BOK Financial Corporation (NASDAQ:BOKF) Q2 2022 Results Conference Call July 27, 2022 10:00 AM ET
Company Participants
Steven Nell – Chief Financial Officer
Stacy Kymes – Chief Executive Officer
Marc Maun – Executive Vice President, Regional Banking
Scott Grauer – Executive Vice President, Wealth Management
Conference Call Participants
Brady Gailey – KBW
Jared Shaw – Wells Fargo Securities
Brett Rabatin – Hovde Group
Peter Winter – Wedbush Securities
Jon Arfstrom – RBC
Matt Olney – Stephens Inc
Gary Tenner – D.A. Davidson
Jennifer Demba – Truist Securities
Operator
Good day, ladies and gentlemen, and welcome to the BOK Financial Corporation Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Steven Nell, Chief Financial Officer for BOK Financial Corporation. Please go ahead, sir.
Steven Nell
Good morning, and thanks for joining us. Today, our CEO, Stacy Kymes, will provide opening comments. And Marc Maun, Executive Vice President for Regional Banking, will cover our loan portfolio and related credit metrics; Scott Grauer, Executive Vice President of Wealth Management, will cover our fee-based results; then I’ll provide details regarding net interest income, net interest margin, expenses and our overall balance sheet position from a liquidity and capital standpoint.
PDFs of the slide presentation and second quarter press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 regarding any forward-looking statements we make during the call.
I’ll now turn the call over to Stacy Kymes.
Stacy Kymes
Good morning, and thanks for joining us to discuss BOK Financial’s second quarter financial results. Starting on Slide 4, second quarter net income was $133 million or $1.96 per diluted share. The quarter represented strong earnings performance from across the Company, demonstrating with our diversity and breadth. Core average loan balances grew $714 million during the quarter, with gross spread among geography and loan types.
More impactful to this quarter’s results was a 35 basis point increase in our average loan yields. Our loan portfolio has begun to reprice in response to the recent increases in short-term rates. As we’ve noted previously, our balance sheet is asset sensitive with the majority of our commercial and commercial real estate loans repricing in a year or less.
Brokerage and trading revenues increased, led by institutional trading fees and a new quarterly high in energy hedging and the second best quarter historically from commercial loans indication fees. Fiduciary and asset management fees grew $3.4 million as our waivers in our money market funds declined as short-term rates increased. Transaction card and deposit service charges, both grew linked quarter, $2.7 million and $1.5 million, respectively.
Our period-end core loan balances grew $711 million or 3.5% linked quarter, but even more impressive with growth in unfunded loan commitments. Those grew $979 million or 7.8% linked quarter. The overall credit quality of our loan book continues to be outstanding with additional improvement again this quarter.
Turning to Slide 5. C&I loan balances increased 5.4% linked quarter with an increase in C&I commitments of 4.4%. Average deposits decreased $1.8 billion this quarter, with virtually all of that in interest-bearing balances. These declines were consistent with our expectations given the actions of the Federal Reserve to increase short-term rates. Compared to June 30, 2021, period-end balances are still $1.2 billion or 3.1% higher than last year with a favorable mix shift to noninterest-bearing balances.
Assets under management or in custody in our Wealth Management group fell slightly this quarter, down 5% to $96 billion. The change was market value driven, primarily due to equities, which account for 1/3 of the assets under management or administration. I’ll provide additional perspective on the results before starting the Q&A session, but now Marc Maun will review the loan portfolio and our credit metrics in more detail. I’ll turn the call over to Marc.
Marc Maun
Thanks, Stacy. Turning to Slide 7. Period-end loans in our core loan portfolio were up — were $21.2 billion, up 3.5% linked quarter. Midway through the year, core loans have now grown $1.3 billion or 13% annualized. Total C&I loans grew $696 million or 5.4% linked quarter with growth spread across our footprint. Our Texas and Oklahoma markets produced combined core C&I growth of 6.8% linked quarter.
Across the markets, health care, energy and services were the primary sectors driving this quarter’s solid C&I results. Although Commercial Real Estate Growth was quiet this quarter, linked quarter commitments grew 7.5%, so we expect that to translate into balance sheet growth over the next several quarters.
Loans in the energy space continued their recent linked quarter growth trend, period-end balances grew $195 million and have increased $386 million since December 31. Linked quarter outstanding balances grew 6% while unfunded commitments increased 11% linked quarter, creating more opportunity for balanced growth as we look to the quarters ahead.
Health care balances increased $255 million or 7.4% linked quarter, primarily driven by our senior housing sector. Excluding energy and health care, core middle market C&I realized positive growth again this quarter, with linked quarter growth of $245 million or 3.9%. And C&I utilization rates did increase slightly this quarter but have yet to return to pre-COVID levels. We still have significant capacity to increase outstanding loan balances as demand continues to come back online without it being predicated on any new customer acquisition.
A return to more normal utilization levels organically add $600 million of core C&I loans outside the anticipated growth in the specialty areas. Based on the growth in balances and commitments over the last two quarters, combined with the geographic and loan type diversity, we are very confident in our ability to produce continued growth throughout the remainder of this year.
Commercial real estate period-end balance growth slowed this quarter following the strong first quarter performance. Through June, balances have increased $275 million, an annualized rate of 14%. Commitments grew $460 million or 7.5% linked quarter, with year-to-date commitment up $855 million. We have plenty of capital allocated for this space to grow balances this year. And given the low current utilization level, a return to more normal funding levels could add several hundred million dollars in outstanding loan balances within the next two to four quarters.
We entered the year with a focus on growing top line revenue and the second quarter demonstrates the progress we are making on the lending front. We are confident that the momentum we’ve experienced up to this point will continue and the resulting loan growth for 2022 will be one of the best in our recent history.
Turning to Slide 8. You can see that we continue to experience meaningful credit quality improvement across the broader loan portfolio. Overall, credit quality is the best we’ve seen in quite some time, far better than pre-pandemic levels. Excluding loans guaranteed by U.S. government agencies, nonperforming assets fell $13 million this quarter to $118 million.
Excluding those guaranteed by U.S. government agencies, nonaccrual loans are now $96 million. As a percentage of tangible equity and loan loss reserves, our criticized assets are at levels not seen in the last 10 years. Our sustained trend of improving credit quality metrics was enough to offset any need for a credit loss provision this quarter, which would have resulted from the strong loan growth and changes in our reasonable and supportable forecast, primarily related to the economic outlook from the Federal Reserve’s actions to control inflation.
Given our solid credit position today, a ratio of capital allocated to commercial real estate, that’s substantially less than our peers and a history of outperformance during past credit cycles, we believe we are well positioned should another economic slowdown materialize in the quarters ahead. We realized net recoveries of $799,000 during the second quarter. Excluding PPP loans, net charge-offs have dropped to an average of 6 basis points over the past four trailing quarters, which is far below our historic loss range of 30 to 40 basis points. Looking forward, we expect net charge-offs to continue to be low.
Excluding PPP loans, the combined allowance for credit losses was $283 million or 1.33% of outstanding loans at quarter end. We expect this ratio to migrate downward, though continued strong loan growth will increasingly influence the prospect of resuming a provision in future quarters. I’ll now turn the call over to Scott.
Scott Grauer
Thanks, Marc. Turning to Slide 10. Total fees and commissions were $173 million for the second quarter, a $76 million increase from the first quarter. Institutional trading fees increased $66 million linked quarter as we move past last quarter’s volatility, returning us to more sustainable trading levels and revenues. Driven by increased activity from our energy customers, our commodity and hedging activities had a record quarter with fees of $13 million, a $2.2 million increase from the record set last quarter.
Commercial syndication fees recorded their second best quarter ever with fees of $6.4 million, an increase of $3.3 million linked quarter. Fiduciary and asset management fees increased $3.4 million linked quarter, primarily due to seasonal tax preparation fees and growth in mutual fund fees and revenues, largely driven by increases in short-term interest rates.
Our assets under management or administration fell 5% linked quarter to $96 billion. This was primarily driven by a 15% decline in the equity portion of the portfolio, with equities representing about 1/3 of the total assets. Despite the decline related to current market valuations, our strong sales activity in this space provided an offset to that change with total assets under management or administration relatively flat to this time last year.
Our current mix of assets under management is 44% fixed income, 34% equities, 14% cash and 8% alternatives. Our relationship-centric business model is perfectly in touch with clients’ needs today as we continue to navigate through this market volatility. We believe the confidence and appreciation for financial advice, we’ve earned from institutions and individuals positions us well to serve our clients in this period of market uncertainty.
Transaction card revenue increased $2.7 million or 11% linked quarter as transaction volumes improved. Year-to-date card revenues are up 8% compared to 2021. This is largely due to broader reopening of the U.S. economy driving transaction volume as well as some impact from inflation. Deposit service charges increased $1.5 million this quarter, with growth once again equally split between our Commercial and Consumer segments.
Compared to second quarter last year, total service charges have grown $2.6 million or 10%. Year-to-date, approximately 23% of the deposit service charge fees were consumer-related overdraft fees. We expect to make changes in the fourth quarter this year that will reduce consumer overdraft fees by approximately $2.5 million per quarter.
Mortgage banking revenue decreased $5.3 million or 32% linked quarter, with production revenues down $5.6 million due to lower production volumes combined with narrowing margins. Mortgaging servicing fees increased $277,000 this quarter and or 6% higher than the second quarter last year. During the last 12 months, we’ve strategically acquired servicing for approximately $6 billion of unpaid principal balances.
Mortgage production volume decreased $102 million during the quarter to $306 million as the industry continues to face housing inventory constraints and rising mortgage rates. The rise in mortgage rates has significantly impacted the refinance market, resulting in only 19% of mortgage loans funded for sale this quarter, down from 45% in the first quarter.
I’ll now turn the call over to Steven to highlight our net interest margin dynamics and the important balance sheet items for the quarter. Steven?
Steven Nell
Thanks, Scott. Turning to Slide 12. Second quarter net interest revenue was $274 million, a $5.6 million increase from last quarter. Interest and fees on loans increased $25.8 million linked quarter, largely due to a 35 basis point increase in loan yields. Average loan balances increased $594 million. Loan yields increased as our variable loan rates began to reprice in response to the recent increase in short-term interest rates.
Our balance sheet is asset sensitive, with the majority of our commercial and commercial real estate loans repricing in a year or less. Interest on our trading securities fell $18 million as we reduced average trading securities $4.4 billion linked quarter. While interest income on trading securities fell this quarter, this was more than offset with an increase in institutional trading fees recognized in fees and commissions.
Interest income on the available for sale and investment portfolios increased $2 million linked quarter, primarily due to a 7 basis point increase in the average yield on the available for sale portfolio due to higher reinvestment rates. During the second quarter, we moved $2.4 billion in securities from available for sale to held for investment. This is the primary driver of $416 million linked quarter increase in the investment portfolio and the $834 million decrease in the available-for-sale portfolio.
Due to the timing of those transfers, the balance sheet impact of that repositioning will become more apparent when we report third quarter results. Total interest expense increased $5.5 million during the second quarter, primarily due to a 10 basis point increase in the average rate of interest-bearing liabilities, while those related average balances fell $2.5 billion. The average effective rate of interest-bearing deposits increased 12 basis points this quarter. Average earning assets decreased $4.4 billion compared to the last quarter, primarily due to the intentional decline in the trading securities portfolio used to support our brokerage and trading business we just noted.
Excluding the $120 million linked quarter decline in PPP loans, average loan balances increased $714 million. Interest-bearing cash decreased $207 million. Average total deposits declined $1.8 billion, with noninterest-bearing deposits increasing $140 million and interest-bearing balances decreasing $1.9 billion this quarter, which was consistent with our expectations given the movement in short-term interest rates.
Net interest margin was 2.76%, a 32 basis point increase from the previous quarter, with the increase of combination of the $4.4 billion linked quarter decline in earning assets and the 35 basis point increase in loan yields. The yield on our trading portfolio increased 29 basis points as we repositioned that portfolio with higher coupon bonds. With our current asset sensitive position and given expectations for further increases in short-term rates as the Fed continues their aggressive posture against inflation, we expect to capture significant benefit throughout the remainder of 2022. If the Fed moves at least 25 basis points in July, then we will materially move beyond the impact of loan floors and would anticipate topping a 3% margin in late third or early fourth quarter.
Turning to Slide 13. We highlight further our asset-sensitive balance sheet position and expect our performance in a rising rate environment to be similar to that experienced during the last rate hiking cycle from 2015 to 2019. Using our standard modeling assuming a parallel shift up 200 basis points gradually over 12 months, net interest revenue would increase 5.2% or approximately $67 million. Over the following 12 months, the total benefit increase is 12.1% or $167 million. However, with a flatter yield curve expected versus the parallel shift up, our estimates for up 200 basis points would be approximately half those levels. I’ll provide more color in a moment when I talk about our specific guidance for net interest income.
On Slide 14, you can see that our liquidity position remains very strong. Our loan-to-deposit ratio increased to 55% this quarter from 52% at March 31, due to the combined impact of an $807 million decrease in total deposits and a $617 million increase in loan balances this quarter. Our significant on-balance sheet liquidity leaves us well positioned to meet future increasing customer loan demand.
Our capital position remains strong as well with a common equity Tier 1 ratio of 11.6%, well above regulatory thresholds. With such strong capital levels, we once again were active with share repurchase, opportunistically repurchasing 294,000 shares at average price of $82.98 per share in the open market. At the current price level, we will continue to be active in repurchasing shares during the third quarter.
Turning to Slide 15. Linked quarter total expenses decreased $4 million. All of that decline is coming from personnel expense. Variable compensation expense decreased $3.7 million and employee benefit expenses decreased $2.4 million due to seasonal decrease in payroll taxes. These decreases were partially offset by a $1.8 million increase in regular compensation expense as we recognized a full quarter of expense related to annual merit increases. We have been successful in managing staffing costs during the tight labor market, but realize that current market conditions continue to present a risk going forward. Non-personnel expense was flat linked quarter with most expense categories having slight increases compared to the first quarter, offset by lower occupancy expense.
On Slide 16, I’ll provide guidance in a few areas as we begin the second half of 2022. We expect loan growth to continue the solid performance seen in the first and second quarters, with period-end point-to-point total loan growth for the year approaching a double-digit rate. We expect a continued reduction in deposit balances with the point-to-point decline in the upper single-digit range for 2022. Considering accelerated loan growth and moderate pressure on deposits, our liquidity position is expected to remain strong with a loan-to-deposit ratio of approximately 60% by year-end.
Considering the items noted above and modeling an additional 175 basis point increase in short-term rates during 2022, consistent with a flattening yield forward curve, we expect core net interest income, excluding the impact of PPP loans year-over-year, to grow approximately 7% versus the prior year. Core net interest margin should expand throughout the remainder of 2022. And given this environment should exceed 3% before year-end.
In fact, our June margin was 2.9%. We expect to maintain the available-for-sale securities portfolio flat through the remainder of the year and reinvest cash flows at current rates. No additional transfers to held to maturity are anticipated. Total fee revenues are expected to be 5% to 10% lower than second quarter results as we saw record derivative activity, seasonality of tax fees and will continue pressure with mortgage banking into the third quarter.
Total fee revenues as a percent of total revenues is expected to remain near 35% during 2022. Total operating expense should be approximately $280 million to $285 million per quarter for the remainder of 2022, bringing total expenses for the year 5% below 2021 and our efficiency ratio below our corporate goal of 60% by the end of the year.
Our current combined loan loss reserve as a percentage of loan balances is 1.33%. We expect this ratio to migrate downward, though continued loan growth at the current pace will increase the probability of resuming a provision in future quarters. We expect to continue opportunistic quarterly share repurchases at the upper level of the dollar range spent over the past several quarters. I’ll now turn the call back over to Stacy for closing commentary.
Stacy Kymes
Thanks, Steven. I’m very excited about this quarter’s results. We ended the year with a focus on growing top line revenue and our team is delivering those results across the board. Our lending teams have really hit their stride, not only growing our balance sheet this quarter, but also creating opportunities for future growth as commitment growth outpaced loan fundings.
This is especially impressive given our commercial lending group and their support teams completed significant transformational projects during the quarter. We successfully implemented a new loan origination platform, significantly updated our treasury platform and introduced a commercial portal.
From an operational and efficiency standpoint, this positions us well to leverage those investments going forward. Other revenues from our mortgage focused business lines have slowed as markets adjust to rising mortgage rates, we’ve taken appropriate steps to adapt to the new environment. We reset our balance sheet strategy for mortgage-related trading securities. And we’ve done some surgical rightsizing of our expenses within our mortgage origination space.
Despite the impact from equity markets, our fiduciary fees continue to grow as rising rates eliminate fee waivers and our sales force generates new business. Transaction card revenues continue to grow as well as our ancillary lending fees related to commodity hedging and syndication activity. We achieved all this with a continued emphasis on expense control. We’ve been intentional about positioning our balance sheet to benefit from rising rates with evidence this quarter as core loan yields increased materially, and we expect that to continue.
As the Federal Reserve moves aggressively to increase short-term interest rates, we will see expanding margins and revenue. Credit quality just keeps getting better and is the best we’ve experienced in a long time, though it is likely unsustainable. The business profile of our geographic footprint remains exceptional. And when combined with BOK’s long-held credit discipline will serve us well if the economy slows in future periods.
With that, we’re pleased to take your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Brady Gailey of KBW.
Brady Gailey
I just wanted to start with the guidance for spread income, which is now 7% growth. I think before it was 9% growth. So it was revised a little lower, which is just a little surprising. It seems like with rates doing what they’re doing, the NII commentary is better. So I just wanted to see kind of why the change there?
I know you’re expecting deposit balances to be a little lower. So maybe that has something to do with it, but your loan growth is still robust. So maybe just the dynamics that went into kind of the lower NII guide.
Steven Nell
Yes. Let me clarify that a little bit because really, the dynamics of what’s going on have really not changed. We just lowered the trading portfolio from the first quarter to the second quarter and then on into our forecast. So we had, I think, in the first quarter about $8 billion average in our trading portfolio. And going forward, it’s going to be about $4 billion.
So that trading portfolio earns a nice spread and contributes to net interest income. So we dropped that balance. That’s what went from the — why it went from 9% to 7%. But my expectation for the third quarter is that NII should grow somewhere between $15 million and $20 million for the next couple of quarters each.
You only saw it grow about $6 million this quarter because of that drop in the trading portfolio. So now that we reset that position for that portfolio within the dynamics of improvement in loan spreads and yields, our continued control in deposit costs and overall asset sensitivity, we’re going to grow net interest income, $15 million to $20 million for the next couple of quarters. Hopefully, that clarifies a little bit.
Brady Gailey
That does. And then just next on the provision, I mean you guys have had a negative to zero provision for a while now. It sounds like you could have something in that line item going forward. But I’m just really wondering about the reserve and the reserves are 133 basis points in percentage terms. I think you said that could continue to go down from here. I was just wondering how you think about kind of the floor on where that reserve could land over time?
Steven Nell
Yes. Well, it’s hard to anticipate a floor. But I do see it migrating down towards that kind of day one CECL level, which is 120. Now whether we get there, I don’t know. I think what we wanted to share is that we likely will need to provide at some point in the future for the loan growth that we’ve got. I mean, our loan growth is significant. And who knows what the economic outlook will be the next quarter or two. But the loan growth itself will drive likely some need for provisioning just because of the size of it. But all that dynamic together, I still believe the 133 slides downward a bit.
Brady Gailey
Okay. And then finally for me. I mean, I heard your comments about overdraft — some overdraft changes being implemented in the fourth quarter, which will take $2.5 million a quarter away from fee income. Are you thinking about anything on the NSF side? Or are there any other changes that you’re thinking about that would impact service charges beyond that $2.5 million per quarter?
Stacy Kymes
No, that’s pretty encompassing. We’ll announce this as we get into the late third or early fourth quarter. But we wanted to signal that they will have an impact. It’s not a huge number for us. The consumer overdraft and sub-charges aren’t a terribly large number for us. I think, for the year, it’s about $21 million or $22 million a year in fee revenue. So will impact that about $2.5 million a quarter with some changes starting in the fourth quarter, but that will largely be related to overdraft and NSF fees.
Operator
The next question is from Jared Shaw of Wells Fargo Securities.
Jared Shaw
I guess maybe looking at loan growth, especially C&I growth, putting up some great numbers there. When you look at that growth in commitments, is that new customers and taking market share? Or is that your customers just feeling more optimistic and creating new lines and creating new projects to look for?
Marc Maun
Yes. This is Marc Maun. I would say it’s a combination of both. We’ve been successful in acquiring new customers and as well as seeing some of our customers expand, take advantage of the opportunities now with the economy and take on some of the projects they may have put off for a while. And I think what the key here is that the breadth of our growth is across all our geographies and really all our lines of business on the commercial side and especially on the C&I side. So we’ve just seen an overall positive impact going for the last six months, nine months, and we expect it to continue.
Stacy Kymes
Yes. This is Stacy. And I think Marc said that well. And what I was most encouraged about was how widespread the growth was across the geographies and loan types. It wasn’t one particular segment that was kind of carrying the day, but really widespread across all of our geographies and different loan types. And so that was really encouraging, and we’re encouraged about the pipeline that we see going into the last half of this year as well.
Jared Shaw
When we look at that pipeline of that growth outlook for the year, does that assume that the utilization rate normalizes this year or start to normalize? Or is that just looking at the pipeline and assuming a slight utilization rate?
Marc Maun
No, we’re not assuming that the utilization is going to normalize. We’re looking at just general growth from our customer base, new customer relationships as well as expansion opportunities to add to the portfolio. If we are able to get increased utilization, it will just benefit us further.
Jared Shaw
Okay. And then I guess shifting on to the deposit side, how should we think about that deposit mix with the overall balance — deposit balances going down? Should we — are you still able to grow DDA going forward? And is that also coming from just new relationships?
Steven Nell
Well, it appears that way. I mean we’ve seen growth in DDA every quarter. Even in the consumer portfolio this quarter, it grew. So I don’t anticipate that, that drops that significantly. I think you’ll have migration with some of your wealth customers and maybe some of your commercial customers who find somewhere else to put their dollars to earn a little bit higher with higher rates. So that’s why we’ve kind of guided to an overall decline in deposits by the end of the year. But the DDA and the mix has held exceptionally strong. And I don’t know that I see that changing.
Stacy Kymes
No, this is Stacy. I think that our commercial treasury platform continues to perform very well, and our sales teams there are exceptional. And our DDA growth has been very good, and we don’t see how that materially changes here as we move forward.
Marc Maun
And this is Marc, I’ll only add one thing here. One of the things we’ve also seen is our treasury services revenue stream on a P x V basis has been growing at a double-digit rate for the last 18 months. So that could be driving some of that DDA growth as well because our service charges are partially covered by some of those balances.
Jared Shaw
Okay. And then I guess just finally for me. When you look at the deposit beta, you highlighted 30% in the last cycle. If we see — I guess what could cause that to go higher than 30%? And if we do get the next 75 or higher basis point move, could we get to that level in short order here?
Steven Nell
Yes. So let me kind of clarify. So the first 150 basis point increase, which we’ve already seen, our beta was about 14%. The next 175 basis point increase that we have built in our forecast, the beta is closer to 40%. So the average for the year is close to that 30% that we’re talking about. But to your point, future rate increases, which we have built in our forecast do carry a higher beta up to that 40% level is what we’re anticipating. And we’ll just see if that plays out, but we think that should be pretty close to what happens.
Operator
The next question is from Brett Rabatin of Hovde Group.
Brett Rabatin
Wanted to first ask, it was good to see the rebound in all the fee income lines of business. And I guess I was a little surprised that the wealth management fees were up despite the decline in the AUM. Can you talk maybe about the dynamics there? And then maybe just a little better outlook on that line item in particular?
Scott Grauer
Sure. I’ll take first stab at that. This is Scott. A couple of factors that moved the needle probably most significantly in the quarter, we talked about a bit. One is, when you think about 14% of our total AUMA being in cash, we started to — we were able to stop waiving fees on our money market funds. We increased our revenue share on outside money market funds. So that gave us lift in the quarter.
Additionally, we had a significant tax seasonal inflow in the quarter which helped and aided. And so I think all of that, coupled with, as Stacy mentioned, we had very strong new sales, new relationships really across the various lines of wealth management for the quarter. And then the only drag on that was the roughly 1/3 that experienced the most significant market decline in the quarter, which were the equity components. So really, that’s kind of the dynamic that we saw playing out in the course of the quarter.
Brett Rabatin
Okay. Great. That’s helpful, Scott. And then I wanted just to make sure I understood the loan growth guidance. It sounds like you’re talking about loan growth being similar in the back half to the first half. But given the guidance for it to be approaching double digit, it does assume somewhat of a slowdown. Are we — I assume we are expecting a bit of a slowdown relative to the second quarter in 3Q? Or I’m not sure if I understand the specific guidance around the back half of the year?
Steven Nell
Well, we’ve experienced 12% to 13% annualized growth the last two quarters, and that’s very strong. And I’m a little reluctant to put 12% out there. I do think our commercial portfolio likely grows that level. Our wealth portfolio has grown well, but not at that level or likely not at that level going forward. So I don’t know, you take all of it together, I think our guidance is around that double-digit mark. But I was a little reluctant to put 13% loan growth out not knowing exactly what the economy is going to do in the third and fourth quarter.
Stacy Kymes
That’s really where the conservatism is. I think that there’s a lot of momentum there, and the pipelines are very good. And I think as we look at that, we just kind of wanted to think about that with a little bit of conservatism just because particularly as you get into the fourth quarter, it’s hard to know exactly what borrower behavior will be. And so we’re awfully optimistic about what we’ve done and what the pipeline looks like going forward.
Brett Rabatin
Okay. That’s helpful. And then just lastly for me on expenses in the guidance for $280 million to $285 million for the back half of the year. Is that a reflection of personnel expenses bumping back up following lower compensation-related expenses in 2Q, you can give a little color on…
Steven Nell
I think you’re likely going to see our stock price a little higher, which is going to drive some variable comp in our stock equity accruals. I think it also has an impact on our deferred compensation. Those two items that you saw that we benefited from in the second quarter will likely turn the other direction and be a little bit higher than that $273 million. That’s why I’m coining towards the $280 million number or a little more. I don’t think it’s going to be general regular salaries or part-time type salaries.
You saw a $1.8 million increase because of merit increases in the second quarter, and that’s our timing for that, so you won’t have that recur in the third and fourth quarter. So I think it is personnel costs that drives a little bit higher in the third and fourth quarter, but it’s mostly variable comp and deferred comp related.
Operator
The next question is from Peter Winter of Wedbush Securities.
Peter Winter
I had two questions on the yields. First, could you just tell us how much is cash flowing each quarter on the securities portfolio and what the reinvestment rate is versus the yields of the securities running off?
Steven Nell
Yes. So we’re — we got about $600 million of cash flow quarterly from the available-for-sale portfolio that we’ll reinvest. And they’re going to be at just normal mortgage-backed security rates, which I don’t know what those guys are getting exactly today, but they’re up close to 3%, I would say. But I can give you more of an exact answer.
Peter Winter
And versus stuff that’s rolling off?
Steven Nell
Yes. I mean definitely, the $184 million that you see in the available for sale, that’s going to migrate up. Maybe gets closer to 2% or so in the next quarter or so.
Peter Winter
Okay. That loan yield increase is very impressive, 35 basis points. So is there anything like interest recoveries that elevated that, that might revert a little bit next quarter?
Steven Nell
No, there’s nothing inside there that really boosted it kind of artificially, if you will. That’s a pretty normal rate. And I think you’ll expect that to go higher. We’ll see what the Fed does today. But most of these price relatively quickly upward. And so yes, I expect a good response in that overall portfolio yield as we move into the third quarter.
Peter Winter
Okay. And just my last question. Obviously, I’ve covered you guys for a while. And you’ve never done it in the past, but I’m just wondering if there’s any thoughts on maybe adding swaps to manage the asset sensitivity and maybe protect the margin when the Fed starts to cut rates just given the asset-sensitive balance sheet?
Steven Nell
Historically, we’ve not done that. We’ve really used on balance sheet kind of cash positions in our securities portfolio. There may be a point where we decide we want to grow the portfolio and take off some asset sensitivity. We’re not at that point today. But no, we’re not contemplating putting on any swaps at the moment.
Operator
The next question is from Jon Arfstrom of RBC.
Jon Arfstrom
This is probably for Stacy and Marc, just on energy. Sometimes, we love it. Sometimes, we hate it. I think we love it right now. And just if you guys could give us an overall view of how you feel about the energy markets today. I know you’re pretty consistent on it, but any more cautiousness on underwriting and any changes in your appetite there? And just generally, what are you seeing from clients?
Stacy Kymes
No. I mean this has been a really historic opportunity for BOK Financial to take market share. Really strong growth in syndication. We’re leading a high percentage of the deals that we’re involved with today. Customers understand risk management practices. So that’s why you saw a record second quarter hedging revenue with commodity prices spiking.
From an underwriting perspective, we feel very good about what we’re doing. We have a cap on oil at $85 and a cap on natural gas at $5.50. So while we traditionally use the forward markets and the forward strip to price the collateral, we have capped that at a level well below the current strip price. So we feel very good about that.
We’re — it’s always been a great portfolio for us. Even in the downtimes that we’ve been through. We performed exceptionally well. And actually, as people begin to think about the potential for a recession or a downturn in the economy, it’s really hard for us to envision a dramatic downturn in our footprint states given the support that commodities will have in Oklahoma and Texas, Colorado and New Mexico, in particular.
The likelihood that you could have a better regional outcome in this footprint that we are in than other parts of the country is very high with commodity prices at the level that they are today. We’ve had six years of underinvestment in the energy space. And so this isn’t something that is likely resolved in a short period of time. I think commodity prices are going to stay higher on a relative basis. They could go lower than they are today, particularly natural gas, but still, on a relative basis, be much higher than they’ve been in the last several years and support our local economies at a high level.
Marc Maun
And Jon, I’ll just add that as we’ve continued through this cycle, our hedging program continues to be substantial. So both our oil-weighted and gas-weighted customers still are overweighted or hedged in excess of 50% as much as 90% into — throughout 2023. So that gives us further comfort when we’re looking at if there’s a potential drop in prices beyond our underwriting ability.
So we’ve maintained that kind of level going forward. And as we ran our stress test, we ran a 40% discount to our entire — through the price deck in total and still saw a very little impact to the overall portfolio quality.
Jon Arfstrom
Good. That’s very helpful. And then just, Steven Nell, one for you. On Slide 13, on your asset sensitivity, help me understand that a little bit more. I think what you’re saying is that 13- to 24-month number is in addition the 1 to 12 month number. Is that the right way to look at it?
Steven Nell
That’s right. But also look at the asterisk there too because I don’t want to overestimate what it could be. That is our normal parallel shift that we put in our 10-Q, but I’m being conservative here because I think the flattening curve scenario is probably more likely and it would cut that number in half. But it is additive to the previous year.
Jon Arfstrom
Yes. But the relative ratio holds is, I guess, what I’m kind of getting here.
Steven Nell
Correct.
Jon Arfstrom
And I guess bigger picture, if you just look at the last few months and assuming we get 75 today, that’s a little over 200 basis points. So you’re saying, yes, you’re getting benefits today. But based on the repricing of your portfolio, the benefits would really start to come third quarter of ’23, even though we see the benefits today, you’re seeing there’s even more to come. Is that…
Steven Nell
No, I think that’s true. I think that’s correct. Yes, we’re set up to benefit significantly in the third and fourth quarter if rates continue to rise. We think that’s going to happen today. And that’s our expectation. That’s why I wanted to highlight earlier, I did in the call, we only grew $6 million between the two quarters, but that wasn’t because some dynamic with our sensitivity. That was more just the size of our trading book.
And if you right size that and carry that on out for the rest of the quarters, then you’ve got a significant bump in NII to that $15 million to $20 million a quarter level. As long as loans continue to grow and the rates continue to rise, that’s how we’re set up.
Operator
The next question is from Matt Olney of Stephens Inc.
Matt Olney
I want to start on the NII guidance, 7%, for the year. I think that excludes the impact of PPP. I want to make sure we’re talking about the same thing. Do you have what the dollar amount of the PPP fees were last year starting point?
Steven Nell
Yes. So in 2021, we had a benefit of about $48 million roughly of NII and fees related to PPP that would be in NII. And then this year, it’s about $8 million. So there’s a $40 million differential between the two years. And if you account for that and look at what our NII forecast is, I think we’ll grow 7% over last year. Now that’s down from 9% that we said last quarter in our guidance, but we had not adjusted our trading portfolio downward like we have today. And I think, in the second quarter, that trading portfolio was $18 million different in NII or interest revenue than what we had in our previous forecast. So that’s why I modified that guidance.
Matt Olney
Okay. And that guidance should get us to that $15 million to $20 million incremental improvement in each of the next two quarters. Is that right?
Steven Nell
Yes. That’s correct.
Matt Olney
Okay. Got it. I think you said within that, it assumes the trading portfolio maintains around that $4 billion level. Did I hear that right? And I guess that would be an increase from the end of period level. So you…
Steven Nell
Yes. It’s around $4 billion to $5 billion average for those two quarters off of an $8 billion to $9 billion average we had previously. So that guidance adjusts for that portfolio being smaller.
Matt Olney
Okay. That’s helpful. And then I guess on the fees, good to see the rebound in the brokerage and trading line. I want to make sure I appreciate kind of what’s going on here. I think the trading line last quarter was a loss of $54 million. Do you have what the dollar amount for that line was in 2Q?
And then I guess how confident are you that you’ve captured all the potential losses from moving some of those lower coupon bonds of the balance sheet that we talked about last April?
Steven Nell
I can address that latter question. I know that we ended up selling out of all of those bonds in the quarter for about $4 million to $5 million more than we had marked those bonds in the first quarter. So we came out better certainly in the sale of the tail of those bonds than what we had marked them when we closed last quarter. That’s the answer for the latter part of the question.
Stacy Kymes
And to your first part, Matt, Page 10 in the investor deck really breaks out in more granular detail that brokerage and trading line item. So you can see in the second quarter, it was $12 million in trading fees for the second quarter of 2022.
Matt Olney
Got it. Okay. And then just lastly on this topic. I guess help me appreciate just increasing the size of that trading portfolio back up to that $4 billion to $5 billion that we brought it down quite a bit over the last few quarters. Just strategically, kind of we’ve increased it, we brought it back down, now we’re bringing it back up. Just help me appreciate that.
Scott Grauer
Yes. So this is Scott. So I think that as we’ve talked about in terms of the factors that influence the just precipitous rise in short rates in the first quarter and the market volatility, we had significant challenges to liquidity in that mortgage-backed security sector.
And as Steven detailed, we liquidated our lowest coupon mortgage-backed securities in the first quarter because we believed, and I think rightly so, that we were going to be entering a period with not just rising rates but a significant amount of fixed income uncertainty. So we feel like as we’ve adjusted the size of that trading securities portfolio to now to that $4 billion to $5 billion level that positions us for the current market conditions.
So if we over the course of the remainder of the year began to see rate and fixed income clarity and confidence return, then we’d consider returning it to the larger levels than it was previously. But in the current market conditions where we see a lot of uncertainty and volatility, we feel very comfortable about that portfolio size to support our mortgage origination customer base and the current kind of outlook for rates and the flatness of the curve.
Stacy Kymes
Matt, this is Stacy. I mean if you think about just mortgage production overall, we’re just — the market is just not creating as much inventory with new paper being originated. And so as a result of that, that activity is going to be at a lower level than it was when you saw really strong mortgage markets overall in the third and fourth quarter last year.
The other thing that we’re starting to see some signs of life in is on the municipal trading side. That’s picked up a little bit here in the second quarter, and that may help us a little bit as we move forward as well.
Operator
The next question is from Gary Tenner of D.A. Davidson.
Gary Tenner
I wanted to ask about the components of loan growth back half of the year. I got on the call late, so I apologize if you went through this. But my sense is that the pipeline and growth expectations are — remain pretty well weighted to commercial. And I’m just curious about the commercial real estate side, we had a big kind of surge, I guess, in the first quarter and then we’re flat 1Q to 2Q.
Can you talk about what you’re seeing in terms of pipelines, transaction demand and if you’re maybe seeing more projects that maybe don’t pencil out at higher rates?
Marc Maun
Well, this is Marc. I would say, first of all, to the latter part of that, we’re certainly employing the same discipline we’ve always employed. And so we’re trying to be selective and pick the best credits that we can. The volume of opportunities is still there. We just may be being a little bit more selective. And then what we saw in the second quarter was a lot of new commitments that we booked that are more construction related and will not fund immediately, but we expect those to start to fund up for the remainder of the year. So that’s when we’ll see the loan growth and outstanding is as those projects are funded going forward.
Gary Tenner
Okay. And in terms of the rate sensitivity, I just wonder if, Steven, you could tell us in terms of the 78% of commercial and commercial real estate, that’s a variable rate or fixed the repricing year, can you drill a little more into the variable rates, say, either prime or two- to two-month LIBOR to be a little more specific on what — how we’re thinking about that?
Steven Nell
I think it is 90% either LIBOR or SOFR. And most of it centered around 30 days. So it moves very quickly.
Operator
And the last question is from Jennifer Demba of Truist Securities.
Jennifer Demba
Question on the senior housing portfolio. When I’ve asked some bankers over the last six months or so, what kinds of loans they see as vulnerable if we go into a recession, some bankers have cited that area. I’m wondering what your thoughts are and what you’re seeing in your portfolio?
Marc Maun
Well, I don’t believe that the senior housing portfolio is sensitive to recession as it is to more what the government does around Medicare and Medicaid rates and what we’ve seen in terms of COVID and et cetera. Those have been the headwinds that have been experienced. And the positive is that the Medicare and Medicaid rates have been improving, while the COVID situation is getting better, too, so we would expect occupancy to start to improve. So from that standpoint, I don’t think the recession is going to change the demographics of the population that would reduce the demand that would require senior housing.
Stacy Kymes
Jennifer, this is not a new portfolio for us, and we’ve had it through previous recessions, including the ’08, ’09 more severe recession, and the credit outcomes in that portfolio have been very, very strong. We haven’t made any changes in our underwriting or liberalized how we look at that in any way. So I wouldn’t expect a materially different performance absent government changes in reimbursement for Medicare and Medicaid.
Operator
Ladies and gentlemen, we reached the end of the question-and-answer session. And I would now like to turn the call back to Mr. Steven Nell for closing remarks.
Steven Nell
Okay. Thank you. Thanks, everyone, for joining us today. I appreciate all the questions. And if you have any additional questions, please call me at (918) 595-3030, or you can e-mail at ir@bokf.com. Everybody, have a great day. Thank you.
Operator
Thank you very much, sir. Ladies and gentlemen, that concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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