This quarter, we've opted to send our summary of publicly available bank earnings calls on an ongoing basis to deliver these insights in a more timely manner. Click here to read Part 1.
The second half of earnings season saw an incredible number of hedging mentions and a better balance between rising rate and declining rate strategies. Several notable strategies stood out:
Axos Financial shared a $600mm liability extension strategy that includes swaps.
Bank of Hawaii discussed a $800mm pay-fixed swap restructure that extends the term of their portfolio.
QCR Holdings announced a $410mm hedging program to protect capital from lower rates.
WSFS Financial Corporation shared that they executed $300mm in floors during the quarter, growing their floor portfolio to $1.5B total.
On the customer hedging front, banks continue to be optimistic. A number saw positive trends in hedging flows and non-interest income. However, many also cited customer uncertainty amid a rate cutting cycle as reason for caution.
Read on for our complete summary:
Associated Banc-Corp
Receive-Fixed Swaps
"We began layering in a portfolio of receive-fixed swaps to our books in 2022 to protect against downside rate risk. As of September 30, we maintain notional balances of approximately $2.85 billion."
Axos Financial
Pay-Fixed Swaps
"To match the duration of our growing pipeline of multifamily, single-family and auto loans, we extended duration of $600 million of liabilities to the issuance of CDs and interest rate swaps when markets were most optimistic about rate cuts at a weighted average yield of 3.4% for a 30-month average duration."
Bank of Hawaii
Pay-Fixed Swap Unwinds & Extensions
"This includes repositioning our swap portfolio by terminating $700 million notional shorter maturity swapswith relatively higher fixed rates and executing $500 million notional of spot-starting swaps at lower rates as well as executing $300 million of forward starting swaps, also at lower rates. The repositioning reduced our active pay fixed, receive float interest rate swaps by $200 million to $2.8 billion notional and reduced the average fixed rate from 4.52% to 4.29%. The $300 million of forward starting pay fixed received float interest rate swaps at an average fixed rate of 3.03% and will become active in 2025 and 2026."
Berkshire Hills Bancorp Inc.
Receive-Fixed Swaps & Customer Hedging Program
"We have $600 millionof low yield receive-fixed swapsmaturing over 2025 and '26 and we have low yield fixed rate securities and loans that will mature and reprice at higher yields."
Q: "It seems like the swap piece picked up quite a bit this quarter. Are you guys seeing just in general with the change in the rate environment, increased demand for that type of product?" A: "The pipeline seems to suggest that it will be relatively flat in the fourth quarter. Difficult to predict it beyond what's in the pipeline. But yes, I think the momentum seems to be holding -- going into the fourth quarter."
Business First Bancshares Inc.
Customer Hedging Program
"One of the things I think we've been most pleased about, particularly with the swap business is it's become more granular... It's 20 trades in the quarter. So I think what we've been most pleased about is it's not as lumpy in the third quarter... good response from our bankers and our clients."
Byline Bancorp Inc.
Customer Hedging Program
"Non-interest expense income totaled $14.4 million in the third quarter, which was up 12% linked quarter, primarily driven by a change in fair value of equity securities, an increase in both our wealth management and customer swap businesses."
Cadence Bank
Customer Hedging Program
"And the increase in other noninterest revenue of $7.1 million, excluding the gain on sale of businesses in the second quarter,included growth in credit-related fees, customer swap fees, SBA income and other miscellaneous revenue, really across the board."
Camden National Corporation
Pay-Fixed Swaps
"We did pay down the full remaining $170 million of the BTFP during the quarter. Essentially, what we ended up doing is we went out and did some swaps there for the FHLB essentially -- and we're able to lower our rate from -- I believe, it was 4.76 down to a weighted, I think it was 4.09. So immediately picking up positive carry there. But also to your point, from an interest rate risk perspective, our risk continues to be for rates higher for longer, certainly rates up."
Colony Bankcorp Inc.
Pay-Fixed Swaps
"We did employ some additional cash flow hedge strategies, which help reduce the pressure on any cost that we may see in wholesale funding if the Fed does not cut rates as fast as some forecasts have suggested."
Community Financial System, Inc.
Customer Hedging Program
"Banking-related operating noninterest revenues were up $3 million or 17.1% over the same quarter of the prior year, driven by increases in mortgage banking revenues and deposit service and other banking fees, including interest rate swap fee revenues."
Customers Bancorp, Inc.
Forward-Starting Receive-Fixed Swaps
Q: "You guys talked about the reducing asset sensitivity here. I'm just kind of curious, kind of was some of that done through swaps?"
A: "We put on some forward starting swap hedges that were taking effect here in Q4, on the liability side converting fixed to floating."
CVB Financial Corp.
Pay-Fixed Swaps
"We continue to have positive carry on the fair value hedges we executed in late June of 2023. We recorded $4.3 million of interest income in the third quarter related to these swaps based on the spread of 170 basis points. The Federal Reserve's 50 basis point rate reduction in September and the anticipated rate reductions in November and December will reduce the spread we earn on these swaps."
Dime Community Bancshares, Inc.
Pay-Fixed Swaps & Customer Hedging Program
Q: "And then just what is the percentage of pure floating rate loans that are priced off SOFR, Prime?"
A: "I believe that number is around 35%, plus or minus, but that includes a portfolio layer hedge that we have was around $500 million. So excluding the portfolio layer hedge, it's probably closer to 27% to 28%. And then with the portfolio layer hedge, it's probably 35%."
"Swap fee revenue was lower in the third quarter. Given the uncertainty with the Federal Reserve's rate cutting decisions this year, we have found that customers are being more patient and taking more time to engage in swap transactions till they have more certainty on the rate outlook. As such, we expect the swap line item to rebound in 2025 with Q3 marking a low point for swap revenue."
Eagle Bancorp Inc.
Customer Hedging Program
"Operating pre-provision net revenue increased 35 -- increased to $35.2 million from $34.4 million in the prior period. The driver of the increase was higher noninterest income from swap and loan fees and to a lesser degree, an increase of net interest income."
East West Bancorp, Inc.
Receive-Fixed Swaps
"And I would say that the swaps won't really have an impact until Q1, and we do think they will come off throughout the quarter in Q1, end of January into February, and they will have a positive effect. I think we've previously quantified that north of $10 million runway into the numbers."
Financial Institutions, Inc.
Customer Hedging Program
"Swap fee income was down $165,000 due to a lower level of back-to-back spot activity in the third quarter as compared to the linked quarter."
First Business Financial Services Inc.
Customer Hedging Program
"Our swap fee income will continue to vary quarterly based on CRE activity, the rate environment and client preference."
First Citizens BancShares
Receive-Fixed Swaps
"As rates have recovered now early in the fourth quarter, we've gone back to invest a little more, look at some swap options there, but it just hasn't been economics to put on receive fixed at the same rate we're paying fixed on the liability side."
First Commonwealth Financial Corp.
Receive-Fixed Swaps
"And we are looking forward to the expiration of receive fixed macro swaps in the near future, $50 million of received fixed macro swaps would mature in the fourth quarter of 2024, $250 million mature in 2025 and $175 million mature in 2026. These expirations should provide a lift to our NIM in 2025 and in 2026."
First Foundation Inc.
Pay-Fixed Swaps
"Finally, as we noted before, we took advantage of the market's early year optimism for declining rates via cash flow hedge swap. We did not add any new swaps in the third quarter as optimism returned, but we expect this to be a valuable tool for us, and we will continue to look for similar opportunities to both enhance revenue and stabilize our rate profile going forward."
First Interstate BancSystem
Receive-Fixed Swap Unwind
"We use those swaps as a tool to manage our balance sheet sensitivity. And at this point, we're relatively neutral. But as we move into 2025, we become naturally more liability sensitive. And so we terminated that $550 million of swaps because they were in a favorable position to do so, and that's just going to reduce our exposure going forward into 2025."
Flushing Financial Corporation
Pay-Fixed Swaps
"Approximately $1.3 billion or 19% of the gross loans are repriced to a short-term index. Our interest rate hedge position increases as a percentage to 26%. For the remainder of 2024, $226 million of loans are due to reprice 185 basis points higher than the current coupon rate."
National Bank Holdings Corporation
Customer Hedging Program
"Our efforts to grow trust in both business... SBA and swaps fees are paying off nicely as these line items have added 31% within the other noninterest income growth since the third quarter of 2023."
Pacific Premier Bancorp Inc.
Pay-Fixed Swaps
"Our swap portfolio contributed 16 basis points to the net interest margin consistent with the prior quarter. As of September 30, we have $800 million of notional swaps remaining with $500 million maturing during the fourth quarter. With our current rate expectations, we anticipate approximately $3 million to $4 million of swap income for the fourth quarter..."
QCR Holdings
Reduce Asset Sensitivity & Customer Hedging Program
"During the third quarter, we executed a derivative strategy with a notional value of $410 million. These derivatives are designed to safeguard the company's regulatory capital ratios against the adverse effects of a significant decline in long-term interest rates that would impact the value of our back-to-back swaps in our LIHTC loan portfolio... should long-term interest rates decline, we will record an increase in the market value of the derivative..."
"Our noninterest income was $27 million for the third quarter, supported by continued strong capital markets revenue of $16 million. Our LIHTC lending and revenue from swap fees continue to be fueled by the steady demand for affordable housing. Our pipeline in this business remains healthy. We are, therefore, reaffirming our capital markets revenue guidance for the next 12 months to be in a range of $50 million to $60 million."
Seacoast Banking Corporation of Florida
Customer Hedging Program
"Other income was higher by $1.5 million, including higher SBIC income and higher loan swap fees. Looking ahead, we continue to focus on growing noninterest income, and we expect fourth quarter noninterest income in a range from $22 million to $23 million."
SmartFinancial, Inc.
Customer Hedging Program
"Notably, the bank generated significantly higher income from customer swap transactions and investment services, which rose by $940,000 and $579,000, respectively."
Southside Bancshares
Pay-Fixed Swap Unwind
"In connection with the sale of these securities, we unwound their related fair value swaps, which resulted in a net loss in the third quarter of $1.9 million... At September 30, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $3.5 million compared to $18.6 million linked quarter. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio."
Trustmark Corporation
Forward-Starting Receive-Fixed Swaps and Floors
"The cash flow hedge portfolio, which is structured to mitigate asset sensitivity had an active notional of $875 million and a weighted average maturity of 3.5 years, including the effect of $390 million in forward settled swaps and $125 million in forward settled floors. The weighted average received fixed rate on the $850 million active notional swaps is 3.12% and the weighted average SOFR rate on the $25 million of active notional floors is 4%."
UMB Financial Corporation
Pay-Fixed Swaps & Floors
"Currently, we have $2.5 billion notional value in pay-fix, receive-float cash flow hedges, which include 3 floor contracts and 8 floor spreads."
USCB Financial Holdings, Inc.
Pay-Fixed Swap Unwinds & Customer Hedging Program
"During the quarter, we unwound $200 million notional of pay fixed interest rate swaps. These swaps while beneficial in a period of rising rates and an inverted yield curve, were at a point where they were not as appealing with the change in Fed policy and the 50 basis points of rate cuts. While these swaps will have a small negative drag in the coming quarters, we have reduced our asset sensitivity with minimal impact on profitability."
Q: "Just wanted to start on swap fees here. I think you said they'd likely remain relatively stable at this $1.2 million or so level in the fourth quarter. But I mean, should we expect that to start to step down a bit in early 2025...?"
A: "The fourth quarter is -- I would say robust and I would say we should be at that level... for near term, I'd say the next six months, I think that level is a good modeling number."
Veritex Holdings
Pay-Fixed Swaps, Collars, & Receive-Fixed Swaps
"If I could renew that hedge at 42 basis points, believe me, I'd be on the phone and not talking to you right now... I put it all on March 9. And if you remember what was going on March 9, 2020, when COVID kicked off, and we just had to work the presence of mind to see the opportunity and grab it... Sometimes, it's better to be lucky than good... The effect of this is $1 million a month in NIM."
"We have some collars and [swap] hedges, though that are going to get more and more in the money. So they're going to help mitigate some of this... We've got hundreds of millions of dollars of fixed receive hedges that are going to help mitigate this, probably $375 million, if my memory is serving me right."
WesBanco Inc.
Customer Hedging Program
"Noninterest income in the third quarter totaled $29.6 million, a 4.1% decrease from the prior year period due to lower net swap fee and valuation income which was driven by a negative fair value adjustment this year as compared to a gain last year."
Wintrust Financial Corporation
Receive-Fixed Swaps
Q:"I think just the last thing I had was the impact of the hedges to margin going forward... What's the ballpark that we should expect going forward?"
A: "For every 25 basis points of a reduction in SOFR, we should benefit by about 2.5 basis points... But I think we're a 17 basis point drag in the third quarter, and it should be less than that as SOFR goes down. But if you sort of use it, we give all the details in the slides, but right now, the average is about 2.5 basis points for a 25 basis point benefit."
WSFS Financial Corporation
Forward-Starting Floors
"We now have about $1.5 billioncompleted [of the hedge program]. And those are floor options and they're basically 6 months forwards with a 30-month term... they kick in at different levels, but the first ones start to kick in at around 4.75%. So I think the way to think about the hedge program is obviously that it's a mitigant to the asset sensitivitythat we have. And so as we go, continue to go through the cycle, if we have additional cuts, that will mitigate some of the sensitivity that we provided."
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