BOK Financial's mortgage-related businesses take hit from rate volatility

Significant interest rate volatility due to substantial changes in the economic and geopolitical environment hit Tulsa, Okla.-based BOK Financial Corp.'s mortgage-related businesses in the first quarter.

"Demand for lower coupon U.S. government agency residential mortgage-backed securities was constrained as investors reacted to interest rate volatility and market uncertainty," President and CEO Stacy Kymes said on the company's earnings call, according to a transcript.

The decreased demand for such securities resulted in a $43 million quarter-over-quarter decline in the pretax contribution from the company's institutional trading group, executives noted. As of March 31, the company has reduced its exposure to those securities by roughly 70% compared to Dec. 31, 2021.

In a Form 8-K filed March 9, BOK Financial announced it logged pretax losses of roughly $50 million since March 4 as it cut the carrying value of its trading securities based on sales of securities or market observations, though it cautioned the losses were unrealized and may change. The company said in the filing that investor appetite for U.S. government agency-issued mortgage-backed securities fell due to the Federal Reserve's expected rate hikes and market disruptions caused by Russia's invasion of Ukraine.

"Regarding our MBS trading activities, we expect the balance sheet usage to moderate through the next several quarters as the mortgage origination market reacts to higher interest rates and continued shortage of housing supply," Scott Grauer, executive vice president of wealth management, said on the call.

Interest rate volatility also negatively affected outcomes in BOK Financial's mortgage servicing right hedging results, creating a $13 million pretax decline in performance compared to the 2021 fourth quarter, according to Kymes.

Moreover, the company's mortgage banking revenue dropped 21.8% from the linked quarter mainly due to lower production volumes and narrowing margins. Mortgage production volume declined $93 million to $408 million amid housing inventory constraints and rising mortgage rates, Grauer said.

"The expected increase in market interest rates has and will have a significant negative impact on our mortgage and brokerage and trading activities," CFO Steven Nell said.