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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.

CONTACT: Patrick Oakes, Executive Vice President and Chief Financial Officer 919.627.6366 poakes@square1bank.com

Source:Square 1 Financial