welcome to the BOK Financial Corporation Second Quarter 2019 Earnings 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. I would now like to turn the presentation over to Stephen Nell, Chief Financial Officer for BLK Financial Corporation.
Please proceed.
Good morning and thanks for joining us. Today, we'll hear from Steve Bradshaw, our CEO Stacey Kines, Executive Vice President of Corporate Banking and I'll also provide some remarks about the quarter. Scott Grauer, Executive Vice President of Wealth Management and Mark Mahn, our Chief Credit Officer have also joined us for the question and answer session. PDF of the slide presentation and second quarter press release are available on our website at www.bokf.com. We refer you to the disclaimers on Slide 2 as it pertains to any forward looking statements we make during this call.
I'll now turn the call over to Steve Bradshaw.
Good morning. Thanks for joining us to discuss the Q2 2019 financial results. We are pleased to report another strong quarter for BOK Financial. In fact, we achieved the highest level of quarterly earnings in the history of the company, both from a net income and an EPS perspective. I'm incredibly proud of the effort of the entire BOK Financial team.
The power of our diversified business model as well as our efforts to gain greater efficiencies across the company really showed themselves this quarter. As shown on Slide 4, 2nd quarter net income was $137,600,000 or $1.93 per diluted share, that's up 24% from the quarter and up 20% from the same quarter a year ago. The growth was driven by a number of key factors. Loan growth continued its strength this quarter, particularly in our specialty lines of business and commercial real estate. Our focus on our energy and healthcare segments continued to deliver above market loan growth for the company, while a reload in commercial real estate following the wave of paydowns in the Q1 was also a large contributor.
Net interest revenue expanded 3% this quarter, though net interest margin remained flat at 3.3%. Stephen will cover the underlying factors in more detail momentarily. We added $1,200,000,000 of short duration fixed income mortgage backed securities this quarter to help support net interest income as we expect interest rates to continue to decline in the near term. Fee commission revenue continued its upward trajectory this quarter expanding nearly 10%. Our brokerage and trading and mortgage banking revenues were the main contributors on strong mortgage backed securities trading and mortgage loan production volumes, all triggered by lower mortgage interest rates during the quarter.
Our multi year effort to gain greater efficiencies has held expenses in check, which continues to drive earnings leverage across the company. Following the integration of CoBiz last quarter, expenses returned to a more normal level this quarter. The credit environment continues to be stable, consistent with our results for last several quarters. Our continued loan growth was the primary driver of our $5,000,000 loan loss provision. Turning to Slide 5, period end loans were $22,300,000,000 an increase of $497,000,000 for the quarter.
We continue to feel optimistic about loan growth for the balance of the year due to the strong commitment growth we've seen over the past several quarters, particularly in energy and healthcare. Assets under management or administration were $81,800,000,000 that's up $2,900,000,000 from the last quarter, benefiting from strength in the equity markets along with strong organic asset gathering success across several of our investment and fiduciary lines of business. And we saw an opportunity to further invest in our company at a favorable price this quarter as we bought back 250,000 BOKF shares at $80.50 per share in the open market. I'll provide additional perspective on the results at the conclusion of the prepared remarks, but now I'll turn the call over to Stephen Nell to cover the financial results in more detail. Steven?
Thanks, Steve. As noted on Slide 7, net interest income for the
quarter was $285,000,000 up 3% from the Q1. While we've been able to significantly expand net interest revenue due to continued loan growth, the change in course of interest rates has impacted net interest margin. Net interest margin was 3.3%, flat from the previous quarter. 2nd quarter net interest margin was supported by a 3,400,000 recovery and an increase in discount accretion from CoBiz, up from $7,800,000 in the Q1 to $13,400,000 this quarter. While these items combined to help margin by 10 basis points total, there were pressure points on net interest margin that combined to fully offset these benefits.
First, lower loan yields from variable rate loans priced off of LIBOR were a factor this quarter. 2nd, we continue to see some exception deposit pricing from our commercial clients, however, at a decreasing pace. And lastly, as Steve mentioned, we expanded our fixed income mortgage backed securities portfolio by $1,200,000,000 as a measure to protect for a down interest rate environment. These additional securities will be added to net interest income, but will have a dilutive effect on the net interest margin calculation, which will be fully realized in the Q3. While we are working to defend net interest margins, significant interest rate cuts will continue to apply pressure.
Omitting the interest recovery and accretion benefits, the yield on average earning assets was 4.31%, a 6 basis point decrease and the yield on the loan portfolio was 5.09 percent, down 2 basis points. The yield on the available for sale securities portfolio increased 6 basis points to 2.63%. The overall cost of interest bearing liabilities increased 4 basis points to 1.7%, including a 9 basis point increase in interest bearing deposits to 1.13%. On Slide 8, fees and commissions were $176,100,000 an increase of nearly 10% for the quarter. The growing trends we mentioned last quarter continue to unfold as declining rates fueled activity in wealth management and mortgage.
Lower mortgage interest rates, coupled with seasonality, led to a $197,000,000 or 32% increase in mortgage applications and commitments over the previous quarter. Mortgage revenues were up 18% and gain on sale margins increased 18 basis points. Increased operating leverage in this segment from our rightsizing efforts continues to pay dividends. Brokerage and trading revenue increased over 28 percent for the quarter, primarily driven by strong mortgage backed security trading results. All other fee revenues increased $2,400,000 or 2.2 percent over the previous quarter, largely due to seasonal factors.
I'll also mention that our total economic cost of changes in the fair value of mortgage servicing rights, net of economic hedges was $7,300,000 This was due primarily to the combination of continued significant mortgage rate volatility that fell outside our hedge protection. Turning to Slide 9, we continue to carefully manage expenses to drive operating leverage. Total operating expenses were $277,000,000 down $10,000,000 from the Q1, which as you'll remember contained 12,700,000 dollars of CoBiz integration costs. We are proud of the efforts we've made on the expense front, which has brought us through our 60% efficiency ratio target with a 2nd quarter efficiency ratio of 59.5%. Omitting integration expenses from the Q1, personnel expenses decreased $5,600,000 this quarter as we're now realizing the full benefits of cost efficiencies from the CoBiz acquisition.
Non personnel expenses was up $8,300,000 dollars omitting integration expenses from the Q1. Business promotion expense increased $2,900,000 primarily due to increased seasonal advertisement spending as well as some remaining advertising expenses related to marketing our BOK Financial brand in the Colorado and Arizona markets. Insurance expense is up $1,900,000 largely due to adjustments to deposit insurance expense related to CoBiz integration. Increases in professional fee and services, dollars 1,700,000 and mortgage banking costs of $1,600,000 were partially offset by a decrease in net losses and expenses of repossessed assets of $1,400,000 dollars In addition, a $1,000,000 charitable donation was made to the BOKF Foundation in the 2nd quarter. Slide 10 has our current outlook for 2019.
We expect mid single digit loan growth with continued strength in energy, healthcare and general C and I lending. Loan loss provision levels will be influenced by loan growth, but will likely run at similar dollar levels when compared to the past few quarters. Interest rate decreases forecasted by the market will continue to put downward pressure on net interest margin. Revenue from fee generating businesses, particularly brokerage and trading and mortgage could continue to benefit from lower interest rates as we've seen this quarter. We'll attempt to maintain an efficiency ratio at or below 60% as long as the environment remains favorable for revenue.
Our capital strategy going forward will support organic growth and modest opportunistic share repurchases. We expect to improve capital ratios over time. And lastly, a word on CECL. Our CECL implementation team continues to develop the models, processes and controls necessary to implement the new credit standard by January 1, 2020. Currently, we do not expect a material change in our existing allowance for credit losses, primarily due to our loan portfolio's relatively short average life.
However, we will need to recognize an allowance for expected credit losses on approximately $2,500,000,000 of acquired loans. Although those loans were marked to fair value at the acquisition date, which included an estimate of expected credit losses, CECL requires duplicate recognition of expected losses in the allowance. CECL also requires us to recognize expected credit losses $3,300,000,000 of residential mortgage loans that we transferred into mortgage backed securities. These loans are guaranteed by the Veterans Administration and we have some exposure to credit losses that exceed the guaranteed amount. As a reminder, initial recognition of CECL will run directly through retained earnings and not the income statement in 2020.
While we currently do not expect CECL to significantly affect the company, the ultimate impact will depend on the composition of loan portfolio as well as economic conditions and forecast at the date of adoption. Stacy Kymes will now review the loan portfolio in more detail. I'll turn the call over to Stacy.
Thanks, Steven. As you can see on Slide 12, total loans were $22,300,000,000 up $497,000,000 for the quarter. Looking at the table, you can see the strength continues to be broad based. Total C and I was up 2.7% for the quarter. Our expertise in energy continues to be the driving factor and was responsible for the bulk of C and I growth this quarter.
Energy was up $216,000,000 or 5.8 percent for the quarter. The lower than normal churn trend in the energy portfolio we've discussed continues as companies continue to be slower to divest or sell in the current market environment. Our healthcare channel was up marginally this quarter, but is not a cause for concern. When we had strong production in this space, higher levels of refinancing into the permanent market in the 2nd quarter impacted overall growth rates. We continue our focus in the senior housing space, which is not only a great business from a growth perspective given current demographic trends, but is also an excellent credit niche given our strong relationships with high quality operators.
The commercial real estate portfolio was up 2.4% for the quarter with strong commitment volume following paydowns experienced in the Q1. While we continue our discipline around concentration limits in the space, we have a proven ability to reload commitments in this portfolio. More broadly, core loan growth outlook for the back half of 2019 remains optimistic as long as the larger economy continues to show strength. On Slide 14, you can see that credit quality remains strong as it did in the Q1. Non
accruals were
up $31,000,000 during the quarter, primarily due to 3 energy loans in the late stages of resolution. These are isolated situations and do not point to anything systemic in the overall portfolio. Net charge off moved to 14 basis points, the lowest level we've seen over the last 5 quarters. Potential problem loans, which are defined as performing loans that based on known information, cause management concern as to the borrower's ability to continue to perform, totaled $161,000,000 at June 30, down from $169,000,000 at March 31. Based on an evaluation of all credit factors, including overall loan portfolio growth, changes in non occurring and potential problem loans and net charge offs, the company determined that a $5,000,000 provision for credit losses was appropriate for the Q2 of 2019.
We remain appropriately reserved with a combined allowance of 0.92% of period end loans and leases. I'll now turn the call back over to Steve Bradshaw for closing commentary.
Thank you, Stacey. Again, it was another record quarter for BOK Financial. I think this quarter really showcased not only our diversified business capabilities, but also our ability to execute well across all lines of business and markets. Many of our fee businesses performed just as we would expect in a falling rent market as we added $15,600,000 in revenue on a linked quarter basis. We remain convinced that our unique business mix and geographic focus will position us for continued strength, no matter what economic environment is on the horizon.
At the halfway point of 20 19, we remain optimistic about the outlook for the remainder of the year. We continue to deliver strong loan growth, fee revenues are accelerating and our expense discipline is driving leverage and has moved us through our 60% efficiency ratio target and credit quality remains strong. In closing, I'll also mention that the overall momentum we are building in Colorado and Arizona on the back of the final systems integration of CoBiz last quarter is growing. We are now very focused on realizing the synergies of bringing our 2 companies together and have seen traction in several areas of the organization. It's obvious that the expense efficiencies have been achieved, but ultimately, we'll realize our return for the investment we've made in the Colorado and Arizona markets by growing our share and serving our customers with a highly competitive array of products, services and advice across the market.
With that, we will take your questions. Operator?
Our first question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.
Great, thanks. Good morning. Good morning. I was hoping we could start off just in terms of the CECL commentary that you had on Slide 10. I think you're one of the first banks to at least even address it in any kind of printed form.
But are you guys able to quantify what level of reserve you might need on that $5,800,000,000 of combined CoBiz and Guarantee bonds?
I think we'll do that in the Q3. We'll continue to work our modeling, our estimation, but we did want to give you all a little bit of an indication of 2 areas where CECL requires additional allowance above our current allowance. So that's the idea is give you a bit of a magnitude of the number of loans or the amount of loans that fall in those two buckets and then we'll be prepared after the Q3 to give some guidance around a range for the entire reserve.
Got you. Okay. And then is it fair at least directionally to assume that because you've written down the CoBiz loans and because not all the guaranteed loans are sort of only a portion is not guaranteed that the reserve is going to be something sort of far less than your 90 basis points that you currently have in your existing portfolio?
For those two particular buckets, particularly the second bucket, certainly it's not going to carry a full reserve, if you will, because there's only the tail, as you mentioned, that we're exposed to.
Got you. Okay. I guess and then maybe shifting gears a little bit, the discount accretion from CoBiz, obviously, very high this quarter. Can you provide any guidance in terms of where you think that might trend in 3Q and beyond?
Yes, this is difficult to do. I tried to provide a little bit of guidance last quarter on the level. Turned out to be a little higher. So I'm not providing any guidance around what we think it will be in the Q3. Although, I tell you that I think around 20% of the accretion has been recognized so far.
And so we've got a pretty big bucket of dollars left that will flow into income sometime over the next couple of years.
Okay. And then maybe if you break out the $13 ish million how much of that was sort of scheduled or expected accretion versus unscheduled?
I would say about $4,000,000 or so was a little bit higher than we expected and was generated from some accelerated payoffs in the real estate portfolio as well as the public finance arena. But I'll tell you that not all of those are loans that paid off and left the bank. Many of those loans are reunderwritten and end up in our kind of portfolio going forward.
Got you. Okay. And then sorry if I can squeeze in one last question. In terms of the MSR valuation adjustment, I thought I heard a number of $7,300,000 I just want to make sure that was a negative this quarter and that offset within your derivatives or your sort of security gain type line. Is that right?
Yes. Actually, the mortgage servicing rights themselves declined $29,000,000 and then we covered through our hedging activity about 75% of that or net $7,300,000 negative.
Got it. Okay, perfect. Thank you very much.
Our next question comes from the line of Peter Winter with Wedbush Securities. Please proceed with your question.
Good morning.
Good morning, Peter.
The efficiency ratio came down nicely this quarter. And I'm just wondering if we do get, let's call it, 2 or 3 Fed rate cuts, is it still sustainable to keep it at that 60% level in the back half of this year?
Well, I think I provide this is Steven, Peter. I provided the guidance that we're sure going to try. But it really depends on the denominator, the revenue growth. I think if the environment changes drastically where revenue growth opportunities are less because of a lower rate environment, which certainly it's going to put some pressure on NIM and some pressure on net interest income, I think our fee businesses are going to do quite well in a lower rate environment, but part of it depends on the revenue side of that equation. But definitely, we're going to attempt to maintain it at that 60 or better.
Does your forecast assume rate
cuts?
Yes. I think what I'm really looking at is kind of what the market's building in. That's anywhere from 2 rate cuts to 3 rate cuts. And so I'm telling you all that if we get that, we will have pressure on our NIM. And of course, we're going to continue to grow loans, we believe, and that's going to generate some opportunity for net interest income growth.
But part of that will be offset by lower overall net interest margin if rates if we get rate cuts throughout the rest of the year.
Is there any way to quantify what the impact to margin is for each 25 basis point rate cut?
You can break I'm not getting I haven't provided guidance around what I think the NIM will be in the 3rd Q4 if we get rate cuts. But I'll tell you that given our LIBOR based loans and the asset repricing on the loan side, it's usually 80% of a rate cut because of all the ones that are variable. On the wholesale funding side, all of that will roll down pretty much 100% with rate cuts. I think the wild card in the margin probably for us and everyone is really what happens on the deposit side. And whether or not deposit betas will be higher on the way down compared to on the way up.
And frankly, I'm not sure that will be the case. So there I think that's the wildcard. But those are some components that you can think about for our balance sheet and how that plays out in our net interest margin calculation. The other one I'll point out is that we did add that $1,200,000,000 of securities portfolio to guard a little bit against the economic and economic outcome if rates do go down. It takes the edge off a little bit, but it also dilutes our net interest margin given that those securities are at a much lower spread than say, for instance, our other earning assets in the loan category.
Okay. I could just squeeze in one more question. Just on the expenses, I would have thought on a core basis, they would have come down quarter to quarter just with the cost saves, which you got from CoBiz. But there were some other items that caused it to increase. Was just wondering, are there any of those kind of one time events and the expenses could decline in the Q3?
Well, I will say and I pointed to this in our Q1 call is that we were going to spend some additional dollars of business promotion to promote our BOK Financial brand in Colorado and Arizona, and we did that. And you'll notice that business promotion, I think, went up $2,900,000 So I don't expect that category to be as high in the Q3. You also had a few extra expenses there related to mortgage. But again, the mortgage revenue side was much higher. So again, Peter, I think we're going to try to maintain a 60% or better efficiency ratio.
I don't know of any extraordinary expenses that are coming our way in the 3rd Q4. So I think we have a good shot of achieving that. But I think it matters certainly on the revenue side.
Okay. Thanks a lot.
Our next question comes from the line of Brady Gailey with KBW. Please proceed with your question.
Hey, good morning guys.
Good morning, Brady.
If you look at kind of the reasons why you guys beat estimates this quarter, a lot of it was in the fee income lines. And if you look at it, brokerage and trading, I mean over $40,000,000 of revenue just in 2Q, that's got to be a record. I know in your guidance you talked about brokerage and trading could continue to see benefit from lower rates.
Is that
$40,000,000 number sustainable or do you think that you'll see some downside to that number going forward?
Hi, this is Scott Grauer. We have we clearly in the Q1 because of the composition of our product mix on the institutional trading side have benefited from the mortgage environment with lower rates. And so that was a catalyst really that began in the Q1 and is pushed on through Q2. That being said, regardless of the movement within range here in mortgage rate sector because of our mortgage securities trading, we're well positioned because of work that we've done to restructure our institutional trading desks and capitalize in that segment. So we feel pretty confident about the product set that we have, the staff that we have and our positioning in the market.
So we are dependent upon mortgage rates to outpace, but we feel pretty good about how we're positioned in the segment today.
All right. And then just a little more color on the $1,200,000,000 of bonds that were purchased. What was the timing on that intra quarter? And looking at the average balances, it looks like you purchased it kind of right in the middle of the quarter. And what was the average yield on that?
And if you look just at the impact in 3Q from those additional bond balances, seeing the full impact, what's the NIM dilution just from those bond purchases?
For this particular quarter, it would only be a basis point or so. It's not a lot. It's part of the kind of 10 basis points that I try to highlight, but it's not a big component. It will be a bigger component in the Q3 from a dilutive impact because your point, we didn't buy those securities all at the beginning of the second quarter. We bought them kind of throughout the second quarter.
So we averaged a bit lower than what we'll average in the Q3.
All right. And what was the average yield that those were purchased at?
2.50, 2.60, I'm not sure exactly, Brady, but somewhere in that range. There are some certainly they have a spread to the cost of funds and of course the freights go down and our wholesale borrowing that support those bonds, if that reprice is down, then of course we'll gain spread as we move down to help protect a little bit of that downside from lower rates.
All right. And then finally for me, NPAs were up a little bit. It looks like most of the increase was related to energy. I know some of your peers have also seen similar trends with energy non performers. Maybe just an update on the health of your energy loan portfolio?
Well, I think from our perspective, we still feel very good about the health of portfolio. I think we have 3 credits that we moved to non accrual this quarter, really late cycle, Really all deals that probably the economic outcome could be different, but you've got management teams and equity sponsors and frankly other banks who are just kind of done and have some fatigue. And so you may end up with some modest non economic outcomes as a result of that. But we recognize that loss content through impairments and charge off, certainly recognize that in our allowance evaluation. And we're not seeing new problems really come through.
These are all kind of late cycle from the depth of the downturn. So we still feel very good about where energy is. The broader issues from a macro perspective in energy really are the closing of the capital markets and the effect that that's having in some respects a positive effect because we see stickier loans on the energy side. But the broader issue is going to be long term exit strategies for a lot of these companies as they work through that there aren't a lot of buyers because of the capital markets being closed. But the health of the portfolio we feel very good about as we move through now and going forward.
Yes. Brady, this is Mark Baughn. One thing I would add is that, we do as Stacy mentioned, we've identified our key problem loans. We also recently ran our stress test on the portfolio where we ran with the oil in the flat low-forty environment and gas in kind of a 210, 215 range. And our results didn't identify any significant issues that we weren't already aware of.
So they've already been accounted for.
Got it. Thanks guys.
Thank you.
Our next question comes from the line of Brett Rabatin with Piper Jaffray. Please proceed with your question.
Hey, guys. Good morning.
Good morning. Good morning.
I wanted just to talk about energy a little more. A lot of other banks, you mentioned capital markets have pulled back from energy somewhat. Can you just talk about your differentiated strategy there? And if energy continues to be one of the bigger segments for growth or do you have limits on how much more energy you want to do? And then just kind of why you're still growing energy and how you think that's different than some banks that have pulled back from energy lending?
It's the same story. I feel like maybe I'm a broken record, maybe it's boring at this point, but we're not underwriting energy today in a differently way we always have. And we were committed to the space when oil and gas were underwater and the energy industry was going undergoing a lot of stress. We felt confident about our process. We have more engineering and engineers on and engineering techs on staff than most of the largest banks who are providers of capital in this space.
We think it's a core competency and it's important to a lot of our broad based businesses, not just energy lending, but across the company. There's a lot of places where we have tentacles into the energy space. So we're exceptionally committed there and we think we've done better than most in terms of identifying borrowers and customers who are a good fit for our underwriting. I don't I think as we look forward and think about the growth rate, some of that growth has been because there hasn't been exit strategies for these private equity companies, the loans have been stickier. I looked at relative growth rates.
So I mean a couple of years ago, we were lamenting the fact that commitments were growing at 15% to 20%, but outstandings were growing low to mid single digits. Now you have a little bit of the inverse. The outstandings are coming up. Utilization is inching up period to period. Our commitment growth annualized through the 1st 6 months of the year is about 6 point percent.
So that's different than the 20 plus percent you're seeing on the year to year on the energy side. The other piece of that is if you look at energy as a percent of the portfolio, it's almost identical to what it was a year ago. So we've seen good growth in energy, but we've seen growth in other areas too that has helped energy continue to be balanced segment of our portfolio.
One other note I would make is that during the 2014, 2018 energy downturn, which is really the worst since the 80s, We had net charge offs averaging only 37 basis points across that whole period. And in any 10 year or 15 year period, our charge offs in the energy have been 25 basis points. So it's been fairly consistent and it's not like we won't maybe have additional charge offs on energy in the future that wouldn't be out
of line with our historical performance.
Okay. I appreciate the color there. And the other thing I wanted to just go back to was the margin and DDA has obviously been a challenge. Do you guys as you think about the back half of the year, can you just talk about what you're expecting a DDA perspective? Do you have any insights into whether those balances might flatten out?
And then specifically, can you talk maybe about Kansas City and or Kansas, I know you've had some changes at MoBank, just that market in particular seemed to have a little lower DDA this quarter. Any thoughts on that market?
Well, we saw this quarter the continued migration of DDA into interest bearing in our commercial clients. Now your question is rate to go down or if they're expected to go down latter part of the year, will we see that flatten out? Perhaps they will. There's volatility in that portfolio. There's some big balances in there that move in and out.
But yes, I would expect some maybe some stabilization of the DDA balances as we go forward. I don't know if you got any.
No, I agree with Stephen there. I think as rates begin to go down, you'll have earnings credits that will respond to that. And so you'll have commercial folks who will have to have more NDA to cover services related to that. But it's hard to know order of magnitude, which I think is maybe the heart of the question that you're trying to ask there. And until we kind of experience that and then see how the market responds, it's going to be tough to answer that.
Steven's earlier analysis around the real question is deposit beta is exactly the right one. I mean, that's the unknown as we go through a modest downtick in short term rates, what happens to deposit betas?
Yes, this is Steve. And as it relates to your question about Kansas City, we've got kind of a handful of relative to their portfolio in Kansas City, larger customers on the DDA side. And so we always see more volatility in that particular market. So I don't think it's particularly indicative of anything other than the fact that you get a large depositor who's using funds or moving funds and it moves the needle there disproportionate to the impact of the company.
Okay, great. Appreciate all the color.
Our next question comes from the line of Gary Tenner with D. A. Davidson. Please proceed with your question.
Thanks. Good morning. Good morning. I wanted to follow-up on the brokerage and trading business. In terms of the rate environment, is it more important to be thinking about the absolute level of rates or directional movement within a quarter in terms of driving volume in that business?
I would say that it's directional. It's also spread in the various categories that influence that. Because we've talked earlier when I responded to the question I talked specifically about the mortgage backed securities area and our activities there. The reality is we've seen a kind of a stabilization and somewhat of a pickup even in the municipal sector. So we have an opportunity given our product set and our diversification of the segments and sectors there to really benefit as spreads move whether from mortgage backed to treasuries or in the corporate sector or as we've seen a little bit of an improvement in the municipal side in the second quarter.
So it's probably more directional than absolute.
Okay, thanks. And it looks like there was some further expansion of the unsettled securities purchases on the balance sheet this quarter, one from about $450,000,000 last quarter to over $800,000,000 this quarter. And you've talked about growing it. I don't know to what degree you'd grow it further, but I'm curious what the kind of relative margin drag was this quarter versus the Q1 from that?
Yes, it was incrementally that much more. If you're looking at the receivable balance, that went up on average a couple of 100,000,000 dollars And that's the real balance that impacts the margin. So it went up $200,000,000 but it wouldn't have that significant additional impact on the margin.
Okay, great. And if I can ask just one more question on oil and gas. I appreciate your comments earlier. I'm really more curious on a macro basis. There's been a lot of talk about why oil prices haven't responded more to some of the geopolitical issues.
And I'm just curious if you have any thoughts on kind of what that means from a demand perspective and if you have any concerns there?
No, I think it's awfully hard for us to be in the prognostication business on oil prices. And so that's why when we underwrite, we underwrite to the forward strip. When we evaluate our book, we do it according to the forward strip. Our customers can hedge that. There is volatility.
I mean, you think back a year ago, we were in the mid to upper 60s as we went into the Q3. The Q1 prices were down. 2nd quarter they've come up. This is a long lived asset. And part of the reason the portfolio performs well over time is because it's self the industry self corrects as prices come down, rigs counts come down, oil supply comes down and it takes a little while for that equilibrium to surface, but it does happen that way and that's part of why we like it.
Obviously, the volatility that creates heartburn from time to time, but if you really evaluate the portfolio like a total return and look at losses over time relative to the revenue, it is a fantastic business for us to be in. It's a core competency. We have strong history there. Our performance through the downturn, that to me is a very difficult stress and our performance there I think created outperformance from that portfolio's perspective and I think we continue to maintain the discipline associated with that.
Thank you.
Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.
Hey, guys. Just wanted to go back to deposits. It looks like Colorado was the big driver decline. So do you think those CoBiz balances are going to start to stabilize here? And then how where do you get uncomfortable as it relates to the loan to deposit ratio as it continues to move higher?
Yes. I will point out that there is a pretty significant decline on DDA in Colorado. A big chunk of that is one client And they're in kind of the funds administration business, so they move a lot of balances around. And so I don't read a lot into that particular drop. But yes, we have stability there.
I think we're going to view CoBiz acquisition. We're going to view it both on the loan deposit as well as their full performance at the Colorado level and the Arizona level. So we've completely incorporated all of the CoBiz businesses into our businesses. And so what we're going to manage and watch closely is the full market impact that we have and the results that we get from a market view. 2nd part of your question was what?
Loan to deposit ratio. It's obviously continued to move higher. Yes.
I mean, it's creeping up to 90%. We've had it higher than that at this company before. None of us probably wanted to go much above 95. And again, I think it's a matter of how well can we gather deposits. I've stated before that one of our goals leading into 2019 was to try to fund the majority of our loan growth with deposit growth.
So we'll continue to look at that. And I would say mid-90s is not that uncomfortable for us, but certainly, I think we would address it and want to keep it somewhere below that 95% range.
Okay. And any concern if the debt and equity capital markets for the energy companies remain kind of seized up or dry that you could see some outflows in deposits as they draw down to support their business growth?
I think that's absolutely one of the outcomes that you could see if they prices stay at this level or go a little bit lower, they're going to use cash flow to help them drill because equity may not be there. And frankly, the banks aren't going to be really excited about funding entirety of drilling programs if borrowing bases are pretty full. So they're going to have to do that out of cash flow. I think seeing energy deposit volumes impacted by that is a very good analytical see through there. Okay.
And then maybe just one more for me. Can you disclose what the impact on the margin was from premium amortization this quarter and maybe what it was last quarter? Thanks.
It's pretty small for us. We don't have a lot of premium amortization on the regular bond portfolio that we're pushing through in any given quarter. So I would say it's insignificant.
Okay. Thanks for taking my questions.
Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Thanks. Good morning, everyone.
Good morning. Good
morning. Stephen, do you have the percentage of the loan portfolio that's LIBOR based? You may have said it, but I am just curious.
Well, let me put it this way. So 70% of our loan portfolio is variable. 80% actually re prices within a year, but 70% is variable. And I would say a pretty high majority of that is LIBOR based. It used to be more split between LIBOR and prime, but it certainly migrated much higher towards the LIBOR side.
And of the LIBOR based loans, 90% of them are 30 day. So it's pretty short on the curve.
That's the entire portfolio or just the commercial piece?
That's the entire portfolio.
Okay.
70% is of Air
Okay. And then offsetting that, you mentioned the wholesale funding piece with 100% beta. What is the size of that?
Big. It's the $10,000,000,000 $10,000,000,000 of our funding is from that from wholesale categories.
Okay.
And that's the piece you're saying is 100%
beta?
Yes, we're there about. I mean, it's going to track very, very closely down.
Keep in mind that larger securities portfolio than most peers has been how we've managed this bank forever. And the result of that over time has been a much more stable net interest margin and net interest revenue base than our peers, but also a lower NIM to some extent because of that the size of that securities portfolio, but that's a real buffer in times of falling interest rates.
Yes. I guess, we're all trying to figure out what kind of an impact lower rates would have. And I guess, it sounds like it's reasonably manageable from your point of view.
I mean, it doesn't show much some
of the big step downs, yes?
I don't think we have ever positioned a balance sheet where we get hammered on the way down or gain significantly on the way up. I mean, we've always stated we try to manage relatively neutral. Now that's not a definition of 0.5% one way or the other. It could be as wide as 3% to 5% one way or the other. But that's relatively neutral when you compare to other banks.
Okay. Good. That helps a lot. Appreciate that. Stacy, for you, you made a comment about core loan growth as long as the economy continues to show strength.
Are you seeing anything that's changing your view on the economy showing strength?
Not at this point. I think you see growth really over the last couple of quarters really across the board in all segments. C and I, real estate, healthcare, energy has obviously been exceptionally strong. I think just because you think about these things as you get into 2020 you worry about things like a presidential election and how the uncertainty around that process could impact borrowers' ability or borrowers' desire to create more leverage. And so you worry a little bit about that headwind as you think about 2020 from how will borrowers respond to that.
But in terms of just what's happening day to day in the economy, it's actually pretty good and borrowers are doing the things you would do in a good economy, but there's still good discipline both from the borrower perspective in it. I would even tell you this late cycle on the banking side, I'm impressed with general discipline across the board in the sector.
Okay, good. And then just one on mortgage sustainability of mortgage, I guess, the way it looks, you may not have an MSR hit this coming quarter like you did the last quarter hopefully. But anything else to call out in terms of the sustainability of the top line mortgage revenues?
Yes, this is Steve. We've done a lot to take expense out of that business unit the last 18 months or so. So we've caught kind of a nice sweet spot here as we've seen application volumes drive pretty strong. We're seeing gain on sale margins increase as well. I think we're up 18 basis points in the Q2.
I think as long as we see rates kind of below that 4%, 4.25% threshold on the 30 year, we're going to continue to see good volume. We're certainly in the middle of the season right now. So we haven't seen anything that would suggest that it's going to wane over the course of second half of the year, but it's a much more profitable segment for us because of our expense work. So this is good timing for us, I think, on the mortgage side.
Yes. Okay.
Thanks a lot, guys. Nice job.
Our next question comes from the line of Matt Alme with Stephens. Please proceed with your question.
Hey, great. Thank you. Good morning, guys. Good morning. Thinking more about the loan growth,
one of
the portfolios you pointed towards was healthcare as far as seeing some good strong pipelines and good growth at the back half of the year. Any more details you can give us on that? Any specific sector you can point to within healthcare that you're seeing some good pipeline growth?
Our real business development focus inside of healthcare is around senior housing, assisted living, skilled nursing, memory care, independent living as well. We think that that's a really good opportunity. We've had great credit outcomes there historically. You have some risk inside that portfolio around reputation risk. You have some risk inside that portfolio around reimbursement risk.
But that has been something that we've managed for 20 years inside of senior housing and something we understand and can work through. And that's really where the segment that we're focused on inside of healthcare. The healthcare risk that we've seen and frankly over the last year seen a few losses related to that that we've worked through is when you look at out of network things or you look at areas where you don't have doctor guarantees embedded with the credit on a standalone style facility. Those have been the areas of healthcare that have underperformed and we've really worked through that. So our business development focus is really on the senior housing side.
We've added talent in that space in the last 90 days or so that we're really excited about. We think will help augment our growth there as well. And so we continue to be extremely optimistic about our strategies inside of healthcare.
And Stacy from a macro standpoint, there are some data points that point towards the overbuilding of some of the senior housing facilities. Is this something that your borrowers are being impacted by right now?
They can be. We're awfully careful when we look at construction of new facilities and things like that where what the capacity for a particular area even sub areas inside of larger metro areas is. There has been pockets where that's certainly been the case. And I think that we've done a good job of avoiding those. Our teams broadly do a really good job of analyzing where there's been overbuilding.
And so we really try to stay away from that. We look at areas where there's some states are certificate of need stakes, so that creates a barrier, particularly on the skilled nursing side. So we're we feel pretty good about that. Where the some of the healthcare senior housing pressure has come from is really on the big players who say the REITs have gobbled up facilities and they haven't paid as much attention to the operators and the operations of the facilities. So they've underperformed.
We're seeing some divestiture from those big players, which is not where we play in this space and which is we think will over the next 12 months or so create outsized opportunities for the regional players and local players which is really where our sweet spot is to acquire facilities and improve the operations of those because that really is the most important part about the senior housing space is the quality of operations and the ability to have good outcomes and good experiences for the residences.
Okay. Thanks for the color, Stacy. And then Stephen Nell, I guess, lots of moving parts from the balance sheet here. I'm trying to appreciate what the average earning assets may look like in the back half of the year. You got the $1,200,000,000 increase of MBS book you mentioned.
We see higher security higher trading securities, the strong loan growth towards the back half of 2Q. It feels like that the average earning assets could be up in 3Q almost $2,000,000,000 versus 2Q. Am I speaking about that growth rate from 2Q to 3Q on average earning assets?
Yes, you're probably pretty close. I mean, we'll continue to grow loans. On average, they should continue to grow in that kind of mid single digit or so level. I don't think we'll incrementally add that much more securities portfolio. So you'll get the effect of the average full quarter average on the securities portfolio in average earning assets, but we won't incrementally be adding that much more to the available for sale portfolio.
And then the funding of all of that would just follow. I mean, we'll either fund it through some sort of deposit gathering activity or in the case of those average securities, they kind of self fund through the wholesale borrowing categories. Is that helpful?
Yes, that is helpful. I appreciate it. Thank you, guys.
Thank you.
Thank you.
Our next question comes from the line of Jennifer Demba with SunTrust. Please proceed with your question.
Thank you. Good morning. I think all the topics have been covered this morning, but just wanted to ask about your M and A interest at this point. I know CoBiz hasn't been on the books too long.
Yes, Jennifer, this is Steve. I think our focus is still squarely on making sure that we generate investment return and the growth in the Colorado and Arizona markets. We clearly got the expense saves that we had targeted and did a lot of hard work there. But really the real work now is growing in those markets. So I'd say our appetite for further M and A is pretty muted at this point.
I think we're focused on making that be absolutely successful for us going forward.
Okay, great. Thank you.
Thank you. Thanks, Jennifer.
Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Steven Nell for closing remarks.
Okay. Thanks again everyone for joining us this morning. If you have any other further questions, please call me at 918-595-3030 or you can e mail our IR site at irbokf.com. Have a great day.