Growing Fee Income with Smart Hedging Strategies

During the 2016 Summer Olympics in Rio de Janeiro, a meme began circulating on social media with a photo of a lifeguard at the Olympic pool, accompanied by the following caption: "If you ever feel useless, just remember that someone is a lifeguard at the Olympics swimming event." People were highly amused by the idea of having lifeguards monitor the world’s most accomplished swimmers, and the meme continues to circulate. In reality, there have been cases where lifeguards have had to step in at world-class swimming events following freak accidents or even injuries to the support staff for elite swimmers.Though the instances that necessitate lifeguards to intervene at world-class swimming events are few and far between, lifeguards remain a staple because most facilities and organizations require them in order to adhere to insurance requirements and reduce liability in the instance of any claims. The banking industry knows a little something about risk management and implementing additional protections, such as the practice of hedging.The Benefits of Hedging for LendersWhen it comes to loans, borrowers want the most attractive rates and structures possible. At the same time, smaller institutions are competing with large lenders who often undercut pricing or offer terms that aren’t feasible for most community financial institutions (CFIs). Hedging bridges this gap. Banks have long relied on hedges to insulate themselves against potential losses related to market fluctuations, particularly risks related to rising interest rates. By using interest rate swaps, you can offer better rates, more term choices, and more customized structures — without taking on additional interest rate risk. You also create upfront non-interest income for your institution, which helps support pricing flexibility and keeps your deals profitable.For lenders, hedging is not just a balance sheet tool — it’s a sales advantage.Why Hedging Matters in Today’s Economic EnvironmentThe current economic environment in the US is a mixed bag. Despite the ongoing strength of the stock market, economists anticipate slower GDP growth. Plus, unemployment has climbed to 4.4%, and inflation remains sticky. According to GDPNow, the economy, which grew at an annual rate of 3.8% in the second quarter of 2025, is projected to experience 4.1% growth for the third quarter. However, in the wake of rising tariffs, slowing consumer spending, and the recent government shutdown, growth is anticipated to slow in the fourth quarter of 2025 and into 2026.Following two rate cuts so far in 2025, economists expect the Fed to implement a third cut of 25bp at its December meeting, with more cuts possible in 2026. Goldman Sachs predicts that the Fed will make two more cuts of 25bp in 2026, while the Fed Funds futures market currently projects three more cuts by September 2026.Rate uncertainty creates both challenges and opportunities for lenders. Borrowers are unsure whether to lock in a fixed rate or stay floating. You need options that keep you competitive and protect your institution’s net interest margin (NIM).Hedging gives you that flexibility. With the right tools, you can confidently structure deals in any rate environment while offering the kind of term flexibility borrowers expect from larger lenders.Your Hedging Toolkit: Practical Loan Applications Swap-based loan structures help you win deals, defend pricing, and provide clear borrower benefits. They also generate upfront fee income — paid at closing and recognized immediately— which supports stronger profitability on each loan.Here are a couple of common structures that lenders can use with clients today.Hybrid Rate Swap Loan (Great for borrowers expecting rate cuts)
Scenario: Borrower wants a floating rate today and fixed-rate certainty provided later 

Swapped Loan with Initial Fixed Rate (Great for a period of declining rates)
Scenario: Borrower wants a fixed rate now, but rates are expected to fall

Borrowers understand the idea of “hedging a bet”, but swaps and derivatives can sound intimidating. This is where lenders often worry about complexity or borrower pushback. PCBB’s Borrower’s Loan Protection® (BLP) program was designed to eliminate those frictions and simplify the logistics and benefits of hedging for both borrowers and lenders.