Fourth quarter earnings calls were highlighted by a resounding shift towards strategies that protect against lower rates. Rather than the somewhat even mix we observed in Q3, most of the strategies we reviewed leaned towards protecting against unexpected rate cuts. As we move through Q1, we expect to see a mix in hedging direction and an increased use of options strategies, given the flat curve environment.
Read on for our complete summary:
Rising Rates Hedging:
Bank of Hawaii Corporation
Pay-Fixed Swap Extensions
"We actively managed our interest rate swaps and securities portfolio to take advantage of opportunities as interest rates shifted. This included repositioning our swap portfolio by terminating $1 billion notional shorter maturity swaps with relatively higher fixed rates and executing $200 million notional swaps at lower rates. We also maintained the $300 million of forward starting pay fixed interest rate swaps that... will become active in 2025 and 2026."
CVB Financial Corp.
Pay-Fixed Swaps
"We had 3 pay fixed swaps that we recorded as fair value hedges totaling $1 billion in notional value… For the fourth quarter of 2024, we earned a positive carry on these swaps, generating $2.3 million of interest income compared to $4.3 million in the third quarter of 2024. At year-end, we continue to have $300 million of brokered CDs that have been swapped as cash flow hedges. As of December 31, 2024, the market value of our remaining 2 fair value hedges, combined with our cash flow hedges, increased by approximately $27 million from the end of the third quarter."
First Foundation Inc.
Pay-Fixed Swap
"We entered into our second swap... The hedge will help reduce any earnings volatility related to our remaining loans held for sale portfolio while also improving our overall interest rate risk position... we will continue monitoring for opportunities to further stabilize our rate profile and earnings going forward."
Huntington Bancshares Incorporated
Investment Portfolio Hedging
"We continue to manage our hedging program with two objectives in mind, to protect net interest margin from a lower rate environment as well as to protect capital from a potential higher rate environment. We have remained relatively stable in our hedging position since November. We continue to monitor the likelihood of potential rate scenarios, and will remain dynamic as we adjust to the rate environment."
"We had effectively hedged the securities portfolio before the rate cycle began... the plan we have with the securities portfolio is just to continue the current approach, and benefit from those hedges that we have put in place in the past."
Pacific Premier Bancorp Inc.
Pay-Fixed Swaps
"Our SOFR-based swap portfolio contributed 10 basis points to the net interest margin, and we have $300 million remaining of notional swaps that mature during the first half of 2026. With our current rate expectations for 2 Fed rate cuts in 2025, we anticipate approximately $2 million to $3 million of swap income for the first quarter...About $4 million was recognized in the fourth quarter."
Southside Bancshares Inc.
Pay-Fixed Swaps
"At December 31, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $16.6 million compared to $3.5 million linked quarter. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio."
Truist Financial Corporation
Pay-Fixed Swaps
"We also had approximately $30 billion of notional pay-fixed swaps with a weighted average pay fixed rate at 3.39%. These swaps are designed to protect the economic value of the balance sheet as well as to manage future capital volatility through AOCI as these swaps are designated against our AFS securities portfolio."
U.S. Bancorp
Pay-Fixed Swaps
"The pay-fixed swaps are intended to help protect capital when interest rates rise. They did rise. We saw 80 basis point upward movement. Our AOCI number did increase... and that helps us manage that Cat II capital level that I spoke to."
Declining Rates Hedging
Associated Banc-Corp
Receive-Fixed Swaps
"As of December 31st, we maintained notional swap balances of approximately $2.7 billion... these actions have reduced our asset sensitivity over time… Our goal is to maintain this modestly asset sensitive positioning going forward."
Bank of Marin Bancorp
Pay-Fixed Swap Termination
"We have more AFS we can reposition, more became available with the unwinding of the swap, which did help our NIM."
Citizens Financial Group, Inc.
Reduce Asset Sensitivity
"We have growing confidence based on our performance in the fourth quarter with a very solid 10 basis point increase in NIM. We've continued to opportunisticallyhedge to reduce the impact of rates falling into the future."
Comerica
Receive-Fixed Swaps
"We continue to believe the successful execution of our interest rate strategy allows us to better protect our profitability from rate volatility... By strategically managing our swap and securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position over time."
Fulton Financial Corporation
Receive-Fixed Swaps
"In addition, we added $900 million of receive-fixed hedges to support a more neutral interest rate risk profile."
Great Southern Bancorp
Pay-Fixed Swap Termination
"We will lose the benefit of the terminated interest rate swap after the third quarter of 2025. We expect to continue realizing approximately $2 million per quarter in interest income from the terminated swap through the first 3 quarters of 2025, after which the benefit to interest income will cease."
Independent Bank Corporation
Interest Rate Floors
"During the quarter the bank added $50 million in floors. Sensitivity of the existing floors... increased as the Fed lowered rates by 50 basis points."
MT Bank Corporation
Reduce Asset Sensitivity
"Our interest rate sensitivity remains relatively neutral, aided by the balance sheet actions we took in 2024, including adding forward starting hedges and building our securities portfolio."
QCR Holdings Inc.
Reduce Asset Sensitivity
"We executed a derivative strategy with a notional value of $410 million during the third quarter. These derivatives are structured to protect the company's regulatory capital ratios from the adverse effects of a significant decline in long-term interest rates... We view this derivative as a prudent way to protect our regulatory capital ratios."
Texas Capital Bancshares Inc.
Reduce Asset Sensitivity
"Given both the volume of maturing swaps and currently more conducive interest rate curve, we do anticipate future interest rate derivative or securities actions in 2025, augmenting potential rates fall earnings generation at materially better terms than available during our deliberate pause through the mid part of last year."
The PNC Financial Services Group Inc.
Receive-Fixed Swaps
Q: "Can you discuss the uptick in forward starting swaps that we saw this quarter and how you're thinking about potentially putting on new forward starters as we look ahead from here?"
A: "So our roll-off of fixed rate assets... when we look at the forward curve available at any given point in time, we can choose to lock in that rate on that replacement yield. So if it's a treasury that's going to mature in 1.5 years with a 2% coupon, I can effectively choose to buy that treasury forward at a 4.5% coupon... we're really comfortable with where we are in '25 because we've used swaps like that to effectively lock in these maturing fixed rate assets."
Truist Financial Corporation
Receive-Fixed Swaps
"We had approximately $84 billion of notional receive-fixed swaps with a weighted average yield of 3.45%. These swaps are designated against our commercial loan portfolio and long-term debt and designed to protect net interest income from lower short-end rates. Approximately $45 billion of these swaps were effective at the end of the quarter. The remaining $39 billion of received fixed swaps are forward starting and will become effective over time."
Trustmark Corporation
Receive-Fixed Swaps & Floors
"The cash flow hedge portfolio, which is structured to mitigate asset sensitivity, had an active notional balance of $875 million... including the effect of $500 million notional in forward settled swaps and $125 million notional forward settled floors... We've taken off the roughly $6.5 billion of floating rate loans, we have effectively swapped them via $875 million notional, $850 million notional interest rate swaps, and $25 million of floors. "
UMB Financial Corporation
Interest Rate Floors
"During the fourth quarter, we added 2 floor spreads each with $250 million of notional value. At year-end, we had $3 billion of notional value hedges, comprised of 3, 4 contracts and 10 floor spreads… some of these hedges are 4- to 5-year terms. So that's a long period of time that we basically bought insurance against falling interest rates."
U.S. Bancorp
Receive-Fixed Swaps
"Our receive-fixed swaps that were attached to either commercial loans or debt... increased our rate relative to where they would have been otherwise."
Western Alliance Bancorporation
Receive-Fixed Swaps
"If we think this is going to play out, we are going to see rates down 100 basis points... We expect that we'll be swapping that to fixed and hold those asset yields higher than they would otherwise be if they fell. And that's how we can really manipulate this and have earnings at risk also positive in a declining rate environment..."
Wintrust Financial
Reduce Asset Sensitivity
"We think plus or minus $6 billion worth of hedges stabilizes our margin in a downrate environment. And so the hedges that were added recently, many of which were forward starting... just add to our ability to kind of cushion any margin pressure from a downward rate environment..."
Zions Bancorporation
Reduce Asset Sensitivity
"Total loan yields declined by 23 basis points, largely in response to the reduction in short-term benchmark rates with some partial offsets from fixed loan repricing and loan swaps."
Customer Hedging Programs:
Bank OZK
Customer Hedging Program
"Our interest rate hedging solutions, we've been blessed where we have that up and running, and we've actually executed on some caps and swaps to generate some additional fee income as well as our real estate capital markets and other like business services under LSCS. So we're on a roll, and we're looking forward to the next year, and we're optimistic."
Bridgewater Bancshares Inc.
Customer Hedging Program
"Noninterest income was also very strong... This was driven by higher letter of credit fees due to elevated construction activity and over $500,000 of swap fees, as swaps made more sense for borrowers relative to other structures given the shape of the curve... We may see some additional swap fee income as well [in 2025] as we continue to leverage the product and educate borrowers."
Business First Bancshares Inc.
Customer Hedging Program
"Noninterest income results for the third quarter did come in slightly better than we had expected and was driven by a contribution from our newly formedcustomer swap business line, which generated approximately $1.3 million in revenue during the quarter."
Byline Bancorp
Customer Hedging Program
"I think the rate environment is also today probably more conducive to doing derivatives with customers in terms of fixing rates and doing swaps... as borrowers get a little more confidence and a little more stability relative to CRE... I think that can help drive the swap line too from a fee perspective."
Community Financial System
Customer Hedging Program
"I think between the swaps and the capital markets activities, it was close to $4 million in terms of fee income... It really is market dependent because we had opportunities in 2024 on the swap side, in particular, with the curve, the way it was inverted where it was clearly a lot more advantageous for our clients to borrow in the swap market than on the fixed side with on balance sheet solutions."
First Commonwealth Financial Corporation
Customer Hedging Program
"Fee income rose quarter-over-quarter nevertheless, due to a $700,000 increase in swap income… That's really driven by customer preferences on the back-to-back swap business. So it's swapping fixed to floating depending on where the rate movements are, what expectations for rate movements are... we generated a bit more in the fourth quarter than we expect to generate next year. So we think that actually is prime for growth next year."
Flushing Financial Corporation
Customer Hedging Program
"We're seeing continued demand for our back-to-back swap offerings. We feel good about the progress achieved so far, and we recognize there's more work to be done... Non-interest income should be aided by the closing of back-to-back swap loans in the pipeline and the benefits of a BOLI 1035 exchange."
Great Southern Bancorp
Customer Hedging Program
"We have back-to-back swaps with loan customers. In some of those cases, if we do those, and the customer wants to do a swap, then we initiate that and then we get an upfront fee on that. And so that was -- the lion's share of that increase in the fourth quarter is about $268,000, I believe."
Southside Bancshares Inc.
Customer Hedging Program
"Noninterest income, excluding net loss on the sales of AFS securities, increased $2.2 million, or 21.6%, for the linked quarter, primarily due to increases in swap fee income and mortgage servicing fee income… if somebody wants a fixed rate loan and the loan is above $2.5 million, likely, we're going to require a swap on it if it's a maturity beyond a year. So we do anticipate some nice fee income from it..."
Reach out with any questions or for pricing on specific structures
"Derivative Path” refers to affiliates, Derivative Path, Inc. and Derivative Path Hedging Solutions, Inc. Derivative Path, Inc. ("DPI") is incorporated in the State of Delaware, United States, and is headquartered in the State of California.
Derivative Path Hedging Solutions, Inc. ("DPHS") is a member of the National Futures Association (NFA) and is registered as an Introducing Broker (IB) and Commodity Trading Advisor (CTA). This communication is for informational purposes only, is not an offer, solicitation, recommendation or commitment for any transaction or to buy or sell any security or other financial product, and is not intended as investment advice or as a confirmation of any transaction.
Any market price, indicative value, estimate, opinion, data or other information contained herein is not warranted as to completeness or accuracy, and DPHS accepts no liability for its use or to update or keep any such information current. Transactions in over-the-counter derivatives have significant risks, including, but not limited to, substantial risk of loss.
Past performance is not indicative of future results. Institutions should consider whether derivative transactions are appropriate in light of their own financial objectives, experience, operational resources, legal capacity and regulatory authority. This communication is intended as an information resource only. It does not contain financial, tax, accounting or legal advice and should not be considered an explanation of all relevant issues or considerations in connection with applicable law, or tax and accounting rules and regulations.
Strategies or guidance recommended in this communication may not be suitable for all parties. You should consult your own accounting, tax or legal advisors before relying on the information contained herein to determine the appropriateness of the risk associated with the information contained herein. These materials are confidential, privileged and only for the information of the intended recipient and may not be used, published or redistributed to any other party without the written consent of DPHS. All information contained herein is provided “as is” and may be subject to change without notice.
This email is subject to a disclaimer, please click on the following link or cut and paste the link into the address bar of your browser https://derivativepath.com/email-disclosure/
Derivative Path, 2001 North Main Street, Suite 250, Walnut Creek, CA 94596
