Square 1 Financial, Inc.
July 25, 2014
PDF
Add to Briefcase

Square 1 Financial Reports Second Quarter 2014 Results

DURHAM, N.C., July 25, 2014 (GLOBE NEWSWIRE) -- Square 1 Financial, Inc. (Nasdaq:SQBK) today announced results for the quarter ended June 30, 2014.

Consolidated net income available to common shareholders for the second quarter of 2014 was $8.1 million, or $0.27 per diluted share, compared to $5.1 million, or $0.21 per diluted share, for the second quarter of 2013 and $7.8 million, or $0.31 per diluted share, for the first quarter of 2014.

"Solid loan and deposit growth across all segments and continued good credit performance drove another quarter of strong profitability," said Douglas H. Bowers, President and Chief Executive Officer of Square 1 Financial. "We believe that higher growth demonstrates increased awareness of our banking offerings among venture firms and venture-backed companies, and our ability to execute effectively."

Second Quarter Highlights

Highlights of the second quarter of 2014 include:

Earnings Summary

The increase in net income available to common shareholders compared to the second quarter of 2013 resulted from a $7.2 million increase in net interest income, partially offset by a $1.2 million decrease in noninterest income and a $2.5 million increase in noninterest expense.

The increase in net income available to common shareholders compared to the first quarter of 2014 was impacted primarily by a $2.4 million increase in net interest income, largely offset by a $0.8 million decrease in noninterest income and a $1.0 million increase in noninterest expense.

Consolidated net income available to common shareholders for the six months ended June 30, 2014 was $15.8 million, or $0.58 per diluted share, compared to $8.3 million, or $0.35 per diluted share, for the six months ended June 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 second quarter of 2014, net interest income increased $7.5 million, or 40.8%, to $25.9 million compared to the second 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 yields on our investment portfolio, partially offset by lower yields on our loan portfolio. The increase in interest income included a $3.9 million, or 27.8%, increase in interest income on loans and a $3.5 million, or 73.2%, increase in interest income on securities. Deposit growth of $548.0 million, or 30.3%, supported a 31.5% increase in the average balance of our loan portfolio and a 30.9% increase in the average balance of our investment securities portfolio.

Net interest income for the second quarter of 2014 increased $2.4 million compared to the first quarter of 2014, primarily driven by an increase in loan interest income of $1.3 million and an increase in investment interest income of $0.9 million from higher average balances and higher yields.

For the second quarter of 2014 our net interest margin increased to 4.03% from 3.78% 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 and lower premium amortization on agency mortgage-backed securities resulting from slower prepayments, which were partially offset by an 18 basis point decline in the yield earned on our loan portfolio in response to competitive pressures in the current low rate environment. For the second quarter of 2014, our net interest margin decreased to 4.03% from 4.12% for the first quarter of 2014. This decrease was largely due to the impact of higher cash balances, partially offset by a 13 basis point increase in the yield earned on our loan portfolio and higher yields on agency mortgage-backed securities.

Noninterest Income

Noninterest income for the second quarter of 2014 was $6.4 million, a decrease of $1.2 million, or 15.9%, compared to the second quarter of 2013 and a decrease of $0.8 million compared to the first quarter of 2014. The decrease in noninterest income compared to the second quarter of 2013 was primarily due to a $2.6 million decrease in warrant income and $0.4 million lower gains on the sale of SBA loans due to our strategic decision to hold more SBA loans in our loan portfolio. These decreases were partially offset by a $0.5 million increase in client service fees, $1.4 million higher unrealized gains from our venture capital fund investments, and a gain of $0.5 million recorded on the transfer of the contract for the management of Square 1 Venture 1, L.P. to a third party.

The $0.8 million decrease in noninterest income compared to the first quarter of 2014 was due to $2.2 million lower warrant income and a $0.3 million decrease in foreign exchange fee income and $0.2 million decrease in letter of credit fee income due to the seasonal nature of these fees. These decreases in noninterest income were largely offset by $1.7 million higher other noninterest income and $0.2 million higher service charges and fees income. The increase in other noninterest income was primarily driven by $1.4 million higher unrealized gains from our venture capital fund investments and the $0.5 million gain recorded on the transfer of the contract for the management of Square 1 Venture 1, L.P. to a third party.

The $2.6 million and $2.2 million decrease in warrant income in the second quarter of 2014 compared to the second quarter of 2013 and the first quarter of 2014, respectively, was due to 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.

During the second quarter of 2014, we exited $0.8 million in warrants in one publicly traded company, we exercised warrants with a total value of $1.4 million and received equity securities in four publicly traded companies. At June 30, 2014, the fair value of equity securities included in investments obtained through the exercise of warrants and still held was $1.0 million. At June 30, 2014, the valuation of our remaining warrants held was $4.7 million, which included $0.8 million held in five publicly traded companies.

Noninterest Expense

Noninterest expense for the second quarter of 2014 increased $2.5 million, or 17.6%, compared to the second quarter of 2013, and increased $1.0 million compared to the first quarter of 2014. The increase compared to the second quarter of 2013 was primarily due to $1.7 million higher personnel expenses in the second quarter of 2014, driven by an increase of 26 full-time equivalent employees and higher incentive compensation expense. The $1.0 million increase compared to the first quarter of 2014 was primarily due to an increase in the provision for unfunded credit commitments and data processing fees in the second quarter of 2014 and the impact of lower professional fees in the first quarter of 2014.

Loans and Credit Quality

Average loans grew $268.6 million, or 31.5%, to $1.1 billion and period-end loans increased $245.9 million, or 27.1%, compared to the second quarter of 2013. Average loans grew $51.1 million, or 4.8%, while period-end loans increased $90.3 million, or 8.5%, compared to the first quarter of 2014. The increase in commercial loans occurred in all our major client industry segments. Period-end loans to venture firms increased $30.0 million, while total loans to venture-backed companies, including life sciences, technology and asset-based loans were up $52.5 million, or 5.8%, at June 30, 2014 compared to March 31, 2014.

At June 30, 2014, nonperforming loans totaled $12.3 million, or 1.07%, of total loans compared to $9.6 million, or 0.91%, of total loans for the first quarter of 2014 and $13.8 million, or 1.52%, of total loans for the second quarter of 2013. The increase in nonperforming loans compared to first quarter of 2014 reflects placing two loans on non-accrual status, both of which are fully reserved. The allowance for loan losses to nonperforming loans at June 30, 2014 was 175.54%, compared to 198.65% at March 31, 2014, and 131.91% at June 30, 2013. Net loan charge-offs were $0.7 million, or 0.25%, of average loans (annualized) for the second quarter of 2014 compared to net loan charge-offs of $2.2 million, or 0.85%, of average loans (annualized) for the first quarter of 2014 and $2.3 million, or 1.09%, of average loans (annualized) for the second quarter of 2013.

Investments

Average investments grew $294.7 million, or 30.9%, compared to the second quarter of 2013 and grew $117.2 million, or 10.4%, compared to the first quarter of 2014 as a result of strong deposit growth. Our available-for-sale securities portfolio totaled $1.1 billion at June 30, 2014, an increase of $113.0 million, or 11.5%, compared to $980.7 million at March 31, 2014. The increase was primarily purchases of new investment securities, consisting mostly of agency and non-agency mortgage backed securities and other asset-backed securities. Our held to maturity securities portfolio had an amortized cost of $210.2 million at June 30, 2014, an increase of $40.7 million, or 24.0%, compared to $169.5 million at March 31, 2014.

Deposits and Client Investment Funds

Average on-balance sheet deposits grew $548.0 million, or 30.3%, to $2.4 billion, compared to the second quarter of 2013 and increased $208.5 million, or 9.7%, compared to the first quarter of 2014. Our June 30, 2014 period-end deposits increased $505.1 million, or 26.0%, to $2.4 billion from June 30, 2013, and increased $247.0 million, or 11.2%, from March 31, 2014. This increase was primarily due to growth of our client base and a continued strong funding environment for venture-backed firms. Our noninterest-bearing deposits increased $193.7 million, or 14.1%, and our interest-bearing deposits increased $53.3 million, or 6.4%, during the second quarter of 2014. Despite the increase in interest-bearing deposits, average cost of deposits of 0.02%, 0.02% and 0.04% for the second quarter of 2014, the first quarter of 2014 and the second 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 $324.9 million, or 76.4%, to $750.0 million, compared to the second quarter of 2013, and grew $119.9 million, or 19.0%, compared to the first quarter of 2014. Our period-end client investment funds increased to $780.0 million for the second quarter of 2014 from $411.8 million for the second quarter of 2013, an increase of 89.4%, and from $643.5 million for the first quarter of 2014, an increase of 21.2%, as our clients took advantage of alternative cash investment vehicles offered by Square 1 Asset Management, the registered investment advisor subsidiary we formed in 2013. Square 1 Asset Management offers customized solutions to our clients that are tailored to meet the unique corporate cash management needs of entrepreneurial companies and venture firms.

Capital

On April 2, 2014, all 5,000 shares of Series A 5% Fixed Rate Cumulative Convertible Preferred Stock were converted by the holder into 500,070 shares of common stock.

During the second quarter of 2014, the remaining $3.7 million of our 8.0% convertible trust preferred securities were converted into 366,500 common shares. At June 30, 2014, no convertible trust preferred securities remained outstanding.

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 27, 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 10:00 a.m. EDT on Friday, July 25, 2014, to discuss the financial results for the quarter ended June 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 71476265. 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 Friday, July 25, 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 June 30,
(In thousands, except per share data)June 30,
2014
March 31,
2014
December 31,
2013
June 30,
2013
Performance Ratios:        
Return on average assets 1.22% 1.33% 1.15% 1.01%
Return on average common equity 11.74 16.34 14.95 11.28
Net interest margin(1) 4.03 4.12 3.96 3.78
Efficiency ratio(2) 51.29 50.61 49.56 54.99
         
Per Share Data:        
Net income (loss) per basic common share  $ 0.28  $ 0.33  $ 0.29  $ 0.22
Net income (loss) per diluted common share  0.27  0.31  0.29  0.21
Book value per common share  9.91  9.29  7.80  7.36
Tangible book value per common share  9.88  9.26  7.77  7.36
         
Capital Ratios (consolidated):        
Tier 1 leverage capital(4) 10.41% 10.90% 8.34% 9.15%
Tier 1 risk-based capital(4) 15.54 15.79 12.08 12.86
Total risk-based capital(4) 16.79 16.96 13.24 14.11
Total shareholders' equity to assets 10.35 10.45 8.13 8.19
Tangible common equity to tangible assets(3) 10.33 10.23 7.89 7.97
         
Asset Quality Ratios:        
Allowance for loan losses as a percent of total loans 1.87% 1.80% 1.70% 2.01%
Allowance for loan losses as a percent of nonperforming loans 175.54 198.65 127.05 131.91
Net charge-offs (recoveries) to average outstanding loans (annualized) 0.25 0.85 1.38 1.09
Nonperforming loans as a percent of total loans 1.07 0.91 1.34 1.52
Nonperforming assets as a percent of total assets 0.45 0.39 0.63 0.64
         
Other Ratios and Statistics:        
Average loans, net of unearned income, to average deposits 47.5% 49.7% 48.9% 47.0%
Period-end full-time equivalent employees 245 239 230 219
Average outstanding shares—basic 28,333 23,726 23,544 23,496
Average outstanding shares—diluted 29,663 25,740 23,972 23,848
Period-end outstanding shares—basic 28,640 27,234 23,612 23,496
Period-end outstanding shares—diluted 29,841 29,082 24,056 23,858
         
Financial Condition Data:        
Average total assets  $ 2,644,511  $ 2,374,169  $ 2,380,750  $ 2,014,214
Average cash and cash equivalents  223,988  119,430  205,462  157,742
Average investment securities - available-for-sale  1,054,438  967,161  928,981  875,190
Average investment securities - held-to-maturity  194,781  164,844  138,641  79,314
Average loans, net of unearned income  1,119,867  1,068,814  1,052,507  851,298
Average on-balance sheet deposits  2,359,042  2,150,508  2,153,002  1,811,017
Average total client investment funds  749,976  630,042  565,106  425,048
Average total shareholders' equity  275,014  198,171  187,518  184,711
(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 June 30, 2014 are estimates.
       
SQUARE 1 FINANCIAL, INC.      
Interim Consolidated Balance Sheets (Unaudited)      
       
(in thousands, except share and per share data)June 30,
2014
March 31, 2014June 30,
2013
Assets      
Cash and cash equivalents  $ 231,192  $ 197,894  $ 213,105
Investment in time deposits  1,250  1,250  1,250
Investment securities—available for sale, at fair value  1,093,684  980,669  857,116
Investment securities—held to maturity, at amortized cost  210,236  169,521  113,682
Loans, net of unearned income of $5.5 million, $4.6 million and $4.5 million  1,151,616  1,061,287  905,765
Less allowance for loan losses  (21,556)  (19,094)  (18,217)
Net loans  1,130,060  1,042,193  887,548
Premises and equipment, net  3,502  3,185  2,866
Deferred income tax assets, net  11,165  12,110  13,358
Bank owned life insurance  34,948  34,631  31,106
Intangible assets  1,922  1,996  1,142
Other receivables  4,648  2,856  8,790
Warrant valuation  4,747  6,596  6,330
Prepaid expenses  1,804  1,311  1,136
Accrued interest receivable and other assets  12,366  12,930  33,715
Total assets  $ 2,741,524  $ 2,467,142  $ 2,171,144
Liabilities and Shareholders' Equity      
Deposits:      
Demand, noninterest-bearing  $ 1,564,856  $ 1,371,149  $ 1,105,739
Demand, interest-bearing  107,300  130,660  66,689
Money market deposit accounts  742,103  666,485  739,621
Time deposits  30,906  29,905  28,050
Total deposits  2,445,165  2,198,199  1,940,099
Borrowings and repurchase agreements  --   --   -- 
Junior subordinated debt  --   3,186  6,205
Accrued interest payable and other liabilities  12,663  7,877  46,955
Total liabilities  $ 2,457,828  $ 2,209,262  $ 1,993,259
Commitments and contingencies (Notes 11 and 16)      
Shareholders' equity:      
Convertible preferred stock, $.01 par value; 10,000,000 shares authorized, 0 shares, 5,000 shares and 5,000 shares issued and outstanding, respectively  --   --   -- 
Common stock, $.01 par value; 45,000,000 shares authorized, 28,640,126 shares, 27,234,386 shares and 23,496,263 shares issued and outstanding, respectively  286  272  235
Additional paid in capital  250,973  239,306  182,811
Accumulated other comprehensive income (loss)  7,308  1,223  (670)
Retained earnings (deficit)  25,129  17,079  (4,491)
Total shareholders' equity  283,696  257,880  177,885
Total liabilities and shareholders' equity  $ 2,741,524  $ 2,467,142  $ 2,171,144
           
SQUARE 1 FINANCIAL, INC.          
Interim Consolidated Statements of Operations (Unaudited)          
           
(in thousands, except per share data)Three Months EndedSix Months Ended
 June 30,
2014
March 31,
2014
June 30,
2013
June 30,
2014
June 30,
2013
Interest income:          
Loans including fees on loans  $ 17,720  $ 16,403  $ 13,864  $ 34,123  $ 26,626
Investment securities  7,218  6,333  4,058  13,551  8,274
Federal funds and other short-term investments  137  64  102  201  155
Total interest income  25,075  22,800  18,024  47,875  35,055
Interest expense:          
Deposits  143  130  174  273  294
Borrowings and repurchase agreements  --   4  --   4  24
Junior subordinated debt  56  159  158  215  317
Total interest expense  199  293  332  492  635
Net interest income  24,876  22,507  17,692  47,383  34,420
Provision for loan losses  3,150  2,964  3,730  6,114  6,490
Net interest income after provision for loan losses  21,726  19,543  13,962  41,269  27,930
Noninterest income:          
Service charges and fees  1,891  1,704  1,604  3,595  3,134
Foreign exchange fees  1,363  1,641  1,139  3,004  2,366
Loan documentation fees  96  137  99  233  179
Investment impairment  --   (43)  (442)  (43)  (744)
Net gain on securities  38  9  849  47  849
Letter of credit fees  297  515  310  812  514
Warrant income  21  2,195  2,591  2,216  2,364
Gain on sale of loans  249  253  619  502  1,221
Bank owned life insurance  317  290  254  607  473
Other  2,100  438  551  2,538  1,254
Total noninterest income  6,372  7,139  7,574  13,511  11,610
Noninterest expense:          
Personnel  10,725  10,634  9,021  21,359  17,489
Occupancy  773  740  730  1,513  1,391
Data processing  918  822  644  1,740  1,332
Furniture and equipment  660  702  618  1,362  1,260
Advertising and promotions  342  275  362  617  624
Professional fees  786  601  750  1,387  1,404
Telecommunications  285  260  290  545  583
Travel  292  166  352  458  551
FDIC assessment  347  405  287  752  600
Other  1,472  978  1,065  2,450  1,912
Total noninterest expense  16,600  15,583  14,119  32,183  27,146
Income before income tax expense  11,498  11,099  7,417  22,597  12,394
Income tax expense  3,447  3,251  2,300  6,698  3,920
Net income  8,051  7,848  5,117  15,899  8,474
Dividends on preferred stock  1  62  62  63  125
Net income available to common shareholders  $ 8,050  $ 7,786  $ 5,055  $ 15,836  $ 8,349
Earnings per share—basic  $ 0.28  $ 0.33  $ 0.22  $ 0.61  $ 0.36
Earnings per share—diluted  $ 0.27  $ 0.31  $ 0.21  $ 0.58  $ 0.35
 
SQUARE 1 FINANCIAL, INC.
Interim Net Interest Margin Analysis (Unaudited)
                   
 Three Months Ended
 June 30, 2014March 31, 2014June 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  $ 206,033   $ 137  0.27%  $ 107,689   $ 64  0.24%  $ 140,073   $ 102  0.29%
Loans, net of unearned income  1,119,867   17,720  6.35  1,068,814   16,403  6.22  851,298   13,864  6.53
Nontaxable securities  233,137   2,823  4.86  228,094   2,724  4.84  179,851   1,941  4.33
Taxable securities  1,016,082   5,382  2.12  903,911   4,560  2.05  774,653   2,797  1.45
Total interest-earning assets  2,575,119   26,062  4.06  2,308,508   23,751  4.17  1,945,875   18,704  3.86
Less: Allowance for loan losses  (20,086)      (19,471)      (16,593)    
Noninterest-earning assets  89,478       85,132       84,932     
Total assets  $ 2,644,511       $ 2,374,169       $ 2,014,214     
Interest-bearing liabilities:                  
Demand deposits  $ 117,542   21  0.07  $ 116,647   24  0.08  $ 58,365   21  0.15
Money market  692,727   106  0.06  616,834   92  0.06  641,129   136  0.08
Time deposits  30,133   16  0.22  26,121   14  0.22  27,365   17  0.25
Total interest-bearing deposits  840,402   143  0.07  759,602   130  0.07  726,859   174  0.10
FHLB advances  —  —  2,000   2  0.41  —  —
Repurchase agreements  —  —  6,092   1  0.10  —  —
Junior subordinated debt  2,236   56  10.09  6,173   160  10.46  6,205   158  10.21
Total interest-bearing liabilities  842,638   199  0.09  773,867   293  0.15  733,064   332  0.18
Noninterest-bearing deposits  1,518,640       1,390,906       1,084,158     
Other noninterest-bearing liabilities  8,219       11,225       12,281     
Total liabilities  2,369,497       2,175,998       1,829,503     
Total shareholders' equity  275,014       198,171       184,711     
Total liabilities and shareholders' equity  $ 2,644,511       $ 2,374,169       $ 2,014,214     
Net interest income    $ 25,863       $ 23,458       $ 18,372   
Interest rate spread     3.97%     4.02%     3.68%
Net interest margin     4.03%     4.12%     3.78%
Ratio of average interest-earning assets to average interest-bearing liabilities     305.60%     298.31%     265.44%
             
SQUARE 1 FINANCIAL, INC.            
Interim Net Interest Margin Analysis (Unaudited)            
             
 Six Months Ended June 30,
 20142013
 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  $ 157,133   $ 201  0.26%  $ 116,667   $ 155  0.27%
Loans, net of unearned income  1,094,482   34,123  6.29  836,874   26,626  6.42
Nontaxable securities  230,629   5,546  4.85  164,043   3,543  4.36
Taxable securities  960,306   9,943  2.09  740,705   5,971  1.63
Total interest-earning assets  2,442,550   49,813  4.11  1,858,289   36,295  3.94
Less: Allowance for loan losses  (19,780)      (15,723)    
Noninterest-earning assets  87,317       84,392     
Total assets  $ 2,510,087       $ 1,926,958     
Interest-bearing liabilities:            
Demand deposits  $ 117,097   44  0.08  $ 37,460   27  0.15
Money market  654,990   199  0.06  570,260   238  0.08
Time deposits  28,138   30  0.22  35,035   29  0.17
Total interest-bearing deposits  800,225   273  0.07  642,755   294  0.09
FHLB advances  995   2  0.41  12,154   25  0.41
Repurchase agreements  3,029   1  0.10  1   — 0.45
Junior subordinated debt  4,194   216  10.36  6,205   317  10.30
Total interest-bearing liabilities  808,443   492  0.12  661,115   636  0.19
Noninterest-bearing deposits  1,455,126       1,070,724     
Other noninterest-bearing liabilities  9,714       13,106     
Total liabilities  2,273,283       1,744,945     
Total shareholders' equity  236,804       182,013     
Total liabilities and shareholders' equity  $ 2,510,087       $ 1,926,958     
Net interest income    $ 49,321       $ 35,659   
Interest rate spread     3.99%     3.75%
Net interest margin     4.07%     3.86%
Ratio of average interest-earning assets to average interest-bearing liabilities     302.13%     281.08%
             
SQUARE 1 FINANCIAL, INC.            
Loans and Unfunded Commitments            
             
 June 30, 2014March 31, 2014June 30, 2013
 AmountPercentAmountPercentAmountPercent
 (Dollars in thousands)   
Commercial loans:            
Technology  $ 578,383  49.98%  $ 553,258  51.91%  $ 485,613  53.35%
Life sciences  232,042  20.05  226,617  21.27  191,881  21.08
Asset-based loans  144,133  12.45  122,151  11.46  80,355  8.83
Venture capital/private equity  121,601  10.51  91,595  8.59  94,173  10.34
SBA and USDA  35,357  3.06  24,864  2.33  15,168  1.67
Other  2,510  0.22  4,624  0.43  5,294  0.58
Total commercial loans  1,114,026  96.27  1,023,109  95.99  872,484  95.85
Real estate loans:            
SBA and USDA  26,997  2.33  29,558  2.77  29,120  3.20
Total real estate loans  26,997  2.33  29,558  2.77  29,120  3.20
Construction:            
SBA and USDA  1,101  0.10  286  0.03  —
Total construction loans  1,101  0.10  286  0.03  —
Credit cards  14,999  1.30  12,916  1.21  8,645  0.95
Total loans  1,157,123  100.00%  1,065,869  100.00%  910,249  100.00%
Less unearned income(1)  (5,507)    (4,582)    (4,484)  
Total loans, net of unearned income  $ 1,151,616     $ 1,061,287     $ 905,765   
             
Total unfunded loan commitments  $ 1,078,788     $ 1,036,497     $ 854,075   
(1)  Unearned income consists of unearned loan fees, the discount on SBA loans and the unearned initial warrant value.

SQUARE 1 FINANCIAL, INC.

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.

 June 30, 2014March 31, 2014June 30, 2013
Period-end:(Dollars in thousands)
Client investment assets under management  $ 245,646   $ 173,927   $ —
Sweep money market funds  277,848   303,135   185,165 
CDARS  256,485   166,452   226,600 
Total period-end client investment funds  $ 779,979   $ 643,514   $ 411,765 
         
SQUARE 1 FINANCIAL, INC.        
Credit Quality        
         
 Three Months Ended
 June 30,
2014
March 31,
2014
December 31,
2013
June 30,
2013
 (Dollars in thousands)
Allowance at beginning of period  $ 19,094   $ 18,379   $ 18,093   $ 16,793 
Provision for loan losses  3,150   2,964   3,960   3,730 
Charge-offs:        
Commercial loans:        
Technology  332   1,834   3,411   2,945 
Life sciences  409   —  —  —
SBA and USDA  —  518   269   —
Total commercial loans  741   2,352   3,680   2,945 
Credit cards  —  —  —  —
Total charge offs  741   2,352   3,680   2,945 
Recoveries:        
Commercial loans:        
Technology  (53)  (103)  (6)  (639)
Life sciences  —  —  —  —
SBA and USDA  —  —  —  —
Total commercial loans  (53)  (103)  (6)  (639)
Credit cards  —  —  —  —
Total recoveries  (53)  (103)  (6)  (639)
Net charge offs  $ 688   $ 2,249   $ 3,674   $ 2,306 
Allowance at end of period  $ 21,556   $ 19,094   $ 18,379   $ 18,217 
         
Total nonaccrual loans  $ 12,280   $ 9,612   $ 14,466   $ 13,810 
         
Credit Quality Ratios:        
Allowance for loan losses as a percent of total loans 1.87% 1.80% 1.70% 2.01%
Allowance for loan losses as a percent of nonperforming loans 175.54 198.65 127.05 131.91
Net charge-offs (recoveries) to average outstanding loans (annualized) 0.25 0.85 1.38 1.09
Nonperforming loans as a percent of total loans 1.07 0.91 1.34 1.52
Nonperforming assets as a percent of total assets 0.45 0.39 0.63 0.64

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" and "net operating 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
 June 30,
2014
March 31,
2014
December 31,
2013
June 30,
2013
Efficiency Ratio        
Noninterest expense (GAAP)  $ 16,600   $ 15,583   $ 15,115   $ 14,119 
Net interest taxable equivalent income  25,863   23,458   23,170   18,372 
Noninterest taxable equivalent income (loss)  6,543   7,297   7,131   7,711 
Add: gain (loss) on sale of securities and impairment  38   (34)  (195)  407 
Adjusted operating revenue  $ 32,368   $ 30,789   $ 30,496   $ 25,676 
Efficiency ratio 51.29% 50.61% 49.56% 54.99%
Tangible Common Equity/Tangible Assets        
Total equity  $ 283,696   $ 257,880   $ 189,149   $ 177,885 
Less: preferred stock  —  4,950   4,950   4,950 
Intangible assets(1)  597   698   800   —
Tangible common equity  $ 283,099   $ 252,232   $ 183,399   $ 172,935 
Total assets  $ 2,741,524   $ 2,467,142   $ 2,326,427   $ 2,171,144 
Less: intangible assets(1)  597   698   800   —
Tangible assets  2,740,927   2,466,444   2,325,627   2,171,144 
Tangible common equity/tangible assets 10.33% 10.23% 7.89% 7.97%
Net Operating Income        
GAAP income before taxes  $ 11,498   $ 11,099   $ 10,135   $ 7,417 
Add: gain (loss) on sale of securities and impairment  38   (34)  (195)  407 
Add: tax equivalent adjustment  1,157   1,108   1,090   816 
Non-GAAP net operating income before taxes  $ 12,617   $ 12,241   $ 11,420   $ 7,826 
Net Interest Income        
GAAP net interest income  $ 24,876   $ 22,507   $ 22,241   $ 17,692 
Add: tax equivalent adjustment  987   951   929   680 
Non-GAAP net interest income (fully tax equivalent basis)  $ 25,863   $ 23,458   $ 23,170   $ 18,372 
(1)  Does not include a loan servicing asset of $1.3 million, $1.3 million, $1.3 million and $1.1 million at June 30, 2014, March 31, 2014, December 31, 2013, and June 30, 2013, respectively.
   
(Dollars in thousands)Six Months Ended
 June 30,
2014
June 30,
2013
Efficiency Ratio    
Noninterest expense (GAAP)  $ 32,183   $ 27,146 
Net interest taxable equivalent income  49,321   35,659 
Noninterest taxable equivalent income (loss)  13,840   11,866 
Add: gain on sale of securities and impairment  4   105 
Adjusted operating revenue  $ 63,157   $ 47,420 
Efficiency ratio 50.96 % 57.25 %
Tangible Common Equity/Tangible Assets    
Total equity  $ 283,696   $ 177,885 
Less: preferred stock  —  4,950 
Intangible assets(1)  597   —
Tangible common equity  $ 283,099   $ 172,935 
Total assets  $ 2,741,524   $ 2,171,144 
Less: intangible assets(1)  597   —
Tangible assets  $ 2,740,927   $ 2,171,144 
Tangible common equity/tangible assets 10.33 % 7.97 %
Net Operating Income    
GAAP income before taxes  $ 22,597   $ 12,394 
Add: gain on sale of securities and impairment  4   105 
Add: tax equivalent adjustment  2,266   1,495 
Non-GAAP net operating income before taxes  $ 24,859   $ 13,784 
Net Interest Income    
GAAP net interest income  $ 47,383   $ 34,420 
Add: tax equivalent adjustment  1,938   1,239 
Non-GAAP net interest income (fully tax equivalent basis)  $ 49,321   $ 35,659 
(1)  Does not include a loan servicing asset of $1.3 million and $1.1 million at June 30, 2014 and June 30, 2013, respectively.
CONTACT: For More Information Contact:

         Patrick Oakes, Executive Vice President

         and Chief Financial Officer

         919.627.6366, poakes@square1bank.com