Wintrust Financial Corporation (NASDAQ:WTFC) Q2 2019 Earnings Conference Call - Final Transcript
Jul 16, 2019 • 02:00 pm ET
Edward Joseph Wehmer
Net interest margin dropped 8 basis points during the quarter, I'll talk about that and rest of the statistics are there for your review. As mentioned, the quarter was negatively impacted by additional provision, almost $14 million, additional MSR and negative valuation adjustments of $3.1 million after netting out a hedging -- a small hedging game. I'll discuss the provision a little later when talking about overall credit. As the MSR adjustment year-to-date, we recorded negative pre-tax fair market value adjustments net of hedging gains of $12.1 million as opposed to positive adjustments of $6.23 million the previous year. Disregarding these would result year-to-date net income and diluted EPS as I said earlier to be up over 8%.
On recent calls we discussed our hedging strategy on this asset. All this -- although this quarter we did have a small income statement hedge in place that partially mitigated the negative adjustment. We actually rely more on internal balance sheet hedge to protect the equity of the enterprise. The market with our mortgage-backed securities on the investment portfolio covers your income statement loss by over 4 times. The problem is that one goes through the equity -- while the other hits the income statement. To that point, since 9/30/18, when rates started to fall, negative MSR valuation adjustments have impacted tangible book value per share by negative $0.28. However changes in the fair market value of our securities portfolio which are run through -- which are run through other comprehensive income and the equity sides of the balance sheet have added a $1.21 to book value per share.
We'll continue to look at income statement hedges when appropriate and cost effective, but you can see we are well served by our current strategy as it relates to overall enterprise value. You could ask what we do when rates rise and the fair market value securities falls, and fair market value of MSRs raises in the same percentage relationship at 4 times. Our positive GAAP position which we increase in low interest rate periods more than covers this decrement. Hope this makes sense as it relates to how we deal with MSRs.
Net interest income and net interest margin. Net interest income increased $4.2 million over quarter one due to one extra day in the quarter and volume growth $797 million in average earning asset growth versus quarter one. Pardon me. FTE -- the FTE then decreased 8 basis points from 3.72% to 3.64%. Earning asset yields holds constant at 4.74%, where our cost of funds increased 8 basis points. Our recently completed $300 million sub debt offering added approximately 1 basis point to this class, the rest due to market competition and special rate -- special rates offered to markets. If the Fed goes ahead and lowers this month or thereafter, you can be assured that we'll be aggressive -- as aggressive as possible and as quickly as possible lowering our costs. The new -- the new sub debt offering will