Square 1 Financial - Fletch and Saul pls review

Hi guys,

Came across this company the other day on Seeking Alpha and there are several characteristics that look promising. Fletch, most of the little I know about bank stock analysis comes from your posts on BOFI and I would be interested in your opinion on this one.

Square 1 is a bank that primarily serves venture-backed companies’ funding needs from the early stages all the way through IPOs and maturation. It appears to be a niche that is tough for large banks to get into. Here is the article that introduced me to the company:

And a few highlights that caught my attention:

  • High loan (22%) and deposit growth (22%)
  • Low percentage if non-performing loans (1.34%)
  • Low cost of deposits (0.04%)
  • Net income growth YOY of 270% for 2012 and 55% for 2013
  • Reasonable valuation at 16 PE
  • Low risk, potential high reward kicker in the form of warrants in the VC companies they lend to.

Let me know your thoughts guys.


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Hi Saul,

Didn’t want this one to slip through the cracks. If you have a few moments please take a look. Also I wanted to PM Fletch, our resident bank stock guru, but I am not sure how to do that.


Also I wanted to PM Fletch, our resident bank stock guru, but I am not sure how to do that.

Sameer, I’m really not at all a bank expert, but if you want to send an email direct to Fletch, go back until you find a post by Fletch (I think you’ll find one at #1128). Then type in a reply, but before you send it, under the reply box check the box titled “E-Mail this Reply to the Author”, and he’ll get it as an email. If you make clear that you’d like a response on this board in your email, he probably will respond here if he has the time.

I think Anirban also has written some good analyses of banks. You might ask him too.



Sorry, I missed that post. I’ll try to take a look at it soon. Thanks for bringing it to my attention.


Thanks guys, I look forward to hearing your thoughts. I will PM Anirban as well.

Hi all,

From an offline conversation with Sameer, where I noted the following:

I had a quick look through their most recent earnings release:

This looks like a very new IPO (March 2014).

I see several encouraging points:

  1. Steady increase in net interest margin
  2. Efficiency ratio stabilising around 50%
  3. Favorable asset quality ratios
  4. Strong growth in deposits and very good growth in client investment funds (could be that they started from a smaller base?)
  5. Strong growth in non-interest income

The valuation look a bit rich. The book value per common share is $9.29. At $19/share, P/B ratio is 2. This should be okay if they can keep growing the book value and earnings. There’s probably not enough history here to judge what they can do, so that’s the question mark for me.

Their deposit base consists of 62.4% non-interest bearing deposits! Great for interest rate increases, whenever that happens.


I think is worth investigating further. I will be taking a closer look at it.



Hi Anirban, I know nothing about banks, which is why I rely on those who know, but I glanced at the Square 1 results and I have some questions:

About Net Income, they said

Net income … compared to the fourth quarter of 2013 was primarily impacted by a $1.0 million decrease in provision for loan losses and a $1.7 million increase in warrant income, largely offset by a $1.5 million decline in income from fees that are contingent upon customer success events, the impact of the $0.4 million gain from the purchase of Sand Hill Finance recorded in the fourth quarter of 2013, and $1.0 million in overall additional personnel expenses.

Now the “$1.0 million decrease in provision for loan losses” is a one time deal, once you’ve taken it you’ve taken it, while the “$1.0 million in overall additional personnel expenses” that it’s balanced against is forever.

About Net Interest Margin they say

Net interest margin increased to 4.12% from 3.95% for the first quarter of 2013 and 3.96% for the fourth quarter of 2013.

My first impulse was to say “Wow! That’s a great Net Interest Margin”. But then I read this:

For the first quarter of 2014 our net interest margin increased to 4.12% from 3.95% versus the same period in the prior year. This increase was due largely to our decision in 2013 to invest a greater percentage of interest-earning assets in higher yielding municipal bonds.

Whoa! Is that a safe investment? Higher yielding means more risky. Investing in bonds means the value of the bond goes down when interest rates go up.

And what does this gibberish mean? Is it good? Is it bad? Is it neutral?

An additional driver of the increase in our net interest margin was lower premium amortization on agency mortgage-backed securities resulting from slower prepayments, which was partially offset by a 7 basis point decline in the yield earned on our loan portfolio in response to competitive pressures in the current low rate environment.

I need a bunch more evaluation before I’d be willing to take a position.



Hi Saul,

You have some very valid concerns.

I am still looking into this. It’s also not that they are working in a disruptive fashion. There were others before them. It’s big competitor is Silicon Valley Bank. This is a big fish with offices in several countries.


Anyways, I will dig some more into it. No positions yet.


Thanks guys. I will be looking deeper into this as well on the weekend. Also, I think we are all curious to see what Fletch has to say.

150 posts from 2k. Wow!

[2 weeks tops!]

150 posts from 2k. Wow!

I know! I can scarcely visit the men’s room without coming back to another dozen posts. And on this board, I read them all.


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Hi Saul,

I looked a bit more into their investment portfolio. Out of about $1B in investments, they held about $127M in municipal bonds. That was a big change with respect to prior years. Now, I don’t know enough about bonds so I have been reading info I could find. One advantage with municipal bonds is that yields are tax exemption. This is noted in their annual report. Further, per Wikipedia, the historical default rate of municipal bonds is lower than corporate bonds. So may be they aren’t all that unsafe if it’s a nice diversified portfolio. Nonetheless, the percentage allocated to municipal bonds is high, so if something goes wrong there it would hurt. Finally, the annual report notes that they intend to hold municipal bonds to maturity while several of their other holdings (mortgage backed assets, corporate bonds etc) are intended for shorter term holding. I wasn’t sure why they intend to hold municipal bonds to maturity.

Anyways, I think this is an interesting company but it a complex one to understand!!


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Anirban -

Is there any information about the specific bonds that they hold? I just looked through the 2013 Audit and couldn’t find any bond by bond specifics.

I work in finance helping develop affordable housing throughout the US. We finance projects using taxable loans and tax exempt (TE) municipal bonds so I have a good understanding of TE bond structures.

As anyone can imagine TE bond rates should be lower than taxable loan rates assuming each is structured and secured by the same collateral. Academically, the delta between the two should be the standard corporate tax rate so that an investor would receive the same economic benefit whether investing in a TE or taxable security with the same underlying security and structure.

Interestingly though over the past several years, TE bond interest rates in many cases have actually been HIGHER than their equivalent taxable loan rates which goes against the above logic that TE rates should be lower than taxable rates.

Without seeing the underlying Muni Bonds, I can not say with certainty what their strategy is, but based on my experience it appears they are capitalizing on a current market dislocation where investing is TE bonds is substantially better economically than taxable fixed income instruments. I would add that muni bonds have historically be a very secure debt instruments however the true security would vary depending on what type of muni bond they have purchased (a Water/Sewer general obligation muni bond that is the local municipality’s general obligation, a revenue bond which pays debt service from asset specific cash flows, or otherwise).

Overall, I wouldn’t be too concerned with the muni bond exposure unless you are seeing high default rates, delinquencies etc.

NOTE: This TE vs TA interest dynamic may not exist outside of my expertise which is multifamily housing finance. I doubt it but I thought it important to caveat it.

Another Note: Silicon Valley Bank is a major competitor of mine in the Bay Area in providing financing to my clients and they have muni bond exposure also which is due to investing in TE bonds as construction and permanent loans for affordable housing multifamily apartment complexes. From my experience this asset class is extremely secure as default rates are well below 1% and most portfolios have less than 0.1% default rates.

If there is any specific bond portfolio information available I’m happy to review it for the group and give you my thoughts.



Wow, Eric, that is very useful information, from the inside so to speak!



Thanks for the info. My readings suggested that municipal bonds are pretty safe but it’s great to have insider info.

The annual reports don’t give specific details of their bond portfolio.

I still need to read more.


Happy to help everyone with thinking this through. This board has been extremely helpful to me in so many ways and of course I am very willing to provide what I can to enhance the group conversation.

I read every single post and article and honestly am excited every day to check the market and this discussion board.

Thanks to Saul and the entire community here. I’m looking forward to hitting 100,000 posts and becoming a better and more thoughtful investor!


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Hi all,

It looks like amid all our talk here about BOFI and INBK, SQBK has quietly delivered a couple great quarters and the stock is up around 40%. NIM, efficiency ratio, and deposit growth all look healthy. Perhaps this is worth another look.

Update: Square 1 Financial Q4 Earnings $SQBK


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