growth later this year and into next year? Is that the thought?

Steven G. Bradshaw -- President and Chief Executive Officer

I think we look at our company and we've typically been kind of closer to 85% loan to deposit ratio over time and I think what happens when you get the economy moving again that you're going to have -- on both sides of the equation, you're going to have loan growth and you're going to have deposit outflows and the result of that is going to be a loan-to-deposit ratio that's probably much more reflective of our history than the current period is and so clearly the opportunity for that is going to create positive momentum around earnings.

One of the things that Steven alluded to in his remarks, I think that's very important is how well positioned we think we are when the Fed does begin to move. I think there's a lot of net interest revenue that will come back into the forefront. There's a lot of fee revenue and Scott's wealth world that will come back into the forefront whenever rates begin to move a little bit and there's been a lot of analysis that we've seen that kind of seems to focus on, how everybody is modeling an increasing rate environment when that day does come.

And I think from our perspective, we've been through that. I think the actual results are probably a better indicator of the future than how everybody's models are working because there's so many different assumptions that go into that. And so we would ask the community -- investment community to really focus on who performed well the last time there was an increasing rate cycle. And I think you'll find that we performed exceptionally well and have pin-up earnings that will show up once rates begin to move. Okay. That's all I have for now. Thanks for answering my questions.

Operator

Our next question is from Brady Gailey with KBW. Please proceed with your question.

Brady Gailey -- KBW -- Analyst

Thank you, good morning guys.

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

Good morning.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Brady Gailey -- KBW -- Analyst

So, we've talked about, you guys have talked about C&I utilization rates being still pretty low. Can you just tell us what that percentage is in the quarter and then what a more normalized level would be?

Steven G. Bradshaw -- President and Chief Executive Officer

The core C&I was below 50% and if you look at kind of the history in that segment, something closer to 55% to 60% and even that's a little bit misleading because you're -- a lot of our core C&I is borrowing base driven with accounts receivable and inventory. So, those borrowing bases, those commitment levels can increase and decrease depending upon inventory and receivable levels, which -- so it's not a perfect apples to apples because I think you'll see those commitments increase as well. Well, it's not just utilization increase, but the commitments will organically increase once kind of a more normal economic environment exist. So, I think there's a lot of organic opportunity at -- I'm not downplaying the customer acquisition process because we're very focused on that, but I think there's a lot of built up loan growth that will show up on the balance sheet once the national economy kind of looks normal again.

Brady Gailey -- KBW -- Analyst

All right. And then on the buyback. It was great to see some buyback this quarter, the stock is cheaper today than kind of where you guys bought it back in the second quarter. So, should we expect a step-up in the buyback as you guys potentially get a little more aggressive when you have excess capital, the stock is cheap, should we expect more buybacks going forward?

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

Yes, we'll be active. I don't know if we'll end up spending the $40 million or $45 million that we did, like we did this quarter, but we do have the capacity, we stay opportunistic with it. Scott and I work together on a daily basis to figure out what we're going to do and I think we'll be active as we were in the second quarter.

Brady Gailey -- KBW -- Analyst

And then finally from me. We haven't talked about any accretable yield levels from CoBiz in the last couple of quarters is that down to a pretty small amount that it's -- you're not to be worth mentioning. What's the CoBiz accretable yield level nowadays.

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

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

Brady Gailey -- KBW -- Analyst

Okay. All right, great. Thank you guys.

Operator

Our next question is from Gary Tenner with DA Davidson. Please proceed with your question.

Gary Tenner -- DA Davidson -- Analyst

Thanks Hi, good morning. I just wanted of kind of revisit the discussion about the loan growth outlook. My interpretation of your comments on what's in the deck kind of suggest 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 from what we're hearing today?

Steven G. Bradshaw -- President and Chief Executive Officer

I don't think so. I mean, I think what we're trying to communicate is that seeing stability and even some modest growth from -- in some of the months intra-quarter inside of C&I was a real positive for us. And the total loan growth headwind was really driven by kind of specific factors inside of energy, where they are, have a higher level of cash flow than what they would have anticipated, probably when they were setting their budgets and plans and higher level of capital markets activity within our commercial real estate portfolio.

It's hard to predict when an energy customer is going to begin to drill and equip 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 real positive growth there. We're seeing good new customer acquisition inside of energy today and we were continuing to originate a good pace inside of our commercial real estate area. Healthcare showed a good loan growth this quarter.

And so I think that it's just hard to tell you with great certainty what quarter is going to show the loan growth, but the underlying activity that you would expect to see so that that would make you think it's certainly close, we're seeing. And I'm optimistic, we're going to see that, but I don't -- I can't tell you that it's going to be the third quarter or the fourth quarter or in July. It certainly seems like we're awfully close and the biggest thing to me was the real core stability in those C&I balances. In fact, we were up a little bit in May, down a little bit in June, but very stable there, which we saw as a real positive going into the end of the quarter.

Gary Tenner -- DA Davidson -- Analyst

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

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

Well, like where they are today, at that roughly 12% or a little bit lower. I don't have any kind of idea this is going to move lower than that. I think we have sufficient capital. We continue to pay a competitive dividend to be in the market as I mentioned earlier on actively in the market on buyback and we'll have, I think plenty of capital that will build to support loan growth that comes back. So, I don't see a pull down in the capital ratios. I think they stay relatively level.

Gary Tenner -- DA Davidson -- Analyst

Great, thank you.

Operator

And our next question is from Matt Olney with Stephens. Please proceed with your question.

Matt Olney -- Stephens -- Analyst

Thanks, good morning, guys. I want to circle back on the PPP. I think you mentioned the PPP fees in [Indecipherable] to the 1Q levels.

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

Yes.

Matt Olney -- Stephens -- Analyst

What's the dollar amount of this. I can't find that in my notes from [Speech Overlap].

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

Well, the first, I'm sorry, the first quarter PPP fees were $11.2 million and in the second quarter it was $11.1 million. The interest that we recorded, net interest revenue on the PPP dollars was $2.4 million in the first quarter and about $1.7 million in the second quarter.

Matt Olney -- Stephens -- Analyst

Got it.

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

So, you'll continue to see that taper obviously as those balances are forgiven or pay out over the course of their [Technical Issues].

Matt Olney -- Stephens -- Analyst

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

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

I think it is $27 million remaining.

Matt Olney -- Stephens -- Analyst

Okay. Thank you. And then I guess switching over to the mortgage side, I guess in 2Q, we saw impacted by both volume and gain on sale margin headwinds. Do you think we're going to bottom here in 2Q or do you think we can continue to bleed lower from here?

Steven G. Bradshaw -- President and Chief Executive Officer

There's seasonality embedded in mortgage and so I think third quarter tends to be a good quarter, second quarter and third quarter tend to be a better quarters there. And I think we'll have a better quarter in the third quarter. I think that fourth quarter would be different depending on the rate environment and there is seasonality that moves against you a little bit in the fourth quarter there, but I think it's relative to second quarter. I would expect third quarter to be similar or better and frankly a little bit better based on kind of what we're seeing early in the quarter and believe will transpire there. Obviously, rates make a big difference there. But we've seen some back up there in rates, which will help. We've seen some changes around the adverse fee, but the agencies we're charging should help. I mean, there's some things that are creating a bit of a modest tailwind for the third quarter in addition to some positive seasonality impacts that will happen there as well.

Matt Olney -- Stephens -- Analyst

And I think the press release mentioned that the realized gain on sale margin was around 2.75%, which was obviously higher than the 155.

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

Yes.

Matt Olney -- Stephens -- Analyst

Are you trying to signal this is more of a longer term or more of a intermediate term level we should think about it for our forecast?

Steven G. Bradshaw -- President and Chief Executive Officer

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

Matt Olney -- Stephens -- Analyst

Okay, thank you.

Operator

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

Kemar -- Wells Fargo -- Analyst

Hi, good morning. This is Kemar [Phonetic] filling in for Jared. Maybe starting on asset sensitivity. If I remember correctly, during the last cycle, BOKF employed hedges to remain somewhat asset neutral. Is that a similar environment, similar strategy that's going to be employed in the future rising rate cycle where the [Indecipherable] is being out of liquidity in the system or I guess if you could just maybe provide some color on how you're positioning the bank heading into the much rising environment?

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

Well, I mean, I think as Stacy said, we did -- we were asset sensitive and -- coming out of the last cycle and we don't really see any reason to believe we'd be much different. I mean, our modeling is hard to compare to other banks, but we think we're kind of middle of the pack, frankly. And you'll see some numbers when we come out with our 10-Q, I don't know exactly where they will land, but I think we'll be somewhere around 5% asset sensitive. And that's on our -- 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'll be a lot different than it was coming out of the last near zero rate environment.

Steven G. Bradshaw -- President and Chief Executive Officer

And in fact, there's an opportunity to even outperform our strong performance last time when rates went up because I think there's more inherent liquidity in the system today. And so the banks overall are not going to feel as compelled to move rates up as quickly once the Fed starts to move on short-term rates. And so, I think that will allow the industry overall to lag deposit rates, perhaps even more than they did in the last time that rates went up. So, I continue to focus on actual results because there's a near term period where you guys can go back and look at how did banks actually perform the last time rates went up and I think that's a better indicator of the future than everybody varied assumptions around deposit modeling. And so I think that's what I would certainly continue to point people to.

Kemar -- Wells Fargo -- Analyst

Okay, that's helpful. And then if I can just have one more follow-up on the loan growth commentary. Looking specifically at your energy customers and the confidence that balances could start heading up in the back end of the year. I guess just given how much liquidity [Indecipherable] the fact that energy customers are still paying down debt and refinancing. I guess what gives you confidence that when the capital budgets are established later this year that borrowers are going to choose to lever up and borrow to drive that that growth rather than digging into their own pockets surely through the initial period?

Steven G. Bradshaw -- President and Chief Executive Officer

Well, I think they are savvy financial people, a modest amount of leverage can enhance the return of their capital investment and so that's been the case for a long time and so I think that, we'll -- I believe that we'll begin to see that. I mean, you look at on the hedging curve, it's backward dated, but you can still hedge above $60 per sure out almost three years. And so I think you're going to see folks begin to look at, hey, I can walk in my cash flow. I know what it's going to cost me to drill and I know how much of that I'm going to get back in that first three years because I can hedge at that level. I'm very optimistic. Our energy team is exceptionally strong. There is not a bank in the U.S. that I would trade our team for and we are seeing lots of opportunities there and we're going to get our disproportionate share because we remain very committed to this space and it's quarter who we are, it's a big part of the economic development of our footprint states in Colorado, Texas and Oklahoma. And we have every expectation to grow energy in the latter half of this year and into next year.

Kemar -- Wells Fargo -- Analyst

Okay and then just finally from me, more of a modeling question. But looking at trading securities balances at period end versus average, average balance was a couple of billion higher than period end. Can you just talk of the dynamics there and is that something where balances are higher during the entirety of the quarter and then dip down toward the end. And how should we expect that to impact NII in the coming quarter?

Steven G. Bradshaw -- President and Chief Executive Officer

Yes. So, yes we allowed those trading balances to be on average a little bit higher during the quarter. We did that intentionally to take advantage of the market and allow Scott and the traders in that group to generate some revenue. I don't think you see those average balances go up really any higher than that. I think they 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 toward 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 going into much higher on average than that $7.5 billion.

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

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

Steven G. Bradshaw -- President and Chief Executive Officer

But I think the big take away from that for us is we had a really strong quarter there and that we believe we can sustain that in the third quarter. That -- as we think about the product mix and the customers that we've added, we think that that's a level that we can sustain into the third quarter. Now, there's some seasonality in the fourth quarter that will impact that, but certainly we think we can sustain that level of revenue into the third quarter.

Kemar -- Wells Fargo -- Analyst

Okay, great. Thank you for the questions.

Operator

And our next question is from Ron Arfstrom with RBC Capital Markets. Please proceed with your question.

Ron Arfstrom -- RBC Capital Markets -- Analyst

Thanks, good morning guys.

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

Hi.

Steven G. Bradshaw -- President and Chief Executive Officer

Good morning.

Ron Arfstrom -- RBC Capital Markets -- Analyst

Steven, question for you. Just on how you want us to think about the provision talking about maybe migrated to pre-pandemic reserve levels. Is that -- are you flagging day one CECL as the benchmark for us? Is there something else going on?

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

Yes. I think that's right. I mean when that 120 to 125 range was pretty much day one CECL, that's kind of pre-pandemic level. So, I guess, we're using those two terms in the same light. I think we migrate that direction, so long as the economy continues to improve. We're very comfortable with our credit quality, continues to get better. All of the metrics internally from potential problem loans, non-accruals, classified, criticized all those areas continue to decline. Charge-offs are right at the lower end of historical levels. I don't really see any change in all of that. So, and if you get loan growth added to it, the mix then I do think we migrate the percentage downward. I think we're at 1.66% on a combined reserve, when you exclude PPP and that migrates, I don't know how long that it takes, we'll just have to see, but year, year and a half who knows we'll migrate that direction we believe.

Ron Arfstrom -- RBC Capital Markets -- Analyst

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

Steven G. Bradshaw -- President and Chief Executive Officer

None are apparent. I think that the same dynamics that exist in our Kansas City or similar to what is in Dallas, I mean, if you think about just our geographic footprint overall, what we've got a great footprint for long-term economic growth, do you think about Texas and Colorado and Arizona, awfully well positioned in those states that are going to have disproportionate economic growth we think over the next 10 years. But in terms of the near term, there's nothing different that we see in the markets themselves.

Ron Arfstrom -- RBC Capital Markets -- Analyst

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

Stacy C. Kymes -- Executive Vice President and Chief Operating Officer

We have seen a lot of new entrants at this point. I mean, all the discussion about loan growth and everybody's seeking that. I mean, I think at some point, you're going to have some folks relook at that and come back in. But clearly, we're seeing good opportunity for us to lead deals. We think about energy from a lending perspective, but there's probably not another segment that we have a fuller revenue suite than in energy, where we've seen our investment banking dollars go, our syndication revenue go up, our hedging revenue go up. I mean, the portfolio, our customer portfolio is the best hedged that I've ever seen into my career here and they're doing a lot of that business with us. And so from a full business perspective that's been and continues to be a wonderful business for us. We're not seeing some of the folks who have to come back yet, you may, but clearly we're seeing opportunities and we're being rewarded for our consistency in this space.

Ron Arfstrom -- RBC Capital Markets -- Analyst

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

Stacy C. Kymes -- Executive Vice President and Chief Operating Officer

Sure. I think there's a couple of things. Most of the ESG analysis that happens today is kind of at the corporate level. So, what are we doing from an environment -- what is BOKF doing from an environmental perspective, not necessarily what are your customers doing and that is where ESG is today for the most part. But certainly, as it evolves, there'll be more in terms of what your customers are doing. But as we think about ESG in our relationship to energy, you think about a couple of different ways. Number one, we exist in large respect to provide capital to help those and our state do well. So, you think about where our footprint is, energy is a big part of that in Colorado, Texas and Oklahoma. But one of the most expensive taxes on people and lower income brackets is energy and so an inexpensive source of energy that exist with oil and natural gas is clearly a positive and if you've been and I have been, if you've been on rigs with folks who work in the Permian or some of the [Technical Issues] they hunt and fish on those same plans that they're drilling on. They care deeply about the environment that they're drilling on. And so this will evolve. I think that a lot of the technology that we think about with respect to energy will also impact carbon-based energy. So whether, it's methane capture technology or things like that. I think that we're a long way away from peak carbon demand, if you will, to propel the domestic economy and there's a place for that and we're happy to provide capital to those who has helped produce that for our country.

Ron Arfstrom -- RBC Capital Markets -- Analyst

Okay, thanks. Stacy.

Operator

And we have reached the end of our question-and-answer session. I'll now turn the call over to Steven Nell for closing remarks.

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

Thanks everyone again for joining us. If you have any further questions, please call me at 918-595-3030 or you can email us at IR at bokf.com. Everyone have a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 54 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 and Chief Operating Officer

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

Peter Winter -- Wedbush Securities -- Analyst

Brandon King -- Truist Securities -- Analyst

Brady Gailey -- KBW -- Analyst

Gary Tenner -- DA Davidson -- Analyst

Matt Olney -- Stephens -- Analyst

Kemar -- Wells Fargo -- Analyst

Ron Arfstrom -- RBC Capital Markets -- Analyst

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