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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from______ to ______

 Commission File Number: 001-36372

SQUARE 1 FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware				20-1872698
(State or other jurisdiction of incorporation or organization)				(IRS Employer Identification Number)
406 Blackwell Street, Suite 240 Durham, North Carolina				27701
(Address of principal executive offices)				(Zip Code)
(866) 355-0468
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (Do not check if a smaller reporting company)		Smaller reporting company		¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No  x

At October 31, 2014, 28,708,925 shares of the registrant’s common stock ($0.01 par value) were outstanding.

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TABLE OF CONTENTS

 

		Page
PART I.	FINANCIAL INFORMATION
ITEM 1.	INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	3
	Interim Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013	3
	Interim Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2014 and 2013	4
	Interim Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2014 and 2013	5
	Interim Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the nine months ended September 30, 2014 and 2013	6
	Interim Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2014 and 2013	7
	Notes to the Interim Consolidated Financial Statements (Unaudited)	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	41
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	75
ITEM 4.	CONTROLS AND PROCEDURES	75
PART II.	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	75
ITEM 1A.	RISK FACTORS	75
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	75
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	76
ITEM 5.	OTHER INFORMATION	76
ITEM 6.	EXHIBITS	77

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PART I - FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Square 1 Financial, Inc.

Interim Consolidated Balance Sheets

(in thousands, except share and per share data)	September 30, 2014				December 31, 2013
Assets	(Unaudited)
Cash and cash equivalents	$	185,606			$	105,730
Investment in time deposits	1,250				1,250
Investment securities—available for sale, at fair value	1,186,887				924,229
Investment securities—held to maturity, at amortized cost	278,121				154,255
Loans, net of unearned income of $7.3 million and $4.5 million	1,271,457				1,082,536
Less allowance for loan losses	(22,816		)		(18,379		)
Net loans	1,248,641				1,064,157
Premises and equipment, net	3,723				3,061
Deferred income tax assets, net	10,142				15,620
Bank owned life insurance	50,278				31,706
Intangible assets	1,770				2,065
Other receivables	3,619				2,592
Warrant valuation	4,089				5,105
Prepaid expenses	1,690				1,309
Accrued interest receivable and other assets	12,370				15,348
Total assets	$	2,988,186			$	2,326,427
Liabilities and Shareholders’ Equity
Deposits:
Demand, noninterest-bearing	$	1,712,674			$	1,380,024
Demand, interest-bearing	164,859				103,638
Money market deposit accounts	774,405				596,247
Time deposits	16,507				26,818
Total deposits	2,668,445				2,106,727
Borrowings and repurchase agreements	—				12,737
Junior subordinated debt	—				6,207
Accrued interest payable and other liabilities	25,539				11,607
Total liabilities	$	2,693,984			$	2,137,278
Commitments and contingencies (Notes 11 and 16)
Shareholders’ equity:
Convertible preferred stock, $.01 par value; 10,000,000 shares authorized, 0 shares and 5,000 shares issued and outstanding, respectively	—				—
Common stock, $.01 par value; 70,000,000 and 45,000,000 shares authorized, 28,700,825 shares and 23,611,746 shares issued and outstanding, respectively	287				236
Additional paid in capital	251,841				183,716
Accumulated other comprehensive income (loss)	8,193				(4,096		)
Retained earnings	33,881				9,293
Total shareholders’ equity	294,202				189,149
Total liabilities and shareholders’ equity	$	2,988,186			$	2,326,427

The accompanying notes are an integral part of these consolidated financial statements.

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Square 1 Financial, Inc.

Interim Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)		Three Months Ended   September 30,								Nine Months Ended   September 30,
		2014				2013				2014				2013
Interest income:
Loans including fees on loans		$	19,326			$	14,949			$	53,448			$	41,575
Investment securities		7,528				4,993				21,079				13,266
Federal funds and other short-term investments		104				78				305				233
Total interest income		26,958				20,020				74,832				55,074
Interest expense:
Deposits		150				182				423				476
Borrowings and repurchase agreements		—				6				4				30
Junior subordinated debt		—				158				215				475
Total interest expense		150				346				642				981
Net interest income		26,808				19,674				74,190				54,093
Provision for loan losses		2,500				2,850				8,614				9,340
Net interest income after provision for loan losses		24,308				16,824				65,576				44,753
Noninterest income:
Service charges and fees		1,150				1,069				3,345				3,020
Foreign exchange fees		1,792				1,270				4,795				3,635
Credit card and merchant income		914				605				2,314				1,787
Investment impairment		—				(782		)		(43		)		(1,525		)
Net (loss) gain on securities		(235		)		847				(188		)		1,696
Letter of credit fees		293				271				1,104				785
Warrant income		721				899				2,937				3,263
Gain on sale of loans		248				444				750				1,665
Bank owned life insurance		330				298				936				771
Other		319				1,808				3,094				3,243
Total noninterest income		5,532				6,729				19,044				18,340
Noninterest expense:
Personnel		10,790				8,639				32,148				26,128
Occupancy		713				691				2,227				2,082
Data processing		1,090				897				2,830				2,229
Furniture and equipment		769				589				2,131				1,850
Advertising and promotions		223				267				840				891
Professional fees		976				876				2,363				2,280
Telecommunications		246				283				791				866
Travel		259				211				717				762
FDIC assessment		393				349				1,145				949
Other		1,376				857				3,826				2,768
Total noninterest expense		16,835				13,659				49,018				40,805
Income before income tax expense		13,005				9,894				35,602				22,288
Income tax expense		4,253				2,926				10,951				6,845
Net income		8,752				6,968				24,651				15,443
Dividends on preferred stock		—				62				63				188
Net income available to common shareholders		$	8,752			$	6,906			$	24,588			$	15,255
Earnings per share—basic		$	0.31			$	0.29			$	0.91			$	0.65
Earnings per share—diluted		$	0.29			$	0.29			$	0.87			$	0.64

The accompanying notes are an integral part of these consolidated financial statements.

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Square 1 Financial, Inc.

Interim Consolidated Statements of Comprehensive Income (Unaudited)

 

(in thousands)		Three Months Ended   September 30,								Nine Months Ended   September 30,
		2014				2013				2014				2013
Net income		$	8,752			$	6,968			$	24,651			$	15,443
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period		740				(1,891		)		12,186				(9,312		)
Less: reclassification adjustment for losses (gains) included in net income		145				(887		)		103				(1,332		)
Other comprehensive income (loss)		885				(2,778		)		12,289				(10,644		)
Comprehensive income		9,637				4,190				36,940				4,799
Dividends on preferred stock		—				62				63				188
Comprehensive income available to common shareholders		$	9,637			$	4,128			$	36,877			$	4,611

The accompanying notes are an integral part of these consolidated financial statements.

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Square 1 Financial, Inc.

Interim Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

 

(dollars in thousands)	Preferred Stock							Common Stock							Additional Paid in Capital				Accumulated Other Comprehensive Income (Loss)				Retained (Deficit) Earnings				Total
	Shares			Amount				Shares			Amount
Balance at December 31, 2012	5,000			$	—			23,491,697			$	235			$	182,135			$	7,195			$	(12,839	)		$	176,726
Issuance of common stock, net issuance costs of $1 thousand	—			—				9,566			—				29				—				—				29
Stock-based compensation	—			—				—			—				1,047				—				—				1,047
Dividends on preferred stock	—			—				—			—				—				—				(188		)		(188		)
Net income	—			—				—			—				—				—				15,443				15,443
Unrealized loss on securities net of tax of $6.3 million	—			—				—			—				—				(10,644		)		—				(10,644		)
Balance at September 30, 2013	5,000			$	—			23,501,263			$	235			$	183,211			$	(3,449	)		$	2,416			$	182,413
Balance at December 31, 2013	5,000			$	—			23,611,746			$	236			$	183,716			$	(4,096	)		$	9,293			$	189,149
Issuance of common stock, net issuance costs of $2.3 million	—			—				3,847,509			39				60,008				—				—				60,047
Stock-based compensation	—			—				—			—				2,098				—				—				2,098
Conversion of preferred stock	(5,000	)		—				500,070			5				(4		)		—				—				1
Conversion of trust preferred securities	—			—				741,500			7				6,023				—				—				6,030
Dividends on preferred stock	—			—				—			—				—				—				(63		)		(63		)
Net income	—			—				—			—				—				—				24,651				24,651
Unrealized gain on securities net of tax of $7.5 million	—			—				—			—				—				12,289				—				12,289
Balance at September 30, 2014	—			$	—			28,700,825			$	287			$	251,841			$	8,193			$	33,881			$	294,202

The accompanying notes are an integral part of these consolidated financial statements.

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Square 1 Financial, Inc.

Interim Consolidated Statements of Cash Flows (Unaudited)

(in thousands)	Nine Months Ended   September 30,
	2014				2013
Net income	$	24,651			$	15,443
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	720				845
Amortization on investment securities, net	13,366				12,190
Provision for loan losses	8,614				9,340
Stock-based compensation	2,390				1,059
Loss (gain) on sale of securities available for sale	188				(1,696		)
Investment impairment	43				1,525
Deferred income tax provision	(2,036		)		(1,566		)
Earnings on bank owned life insurance	(936		)		(771		)
Changes in assets and liabilities:
Accrued interest receivable and other assets	2,880				(4,169		)
Accrued interest payable and other liabilities	13,931				(1,183		)
Net cash provided by operating activities	63,811				31,017
Cash flows from investing activities:
Purchase of securities available for sale	(413,659		)		(351,909		)
Purchase of securities held to maturity	(90,635		)		(56,135		)
Proceeds from calls/maturities of securities available for sale	118,172				117,891
Proceeds from sales of securities available for sale	3,419				77,902
Proceeds from paydowns of securities held to maturity	2,387				2,047
Net increase in loans	(193,097		)		(160,848		)
Purchase of bank owned life insurance	(17,635		)		(10,000		)
Purchases of premises and equipment	(1,383		)		(369		)
Net cash used in investing activities	(592,431		)		(381,421		)
Cash flows from financing activities:
Net increase in deposits	561,718				345,061
Net (decrease) increase in repurchase agreements	(12,737		)		25,605
Decrease in FHLB borrowings	—				(15,000		)
(Decrease) increase in subordinated debt	(6,207		)		1
Preferred dividends paid	(63		)		(188		)
Proceeds from issuance of common stock, net of issuance costs	65,004				(1		)
Proceeds from issuance of shares under stock-based compensation plan	781				18
Net cash provided by financing activities	608,496				355,496
Net change in cash and cash equivalents	79,876				5,092
Cash and cash equivalents at beginning of year	105,730				48,971
Cash and cash equivalents at end of year	$	185,606			$	54,063
Supplemental statement of cash flow disclosures
Interest paid	$	642			$	981
Income taxes paid	$	13,470			$	7,815

The accompanying notes are an integral part of these consolidated financial statements.

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Notes to the Interim Consolidated Financial Statements (Unaudited)

1.	ORGANIZATION AND BASIS OF PRESENTATION

Organization and Nature of Operations

Square 1 Financial, Inc. (the “Company”) is a bank holding company incorporated under the laws of Delaware on October 6, 2004. The Company’s primary function is to serve as the holding company for its wholly-owned subsidiary, Square 1 Bank. Square 1 Bank (the “Bank”) was incorporated under the laws of North Carolina on July 11, 2005 and commenced banking operations on August 8, 2005. The Bank is not a member of the Federal Reserve System. The Bank provides a full range of commercial banking services primarily to companies that have received institutional investment, typically from venture capital and private equity sources. The Bank’s primary source of revenue is interest earned from loans to customers and from invested cash and securities and non-interest income derived from various fees. During 2007, the Company formed Square 1 Ventures, LLC (a Delaware limited liability company); a wholly-owned subsidiary established to sponsor a fund of funds. Square 1 Ventures, LLC is consolidated into the Company’s financial statements. In 2013, the Bank formed Square 1 Asset Management, a wholly owned subsidiary of the Bank and SEC-registered investment adviser, to provide an investment alternative for clients. On March 31, 2014, the Company closed on its initial public offering ("IPO").

The Bank operates one branch in Durham, NC and loan production offices in Menlo Park, San Francisco, San Diego, Los Angeles, Orange County and Campbell, CA; and Austin, New York, Denver, Boston, Seattle and the District of Columbia area. The Company’s corporate headquarters are located in Durham, NC.

In September 2008, Square 1 Financial Capital Trust I (the “Trust”), a Delaware trust, was formed by the Company, as Sponsor, in order to facilitate the issuance of convertible trust preferred securities. The Trust invested the total proceeds from the sales of the convertible trust preferred securities in convertible junior subordinated deferrable interest debentures issued by the Company. The assets of the trust were not assets of the Company and were not consolidated into the Company’s consolidated financial statements. The subordinated debentures issued by the Company to the Trust were included in borrowings, and the Company’s equity interests in the Trust were included in other assets at December 31, 2013. The Company notified all holders of trust preferred securities of its intent to redeem such securities as of June 30, 2014 and all outstanding trust preferred securities were converted by the holders into shares of Company common stock prior to that date (see Note 8).

In 2013, the Bank acquired the business operations and key employees of Sand Hill Finance LLC, a factoring company located in California, as part of the Bank's strategy to continue to grow its asset-based lending portfolio. Square 1 Bank acquired approximately $11.9 million of factoring loans from Sand Hill Finance LLC and certain other assets for a total purchase price of approximately $12.4 million, which included the repayment of $7.2 million in debt. Additionally, the Bank assumed obligations under the real estate lease for the company’s primary place of business and hired the company’s seven employees. The Bank has integrated the factoring product into its existing suite of asset-based lending products.

Basis of Presentation

These unaudited interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in the notes to the audited financial statements for the fiscal year ended December 31, 2013 included in the Company's Registration Statement on Form S-1 (File No. 333-193197), which was initially filed with the Securities and Exchange Commission ("SEC") on January 6, 2014, subsequently amended thereafter and declared effective by the SEC on March 26, 2014 (the "Registration Statement"). These unaudited interim consolidated financial statements have also been prepared in accordance with the instructions for Form 10-Q pursuant to the rules and regulations of the SEC, and as such certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. Because the accompanying interim financial statements do not include all of the information and footnotes required by GAAP for annual financial statements, they should be read in conjunction with the audited financial statements for the fiscal year ended December 31, 2013 and notes thereto included in the Registration Statement. Certain prior year amounts have been reclassified to conform to current year presentation.

The amounts included in these financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods. Unless otherwise noted, all adjustments are normal and recurring in nature. In preparing financial statements that conform to GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses and the disclosure of contingent assets and liabilities at the date of the financial

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statements. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of amounts expected for the entire year or future periods.

Principles of Consolidation

The consolidated financial statements include the financial statements of Square 1 Financial and its consolidated subsidiaries and other entities in which it has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities ("VIEs") and to assess whether it is the primary beneficiary of such entities. If the determination was made that the Company is the primary beneficiary, then that entity would be included in the consolidated financial statements. If an entity is not a VIE, the Company also evaluates arrangements in which there is a general partner or managing member to determine whether consolidation is appropriate.

Square 1 Venture 1, L.P.-The Company owns approximately a 2% partnership interest in Square 1 Venture 1, L.P., which was formed for the primary purpose of sponsoring a fund of funds. The Company has determined that Square 1 Venture 1, L.P. is not a VIE for all periods presented; accordingly, Square 1 Venture 1, L.P. is not consolidated with the Company. The Company accounts for the investment in Square 1 Venture 1, L.P. using the equity method of accounting. For the three and nine months ended September 30, 2014, gains of $0.1 million and $0.8 million, respectively, were recognized. For the three and nine months ended September 30, 2013, gains of $0.2 million were recognized. The fair value of the investment at September 30, 2014 and December 31, 2013, was $1.8 million and $1.0 million, respectively, and is included in other assets on the balance sheet.

On April 1, 2014, Square 1 Ventures, LLC transferred the contract for the management of Square 1 Venture 1, L.P. to Industry Ventures, a fund-of-funds manager in San Francisco, CA. In connection with this transfer, we recorded a gain of $0.5 million. We do not expect the impact of the sale of the management contract to have an ongoing material impact to our results of operations or financial condition.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of investment securities, recognition and measurement of income tax assets and liabilities and the valuation of equity warrant assets and foreclosed assets.

Cash and Cash Equivalents

Cash and cash equivalents include noninterest-earning and interest-earning deposits at other institutions, federal funds sold and other short term investments. Generally, federal funds are purchased and sold for one-day periods. At times, the Bank places deposits with high credit-quality financial institutions in amounts which may be in excess of federally insured limits. The Bank is required to maintain reserve and clearing balances with the Federal Reserve Bank. Accordingly, the Bank has amounts restricted for this purpose of $15.5 million and $12.0 million in the consolidated balance sheet at September 30, 2014 and December 31, 2013, respectively.

2.	NEW ACCOUNTING STANDARDS

In August 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). ASU 2014-15 also provides principles for considering the mitigating effect of management’s plans, requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. For the Company, ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and

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interim periods thereafter. Early adoption is permitted. The Company does not expect adoption of ASU 2014-15 to have a material effect on its consolidated results of operations, financial position or disclosures.

In June 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. Additionally, the new guidance requires expanded disclosures about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction and about the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. For the Company, ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. Early adoption is not permitted for public entities. The Company does not expect adoption of this ASU to have a material effect on its consolidated results of operations or financial position.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2014-09 create Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance. In addition, the amendments create new ASC Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of ASC Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Exclusions include lease contracts; insurance contracts; financial instruments and other contractual rights and obligations, such as receivables, investments, liabilities, debt, derivatives, and transfers and servicing; and guarantees other than product and service warranties. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of ASC Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of ASC Topic 350, Intangibles-Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in ASU 2014-09. An entity can apply this standard retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings (simplified transition method). For the Company, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted for public entities. The Company is currently assessing the impacts of adopting ASU 2014-09.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Additionally, the new guidance requires expanded disclosures about the assets, liabilities, income, and expenses of discontinued operations and requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. For the Company, ASU No. 2014-08 would be applied prospectively to disposals or classifications as held for sale for annual financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted. The Company does not expect adoption of this ASU to have a material effect on its consolidated results of operations or financial position.

The FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting reclassifications out of accumulated other comprehensive income (OCI) by requiring entities to present in one place information about significant amounts reclassified and, in some cases, to provide cross-references to related footnote disclosures. The amendments do not change the current requirements for reporting net income or OCI in the financial statements, nor do they require new information to be disclosed. The amendments require prospective application and were effective for public entities in reporting periods beginning after December 15, 2012. For nonpublic companies, this revised guidance was effective on a prospective basis for interim and annual periods beginning January 1, 2014. Other than additional disclosures or a change in the presentation on the statement of comprehensive income, this revised guidance did not impact the Company's consolidated results of operations or financial position.

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In June 2013, the FASB issued ASU 2013-08, Financial Services—Investment Companies (ASC Topic 946): Amendments to the Scope, Measurement and Disclosure Requirement. This ASU modifies the guidance in ASC 946 for determining whether an entity is an investment company, as well as the measurement and disclosure requirements for investment companies. The ASU does not change current accounting where a noninvestment company parent retains the specialized accounting applied by an investment company subsidiary in consolidation. ASU 2013-08 has been applied prospectively for all periods beginning after December 15, 2013. This ASU did not have a material effect on the Company's results of operations or financial position.

3.	INVESTMENT SECURITIES

Investments in securities are classified into three categories and accounted for as follows:

Securities Held to Maturity—Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost; or

Trading Securities—Debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; or

Securities Available for Sale—Debt and equity securities not classified as either held to maturity securities or trading securities are classified as available for sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as other comprehensive income, a separate component of shareholders’ equity.

The Company intends to hold its securities classified as available for sale securities for an indefinite period of time but may sell them prior to maturity. All other securities, which the Company has the positive intent and ability to hold to maturity, are classified as held to maturity securities. The initial classification of securities is determined at the date of purchase. Gains and losses on sales of securities, computed based on specific identification of the adjusted cost of each security, are included in noninterest income at the time of the sales. The Company's investments include agency direct obligations, Small Business Administration ("SBA") pools, agency and non-agency mortgage backed securities ("MBS"), corporate securities, municipal bonds, and asset backed securities ("ABS"). Equity securities include securities obtained from the exercise of equity warrants and required to be held until the expiration of their respective lock-up periods, which expire within one year. The Company intends to monetize these securities upon removal of all sale restrictions (see Note 14).

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Investment securities at September 30, 2014 and December 31, 2013, are summarized as follows:

(in thousands)		September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available for sale securities:
U.S. treasuries		$	19,679			$	—			$	(17	)		$	19,662
Agency direct obligations		34,534				113				—				34,647
SBA pools		143,110				1,973				(42		)		145,041
Agency MBS		577,389				7,747				(1,098		)		584,038
Municipal bonds		96,402				1,794				(70		)		98,126
Corporates		116,840				4,217				(32		)		121,025
Non-agency MBS		132,909				1,278				(1,300		)		132,887
Other ABS		49,574				90				(656		)		49,008
Equity securities		2,764				23				(334		)		2,453
Total		$	1,173,201			$	17,235			$	(3,549	)		$	1,186,887
Held to maturity securities:
Agency mortgaged-backed		$	60,663			$	800			$	(264	)		$	61,199
Municipal bonds		165,531				7,273				(606		)		172,198
Corporates		51,927				10				(2,177		)		49,760
Total		$	278,121			$	8,083			$	(3,047	)		$	283,157

(in thousands)		December 31, 2013
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available for sale securities:
Agency direct obligations		$	34,853			$	208			$	—			$	35,061
SBA pools		127,309				1,958				(56		)		129,211
Agency mortgaged-backed		445,855				4,395				(2,400		)		447,850
Municipal bonds		97,532				—				(5,503		)		92,029
Corporates		148,288				1,173				(3,644		)		145,817
Non-agency mortgage-backed securities		54,134				371				(2,335		)		52,170
Other asset-backed securities		22,787				112				(808		)		22,091
Total		$	930,758			$	8,217			$	(14,746	)		$	924,229
Held to maturity securities:
Agency mortgaged-backed		$	18,666			$	188			$	(608	)		$	18,246
Municipal bonds		127,339				426				(5,756		)		122,009
Corporates		8,250				—				(1,951		)		6,299
Total		$	154,255			$	614			$	(8,315	)		$	146,554

Investment securities with a fair value of $297.0 million and $343.7 million at September 30, 2014 and December 31, 2013, respectively, were pledged to secure customer repurchase agreements and to secure prospective borrowing capacities at our correspondent banks, the Federal Reserve Bank, and the Federal Home Loan Bank of Atlanta.

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The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired. Investment securities contained in the table are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2014 and December 31, 2013:

(in thousands)		September 30, 2014
		Less Than 12 Months								12 Months or Greater								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Available for sale securities:
U.S. Treasuries		$	19,662			$	(17	)		$	—			$	—			$	19,662			$	(17	)
SBA Pools		4,906				(34		)		4,440				(8		)		9,346				(42		)
Agency MBS		115,807				(801		)		24,197				(297		)		140,004				(1,098		)
Municipal Bonds		3,780				(7		)		6,390				(63		)		10,170				(70		)
Corporates		5,013				(32		)		—				—				5,013				(32		)
Non-Agency MBS		57,578				(476		)		18,888				(824		)		76,466				(1,300		)
Other ABS		5,306				(8		)		4,819				(648		)		10,125				(656		)
Equity securities		2,218				(334		)		—				—				2,218				(334		)
Total		$	214,270			$	(1,709	)		$	58,734			$	(1,840	)		$	273,004			$	(3,549	)
Held to maturity securities:
Agency MBS		$	4,970			$	(26	)		$	5,971			$	(238	)		$	10,941			$	(264	)
Municipal Bonds		11,022				(80		)		22,345				(526		)		33,367				(606		)
Corporates		39,120				(658		)		6,750				(1,519		)		45,870				(2,177		)
Total		$	55,112			$	(764	)		$	35,066			$	(2,283	)		$	90,178			$	(3,047	)

(in thousands)		December 31, 2013
		Less Than 12 Months								12 Months or Greater								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Available for sale securities:
SBA Pools		$	13,724			$	(56	)		$	—			$	—			$	13,724			$	(56	)
Agency MBS		126,563				(1,801		)		24,288				(599		)		150,851				(2,400		)
Municipal Bonds		92,029				(5,503		)		—				—				92,029				(5,503		)
Corporates		72,092				(3,644		)		—				—				72,092				(3,644		)
Non-Agency MBS		22,422				(410		)		14,138				(1,925		)		36,560				(2,335		)
Other ABS		—				—				4,852				(808		)		4,852				(808		)
Total		$	326,830			$	(11,414	)		$	43,278			$	(3,332	)		$	370,108			$	(14,746	)
Held to maturity securities:
Agency MBS		$	13,575			$	(608	)		$	—			$	—			$	13,575			$	(608	)
Municipal Bonds		77,344				(3,313		)		16,368				(2,443		)		93,712				(5,756		)
Corporates		—				—				6,299				(1,951		)		6,299				(1,951		)
Total		$	90,919			$	(3,921	)		$	22,667			$	(4,394	)		$	113,586			$	(8,315	)

At September 30, 2014, there were a total of 74 available for sale securities that were in an unrealized loss position, of which 26 investments had fair values less than their amortized cost for a period of time greater than 12 months. At December 31, 2013, there were a total of 104 available for sale securities that were in an unrealized loss position, of which 25 investments had fair values less than their amortized cost for a period of time greater than 12 months. At September 30, 2014, the fair value of equity securities included $1.3 million in equity securities obtained from the exercise of equity warrants, which the Company intends to monetize upon removal of all sale restrictions, and $1.1 million in other equity securities.

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The Company performs extensive ongoing evaluations of the investment portfolio at the individual bond level, including market valuations and impairment analyses. The Company had no recorded impairment for the three months ended September 30, 2014 and $0.8 million of impairment on certain mortgage-related securities for the three months ended September 30, 2013. The Company had recorded impairment of $43 thousand and $1.5 million of impairment on certain mortgage-related securities for the nine months ended September 30, 2014 and 2013, respectively. The Company had deemed these securities permanently impaired and unlikely to receive full principal, even if the investments were held to maturity. The Company believes the remainder of the investment portfolio, based on the evaluation performed, will be paid in full and that any temporary impairment will be fully recoverable prior to or at maturity. The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient for a forecasted recovery of fair value or until maturity.

The amortized cost of debt securities at September 30, 2014, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(in thousands)		September 30, 2014
		Total Amortized Cost				Less than One Year Amortized Cost				After One Year to Five Years Amortized Cost				After Five Years to Ten Years Amortized Cost				After Ten Years Amortized Cost
Available for sale securities:
Contractual maturity
U.S. Treasuries		$	19,679			$	—			$	19,679			$	—			$	—
Agency Direct Obligations		34,534				3,890				30,644				—				—
SBA Pools		143,110				—				5,200				60,428				77,482
Agency MBS		577,389				—				1,856				35,356				540,177
Municipal Bonds		96,402				—				—				12,016				84,386
Corporates		116,840				—				55,687				12,950				48,203
Non-Agency MBS		132,909				—				1,495				15,316				116,098
Other ABS		49,574				12,999				15,831				15,277				5,467
Equity securities		2,764				—				—				—				2,764
Total		$	1,173,201			$	16,889			$	130,392			$	151,343			$	874,577
Held to maturity securities:
Contractual maturity
Agency MBS		$	60,663			$	—			$	—			$	—			$	60,663
Municipal Bonds		165,531				—				—				7,460				158,071
Corporates		51,927				—				—				—				51,927
Total		$	278,121			$	—			$	—			$	7,460			$	270,661

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4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

The composition of loans, net of unearned income, broken out by portfolio segment at September 30, 2014 and December 31, 2013, are as follows:

(in thousands)		September 30, 2014				December 31, 2013
Commercial loans:
Technology		$	634,908			$	543,788
Life sciences		240,375				224,069
Asset-based loans		152,282				111,251
Venture capital/private equity		159,349				143,468
SBA and USDA		33,245				23,719
Other		5,468				1,424
Total commercial loans		1,225,627				1,047,719
Real estate loans:
SBA and USDA		31,532				27,504
Total real estate loans		31,532				27,504
Construction loans:
SBA and USDA		2,290				287
Total construction loans		2,290				287
Credit cards		19,345				11,575
Less unearned income, net		(7,337		)		(4,549		)
Total loans, net of unearned income		$	1,271,457			$	1,082,536

Directors and executive officers of the Company, including their immediate families and companies in which they have an interest, may be loan customers in the normal course of business. The Company had one commitment and three commitments, respectively, totaling $7.5 million to these parties at September 30, 2014 and December 31, 2013.

The Bank makes loans under the Small Business Administration (SBA) and United States Department of Agriculture (USDA) programs. At September 30, 2014 and December 31, 2013, the outstanding balances of these loans being serviced were $126.1 million and $114.6 million, respectively. The SBA/USDA guaranteed portions of eight and 21 of these loans were sold to the secondary market during 2014 and 2013, respectively. The outstanding sold balance at September 30, 2014 and December 31, 2013, was $59.3 million and $63.1 million, respectively.

The Company accounts for loan servicing rights or liabilities under Accounting Standards Codification (ASC) 860, “Transfers and Servicing.” ASC requires the Company to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset. Changes in the fair value of the servicing asset are recognized in other noninterest income. The valuation methodology estimates the present value of future cash flows based on the unique characteristics of the loan, market-based assumptions for prepayment speeds, and discount rate assumptions. The servicing asset is recorded in intangible assets in the financial statements.

See Note 15 for a summary of the activity for the Company's servicing assets.

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Allowance for Loan Losses

The following tables summarize the activity in the allowance for loan losses during the three and nine months ended September 30, 2014 and 2013, broken out by portfolio segment:

(in thousands)		Three Months Ended September 30, 2014
		Beginning Balance				Charge Offs				Recoveries				Provision (Benefit)				Ending Balance
Commercial loans
Technology		$	13,380			$	382			$	13			$	3,185			$	16,196
Life sciences		5,174				1,107				5				(1,063		)		3,009
Asset-based loans		1,363				—				—				501				1,864
Venture capital/private equity		143				—				—				71				214
SBA and USDA		614				—				14				(43		)		585
Other		11				—				—				(3		)		8
Total commercial loans		20,685				1,489				32				2,648				21,876
Real estate loans:
SBA and USDA		702				—				217				(195		)		724
Total real estate loans		702				—				217				(195		)		724
Construction:
SBA and USDA		19				—				—				4				23
Total construction loans		19				—				—				4				23
Credit cards		150				—				—				43				193
Total loans		$	21,556			$	1,489			$	249			$	2,500			$	22,816

(in thousands)		Three Months Ended September 30, 2013
		Beginning Balance				Charge Offs				Recoveries				Provision (Benefit)				Ending Balance
Commercial loans
Technology		$	14,637			$	2,988			$	14			$	1,434			$	13,097
Life sciences		2,033				—				—				200				2,233
Asset-based loans		576				—				—				195				771
Venture capital/private equity		133				—				—				(9		)		124
SBA and USDA		211				—				—				457				668
Other		85				—				—				(68		)		17
Total commercial loans		17,675				2,988				14				2,209				16,910
Real estate loans:
SBA and USDA		462				—				—				617				1,079
Total real estate loans		462				—				—				617				1,079
Construction:
SBA and USDA		—				—				—				12				12
Total construction loans		—				—				—				12				12
Credit cards		80				—				—				12				92
Total loans		$	18,217			$	2,988			$	14			$	2,850			$	18,093

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(in thousands)		Nine Months Ended September 30, 2014
		Beginning Balance				Charge Offs				Recoveries				Provision (Benefit)				Ending Balance
Commercial loans
Technology		$	13,609			$	2,548			$	169			$	4,966			$	16,196
Life sciences		1,971				1,516				5				2,549				3,009
Asset based loans		684				—				—				1,180				1,864
Venture capital/private equity		197				—				—				17				214
SBA and USDA		627				128				14				72				585
Other		2				—				—				6				8
Total commercial loans		17,090				4,192				188				8,790				21,876
Real estate loans:
SBA and USDA		1,163				390				217				(266		)		724
Total real estate loans		1,163				390				217				(266		)		724
Construction:
SBA and USDA		10				—				—				13				23
Total construction loans		10				—				—				13				23
Credit cards		116				—				—				77				193
Total loans		$	18,379			$	4,582			$	405			$	8,614			$	22,816

(in thousands)		Nine Months Ended September 30, 2013
		Beginning Balance				Charge Offs				Recoveries				Provision (Benefit)				Ending Balance
Commercial loans
Technology		$	10,651			$	5,932			$	692			7,686				$	13,097
Life sciences		804				—				—				1,429				2,233
Asset based loans		1,102				—				—				(331		)		771
Venture capital/private equity		152				—				—				(28		)		124
SBA and USDA		381				—				150				137				668
Other		4				—				—				13				17
Total commercial loans		13,094				5,932				842				8,906				16,910
Real estate loans:
SBA and USDA		680				—				—				399				1,079
Total real estate loans		680				—				—				399				1,079
Construction:
SBA and USDA		—				—				—				12				12
Total construction loans		—				—				—				12				12
Credit cards		69				—				—				23				92
Total loans		$	13,843			$	5,932			$	842			$	9,340			$	18,093

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The following tables summarize the allowance for loan losses individually and collectively evaluated for impairment at September 30, 2014 and December 31, 2013, broken out by portfolio segment:

(in thousands)		September 30, 2014
		Ending  Balance: Individually Evaluated for Impairment				Ending  Balance: Collectively Evaluated for Impairment
Commercial loans
Technology		$	7,220			$	8,976
Life sciences		1,107				1,902
Asset based loans		—				1,864
Venture capital/private equity		—				214
SBA and USDA		47				538
Other		—				8
Total commercial loans		8,374				13,502
Real estate loans:
SBA and USDA		—				724
Total real estate loans		—				724
Construction:
SBA and USDA		—				23
Total construction loans		—				23
Credit cards		—				193
Total loans		$	8,374			$	14,442

(in thousands)		December 31, 2013
		Ending  Balance: Individually Evaluated for Impairment				Ending  Balance: Collectively Evaluated for Impairment
Commercial loans
Technology		$	4,830			$	7,646
Life sciences		—				1,894
Asset based loans		—				1,894
Venture capital/private equity		—				197
SBA and USDA		132				495
Other		—				2
Total commercial loans		4,962				12,128
Real estate loans:
SBA and USDA		481				682
Total real estate loans		481				682
Construction:
SBA and USDA		—				10
Total construction loans		—				10
Credit cards		—				116
Total loans		$	5,443			$	12,936

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Credit Quality

The following table summarizes the aging of gross loans, broken out by portfolio segment, at September 30, 2014 and December 31, 2013. See Note 2 to the Consolidated Financial Statements in the Company's Registration Statement for a discussion of credit quality indicators.

(in thousands)		September 30, 2014
		30-59 Days Past Due				60-89 Days Past Due				90+ Days Past Due				Total Loans Past Due				Current				Total Loans				Loans 90+  Days Past Due Still Accruing
Commercial loans:
Technology		$	—			$	—			$	2,627			$	2,627			$	632,281			$	634,908			$	—
Life sciences		—				—				—				—				240,375				240,375				—
Asset-based loans		—				—				—				—				152,282				152,282				—
Venture capital/private equity		—				—				—				—				159,349				159,349				—
SBA and USDA		—				—				—				—				33,245				33,245				—
Other		—				—				—				—				5,468				5,468				—
Total commercial loans		—				—				2,627				2,627				1,223,000				1,225,627				—
Real estate loans:
SBA and USDA		—				415				—				415				31,117				31,532				—
Total real estate loans		—				415				—				415				31,117				31,532				—
Construction loans:
SBA and USDA		—				—				—				—				2,290				2,290				—
Total construction loans		—				—				—				—				2,290				2,290				—
Credit cards		—				—				—				—				19,345				19,345				—
Total loans, gross		$	—			$	415			$	2,627			$	3,042			$	1,275,752			$	1,278,794			$	—

(in thousands)		December 31, 2013
		30-59 Days Past Due				60-89 Days Past Due				90+ Days Past Due				Total Loans Past Due				Current				Total Loans				Loans 90+  Days Past Due Still Accruing
Commercial loans:
Technology		$	411			$	—			$	2,372			$	2,783			$	541,005			$	543,788			$	—
Life sciences		—				—				—				—				224,069				224,069				—
Asset-based loans		—				—				—				—				111,251				111,251				—
Venture capital/private equity		—				—				—				—				143,468				143,468				—
SBA and USDA		—				—				648				648				23,071				23,719				—
Other		—				—				—				—				1,424				1,424				—
Total commercial loans		411				—				3,020				3,431				1,044,288				1,047,719				—
Real estate loans:
SBA and USDA		—				—				1,665				1,665				25,839				27,504				—
Total real estate loans		—				—				1,665				1,665				25,839				27,504				—
Construction loans:
SBA and USDA		—				—				—				—				287				287				—
Total construction loans		—				—				—				—				287				287				—
Credit cards		—				—				95				95				11,480				11,575				—
Total loans, gross		$	411			$	—			$	4,780			$	5,191			$	1,081,894			$	1,087,085			$	—

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The following tables summarize impaired loans as they relate to allowance for loan losses, broken out by portfolio segment, at September 30, 2014 and December 31, 2013:

	(in thousands)		September 30, 2014
			Allowance for loan  losses related to impaired loans				Impaired loans  with related allowance for loan losses				Impaired loans  with no related allowance for loan losses				Recorded investment  in impaired loans				Total of  unpaid principal of impaired loans
	Commercial loans:
	Technology		$	7,220			$	10,131			$	296			$	10,427			$	12,784
	Life Sciences		1,107				1,107				—				1,107				2,225
	SBA and USDA		47				264				—				264				387
	Total commercial loans		8,374				11,502				296				11,798				15,396
	Real estate loans:
	SBA and USDA		—				—				—				—				—
	Total real estate loans		—				—				—				—				—
	Total loans, gross		$	8,374			$	11,502			$	296			$	11,798			$	15,396

	(in thousands)		December 31, 2013
			Allowance for loan  losses related to impaired loans				Impaired loans  with related allowance for loan losses				Impaired loans with no related allowance for loan losses				Recorded investment  in impaired loans				Total of  unpaid principal of impaired loans
	Commercial loans:
	Technology		$	4,830			$	12,153			$	—			$	12,153			$	13,745
	SBA and USDA		132				648				—				648				648
	Total commercial loans		4,962				12,801				—				12,801				14,393
	Real estate loans:
	SBA and USDA		481				1,665				—				1,665				1,665
	Total real estate loans		481				1,665				—				1,665				1,665
	Total loans, gross		$	5,443			$	14,466			$	—			$	14,466			$	16,058

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The following table summarizes average impaired loans, broken out by portfolio segment, during the three and nine months ended September 30, 2014 and 2013:

	(in thousands)		Three Months Ended September 30,
			2014								2013
			Average  recorded investment in impaired loans				Interest  income recognized				Average  recorded investment in impaired loans				Interest  income recognized
	Commercial loans:
	Technology		$	10,427			$	—			$	12,423			$	—
	Life sciences		1,107				—				—				—
	SBA and USDA		265				—				1,031				—
	Total commercial loans		11,799				—				13,454				—
	Real estate loans:
	SBA and USDA		—				—				—				—
	Total real estate loans		—				—				—				—
	Total loans, gross		$	11,799			$	—			$	13,454			$	—

	(in thousands)		Nine Months Ended September 30,
			2014								2013
			Average  recorded investment in impaired loans				Interest  income recognized				Average  recorded investment in impaired loans				Interest  income recognized
	Commercial loans:
	Technology		$	8,523			$	—			$	14,517			$	—
	Life sciences		1,285				—				—				—
	SBA and USDA		566				—				589				—
	Total commercial loans		10,374				—				15,106				—
	Real estate loans:
	SBA and USDA		856				—				—				—
	Total real estate loans		856				—				—				—
	Credit cards		3				—				—				—
	Total loans, gross		$	11,233			$	—			$	15,106			$	—

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The following table summarizes the credit quality indicators, broken out by portfolio segment, at September 30, 2014 and December 31, 2013:

(in thousands)		September 30, 2014
		Pass				Performing (Criticized)				Impaired				Total
Commercial loans:
Technology		$	569,619			$	54,862			$	10,427			$	634,908
Life sciences		228,872				10,396				1,107				240,375
Asset-based loans		124,863				27,419				—				152,282
Venture capital/private equity		159,349				—				—				159,349
SBA and USDA		32,718				263				264				33,245
Other		2,282				3,186				—				5,468
Total commercial loans		1,117,703				96,126				11,798				1,225,627
Real estate loans:
SBA and USDA		24,140				7,392				—				31,532
Total real estate loans		24,140				7,392				—				31,532
Construction loans:
SBA and USDA		2,290				—				—				2,290
Total construction loans		2,290				—				—				2,290
Credit cards		19,345				—				—				19,345
Total loans, gross		$	1,163,478			$	103,518			$	11,798			$	1,278,794

(in thousands)		December 31, 2013
		Pass				Performing (Criticized)				Impaired				Total
Commercial loans:
Technology		$	475,531			$	56,104			$	12,153			$	543,788
Life sciences		210,257				13,812				—				224,069
Asset-based loans		110,184				1,067				—				111,251
Venture capital/private equity		143,468				—				—				143,468
SBA and USDA		22,063				1,008				648				23,719
Other		1,424				—				—				1,424
Total commercial loans		962,927				71,991				12,801				1,047,719
Real estate loans:
SBA and USDA		19,852				5,987				1,665				27,504
Total real estate loans		19,852				5,987				1,665				27,504
Construction loans:
SBA and USDA		287				—				—				287
Total construction loans		287				—				—				287
Credit cards		11,575				—				—				11,575
Total loans, gross		$	994,641			$	77,978			$	14,466			$	1,087,085

Troubled debt restructurings (“TDRs”)

Uncollateralized loans are measured for impairment based on the present value of expected future cash flows, discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral.

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The following table summarizes our loans classified as TDRs, broken out by portfolio segment, during the three and nine months ended September 30, 2014:

(dollars in thousands)		Three Months Ended September 30, 2014
		Modifications											TDRs That Subsequently Defaulted
		Number of Contracts			Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of Contracts			Recorded Investment
Commercial loans:
Life Sciences		1			$	2,214			$	1,107			—			$	—
Total commercial loans		1			2,214				1,107				—			—
Total loans, gross		1			$	2,214			$	1,107			—			$	—

The loan identified as a TDR during the three and nine months ended September 30, 2014, was restructured to defer interest payments. The loan is considered a nonperforming loan and, as such, was individually considered for allowance for loan losses calculations.

The following table summarizes our loans classified as TDRs, broken out by portfolio segment, during the three and nine months ended September 30, 2013:

(dollars in thousands)		Modifications											TDRs That Subsequently Defaulted
		Number of Contracts			Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of Contracts			Recorded Investment
Commercial loans:
Technology		1			$	2,540			$	2,540			—			$	—
Total commercial loans		1			2,540				2,540				—			—
Total loans, gross		1			$	2,540			$	2,540			—			$	—

The loan identified as a TDR during the three and nine months ended September 30, 2013, was restructured to a below market interest rate. The loan is considered a nonperforming loan and, as such, was individually considered for allowance for loan losses calculations.

The Bank currently has no commitments to lend to borrowers with loans identified as TDRs.

5.	INTANGIBLE ASSETS

The Bank recognizes servicing right intangibles related to obligations to service financial assets. See Note 15 for information about the Company's servicing assets. The Bank acquired certain intangible assets, consisting of non-compete agreements and existing customer relationships, as part of its acquisition of Sand Hill Finance LLC on December 31, 2013. The non-compete agreements and existing customer relationships are finite-lived intangible assets subject to amortization. The non-compete agreements intangible asset has a one-year amortization period and the existing customer relationships intangible asset has a three-year amortization period. The acquired intangible assets do not have renewal or extension provisions.

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The Company's finite-lived intangible assets at September 30, 2014 and December 31, 2013, are as follows:

(in thousands)		September 30, 2014				December 31, 2013
Non-compete agreements		$	210			$	210
Existing customer relationships		590				590
Total gross carrying amounts		800				800
Accumulated amortization - non-compete agreements		(157		)		—
Accumulated amortization - existing customer relationships		(148		)		—
Total accumulated amortization		(305		)		—
Total intangible assets subject to amortization, net		$	495			$	800

Amortization expense, net of tax for the three and nine months ended September 30, 2014, amounted to $62 thousand and $187 thousand, respectively, and is included in other noninterest expense on the accompanying consolidated statements of operations.

The following table shows the expected amortization for the next five years for intangible assets at September 30, 2014:

(in thousands)
2014		$	101
2015		197
2016		197
		$	495

6.	DEPOSITS

Time deposits in denominations of $100,000 or more were approximately $16.2 million and $26.6 million at September 30, 2014 and December 31, 2013, respectively. Interest expense paid on time deposits individually exceeding $100,000 totaled $16 thousand and $46 thousand for the three and nine months ended September 30, 2014, respectively. Interest expense paid on time deposits individually exceeding $100,000 totaled $17 thousand and $45 thousand for the three and nine months ended September 30, 2013, respectively. At September 30, 2014, time deposits scheduled to mature on or before September 30, 2015, totaled $15.2 million.

7.	REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS

Securities purchased under agreements to resell generally mature within one to four days from the transaction date. Securities purchased under reverse repurchase agreements, which are included in cash and cash equivalents in the interim consolidated balance sheets, were $10.0 million at September 30, 2014. The Company had no reverse repurchase agreements outstanding at December 31, 2013.

Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company had no repurchase agreements outstanding at September 30, 2014. Repurchase agreements outstanding at December 31, 2013, were $12.7 million.

8.	BORROWINGS

The Company may purchase federal funds through unsecured federal funds lines of credit totaling $60.0 million. These lines of credit are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company also has the ability to utilize short-term borrowings from the Federal Reserve Bank with interest based upon the Federal Reserve US Primary Credit Discount Rate. This $84.4 million line is secured by loans and investment securities. There were no outstanding borrowings for these lines at September 30, 2014 and December 31, 2013.

In addition, the Company has the ability to borrow longer term from the Federal Home Loan Bank ("FHLB"), with a $199.0 million line of credit available. The rate on these advances varies based on borrowing terms. Advances from this line of credit must be adequately collateralized with securities. There were no outstanding borrowings for this line at September 30, 2014 and December 31, 2013.

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In September 2008, the Company issued $7.4 million of convertible trust preferred securities. These securities were placed through the Trust. The Trust held, as its sole asset, the subordinated debentures issued by the Company. The Company did not consolidate the Trust into its consolidated financial statements. The subordinated debentures issued by the Company amounted to $7.6 million. A debt discount of $1.5 million was recorded and was to be amortized over 30 years. At December 31, 2013, the remaining balance of the subordinated debentures, including respective remaining debt discount of $1.4 million, was $6.2 million. The Company notified the holders of all trust preferred securities of its intent to redeem such securities as of June 30, 2014, and all remaining outstanding trust preferred securities were converted by the holders into shares of Company common stock prior to that date. At September 30, 2014, no convertible trust preferred securities remained outstanding, and the Trust has been dissolved.

During the nine months ended September 30, 2014, investors converted $7.4 million of the outstanding convertible trust preferred securities into 741,500 common shares at $10.00 per share. For the nine months ended September 30, 2014, interest expense on the trust preferred securities was $215 thousand. For the three and nine months ended September 30, 2013, interest expense on the trust preferred securities was $158 thousand and $475 thousand, respectively.

9.	EQUITY

Preferred Stock

In December 2008, the Company issued 5,000 shares of Series A, 5% Fixed Rate Cumulative Convertible Preferred Stock. Dividends were paid quarterly, in arrears.

The preferred stock was convertible into shares of the Company’s common stock at the option of the holder and had a conversion price of $10.00 per share. At December 31, 2013, the Series A convertible preferred stock could be converted into 500,000 shares of common stock of the Company. On April 2, 2014, all shares of preferred stock were converted by the holder into 500,070 shares of common stock.

Issuances of Common Stock

During the three and nine months ended September 30, 2014, the Company issued 743 shares and 43,073 shares, respectively, of common stock related to vesting of restricted stock units issued under the Company's stock-based incentive compensation plan, and issued 72,960 shares and 191,690 shares, respectively, of common stock related to the exercise of stock options issued under the stock-based incentive compensation plan.

During the three and nine months ended September 30, 2014, the Company issued 4,000 shares and 36,000 shares, respectively, of common stock related to the exercise of warrants issued to certain individuals in 2005 in connection with the organization of the Bank.

On March 31, 2014, the Company sold a total of 3,125,000 shares of Class A common stock in our initial public offering at an initial public offering price of $18.00 and received net proceeds of $51.1 million after expenses. On April 1, 2014, the underwriters exercised in full the underwriters’ purchase option granted in connection with the initial public offering, at the initial public offering price of $18.00, resulting in an additional 468,750 shares purchased from us for which we received $7.9 million in net proceeds on April 4, 2014.

During the nine months ended September 30, 2014, the Company issued 741,500 common shares of its Class A common stock in connection with the conversion of $7.4 million of our outstanding convertible trust preferred securities into common shares at the conversion price of $10.00 per share. At September 30, 2014, no convertible trust preferred securities remained outstanding.

Earnings Per Share

Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur if convertible preferred stock, convertible trust preferred securities, stock options or warrants were exercised, resulting in the issuance of common stock that then shared in the net income of the Company.

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Our basic and diluted earnings per common share are calculated as follows:

(in thousands except per share data)			Three Months Ended   September 30,								Nine Months Ended   September 30,
			2014				2013				2014				2013
Basic:
Net income			$	8,752			$	6,968			$	24,651			$	15,443
Less:	dividends on preferred stock		—				62				63				188
Net income attributable to common shares			8,752				6,906				24,588				15,255
Basic weighted-average common shares outstanding			28,681				23,501				26,931				23,496
Earnings per share—basic			$	0.31			$	0.29			$	0.91			$	0.65
Diluted:
Net income attributable to common shares			$	8,752			$	6,906			$	24,588			$	15,255
Plus:	dividends on preferred stock		—				—				63				—
	convertible trust preferred securities		—				—				146				—
Net income attributable to common shares after assumed conversions			8,752				6,906				24,797				15,255
Basic weighted-average common shares outstanding			28,681				23,501				26,931				23,496
Effect of dilutive stock options and warrants(1)			1,090				362				1,503				326
Diluted weighted-average common shares outstanding			29,771				23,863				28,434				23,822
Earnings per share—diluted			$	0.29			$	0.29			$	0.87			$	0.64

(1)	Excludes anti-dilutive warrants, preferred stock and trust preferred securities representing 1,311,500 shares at September 30, 2013. There were no anti-dilutive warrants, preferred stock and trust preferred securities at September 30, 2014.

In 2010, in connection with a private placement of Company common stock, the Company issued warrants to purchase 750,000 shares of common stock at any time. The exercise price of the warrants is $5.15 per share. Half of the warrants expire on February 23, 2015. The remainder expire on May 20, 2015. These warrants were valued at $1.8 million using a Black-Scholes-Merton fair value model and are included in additional paid in capital in the accompanying consolidated balance sheet.

In 2005, the Company's organizers received warrants to purchase one additional share of common stock for every share of common stock purchased. These warrants expire 10 years after issuance. At September 30, 2014 and December 31, 2013, there were 34,000 warrants and 70,000 warrants, respectively, outstanding with an exercise price of $10.00 per share.

Accumulated Other Comprehensive Income (Loss)

The Company’s only components of accumulated other comprehensive income (loss) relate to unrealized gains and losses on available for sale securities and their related tax effects. Reclassification adjustments out of accumulated other comprehensive income for the three and nine months ended September 30, 2014 and 2013 are presented in the following table:

(in thousands)				Three Months Ended September 30,								Nine Months Ended   September 30,
		Location		2014				2013				2014				2013
Reclassification adjustment for losses (gains) included in net income		Net (loss) gain on securities		$	231			$	(1,411	)		$	165			$	(2,118	)
Related tax (expense) benefit		Income tax expense		(86		)		524				(62		)		786
Other comprehensive income (loss)				$	145			$	(887	)		$	103			$	(1,332	)

10.	INCOME TAXES

The Company and its subsidiaries file a consolidated U.S. federal income tax return. The Company is generally no longer subject to the assessment of tax with respect to returns that have been filed for years prior to 2009.

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Realization of the Company’s net deferred tax assets is dependent upon the Company generating sufficient taxable income in future years to obtain a benefit from the reversal of deductible temporary differences and from tax loss carry-forwards. The Company has concluded that, based on expected future results and the future reversals of existing taxable temporary differences, it is more likely than not that its deferred tax assets will be realized, except for a $0.3 million valuation allowance for North Carolina. The Company’s net operating loss carry-forwards will begin to expire in 2029.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. At September 30, 2014 and December 31, 2013, the Company did not record a liability for uncertain tax positions because no material positions existed.

The Company classifies tax related interest and penalties as a component of income taxes. Interest and penalties for all periods presented were immaterial.

11.	REGULATORY MATTERS AND RESTRICTIONS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as set forth in the table below. Management believes that at September 30, 2014, the Company and the Bank met all capital requirements to which they are subject and are “well-capitalized”.

The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. Regulatory authorities may further limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank.

The Company’s actual capital amounts and ratios at September 30, 2014 and December 31, 2013, and the minimum capital requirements, are presented in the following table:

(dollars in thousands)
		Minimum Requirements to be:
COMPANY		Actual							Adequately Capitalized							Well Capitalized
		Amount				Ratio			Amount				Ratio			Amount				Ratio
September 30, 2014
Total risk-based capital ratio		$	309,000			14.84	%		$	166,620			8.00	%		$	208,275			10.00	%
Tier 1 risk-based capital ratio		285,154				13.69			83,310				4.00			124,965				6.00
Tier 1 leverage ratio		285,154				10.05			113,513				4.00			141,892				5.00
December 31, 2013
Total risk-based capital ratio		$	217,345			12.46	%		$	139,532			8.00	%		$	174,415			10.00	%
Tier 1 risk-based capital ratio		198,430				11.38			69,766				4.00			104,649				6.00
Tier 1 leverage ratio		198,430				8.34			95,205				4.00			119,007				5.00

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The Bank’s actual capital amounts and ratios at September 30, 2014 and December 31, 2013, and the minimum capital requirements, are presented in the following table:

(dollars in thousands)
		Minimum Requirements to be:
BANK		Actual							Adequately Capitalized							Well Capitalized
		Amount				Ratio			Amount				Ratio			Amount				Ratio
September 30, 2014
Total risk-based capital ratio		$	302,576			14.54	%		$	166,428			8.00	%		$	208,036			10.00	%
Tier 1 risk-based capital ratio		278,730				13.40			83,214				4.00			124,821				6.00
Tier 1 leverage ratio		278,730				9.83			113,400				4.00			141,750				5.00
December 31, 2013
Total risk-based capital ratio		$	212,821			12.21	%		$	139,385			8.00	%		$	174,231			10.00	%
Tier 1 risk-based capital ratio		193,906				11.13			69,692				4.00			104,539				6.00
Tier 1 leverage ratio		193,906				8.16			95,053				4.00			118,817				5.00

12.	RETIREMENT PLAN

The Company approved in January 2006 the establishment of an employee benefit plan (the “Plan”) pursuant to Section 401(k) of the Internal Revenue Code for the benefit of its employees. The Plan includes provisions for discretionary employee contributions, subject to limitation under the Internal Revenue Code. Under the Plan, employees may contribute up to an annual maximum as determined by the Internal Revenue Code. During 2014 and 2013, the Company matched 100% of the first 3% of employee contributions and 50% on contributions between 3-5%. The expense related to the plan for the three and nine months ended September 30, 2014, amounted to $0.2 million and $0.8 million, respectively. The expense related to the plan for the three and nine months ended September 30, 2013, amounted to $0.2 million and $0.6 million, respectively.

13.	STOCK-BASED COMPENSATION PLAN

The Company maintains a stock-based incentive compensation plan covering certain officers, directors and employees. Grants of options are made by the Compensation Committee of the Board of Directors. Excluding minimal exceptions, all grants must be at no less than fair market value on the date of grant, must be exercised no later than seven years from the date of grant, and may be subject to some vesting provisions. Grants generally vest over five years from the date of grant. The 2009 Stock Incentive Plan, as amended, provides for the issuance of up to 2,820,542 restricted stock units and options to purchase shares of the Company’s stock. At September 30, 2014, 920,119 shares of common stock remained available for future issuance through stock options or restricted stock units.

The following table presents a rollforward of the Company’s stock options outstanding during the nine months ended September 30, 2014:

									Weighted Average Remaining Contractual Life in Years
		Shares			Weighted Average Exercise Price
Outstanding at beginning of period		1,394,550			$	6.12			4.24
Granted		—			—				—
Exercised		(191,690	)		6.08
Forfeited		(14,120	)		6.00
Outstanding at end of period		1,188,740			$	6.12			3.65
Options exercisable at period end		801,240			$	6.06			3.58

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The following table provides information for restricted stock units issued under the stock-based incentive compensation plan during the nine months ended September 30, 2014:

		Shares			Weighted Average Grant Date Fair Value
Nonvested at beginning of period		532,460			$	8.03
Granted		141,757			14.51
Vested		(47,855	)		10.70
Forfeited		(30,804	)		9.80
Nonvested at end of period		595,558			$	9.26

The Company’s pre-tax compensation cost for stock-based employee compensation was $0.7 million and $2.4 million for the three and nine months ended September 30, 2014, respectively. The Company’s pre-tax compensation cost for stock-based employee compensation was $0.4 million and $1.1 million for the three and nine months ended September 30, 2013, respectively. At September 30, 2014, there was $4.6 million of unrecognized compensation cost related to non-vested stock-based compensation under this plan to be recognized over five years.

14.	DERIVATIVES

The Company receives equity warrants with net settlement terms in connection with extending loan commitments to certain of its customers. These warrants are obtained at the inception of a loan facility or the amendment of a loan facility. These warrants are not obtained in lieu of other fees, interest or payments. These warrants potentially provide an additional return, in addition to the traditional loan yield from interest and fees, in the event of a liquidity event of the borrowing company. We hold these equity warrants for future investment gains, rather than to hedge economic risks. In general, the equity warrants entitle the Company to buy a specific number of shares of the customer’s stock at a specific price over a specific time period. The warrants may also include contingent provisions which provide for additional shares to be purchased at a specific price if defined future events occur, such as future rounds of equity financing by the customer, or upon additional borrowings by the customer. All of the Company’s equity warrants contain net share settlement provisions, which permit the customer to deliver to the Company, upon the Company’s exercise of the warrant, the amount of shares with a current fair value equal to the net gain under the warrant agreement.

ASC 815 Derivatives and Hedging requires that all derivative instruments be recorded on the balance sheet at fair value. Equity warrants with net share settlement provisions are considered derivatives. Our equity warrants portfolio is primarily comprised of holdings in non-public companies and generally our practice is to monetize our positions as soon as an open market is available. The Bank estimates the initial fair value of non-public company equity warrants using a Black-Scholes option pricing model to approximate fair market value. The model estimates market value for each warrant based on the most recent equity offering at the time of issuance, the warrant specific exercise price, the warrant’s expected life, a risk-free interest rate based on a duration matched U.S. Treasury rate and volatility factors derived from indices of comparable publicly traded companies. On a monthly basis, the Bank adjusts the value of equity warrants in non-public companies using a Black-Scholes model to approximate fair market value based on changes to the risk-free interest rate, the volatility rate and the warrant’s expected life.

We also hold warrants in public companies. When a private company goes public there is often a lock-up period requiring us to hold our equity position in a publicly traded security until the expiration of the lock-up period. We adjust the value of equity warrants in public companies on a monthly basis based on the month-end closing stock price adjusted for the option value of the warrant. The model estimates market value for each warrant based on the share price as of the evaluation date, the warrant specific exercise price, the warrant’s expected life, a risk-free interest rate based on a duration matched U.S. Treasury rate and uses a company specific volatility factor. See Note 17 for further information regarding the fair value of our equity warrants. Any changes from the grant date in the fair value of equity warrant assets will be recognized as increases or decreases to warrant valuation and as unrealized gains or losses in non-interest income. When a portfolio company completes an initial public offering on a publicly reported market or is acquired, we may exercise these equity warrant assets for shares or cash. Shares received from the exercise of warrants and subject to lock-up agreements are held as equity securities in our available for sale portfolio.

The grant date fair values of equity warrants received in connection with extending loan commitments are considered to be loan fees and are recognized over the life of the loan commitment as an adjustment to loan yield through loan interest income. At September 30, 2014 and December 31, 2013, unearned income on loans included $1.4 million and $1.2 million, respectively, related to the initial valuation of equity warrant assets. For the three and nine months ended September 30,

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2014, we recognized $0.3 million and $0.9 million, respectively, in income from the amortization of loan fees related to the initial valuation of equity warrant assets. For the three and nine months ended September 30, 2013, we recognized $0.3 million and $0.8 million, respectively, in income from the amortization of loan fees related to the initial valuation of equity warrant assets.

Warrants held, which amounted to $4.1 million and $5.1 million in 451 and 451 companies at September 30, 2014 and December 31, 2013, respectively, are shown as warrant valuation in the accompanying consolidated balance sheets. At September 30, 2014, included in the $4.1 million in equity warrant assets in 451 companies are $0.1 million of equity warrant assets held in five publicly traded companies, which the Company intends to monetize once all restrictions to selling having been removed. At December 31, 2013, included in the $5.1 million in equity warrant assets in 451 companies are $1.0 million of equity warrant assets held in three publicly traded companies, which the Company monetized upon the expiration of all sale restrictions.

During the three and nine months ended September 30, 2014, the Company exercised warrants with a total value of $1.4 million and $2.8 million, respectively, and received equity securities in six and 10 publicly traded companies, respectively. During the three months ended September 30, 2014, the Company monetized equity securities, which we had obtained in two public companies through the exercise of warrants, for $0.7 million in proceeds. These equity securities had an initial value of $0.9 million and we recognized a loss of $0.2 million. During the nine months ended September 30, 2014, the Company monetized equity securities, which we had obtained in three public companies through the exercise of warrants, for $1.0 million in proceeds. These equity securities had an initial value of $1.2 million and we recognized a loss of $0.2 million. During the three and nine months ended September 30, 2013, the Company monetized warrants and realized a gain of $1.3 million on the exercise of warrants in one portfolio company client that conducted an IPO.

At September 30, 2014, the fair value of equity securities included in investments obtained through the exercise of warrants and still held was $1.3 million (see Note 3). The Company did not have equity securities obtained from the exercise of warrants in our available for sale portfolio in 2013.

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The following table presents gains and losses on equity warrant exercises and the number of companies on which warrants were exercised, broken out by stage of emerging companies:

(in thousands except number of companies)	Three Months Ended September 30,								Nine Months Ended September 30,
	2014				2013				2014				2013
Equity warrant assets:
Gains:
Early stage	$	167			$	—			$	1,197			$	456
Expansion stage	350				2,433				1,884				2,915
Late stage	1,296				—				1,750				672
Total gains on exercise of equity warrant assets	1,813				2,433				4,831				4,043
Losses:
Early stage	—				—				(8		)		—
Expansion stage	(8		)		—				(2		)		—
Total losses on exercise of equity warrant assets (1)	(8		)		—				(10		)		—
Net gains on exercise of equity warrant assets	1,805				2,433				4,821				4,043
Non-monetized write off of warrant assets	(178		)		(132		)		(354		)		(310		)
Net realized gains on equity warrants	1,627				2,301				4,467				3,733
Change in fair value of equity warrant assets	(906		)		(1,402		)		(1,530		)		(470		)
Warrant income	$	721			$	899			$	2,937			$	3,263
Number of companies on which warrant gains were realized:
Early stage	4				—				15				3
Expansion stage	8				9				25				18
Late stage	3				—				8				2
Total number of companies	15				9				48				23

(1) Realized warrant losses for the three months ended September 30, 2014, related to one early stage company, and for the three and nine months ended September 30, 2014, related to one early stage company and one expansion stage company.

15.	FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Fair Value Measurements

Our marketable investment securities and derivative instruments are financial instruments recorded at fair value on a recurring basis. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing our consolidated financial statements. ASC 825-10 provides an option to report selected financial assets and liabilities at fair value. The Company has not elected to measure any financial assets or liabilities using the fair value option under ASC 825-10.

ASC 820, Fair Value Measurements and Disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. Fair value is a market-based measurement considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measurement.

ASC 820 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.

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The three levels for measuring fair value are based on the reliability of inputs and are as follows:

Level 1		Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to instruments utilizing Level 1 inputs. Since valuations are based on quoted prices that are readily available in an active market, valuation of these products does not entail a significant degree of judgment. Assets utilizing Level 1 inputs include exchange-traded equity securities.

Level 2		Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Assets and liabilities utilizing Level 2 inputs include: U.S. treasury and agency securities, mortgage-backed securities, collateralized mortgage obligations, commercial mortgage-backed securities, municipal bonds and notes, Over-the-Counter (“OTC”) derivative instruments (foreign exchange forwards and option contracts, interest rate swaps related to our senior notes, subordinated notes and junior subordinated debentures), and equity warrant assets for shares of public company capital stock.
Level 3		Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Assets utilizing Level 3 inputs include: limited partnership interests in private equity funds, direct equity investments in private companies, mortgage-backed securities, and equity warrant assets for shares of private company capital stock.

For inactive markets, there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring. Price quotes based upon transactions that are not orderly are not considered to be determinative of fair value and are given little, if any, weight in measuring fair value. Price quotes based upon transactions that are orderly are considered in determining fair value, with the weight given based upon the facts and circumstances. If sufficient information is not available to determine if price quotes are based upon orderly transactions, less weight is given to the price quote relative to other transactions that are known to be orderly.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment that we use to determine fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement is determined is based on the lowest level input that is significant to the fair value measurement in its entirety.

Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

The types of instruments valued based on quoted market prices in active markets include the Company’s U.S. government and agency securities, mortgage-backed securities and asset-backed securities (“ABS”). Such instruments are generally classified within level 1 or level 2 of the fair value hierarchy. As required by ASC 820, the Company does not adjust the quoted price for such instruments.

Level 3 valuations are for instruments that are not traded in active markets or are subject to transfer restrictions, and may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Such instruments in this category include some investment securities, all impaired loans, warrants and foreclosed assets.

Transfers between fair value hierarchy levels would represent assets or liabilities that were previously categorized at a higher level for which the inputs to the estimate became less observable or classified at a lower level for which the inputs became more observable during the period. The Company's policy is to recognize transfers between levels at the end of the period.

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Following is a summary of the valuation techniques used for each class of Level 3 assets:

(dollars in thousands)		September 30, 2014
		Fair Value				Valuation Technique		Unobservable Input
Available for sale securities:
Corporates		$	—			Sensitivity analyses		Indicative pricing
Non-Agency MBS		132,887				Volatility-driven, multi-dimensional spread tables, optional adjusted spread model and prepayment model		Indicative pricing, collateral performance
Other ABS		49,008				Multi-dimensional, collateral specific spread tables		Indicative pricing, collateral performance
Warrants		4,089				Black-Scholes option pricing model		Estimated market price, stated strike prices, option expiration prices, risk-free interest rates, option volatility assumptions
Servicing asset		1,275				Discounted cash flow		Discount rates, default rates, prepayment rates, servicing costs
Venture capital fund investments		4,244				Private company equity pricing		Actual and forecasted results, cash position, market comparable companies

(dollars in thousands)		December 31, 2013
		Fair Value				Valuation Technique		Unobservable Input
Available for sale securities:
Corporates		$	26,301			Sensitivity analyses		Indicative pricing
Non-Agency MBS		52,170				Volatility-driven, multi-dimensional spread tables, optional adjusted spread model and prepayment model		Indicative pricing, collateral performance
Other ABS		22,091				Multi-dimensional, collateral specific spread tables		Indicative pricing, collateral performance
Warrants		5,105				Black-Scholes option pricing model		Estimated market price, stated strike prices, option expiration prices, risk-free interest rates, option volatility assumptions
Servicing asset		1,265				Discounted cash flow		Discount rates, default rates, prepayment rates, servicing costs
Venture capital fund investments		4,066				Private company equity pricing		Actual and forecasted results, cash position, market comparable companies

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Following are tables that present information about our investment securities, warrants, servicing asset, and venture capital fund investments, measured at fair value on a recurring basis:

(in thousands)		At September 30, 2014
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Ending Balance
		(Level 1)				(Level 2)				(Level 3)
Available for sale securities:
US Treasuries		$	19,662			$	—			$	—			$	19,662
Agency Direct Obligations		34,647				—				—				34,647
SBA Pools		—				145,041				—				145,041
Agency MBS		—				584,038				—				584,038
Corporates		—				121,025				—				121,025
Municipal Bonds		—				98,126				—				98,126
Non-Agency MBS		—				—				132,887				132,887
Other ABS		—				—				49,008				49,008
Equity securities		2,453				—				—				2,453
Total available for sale securities		$	56,762			$	948,230			$	181,895			$	1,186,887
Warrants		$	—			$	—			$	4,089			$	4,089
Servicing asset		$	—			$	—			$	1,275			$	1,275
Venture capital fund investments		$	—			$	—			$	4,244			$	4,244

(in thousands)		At December 31, 2013
		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Ending Balance
		(Level 1)				(Level 2)				(Level 3)
Available for sale securities:
Agency Direct Obligations		$	35,061			$	—			$	—			$	35,061
SBA Pools		—				129,211				—				129,211
Agency MBS		—				447,850				—				447,850
Corporates		—				119,516				26,301				145,817
Municipal Bonds		—				92,029				—				92,029
Non-Agency MBS		—				—				52,170				52,170
Other ABS		—				—				22,091				22,091
Total available for sale securities		$	35,061			$	788,606			$	100,562			$	924,229
Warrants		$	—			$	—			$	5,105			$	5,105
Servicing asset		$	—			$	—			$	1,265			$	1,265
Venture capital fund investments		$	—			$	—			$	4,066			$	4,066

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The following tables present additional information about Level 3 securities, venture capital fund investments, servicing assets and warrants, measured at fair value on a recurring basis:

(dollars in thousands)		Three Months Ended September 30, 2014
		Available for sale securities
		Corporates				Non-Agency MBS				Other ABS				Venture Capital Fund Investments				Servicing Asset				Warrants				Total
Balance at June 30, 2014		$	6,085			$	85,434			$	34,047			$	4,333			$	1,325			$	4,747			$	135,971
Transfers into Level 3		—				—				—				—				—				—				—
Transfers out of Level 3		(6,085		)		—				—				—				—				(129		)		(6,214		)
Total gains (losses):
included in net income		—				—				—				(261		)		—				721				460
included in other comprehensive income		—				(3,706		)		—				—				—				—				(3,706		)
Purchases, sales, issuances and settlements:
Purchases		—				51,159				24,222				232				—				—				75,613
Sales		—				—				—				—				—				(1,782		)		(1,782		)
Issuances		—				—				—				—				56				532				588
Settlements		—				—				(9,261		)		(60		)		(106		)		—				(9,427		)
Balance at September 30, 2014		$	—			$	132,887			$	49,008			$	4,244			$	1,275			$	4,089			$	191,503

(dollars in thousands)		Three Months Ended September 30, 2013
		Available for sale securities
		Corporates				Non-Agency MBS				Other ABS				Venture Capital Fund Investments				Servicing Asset				Warrants				Total
Balance at June 30, 2013		$	16,584			$	27,592			$	12,211			$	3,156			$	1,142			$	6,330			$	67,015
Transfers into Level 3		5,138				—				—				—				—				—				5,138
Transfers out of Level 3		—				—				—				—				—				—				—
Total gains (losses):
included in net income		—				—				—				988				(73		)		899				1,814
included in other comprehensive income		—				690				1,130				—				—				—				1,820
Purchases, sales, issuances and settlements:
Purchases		—				17,657				8,979				34				—				—				26,670
Sales		—				—				—				—				—				(2,490		)		(2,490		)
Issuances		—				—				—				—				127				479				606
Settlements		—				—				—				(102		)		—				—				(102		)
Balance at September 30, 2013		$	21,722			$	45,939			$	22,320			$	4,076			$	1,196			$	5,218			$	100,471

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(dollars in thousands)		Nine Months Ended September 30, 2014
		Available for sale securities
		Corporates				Non-Agency MBS				Other ABS				Venture Capital Fund Investments				Servicing Asset				Warrants				Total
Balance at December 31, 2013		$	26,301			$	52,170			$	22,091			$	4,066			$	1,265			$	5,105			$	110,998
Transfers into Level 3		2,994				—				2,762				—				—				—				5,756
Transfers out of Level 3		(29,474		)		—				—				(953		)		—				(1,498		)		(31,925		)
Total gains (losses):
included in net income		—				—				—				1,154				18				2,937				4,109
included in other comprehensive income		179				(8,111		)		(7,058		)		—				—				—				(14,990		)
Purchases, sales, issuances and settlements:
Purchases		—				91,031				40,474				402				—				—				131,907
Sales		—				(2,203		)		—				—				—				(3,582		)		(5,785		)
Issuances		—				—				—				—				166				1,127				1,293
Settlements						—				(9,261		)		(425		)		(174		)		—				(9,860		)
Balance at September 30, 2014		$	—			$	132,887			$	49,008			$	4,244			$	1,275			$	4,089			$	191,503

(dollars in thousands)		Nine Months Ended September 30, 2013
		Available for sale securities
		Corporates				Non-Agency MBS				Other ABS				Venture Capital Fund Investments				Servicing Asset				Warrants				Total
Balance at December 31, 2012		$	11,715			$	19,016			$	2,643			$	3,303			$	987			$	4,780			$	42,444
Transfers into Level 3		5,501				—				—				—				—				—				5,501
Transfers out of Level 3		—				—				—				—				—				—				—
Total gains (losses):
included in net income		—				—				—				986				(77		)		3,263				4,172
included in other comprehensive income		485				2,185				—				—				—				—				2,670
Purchases, sales, issuances and settlements:
Purchases		4,021				24,738				19,677				328				—				—				48,764
Sales		—				—				—				—				—				(4,224		)		(4,224		)
Issuances		—				—				—				—				286				1,399				1,685
Settlements		—				—				—				(541		)		—				—				(541		)
Balance at September 30, 2013		$	21,722			$	45,939			$	22,320			$	4,076			$	1,196			$	5,218			$	100,471

For the three and nine months ended September 30, 2014, no available for sale securities and two available for sale securities, respectively, were transferred from Level 2 due to lack of observable inputs to substantiate a Level 2 valuation. For the three and nine months ended September 30, 2013, two available for sale securities and eight available for sale securities, respectively, were transferred from Level 2 due to lack of observable inputs to substantiate a Level 2 valuation.

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Investments in Entities that Calculate Net Asset Value Per Share

FASB guidance (ASC 825-10-50-6A) requires disclosures about the fair value measurements of investments in certain entities that calculate net asset value per share or its equivalents. These disclosures include the fair value of funds; significant investment strategies of the investees; for investments that cannot be redeemed, estimates of the time periods over which underlying assets are expected to be liquidated; the amounts of the Company's unfunded commitments; redemption features of the investments; restrictions on the ability to sell the investments; and information about sales in certain circumstances.

The Company has investments in venture capital funds that calculate net asset value per share. The Company's investments in venture capital funds generally cannot be redeemed. Alternatively, the Company expects distributions, if any, to be received primarily through M&A activity and IPOs of the underlying assets of the fund. The Company currently does not have any plans to sell any of these fund investments. If the Company decides to sell these investments in the future, generally the investee fund’s management must approve of the buyer before the sale of the investments can be completed. The fair values of the fund investments have been estimated using the net asset value per share of the investments, adjusted for any differences between our measurement date and the date of the fund investment’s net asset value based on the most recently available financial information from the investee general partner. The most recently available financial information is generally as of the end of the previous quarter. For example, the September 30, 2014 financial statements reflect the June 30, 2014 financial information from the investee general partner, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.

The following tables summarize the estimated fair values of these investments and remaining unfunded commitments for these investments:

(in thousands)		September 30, 2014
		Carrying Value				Fair Value				Unfunded Commitments
Venture capital fund investments		$	4,244			$	4,244			$	2,025
Total		$	4,244			$	4,244			$	2,025

(in thousands)		December 31, 2013
		Carrying Value				Fair Value				Unfunded Commitments
Venture capital fund investments		$	4,066			$	4,066			$	1,006
Total		$	4,066			$	4,066			$	1,006

Venture capital fund investments include investments made by Square 1 Financial, Inc. and Square 1 Bank. These investments represent commitments to venture capital funds that invest in or lend money to primarily U.S. and global technology and life sciences companies and invest in U.S. based venture capital funds themselves. It is estimated that the Company will receive distributions from the fund investments over the next 10 to 13 years, depending on the age of the funds and any potential extensions of terms of the funds.

At September 30, 2014, the $4.2 million venture capital fund investments valuation consisted of $1.3 million of Bank investments primarily for CRA purposes, $1.8 million from Square 1 Ventures, and $0.9 million of holding company investments.

Fair Value of Assets Measured on a Non-recurring Basis

Foreclosed Assets — Upon acquisition, foreclosed assets are initially recorded at the fair value of the asset less cost to sell. Any excess of the recorded investment over the fair value of the property received is charged to the allowance for loan losses. Subsequently, foreclosed assets are carried at the lower of carrying value or net realizable value. Reviews will be performed by management and any subsequent write-downs due to the excess of carrying value of a property over its estimated fair value (less estimated costs to sell) are charged against other expenses. Foreclosed assets are included in other assets in the accompanying consolidated balance sheets.

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The following table presents information about our assets measured at fair value on a non-recurring basis:

(in thousands)		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Ending Balance
		(Level 1)				(Level 2)				(Level 3)
September 30, 2014
Impaired loans		$	—			$	—			$	3,425			$	3,425
December 31, 2013
Foreclosed assets		$	—			$	—			$	119			$	119
Impaired loans		$	—			$	—			$	9,022			$	9,022

Financial Instruments Not Carried at Fair Value

FASB issued guidance over financial instruments (ASC 825-10-65) requires that we disclose estimated fair values for our financial instruments not carried at fair value. Fair value estimates, methods and assumptions, set forth below for our financial instruments, are made solely to comply with the requirements of ASC 825.

Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for many of our financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management’s estimates of the values, and they are calculated based on indicator prices corroborated by observable market quotes or pricing models, the economic and competitive environment, the characteristics of the financial instruments, expected losses, and other such factors.

These calculations are subjective in nature, involve uncertainties and matters of significant judgment, and do not include tax ramifications; therefore, the results cannot be determined with precision or substantiated by comparison to independent markets, and they may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein does not represent, and should not be construed to represent, the underlying value of the Company.

The following describes the methods and assumptions used in estimating the fair values of financial instruments, excluding financial instruments already recorded at fair value as described above.

Cash and due from banks, federal funds sold and short-term investments

The carrying amounts for cash and due from banks, federal funds sold and short-term investments approximate fair value because of the short maturities of those instruments.

Loans

The fair value of the net loan portfolio has been estimated based on management’s assumptions with respect to present value of expected cash flows, discounted at an interest rate giving consideration to estimated prepayment risk and credit loss factors. There is no material difference between carrying value and fair value of loans as outstanding loans are predominately at variable rates.

Investment securities—held to maturity

The fair value of investment securities held to maturity are based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly.

FHLB stock

The carrying amount of FHLB stock approximates fair value as it is not practicable to determine the fair value due to restrictions placed on its transferability.

Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates fair value due to the short-term nature of the balance.

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Deposits

The fair value of deposits with no stated maturities are predominately at variable rates and, accordingly, the fair values have been estimated to equal the carrying amounts (the amount payable on demand). The fair values of certificates of deposits are estimated by discounting the future cash flows using the current rates offered for similar deposits with the same remaining maturities.

Short-term borrowings

The Company’s short-term borrowings include securities sold under repurchase agreements, federal funds purchased and short-term lines of credit. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the borrowing and its contractual maturity.

Long-term debt

The Company’s long-term debt includes the Company’s convertible subordinated debentures. Fair value of long-term debt is estimated by discounting the future cash flows using current rates offered with the same maturities, price indications from reputable dealers or utilizing observable market prices of the underlying instrument, whichever is deemed more reliable.

Financial instruments with off-balance sheet risk

With regard to financial instruments with off-balance sheet risk discussed in Note 16, carrying amounts are reasonable estimates of the fair values for such financial instruments. Commitments to extend credit generally result in loans with a market interest rate if funded.

The following tables present the estimated fair values of our financial instruments that are not carried at fair value:

(in thousands)		September 30, 2014
		Carrying Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Ending Balance
Financial assets:
Cash and cash equivalents		$	185,606			$	185,606			$	—			$	—			$	185,606
Investment in time deposits		1,250				1,250				—				—				1,250
Investment securities—held to maturity		278,121				—				276,407				6,750				283,157
Loans, net of unearned income		1,271,457				—				—				1,277,550				1,277,550
FHLB stock		2,091				—				—				2,091				2,091
Accrued interest receivable		10,835				—				—				10,835				10,835
Financial liabilities:
Non-maturity deposits(1)		2,651,938				2,651,938				—				—				2,651,938
Time deposits		16,507				—				16,466				—				16,466
Short-term borrowings		—				—				—				—				—
Long-term debt		—				—				—				—				—
Off-balance sheet financial assets:
Future financing commitments		—				—				—				1,167,115				1,167,115

(1)Includes noninterest demand deposits, interest-bearing demand deposits and money market deposits.

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(in thousands)		December 31, 2013
		Carrying Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Ending Balance
Financial assets:
Cash and cash equivalents		$	105,730			$	105,730			$	—			$	—			$	105,730
Investment in time deposits		1,250				1,250				—				—				1,250
Investment securities—held to maturity		154,255				—				140,254				6,300				146,554
Loans, net of unearned income		1,082,536				—				—				1,088,062				1,088,062
FHLB stock		2,162				—				—				2,162				2,162
Accrued interest receivable		9,023				—				9,023				—				9,023
Financial liabilities:
Non-maturity deposits(1)		2,079,909				2,046,398				—				—				2,046,398
Time deposits		26,818				—				26,851				—				26,851
Short-term borrowings		—				—				—				—				—
Long-term debt		6,207				—				5,753				—				5,753
Off-balance sheet financial assets:
Future financing commitments		—				—				—				977,262				977,262

(1)Includes noninterest demand deposits, interest-bearing demand deposits and money market deposits.

16.	OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES

To meet the financial needs of its customers, the Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments are comprised of unfunded lines of credit and financial standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the accompanying consolidated balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of these instruments. The Company uses the same credit policies in making these commitments as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but may include cash in deposit accounts, trade accounts receivable, property, plant, and equipment and intellectual property. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

At September 30, 2014 and December 31, 2013, unfunded lines of credit were $1.2 billion and $977.3 million, respectively, and outstanding standby letters of credit amounted to $68.2 million and $89.2 million, respectively.

From time to time, the Company is party, either as a defendant or plaintiff, to lawsuits in the normal course of our business. While any litigation involves an element of uncertainty, management is of the opinion that the liability, if any, resulting from pending legal proceedings will not have a material adverse effect on our financial condition, liquidity or results of operations.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of section 27A of the Securities Act and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable of a future or forward-looking nature. 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 are not limited to, the following:

•	market and economic conditions (including interest rate environment, levels of public offerings, mergers and acquisitions (“M&A”) and venture capital financing activities) and the associated impact on us;

•	changes in management personnel;

•	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;

•	our overall investment plans, strategies and activities, including our investment of excess cash/liquidity;

•	venture capital/private equity funding and investments;

•	operational, liquidity and credit risks associated with our business;

•	deterioration of our asset quality;

•	our overall management of interest rate risk, including managing the sensitivity of our interest-earning assets and interest-bearing liabilities to interest rates, and the impact to earnings from a change in interest rates;

•	our ability to execute our strategy and to achieve organic loan and deposit growth;

•	increased competition in the financial services industry, nationally, regionally or locally, which may adversely affect pricing and terms;

•	the adequacy of reserves (including allowance for loan and lease losses) and the appropriateness of our methodology for calculating such reserves;

•	the level of client investment fees and associated margins;

•	changes in federal tax law or policy;

•	volatility and direction of market interest rates;

•	changes in the regulatory environment;

•	changes in trade, monetary and fiscal policies and laws;

•	governmental legislation and regulation, including changes in accounting regulation or standards, the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Act, Basel guidelines, capital requirements and other applicable laws and regulations;

•	changes in interpretation of existing law and regulation;

•	further government intervention in the U.S. financial system; and

•	other factors that are discussed in the section titled “Risk Factors,” which are set forth in the Company's Registration Statement.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this filing. 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. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the unaudited interim consolidated financial statements and notes thereto in this Form 10-Q and in conjunction with Square 1's consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and notes thereto included in the Registration Statement.

Management’s Discussion and Analysis includes financial information prepared in accordance with GAAP, as well as certain non-GAAP financial measures such as “efficiency ratio,” “tangible common equity to tangible assets,” “net operating income,” "net interest income," and "core banking noninterest income" (see "Non-GAAP Financial Measures").

Summary Financial Information

The following summary financial information is derived in part from our consolidated financial statements. The following is only a summary and you should read it in conjunction with the unaudited interim consolidated financial statements and the related notes.

(Dollars in thousands)		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Financial Condition Data:		(Dollars in thousands)								(Dollars in thousands)
Average total assets		$	2,838,269			$	2,123,359			$	2,620,684			$	1,991,599
Average cash and cash equivalents		157,129				112,915				166,987				128,721
Average investment securities - available-for-sale		1,133,467				887,213				1,052,298				850,264
Average investment securities - held-to-maturity		252,289				123,628				204,292				90,236
Average loans, net of unearned income		1,223,906				943,696				1,138,097				872,873
Average on-balance sheet deposits		2,533,778				1,900,576				2,349,180				1,776,530
Average total client investment funds		931,780				443,612				771,705				405,311
Average borrowings		543				10,988				3,623				15,876
Average repurchase agreements		—				22,525				2,009				7,592
Average total shareholders' equity		289,021				179,958				254,401				181,319
Operating Data:
Interest income		$	26,958			$	20,020			$	74,832			$	55,074
Interest expense		150				346				642				981
Net interest income		26,808				19,674				74,190				54,093
Provision for loan losses		2,500				2,850				8,614				9,340
Net interest income after provision for loan losses		24,308				16,824				65,576				44,753
Noninterest income		5,532				6,729				19,044				18,340
Noninterest expense		16,835				13,659				49,018				40,805
Income before income tax expense		13,005				9,894				35,602				22,288
Income tax expense		4,253				2,926				10,951				6,845
Preferred stock dividends and discount accretion		—				62				63				188
Net income available to common shareholders		8,752				6,906				24,588				15,255

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		At or For the
		Three Months Ended September 30,						Nine Months Ended September 30,
		2014			2013			2014			2013
Performance Ratios:
Return on average assets		1.22	%		1.29	%		1.25	%		1.02	%
Return on average common equity		12.01			15.66			13.01			11.56
Net interest margin(1)		4.00			3.95			4.04			3.89
Efficiency ratio(2)		49.79			49.85			50.55			54.54
Average equity to average assets		10.18			8.48			9.71			9.10
Capital Ratios (consolidated):
Tier 1 leverage capital		10.05			9.02			10.05			9.02
Tier 1 risk-based capital		13.69			11.68			13.69			11.68
Total risk-based capital		14.84			12.79			14.84			12.79
Total shareholders’ equity to assets		9.85			8.43			9.85			8.43
Tangible common equity to tangible assets(3)		9.83			8.20			9.83			8.20
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans		1.79			1.78			1.79			1.78
Allowance for loan losses as a percent of nonperforming loans		193.38			134.56			193.38			134.56
Net charge-offs to average outstanding loans (annualized)		0.40			1.25			0.49			0.78
Nonperforming loans as a percent of total loans		0.93			1.32			0.93			1.32
Nonperforming assets as a percent of total assets		0.39			0.63			0.39			0.63

(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 other than loan servicing intangible assets. We believe that the most directly comparable GAAP financial measure is total shareholders’ equity to assets. See “Non-GAAP Financial Measures.”

Non-GAAP Financial Measures

The information set forth above 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.

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

		At or For the
(Dollars in thousands)		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Efficiency Ratio
Noninterest expense (GAAP)		$	16,835			$	13,659			$	49,019			$	40,805
Net interest taxable equivalent income		27,867				20,577				77,186				56,235
Noninterest taxable equivalent income		5,709				6,889				19,549				18,755
Less: (loss) gain on sale of securities and impairment		(235		)		65				(231		)		171
Adjusted operating revenue		$	33,811			$	27,401			$	96,966			$	74,819
Efficiency ratio		49.79		%		49.85		%		50.55		%		54.54		%
Tangible Common Equity/Tangible Assets
Total equity		$	294,202			$	182,413			$	294,202			$	182,413
Less: preferred stock		—				4,950				—				4,950
Intangible assets(1)		495				—				495				—
Tangible common equity		$	293,707			$	177,463			$	293,707			$	177,463
Total assets		$	2,988,186			$	2,163,452			$	2,988,186			$	2,163,452
Less: intangible assets(1)		495				—				495				—
Tangible assets		$	2,987,691			$	2,163,452			$	2,987,691			$	2,163,452
Tangible common equity/tangible assets		9.83		%		8.20		%		9.83		%		8.20		%
Net Operating Income
GAAP income before taxes		$	13,005			$	9,894			$	35,600			$	22,286
Add: (loss) gain on sale of securities and impairment		(235		)		65				(231		)		171
Add: tax equivalent adjustment		1,237				1,063				3,503				2,558
Non-GAAP net operating income before taxes		$	14,477			$	10,892			$	39,334			$	24,673
Net Interest Income
GAAP net interest income		$	26,808			$	19,674			$	74,190			$	54,093
Add: tax equivalent adjustment		1,059				903				2,996				2,142
Non-GAAP net interest income (fully tax equivalent basis)		$	27,867			$	20,577			$	77,186			$	56,235
Core Banking Noninterest Income
GAAP noninterest income		$	5,532			$	6,729			$	19,044			$	18,340
Less: net (loss) gain on securities		(235		)		65				(231		)		171
Warrant income		721				899				$	2,937			$	3,263
Gain on sale of loans		248				444				750				1,665
Bank owned life insurance		330				298				936				771
Other		137				1,607				2,573				2,739
Non-GAAP core banking noninterest income		$	4,331			$	3,416			$	12,079			$	9,731

(1) Does not include a loan servicing asset of $1.3 million and $1.2 million at September 30, 2014 and September 30, 2013, respectively.

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Executive Overview of Recent Financial Performance

Our strategy is to grow organically in the key U.S. innovation markets. As part of this growth strategy, we expect to evolve our mix of loan business to include more later stage companies and more business with venture capital firms and life sciences companies. We believe this loan mix tilt will help us continue to lower credit costs. Certain elements of our business, such as warrant gains, deposit inflows and to some extent credit quality, can create a degree of quarterly variability to our numbers.

We continued to experience solid balance sheet and revenue growth, which resulted in increased net operating income during the three and nine months ended September 30, 2014. We had net income available to common shareholders of $8.8 million and diluted earnings per share of $0.29 for the three months ended September 30, 2014, compared to net income available to common shareholders of $6.9 million and diluted earnings per share of $0.29 for the three months ended September 30, 2013. Return on average common equity was 12.01% and return on average assets was 1.22% for the three months ended September 30, 2014. 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. Return on average common equity was 13.01% and return on average assets was 1.25% for the nine months ended September 30, 2014.

We experienced strong growth in net interest income compared to the three and nine months ended September 30, 2013. Net interest income increased as a result of significant growth in both our loans and deposits. Average loan balances for the three months ended September 30, 2014, were $1.2 billion, compared to $943.7 million for the three months ended September 30, 2013. Average loan balances for the nine months ended September 30, 2014, were $1.1 billion, compared to $872.9 million for the nine months ended September 30, 2013. Period-end loans increased $188.9 million from December 31, 2013. Overall credit quality remains strong. At September 30, 2014, our ratio of nonperforming loans to total loans was 0.93%, improving from 1.34% at December 31, 2013. Loan growth was funded by our continued success in growing our low cost deposits from new and existing venture firms and entrepreneurial companies. Our average client funds, which consist of on-balance sheet deposits and client investment funds, increased $1.1 billion, or 47.8%, and $939.0 million, or 43.0%, respectively, for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013. Higher balances and yields on our investment portfolio also drove the increase in net interest income. We also continue to experience favorable funding of our interest earning assets with 65.2% and 64.8%, respectively, of our average deposits for the three and nine months ended September 30, 2014 coming from noninterest-bearing deposits, compared to 59.9% and 61.5%, respectively, for the three and nine months ended September 30, 2013. Net interest margin increased to 4.00% and 4.04%, respectively, for the three and nine months ended September 30, 2014 compared to 3.95% and 3.89%, respectively, for the same periods in the prior year.

Core banking noninterest income within noninterest income was $4.3 million for the three months ended September 30, 2014, an increase of $0.9 million, or 26.8%, compared to the three months ended September 30, 2013. Total noninterest income decreased $1.2 million, or 17.8%, compared to the three months ended September 30, 2013, primarily driven by a $1.2 million decrease in income from our venture capital fund investments due to unrealized losses. The increase in core banking noninterest income was offset by higher net losses on the sale of securities of $0.3 million, lower warrant income of $0.2 million, and lower gains on sales of SBA loans of $0.2 million. Quarterly results from our venture capital fund investments are not indicative of annual results as income from venture capital fund investments can be volatile. Core banking noninterest income was $12.1 million for the nine months ended September 30, 2014, an increase of $2.3 million, or 24.1%, compared to the nine months ended September 30, 2013. Total noninterest income increased $0.7 million, or 3.8%, compared to the nine months ended September 30, 2013, as the $2.3 million increase in core banking noninterest income was largely offset by higher net losses on the sale of securities of $0.4 million, lower warrant income of $0.3 million, and lower gains on sales of SBA loans of $0.9 million.

Noninterest expense increased $3.2 million, or 23.3%, compared to the three months ended September 30, 2013 and increased $8.2 million, or 20.1%, compared to the nine months ended September 30, 2013. As we continue to grow our business and add employees to support our growth, we will continue to incur additional personnel and benefits expenses related to such growth. In addition, our occupancy, data processing and furniture and equipment expenses are increasing in 2014 due to expansion of our loan production offices and banking system updates. Expansion of our loan production offices and system updates have and will continue to result in increased expenses in 2014 and into 2015. Increases in the provision for unfunded credit commitments compared to the three and nine months ended September 30, 2013, also contributed to higher noninterest expense.

On March 31, 2014, we sold a total of 3,125,000 shares of Class A common stock in our initial public offering at an initial public offering price of $18.00 and received net proceeds of $51.1 million after deducting approximately $3.8 million in underwriting discounts and commissions and approximately $1.4 million in IPO-related expenses. We intend to use these

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proceeds to support our long-term growth by enhancing our capital ratios in light of Basel III, and for general working capital and other corporate purposes. 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 nine months ended September 30, 2014, investors converted $7.4 million of outstanding convertible trust preferred securities into 741,500 common shares. At September 30, 2014, no convertible trust preferred securities remained outstanding.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of financial condition and results of operations is based on our unaudited interim consolidated financial statements, which were prepared in accordance with GAAP. In preparing our unaudited interim consolidated financial statements, we made certain estimates that were critical in nature to our financial condition and results of operations as they require us to make especially difficult, subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported using different conditions and assumptions. We have discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

There have been no material changes to critical accounting policies and estimates discussed under "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in the Registration Statement.

Impact of Recent Accounting Pronouncements

The information required by this item is included in Note 2 to the consolidated financial statements included in this Form 10-Q.

RESULTS OF OPERATIONS

Performance Summary

Three Months Ended September 30, 2014 and 2013. For the three months ended September 30, 2014, we reported net income available to common shareholders of $8.8 million, an increase of $1.8 million, or 26.7%, compared to net income available to common shareholders of $6.9 million for the three months ended September 30, 2013. The increase resulted from a $7.1 million, or 36.3%, increase in net interest income, partially offset by a $1.2 million, or 17.8%, decrease in noninterest income and a $3.2 million, or 23.3%, increase in noninterest expense.

The increase in net interest income compared to the three months ended September 30, 2013 was primarily the result of our continued success in growing our loan portfolio and low cost deposits, along with higher balances and yields on our investment portfolio. The decrease in noninterest income was primarily due to a $1.2 million decrease in income from our venture capital fund investments due to unrealized losses, higher net losses on the sale of securities of $0.3 million, lower warrant income of $0.2 million, and $0.2 million lower gain on sale of SBA loans due to our strategic decision to hold more SBA loans in our loan portfolio, partially offset by a $0.9 million increase in core banking noninterest income. The increase in noninterest expense compared to the three months ended September 30, 2013 was primarily due to $2.2 million higher personnel expenses in the three months ended September 30, 2014 driven by an increase of 27 full-time equivalent employees and higher incentive compensation expense. Increases in data processing and furniture and equipment expenses also contributed to higher total noninterest expense.

Nine Months Ended September 30, 2014 and 2013. For the nine months ended September 30, 2014, we reported net income available to common shareholders of $24.6 million, an increase of $9.3 million, or 61.2%, compared to net income available to common shareholders of $15.3 million for the nine months ended September 30, 2013. The increase resulted from a $20.1 million, or 37.2%, increase in net interest income and a $0.7 million, or 3.8%, increase in noninterest income, partially offset by a $8.2 million, or 20.1%, increase in noninterest expense.

The increase in net interest income compared to the nine months ended September 30, 2013 was primarily the result of the same factors as in the three months ended September 30, 2014. The increase in noninterest income was primarily due to a $2.3 million increase in core banking noninterest income, which was largely offset by higher net losses on the sale of securities of $0.4 million, lower warrant income of $0.3 million, and lower gain on sale of SBA loans of $0.9 million due to our strategic decision to hold more SBA loans in our loan portfolio. The increase in noninterest expense was largely due to $6.0 million higher personnel expenses driven by the increase in full-time equivalent employees and higher incentive compensation expense, as well as the increases in the provision for unfunded credit commitments and higher data processing and furniture and equipment expenses.

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Net Interest Income and Net Interest Margin (Fully Tax Equivalent Basis)

The information set forth below contains certain financial information determined by methods other than in accordance with GAAP. See "Non-GAAP Financial Measures" section for a reconciliation of this non-GAAP measure to its most comparable GAAP measure.

Net interest income, the primary contributor to our earnings, represents the difference between the income that we earn on our interest-earning assets and the cost to us of our interest-bearing liabilities. Our net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that we earn or pay on them. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” The yield earned on loans includes loan fees, which are primarily loan origination fees and loan documentation fees related to loan origination. 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.

Net Interest Income (Fully Tax Equivalent Basis)

Three Months Ended September 30, 2014 and 2013. For the three months ended September 30, 2014, net interest income increased $7.3 million, or 35.4%, to $27.9 million compared to the three months ended September 30, 2013. This increase was primarily driven by a $7.1 million, or 33.9%, increase in interest income. Our interest income increase primarily resulted from:

•	a $4.4 million, or 29.3%, increase to $19.3 million in interest income on loans, resulting from a 29.7% higher average balance, partially offset by a 2 basis point decline in the yield earned. The 2 basis point decline in the yield earned resulted from increased competitive pressure in the current low rate environment;

•

a $2.3 million, or 67.8%, increase to $5.6 million in interest income on taxable securities due to a 43.8% higher average balance and a 28 basis point increase in the yield earned. The higher taxable securities balance was driven by investments purchased as a result of deposit growth, and the higher yield was primarily a result of lower premium amortization on agency mortgage-backed securities resulting from slower prepayments; and

•	a $0.4 million, or 17.1%, increase to $3.0 million in interest income on nontaxable securities caused by a 13.0% higher average balance and a 17 basis point increase in the yield earned on nontaxable securities. The higher nontaxable securities balance and yield was primarily a result of our continued purchases of higher yielding municipal securities.

Interest expense of $0.2 million represented a 56.6% decrease from the three months ended September 30, 2013, and was primarily driven by the conversion to common stock of the trust preferred securities in the first half of 2014, and lower yields paid on demand deposit and money market accounts.

Nine Months Ended September 30, 2014 and 2013. For the nine months ended September 30, 2014, net interest income increased $21.0 million, or 37.3%, to $77.2 million compared to the nine months ended September 30, 2013. This increase was primarily driven by a $20.6 million, or 36.0%, increase in interest income. Our interest income increase primarily resulted from:

•	a $11.9 million, or 28.6%, increase to $53.4 million in interest income on loans, resulting from a 30.4% higher average balance, partially offset by a 9 basis point decrease in the yield earned. The 9 basis point decrease in the yield earned resulted from increased competitive pressure in the current low rate environment;

•

a $6.2 million, or 67.0%, increase to $15.5 million in interest income on taxable securities due to a 34.6% higher average balance and a 39 basis point increase in the yield earned. The higher taxable securities balance was driven by investments purchased as a result of deposit growth, and the higher yield was primarily a result of lower premium amortization on agency mortgage-backed securities resulting from slower prepayments; and

•	a $2.4 million, or 39.9%, increase to $8.6 million in interest income on nontaxable securities caused by a 29.4% higher average balance and a 37 basis point increase in the yield earned. The higher nontaxable securities balance and yield was primarily a result of our continued purchases of higher yielding municipal securities.

Interest expense of $0.6 million represented a 34.6% decrease from the nine months ended September 30, 2013. This decrease was largely due to the 55.2% decrease in the average balance on junior subordinated debt. Lower yields paid on deposits also contributed to the decrease in interest expense for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Lower yields paid on deposits resulted in a slight decrease in interest expense despite a $144.4 million, or 21.1%, increase in the average balance on interest-bearing deposits.

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Net Interest Margin (Fully Tax Equivalent Basis)

Three and Nine Months Ended September 30, 2014 and 2013. Our net interest margin increased to 4.00% from 3.95% for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, and increased to 4.04% from 3.89% for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The primary reasons for these increases were:

•	lower premium amortization on agency mortgage backed securities as loan prepayments slowed;

•	continued purchasing of higher yielding municipal securities; and

•	lower cost of funds as interest paid on interest bearing deposits declined and trust preferred securities were converted to common shares.

These increases were partially offset by:

•	a decline in loan yields in the current low rate environment that continues in 2014.

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Average Balances and Yields

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. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented. Loan fees are included in interest income on loans. Yields are presented on a tax equivalent basis.

		Three 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		$	152,008			$	104			0.27	%		$	111,426			$	78			0.28	%
Loans, net of unearned income		1,223,906				19,326				6.26			943,696				14,949				6.28
Nontaxable securities		248,629				3,020				4.82			220,063				2,578				4.65
Taxable securities		1,137,127				5,567				1.94			790,777				3,317				1.66
Total interest-earning assets		2,761,670				28,017				4.02			2,065,962				20,922				4.02
Less: Allowance for loan losses		(22,888		)									(18,038		)
Noninterest-earning assets		99,487											75,435
Total assets		$	2,838,269										$	2,123,359
Interest-bearing liabilities:
Demand deposits		$	87,957			18				0.08			$	92,500			33				0.14
Money market		765,338				115				0.06			641,159				131				0.08
Time deposits		27,997				16				0.22			28,872				17				0.23
Total interest-bearing deposits		881,292				149				0.07			762,531				181				0.09
FHLB advances		543				—				0.14			4,783				—				—
Repurchase agreements		—				—				—			22,525				6				—
Junior subordinated debt		—				1				—			6,205				159				10.10
Total interest-bearing liabilities		881,835				150				0.07			796,044				346				0.17
Noninterest-bearing deposits		1,652,486											1,138,044
Other noninterest-bearing liabilities		14,927											9,313
Total liabilities		2,549,248											1,943,401
Total shareholders’ equity		289,021											179,958
Total liabilities and shareholders’ equity		$	2,838,269										$	2,123,359
Net interest income						$	27,867										$	20,576
Interest rate spread										3.95	%										3.85	%
Net interest margin										4.00	%										3.95	%
Ratio of average interest-earning assets to average interest-bearing liabilities										313.17	%										259.53	%

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		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	%

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Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

		Three Months Ended September 30, 2014
		Compared to
		Three Months Ended September 30, 2013
		Increase (Decrease) Due to
		Rate				Volume				Net
		(Dollars in thousands)
Interest income:
Federal Reserve deposits, federal funds sold and other short-term investments		$	5			$	21			$	26
Loans, net of unearned income		(62		)		4,439				4,377
Nontaxable securities(1)		8				434				442
Taxable securities		10				2,240				2,250
Total interest-earning assets		(39		)		7,134				7,095
Interest expense:
Demand deposits		(13		)		(2		)		(15		)
Money market		(42		)		26				(16		)
Time deposits		—				(1		)		(1		)
Borrowings		(8		)		(156		)		(164		)
Total interest-bearing liabilities		(63		)		(133		)		(196		)
Change in net interest income		$	24			$	7,267			$	7,291

(1)	Tax equivalent income.

		Nine Months Ended September 30, 2014
		Compared to
		Nine Months Ended September 30, 2013
		Increase (Decrease) Due to
		Rate				Volume				Net
		(Dollars in thousands)
Interest income:
Federal Reserve deposits, federal funds sold and other short-term investments		$	(2	)		$	74			$	72
Loans, net of unearned income		(760		)		12,633				11,873
Nontaxable securities(1)		792				1,653				2,445
Taxable securities		1,607				4,617				6,224
Total interest-earning assets		1,637				18,977				20,614
Interest expense:
Demand deposits		(54		)		56				2
Money market		(117		)		62				(55		)
Time deposits		7				(7		)		—
Borrowings		104				(390		)		(286		)
Total interest-bearing liabilities		(60		)		(279		)		(339		)
Change in net interest income		$	1,697			$	19,256			$	20,953

(1)	Tax equivalent income.

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Provision for Loan Losses

We consider a number of factors in determining the required level of our loan reserves and the provision required to achieve what we believe is the appropriate reserve level, including loan growth, credit risk rating trends, nonperforming loan levels, delinquencies, loan portfolio concentrations and economic and market trends. The provision for loan losses represents our determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that we consider adequate in relation to the estimated losses inherent in the loan portfolio.

Three and Nine Months Ended September 30, 2014 and 2013. For the three months ended September 30, 2014, the provision for loan losses was $2.5 million, a decrease of $0.4 million, or 12.3%, compared to the three months ended September 30, 2013. For the nine months ended September 30, 2014, the provision for loan losses was $8.6 million, a decrease of $0.7 million, or 7.8%, compared to the nine months ended September 30, 2013. The lower provision for the three and nine months ended September 30, 2014 reflected an overall improvement in credit quality, partially offset by the growth in our loan portfolio. At September 30, 2014, nonperforming loans totaled $11.8 million, or 0.93%, of total loans compared to $14.5 million, or 1.34%, of total loans, at December 31, 2013, and $13.4 million, or 1.32%, at September 30, 2013. Net loan charge-offs were $1.2 million, or 0.40%, of average loans (annualized) for the three months ended September 30, 2014, compared to net loan charge-offs of $3.0 million, or 1.25%, of average loans (annualized) for the three months ended September 30, 2013. The allowance for loan losses to nonperforming loans at September 30, 2014 was 193.38%, compared to 134.56% at September 30, 2013. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management" for a discussion of credit risk and credit quality.

Noninterest Income

Three and Nine Months Ended September 30, 2014 and 2013. The following tables show the components of noninterest income and the related dollar and percentage changes:

		Three Months Ended September 30,								Change
		2014				2013				Dollars				Percent
		(Dollars in thousands)
Core banking income:
Service charges and fees		$	1,150			$	1,069			$	81			7.6	%
Foreign exchange fees		1,792				1,270				522				41.1
Credit card and merchant income		914				605				309				51.1
Letter of credit fees		293				271				22				8.1
Client investment fees(1)		79				48				31				64.6
Loan documentation fees(1)		103				153				(50		)		(32.7	)
Total core banking noninterest income		4,331				3,416				915				26.8
Net (loss) gain on securities		(235		)		65				(300		)		(461.5	)
Warrant income		721				899				(178		)		(19.8	)
Gain on sale of loans		248				444				(196		)		(44.1	)
Bank owned life insurance		330				298				32				10.7
Other		137				1,607				(1,470		)		(91.5	)
Total noninterest income		$	5,532			$	6,729			$	(1,197	)		(17.8	)%

(1) Included in other noninterest income in the consolidated statements of operations.

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		Nine Months Ended September 30,								Change
		2014				2013				Dollars				Percent
		(Dollars in thousands)
Core banking income:
Service charges and fees		$	3,345			$	3,020			$	325			10.8	%
Foreign exchange fees		4,795				3,635				1,160				31.9
Credit card and merchant income		2,314				1,787				527				29.5
Letter of credit fees		1,104				785				319				40.6
Client investment fees(1)		185				171				14				8.2
Loan documentation fees(1)		336				333				3				0.9
Total core banking noninterest income		12,079				9,731				2,348				24.1
Net (loss) gain on securities		(231		)		171				(402		)		(235.1	)
Warrant income		2,937				3,263				(326		)		(10.0	)
Gain on sale of loans		750				1,665				(915		)		(55.0	)
Bank owned life insurance		936				771				165				21.4
Other(1)		2,573				2,739				(166		)		(6.1	)
Total noninterest income		$	19,044			$	18,340			$	704			3.8	%

(1) Included in other noninterest income in the consolidated statements of operations.

Core banking noninterest income represents recurring income from traditional banking services provided to our customers. The $0.9 million, or 26.8%, and $2.3 million, or 24.1%, increase in core banking noninterest income for the three and nine months ended September 30, 2014, respectively, was primarily due to an increased customer base combined with increased utilization of our core banking services by our customers. Service charges and fees represent fees earned on our deposit accounts. Foreign exchange fees are primarily transaction-based fees earned from our customers for performing foreign currency-based transactions on their behalf. The increase in foreign exchange fees 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 the three months ended September 30, 2014 reflects certain large transactions, which may not occur in future periods. Credit card and merchant income represents fees earned on credit card accounts and transactions. The increase in credit card and merchant income reflects growth in credit card accounts. Credit card balances outstanding were $19.3 million, $11.6 million and $9.2 million at September 30, 2014, December 31, 2013 and September 30, 2013, respectively. Letters of credit fees represent fees charged to issue and process letters of credit for customers. The increase in letters of credit fees for the nine months ended September 30, 2014 was driven by an increase in the volume of letters of credit. These increases in fees for the three and nine months ended September 30, 2014 are consistent with new customer growth and increased utilization of our core banking services by our existing customers.

For the three and nine months ended September 30, 2014, net loss on the sale of securities includes losses on the sale of equity securities held in our investment portfolio that we obtained in public companies through the exercise of warrants and the decrease in gain on sale of loans was due to our strategic decision to hold more SBA loans in our loan portfolio.

The decrease in our other noninterest income for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily driven by a $1.2 million decrease in income from our venture capital fund investments due to unrealized losses. Quarterly results from our venture capital fund investments are not indicative of annual results as income from venture capital fund investments can be volatile. See Note 15 for further information regarding our venture capital fund investments.

Warrant income includes income realized upon the exercise of a warrant, as well as unrealized gains and losses from the quarterly mark-to-market of our warrant portfolio. The timing and volume of successful liquidity events, including IPOs, for the clients in which we had taken warrant positions, and changes in the fair value of our equity warrant assets drive variances in warrant income. The variances in warrant income demonstrate the volatility of this income which is created, in part, by the erratic nature of public equity markets and their receptivity to IPOs.

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The following tables show the components of warrant income and the period-to-period changes (see further discussion of our equity warrant assets in Note 14 to the interim consolidated financial statements):

		Three Months Ended September 30,								Change
		2014				2013				Dollars				Percent
		(Dollars in thousands)
Equity warrant assets:
Net gains on exercise of equity warrant assets		$	1,805			$	2,433			$	(628	)		(25.8	)%
Non-monetized write off of warrant assets		(178		)		(132		)		(46		)		34.8
Net realized gains on equity warrants		1,627				2,301				(674		)		(29.3	)
Change in fair value		(906		)		(1,402		)		496				35.4
Warrant income		$	721			$	899			$	(178	)		(19.8	)%

		Nine Months Ended September 30,								Change
		2014				2013				Dollars				Percent
		(Dollars in thousands)
Equity warrant assets:
Net gains on exercise of equity warrant assets		$	4,821			$	4,043			$	778			19.2	%
Non-monetized write off of warrant assets		(354		)		(310		)		(44		)		14.2
Net realized gains on equity warrants		4,467				3,733				734				19.7
Change in fair value		(1,530		)		(470		)		(1,060		)		(225.5	)
Warrant income		$	2,937			$	3,263			$	(326	)		(10.0	)%

During the three and nine months ended September 30, 2014, our net realized gains were largely driven by public company equity warrants. During the three months ended September 30, 2014, we realized warrant gains in 15 companies, including the exercise of warrants with a total value of $1.4 million for equity securities in six publicly traded companies, of which five companies had conducted IPOs in 2014. During the three months ended September 30, 2014, the Company monetized equity securities for $0.7 million in proceeds following the expiration of their applicable lock-up periods. The equity securities had an initial value of $0.9 million and we recognized a loss of $0.2 million. We had obtained these equity securities through the exercise of warrants in two public companies.

During the nine months ended September 30, 2014 , we realized warrant gains in 48 companies, including the exercise of warrants with a total value of $2.8 million for equity securities in 10 publicly traded companies, of which eight companies had conducted IPOs in 2014. During the nine months ended September 30, 2014, the Company monetized equity securities for $1.0 million in proceeds following the expiration of their applicable lock-up periods. The equity securities had an initial value of $1.2 million and we recognized a loss of $0.2 million. We had obtained these equity securities through the exercise of warrants in three public companies.

During the three and nine months ended September 30, 2013, we realized warrant gains in 9 companies, and 23 companies, respectively, including the monetization of warrants and a realized gain of $1.3 million on the exercise of warrants in one portfolio company client that conducted an IPO. The Company did not have equity securities obtained from the exercise of warrants in our available for sale portfolio in 2013.

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Noninterest Expense

Three and Nine Months Ended September 30, 2014 and 2013. The following table shows the components of noninterest expense and the related dollar and percentage changes:

		Three Months Ended September 30,								Change
		2014				2013				Dollars				Percent
		(Dollars in thousands)
Personnel		$	10,790			$	8,639			$	2,151			24.9	%
Occupancy		713				691				22				3.2
Data processing		1,090				897				193				21.5
Furniture and equipment		769				589				180				30.6
Advertising and promotions		223				267				(44		)		(16.5	)
Professional fees		976				876				100				11.4
Telecommunications		246				283				(37		)		(13.1	)
Travel		259				211				48				22.7
FDIC assessment		393				349				44				12.6
Other		1,376				857				519				60.6
Total noninterest expense		$	16,835			$	13,659			$	3,176			23.3	%

		Nine Months Ended September 30,								Change
		2014				2013				Dollars				Percent
		(Dollars in thousands)
Personnel		32,148				$	26,128			$	6,020			23.0	%
Occupancy		2,227				2,082				145				7.0
Data processing		2,830				2,229				601				27.0
Furniture and equipment		2,131				1,850				281				15.2
Advertising and promotions		840				891				(51		)		(5.7	)
Professional fees		2,363				2,280				83				3.6
Telecommunications		791				866				(75		)		(8.7	)
Travel		717				762				(45		)		(5.9	)
FDIC assessment		1,145				949				196				20.7
Other		3,826				2,768				1,058				38.2
Total noninterest expense		$	49,018			$	40,805			$	8,213			20.1	%

Personnel represented 64.1% of our total noninterest expense and increased $2.2 million, or 24.9%, for the three months ended September 30, 2014, and 65.6% of our total noninterest expense and increased $6.0 million, or 23.0%, for the nine months ended September 30, 2014. The increase in personnel expense primarily resulted from an increase in our full-time equivalent employees to 253 at September 30, 2014, from 226 at September 30, 2013, to drive and support our balance sheet and income growth. Over the past year we have added 18 venture bankers and client managers in key markets, including Menlo Park, San Francisco, San Diego, Los Angeles, Orange County and Campbell, CA, and Boston, Chicago and New York. Additionally, our acquisition of Sand Hill Finance on December 31, 2013 yielded seven additional employees. In addition, our occupancy and furniture and equipment expenses are increasing in 2014 due to our assumption of the leases for the Sand Hill Finance LLC offices, the addition of new loan production offices in San Francisco which opened in the second quarter, and Chicago which is expected to open later in 2014, and an increase in our lease expenses for one of our existing loan production offices. Data processing fees have also increased to support our overall growth in connection with upgrades for our lending and credit operations. These updates have and will continue to result in increased expenses in 2014. Higher other noninterest expense was primarily driven by an increase in the provision for unfunded credit commitments.

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Income Tax Provision

Three and Nine Months Ended September 30, 2014 and 2013. Income tax expense increased $1.3 million, or 45.4%, for the three months ended September 30, 2014 as compared to the same period in the prior year, primarily due to a $3.1 million, or 31.4%, increase in pre-tax income. Income tax expense increased $4.1 million, or 60.0%, for the nine months ended September 30, 2014 as compared to the same period in the prior year, primarily due to a $13.3 million, or 59.7%, increase in pre-tax income. Our effective tax rate increased to 32.7% for the three months ended September 30, 2014 from 29.6% for the three months ended September 30, 2013, and to 30.8% for the nine months ended September 30, 2014 from 30.7% for the nine months ended September 30, 2013, as a result of the tax impact of the one-time gain recorded on the transfer of the contract for the management of Square 1 Venture 1, L.P. to a third party and a decrease in our tax preferred income from our municipal securities portfolio.

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

Our total assets increased $661.8 million, or 28.4%, to $3.0 billion at September 30, 2014, from $2.3 billion at December 31, 2013, primarily due to deposit growth of $561.7 million and the proceeds of our initial public offering of $51.1 million, which resulted in $79.9 million in additional period end cash and cash equivalents, a $386.5 million increase in our investment securities portfolio, and a $188.9 million increase in our loan portfolio.

Our deposit and loan portfolios include entrepreneurial companies at all stages of their life cycles, as well as venture firms. The following table provides a summary of total loans outstanding, total unfunded loan commitments and deposit balances by stage and type at September 30, 2014 and December 31, 2013:

		September 30, 2014
		Loans Outstanding							Unfunded Loan Commitments							Deposit Balances
		Amount				Percent			Amount				Percent			Amount				Percent
		(Dollars in thousands)
Stage:
Early		$	202,154			15.81	%		$	110,260			9.45	%		$	1,250,453			46.86	%
Expansion		603,802				47.22			337,667				28.93			588,717				22.06
Late		227,077				17.76			171,920				14.73			380,833				14.27
Total portfolio company		1,033,033				80.79			619,847				53.11			2,220,003				83.19
Venture capital/private equity		159,349				12.46			519,552				44.52			448,025				16.79
SBA and USDA		67,067				5.24			5,059				0.43			417				0.02
Credit cards		19,345				1.51			22,657				1.94			—				—
Total		1,278,794				100.00	%		$	1,167,115			100.00	%		$	2,668,445			100.00	%
Less unearned income		(7,337		)
Total loans, net of unearned income		$	1,271,457

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		December 31, 2013
		Loans Outstanding							Unfunded Loan Commitments							Deposit Balances
		Amount				Percent			Amount				Percent			Amount				Percent
		(Dollars in thousands)
Stage:
Early		$	146,096			13.44	%		$	81,611			8.35	%		$	730,511			34.67	%
Expansion		590,511				54.32			299,898				30.69			746,032				35.41
Late		143,925				13.24			163,231				16.70			223,989				10.63
Total portfolio company		880,532				81.00			544,740				55.74			1,700,532				80.71
Venture capital/private equity		143,468				13.20			415,830				42.55			405,870				19.27
SBA and USDA		51,510				4.74			2,388				0.25			325				0.02
Credit cards		11,575				1.06			14,304				1.46			—				—
Total		1,087,085				100.00	%		$	977,262			100.00	%		$	2,106,727			100.00	%
Less unearned income		(4,549		)
Total loans, net of unearned income		$	1,082,536

Loans

The following table presents the loan balances and associated percentage of each category of loans within our loan portfolio at the dates indicated:

		September 30, 2014							December 31, 2013
		Amount				Percent			Amount				Percent
		(Dollars in thousands)
Commercial loans:
Technology		$	634,908			49.65	%		$	543,788			50.02	%
Life sciences		240,375				18.80			224,069				20.61
Asset-based loans		152,282				11.91			111,251				10.24
Venture capital/private equity		159,349				12.46			143,468				13.20
SBA and USDA		33,245				2.60			23,719				2.18
Other		5,468				0.42			1,424				0.13
Total commercial loans		1,225,627				95.84			1,047,719				96.38
Real estate loans:
SBA and USDA		31,532				2.47			27,504				2.53
Total real estate loans		31,532				2.47			27,504				2.53
Construction:
SBA and USDA		2,290				0.18			287				0.03
Total construction loans		2,290				0.18			287				0.03
Credit cards		19,345				1.51			11,575				1.06
Total loans		1,278,794				100.00	%		1,087,085				100.00	%
Less unearned income(1)		(7,337		)					(4,549		)
Total loans, net of unearned income		$	1,271,457						$	1,082,536

(1)	Unearned income consists of unearned loan fees, the discount on SBA loans and the unearned initial warrant value.

The 17.0% increase in commercial loans from December 31, 2013 to September 30, 2014 was primarily driven by increases in total loans to venture-backed companies and the venture firm client industry segment. Within our commercial loan portfolio, our loans to venture firm clients fluctuate from period-to-period based on funding needs driven by investment cycles and timing. The amount of loan commitments that are utilized by these clients vary during the year and often increase at the end of the year when these clients may increase the amount drawn on their lines of credit for various business reasons. Growth

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in SBA and USDA loans also contributed to the overall growth in commercial loans from December 31, 2013 to September 30, 2014.

Total loans to venture-backed companies were up $148.5 million, or 16.9%, while loans to venture firms increased $15.9 million, or 11.1%, at September 30, 2014 compared to December 31, 2013. Our asset-based loans to venture-backed companies increased $41.0 million, or 36.9%, from December 31, 2013 to September 30, 2014. This increase in our asset-based loans was primarily due to our strategic focus on expanding this product line to better serve the needs of our expansion and late stage clients.

We began offering SBA and USDA loans in 2011. At September 30, 2014, SBA and USDA loans represented 5.2% of our loan portfolio compared to 4.7% at December 31, 2013. Total SBA and USDA loans increased $15.6 million, or 30.2%, from December 31, 2013 to September 30, 2014. We expect to continue to grow our SBA and USDA loan portfolio as we originate new loans and sell a portion of the guaranteed balances. We also made a strategic decision to hold more SBA loans in our loan portfolio.

Loan Concentration

Loan concentrations may exist when there are borrowers engaged in similar activities or types of loans extended to a diverse group of borrowers that could cause those borrowers or portfolios to be similarly impacted by economic or other conditions.

The breakdown of total loans by industry sector at September 30, 2014 and December 31, 2013, is as follows:

		September 30, 2014							December 31, 2013
		Amount				Percent			Amount				Percent
		(Dollars in thousands)
Venture portfolio industry:
Software		$	172,898			13.60	%		$	178,408			16.47	%
Business products and services		121,033				9.52			56,635				5.23
Hardware		112,748				8.87			76,203				7.04
Consumer products and services		98,896				7.78			55,985				5.17
Media and telecom		91,796				7.22			70,470				6.51
Biotech		91,760				7.22			55,180				5.10
Healthcare services		79,534				6.26			75,311				6.96
IT services		65,520				5.15			68,203				6.30
Medical devices and equipment		56,755				4.46			57,725				5.33
Financial services		39,400				3.10			55,215				5.10
Other industries		102,764				8.08			131,332				12.13
Total venture portfolio industry		1,033,104				81.26			880,667				81.34
VCS		159,349				12.53			143,468				13.25
SBA and USDA		67,067				5.28			51,510				4.76
Credit cards		19,345				1.52			11,575				1.08
Other (overdrafts and in-process)		(71		)		(0.01	)		(135		)		(0.01	)
Total loans		1,278,794				100.58			1,087,085				100.42
Less unearned income		(7,337		)		(0.58	)		(4,549		)		(0.42	)
Loans, net of unearned income		$	1,271,457			100.00	%		$	1,082,536			100.00	%

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The following table provides a summary of total loans by size and category. The breakout of the categories is based on total client balances (individually or in the aggregate) at September 30, 2014 and December 31, 2013:

		September 30, 2014
		Total							Less than $5 Million							$5 Million - $10 Million							Greater than $10 Million
		Amount				Number			Amount				Number			Amount				Number			Amount				Number
		(Dollars in thousands)
Commercial loans:
Technology		$	634,908			259			$	357,825			225			$	182,610			27			$	94,473			7
Life sciences		240,375				73			105,070				57			75,196				12			60,109				4
Asset-based loans		152,282				74			38,325				64			35,935				5			78,022				5
Venture capital/private equity		159,349				62			53,877				53			25,797				4			79,675				5
SBA and USDA		33,245				55			33,245				55			—				—			—				—
Other		5,468				11			5,468				11			—				—			—				—
Total commercial loans		1,225,627				534			593,810				465			319,538				48			312,279				21
Real estate loans:
SBA and USDA		31,532				53			25,659				52			5,873				1			—				—
Total real estate loans		31,532				53			25,659				52			5,873				1			—				—
Construction loans:
SBA and USDA		2,290				4			2,290				4			—				—			—				—
Total construction loans		2,290				4			2,290				4			—				—			—				—
Credit cards		19,345				498			19,345				498			—				—			—				—
Total loans		1,278,794				1,089			$	641,104			1,019			$	325,411			49			$	312,279			21
Less unearned income		(7,337		)
Loans, net of unearned income		$	1,271,457

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		December 31, 2013
		Total							Less than $5 Million							$5 Million - $10 Million							Greater than $10 Million
		Amount				Number			Amount				Number			Amount				Number			Amount				Number
		(Dollars in thousands)
Commercial loans:
Technology		$	543,788			248			$	341,433			220			$	185,189			27			$	17,166			1
Life sciences		224,069				70			98,910				56			67,259				10			57,900				4
Asset-based loans		111,251				58			43,494				53			9,217				1			58,540				4
Venture firm		143,468				70			60,168				61			40,496				6			42,804				3
SBA and USDA		23,719				40			23,719				40			—				—			—				—
Other		1,424				18			1,424				18			—				—			—				—
Total commercial loans		1,047,719				504			569,148				448			302,161				44			176,410				12
Real estate loans:
SBA and USDA		27,504				44			21,669				43			5,835				1			—				—
Total real estate loans		27,504				44			21,669				43			5,835				1			—				—
Construction loans:
SBA and USDA		287				1			287				1			—				—			—				—
Total construction loans		287				1			287				1			—				—			—				—
Credit cards		11,575				578			11,575				578			—				—			—				—
Total loans		1,087,085				1,127			$	602,679			1,070			$	307,996			45			$	176,410			12
Less unearned income		(4,549		)
Loans, net of unearned income		$	1,082,536

Loan Maturity

At September 30, 2014, 91.3%, or $1.2 billion, of our total outstanding gross loans were variable rate loans that adjust at specified dates based on our prime lending rate or other variable indices, compared to 92.7%, or $1.0 billion, at December 31, 2013. At September 30, 2014, just over 48% of the loans had floors above the floating rate coupon. After an increase in rates of 100 bps, only 9% of these loans will continue to have floors above the floating rate coupon.

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The following table sets forth the remaining contractual maturity distribution of our gross loan portfolio, by industry sector, at September 30, 2014 and December 31, 2013, for fixed and variable rate loans:

		September 30, 2014
		Remaining Contractual Maturity of Gross Loans
		One Year or Less				After One Year and Through Five Years				After Five Years				Total
		(In thousands)
Fixed-rate loans:
Commercial loans:
Technology		$	8,401			$	9,564			$	—			$	17,965
Life sciences		6,020				58,477				—				64,497
Asset-based loans		22,103				1,362				—				23,465
Venture capital/private equity		—				366				—				366
SBA and USDA		—				—				1,176				1,176
Other		—				—				3,778				3,778
Total commercial loans		36,524				69,769				4,954				111,247
Real estate loans:
SBA and USDA		—				—				491				491
Total real estate loans		—				—				491				491
Total construction loans		—				—				—				—
Credit cards		—				—				—				—
Total fixed-rate loans		$	36,524			$	69,769			$	5,445			$	111,738
Variable-rate loans:
Commercial loans:
Technology		$	270,014			$	346,929			$	—			$	616,943
Life sciences		74,463				101,415				—				175,878
Asset-based loans		66,791				62,026				—				128,817
Venture capital/private equity		141,964				14,670				2,349				158,983
SBA and USDA		—				89				31,980				32,069
Other		1,690				—				—				1,690
Total commercial loans		554,922				525,129				34,329				1,114,380
Real estate loans:
SBA and USDA		—				38				31,003				31,041
Total real estate loans		—				38				31,003				31,041
Construction loans:
SBA and USDA		—				—				2,290				2,290
Total construction loans		—				—				2,290				2,290
Credit cards		19,345				—				—				19,345
Total variable rate loans		$	574,267			$	525,167			$	67,622			1,167,056
Less unearned income														(7,337		)
Total loans, net of unearned income														$	1,271,457

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		December 31, 2013
		Remaining Contractual Maturity of Gross Loans
		One Year or Less				After One Year and Through Five Years				After Five Years				Total
		(In thousands)
Fixed-rate loans:
Commercial loans:
Technology		$	1,948			$	4,414			$	—			$	6,362
Life sciences		6,273				26,343				—				32,616
Asset-based loans		19,217				18,646				—				37,863
Venture capital/private equity		—				452				—				452
SBA and USDA		—				—				—				—
Other		—				—				528				528
Total commercial loans		27,438				49,855				528				77,821
Real estate loans:
SBA and USDA		—				—				1,900				1,900
Total real estate loans		—				—				1,900				1,900
Construction		—				—				—				—
Credit cards		—				—				—				—
Total fixed-rate loans		$	27,438			$	49,855			$	2,428			$	79,721
Variable-rate loans:
Commercial loans:
Technology		$	219,877			$	317,549			$	—			$	537,426
Life sciences		39,117				152,336				—				191,453
Asset-based loans		50,930				22,458				—				73,388
Venture capital/private equity		121,760				19,547				1,709				143,016
SBA and USDA		—				—				23,719				23,719
Other		896				—				—				896
Total commercial loans		432,580				511,890				25,428				969,898
Real estate loans:
SBA and USDA		—				—				25,604				25,604
Total real estate loans		—				—				25,604				25,604
Construction loans:
SBA and USDA		—				—				287				287
Total construction loans		—				—				287				287
Credit cards		11,575				—				—				11,575
Total variable rate loans		$	444,155			$	511,890			$	51,319			1,007,364
Less unearned income														(4,549		)
Total loans, net of unearned income														$	1,082,536

Upon maturity, loans satisfying our credit quality standards may be renewed. Renewals are subject to the same underwriting and credit administration practices as we utilize for new loans. It is not our practice to grant loans with unconditional extension or renewal terms.

Investment Securities

Investment securities totaled $1.5 billion at September 30, 2014, an increase of $386.5 million, or 35.8%, compared to $1.1 billion at December 31, 2013. See Notes 3 and 15 to the unaudited interim consolidated financial statements.

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Our investment securities portfolio is comprised of both available-for-sale securities and securities that we intend to hold to maturity. We purchase securities for our investment securities portfolio to manage interest rate risk, ensure a stable source of liquidity, and to provide a steady source of income in excess of our cost of funds.

Our available-for-sale securities portfolio totaled $1.2 billion at September 30, 2014, an increase of $262.7 million, or 28.4%, compared to $924.2 million at December 31, 2013. The increase was primarily due to 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 is mainly comprised of municipal bonds, which we began purchasing for this portfolio in 2011. Prior to that, our held to maturity securities portfolio was primarily comprised of agency mortgage-backed securities. Our held to maturity securities portfolio had an amortized cost of $278.1 million at September 30, 2014, an increase of $123.9 million, or 80.3%, compared to $154.3 million at December 31, 2013. The increase in this portfolio was primarily due to our purchase of new municipal bond securities and agency mortgage backed securities that we intend to hold until they are either called or reach maturity.

At September 30, 2014, the duration of our available-for-sale securities portfolio was approximately 2.1 years and the overall investment securities portfolio duration was 2.7 years.

The following table sets forth the stated maturities and weighted average yields of investment securities at September 30, 2014. Weighted average yields on tax-exempt securities are presented on a tax equivalent basis. While not reflected in the table below, 33.0% of the investment portfolio is either floating rate or adjustable rate securities and will reprice either immediately or within the first year based on the repricing of the underlying loans.

						September 30, 2014
						Less than One Year							After One to Five Years							After Five to Ten Years							After Ten Years
		Total Amortized Cost				Amortized Cost				Average Yield			Amortized Cost				Average Yield			Amortized Cost				Average Yield			Amortized Cost				Average Yield
		(Dollars in thousands)
Available-for sale-securities:
U.S. Treasuries		$	19,679			$	—						$	19,679			1.29	%		$	—						$	—
Agency direct obligations		34,534				3,890				2.75			30,644				0.76			—							—
SBA pools		143,110				—							5,200				1.63			60,428				1.63			77,482				1.63
Agency mortgage-backed securities		577,389				—							1,856				0.70			35,356				1.46			540,177				2.29
Municipal bonds		116,840				—							55,687				1.57			12,950				1.33			48,203				2.49
Corporates		96,402				—							—							12,016				3.66			84,386				4.39
Non-agency mortgage-backed securities		132,909				—							1,495				3.62			15,316				3.39			116,098				2.52
Other asset-backed securities		49,574				12,999				2.71			15,831				2.21			15,277				2.90			5,467				1.11
Equity securities		2,764				—							—							—							2,764				—
Total available for sale securities		$	1,173,201			$	16,889			2.72	%		$	130,392			1.43	%		$	151,343			2.03	%		$	874,577			2.46	%
Held-to-maturity securities:
Contractual maturity
Agency mortgage-backed securities		$	60,663			$	—						$	—						$	—						$	60,663			3.17	%
Municipal bonds		165,531				—							—							7,460				2.59			158,071				5.45
Corporates		51,927				—							—							—							51,927				4.28
Total held-to-maturity		$	278,121			$	—			—	%		$	—						$	7,460			2.59	%		$	270,661			4.71	%
Total securities		$	1,451,322			$	16,889			2.72	%		$	130,392			1.43	%		$	158,803			2.06	%		$	1,145,238			2.99	%

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Derivatives

Derivative instruments are recorded as a component of other assets and other liabilities on the balance sheet.

Equity Warrant Assets. In most cases, we seek equity warrants in connection with extending loan commitments to our customers. In general, the equity warrants entitle us to purchase a specific number of shares of a client’s stock at a specific price over a specified time period. The warrants may also include contingent provisions which provide for additional shares to be purchased at a specific price if defined future events occur, such as future rounds of equity financing by the client, or additional borrowings by the client. These warrants are obtained at the inception of a loan facility or the amendment of a loan facility. These warrants are not obtained in lieu of other fees, interest or payments. These warrants potentially provide an additional return, in addition to the traditional loan yield from interest and fees, in the event of a liquidity event of the borrowing company. The grant date fair values of equity warrants received in connection with extending loan commitments are considered to be loan fees and are recognized over the life of the loan commitment as an adjustment to the loan yield through loan interest income. Any changes from the grant date in the fair value of equity warrant assets are recognized as increases or decreases to warrant valuation and as net gains or losses in noninterest income during the period in which the change is recognized. These changes in warrant valuation and related gains or losses may occur as a result of a change in the Black Scholes value of the warrant, or when a portfolio company completes an initial public offering on a publicly reported market or is acquired. We may exercise these equity warrant assets for either shares or cash. When a private company goes public there is often a lock-up period requiring us to hold our equity position in a publicly traded security until the expiration of the lock-up period. Shares received from the exercise of warrants and subject to lock-up agreements are held as equity securities in our available for sale portfolio.

Our equity warrants portfolio is primarily comprised of warrants in non-public companies and our practice generally is to monetize our positions as soon as a liquidity event occurs. Often there is a lock-up period requiring us to hold our equity position in a publicly traded security until the expiration of the lock-up period. Warrants held, which amounted to $4.1 million and $5.1 million in 451 and 451 companies at September 30, 2014 and December 31, 2013, respectively, are shown as warrant valuation in the accompanying consolidated balance sheets. At September 30, 2014, the $4.1 million valuation on warrants held included $0.1 million in equity securities of five publicly traded companies, which we intend to monetize upon removal of all sale restriction for those securities, compared to $1.0 million held in equity securities of three publicly traded companies at December 31, 2013.

During the three and nine months ended September 30, 2014, the Company exercised warrants with a total value of $1.4 million and $2.8 million, respectively, and received equity securities in six and 10 publicly traded companies, respectively. The Company sold a portion of these securities during the three and nine months ended September 30, 2014 (see discussion under "Results of Operations - Noninterest Income"). At September 30, 2014, the fair value of equity securities included in equity securities within our available-for-sale investments obtained through the exercise of warrants and still held was $1.3 million (see Note 3). The Company did not have equity securities obtained from the exercise of warrants in our available for sale portfolio in 2013. See Notes 14 and 15 for further information regarding our equity warrant assets.

Foreign Exchange Forward Contracts. We enter into foreign exchange forward contracts with clients involved in foreign activities, either as the purchaser or seller, depending upon the clients’ needs. For each forward contract entered into with our clients, we enter into an opposite way forward contract with a correspondent bank, which mitigates the risk of fluctuations in currency rates. At September 30, 2014, we had $9.8 million in gross notional customer outstanding forward contracts and an offsetting $9.7 million in gross national correspondent bank outstanding forward contracts. At December 31, 2013, we had $3.9 million in gross notional customer outstanding forward contracts and an offsetting $3.8 million in gross national correspondent bank outstanding forward contracts.

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Deposits

The following table sets forth the composition of our deposits at September 30, 2014 and December 31, 2013:

		September 30, 2014							December 31, 2013
		Amount				Percent			Amount				Percent
		(Dollars in thousands)
Period-end:
Noninterest-bearing demand deposits		$	1,712,674			64.18	%		$	1,380,024			65.51	%
Interest-bearing deposits:
Demand deposits		164,859				6.18			103,638				4.92
Money market		774,405				29.02			596,247				28.30
Time deposits		16,507				0.62			26,818				1.27
Total period end deposits		$	2,668,445			100.00	%		$	2,106,727			100.00	%

The following tables set forth the composition of our average deposits for the three and nine months ended September 30, 2014 and 2013:

		Three Months Ended September 30,
		2014							2013
		Amount				Percent			Amount				Percent
		(Dollars in thousands)
Average:
Noninterest-bearing demand deposits		$	1,652,486			65.22	%		$	1,138,044			59.87	%
Interest-bearing deposits:
Demand deposits		87,957				3.47			92,500				4.87
Money market		765,338				30.21			641,159				33.74
Time deposits		27,997				1.10			28,872				1.52
Total average deposits		$	2,533,778			100.00	%		$	1,900,575			100.00	%

		Nine Months Ended September 30,
		2014							2013
		Amount				Percent			Amount				Percent
		(Dollars in thousands)
Average:
Noninterest-bearing demand deposits		$	1,521,635			64.77	%		$	1,093,411			61.55	%
Interest-bearing deposits:
Demand deposits		107,276				4.57			56,008				3.15
Money market		692,178				29.46			594,153				33.44
Time deposits		28,090				1.20			32,958				1.86
Total average deposits		$	2,349,179			100.00	%		$	1,776,530			100.00	%

Our deposits increased to $2.7 billion at September 30, 2014, from $2.1 billion at December 31, 2013, an increase of $561.7 million, or 26.7%. 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 $332.7 million, or 24.1%, and our interest-bearing deposits increased $229.1 million, or 31.5%, during the period.

At September 30, 2014, the aggregate balance of time deposit accounts individually equal to or greater than $100,000 totaled $16.2 million. At September 30, 2014, substantially all time deposit accounts in amounts equal to or greater than $100,000 were scheduled to mature within one year.

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Client Investment Funds

We utilize alternative cash investment vehicles to manage our on-balance sheet deposit growth, which tends to be volatile as is typical in the market in which we operate. For example, we offer our clients alternative cash investment vehicles such as sweep accounts and investments in the CDARS, the latter of which allows us to place client deposits in one or more insured depository institutions. 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. At September 30, 2014 and December 31, 2013, Square 1 Asset Management had $609.3 million and $108.1 million, respectively, of assets under management. We expect to continue to manage our on-balance sheet deposit growth through these alternative investment vehicles for our clients and to grow the amount of assets under management by Square 1 Asset Management.

The following table sets forth the composition of our client investment funds at September 30, 2014 and December 31, 2013:

		September 30, 2014				December 31, 2013				% Change
Period-end:		(Dollars in thousands)
Client investment assets under management		$	609,284			$	108,105			463.6	%
Sweep money market funds		241,274				271,823				(11.2	)
CDARS		107,076				177,955				(39.8	)
Total period-end client investment funds		$	957,634			$	557,883			71.7	%

N/M = Not meaningful

The following tables set forth the composition of average client investment funds for the three and nine months ended September 30, 2014 and 2013:

		Three Months Ended September 30,
		2014				2013				% Change
Average:		(Dollars in thousands)
Client investment assets under management		$	483,147			$	6,815			6,989.5	%
Sweep money market funds		254,456				219,907				15.7
CDARS		194,177				216,890				(10.5	)
Total average client investment funds		$	931,780			$	443,612			110.0	%

		Nine Months Ended September 30,
		2014				2013				% Change
Average:		(Dollars in thousands)
Client investment assets under management		$	280,181			$	2,297			12,097.7	%
Sweep money market funds		288,616				214,694				34.4
CDARS		202,908				188,321				7.7
Total average client investment funds		$	771,705			$	405,312			90.4	%

N/M = Not meaningful

Repurchase Agreements and Borrowings

As a result of strong deposit growth and proceeds from the initial public offering of our common stock, we decreased borrowings by $18.9 million at September 30, 2014. Repurchase agreements decreased $12.7 million as the result of customer repurchase agreements moving to Square 1 Asset Management, and the remaining $6.2 million balance of subordinated debentures, including respective remaining debt discount, was redeemed as $7.4 million in trust preferred securities were converted to common shares during the nine months ended September 30, 2014. See Note 7 for further information regarding our repurchase agreements and Note 8 for further discussion of our borrowings.

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Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States of America, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and letters of credit.

The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and any existing collateral has no value. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at September 30, 2014 and December 31, 2013, are as follows:

		September 30, 2014				December 31, 2013
		(In thousands)
Commitments to extend credit(1):
Future loan commitments		$	1,167,115			$	977,262
Standby letters of credit(2)		68,155				89,232
Total commitments		$	1,235,270			$	1,066,494

(1)	Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments may require payment of a fee and generally have fixed expiration dates or other termination clauses.

(2)	Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.

For the three and nine months ended September 30, 2014, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

RISK MANAGEMENT

Overview

Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available for sale securities, which are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers due to unforeseen circumstances. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.

Credit Risk

Analysis of Nonperforming and Classified Assets. We place loans that are 90 days or more past due as to principal or interest payments on nonaccrual status, or prior to that if we have determined based upon current information available to us that the timely collection of principal or interest is not probable. When a loan is placed on nonaccrual status, any previously recorded interest is reversed and recorded as a reduction of loan interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan are applied to the outstanding principal as determined at the time of collection of the loan.

Troubled debt restructurings occur when debtors are granted concessions we would not otherwise consider, because of economic or legal reasons pertaining to the debtor’s financial difficulties. Such concessions would include, but are not limited to, the transfer of assets or the issuance of equity interests by the debtor to satisfy all or part of the debt, modification of the terms of debt or the substitution or addition of debtor(s).

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The following table provides information with respect to our nonperforming assets and troubled debt restructurings at the dates indicated:

		September 30, 2014				December 31, 2013
		(Dollars in thousands)
Nonaccrual loans:
Commercial loans:
Technology		$	10,427			$	12,153
Life sciences		1,107				—
SBA and USDA		264				648
Total commercial loans		11,798				12,801
Real estate loans:
SBA and USDA		—				1,665
Total real estate loans		—				1,665
Total nonaccrual loans		11,798				14,466
Other real estate owned		—				—
Total nonperforming loans		$	11,798			$	14,466
Total accruing loans past 90 days or more		$	—			$	—
Foreclosed assets(1)		—				119
Nonaccrual troubled debt restructurings		3,907				3,379
Total troubled debt restructurings		3,907				3,379
Less nonaccrual troubled debt restructurings included in total nonaccrual loans		(3,907		)		(3,379		)
Total nonperforming assets and troubled debt restructurings		$	11,798			$	14,585
Total nonperforming loans to total loans		0.93		%		1.34		%
Total nonperforming loans to total assets		0.39		%		0.62		%
Total nonperforming assets and troubled debt restructurings to total assets		0.39		%		0.63		%

(1)	Foreclosed assets consist of capital stock acquired in lieu of incurring a charge-off.

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The following tables present the composition of portfolio company nonperforming loans by stage at September 30, 2014 and December 31, 2013 :

		September 30, 2014
		Amount				Number			Percent
		(Dollars in thousands)
Stage:
Early		$	2,343			3			20.31	%
Expansion		6,767				4			58.67
Late		2,425				1			21.02
Total portfolio company loans		$	11,535			8			100.00	%

		At December 31, 2013
		Amount				Number			Percent
		(Dollars in thousands)
Stage:
Early		$	1,580			3			13.00	%
Expansion		3,287				2			27.05
Late		7,286				3			59.95
Total portfolio company loans		$	12,153			8			100.00	%

At September 30, 2014, our total nonperforming assets and troubled debt restructurings were $11.8 million, a $2.8 million, or 19.1%, decline from December 31, 2013. At September 30, 2014, nonperforming loans represented 0.93% of our total loans and were comprised of 10 credits that had $8.4 million in specific reserves held against them.

At September 30, 2014, our criticized (performing) and impaired loans represented approximately 9.0% of our total gross loans. This compares to 8.5% at December 31, 2013. 56.6% of our criticized and impaired loans at September 30, 2014 are to companies in the technology sector, across all growth stages. Loans to technology sector companies represented approximately 49.6% of our loan portfolio at September 30, 2014. Loans to early and expansion stage portfolio company clients comprised 77.2% of our nonperforming loans. It is common for an early or expansion stage client’s remaining liquidity to fall temporarily below the threshold necessary for a pass-rated credit during its capital-raising period for a new round of funding. This situation typically lasts only a few weeks and, in our experience, generally resolves itself with a subsequent round of venture funding. As a result, we expect that some of our early-stage and expansion stage clients will be managed through our criticized portfolio during a portion of their life cycle without resulting in net charge-offs.

Management is proactive in its approach to identifying and resolving problem loans and is focused on working with the borrowers and guarantors of these loans to provide loan modifications when warranted. The level of nonperforming assets fluctuates in response to changing economic and market conditions, the relative size and composition of the loan portfolio, as well as management’s degree of success in resolving problem assets.

Interest income that would have been recorded had nonaccruing loans and troubled debt restructurings been current in accordance with their original terms and had been outstanding throughout the period, amounted to $0.2 million and $0.5 million, respectively, for the three and nine months ended September 30, 2014, and $0.2 million and $0.6 million, respectively, for the three and nine months ended September 30, 2013.

Allowance for Loan Losses. The allowance for loan losses, a material estimate which could change significantly in the near-term, is established through a provision for loan losses charged to earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that management believes is adequate to absorb losses in the loan portfolio. Loan losses are charged against the allowance for loan losses when management believes that the uncollectibility of the principal loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses when received.

Management’s judgment in determining the adequacy of the allowance is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available and as situations change.

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The allowance for loan losses is evaluated on a monthly basis by management and takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions and trends that may affect the borrower’s ability to repay.

The allowance for loan losses consists of the following key elements:

•	Specific allowance for identified impaired loans. For such loans that are identified as impaired, an allowance is established when the discounted cash flows (or collateral value if the loan is collateral dependent) or observable market price of the impaired loan are lower than the carrying value of that loan.

•

General valuation allowance, which represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired loans. For this portion of the allowance, loans are reviewed based on industry, stage and structure, and are assigned allowance percentages based on historical loan loss experience adjusted for qualitative factors. Qualitative factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date, may include changes in lending policies and procedures; changes in national and local economic and business conditions, including the condition of various market segments; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and staff; changes in the volume and severity of past due and classified loans and in the volume of nonaccruals, trouble debt restructurings, and other loan modifications; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated and inherent credit losses in the Bank’s current portfolio.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated:

		September 30, 2014										December 31, 2013
		Amount				% of Allowance of Total Allowance			% of Loans in Category to Total Loans			Amount				% of Allowance of Total Allowance			% of Loans in Category to Total Loans
		(Dollars in thousands)
Commercial loans:
Technology		$	16,196			70.98	%		49.65	%		$	12,476			67.88	%		50.02	%
Life sciences		3,009				13.19			18.80			1,894				10.31			20.61
Asset-based loans		1,864				8.17			11.91			1,894				10.31			10.24
Venture capital/private equity		214				0.94			12.46			197				1.07			13.20
SBA and USDA		585				2.56			2.60			627				3.41			2.18
Other		8				0.04			0.42			2				0.01			0.13
Total commercial loans		21,876				95.88			95.84			17,090				92.99			96.38
Real estate loans:
SBA and USDA		724				3.17			2.47			1,163				6.33			2.53
Total real estate loans		724				3.17			2.47			1,163				6.33			2.53
Construction:
SBA and USDA		23				0.10			0.18			10				0.05			0.03
Total construction loans		23				0.10			0.18			10				0.05			0.03
Credit cards		193				0.85			1.51			116				0.63			1.06
Total		$	22,816			100.00	%		100.00	%		$	18,379			100.00	%		100.00	%

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Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated:

		Three Months Ended September 30,
		2014				2013
		(Dollars in thousands)
Allowance at beginning of period		$	21,556			$	18,217
Provision for loan losses		2,500				2,850
Charge-offs:
Commercial loans:
Technology		382				2,988
Life sciences		1,107				—
SBA and USDA		—				—
Total commercial loans		1,489				2,988
Credit cards		—				—
Total charge offs		1,489				2,988
Recoveries:
Commercial loans:
Technology		(13		)		(14		)
Life sciences		(5		)		—
SBA and USDA		(14		)		—
Total commercial loans		(32		)		(14		)
Real estate loans:
SBA and USDA		(217		)		—
Total real estate loans		(217		)		—
Credit cards		—				—
Total recoveries		(249		)		(14		)
Net charge offs		1,240				2,974
Allowance at end of period		$	22,816			$	18,093
Allowance for loan losses to total loans at end of period		1.79		%		1.78		%
Net charge offs to average loans outstanding during period (annualized)		0.40		%		1.25		%

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		Nine Months Ended September 30,
		2014				2013
		(Dollars in thousands)
Allowance at beginning of period		$	18,379			$	13,843
Provision for loan losses		8,614				9,340
Charge-offs:
Commercial loans:
Technology		2,548				5,932
Life sciences		1,516				—
SBA and USDA		518				—
Total commercial loans		4,582				5,932
Credit cards		—				—
Total charge offs		4,582				5,932
Recoveries:
Commercial loans:
Technology		(169		)		(692		)
Life sciences		(5		)		—
SBA and USDA		(14		)		(150		)
Total commercial loans		(188		)		(842		)
Real estate loans:
SBA and USDA		(217		)		—
Total real estate loans		(217		)		—
Credit cards		—				—
Total recoveries		(405		)		(842		)
Net charge offs		4,177				5,090
Allowance at end of period		$	22,816			$	18,093
Allowance for loan losses to total loans at end of period		1.79		%		1.78		%
Net charge offs to average loans outstanding during period (annualized)		0.49		%		0.78		%

Interest Rate Risk

Interest Rate Risk Management. Market risk is defined as the risk of adverse fluctuations in the market value of financial instruments due to changes in market interest rates. Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of market yield curves. Additionally, changes in interest rates can influence the rate of principal prepayments on mortgage securities, which affects the rate of amortization of purchase premiums and discounts, and ultimately the yield, of such securities. Other market risks include foreign currency exchange risk and equity price risk. These risks are not considered significant and no separate quantitative information concerning them is presented herein.

We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Management of interest rate risk is carried out primarily through strategies involving our available-for-sale securities and available funding sources. In addition, our policies permit the use of on- and off-balance sheet derivative financial instruments to assist in managing interest rate risk, although to date we have not entered into any derivative financial instruments for such purposes.

We have a Management Asset/Liability Committee to communicate, coordinate and control all aspects involving interest rate risk management. The Management Asset/Liability Committee, with oversight from the Board Asset/Liability Committee (“BALCO”), establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. Adherence to relevant policies is monitored on an ongoing basis.

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Market Risk

Net Interest Income Simulation Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. We analyze our interest rate sensitivity position to manage the risk associated with interest rate movements through the use of a net interest income (“NII”) simulation model.

The NII simulation is completed monthly and presented to the Asset/Liability Management Committee. The simulation provides an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Management Committee on a monthly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth an approximation of our NII sensitivity exposure for the 12-month periods beginning September 30, 2014. The simulation uses projected repricing of assets and liabilities beginning September 30, 2014, on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the large percentage of variable rate loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. Generally, when interest rates rise, prepayments tend to slow. When interest rates fall, mortgage prepayments tend to rise. Our asset sensitivity would be reduced if mortgage prepayments slow and vice versa. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

Numerous assumptions are used to model deposits since they do not have a contractual maturity and rates are internally set based on market conditions and management goals. Our assumption is that the rate paid on interest-bearing deposits is tied to the fed funds rate. We also use a pricing beta that represents the correlation between the fed funds rate and the actual rate modeled on interest-bearing deposits. We currently model interest-bearing deposits using a pricing beta of approximately 70% such that for an assumed 1.00% move in the fed funds rate there would be a 0.70% change in the modeled rate that we would pay on interest-bearing deposits. In addition, we also make assumptions as to how deposits will shift between interest-bearing products and non-interest bearing products in response to changes in rates. As rates increase we assume that an increasing percentage of deposits will shift from non-interest bearing to interest-bearing resulting in higher rates being paid on larger balances. The opposite would be true when rates are assumed to decrease.

		Estimated Increase/Decrease in Net Interest Income
Basis Point (“bp”) Change in Interest Rates		12 Months Beginning
		September 30, 2014
300		11.8%
200		9.7
100		6.0
(100)		(4.1)
(200)		(6.0)

Rates are immediately increased at the beginning of the projection. The results show that we are asset sensitive and that net interest income will increase as rates rise and will decrease as rates decline. Interest rates do not normally move instantaneously, but the analysis is useful to understanding the potential direction and magnitude of net interest income changes due to changing interest rates.

Liquidity Risk

Liquidity Management. Liquidity management is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and sales, maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows,

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mortgage prepayments and loan and security sales are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investment in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management, funds management and liquidity policies. The objective of the liquidity policy is to reduce the risk to our earnings and capital arising from the inability to meet obligations in a timely manner without incurring unacceptable losses. This entails ensuring sufficient funds are available at a reasonable cost to meet potential demands from both fund providers and borrowers. Liquid assets, defined as cash, due from banks, federal funds sold, repurchase agreements, and available-for-sale securities, were 45.5% of total assets at September 30, 2014. Excess liquid assets are generally invested in investment grade available-for-sale securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2014, cash and cash equivalents totaled $185.6 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $1.2 billion at September 30, 2014. In addition, at September 30, 2014, we had the ability to borrow $199.0 million from the FHLB. There were no outstanding borrowings under this line at September 30, 2014. Additionally, at September 30, 2014, we had the ability to access $84.4 million from the Federal Reserve Bank’s Discount Window on a collateralized basis. There were no outstanding borrowings under this line at September 30, 2014. We also maintain $60.0 million of unsecured lines of credit from four financial institutions to access federal funds. We had not accessed these unsecured lines of credit as of September 30, 2014. We believe that our liquid assets combined with the available credit lines provide adequate liquidity to meet our current financial obligations.

The following table presents our contractual obligations at September 30, 2014:

		Payments Due by Period
		Total				Less Than One Year				One to Three Years				Three to Five Years				More Than Five Years
		(In thousands)
Contractual Obligations
Deposits without stated maturity		$	2,651,938			$	2,651,938			$	—			$	—			$	—
Time deposits		16,507				15,507				1,000				—				—
FHLB and other borrowings		—				—				—				—				—
Junior subordinated debentures		—				—				—				—				—
Operating lease obligations		12,797				2,687				4,442				1,998				3,670
Total		$	2,681,242			$	2,670,132			$	5,442			$	1,998			$	3,670

Capital Management. Our management seeks to maintain adequate capital to support anticipated asset growth, operating needs and unexpected risks, and to ensure that Square 1 Financial and Square 1 Bank are in compliance with all current and anticipated regulatory capital guidelines. Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of capital stock or other securities. Our management engages, in consultation with the BALCO, in an annual capital planning process in an effort to optimize the use of the capital available to us and to appropriately plan for our future capital needs. The capital plan, approved annually by the Board of Directors, considers capital needs for the foreseeable future and allocates capital to both existing and future business activities. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments.

Regulatory capital ratios for Square 1 Financial and the Bank exceeded minimum federal regulatory guidelines for a well-capitalized depository institution as of September 30, 2014 and December 31, 2013. See Note 11 to the consolidated financial statements for further information. On January 1, 2015, the Basel III regulatory standard on bank capital adequacy will become effective and will have an impact on capital ratios.

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Capital ratios for Square 1 Financial and Square 1 Bank, compared to the minimum regulatory ratios to be considered “well capitalized” and “adequately capitalized,” are set forth below.

			September 30, 2014			December 31, 2013			Minimum Ratio to be “Well Capitalized”			Minimum Ratio to be “Adequately Capitalized”
	Square 1 Financial:
	Total risk-based capital ratio		14.84	%		12.46	%		10.00	%		8.00	%
	Tier 1 risk-based capital ratio		13.69			11.38			6.00			4.00
	Tier 1 leverage ratio		10.05			8.34			N/A			4.00
	Tangible common equity to tangible assets ratio		9.83			7.89			N/A			N/A
	Tangible equity to risk-weighted assets ratio		14.10			10.52			N/A			N/A
	Square 1 Bank:
	Total risk-based capital ratio		14.54	%		12.21	%		10.00	%		8.00	%
	Tier 1 risk-based capital ratio		13.40			11.13			6.00			4.00
	Tier 1 leverage ratio		9.83			8.16			5.00			4.00

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management" for discussion of quantitative and qualitative disclosures about market risk.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective, in all material respects, as of the end of the period covered by this report, in ensuring that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including the Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are party to other legal actions that are routine and incidental to our business. In management’s opinion, the outcome of these matters, individually or in the aggregate, will not have a material effect on our results of operations or financial position.

See also Note 16 "Off-balance Sheet Risk, Commitments and Contingencies" of the "Notes to Interim Consolidated Financial Statements (Unaudited)" under Part I, Item 1 of this Form 10-Q.

ITEM 1A. RISK FACTORS

There have been no material changes in our assessment of our risk factors from those set forth in the Registration Statement.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 26, 2014 our registration statement on Form S-1 (File No. 333-193197) was declared effective by the Securities and Exchange Commission (SEC) for our initial public offering pursuant to which we sold an aggregate of 3,593,750 shares of our Class A common stock at a price of $18.00 per share.

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As a result of the offering, we received net proceeds of approximately $59.0 million, after deducting approximately $3.8 million in underwriting discounts and commissions and approximately $1.4 million in IPO-related expenses.

There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on March 27, 2014 pursuant to Rule 424(b).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

List of Exhibits

Exhibit			Description		Method of Filing
3.1			Second Amended and Restated Certificate of Incorporation of Square 1 Financial, Inc.		(incorporated by reference to the Exhibit 3.1 in the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, File No. 001-36372)
3.2			Bylaws of Square 1 Financial, Inc.		(incorporated by reference to the Exhibit 3.2 in the Registrant’s Registration Statement on Form S-1, File No. 333-193197)
4.1			Specimen Stock Certificate for Class A Common Stock of Square 1 Financial, Inc.		(incorporated by reference to the Exhibit 4.1 in the Registrant’s Registration Statement on Form S-1, File No. 333-193197)
10.1			Square 1 Financial, Inc. 2009 Stock Incentive Plan, as amended		(incorporated by reference to the Exhibit 99.1 in the Registrant’s Registration Statement on Form S-8, File No. 333-195221)
31.1			Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
31.2			Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith
32.1			Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Filed herewith
32.2			Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Filed herewith
101.INS			XBRL Instance Document		Filed herewith
101.SCH			XBRL Taxonomy Extension Schema Document		Filed herewith
101.CAL			XBRL Taxonomy Calculation Linkbase Document		Filed herewith
101.LAB			XBRL Taxonomy Label Linkbase Document		Filed herewith
101.PRE			XBRL Taxonomy Presentation Linkbase Document		Filed herewith
101.DEF			XBRL Taxonomy Definition Linkbase Document		Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Durham, State of North Carolina on November 10, 2014.

 

	Square 1 Financial, Inc.
	By:	/s/ Douglas H. Bowers
		Douglas H. Bowers President and Chief Executive Officer
		/s/ Patrick Oakes
		Patrick Oakes Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

 

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