Hi Anirban, I know nothing about banks, which is why I rely on those who know, but I glanced at the Square 1 results and I have some questions:
About Net Income, they said
Net income … compared to the fourth quarter of 2013 was primarily impacted by a $1.0 million decrease in provision for loan losses and a $1.7 million increase in warrant income, largely offset by a $1.5 million decline in income from fees that are contingent upon customer success events, the impact of the $0.4 million gain from the purchase of Sand Hill Finance recorded in the fourth quarter of 2013, and $1.0 million in overall additional personnel expenses.
Now the “$1.0 million decrease in provision for loan losses” is a one time deal, once you’ve taken it you’ve taken it, while the “$1.0 million in overall additional personnel expenses” that it’s balanced against is forever.
About Net Interest Margin they say
Net interest margin increased to 4.12% from 3.95% for the first quarter of 2013 and 3.96% for the fourth quarter of 2013.
My first impulse was to say “Wow! That’s a great Net Interest Margin”. But then I read this:
For the first quarter of 2014 our net interest margin increased to 4.12% from 3.95% versus the same period in the prior year. This increase was due largely to our decision in 2013 to invest a greater percentage of interest-earning assets in higher yielding municipal bonds.
Whoa! Is that a safe investment? Higher yielding means more risky. Investing in bonds means the value of the bond goes down when interest rates go up.
And what does this gibberish mean? Is it good? Is it bad? Is it neutral?
An additional driver of the increase in our net interest margin was lower premium amortization on agency mortgage-backed securities resulting from slower prepayments, which was partially offset by a 7 basis point decline in the yield earned on our loan portfolio in response to competitive pressures in the current low rate environment.
I need a bunch more evaluation before I’d be willing to take a position.