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Square 1 Financial Reports Second Quarter 2015 Results

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DURHAM, N.C., July 15, 2015 (GLOBE NEWSWIRE) -- Square 1 Financial, Inc. (Nasdaq: SQBK) today announced results for the quarter ended June 30, 2015.

Consolidated net income available to common shareholders for the second quarter of 2015 was $9.9 million, or $0.33 per diluted share, compared to $8.2 million, or $0.27 per diluted share, for the first quarter of 2015. Earnings per share excluding the impact of merger-related expenses was $0.36 per diluted share for the second quarter of 2015 compared to $0.27 per diluted share for the first quarter of 2015.

"The brand momentum of Square 1 Bank coupled with a very healthy venture environment put us in a good place to produce both quality earnings and strong balance sheet growth," said Doug Bowers, President and Chief Executive Officer of Square 1 Financial. "We remain focused on providing the best banking services to our clients in the innovation economy."

Second Quarter Highlights

Highlights of the second quarter of 2015 include:

  • Return on average common equity of 12.24% and return on average assets of 1.14%.
  • Average loans grew 35.2% while period-end loans increased 31.6% compared to the second quarter of 2014. Average loans grew 10.5% while period-end loans increased 2.5% compared to the first quarter of 2015.
  • Average on-balance sheet deposits grew 34.2% while period-end on-balance sheet deposits increased 45.7% compared to second quarter of 2014. Average on-balance sheet deposits grew 12.5% while period-end on-balance sheet deposits increased 18.4% compared to the first quarter of 2015.
  • Average client investment funds of $1.6 billion, up 112.3% from the second quarter of 2014 and up 10.6% compared to the first quarter of 2015.
  • Net loan charge-offs were $3.5 million, or 0.92%, of average loans (annualized) for the second quarter of 2015.
  • An Efficiency ratio of 49.33% excluding merger-related expenses of $0.8 million in the second quarter of 2015.
  • Tangible book value per share of $10.92 as of June 30, 2015.

See "Non-GAAP Financial Measures" at the end of this release for reconciliations of our non-GAAP measures.

Earnings Summary

The increase in net income available to common shareholders compared to the first quarter of 2015 was due primarily to a $1.7 million decrease in the provision for loan losses, a $2.3 million increase in net interest income, and a $1.4 million increase in noninterest income, partially offset by a $2.0 million increase in noninterest expense and a $1.6 million increase in income tax expense.

Consolidated net income available to common shareholders for the six months ended June 30, 2015 was $18.1 million, or $0.59 per diluted share, compared to $15.8 million, or $0.58 per diluted share, for the six months ended June 30, 2014. Earnings per share excluding the impact of merger-related expenses was $0.62 per diluted share for the six months ended June 30, 2015.

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 the "Non-GAAP Financial Measures" section for a reconciliation of these non-GAAP measures to their most comparable GAAP measures.

Net interest income for the second quarter of 2015 increased $2.3 million compared to the first quarter of 2015, primarily due to an increase in loan interest income of $2.1 million driven by a higher average balance of our loan portfolio, partially offset by lower loan yields. An increase in investment interest income of $0.1 million also contributed to higher net interest income. The increase in investment interest income was driven by the higher average balance of our investment securities portfolio, partially offset by lower yields. Average deposits grew $351.6 million, or 12.5%, supporting a 10.5% increase in the average balance of our loan portfolio and a 2.5% increase in the average balance of our investment securities portfolio.

For the second quarter of 2015, our net interest margin decreased to 3.83% from 3.96% for the first quarter of 2015. This decrease was largely due to the lower yields earned on our loan and investment securities portfolios along with higher cash and investment securities balances due to the strong growth in deposits. The lower yield earned on our loan portfolio was driven by slightly lower interest yield. The lower yield on our investment securities portfolio was largely driven by higher prepayments on SBA securities.

Provision for Loan Losses

The $1.7 million decrease in the provision for loan losses compared to the first quarter of 2015 was primarily due to the impact of slower loan growth. Net loan charge-offs were $3.5 million, or 0.92%, of average loans (annualized) for the second quarter of 2015 compared to net loan charge-offs of $3.6 million, or 1.07%, of average loans (annualized) for the first quarter of 2015.

Noninterest Income

Noninterest income of $7.6 million for the second quarter of 2015 increased $1.4 million compared to the first quarter of 2015 largely due to a $1.2 million increase in net gain on securities and $0.3 million higher unrealized gains from our venture capital fund investments. The $4.8 million of core banking noninterest income within noninterest income increased $0.3 million compared to the first quarter of 2015. Core banking noninterest income represents recurring income from traditional banking services provided to our customers (see "Non-GAAP Financial Measures" section). Within core banking noninterest income $0.2 million higher letter of credit fees, $0.1 million higher service charges and fees income and $0.1 million higher credit card and merchant income was partially offset by $0.1 million lower foreign exchange fee income compared to the first quarter of 2015.

Warrant income was $0.2 million in the second quarter of 2015, compared to warrant income of $0.5 million in the first quarter of 2015. At June 30, 2015, the valuation of our remaining warrants was $5.1 million held in 484 companies, which included $0.6 million held in nine publicly traded companies.

Noninterest Expense

Noninterest expense for the second quarter of 2015 increased $2.0 million compared to the first quarter of 2015. The increase primarily resulted from $0.3 million higher personnel expenses, $0.3 million higher professional fees, $0.6 million higher merger-related expenses and a $0.2 million increase in the provision for unfunded credit commitments. Higher personnel expenses were driven by an increase of 10 full-time equivalent employees from the first quarter of 2015 and higher incentive compensation expense. The second quarter of 2015 included $0.8 million in merger-related expenses compared to $0.2 million of merger-related expenses in the first quarter of 2015.

Income Tax Provision

Our projected annual effective tax rate for 2015 increased to 31.9% from an annual effective tax rate of 31.4% for 2014 due to an increase in the portion of taxable income to nontaxable income.

Loans and Credit Quality

Average loans grew $144.1 million while period-end loans increased $37.5 million compared to the first quarter of 2015. Period-end loans to venture firms increased $26.2 million, or 13.8%, while total loans to venture-backed companies, including life sciences, technology and asset-based loans, were flat at June 30, 2015 compared to March 31, 2015 as increases in loans in the life sciences and technology segments were offset by an increase in payoffs in asset-based loans. Average loans grew $393.6 million while period-end loans increased $364.4 million compared to the second quarter of 2014. Period-end loans to venture firms increased $94.7 million, or 77.9%, while total loans to venture-backed companies, including life sciences, technology and asset-based loans were up $234.9 million, or 24.6%, at June 30, 2015 compared to June 30, 2014.

At June 30, 2015, nonperforming loans totaled $17.9 million, or 1.18%, of total loans compared to $18.3 million, or 1.24%, of total loans at March 31, 2015 and $12.3 million, or 1.07%, of total loans at June 30, 2014. The allowance for loan losses to nonperforming loans at June 30, 2015, was 139.58%, compared to 135.34% at March 31, 2015 and 175.54% at June 30, 2014.

Investments

Average investments grew 2.5% compared to the first quarter of 2015 as a result of continued strong deposit growth. Our available-for-sale securities portfolio totaled $1.5 billion at June 30, 2015, which increased $248.4 million, or 19.2%, compared to March 31, 2015. Our held to maturity securities portfolio increased $27.1 million, or 7.4%, to an amortized cost of $392.9 million at June 30, 2015, compared to $365.8 million at March 31, 2015. The increase in investments in the second quarter was primarily due to the purchase of $130.0 million of Treasury securities and $124.0 million of Agency MBS. The duration of the investment portfolio was estimated to be 2.7 years at the end of the second quarter of 2015.

Deposits and Client Investment Funds

Our June 30, 2015 period-end deposits increased $554.3 million, or 18.4%, to $3.6 billion from March 31, 2015 and increased $1.1 billion, or 45.7%, from June 30, 2014. These increases were 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 $421.5 million, or 21.6%, while our interest-bearing deposits increased $132.8 million, or 12.5%, from March 31, 2015.

Average on-balance sheet deposits increased $351.6 million compared to the first quarter of 2015 and increased $806.4 million compared to the second quarter of 2014. The average cost of deposits was 0.02%, 0.03% and 0.02% for the second quarter of 2015, the first quarter of 2015 and second quarter of 2014, respectively, which yielded interest expense on deposits of $0.2 million, $0.2 million and $0.1 million for the same periods, respectively.

Our period-end client investment funds increased to $1.7 billion at June 30, 2015 from $1.5 billion at March 31, 2015, an increase of 17.2%, and increased 119.6% from $780.0 million at June 30, 2014, as our clients took advantage of alternative cash investment vehicles offered by Square 1 Asset Management, our registered investment adviser subsidiary. Average off-balance sheet client investment funds grew $152.4 million compared to the first quarter of 2015 and grew $842.2 million compared to the second quarter of 2014.

Additional Events

On March 2, 2015, PacWest Bancorp and Square 1 announced the signing of a definitive agreement and plan of merger under which PacWest Bancorp will acquire Square 1 in a transaction valued at approximately $849 million.

Subject to the satisfaction or waiver of the closing conditions contained in the merger agreement, including the approval of bank regulatory authorities and approval of the merger agreement by Square 1's stockholders, PacWest Bancorp and Square 1 expect that the merger will be completed during the fourth quarter of 2015. However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the merger being completed at a different time or not at all.

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 the 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; (xii) the ability to complete the proposed merger transaction, including obtaining regulatory approvals and approval by the stockholders of the Square 1, and business disruption caused by the proposed transaction and (xiii) other factors that are discussed in the section titled "Risk Factors," in our Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on March 20, 2015.

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.

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 thirteen 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 Six Months Ended
(In thousands, except per share data) June 30,
2015
March 31,
2015
June 30,
2014
June 30,
2015
June 30,
2014
Performance Ratios:          
Return on average assets 1.14% 1.04% 1.22% 1.09% 1.27%
Return on average common equity 12.24 10.66 11.74 11.47 13.63
Net interest margin(1) 3.83 3.96 4.03 3.89 4.07
Efficiency ratio(2) 49.33 48.92 51.29 49.13 50.96
           
Per Share Data:          
Net income per basic common share  $ 0.33   $ 0.28   $ 0.28   $ 0.61   $ 0.61 
Net income per diluted common share  0.33   0.27   0.27   0.59   0.58 
Book value per common share  10.93   10.71   9.91   10.93   9.91 
Tangible book value per common share(3)  10.92   10.70   9.88   10.92   9.88 
           
Capital Ratios (consolidated):          
Tier 1 leverage capital(4) 9.08% 9.61% 10.42% 9.08% 10.42%
Common equity Tier 1 capital(4) 12.11 11.73 14.70 12.11 14.70
Tier 1 risk-based capital(4) 12.11 11.73 14.70 12.11 14.70
Total risk-based capital(4) 13.14 12.73 15.88 13.14 15.88
Total shareholders' equity to assets 8.35 9.55 10.35 8.35 10.35
Tangible common equity to tangible assets(5) 8.34 9.54 10.33 8.34 10.33
           
Asset Quality Ratios:          
Allowance for loan losses as a percent of total loans 1.65% 1.67% 1.87% 1.65% 1.87%
Allowance for loan losses as a percent of nonperforming loans 139.58 135.34 175.54 139.58 175.54
Net charge-offs to average outstanding loans (annualized) 0.92 1.07 0.25 0.99 0.54
Nonperforming loans as a percent of total loans 1.18 1.24 1.07 1.18 1.07
Nonperforming assets as a percent of total assets 0.46 0.55 0.45 0.46 0.45
           
Other Ratios and Statistics:          
Average loans, net of unearned income, to average deposits 47.8% 48.7% 47.5% 48.2% 48.5%
Period-end full-time equivalent employees  280   270   245   280   245 
Average outstanding shares—basic  29,825   29,270   28,333   29,549   26,042 
Average outstanding shares—diluted  30,495   30,281   29,664   30,391   27,753 
Period-end outstanding shares—basic  29,881   29,758   28,640   29,881   28,640 
Period-end outstanding shares—diluted  30,530   30,533   29,841   30,530   29,841 
           
Financial Condition Data:          
Average total assets  $ 3,503,389   $ 3,190,370   $ 2,644,511   $ 3,347,745   $ 2,510,087 
Average cash and cash equivalents  211,733   85,076   223,988   148,754   171,998 
Average investment securities - available-for-sale  1,337,891   1,309,450   1,054,438   1,323,749   1,011,040 
Average investment securities - held-to-maturity  373,227   359,341   194,781   366,322   179,895 
Average loans, net of unearned income  1,513,504   1,369,428   1,119,867   1,441,864   1,094,482 
Average on-balance sheet deposits  3,165,466   2,813,912   2,359,042   2,990,659   2,255,351 
Average total client investment funds  1,592,218   1,439,848   749,976   1,516,454   690,340 
Average total shareholders' equity  325,094   310,104   275,014   317,640   236,804 
(1) Represents net interest income as a percent of average interest-earning assets.
(2) Represents noninterest expense, excluding merger-related expenses 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 book value per common share is a non-GAAP financial measure. Tangible common equity is computed as total shareholders' equity less intangible assets. Tangible book value per common share is calculated as tangible common equity divided by common shares outstanding. We believe that the most directly comparable GAAP financial measure is book value per common share. See "Non-GAAP Financial Measures."
(4) Tier 1 leverage, Common equity Tier 1, Tier 1 risk-based and Total risk-based capital ratios for June 30, 2015 and Common equity Tier 1 capital ratios for June 30, 2014 are estimates.
(5) Tangible common equity to tangible assets is a non-GAAP financial measure. Tangible common equity is computed as total shareholders' equity 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."
           
       
SQUARE 1 FINANCIAL, INC.
Interim Consolidated Balance Sheets
       
(in thousands, except share and per share data) June 30,
2015
March 31,
2015
June 30,
2014
Assets  (Unaudited)  (Unaudited)  (Unaudited)
Cash and due from banks  $ 39,579   $ 32,236   $ 49,953 
Interest-bearing deposits in other banks  347,768   93,994   179,091 
Federal funds sold and securities purchased under resale agreements  —  —  594 
Total cash and cash equivalents  387,347   126,230   229,638 
Investment in time deposits  1,002   1,001   1,250 
Investment securities—available for sale, at fair value  1,541,342   1,292,931   1,093,684 
Investment securities—held to maturity, at amortized cost  392,872   365,771   210,236 
Loans, net of unearned income of $8.7 million, $8.6 million and $5.5 million  1,516,032   1,478,582   1,151,616 
Less allowance for loan losses  (25,037)  (24,739)  (21,556)
Net loans  1,490,995   1,453,843   1,130,060 
Premises and equipment, net  4,015   3,993   3,502 
Deferred income tax assets, net  10,666   7,786   11,165 
Bank owned life insurance  51,582   51,157   34,948 
Intangible assets  1,745   1,737   1,922 
Other receivables  3,500   11,408   4,648 
Warrant valuation  5,125   4,649   4,747 
Prepaid expenses  1,779   1,695   1,804 
Accrued interest receivable and other assets  20,533   14,823   13,920 
Total assets  $ 3,912,503   $ 3,337,024   $ 2,741,524 
Liabilities and Shareholders' Equity      
Deposits:      
Demand, noninterest-bearing  $ 2,372,673   $ 1,951,176   $ 1,564,856 
Demand, interest-bearing  100,496   91,635   107,300 
Money market deposit accounts  1,081,211   952,186   742,103 
Time deposits  9,384   14,466   30,906 
Total deposits  3,563,764   3,009,463   2,445,165 
Accrued interest payable and other liabilities  22,093   8,790   12,663 
Total liabilities  3,585,857   3,018,253   2,457,828 
Commitments and contingencies      
Shareholders' equity:      
Common stock, $.01 par value; 70,000,000 and 45,000,000 shares authorized, respectively:      
Class A common stock, $.01 par value; 26,485,682 shares, 26,362,618 shares, and 25,245,016 shares issued and outstanding, respectively  265   263   252 
Class B convertible common stock, $.01 par value; 3,395,110 shares issued and outstanding  34   34   34 
Additional paid in capital  256,382   254,630   250,973 
Accumulated other comprehensive income  8,479   12,277   7,308 
Retained earnings  61,486   51,567   25,129 
Total shareholders' equity  326,646   318,771   283,696 
Total liabilities and shareholders' equity  $ 3,912,503   $ 3,337,024   $ 2,741,524 
       
           
SQUARE 1 FINANCIAL, INC.
Interim Consolidated Statements of Operations (Unaudited)
           
           
(in thousands, except per share data) Three Months Ended Six Months Ended
  June 30,
2015
March 31,
2015
June 30,
2014
June 30,
2015
June 30,
2014
Interest income:          
Loans including fees on loans  $ 22,207   $ 20,134   $ 17,720   $ 42,341   $ 34,123 
Investment securities:          
Taxable  6,795   6,898   5,382   13,693   9,943 
Non-taxable  2,463   2,329   1,836   4,792   3,608 
Federal funds and other short-term investments  128   40   137   168   201 
Total interest income  31,593   29,401   25,075   60,994   47,875 
Interest expense:          
Deposits  193   211   143   404   273 
Borrowings and repurchase agreements  1   45   —  46   4 
Junior subordinated debt  —  —  56   —  215 
Total interest expense  194   256   199   450   492 
Net interest income  31,399   29,145   24,876   60,544   47,383 
Provision for loan losses  3,758   5,447   3,150   9,205   6,114 
Net interest income after provision for loan losses  27,641   23,698   21,726   51,339   41,269 
Noninterest income:          
Service charges and fees  1,325   1,258   1,126   2,583   2,194 
Foreign exchange fees  1,620   1,718   1,363   3,338   3,004 
Credit card and merchant income  1,100   1,021   765   2,121   1,401 
Investment impairment  —  —  —  —  (43)
Net gain (loss) on securities  1,025   (204)  38   821   47 
Letter of credit fees  455   242   297   697   812 
Warrant income  239   462   21   701   2,216 
Gain on sale of loans  592   806   249   1,398   502 
Bank owned life insurance  424   435   317   859   607 
Other  852   474   2,196   1,326   2,771 
Total noninterest income  7,632   6,212   6,372   13,844   13,511 
Noninterest expense:          
Personnel  12,541   12,227   10,725   24,768   21,359 
Occupancy  880   823   773   1,703   1,513 
Data processing  1,049   937   918   1,986   1,740 
Furniture and equipment  793   765   660   1,558   1,362 
Advertising and promotions  383   241   342   624   617 
Professional fees  1,089   812   786   1,901   1,387 
Telecommunications  286   291   285   577   545 
Travel  285   197   292   482   458 
FDIC assessment  497   419   347   916   752 
Merger-related expenses  792   212   —  1,004   —
Other  1,712   1,413   1,472   3,125   2,450 
Total noninterest expense  20,307   18,337   16,600   38,644   32,183 
Income before income tax expense  14,966   11,573   11,498   26,539   22,597 
Income tax expense  5,047   3,420   3,447   8,467   6,698 
Net income  9,919   8,153   8,051   18,072   15,899 
Dividends on preferred stock  —  —  1   —  63 
Net income available to common shareholders  $ 9,919   $ 8,153   $ 8,050   $ 18,072   $ 15,836 
Earnings per share—basic  $ 0.33   $ 0.28   $ 0.28   $ 0.61   $ 0.61 
Earnings per share—diluted  $ 0.33   $ 0.27   $ 0.27   $ 0.59   $ 0.58 
           
SQUARE 1 FINANCIAL, INC.
Interim Net Interest Margin Analysis (Unaudited)
The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. 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. Yields are also presented on a tax equivalent basis.
  Three Months Ended
  June 30, 2015 March 31, 2015 June 30, 2014
 
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:                  
Interest-bearing deposits in other banks  $ 204,375   $ 127  0.25%  $ 75,022   $ 39  0.21%  $ 204,385   $ 134  0.27%
Federal funds sold and other short-term investments  1,001   1  0.35  1,248   1  0.29  1,648   3  0.75
Loans, net of unearned income  1,513,504   22,207  5.89  1,369,428   20,134  5.96  1,119,867   17,720  6.35
Nontaxable securities  303,692   3,789  5.00  287,216   3,583  5.06  233,137   2,823  4.86
Taxable securities  1,407,426   6,795  1.94  1,381,575   6,898  2.02  1,016,082   5,382  2.12
Total interest-earning assets  3,429,998   32,919  3.85  3,114,489   30,655  3.99  2,575,119   26,062  4.06
Less: Allowance for loan losses  (24,919)      (23,521)      (20,086)    
Noninterest-earning assets  98,310       99,402       89,478     
Total assets  $ 3,503,389       $ 3,190,370       $ 2,644,511     
Interest-bearing liabilities:                  
Demand deposits  $ 96,817   18  0.08  $ 92,397   27  0.12  $ 117,542   21  0.07
Money market  933,385   172  0.07  841,030   179  0.09  692,727   106  0.06
Time deposits  11,733   3  0.09  16,666   5  0.11  30,133   16  0.22
Total interest-bearing deposits  1,041,935   193  0.07  950,093   211  0.09  840,402   143  0.07
FHLB advances  440   1  0.38  49,111   44  0.37  —  —  —
Repurchase agreements  —  —  —  333   — 0.30  —  —  —
Junior subordinated debt  —  —  —  —  —  —  2,236   56  10.09
Total interest-bearing liabilities  1,042,375   194  0.07  999,537   255  0.10  842,638   199  0.09
Noninterest-bearing deposits  2,123,531       1,863,819       1,518,640     
Other noninterest-bearing liabilities  12,389       16,910       8,219     
Total liabilities  3,178,295       2,880,266       2,369,497     
Total shareholders' equity  325,094       310,104       275,014     
Total liabilities and shareholders' equity  $ 3,503,389       $ 3,190,370       $ 2,644,511     
Net interest income    $ 32,725       $ 30,400       $ 25,863   
Interest rate spread     3.78%     3.89%     3.97%
Net interest margin     3.83%     3.96%     4.03%
Ratio of average interest-earning assets to average interest-bearing liabilities     329.06%     311.59%     305.60%
                   
             
SQUARE 1 FINANCIAL, INC.
Interim Net Interest Margin Analysis (Unaudited)
             
  Six Months Ended June 30,
  2015 2014
 
Average
Balance

Interest
and
Dividends


Yield/
Cost


Average
Balance

Interest
and
Dividends


Yield/
Cost

  (Dollars in thousands)
Interest-earning assets:            
Interest-bearing deposits in other banks  $ 140,056   $ 166  0.24%  $ 155,595   $ 196  0.25%
Federal funds sold and other short-term investments  1,124   2  0.32  1,538   5  0.63
Loans, net of unearned income  1,441,864   42,341  5.92  1,094,482   34,123  6.29
Nontaxable securities  295,499   7,372  5.03  230,629   5,546  4.85
Taxable securities  1,394,572   13,693  1.98  960,306   9,943  2.09
Total interest-earning assets  3,273,115   63,574  3.92  2,442,550   49,813  4.11
Less: Allowance for loan losses  (24,224)      (19,780)    
Noninterest-earning assets  98,854       87,317     
Total assets  $ 3,347,745       $ 2,510,087     
Interest-bearing liabilities:            
Demand deposits  $ 94,620   45  0.10  $ 117,097   44  0.08
Money market  887,462   352  0.08  654,990   199  0.06
Time deposits  14,186   7  0.10  28,138   30  0.22
Total interest-bearing deposits  996,268   404  0.08  800,225   273  0.07
FHLB advances  24,641   46  0.37  995   2  0.41
Repurchase agreements  —  —  —  3,029   1  0.10
Junior subordinated debt  166   — 0.30  4,194   216  10.36
Total interest-bearing liabilities  1,021,075   450  0.09  808,443   492  0.12
Noninterest-bearing deposits  1,994,391       1,455,126     
Other noninterest-bearing liabilities  14,636       9,714     
Total liabilities  3,030,102       2,273,283     
Total shareholders' equity  317,643       236,804     
Total liabilities and shareholders' equity  $ 3,347,745       $ 2,510,087     
Net interest income    $ 63,124       $ 49,321   
Interest rate spread     3.83%     3.99%
Net interest margin     3.89%     4.07%
Ratio of average interest-earning assets to average interest-bearing liabilities     320.56%     302.13%
             
             
SQUARE 1 FINANCIAL, INC.
Loans and Unfunded Commitments
             
  June 30, 2015 March 31, 2015 June 30, 2014
  Amount Percent Amount Percent Amount Percent
  (Dollars in thousands)
Commercial loans:            
Technology  $ 739,016  48.47%  $ 732,840  49.28%  $ 578,383  49.98%
Life sciences  307,240  20.15  291,700  19.61  232,042  20.05
Asset-based loans  143,204  9.39  163,004  10.96  144,133  12.45
Venture capital/private equity  216,268  14.18  190,037  12.78  121,601  10.51
SBA and USDA  36,926  2.42  35,588  2.39  35,357  3.06
Other  14,062  0.93  11,149  0.75  2,510  0.22
Total commercial loans  1,456,716  95.53  1,424,318  95.77  1,114,026  96.27
Real estate loans:            
SBA and USDA  37,995  2.49  36,896  2.48  26,997  2.33
Total real estate loans  37,995  2.49  36,896  2.48  26,997  2.33
Construction:            
SBA and USDA  6,752  0.44  5,453  0.37  1,101  0.10
Total construction loans  6,752  0.44  5,453  0.37  1,101  0.10
Credit cards  23,379  1.53  20,465  1.38  14,999  1.30
Total loans  1,524,842  100.00%  1,487,132  100.00%  1,157,123  100.00%
Less unearned income(1)  (8,810)    (8,550)    (5,507)  
Total loans, net of unearned income  $ 1,516,032     $ 1,478,582     $ 1,151,616   
             
Total unfunded loan commitments  $ 1,431,391     $ 1,297,505     $ 1,078,788   
(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.      
  June 30, 2015 March 31, 2015 June 30, 2014
Period-end: (Dollars in thousands)
Client investment assets under management  $ 1,222,834   $ 967,868   $ 245,646 
Sweep money market funds  458,683   453,505   277,848 
CDARS  31,507   40,382   256,485 
Total period-end client investment funds  $ 1,713,024   $ 1,461,755   $ 779,979 
       
           
SQUARE 1 FINANCIAL, INC.
Credit Quality
           
  Three Months Ended Six Months Ended
  June 30,
2015
March 31,
2015
June 30,
2014
June 30,
2015
June 30,
2014
  (Dollars in thousands)
Allowance at beginning of period  $ 24,739   $ 22,906  $ 19,094  $ 22,906  $ 18,379
Provision for loan losses  3,758   5,447  3,150  9,205  6,114
Charge-offs:          
Commercial loans:          
Technology  1,630  2,061  332  3,691  2,166
Life sciences  600  1,361  409  1,961  409
Asset-based loans  938  —  —  938  —
SBA and USDA  26  38  —  64  —
Other  246  —  —  246  518
Total commercial loans  3,440  3,460  741  6,900  3,093 
Real estate loans:          
SBA and USDA  27  540  —  567  —
Total real estate loans  27  540  —  567  —
Total charge offs  3,467  4,000  741  7,467  3,093
Recoveries:          
Commercial loans:          
Technology  (6)  (386)  (53)  (392)  (156)
SBA and USDA  (1)  —  —  (1)  —
Total commercial loans  (7)  (386)  (53)  (393)  (156)
Total recoveries  (7)  (386)  (53)  (393)  (156)
Net charge offs  3,460  3,614  688  $ 7,074  $ 2,937
Allowance at end of period  $ 25,037  $ 24,739  $ 21,556  $ 25,037  $ 21,556
           
Total nonaccrual loans  $ 17,937   $ 18,280   $ 12,280   $ 17,937   $ 12,280 
           
Credit Quality Ratios:          
Allowance for loan losses as a percent of total loans 1.65% 1.67% 1.87% 1.65% 1.87%
Allowance for loan losses as a percent of nonperforming loans 139.58 135.34 175.54 139.58 175.54
Net charge-offs to average outstanding loans (annualized) 0.92 1.07 0.25 0.99 0.54
Nonperforming loans as a percent of total loans 1.18 1.24 1.07 1.18 1.07
Nonperforming assets as a percent of total assets 0.46 0.55 0.45 0.46 0.45
           
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," "tangible book value per common share," "net operating income," "net interest income (fully tax equivalent basis)," 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.
Efficiency ratio represents noninterest expense, excluding merger-related expenses divided by the sum of net interest income and other income, excluding gains or losses on the impairment and sale of securities. This measure is used by management to evaluate our operational efficiency.
Tangible common equity to tangible assets ratio is used by management to evaluate the adequacy of our capital levels. Tangible common equity is computed as total shareholders' equity less intangible assets. Tangible assets are calculated as total assets less intangible assets other than loan servicing intangible assets. We believe that the most directly comparable GAAP financial measure is total shareholders' equity to assets.
Tangible common equity is computed as total shareholders' equity less intangible assets. Tangible book value per common share is calculated as tangible common equity divided by common shares outstanding. We believe that the most directly comparable GAAP financial measure is book value per common share.
Non-GAAP net operating income represents net operating income before income tax expense on a fully tax equivalent basis excluding the impact of gains and losses on the sale of securities and impairments. We believe that the most directly comparable GAAP financial measure is income before income tax expense.
Our discussions of 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. We believe that the most directly comparable GAAP financial measure is net interest income.
Core banking noninterest income represents recurring income from traditional banking services provided to our customers and excludes line items where results are typically subject to market or other conditions beyond our control. We believe that the most directly comparable GAAP financial measure is noninterest income.
Non-GAAP earnings per diluted share excluding merger-related expenses represents earnings per diluted share on a GAAP basis excluding the impact of recorded charges for merger expenses related to the PacWest Bancorp and Square 1 merger. Merger expenses include merger transaction and integration costs. Management does not consider these expenses to be representative of our fundamental earnings as we would not otherwise incur these expenses as part of our operations in the periods presented. We believe that the most directly comparable GAAP financial measure is earnings per share - diluted.
The information provided below reconciles each non-GAAP measure to its most comparable GAAP measure.
       
(Dollars in thousands) Three Months Ended
  June 30,
2015
March 31,
2015
June 30,
2014
Efficiency Ratio      
Noninterest expense (GAAP)  $ 20,307  $ 18,337  $ 16,600
Less: merger-related expenses  792  212  —
Adjusted noninterest expense  $ 19,515  $ 18,125  $ 16,600
Net interest taxable equivalent income  32,725  30,400  25,863
Noninterest taxable equivalent income  7,861  6,446  6,543
Less: gain (loss) on sale of securities and impairment  1,025  (204)  38
Adjusted operating revenue  $ 39,561  $ 37,050  $ 32,368
Efficiency ratio 49.33% 48.92% 51.29%
Tangible Common Equity/Tangible Assets      
Total equity  $ 326,646  $ 318,771  $ 283,696
Less: Intangible assets(1)  295  344  597
Tangible common equity  $ 326,351  $ 318,427  $ 283,099
Total assets  $ 3,912,503  $ 3,337,024  $ 2,741,524
Less: intangible assets(1)  295  344  597
Tangible assets  $ 3,912,208  $ 3,336,680  $ 2,740,927
Tangible common equity/tangible assets 8.34% 9.54% 10.33%
Net Operating Income      
GAAP income before taxes  $ 14,966  $ 11,573  $ 11,498
Add: gain (loss) on sale of securities and impairment  1,025  (204)  38
Add: tax equivalent adjustment  1,555  1,488  1,157
Non-GAAP net operating income before taxes  $ 15,496  $ 13,265  $ 12,617
Net Interest Income      
GAAP net interest income  $ 31,399  $ 29,145  $ 24,876
Add: tax equivalent adjustment  1,326  1,255  987
Non-GAAP net interest income (fully tax equivalent basis)  $ 32,725  $ 30,400  $ 25,863
Core Banking Noninterest Income      
GAAP noninterest income  $ 7,632  $ 6,212  $ 6,372
Less: net gain (loss) on securities and impairment  1,025  (204)  38
Warrant income  239  462  21
Gain on sale of loans  592  806  249
Bank owned life insurance  424  435  317
Other  565  260  2,035
Non-GAAP core banking noninterest income  $ 4,787  $ 4,453  $ 3,712
Earnings Per Diluted Share Excluding Merger-related Expenses      
GAAP earnings per share - diluted  $ 0.33  $ 0.27  $ 0.27
Add: merger related expenses  0.03  —  —
Non-GAAP earnings per diluted share excluding merger costs  $ 0.36  $ 0.27  $ 0.27
(1)  Does not include a loan servicing asset of $1.4 million, $1.4 million and $1.3 million at June 30, 2015, March 31, 2015, and June 30, 2014, respectively.
       
(Dollars in thousands) Six Months Ended
  June 30,
2015
June 30,
2014
Efficiency Ratio    
Noninterest expense (GAAP)  $ 38,644  $ 32,183
Less: merger-related expenses  1,004  —
Adjusted noninterest expense  $ 37,640  $ 32,183
Net interest taxable equivalent income  63,124  49,321
Noninterest taxable equivalent income  14,307  13,840
Add: gain on sale of securities and impairment  821  4
Adjusted operating revenue  $ 76,610  $ 63,157
Efficiency ratio 49.13% 50.96%
Tangible Common Equity/Tangible Assets    
Total equity  $ 326,646  $ 283,696
Less: Intangible assets(1)  295  597
Tangible common equity  $ 326,351  $ 283,099
Total assets  $ 3,912,503  $ 2,741,524
Less: intangible assets(1)  295  597
Tangible assets  $ 3,912,208  $ 2,740,927
Tangible common equity/tangible assets 8.34% 10.33%
Net Operating Income    
GAAP income before taxes  $ 26,539  $ 22,597
Add: gain on sale of securities and impairment  821  4
Add: tax equivalent adjustment  3,043  2,266
Non-GAAP net operating income before taxes  $ 28,761  $ 24,859
Net Interest Income    
GAAP net interest income  $ 60,544  $ 47,383
Add: tax equivalent adjustment  2,580  1,938
Non-GAAP net interest income (fully tax equivalent basis)  $ 63,124  $ 49,321
Core Banking Noninterest Income    
GAAP noninterest income  $ 13,844  $ 13,511
Less: net gain on securities and impairment  821  4
Warrant income  701 2,216
Gain on sale of loans  1,398  502
Bank owned life insurance  859  607
Other  826  2,432
Non-GAAP core banking noninterest income  $ 9,239  $ 7,750
Earnings Per Diluted Share Excluding Merger-related Expenses    
GAAP earnings per share - diluted  $ 0.59  $ 0.58
Add: merger related expenses  0.03  —
Non-GAAP earnings per diluted share excluding merger costs  $ 0.62  $ 0.58
(1) Does not include a loan servicing asset of $1.4 million and $1.3 million at June 30, 2015 and June 30, 2014, respectively.
CONTACT: For More Information Contact: Patrick Oakes, Executive Vice President and Chief Financial Officer 919.627.6366, poakes@square1bank.com

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