Q1 marked the first quarter in years that declining rates hedges led our flows. Many depositories capitalized on the 40+ bp spike in rates by unwinding pay-fixed swaps or executing receive-fixed swaps, which became income accretive. Options were less popular but have re-emerged as market volatility calmed from March highs, making the asymmetric payoff profile more affordable.
Here are a few ALM hedging strategies that we found interesting:
- Axos Financial, Inc.: swapped ~$750mm of 3-10 year Treasurys to enhance ROE.
- Independent Bank Corporation: terminated $87mm of pay-fixed swaps and purchased $75mm of floors.
- Wintrust Financial Corporation: executed carry-neutral receive-fixed swaps
Read on for our complete summary:
Rising Rates Hedging
| Axos Financial, Inc. | Pay-Fixed Swaps | “And what we identified in the marketplace back in October, November was kind of a dislocation where if we bought some Treasurys in 3, 5, 7, or 10 years and were able to hedge them with a SOFR swap, we could actually generate 30 basis points improvement over holding that cash at the Fed Reserve… it was the widest that spread had gotten, other than on the liberation day… So that was around $750 million that we moved into those securities.” |
| Bank of Hawaii Corporation | Pay-Fixed Swaps | “…we finished the quarter with an active pay-fixed receive-float portfolio of $1.2 billion at a weighted average fixed rate of 3.3% and an average life of 1.5 years. $900 million of these swaps are hedging our loan portfolio, while $300 million are hedging our securities. In addition, we have $400 million of forward-starting swaps with a weighted average fixed rate of 3.1% and an average life of 2.4 years. $200 million of these forward swaps became active at the beginning of April, while the remaining $200 million will become effective during the third quarter.“ |
| Camden National Corporation | Rising Rates Hedges | “…we have some derivatives… that are rolling off. But some of those have served us really well over the last few years, but just given the Fed position today, are a little bit underwater.” |
| Southside Bancshares, Inc. | Rising Rates Hedges | “We have a notional of $258.1 million in fair value hedges on municipal and MBS securities… On March 31, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $1.95 million compared to $788,000 linked quarter.” |
| United Community Banks, Inc. | Interest Rate Caps | “Noninterest income was $43.7 million in the quarter. This included a $5.2 million gain on an interest rate cap that was hedging a sub debt issuance that we intend to redeem on April 30.” |
Declining Rates Hedging
| Bank of Hawaii Corporation | Terminated Pay-Fixed Swaps | “During the quarter, we terminated $400 million of our active swaps…“ |
| East West Bancorp, Inc. | Declining Rates Hedges | Q: “I think in last quarter, you mentioned the impact from hedging… What was it this quarter?” A: “Yes, it’s roughly flat and all those hedges today are in the money looking forward… we’re still in the money — the mark-to-market values of all the trades is positive. So we’re going to add value moving forward.” |
| Fifth Third Bancorp | Declining Rates Hedges | “Given the updated rate outlook and our more asset-sensitive balance sheet… We will continue to take actions to move the balance sheet to a more neutral rate risk position over time, which could include… other hedging actions.” |
| First Bank | Receive-Fixed Swaps | Q: “…what floating rate exposure is in the loan book?” A: “We still do have some interest rate swaps in place that are protecting us a little bit on some of these things, but not much, especially as rates move lower, some of those would move lower.” |
| Independent Bank Corporation | Interest Rate Floors + Terminated Pay-Fixed Swaps | “The NII sensitivity to lower rates declined modestly, while the benefit to higher rates remained largely unchanged. Reduced exposure to lower rates is due to $75 million of notional floor purchases and the termination of $87 million of short-term pay-fixed swaps…” |
| M&T Bank Corporation | Receive-Fixed Swaps | “Net interest margin was 3.71%, an increase of 2 basis points from the prior quarter. This improvement was driven by… a favorable impact on our swap portfolio.” |
| Simmons First National Corporation | Declining Rates Hedges | “Go back to the balance sheet restructure, and we really changed the earnings profile of the company. We split from liability sensitive to look slightly asset sensitive. We put on some hedges, and we’ve gone through 3 rate cuts since then, and we’ve grown our margin each quarter since then.” |
| Southside Bancshares, Inc. | Terminated Pay-Fixed Swaps | “We unwound $155 million in municipal loan swaps during the quarter, creating a small gain that will be accreted over the life of the previously hedged items. This slightly improves our interest rate risk position in rates-down scenarios.” |
| Texas Capital Bancshares, Inc. | Receive-Fixed Swaps | “During Q1, $350 million in swaps matured with a 3.31% receive rate. These were replaced with $500 million in receive-fixed SOFR swaps executed at 3.45% with $100 million becoming effective March 1, and the remainder becoming effective on April 1.” |
| The PNC Financial Services Group, Inc. | Declining Rates Hedges | “We’re flat to overall rate movement inside of our balance sheet. Having said that, we have continued the [hedging] process as you’ve seen us do in last year and this year of locking in forward curve rates, particularly when we see some volatility to the upside, the belly of the curve.” |
| Wintrust Financial Corporation | Receive-Fixed Swaps | “…even if rates go up 1x or 2x or down 1x or 2x, we really feel we’re fairly neutral… we added 3 new swaps during the quarter with swap rates ranging in the mid-3 range up to the 3.60s… So we continue to replace the swaps out into the future because we do think that managing the margin to try to stay neutral in the 350s range is still prudent.” |
Customer Hedging Programs
| Alerus Financial Corporation | Customer Hedging | “Adjusted banking fees declined modestly from the prior quarter, primarily driven by lower swap revenues.” |
| Atlantic Union Bankshares Corporation | Customer Hedging | “Noninterest income declined by $2.2 million to $54.8 million for the first quarter, primarily driven by lower loan-related interest rate swap fees due to seasonally lower transaction volumes…” |
| Bank OZK | Customer Hedging | “…if a client has a desire for a fixed rate, we offer them through our interest rate hedging solutions desk, the opportunity to swap their loan. And then artificially fixed as a result, which would generate additional noninterest income for the bank.” |
| BankUnited, Inc. | Customer Hedging | “We felt good about the activity that we saw in our capital markets fee income, but they are dependent on activity in the quarter, when loans close, when syndication fees occur, size of the types of swaps that are booked…” |
| BOK Financial Corporation | Customer Hedging | “Customer hedging revenue grew $1.1 million as our energy customers predictably increased their hedging activity when higher short-term crude oil prices presented themselves.” “…with the volatility in the global setting. It creates some spurts of activity on the energy side. We have seen less activity on our interest rate side because we’ve had a relatively stable rate environment. But we’re continuing to see good demand really across all the hedging opportunities with the biggest focus being on the energy side.” |
| Bridgewater Bancshares, Inc. | Customer Hedging | “In addition, noninterest income has topped $2 million every quarter since the fourth quarter of 2024…This is a result of new fee income sources we have added recently, including swap fees… which we expect to continue to see throughout 2026.” |
| Business First Bancshares, Inc. | Customer Hedging | “As a key component of our positive earnings results, we are pleased to note the contribution of our noninterest income, primarily through the Financial Services group and in particular, their work providing interest rate swaps…” |
| Camden National Corporation | Customer Hedging | “…we see some nice fees coming out of the commercial business as well on the swap front.” |
| Citizens Financial Group, Inc. | Customer Hedging | “Our Global Markets business was up $10 million linked quarter with increased client hedging activity in interest rate products…” |
| Equity Bancshares, Inc. | Customer Hedging | “Noninterest income held steady at $9.5 million, expanding fee lines, including… swap fee revenue for the period.” |
| F.N.B. Corporation | Customer Hedging | “…we’re seeing more and more opportunities with international banking with hedging and spot transactions for our clients, particularly as we’re moving up market.” “We also think that when there’s less interest rate volatility here, if things settle down a little bit, there should be a pickup in derivative activity.” |
| Fifth Third Bancorp | Customer Hedging | “Capital markets fees were $134 million, up 11% sequentially. Increased hedging activities and commodities and FX and strong bond underwriting fees… were the primary drivers of this growth.” “…our capital markets team completed fuels and metals commodity hedges…” |
| Financial Institutions, Inc. | Customer Hedging | “Noninterest income was $10.7 million for the quarter, compared to $11.9 million in the fourth quarter. The primary driver of the variance was lighter commercial back-to-back swap activity given the rate environment and origination activity… However, our loan pipelines are supportive of higher originations for the remainder of the year, which will positively impact swap activity and noninterest income…” |
| First Business Financial Services, Inc. | Customer Hedging | “There’s still going to be lumpiness, but that’s something we’re working on and trying to improve, right?…But it’s just the nature of swap fees and SBA gains. It’s just going to be lumpy still. But that’s why we’re really focused on that 10% year-over-year growth.” |
| First Financial Bancorp. | Customer Hedging | “Foreign exchange delivered strong results and client derivative fees increased during the period as well.” “Adjusted noninterest income was $75.6 million, which was 24% higher than in the first quarter of 2025 and only a slight decline from the linked quarter. These results were driven by… strong client derivative income…” |
| First Hawaiian, Inc. | Customer Hedging | “Noninterest income totaled $52.8 million for the quarter. The decline from last quarter was primarily attributed to lower… swap fee activity, which we view as timing related rather than structural.” |
| Great Southern Bancorp, Inc. | Customer Hedging | “We also benefited from other income in the quarter, $421,000 of which was related to a fee on a newly originated loan with an interest rate swap as part of the transaction…” |
| Hope Bancorp, Inc. | Customer Hedging | “The quarter-over-quarter decrease in noninterest income was primarily due to… lower customer level swap fee income, the latter of which reflected less underlying transaction activity in the first quarter.” |
| Huntington Bancshares Incorporated | Customer Hedging | “Capital Markets delivered its strongest revenue quarter on record and beat our initial plan with broad-based contributions across loan syndications, advisory, debt capital markets, fixed income sales and trading and rate hedging…” |
| KeyCorp | Customer Hedging | “Then corporate services, which is really FX and derivatives and other hedging, so the oil volatility has created some tailwinds there. If that settles in, derivatives tend to follow with loan growth. So that’s been very positive and we’ve seen some good traction in FX as well.” |
| OceanFirst Financial Corp. | Customer Hedging | “Additionally, we saw some reductions in commercial loan swap income due to lower swap origination volume for the quarter. That should improve through the year as seasonal origination volumes increase.” |
| Orrstown Financial Services, Inc. | Customer Hedging | “Swap fees were very strong at $1.3 million in the quarter.” |
| Regions Financial Corporation | Customer Hedging | “Capital markets income increased 5% during the quarter, driven by improvements in commercial swap, loan syndication and securities underwriting activity…” |
| Southside Bancshares, Inc. | Customer Hedging | “We really made an intentional approach to continue to generate swap income. Granted, that is somewhat market-driven. So every relationship manager is with the appropriate customer. They are talking to them about swaps.” “Other non-interest income increased primarily due to an increase in swap fee income.” |
| USCB Financial Holdings, Inc. | Customer Hedging | “Service fee income reached $3.1 million, mainly driven by record swap fees of $1.6 million amid strong loan activity and strong sales execution with rate volatility in the quarter.” “I think the sales team really knows how to work with their customers, position that as a product where they can choose either a fixed rate or a swap. And that was elevated.” |
| Washington Trust Bancorp, Inc. | Customer Hedging | “Loan-related derivative income, which is transactional in nature, was down by $854,000 compared to Q4.” |
| WesBanco, Inc. | Customer Hedging | “Total treasury management revenue should see increases from 2025 as the compounding effect of our services continue to expand and gross commercial swap fee income, excluding market adjustments, should be in the $8 million to $10 million range.” |
| Zions Bancorporation, National Association | Customer Hedging | “In the first quarter, we saw real strength with our syndications and our interest rate hedging businesses and also with a new commodity hedging, oil and gas hedging practice that we started in the third, fourth quarter of last year. We think it has the potential to generate, I don’t know, $7 million to $10 million a year in revenue, and we’re just getting started there.” |
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