Balance sheet hedging strategies that protect against lower rates continued to outnumber rising rates strategies in the second half of earnings season, though it's worth noting that Q1 ended just before the tariff-driven decline in swap rates.
Hedging Strategies in Action: Q1 Earnings Calls Part II
May 5th, 2025
This quarter, we've opted to send our summary of earnings commentary in two parts to deliver these insights in a more timely manner. Click here to read Part I.
Balance sheet hedging strategies that protect against lower rates continued to outnumber rising rates strategies in the second half of earnings season. However, it's important to note that Q1 ended just beforethe tariff-driven decline in swap rates. On the customer hedging front, the optimistic tone established early in earnings season persisted, with several institutions highlighting strong pipeline growth.
Read on for our complete summary:
Rising Rates Hedging:
CVB Financial Corp.
Pay-Fixed Swaps
"Hedging the market risk of our AFS portfolio, we had $700 million of fair value hedges at the end of the first quarter... The net after-tax impact of changes in both fair value of our AFS securities and our derivatives resulted in a $35 million increase in other comprehensive income for the first quarter."
"Our wholesale funds consisted of $300 million of brokered CDs that have been swapped as cash flow hedges at an average rate of 4.4%."
First Foundation Inc.
Pay-Fixed Swaps
"Total noninterest income during the quarter was $19.6 million, including a... $2.8 million net gain on a favorable change in the held-for-sale portfolio valuation allowance and the swap we executed earlier in the quarter to hedge the valuation allowances sensitivity to market rates."
Southside Bancshares Inc.
Pay-Fixed Swaps
"On March 31, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $8.6 million compared to $16.6 million linked quarter. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio."
Declining Rates Hedging
Associated Banc-Corp
Receive-Fixed Swaps
"We've maintained receive-fixed notional swap balances of approximately $2.85 billion, and we've emphasized shorter duration contractual funding obligations to maintain repricing flexibility. Taken together, these actions have reduced our asset sensitivity over time."
First Internet Bancorp
Pay-Fixed Swap Termination
"The fourth quarter benefited from $4.7 million of prepayment and terminated interest rate swap gains related to the paydown of Federal Home Loan Bank advances."
ST Bancorp Inc.
Receive-Fixed Swaps
"If we don't take any action, we'll return to some level of asset sensitivity.... depending on the environment, there are some things we can do relative like on the swap side to counteract that and continue to have a more neutral IRR position... we'll have to be more active as that burns off over the course of this year."
WSFS Financial Corporation
Interest Rate Floors
"We have $1.5 billion of floor options... about $500 million are in the money. And with every successive rate cut, more and more become in the money... So every rate cut, the impact to our NIM of every rate cut is going to be lower as we go through the cycle. And so I think we are -- we do use all of those tools to mitigate net interest margin kind of compression."
Customer Hedging Programs:
Business First Bancshares Inc.
Customer Hedging
"Noninterest revenue is contributing meaningfully to bottom line profitability with another quarter of strong swap fees and SBA loan gains on sales… the SBA and the swap income that we're building is somewhat lumpy, but we're pleased with the scale that we're seeing."
First Business Financial Services Inc.
Customer Hedging
"We still think we can grow fee income -- swap fee income that comes and goes as a client preferences in the rate environment."
Origin Bancorp Inc.
Customer Hedging
"You did mention the swap income... We've really been focusing on that aspect of our business, and we feel like there could be some opportunity there."
Southside Bancshares Inc.
Customer Hedging
"We had like $1.4 million in swap fee income in the fourth quarter, which was a little extraordinary at the time... and we did have some swap fee income this quarter... around $98,000... we're projecting that the swap fee income will be much greater... it will be at least a few times the amount of swap income that we had in the first quarter."
USCB Financial Holdings Inc.
Customer Hedging
"Swap loans decreased this quarter due to market conditions, but we have plenty of swap loans in the pipeline and expect Q2 to have better results."
Valley National Bancorp
Customer Hedging
"FX continues to be a strong growth driver… And then as CRE originations pick up, we would expect to see some additional swap activity as well supporting the capital markets line."
WesBanco Inc.
Customer Hedging
"Gross swap fees increased $1.2 million year-over-year to $2 million... We certainly see opportunities, particularly even as you mentioned there on the swap fee income...we'd expect to see a nice bump here in the second quarter as we kind of realize the full quarter's effect of the fee income."
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