Hedging Strategies from Q4 2022

Q4 2022 Balance Sheet Hedging: Trends & Strategies

Isaac Wheeler
Isaac Wheeler
Head of Balance Sheet Strategy
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This summary is the largest we’ve compiled since we began collecting commentary in 2020. While these banks are a small representation of the industry, the breadth of hedging activity speaks volumes about the uncertainty in the rate outlook and the unwillingness of banks of any size to ignore interest rate risk.  Strategies that protect net interest margin from declining rates remain the most popular, but banks also discussed their customer hedging programs and funding strategies on their earnings calls.

Strategy #1: Protecting Margin from a Decline in Rates

As the swap curve has inverted, strategies like receive-fixed swaps become comparably less attractive due to the immediate reduction in interest income. As a result, we’ve seen institutions turn to interest rate floors and forward-starting receive-fixed swaps to protect future earnings cost-efficiently.

During the quarter, we added $850 million in notional of forward starting receive-fixed swaps against both loans and investment securities. Together with the changes in the composition of our balance sheet, we are now essentially neutral to changes in short-term rates.

First Interstate BancSystem, Inc

We selectively adding some derivatives and rate floors to ensure that we can lock in as much as possible the margin that we enjoyed here… Throughout 2022, we’ve added a few hundred million of rate hedges.

National Bank Holdings Corporation

Strategy #2: Customer Hedging Programs

Customer hedging programs provide borrowers with interest rate certainty and help banks reduce rate risk and potentially generate fee income. This quarter, we saw several institutions highlight the benefits of their customer hedging programs.

I would also highlight that over 40% of our variable rate commercial real estate loans have customer level interest rate derivative contracts in place… With the customer level derivative contracts, we’ve helped our customers enter into low level interest rate swaps, collars and caps, currently structured to help protect customers against rising debt service costs. At the same time, the loans remain variable rate on our balance sheet and the bank benefits from the asset sensitivity.

East West Bancorp, Inc.

In addition, we anticipate an increase in new commercial swap fee income above the approximate $4 million we’ve earned annually over the last few years as we have implemented improvements in our training and strategy.

WesBanco, Inc

Strategy #3: Hedging Wholesale Borrowings

Combining a pay-fixed swap with a series of short-term FHLB advances or brokered CDs creates synthetic fixed funding with costs below traditional alternatives. This popular strategy eliminates the term premium (and the promise of term liquidity) associated with conventional fixed-rate borrowings.

We are looking at things other than just FHLB straight borrowings. We looked at swaps. Right now, the swap margin has a positive spread to a straight up FHLB borrowing.

Blue Foundry Bancorp

Brokered deposits and short-term funding increased in the second half of the year with the drop in longer-term rates. Since October, we’ve been evaluating and executing various long-term funding and swap transactions to convert some of our short-term funding into 3- to 5-year fixed rate terms.

West Bancorporation, Inc.

For a more in-depth look, we’ve compiled a complete list of hedging commentary from fourth-quarter earnings calls.


The Term “Derivative Path” refers to affiliates, Derivative Path, Inc. and Derivative Path Hedging Solutions, Inc. Derivative Path, Inc. is headquartered in the State of California. Hedging advisory and execution services are provided through Derivative Path Hedging Solutions, Inc. (DPHS). DPHS is a Commodities Futures Trading Commission (CFTC) registered Introducing Broker (IB) and Commodity Trading Advisor (CTA) and member of the National Futures Association (NFA). 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. This communication is intended as an information resource only; Derivative Path has taken reasonable measures to ensure the accuracy of this communication. Any information contained herein is not warranted as to completeness or accuracy, and Derivative Path accepts no liability for its use or to update or keep any such information current. The content of this communication is subject to change at any time without notice. For additional information, you can read more here.

Isaac Wheeler
Isaac Wheeler

Isaac Wheeler is Managing Director and Head of Balance Sheet Strategy at Derivative Path, where he helps financial institutions structure and execute hedging transactions. Before joining the firm, Isaac spent five years at MFS Investment Management supporting execution of interest rate, currency and equity derivatives. He also spent time in MFS’s portfolio risk and technology teams. Isaac has a B.A. in Economics from Boston University.


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