Greetings, and welcome to the BOK Financial Corporation's 2nd Quarter 2020 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.
Stephen Nell, Chief Financial Officer for BOK Financial Corporation. Thank you. You may begin.
Good morning, and thanks for joining us. Today, our CEO, Steve Bradshaw, will provide opening comments and Stacy Kymes, Executive Vice President of Corporate Banking, will cover our loan portfolio, including detail around our energy, healthcare and commercial real estate portfolios. Mark Mahn, our Chief Credit Officer will cover credit metrics and Scott Grauer, Executive Vice President of Wealth Management will cover the outstanding results from his team this quarter. Lastly, I'll provide 2nd quarter details regarding net interest income, net interest margin, additional fee revenues, expenses and our overall balance sheet position from a liquidity and capital standpoint. In addition, I'll provide a few thoughts regarding expectations for future quarters.
PDFs of the slide presentation and Q2 press release are available on our website atbokf.com. We refer you to the disclaimers on Slide 2 as it pertains to any forward looking statements we make during the call. I'll now turn the call over to Steve Bradshaw.
Good morning. Thanks for joining us to discuss the second quarter 2020 financial results. We are pleased to report a record quarter for BOK Financial in terms of pre provision net revenue despite the many economic challenges due to COVID-nineteen. Shown on Slide 4, 2nd quarter net income was 64 $700,000 or $0.92 per diluted share. That's up 4% from last quarter despite another quarter of elevated provision for credit losses.
Earnings this quarter were bolstered dramatically by $214,000,000 in revenues from our fee businesses as our wealth management and mortgage teams have continued their momentum to post simultaneous record quarters for the company. Focusing on pre provision net revenue, it's clear to see the significant benefit we drive for our company with our long term commitment to balanced revenue and breadth of business capabilities. Pre provision net revenue was $216,000,000 this quarter, the highest level in the history of our company. Considering the environment we find ourselves in today, this is truly a remarkable outcome that all of our high performing and talented employees should be proud of. Fee and commission revenue was up nearly 11% from the previous quarter and an incredible 21% quarterly year over year on continued strong wealth management and mortgage revenues.
Fee revenue now represents 43% of total revenue, and that's up from 38% in the same quarter a year ago. This once again demonstrates an important differentiating characteristic of BOK Financial. We have long had a diverse revenue mix that provides an earnings buffer and economic downturns because of the countercyclical nature of some of these fee revenue streams. Expense management remains prudent with an efficiency ratio below 60% for the quarter, even with the shift in the mix of revenue towards fee income. It should also be noted that we added $3,000,000 in unplanned contribution to our foundation, including an incremental $1,000,000 in the second quarter to aid those in our communities with food insecurity, while providing much needed jobs for displaced restaurant workers.
Our loan loss provision was $135,000,000 this quarter due to a combination of changes in our reasonable and supportable forecast of macroeconomic variables, along with some credit migration that Mark will cover in more detail momentarily. While we continue to build a reserve again this quarter, we believe the material reserve build should be largely complete, assuming our economic forecast is in line going forward. Net interest revenue was up $16,700,000 to $278,000,000 this quarter despite the ongoing impact of the 150 basis points of emergency rate cuts in March, our ability to decrease deposit costs and the relatively elevated nature of LIBOR early in the quarter helped preserve a large portion of our margin. Stephen will cover the underlying components in more detail later in the call. Turning to Slide 5, average loans increased $2,200,000,000 to eclipse $24,000,000,000 this quarter.
While this was positive for the company overall, dollars 1,700,000,000 of this was due to the Small Business Administration's PPP program. Average deposits were up nearly 16% linked quarter and up nearly 30% from the same quarter a year ago. We attribute this strong growth to continued momentum in deposit gathering activities along with PPP loan deposits and government stimulus payments. Even with the significant growth in deposits, we were able to bring overall interest bearing costs down from 98 basis points last quarter to 34 basis points this quarter as we were able to adjust rates paid on interest bearing deposits due to our proactive management in the face of an unprecedented Fed movement in the Q1. Assets under management are in custody, were up nearly 5% this quarter on strong sales efforts and increases in the equity markets during the quarter.
We believe asset growth is in part attributable to the volatility in the markets, which has really underscored the value that a professional advisor brings to individual and corporate investors during times of extreme uncertainty. I'll provide additional perspective on the results at the conclusion of the prepared remarks, but now Stacy Kymes will review the loan portfolio in more detail. I'll turn the call over to Stacy.
Thanks, Steve. As you can see on Slide 7, period end loans were $24,200,000,000 up $1,700,000,000 for the quarter. PPP loans added $2,100,000,000 to the portfolio. So then we did see growth in some of our specialty areas, net of PPP, broad paydowns across our core commercial and industrial loan book actually contracted the portfolio this quarter. Some of this was repayment of more defensive draws in the Q1 and some of this was through the organic decline in economic activity.
Energy loans contracted 3.3% for the quarter as commodity prices made new deals difficult to source in the current environment. Energy borrowers are paying down debt to reduce leverage at this point in the cycle. Energy commitments were down $360,000,000 from the Q1 of 2020 $630,000,000 since the end of the year. These commitment declines are a direct result to the redetermination of borrowing basis that occurred during the Q2. Despite these factors, we remain open for business and continue to support our customers in the energy industry.
Energy lending is core to our DNA and our experience in previous commodity cycles proved that this is a profitable business when approached in a consistent and disciplined manner. This business is more than just lending activities as evidenced by the record quarter we had of $5,400,000 in energy derivatives revenue this quarter as customers continue to aggressively manage their commodity risk. This long term view has served us well. And today, we remain well positioned in the industry with a complete service offering, world class energy bankers and enviable customer base. We continue to see great opportunity for our energy franchise over the next several years as other banks have retrenched from this space entirely or in part.
Mark will cover the credit specifics of the energy portfolio momentarily. But as we said in the past, we believe the duration of the oil price decline is a more significant factor affecting performance than the level of prices. Our healthcare sector loan balances increased $124,000,000 to $3,300,000,000 or nearly 4% for the quarter, primarily due to growth in balances from our hospital system clients who demonstrate a strong credit profile. This client segment has been impacted due to deferrals of elective procedures as well as the need to increase the inventory of supplies and protective equipment. That said, the CARES Act has multiple revenue enhancement measures for both hospitals and skilled nursing facilities as they manage due to risk of the virus.
This has benefited multiple clients and is expected to help mitigate the credit risk in the healthcare portfolio. While it is still early, thus far we have not realized any material credit migration or deterioration in this portfolio. Commercial Real Estate loan balances were up 2.3% from the previous quarter, largely due to the lowest level of pay downs we have seen in many years as a result of friction in the permanent financing market. While PPP loans did help stimulate overall loan growth in the second quarter, our outlook for loan growth for the rest of the year will largely be determined by the speed and shape of the broader economic recovery. I'll turn the call over to Mark Mahn to discuss our credit metrics.
Mark?
Thanks, Stacy. Turning to Slide 9, we've again compiled a list of loan segments we consider more exposed to the economic impact of the pandemic. As you can see, the exposure to the entertainment and recreation, which includes gaming in our Native American specialty portfolio that boasts a strong credit profile, retail, hotels, churches, airline travel and higher education that are dependent on large social gatherings to remain profitable today is less than 7% of our total portfolio. This group of loans is highly diversified with over 5 50 loans for an average loan size of less than $3,000,000 Some of these clients have participated in the Paycheck Protection Program, which has provided some measure of relief. We'll obviously continue monitoring these exposures closely in the coming months.
Credit quality has remained manageable and but there has been some migration of non accrual and potential problem loans given the current economic environment, primarily in our energy portfolio that led to a larger provision for credit losses in the Q2. Slide 10 details our provision actions this quarter. The total provision was $135,300,000 with $138,800,000 related to lending activities. Changes in our reasonable and supportable forecast of macroeconomic variables, primarily due to the anticipated impact of the ongoing COVID-nineteen pandemic and other assumptions required a provision of $54,600,000 All other changes totaled $84,200,000 which included $14,400,000 primarily due to increased specific impairment of energy loans and portfolio changes of $55,700,000 primarily due to changes in risk grades related to energy loans. The $84,200,000 was partially offset by the impact of a decrease in loan balances and net charge offs of $14,100,000 bringing net portfolio change adjustments to $70,100,000 for the quarter.
The provision related to lending activities was partially offset by a $3,600,000 decrease in the accrual for expected credit losses for mortgage banking activities. Our base case reasonable and supportable forecast includes an 18% increase in GDP and an 8 0.4% civilian unemployment rate in the Q3 of 2020 as adjusted for the impact of government stimulus programs. Our forward 12 month forecast through the Q2 of 2021 assumes a 5% increase in GDP and an 8.5% civilian unemployment rate. WTI oil prices are projected to generally follow the NYMEX forward curve that existed at the end of June 2020, dollars 38.99 per barrel for delivery in the Q3 of 2020 and increasing to $40.13 per barrel in the Q2 of 2021. Our downside reasonable and supportable forecast reflects a more severe and prolonged disruption in economic activity than the base case and includes a 6% increase in GDP and a 9.7% adjusted civilian unemployment rate in the Q3 of 2020.
Our forward 12 month forecast through the Q2 'twenty one assumes a 6% increase in GDP and a 10% adjusted civilian unemployment rate. WTI oil prices are projected to range from $33.99 per barrel for delivery in the Q3 2020 to $34.63 per barrel for delivery in the Q2 of 2021. Turning to Slide 11, non accruing loans increased $92,000,000 this quarter, primarily due to a $67,000,000 increase in non accruing energy loans and a $13,000,000 increase in non accruing services loans. As we have said before, we believe the risk of migration to potential problem and non accruing status outweighs the risk of loss in the energy portfolio. Potential problem loans totaled $626,000,000 at quarter end, up from $293,000,000 at March 31.
This increase largely comes from the energy portfolio as the recent oil price decline coupled with the capital markets environment requiring certain customers to work through their liquidity needs weighed on some energy borrowers. Commodity prices, particularly oil prices remained depressed throughout most of the second quarter, but recovered somewhat in June. As we noted last quarter, if prices remain depressed as we went through the spring borrowing base redetermination process, we would expect continued credit quality issues in this portfolio. We realized this migration as we completed most of our redeterminations in April May. Prices have improved since, but do remain fragile and closely tied to the continued economic recovery.
Should current price levels hold into the fall, we would anticipate positive credit quality migration in this portfolio. The allowance for loan losses totaled 436,000,000
dollars or 1.8
percent of outstanding loans at June 30, 2020. Excluding PPP loans, the allowance for loan losses was 1.97% of outstanding loan and the combined allowance for loan losses and accrual for off balance sheet credit risk from unfunded loan commitments was 2.12%. Fiscal stimulus has had a positive effect on credit quality through PPP loans, SBA support and other CARES Act programs. That said, we received a number of deferral or forbearance requests early in the quarter, but very few new ones after April. All requests were evaluated on a case by case basis, and we have granted $1,200,000,000 in forbearance requests from customers as of June 30, including $704,000,000 or about 5% of commercial loans, primarily in the small business and healthcare portfolios, $398,000,000 or roughly 9% of the commercial real estate loans and $143,000,000 or roughly 4% of loans to individuals.
We are just starting to reach the expiration of the 1st 90 days and to date over 60% of the deferred loans are going back to regular payments. While retail commercial real estate does account for over 40% of our commercial real estate deferrals, we have not experienced any material credit issues to date, primarily due to stimulus programs. Clearly, the retail portion of this portfolio is the most vulnerable to sustained stay at home and shelter in place directives. As with oil, the lost content in retail will closely correlate with the duration of the various governmental orders and adjustments in consumer behavior after these orders are lifted. While office and multifamily will see impacts here, we believe our geographic footprint will help us in these segments in the long term because of the strong in migration over time.
Short term quality migration in commercial real estate will be dependent on economic recovery and the impact of fiscal stimulus. I'll turn the call over to Scott Grauer to cover the Wealth Management fee revenue contribution this quarter. Scott?
Thanks, Mark. On Slide 13, you'll see the highlights of the Wealth Management division's 2nd quarter financial results. As our investors know, Wealth Management is a business that we've been committed to for over a century at BOK Financial, with a broad cross section of products and services, including institutional and personal wealth management, trust services for individuals and corporations and institutions, private banking services, retail and institutional brokerage, investment banking and financial risk management as well as a few others. Wealth Management revenue was up 14% to $134,000,000 from the previous quarter and up 18% quarterly year over year. This is inclusive of the fee income lines that investors see in our corporate income statement, brokerage and trading and fiduciary asset management, but it also includes net interest income from loans and deposits in our Private Wealth Group and our trading portfolio.
BOKF's continued its growth in hedging pipeline risk and providing liquidity to mortgage originators, strengthening its position as a market leader and a market maker in that space. Overall mortgage issuance increases driven by lower rates as the Fed stepped in to provide market stability and GSE policy changes around forbearance created an opportunity for BOKF to provide greater liquidity to the housing market during a period of record volumes, increasing the trading portfolio by 27% and driving a record quarter in our trading and derivatives business. Total brokerage and trading revenues generated in the Wealth Management division were up 61% from the same quarter a year ago, eclipsing $54,000,000 The majority of this was derived from mortgage related trading activity with 2nd quarter total MBS, TBA trading related revenue of $48,000,000 That's a 21% increase over linked quarter and a 2 20% increase from the same quarter a year ago. Net direct contribution, which is operating income before corporate allocations, was up a robust 37% for the quarter. This was a result of careful expense management as total operating expenses for the division before corporate allocations were up only 3% compared to last quarter and up 16% from the same quarter a year ago, despite the outsized revenue growth.
This translated into significant and meaningful earnings leverage for the division. On the net interest revenue side, wealth management loans were up slightly and deposits were up 10%, respectively, this quarter, a testament to our ability to be additive in a multitude of ways to the company. In fact, wealth management deposits now represent 26% of total company deposits as our efforts there have expanded relative to the rest of the company. Perhaps most importantly, the stage is set for continued growth in the Wealth Management division. In the short term, lower interest rates and the resulting stimulation of the mortgage industry bodes well for continued performance in our Brokerage and Trading segment.
Longer term, the retirement of the baby boomers and transfer of nearly $6,000,000,000,000 of wealth to their heirs is one of the most powerful demographic trends facing the wealth management industry. We believe we are well positioned to benefit with a diverse set of products and services to meet the needs of the next generation. I'll now turn the call over to Steven Nell. Steven?
Thanks, Scott. As noted on Slide 15, interest income for the quarter was $278,000,000 up nearly $17,000,000 from the Q1, though $13,600,000 of that was attributable to PPP loan activity. Net interest margin was 2.83% compared to 2.80% in the previous quarter. The extreme reduction in deposit costs of 64 basis points all the way down to 34 basis points, LIBOR spread remaining elevated early in the Q2 and the strategic positioning of our balance sheet have combined to reduce the pressure on margin this quarter. Excluding the impact of PPP loans, net interest margin was 2.82% compared to 2.80% in the previous quarter, a testament to the steps we've taken.
Average earning assets increased $1,900,000,000 over the last quarter and average loan balances increased $2,200,000,000 largely due to the influx of PPP loans in the 2nd quarter. Available for sale securities increased $816,000,000 as we have adjusted our balance sheet for the current rate environment. Fair value option securities held as an economic hedge of the changes in fair value of mortgage servicing rights decreased $1,000,000,000 In addition, receivables from unsettled securities sales primarily related to our mortgage backed trading operations increased 1,600,000,000 dollars Growth in average earning assets and non interest bearing receivables was largely funded by $2,200,000,000 increase in interest bearing deposits. More than $2,000,000,000 of PPP loans outstanding at quarter end were funded through the Federal Reserve's PPP liquidity facility. On Slide 16, fees and commissions were $213,700,000 an increase of nearly 11% from last quarter and an increase of 21% quarterly year over year.
This was fueled largely by strength in our brokerage and trading business that Scott just covered, but also a record quarter from our mortgage banking activities. Mortgage banking saw a significant surge in production revenue this quarter, growing $17,600,000 or more than 81% relative to last quarter and almost 2 30% from the same quarter a year ago. While volumes were up, it was the increase in gain on sale margins of 159 basis points compared to last quarter that drove the strength. Today, the industry is against capacity constraints, which is easing pricing competition and growing margins. Refinances represented 71 of total originations as low rates drove much of the demand.
While we see the 2nd quarter as peak seasonality in this space, we fully expect to be able to capture our share of the purchase and refinance activity as long as the opportunities persist. Service charges decreased $4,100,000 largely due to the shelter in place impacts coupled with proactive waivers of fees that were extended as a courtesy to our customers during the pandemic. Another success story of the quarter relates to the hedging of our mortgage servicing rights. This quarter, the net MSR activity results in a 9,300,000 benefit through the combination of positive net hedging results, modest assumption updates and an economic benefit from the sale of approximately $1,600,000,000 in unpaid principal balance of our out of footprint Ginnie Mae servicing rights, an impressive outcome as the rate environment remains volatile. Many of our fee businesses are clearly driving the overall success story of the company, once again highlighting the significance of the revenue diversity that we have.
Turning to Slide 17, total operating expenses increased $26,800,000 to 295,400,000 Personnel expense increased $20,000,000 for the quarter, largely due to a $22,300,000 increase in incentive based compensation split between cash based and deferred compensation. The cash based portion of $11,000,000 resulted from increased trading and mortgage activity and $11,600,000 of deferred compensation, largely related to the overall equity market recovery. This recognition of deferred compensation expense is offset by an $11,700,000 gain on related deferred compensation assets, resulting in no earnings impact for the quarter. Other components included an increase in regular compensation of $1,500,000 and a seasonal payroll tax decrease in employee benefits of 2,100,000. Non personnel expense was up 6 point $7,000,000 for the quarter.
Mortgage banking costs increased $5,100,000 with $1,700,000 due to MSR amortization expense and $2,800,000 due to changes in our portfolio and loan counts, delinquency levels and additional accruals related to losses on loans and forbearance. Occupancy and equipment expense increased $4,600,000 due to the impairment of 2 leases. We also made a charitable contribution of $3,000,000 to the BOKF Foundation in the 2nd quarter. These increases were partially offset by a decrease of $4,300,000 in business promotion costs, largely related to reduced travel and entertainment expenses as a result of the pandemic. Our liquidity position remains very strong given the exceptional inflow of deposit balances.
Our loan to deposit ratio is now 71% compared to 77% at March 31, providing significant on balance sheet liquidity to needs. Additionally, we have $14,600,000,000 of secured borrowing capacity and over $6,500,000,000 of unsecured and contingent liquidity capacities to support liquidity needs of the company. Our capital levels remain strong with a common equity Tier 1 ratio of 11.4%, an improvement from 10.98% last quarter and well ahead of our internal operating range minimums and a full 4.40 basis points above regulatory minimums. Our internal stress tests have given us confidence to support our customer base and to maintain our current level of dividends. Although we have no set plans or commitments to buy back stock in the near term, our capital levels would allow for that opportunity.
Currently, we don't feel the need to supplement holding company or bank level capital with any capital raising actions. Due to the continued uncertainty around the severity and duration of the pandemic and its impact on the broader economy, it's difficult to provide specific guidance that we've done in more normal times. But I'll give you a few comments on Slide 19 that might be helpful. Our loan growth is expected to be soft for the foreseeable future. Most energy deals will likely not be done at current prices.
Many healthcare opportunities will remain on hold due to the pandemic and little activity will be present in our CRE and C and I portfolios. We will continue to originate mortgage loans, very limited amount ending up in our permanent portfolio. Our available for sale securities portfolio, which is largely agency mortgage backed securities yielded 2.29% during the 2nd quarter. Given the sustained low rate environment, prepayments could reach over $700,000,000 per quarter. We expect to reinvest those cash flows at current rates around 90 to 100 basis points.
As we noted, we had success during the second quarter driving deposit costs down significantly. We feel there's a bit more room to reduce deposit costs, but likely will not drift much below 30 basis points, which is comparable to our deposit cost low watermark during the last near zero rate environment. The combination pressure of asset yields and little room to lower deposit costs will put some pressure on net interest margin in the next quarter. Our diverse portfolio of fee revenue stream should continue to provide some mitigating impact to overall earnings pressure being felt in our spread businesses. We expect our brokerage and trading activity to continue at elevated levels given our products and capabilities in the mortgage backed trading space.
Our mortgage origination and servicing business should remain solid, but will likely slow some as refinance opportunities abate and seasonality trends slow as the year progresses. Our disciplined approach to controlling personnel and non personnel costs will continue. We have no plans to reduce staffing or cut existing capabilities or products. As you've seen with BOKF and most other banks, significant loan loss reserve building has taken place during the 1st and second quarter. Although there remains much uncertainty in the economic environment, we believe loan loss reserve building is largely behind us.
As I mentioned a moment ago, we feel good about our capital strength. We'll maintain our current level of quarterly cash dividends and we'll evaluate share buyback as the year continues. I'll now turn the call back over to Steve Bradshaw for closing commentary.
Thanks, Stephen. Our success this quarter is a result of a long term strategy to serve clients in a holistic way with the benefit to shareholders of less earnings volatility and enhanced risk mitigation as we do not feel any temptation to reach for growth by extending risk in any of our lending businesses. Those who have been with us for a while can think back to the last interest rate cycle where most financial institutions saw their earnings opportunities compress with net interest revenue. At that time, as it does today, BOK Financial outperformed with a unique heavily fee based business model that benefited our shareholders through that challenging environment. While no two downturns are the same, there are clearly several bright spots proving out at BOKF today, namely in our wealth management and our mortgage businesses.
That said, the most significant opportunity going forward will be the return to full economic activity in a safe manner across the nation. Ultimately, we thrive when our clients and our communities do, so our expectations remain tempered as the path to a healthier macro environment comes into focus. Until that time, we will continue to do everything we can to assist our customers regardless of the speed and shape of the economic recovery. Achieving more together is a phrase you'll often hear at BOKF and that couldn't be more true today. When COVID-nineteen began to threaten our communities, we stood together taking difficult steps to reduce the risk of infection for our clients and each other.
Being together apart does have its own set of challenges, but we continue to learn from our virtual experience and we are laying it to shape how we will manage aspects of our business going forward. I'm just as proud of the resiliency I see in the individuals across our organization as I am the financial outcomes it is generating. Our strategy and our people at BOK Financial are clearly different than most similar sized peers and I think that our ability to compete effectively with the national banks and investment firms is a significant factor in the results we produced this quarter. With that, we are pleased to take your questions. Operator?
Thank you. Our first question is coming from Ken Zerbe of Morgan Stanley. Please go ahead.
Great, thanks. Good morning.
Good morning,
Ken. Good morning. I guess maybe just sort of a broad question about energy. I know when the whole pandemic started, you guys sort of made some cautious commentary just about obviously the duration, the magnitude of the pandemic could lead to some pretty serious losses, if it were to continue. How is that it's been 3 months since your last earnings release, like how is that the trends in the energy industry performed versus kind of your expectations at the beginning of the cycle?
Thanks.
Sure. Ken, this is Stacy. I think from our perspective, the recovery has been swifter than we would have anticipated when it began. I think the market and I think including us didn't forecast the level of shut in production and things that would happen to curtail supply in this environment. We saw a very strong response from the industry when prices decline so precipitously.
And so the industry has always been self healing and we talk about that. It usually takes 6 months to 18 months to kind of find a new equilibrium price. But certainly the price recovery that we've seen in the last 30 days or so, particularly in oil has been very encouraging. And certainly we feel much, much better about future loss potential at these price levels than what we were. We're on the strip average, not on the spot, but on the strip average, we're $12 or so per barrel higher today than we were when we had our earnings call last quarter.
And that makes a big difference in terms of our outlook and what we see as potential loss content there. I think Mark alluded in his comments to the fact that if prices stay here, we would expect to see positive credit outcomes from a credit migration perspective as we move into the 3rd Q4. Recall that we don't downgrade the whole portfolio when prices move. We do that as we touch them through the semiannual redetermination process. And those prices were not great prices when we were going through the redetermination.
But much in the same way, we don't upgrade the entire portfolio when there's a price recovery. So as we touch those credits in the late 3rd and into the Q4, if prices hold at these levels, we would expect to see very positive migration in that book.
All right, great, perfect. And then just the second question, you had a line in your press release that it looks like you of your deposit growth, it says $2,700,000,000 was related to CARES Act funding. I think you had $2,100,000,000 of PPP loans. Can you just clarify that? Did you access the federal government's facility to fund the PPP loans?
Was that part of the deposit growth?
Ken, this is Stephen. No, that was just an inflow both from PPP as well as all other kind of CARES Act initiatives that generated that deposit growth. So it was not just PPP, but it was other CARES Act stimulus that flowed into our customers' accounts. So we went through and tried to find out how much of our $4,500,000,000 of deposit growth was related to either CARES or other stimulus programs and came up with roughly $2,700,000,000 of that growth was from those areas. The rest of it was just regular kind of growth from our core customer base.
I see. Okay. So if the PPP loans pay off and or let's just say PPP plus loans pay off, that maybe $2,700,000,000 of that funding might go away or that deposits go away. But then you're saying the other call it, roughly $2,000,000,000 of deposits is just core deposits that might be more sustainable over time?
That's correct.
All right, perfect. Thank you very much for the questions.
Thank you. Our next question is coming from Gary Tenner of D. A. Davidson. Please go ahead.
Thanks. Good morning, everybody. Mark, I appreciate the color on the the economic outlook. I think in the slide deck, it noted kind of the build was based on 3 scenarios that you highlighted too. Could you I assume the 3rd is that a further adverse scenario or is that a kind of upward scenario and maybe could you tell us the weightings between the three scenarios that you used?
Sure. The base case scenario is when we highlighted there that we weighted at 50%. We also run an upside case and a downside case that weighted each of those at 25%. That's similar weighting to what we had in the Q1. Again, the economy is moving so quickly and changing so rapidly that we felt that kind of that base even weighting across those scenarios of a 50%, 25%, 25% helped reflect kind of that potential volatility.
Okay. Thank you. And then as you're thinking about recognizing the fee side of the PPP loans and what you've got embedded in the net interest revenue this quarter from that. Was that just based on a 24 month average life or have you made any other adjustments in terms of assuming a shorter average life for revenue recognition purposes?
So, yes, this is Steven. You're correct. We felt there was about $13,600,000 I believe benefit on our net interest income from PPP split well not split, but roughly $10,000,000 or a little bit more was the fee recognition side and another $3,000,000 or so just in net interest income from PPP loans. We have it weighted as those loans begin to get forgiven out more in the Q4 than any other period. So you'll see additional in the 3rd, but then more in the 4th quarter as we think a lot of those will begin to get into forgiveness status and then there'll be a tail of it as those loans stay on the books out for 24 months.
So we've got it staged out that way.
All right. Thank you.
Thank you. Our next question is coming from Brady Gailey of KBW. Please
I wanted to start with fee income. I mean, another new record this quarter after another record last quarter. But it sounds like, I mean, from your commentary, it sounds like brokerage and trading could remain at this level, mortgage could come down some, but it sounds like fee income will remain at close to this elevated level for the rest of the year. Is that the right way to think about the strength in fee income? So
why don't you take the brokerage and trading piece and I can make some comments about mortgage?
Okay. So, sure. So, this is Scott Grauer. In terms of wealth management, a couple of reasons we feel confident about the momentum and really beyond even the mortgage backed securities volume and activity, which was obviously very strong in both the 1st and second quarter. And we look to maintain robust levels there, both on our TBA hedging activity as well as just the overall volumes inside of the mortgage backed securities product mix.
But we've got good momentum and have had solid results in our Financial Institutions Group, which offers both taxable and tax exempt securities across the spectrum to downstream banks. As banks look to position their securities portfolios with a little bit of a waning loan demand. So that activity has been very strong. In terms of our Corporate Trust business and our Retirement Plans business, we've seen very good activity and pretty good pipelines. In fact, in our defaulted debt space and our corporate trust piece where we typically have handled 1 or 2 recognizable names.
We today have 8 defaulted debt assignments. So that presents good opportunities for us. Our investment banking activity in the second quarter was very strong, both on the municipal piece, financial advisory and underwriting, as well as our corporate deals where we had surprisingly high number of capital market transactions for energy names. So when you look at just the overall trust fees, we really went from a period of decline if you looked at from end of 2019 to the end of March and then on into April, trust fee revenue rate had declined about 17% from peak to the bottom, and we've now recaptured that and are back on year end trust fees overall beginning in June. So we feel like we've got pretty good activity and a reason to be confident about sustaining the momentum.
So Brady, on the mortgage side, we've had 2 quarters in a row now with mortgage production volumes over $1,000,000,000 I think the difference this quarter was the margin, the gain on sale margin improved from 206 in the Q1 to 365 in the second quarter. So that's what drove the majority of that increase in mortgage revenue. And I we're going to be strong there, I think on out through the year. But I do think there's some seasonality there. When you look at the 2nd quarter also being 71% refi, I mean, those refis are not going to last forever.
I mean, I think that abates some over time. So even though I think mortgage is going to stay strong, I'm cautious to say it hits the same level that it hit in the second quarter because of the outsized margins. The rest of the fee businesses look pretty good. I mean, you look at the Trans Fund network and their activity, their softness in consumer service charges. You see that across the industry with the pandemic.
And we'll see if that recovers over time. But our fee businesses are going to be a pretty significant contributor, I think, for the next several quarters relative to our other businesses in the bank.
All right. That's helpful. And then lastly for me, if you look at potential problem loans, they're up a pretty notable amount in the quarter. I think they went from roughly $300,000,000 to about 6 $100,000,000 I think you guys called out energy as one of the big drivers. But any other color on the increase in potential problem loans in the quarter?
Well, this is Mark. To date, it really has been energy driven. The borrowing base redetermination season was in the primarily in April May, which was at the low point for oil prices. And so that was what caused the migration in those potential problem loans, which we hope, as Stacy mentioned earlier, prices stay where they are, that, that will migrate positively as we go into the fall. To date, we have not seen any significant migration in other portfolios.
We've had nothing that I would call outsized relative to what you would see in a normal cycle. We are monitoring our portfolios across the board, have done a lot more deep dives into areas of where we consider higher risk, and we're focused on those. And so we'll monitor them closely and evaluate them as they go forward, but we haven't seen any significant migration yet.
And I would expect to see that improve much like the commodity price improvement that we've seen. That's also that potential problem loan bucket is where we put those revolving credits and energy that have gone through bankruptcy, but the revolver is generally okay, but it's the sub debt or the capital markets unsecured debt that is being kind of cleansed and equitized. We've used that potential private loan bucket to kind of park those as they go through that process. So as those begin to emerge, there could be some positive credit migration that would come out of there from that perspective as well.
Got it. Thanks guys.
Thank you. Our next question is coming from Jennifer Demba of SunTrust Robinson Humphrey. Please go ahead.
Hey, this is Brandon King on for Jennifer.
Hey, Brandon.
Hey, I noticed
that in your impact areas table that churches and colleges were mentioned and I wanted to know if you had any color on what was going on as far as trends in these portfolios?
As far as to date on those portfolios, we haven't seen any significant issues on the colleges and university side of it. Of course, we're in the summer. We're waiting to see how they plans at the various universities make with regards to reopening and bringing students back. But we're in visiting with those. We're we feel like we're in good shape on those loans today, but we're closely monitoring them.
On the churches, it is a broad based portfolio of a lot of smaller loans. So we've had 2 or 3 loans that we've had some issues with, but overall, we haven't seen any migration yet. But that's a much broader base. There's not substantial large loans in that portfolio. They tend to be pretty small.
So we feel pretty comfortable that we can manage that risk associated with that portfolio.
Okay. Thanks. And just additionally, of the impact areas, which of those areas are you seeing the most stress? And what areas are you seeing the least stress?
Well, if I just be selective on that, I think the least stress is probably in the casino piece of that. Those are with almost they're all exclusively Native American and tribal casinos. I think 70% of our outstandings are covered by cash that's available at either the casinos itself or the tribes. So while they have shut down completely for a couple of months, they're starting to reopen. We feel pretty comfortable based on the liquidity of the tribes and so forth.
There was very few PPP loan requests associated with the casinos or loan deferrals associated with the casinos. So that has probably performed in a positive manner. We have a small hotel portfolio that we acquired as a result of our CoBiz acquisition because that's not an area that we pursue or or have ever pursued actively. That portfolio, it's pretty small, but it is probably going to be the most challenged portfolio of the loans that are identified on that slide.
All right. Thank you very much.
Thank you. Our next question is coming from Jon Astrum of RBC Capital Markets. Please go ahead.
Thanks. Good morning.
Good morning. A couple of cleanup follow-up questions, I guess. Just on the energy NPLs, Stacy or Mark, can you just talk about the characteristics of the increase? It may be obvious, but give us an idea of what's in there.
Well, what happens, I guess, I'll put it this way, the increase in the nonperformings were done primarily from the borrowing base redetermination process we went through in April May. We in our price deck, as Stacy noted, was $10 to $12 less. So based on that, when we're discounting back the cash flow, the level of collateral support was below, in some cases, what the loan level was and would need to be a deficiency that would need to be addressed. The overall quality of the with the collateral base was strong enough that we were covered and don't expect didn't expect significant amounts of loss, but it did create a stress situation for those borrowers. And so that resulted in an increase in nonperforming loans.
Now if we as we go forward, the great thing about the Energy Lending portfolio is we get to resize our loans. We get to reassess the loans every 6 months based the current price deck. So if we were looking at these loans in the fall, we anticipate that they'll migrate more positively because we have a significant increase in the price availability. I mean, it's important to note that we're not relying on drilling to get repaid. We are reliant on the production of the existing borrowing base or the existing collateral set at the given price levels.
And I'll add one more thing to this. I think it's important to get this out is that we have a significant amount of hedging in our portfolio. It continues to be very strong. 77% of our oil commitments are hedged at greater than 50% at $52 for the rest of 2020 and 41% are hedged more than 50% at 52.20 throughout 2021. So the hedging profile of both our oil and gas portfolios is going to help sustain them through this process as the economy reopens and the price deck improves.
Okay. Good.
And you also see you've got an allowance there for energy that's 4.4 plus percent that's well above what it was during the last cycle at the peak. And our view is that we're trying to address this now through CECL proactively. So you kind of get this all reserved for. We evaluate every one of those NPLs for any impairment as we look at those. So I think the perspective is we reserve for that.
We'll continue to evaluate circumstances, but we think that we're well reserved and adequately reserved for that portfolio as we move forward.
Okay, good. That's all helpful. And I kind of follow the next question, I have 2 more, but I put tried to put abate into my loan loss provision line in my model and it didn't work. So I need a little bit of help defining what abate means in terms of reserve building. Are you saying it was meant to be funny, by the way, but are you saying that you do expect to build reserves somewhat, you're not expecting very much lost content.
And obviously, you've sent a pretty clear message on loan balances. So is the message expected pretty heavy retreat in the provision from here?
I would go ahead, Mark.
Yes. I won't say that we will have a heavy retreat. What I would suggest is that if we have CECL is designed to bring reserve build earlier in the cycle. The economic forecast that have been put out and plus the we've looked at our loan portfolio has resulted in a pretty strong reserve build to this point in time. If our base case forecast would play out, we would not need additional reserve build.
That doesn't mean that we would start to reduce that unless we saw improving credit quality or not see the increase in credit deterioration that might accompany, should depending on how things play out in the economy. We feel very good about the energy portfolio. We still stimulus packages have helped support retail and some of the COVID impacted industries, and we need to see how those play out over the next several quarters. But I would say if it does play out in maybe into 2021, you might see us have the opportunity to relook at that reserve level.
John, we define reserve build as provision greater than charge offs. And certainly, depending on what we see from a credit migration as this virus unfolds, what we're trying to foreshadow there is, we do think the significant provision and reserve building that we experienced in the first and second quarter is largely behind us. And as we move forward, we would be more responsive to actual charge off levels than continuing to try to build the reserve if our economic forecast holds.
Okay.
Okay. I may follow-up on that, but it just it feels to me like with your potential problems potentially coming down, you're really not signaling a lot of stress in credit from here is the way I'm reading it, but I can follow-up on that. Last one is on the buyback. What would you guys need to have the maybe courage is too strong of a word, but the comfort or courage to think about restarting the repurchase program?
That's all I had. Thanks.
Well, this is Stephen. I think what I would say is that we think the price is attractive and we'll have to see what the environment looks like. We have substantial capital. I'm really happy with our capital position. It actually grew this quarter.
So I'm not making any specific commitment to buyback or not buyback, but I do think it's something that we discuss opportunistically here at the bank and we'll make a decision, but it's not necessarily off the table. Like you've seen a lot of banks announce, no more buybacks for the year. I just we're not going to be in that position. We'll evaluate it as time goes across the year and could very well buy back some shares. There's no firm commitment.
All right. Great. Thank you.
Thank you. Our next question is coming from Jared Shaw of Wells Fargo. Please go ahead.
Hi, good morning.
This is actually Timur Braziler for Jared. Hi. I'd like to just follow-up on that credit question from the prior caller. It looked like the allowance build this quarter was quite sensitive to credit migration. And from all the commentary that you're saying, it seems like the combination of improved pricing, along with other things, there's going to be some potentially meaningful positive credit migration in as early as the Q3.
I guess what would prevent that same level of sensitivity of allowance coming off as migration improves in the coming quarters versus allowance build when migration worsened in the Q2?
Well, I mean, I think that's the nature of CECL. And our models build in a factor for risk grade migration, which we had. And as Mark and Stacy pointed out, when we did our borrowing base determinations, that's when we determine the risk grade of those energy customers. And we saw migration negative and that feeds into our probability of loss or our probability of default calculations in our CECL model. So to your point, if we get improvement in those grades in the 3rd or Q4 when we redo the borrowing base is at that time, hopefully at these prices that have come back substantially in June, then we would expect risk grade migration back the other direction, which would clearly have a very positive impact on our CECL calculation.
And the nature of that calculation is if we feel there's reserves that need to come off, then we'll pull those we'll pull the reserves off. We just have to see where that lands in the 3rd Q4. But that's the way we understand it works.
Okay. That's helpful. And then just last one for me. There's a statement in the release talking about repurchasing loans from Ginnie Mae when certain delinquency criteria is met. Is that mandatory when certain criteria is met, you have to repurchase them back from those pools or is that at your discretion?
And I guess any kind of color you can provide around that would be helpful.
Yes. It's not mandatory. It's our discretion, but you lose sale, you basically have controls since you can purchase them back. So you bring them back on your balance sheet, but it just grosses up the balance sheet. So you don't actually purchase them, but you bring the loans back and then you have an offsetting liability on the other side.
So it's not mandatory. But we have in the past purchased some of those for real and had gained some advantage of that over time, but that's the way the accounting works there.
Got it. Thank you.
Thank you. Our next question is coming from Gary Tenner of D. A. Davidson. Please proceed with your follow-up.
Thanks. I just had one quick follow-up. In terms of the $1,600,000,000 of the COVID-nineteen impact area loans on Slide 9. What amount of those have been under a forbearance or modification since this pandemic, sorry?
Yes, this is Mark. What amount has been under deferral? We've actually had our deferral amount is about 5.6% of our total loans, But 70% of the loans that are in that slide actually receive PPP as opposed to asking for deferrals. So we haven't had any significant increase in deferrals on that particular slide relative to any other part of the portfolio, because they were primary beneficiaries from PPP and that caused a number of them not to take deferrals.
Okay. The slide says PPP loans to those categories are $240,000,000 versus the $1,600,000,000 So that's about 15%.
Right. 15% of those loans received PPP, but 70% of the customers got the PPP loan.
I see. 70% more on
account, yes, than the dollars. Okay, perfect. Thank you.
At this time, I would like to turn the floor back over to Mr. Nell for closing comments.
Okay. If that's all the questions we have, we really appreciate everyone joining us today. If you have any further questions, feel free to call me at 918-595 3030 or you can email us at irbokf.com. Everyone have a great day. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and have a wonderful day.