Square 1 Financial Reports Third Quarter 2014 Results


DURHAM, N.C., Oct. 23, 2014 (GLOBE NEWSWIRE) -- Square 1 Financial, Inc. (Nasdaq:SQBK) today announced results for the quarter ended September 30, 2014.

Consolidated net income available to common shareholders for the third quarter of 2014 was $8.8 million, or $0.29 per diluted share, compared to $6.9 million, or $0.29 per diluted share, for the third quarter of 2013 and $8.1 million, or $0.27 per diluted share, for the second quarter of 2014. "Continued growth in loans and deposits, combined with a decrease in our loan loss provision, resulted in another quarter of strong profitability," said Douglas H. Bowers, President and Chief Executive Officer of Square 1 Financial. "We remain focused on executing our strategy to provide the best banking services to our clients in the innovation economy."

Third Quarter Highlights

Highlights of the third quarter of 2014 include:

  • Increase in net income available to common shareholders of $1.8 million, or 26.7%, compared to the third quarter of 2013, and $0.7 million, or 8.7%, compared to the second quarter of 2014.
  • Return on average common equity of 12.01% and return on average assets of 1.22%.
  • Tangible book value per share of $10.23 as of September 30, 2014.
  • Average on-balance sheet deposits grew $633.2 million, or 33.3%, compared to the third quarter of 2013, and increased $174.7 million, or 7.4%, compared to the second quarter of 2014. Average client investment funds grew $488.2 million, or 110.0%, compared to the third quarter of 2013, and grew $181.8 million, or 24.2%, compared to the second quarter of 2014.
  • Average loan balances grew $280.2 million, or 29.7%, to $1.2 billion, and period-end loans increased $252.6 million, or 24.8%, compared to the third quarter of 2013. Average loans grew $104.0 million, or 9.3%, while period-end loans increased $119.8 million, or 10.4%, compared to the second quarter of 2014.
  • Net loan charge-offs were $1.2 million, or 0.40%, of average loans (annualized) for the third quarter of 2014 and were $4.2 million, or 0.49%, for the nine months ended September 30, 2014. Provision for loan losses expense decreased $0.7 million compared to the second quarter of 2014.
  • Net interest margin decreased to 4.00% from 4.03% for the second quarter of 2014.
  • Third quarter 2014 core banking noninterest income increased $0.6 million, or 16.7%, to $4.3 million from $3.7 million in the second quarter of 2014.

Earnings Summary

The increase in net income available to common shareholders compared to the third quarter of 2013 resulted from a $7.1 million increase in net interest income, partially offset by a $1.2 million decrease in noninterest income and a $3.2 million increase in noninterest expense.

The increase in net income available to common shareholders compared to the second quarter of 2014 was due primarily to a $1.9 million increase in net interest income, partially offset by a $0.8 million decrease in noninterest income and a $0.2 million increase in noninterest expense.

Consolidated net income available to common shareholders for the nine months ended September 30, 2014 was $24.6 million, or $0.87 per diluted share, compared to $15.3 million, or $0.64 per diluted share, for the nine months ended September 30, 2013.

Net Interest Income and Margin (Fully Tax Equivalent Basis)

The information set forth below contains certain financial information determined by methods other than in accordance with GAAP. Net interest income and the net interest margin are presented on a fully taxable equivalent basis based on the federal statutory rate of 35% to consistently reflect income from taxable loans and securities and tax-exempt securities. See "Non-GAAP Financial Measures" section for a reconciliation of these non-GAAP measures to their most comparable GAAP measures.

For the third quarter of 2014, net interest income increased $7.3 million, or 35.4%, to $27.9 million compared to the third quarter of 2013. The increase in net interest income was primarily the result of our continued success in growing our loan portfolio and our low cost deposits, along with higher balances and yields on our investment portfolio. The increase in interest income included a $4.4 million, or 29.3%, increase in interest income on loans and a $2.7 million, or 45.7%, increase in interest income on securities. Deposit growth of $633.2 million, or 33.3%, supported a 29.7% increase in the average balance of our loan portfolio and a 37.1% increase in the average balance of our investment securities portfolio.

Net interest income for the third quarter of 2014 increased $2.0 million compared to the second quarter of 2014, primarily driven by an increase in loan interest income of $1.6 million and an increase in investment interest income of $0.4 million from higher average balances, partially offset by a lower yield. Deposit growth of $174.7 million, or 7.4%, and lower average cash balances supported a 9.3% increase in the average balance of our loan portfolio and a 10.9% increase in the average balance of our investment securities portfolio.

For the third quarter of 2014 our net interest margin increased to 4.00% from 3.95% versus the same period in the prior year. This increase was due largely to lower premium amortization on agency mortgage-backed securities resulting from slower prepayments. For the third quarter of 2014, our net interest margin decreased to 4.00% from 4.03% for the second quarter of 2014. This decrease was largely due to the impact of slightly higher premium amortization on agency mortgage-backed securities resulting from faster prepayments and a decrease in the yield earned on our loan portfolio, partially offset by lower cash balances.

Noninterest Income

Noninterest income for the third quarter of 2014 was $5.5 million, a decrease of $1.2 million, or 17.8%, compared to the third quarter of 2013, and a decrease of $0.8 million compared to the second quarter of 2014. The decrease in noninterest income compared to the third quarter of 2013 was primarily driven by a $1.2 million decrease in income from our venture capital fund investments due to unrealized losses. Core banking noninterest income within noninterest income for the third quarter of 2014 was $4.3 million, an increase of $0.9 million, or 26.8%, compared to the third quarter of 2013, and an increase of $0.6 million, or 16.7%, compared to the second quarter of 2014, primarily driven by higher foreign exchange fee income and higher credit card and merchant income.

The $0.8 million decrease in noninterest income compared to the second quarter of 2014 was primarily driven by a $1.7 million decrease in income from our venture capital fund investments due to unrealized losses, and a $0.2 million net loss on the sale of securities in the third quarter of 2014. The $0.2 million net loss on the sale of securities in the third quarter of 2014 was primarily related to the sale of equity securities held in our investment portfolio that we obtained in two public companies through the exercise of warrants. These decreases were partially offset by warrant income of $0.7 million compared to warrant income of $21 thousand for the second quarter of 2014, and a $0.4 million increase in foreign exchange fee income.

Quarterly results from our venture capital fund investments are not indicative of annual results as income from venture capital fund investments was $1.2 million for the nine months ended September 30, 2014 compared to $1.0 million for the nine months ended September 30, 2013. The increase in foreign exchange fee income reflects the expanding geographic footprint of our clients, and our ability to cross-sell our banking services. Additionally, foreign exchange fee income fluctuates based on our customers' needs for foreign currency-based transactions and third quarter of 2014 reflects certain large transactions, which may not occur in future periods.

Warrant income was $0.7 million in the third quarter of 2014, compared to warrant income of $0.9 million in the third quarter of 2013 and warrant income of $21 thousand in the second quarter of 2014. Warrant income is largely driven by changes in the fair value of our equity warrant assets and successful liquidity events, including IPOs, for the clients in which we had taken warrant positions. These variances demonstrate the volatility of this income which is created, in part, by the erratic nature of public equity markets and their receptivity to IPOs. Equity securities received upon the exercise of warrants are either sold or are held as equity securities within our investment portfolio, if subject to a lock-up period. The increase in warrant income compared to the second quarter of 2014 was primarily due to higher income from warrants in one client that conducted an IPO during the third quarter of 2014. At September 30, 2014, the valuation of our remaining warrants held was $4.1 million held in 451 companies, which included $0.1 million held in five publicly traded companies.

Noninterest Expense

Noninterest expense for the third quarter of 2014 increased $3.2 million, or 23.3%, compared to the third quarter of 2013, and increased $0.2 million compared to the second quarter of 2014. The increase compared to the third quarter of 2013 was primarily due to $2.2 million higher personnel expenses in the third quarter of 2014, driven by an increase of 27 full-time equivalent employees and higher incentive compensation expense. The $0.2 million increase compared to the second quarter of 2014 primarily resulted from increases in professional and data processing fees due to company growth.

Loans and Credit Quality

Average loans grew $280.2 million, or 29.7%, to $1.2 billion and period-end loans increased $252.6 million, or 24.8%, compared to the third quarter of 2013. Average loans grew $104.0 million, or 9.3%, while period-end loans increased $119.8 million, or 10.4%, compared to the second quarter of 2014. The increase in commercial loans occurred in all our major client industry segments. Period-end loans to venture firms increased $37.7 million, while total loans to venture-backed companies, including life sciences, technology and asset-based loans were up $73.0 million, or 7.6%, at September 30, 2014 compared to June 30, 2014.

At September 30, 2014, nonperforming loans totaled $11.8 million, or 0.93%, of total loans compared to $13.6 million, or 1.32%, of total loans for the third quarter of 2013 and $12.3 million, or 1.07%, of total loans for the second quarter of 2014. The allowance for loan losses to nonperforming loans at September 30, 2014, was 193.38%, compared to 134.56% at September 30, 2013 and 175.54% at June 30, 2014. Net loan charge-offs were $1.2 million, or 0.40%, of average loans (annualized) for the third quarter of 2014 compared to net loan charge-offs of $3.0 million, or 1.25%, of average loans (annualized) for the third quarter of 2013 and $0.7 million, or 0.25%, of average loans (annualized) for the second quarter of 2014.

Investments

Average investments grew $374.9 million, or 37.1%, compared to the third quarter of 2013 and grew $136.5 million, or 10.9%, compared to the second quarter of 2014 as a result of strong deposit growth. Our available-for-sale securities portfolio totaled $1.2 billion at September 30, 2014, an increase of $93.2 million, or 8.5%, compared to $1.1 billion at June 30, 2014. Our held to maturity securities portfolio had an amortized cost of $278.1 million at September 30, 2014, an increase of $67.9 million, or 32.3%, compared to $210.2 million at June 30, 2014.

Deposits and Client Investment Funds

Average on-balance sheet deposits grew $633.2 million, or 33.3%, to $2.5 billion, compared to the third quarter of 2013 and increased $174.7 million, or 7.4%, compared to the second quarter of 2014. Our September 30, 2014 period-end deposits increased $804.1 million, or 43.1%, to $2.7 billion from September 30, 2013, and increased $223.3 million, or 9.1%, from June 30, 2014. This increase was primarily due to growth of our client base and a continued strong funding environment for venture-backed firms. Our period-end noninterest-bearing deposits increased $147.8 million, or 9.4%, and our interest-bearing deposits increased $75.5 million, or 8.6%, during the third quarter of 2014. Average interest-bearing deposits grew $40.9 million compared to the second quarter of 2014 and increased $118.8 million compared to the third quarter of 2013. Despite the increase in deposits, average cost of deposits of 0.02%, 0.02% and 0.04% for the third quarter of 2014, the second quarter of 2014 and the third quarter of 2013, respectively, yielded interest expense on deposits of $0.1 million, $0.1 million and $0.2 million for the same periods, respectively.

Average off-balance sheet client investment funds grew $488.2 million, or 110.0%, to $931.8 million, compared to the third quarter of 2013, and grew $181.8 million, or 24.2%, compared to the second quarter of 2014. Our period-end client investment funds increased to $957.6 million for the third quarter of 2014 from $460.1 million for the third quarter of 2013, an increase of 108.1%, and from $780.0 million for the second quarter of 2014, an increase of 22.8%, as our clients took advantage of alternative cash investment vehicles offered by Square 1 Asset Management, our registered investment adviser subsidiary. Square 1 Asset Management offers customized solutions that are tailored to meet the unique corporate cash management needs of entrepreneurial companies and venture firms.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following: (i) market and economic conditions (including interest rate environment, levels of public offerings, mergers and acquisitions and venture capital financing activities) and the associated impact on us; (ii) the sufficiency of our capital, including sources of capital (such as funds generated through retained earnings) and the extent to which capital may be used or required; (iii) our overall investment plans, strategies and activities, including our investment of excess cash/liquidity; (iv) operational, liquidity and credit risks associated with our business; (v) deterioration of our asset quality; (vi) our overall management of interest rate risk; (vii) our ability to execute our strategy and to achieve organic loan and deposit growth; (viii) increased competition in the financial services industry, nationally, regionally or locally, which may adversely affect pricing and terms; (ix) the adequacy of reserves (including allowance for loan and lease losses) and the appropriateness of our methodology for calculating such reserves; (x) volatility and direction of market interest rates; (xi) changes in the regulatory or legal environment; and (xii) other factors that are discussed in the section titled "Risk Factors," in our registration statement on Form S-1/A, filed with the Securities and Exchange Commission and effective as of March 26, 2014.

The foregoing factors should not be construed as exhaustive. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Any forward-looking statement speaks only as of the date on which it is made, and we do not intend, or undertake any obligation to publicly update these forward-looking statements.

Earnings Conference Call

The Company will host a conference call at 10:30 a.m. EDT on Thursday, October 23, 2014, to discuss the financial results for the quarter ended September 30, 2014. Individuals wishing to participate in the conference call may do so by dialing 877.359.9508 from the United States, or 224.357.2393 from outside the United States, and entering Conference ID 15998084. The call will also be available live via webcast on the Investor Relations page of the Company's website, www.square1financial.com. A replay of the call will be available on the Company's website for 90 days beginning on Thursday, October 23, 2014.

About Square 1 Financial

Square 1 Financial is a financial services company focused primarily on serving entrepreneurs and their investors. Square 1 Financial (Nasdaq:SQBK) is headquartered in Durham, North Carolina with twelve loan production offices located in key innovation hubs across the United States. Through Square 1 Bank, which was formed by experienced venture bankers, commercial bankers and entrepreneurs, we offer a full range of banking and financial products focused on the entrepreneurial community and their venture capital and private equity investors. Since inception, we have operated as a highly-focused venture bank and have provided a broad range of financial services to entrepreneurs, growing entrepreneurial companies and the venture capital and private equity communities. We provide banking services to our clients, including venture, commercial and international banking services, asset-based lending programs, and SBA and USDA commercial and real estate loan programs. We also provide investment advisory and asset management services to our clients through Square 1 Asset Management, a subsidiary of Square 1 Bank. More information can be found at www.square1financial.com.

SQUARE 1 FINANCIAL, INC.  
Summary Financial Information  
  At or For the
  Three Months Ended Nine Months Ended
(In thousands, except per share data) September 30,
2014
June 30,
2014
September 30,
2013
September 30,
2014
September 30,
2013
Performance Ratios:          
Return on average assets 1.22 % 1.22 % 1.29 % 1.25 % 1.02 %
Return on average common equity 12.01 11.74 15.66 13.01 11.56
Net interest margin(1) 4.00 4.03 3.95 4.04 3.89
Efficiency ratio(2) 49.79 51.29 49.85 50.55 54.54
           
Per Share Data:          
Net income (loss) per basic common share  $ 0.31   $ 0.28   $ 0.29   $ 0.91   $ 0.65 
Net income (loss) per diluted common share  0.29   0.27   0.29   0.87   0.64 
Book value per common share  10.25   9.91   7.55   10.25   7.55 
Tangible book value per common share  10.23   9.88   7.55   10.23   7.55 
           
Capital Ratios (consolidated):          
Tier 1 leverage capital(4) 10.05 % 10.42 % 9.02 % 10.05 % 9.02 %
Tier 1 risk-based capital(4) 13.69 14.70 11.68 13.69 11.68
Total risk-based capital(4) 14.84 15.88 12.79 14.84 12.79
Total shareholders' equity to assets 9.85 10.35 8.43 9.85 8.43
Tangible common equity to tangible assets(3) 9.83 10.33 8.20 9.83 8.20
           
Asset Quality Ratios:          
Allowance for loan losses as a percent of total loans 1.79 % 1.87 % 1.78 % 1.79 % 1.78 %
Allowance for loan losses as a percent of nonperforming loans 193.38 175.54 134.56 193.38 134.56
Net charge-offs to average outstanding loans (annualized) 0.40 0.25 1.25 0.49 0.78
Nonperforming loans as a percent of total loans 0.93 1.07 1.32 0.93 1.32
Nonperforming assets as a percent of total assets 0.39 0.45 0.63 0.39 0.63
           
Other Ratios and Statistics:          
Average loans, net of unearned income, to average deposits 48.3 % 47.5 % 49.7 % 48.4 % 49.1 %
Period-end full-time equivalent employees  253   245   219   253   219 
Average outstanding shares—basic  28,681   28,333   23,501   26,931   23,496 
Average outstanding shares—diluted  29,771   29,664   23,863   28,435   23,822 
Period-end outstanding shares—basic  28,701   28,640   23,501   28,701   23,501 
Period-end outstanding shares—diluted  29,819   29,841   23,890   29,819   23,890 
           
Financial Condition Data:          
Average total assets  $ 2,838,269   $ 2,644,511   $ 2,123,359   $ 2,620,684   $ 1,991,599 
Average cash and cash equivalents  157,129   223,988   112,915   166,987   128,721 
Average investment securities - available-for-sale  1,133,467   1,054,438   887,213   1,052,298   850,264 
Average investment securities - held-to-maturity  252,289   194,781   123,628   204,292   90,236 
Average loans, net of unearned income  1,223,906   1,119,867   943,696   1,138,097   872,873 
Average on-balance sheet deposits  2,533,778   2,359,042   1,900,576   2,349,180   1,776,530 
Average total client investment funds  931,780   749,976   443,612   771,705   405,311 
Average total shareholders' equity  289,021   275,014   179,958   254,401   181,319 
(1)  Represents net interest income as a percent of average interest-earning assets.
(2)  Represents noninterest expense divided by the sum of net interest income and other income, excluding gains or losses on the impairment and sale of securities. Efficiency ratio, as calculated, is a non-GAAP financial measure. See "Non-GAAP Financial Measures."
(3)  Tangible common equity to tangible assets is a non-GAAP financial measure. Tangible common equity is computed as total shareholders' equity, excluding preferred stock, less intangible assets. Tangible assets are calculated as total assets less intangible assets. We believe that the most directly comparable GAAP financial measure is total shareholders' equity to assets. See "Non-GAAP Financial Measures."
(4)  Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratio for September 30, 2014 are estimates.
       
       
SQUARE 1 FINANCIAL, INC.      
Interim Consolidated Balance Sheets (Unaudited)      
       
(in thousands, except share and per share data) September 30,
2014
June 30,
2014
September 30,
2013
Assets      
Cash and cash equivalents  $ 175,606   $ 231,192   $ 54,063 
Investment in time deposits  1,250   1,250   1,250 
Investment securities—available for sale, at fair value  1,186,887   1,093,684   898,931 
Investment securities—held to maturity, at amortized cost  278,121   210,236   125,473 
Loans, net of unearned income of $7.3 million, $5.5 million and $4.9 million  1,271,457   1,151,616   1,018,838 
Less allowance for loan losses  (22,816)  (21,556)  (18,093)
Net loans  1,248,641   1,130,060   1,000,745 
Premises and equipment, net  3,723   3,502   2,695 
Deferred income tax assets, net  10,142   11,165   16,431 
Bank owned life insurance  50,278   34,948   31,404 
Intangible assets  1,770   1,922   1,196 
Other receivables  3,619   4,648   5,628 
Warrant valuation  4,089   4,747   5,218 
Prepaid expenses  1,690   1,804   1,392 
Accrued interest receivable and other assets  22,370   12,366   19,026 
Total assets  $ 2,988,186   $ 2,741,524   $ 2,163,452 
Liabilities and Shareholders' Equity      
Deposits:      
Demand, noninterest-bearing  $ 1,712,674   $ 1,564,856   $ 1,157,986 
Demand, interest-bearing  164,859   107,300   73,176 
Money market deposit accounts  774,405   742,103   606,215 
Time deposits  16,507   30,906   27,012 
Total deposits  2,668,445   2,445,165   1,864,389 
Borrowings and repurchase agreements  —  —  100,605 
Junior subordinated debt  —  —  6,205 
Accrued interest payable and other liabilities  25,539   12,663   9,840 
Total liabilities  $ 2,693,984   $ 2,457,828   $ 1,981,039 
Commitments and contingencies      
Shareholders' equity:      
Convertible preferred stock, $.01 par value; 10,000,000 shares authorized, 0 shares, 0 shares and 5,000 shares issued and outstanding, respectively  —  —  —
Common stock, $.01 par value; 70,000,000, 45,000,000 and 45,000,000 shares authorized, 28,700,825 shares, 28,640,126 shares and 23,501,263 shares issued and outstanding, respectively  287   286   235 
Additional paid in capital  251,841   250,973   183,211 
Accumulated other comprehensive income (loss)  8,193   7,308   (3,448)
Retained earnings  33,881   25,129   2,415 
Total shareholders' equity  294,202   283,696   182,413 
Total liabilities and shareholders' equity  $ 2,988,186   $ 2,741,524   $ 2,163,452 
           
           
SQUARE 1 FINANCIAL, INC.          
Interim Consolidated Statements of Operations (Unaudited)
           
(in thousands, except per share data) Three Months Ended Nine Months Ended
  September 30,
2014
June 30,
2014
September 30,
2013
September 30,
2014
September 30,
2013
Interest income:          
Loans including fees on loans  $ 19,326   $ 17,720   $ 14,949   $ 53,448   $ 41,575 
Investment securities  7,528   7,218   4,993   21,079   13,266 
Federal funds and other short-term investments  104   137   78   305   233 
Total interest income  26,958   25,075   20,020   74,832   55,074 
Interest expense:          
Deposits  150   143   182   423   476 
Borrowings and repurchase agreements  —  —  6   4   30 
Junior subordinated debt  —  56   158   215   475 
Total interest expense  150   199   346   642   981 
Net interest income  26,808   24,876   19,674   74,190   54,093 
Provision for loan losses  2,500   3,150   2,850   8,614   9,340 
Net interest income after provision for loan losses  24,308   21,726   16,824   65,576   44,753 
Noninterest income:          
Service charges and fees  1,150   1,126   1,069   3,345   3,020 
Foreign exchange fees  1,792   1,363   1,270   4,795   3,635 
Credit card and merchant income  914   765   605   2,314   1,787 
Investment impairment  —  —  (782)  (43)  (1,525)
Net (loss) gain on securities  (235)  38   847   (188)  1,696 
Letter of credit fees  293   297   271   1,104   785 
Warrant income  721   21   899   2,937   3,263 
Gain on sale of loans  248   249   444   750   1,665 
Bank owned life insurance  330   317   298   936   771 
Other  319   2,196   1,808   3,094   3,243 
Total noninterest income  5,532   6,372   6,729   19,044   18,340 
Noninterest expense:          
Personnel  10,790   10,725   8,639   32,148   26,128 
Occupancy  713   773   691   2,227   2,082 
Data processing  1,090   918   897   2,830   2,229 
Furniture and equipment  769   660   589   2,131   1,850 
Advertising and promotions  223   342   267   840   891 
Professional fees  976   786   876   2,363   2,280 
Telecommunications  246   285   283   791   866 
Travel  259   292   211   717   762 
FDIC assessment  393   347   349   1,145   949 
Other  1,376   1,472   857   3,826   2,768 
Total noninterest expense  16,835   16,600   13,659   49,018   40,805 
Income before income tax expense  13,005   11,498   9,894   35,602   22,288 
Income tax expense  4,253   3,447   2,926   10,951   6,845 
Net income  8,752   8,051   6,968   24,651   15,443 
Dividends on preferred stock  —  1   62   63   188 
Net income available to common shareholders  $ 8,752   $ 8,050   $ 6,906   $ 24,588   $ 15,255 
Earnings per share—basic  $ 0.31   $ 0.28   $ 0.29   $ 0.91   $ 0.65 
Earnings per share—diluted  $ 0.29   $ 0.27   $ 0.29   $ 0.87   $ 0.64 
 
 
SQUARE 1 FINANCIAL, INC.
Interim Net Interest Margin Analysis (Unaudited)
 
  Three Months Ended
  September 30, 2014 June 30, 2014 September 30, 2013
  Average
Balance
Interest
and
Dividends
Yield/
Cost
Average
Balance
Interest
and
Dividends
Yield/
Cost
Average
Balance
Interest
and
Dividends
Yield/
Cost
  (Dollars in thousands)
Interest-earning assets:                  
Federal Reserve deposits, federal funds sold and other short-term investments  $ 152,008   $ 104  0.27 %  $ 206,033   $ 137  0.27 %  $ 111,426   $ 78  0.28 %
Loans, net of unearned income  1,223,906   19,326  6.26  1,119,867   17,720  6.35  943,696   14,949  6.28
Nontaxable securities  248,629   3,020  4.82  233,137   2,823  4.86  220,063   2,578  4.65
Taxable securities  1,137,127   5,567  1.94  1,016,082   5,382  2.12  790,777   3,317  1.66
Total interest-earning assets  2,761,670   28,017  4.02  2,575,119   26,062  4.06  2,065,962   20,922  4.02
Less: Allowance for loan losses  (22,888)      (20,086)      (18,038)    
Noninterest-earning assets  99,487       89,478       75,435     
Total assets  $ 2,838,269       $ 2,644,511       $ 2,123,359     
Interest-bearing liabilities:                  
Demand deposits  $ 87,957   18  0.08  $ 117,542   21  0.07  $ 92,500   33  0.14
Money market  765,338   115  0.06  692,727   106  0.06  641,159   131  0.08
Time deposits  27,997   16  0.22  30,133   16  0.22  28,872   17  0.23
Total interest-bearing deposits  881,292   149  0.07  840,402   143  0.07  762,531   181  0.09
FHLB advances  543   — 0.14  —  —  —  4,783   —  —
Repurchase agreements  —  —  —  —  —  —  22,525   6   —
Junior subordinated debt  —  1   —  2,236   56  10.09  6,205   159  10.10
Total interest-bearing liabilities  881,835   150  0.07  842,638   199  0.09  796,044   346  0.17
Noninterest-bearing deposits  1,652,486       1,518,640       1,138,044     
Other noninterest-bearing liabilities  14,927       8,219       9,313     
Total liabilities  2,549,248       2,369,497       1,943,401     
Total shareholders' equity  289,021       275,014       179,958     
Total liabilities and shareholders' equity  $ 2,838,269       $ 2,644,511       $ 2,123,359     
Net interest income    $ 27,867       $ 25,863       $ 20,576   
Interest rate spread     3.95 %     3.97 %     3.85 %
Net interest margin     4.00 %     4.03 %     3.95 %
Ratio of average interest-earning assets to average interest-bearing liabilities     313.17 %     305.60 %     259.53 %
 
 
SQUARE 1 FINANCIAL, INC.
Interim Net Interest Margin Analysis (Unaudited)
 
  Nine Months Ended September 30,
  2014 2013
  Average
Balance
Interest
and
Dividends
Yield/
Cost
Average
Balance
Interest
and
Dividends
Yield/
Cost
  (Dollars in thousands)
Interest-earning assets:            
Federal Reserve deposits, federal funds sold and other short-term investments  $ 155,406   $ 305  0.26 %  $ 114,901   $ 233  0.27 %
Loans, net of unearned income  1,138,097   53,448  6.28  872,873   41,575  6.37
Nontaxable securities  236,695   8,566  4.84  182,921   6,121  4.47
Taxable securities  1,019,894   15,511  2.03  757,579   9,287  1.64
Total interest-earning assets  2,550,092   77,830  4.08  1,928,274   57,216  3.97
Less: Allowance for loan losses  (20,827)      (16,503)    
Noninterest-earning assets  91,419       81,373     
Total assets  $ 2,620,684       $ 1,993,144     
Interest-bearing liabilities:            
Demand deposits  $ 107,276   63  0.08  $ 56,008   61  0.14
Money market  692,178   314  0.06  594,153   369  0.08
Time deposits  28,090   46  0.22  32,958   46  0.19
Total interest-bearing deposits  827,544   423  0.07  683,119   476  0.09
FHLB advances  842   2  0.35  9,670   24  0.34
Repurchase agreements  2,009   1   —  7,592   6   —
Junior subordinated debt  2,781   216  10.36  6,205   475  10.24
Total interest-bearing liabilities  833,176   642  0.10  706,586   981  0.19
Noninterest-bearing deposits  1,521,635       1,093,411     
Other noninterest-bearing liabilities  11,470       11,828     
Total liabilities  2,366,281       1,811,825     
Total shareholders' equity  254,403       181,319     
Total liabilities and shareholders' equity  $ 2,620,684       $ 1,993,144     
Net interest income    $ 77,188       $ 56,235   
Interest rate spread     3.98 %     3.78 %
Net interest margin     4.04 %     3.89 %
Ratio of average interest-earning assets to average interest-bearing liabilities     306.07 %     272.90 %
 
 
SQUARE 1 FINANCIAL, INC.
Loans and Unfunded Commitments
 
  September 30, 2014 June 30, 2014 September 30, 2013
  Amount Percent Amount Percent Amount Percent
  (Dollars in thousands)
Commercial loans:            
Technology  $ 634,908  49.65 %  $ 578,383  49.98 %  $ 560,084  54.71 %
Life sciences  240,375  18.80  232,042  20.05  224,321  21.91
Asset-based loans  152,282  11.91  144,133  12.45  95,481  9.33
Venture capital/private equity  159,349  12.46  121,601  10.51  85,213  8.32
SBA and USDA  33,245  2.60  35,357  3.06  19,531  1.91
Other  5,468  0.42  2,510  0.22  1,277  0.13
Total commercial loans  1,225,627  95.84  1,114,026  96.27  985,907  96.31
Real estate loans:            
SBA and USDA  31,532  2.47  26,997  2.33  27,378  2.67
Total real estate loans  31,532  2.47  26,997  2.33  27,378  2.67
Construction:            
SBA and USDA  2,290  0.18  1,101  0.10  1,226  0.12
Total construction loans  2,290  0.18  1,101  0.10  1,226  0.12
Credit cards  19,345  1.51  14,999  1.30  9,219  0.90
Total loans  1,278,794  100.00 %  1,157,123  100.00 %  1,023,730  100.00 %
Less unearned income(1)  (7,337)    (5,507)    (4,893)  
Total loans, net of unearned income  $ 1,271,457     $ 1,151,616     $ 1,018,837   
             
Total unfunded loan commitments  $ 1,167,115     $ 1,078,788     $ 924,788   
(1)  Unearned income consists of unearned loan fees, the discount on SBA loans and the unearned initial warrant value.

Client Investment Funds

We offer our clients alternative cash investment vehicles such as sweep accounts and investment in the Certificates of Deposit Account Registry Service ("CDARS"), the latter of which allows us to place client deposits in one or more insured depository institutions.

  September 30, 2014 June 30, 2014 September 30, 2013
Period-end: (Dollars in thousands)
Client investment assets under management  $ 609,284   $ 245,646   $ 22,451 
Sweep money market funds  241,274   277,848   215,080 
CDARS  107,076   256,485   222,618 
Total period-end client investment funds  $ 957,634   $ 779,979   $ 460,149 
           
           
SQUARE 1 FINANCIAL, INC.          
Credit Quality          
  Three Months Ended Nine Months Ended
  September 30,
2014
June 30,
2014
September 30,
2013
September 30,
2014
September 30,
2013
  (Dollars in thousands)
Allowance at beginning of period  $ 21,556   $ 19,094   $ 18,217   $ 18,379   $ 13,843 
Provision for loan losses  2,500   3,150   2,850   8,614   9,340 
Charge-offs:          
Commercial loans:          
Technology  382   332   2,988   2,548   5,932 
Life sciences  1,107   409   —  1,516   —
SBA and USDA  —  —  —  518   —
Total commercial loans  1,489   741   2,988   4,582   5,932 
Credit cards  —  —  —  —  —
Total charge offs  1,489   741   2,988   4,582   5,932 
Recoveries:          
Commercial loans:          
Technology  (13)  (53)  (14)  (169)  (692)
Life sciences  (5)  —  —  (5)  —
SBA and USDA  (14)  —  —  (14)  (150)
Total commercial loans  (32)  (53)  (14)  (188)  (842)
Real estate loans:          
SBA and USDA  (217)  —  —  (217)  —
Total real estate loans  (217)  —  —  (217)  —
Credit cards  —  —  —  —  —
Total recoveries  (249)  (53)  (14)  (405)  (842)
Net charge offs  $ 1,240   $ 688   $ 2,974   $ 4,177   $ 5,090 
Allowance at end of period  $ 22,816   $ 21,556   $ 18,093   $ 22,816   $ 18,093 
           
Total nonaccrual loans  $ 11,799   $ 12,280   $ 13,445   $ 11,799   $ 13,445 
           
Credit Quality Ratios:          
Allowance for loan losses as a percent of total loans 1.79 % 1.87 % 1.78 % 1.79 % 1.78 %
Allowance for loan losses as a percent of nonperforming loans 193.38 175.54 134.56 193.38 134.56
Net charge-offs to average outstanding loans (annualized) 0.40 0.25 1.25 0.49 0.78
Nonperforming loans as a percent of total loans 0.93 1.07 1.32 0.93 1.32
Nonperforming assets as a percent of total assets 0.39 0.45 0.63 0.39 0.63

SQUARE 1 FINANCIAL, INC.
Non-GAAP Financial Measures

The information set forth in this release contains certain financial information determined by methods other than in accordance with GAAP. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. These non-GAAP financial measures for us are "efficiency ratio," "tangible common equity to tangible assets," "net operating income," "net interest income," and "core banking noninterest income." Although we believe these non-GAAP financial measures provide a greater understanding of our business, these measures are not necessarily comparable to similar measures that may be presented by other companies. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP.

The information provided below reconciles each non-GAAP measure to its most comparable GAAP measure.

(Dollars in thousands) Three Months Ended
  September 30,
2014
June 30,
2014
September 30,
2013
Efficiency Ratio      
Noninterest expense (GAAP)  $ 16,835   $ 16,600   $ 13,659 
Net interest taxable equivalent income  27,867   25,863   20,577 
Noninterest taxable equivalent income  5,709   6,543   6,889 
Less: (loss) gain on sale of securities and impairment  (235)  38   65 
Adjusted operating revenue  $ 33,811   $ 32,368   $ 27,401 
Efficiency ratio 49.79 % 51.29 % 49.85 %
Tangible Common Equity/Tangible Assets      
Total equity  $ 294,202   $ 283,696   $ 182,413 
Less: preferred stock  —  —  4,950 
Intangible assets(1)  495   597   —
Tangible common equity  $ 293,707   $ 283,099   $ 177,463 
Total assets  $ 2,988,186   $ 2,741,524   $ 2,163,452 
Less: intangible assets(1)  495   597   —
Tangible assets  $ 2,987,691  $ 2,740,927  $ 2,163,452
Tangible common equity/tangible assets 9.83 % 10.33 % 8.20 %
Net Operating Income      
GAAP income before taxes  $ 13,005   $ 11,498   $ 9,894 
Add: (loss) gain on sale of securities and impairment  (235)  38   65 
Add: tax equivalent adjustment  1,237   1,157   1,063 
Non-GAAP net operating income before taxes  $ 14,477   $ 12,617   $ 10,892 
Net Interest Income      
GAAP net interest income  $ 26,808   $ 24,876   $ 19,674 
Add: tax equivalent adjustment  1,059   987   903 
Non-GAAP net interest income (fully tax equivalent basis)  $ 27,867   $ 25,863   $ 20,577 
Core Banking Noninterest Income      
GAAP noninterest income  $ 5,532   $ 6,372   $ 6,729 
Less: net (loss) gain on securities  (235)  38   65 
Warrant income  721   21   899 
Gain on sale of loans  248   249   444 
Bank owned life insurance  330   317   298 
Other  137   2,035   1,607 
Non-GAAP core banking noninterest income  $ 4,331   $ 3,712   $ 3,416 
(1) Does not include a loan servicing asset of $1.3 million, $1.3 million and $1.2 million at September 30, 2014, June 30, 2014, and September 30, 2013, respectively.
 
(Dollars in thousands) Nine Months Ended
  September 30,
2014
September 30,
2013
Efficiency Ratio    
Noninterest expense (GAAP)  $ 49,019   $ 40,805 
Net interest taxable equivalent income  77,186   56,235 
Noninterest taxable equivalent income  19,549   18,755 
Add: (loss) gain on sale of securities and impairment  (231)  171 
Adjusted operating revenue  $ 96,966   $ 74,819 
Efficiency ratio 50.55 % 54.54 %
Tangible Common Equity/Tangible Assets    
Total equity  $ 294,202   $ 182,413 
Less: preferred stock  —  4,950 
Intangible assets(1)  495   —
Tangible common equity  $ 293,707   $ 177,463 
Total assets  $ 2,988,186   $ 2,163,452 
Less: intangible assets(1)  495   —
Tangible assets  $ 2,987,691   $ 2,163,452 
Tangible common equity/tangible assets 9.83 % 8.20 %
Net Operating Income    
GAAP income before taxes  $ 35,600   $ 22,286 
Add: (loss) gain on sale of securities and impairment  (231)  171 
Add: tax equivalent adjustment  3,503   2,558 
Non-GAAP net operating income before taxes  $ 39,334   $ 24,673 
Net Interest Income    
GAAP net interest income  $ 74,190   $ 54,093 
Add: tax equivalent adjustment  2,996   2,142 
Non-GAAP net interest income (fully tax equivalent basis)  $ 77,186   $ 56,235 
Core Banking Noninterest Income    
GAAP noninterest income  $ 19,044   $ 18,340 
Less: net (loss) gain on securities  (231)  171 
Warrant income  2,937   3,263 
Gain on sale of loans  750   1,665 
Bank owned life insurance  936   771 
Other  2,573   2,739 
Non-GAAP core banking noninterest income  $ 12,079   $ 9,731 
(1)  Does not include a loan servicing asset of $1.3 million and $1.2 million at September 30, 2014 and September 30, 2013, respectively.


            

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