Square 1 Financial Banks On Entrepreneurial Clients

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Anyone who questions the entrepreneurial spirit of Americans might be swayed by spending a few minutes chatting with Doug Bowers.

He's CEO of Durham, N.C.-based Square 1 Financial ( SQBK ), the holding company for Square 1 Bank, which provides loans and other financial services to entrepreneurs, startups, venture capital firms and private equity outfits.

The company, which was founded in 2005 and had its initial public offering on March 27, depends on a steady stream of innovative people, companies and ideas to expand its business.

In that regard, Square 1 is in good shape, Bowers says.

"About $25 billion to $30 billion is invested into the innovation sector every year, and it goes to somewhere between 3,000 and 4,000 companies," he told IBD. "Of that, about one-third are brand-new companies. That represents the pool of opportunity we focus on."

Where The Go-Getters Are

To reach that pool of opportunity, Square 1 employs 75 client representatives -- what Bowers calls "client-facing individuals" -- in a dozen offices throughout the country.

These offices are concentrated in what he calls innovation hubs -- places that focus primarily on technology and life sciences.

They tend to be markets rich in talent, research and venture cap firms. They include Boston, New York, Seattle, California's Silicon Valley, San Diego, Denver and North Carolina's Research Triangle, where Square 1 is headquartered.

About 80% of Square 1's loan portfolio is dedicated to entrepreneurial companies backed by VC investors, Bowers says. Of that 80%, about 60% is technology-based and 20% life sciences-based.

The remaining 20% of Square 1's portfolio is dedicated to venture cap investors. These are the types of borrowers who don't find a lot of financing options at traditional banks.

"Given the unique nature of the borrower and investor, there are very few banks willing to make these types of loans because of the real or perceived risk of lending to startups or near startups," Bowers said. "Commercial banks see a company that may not have revenue and certainly does not have income or positive cash flow, and may not have collateral -- so the commercial banks tend to say, 'No, thank you.'"

One result is that VC firms and entrepreneurs must go shopping for loans at banks and other financial firms that either specialize in venture banking services or offer them as part of a larger menu of services.

Among publicly traded companies, the list includesSilicon Valley Bank ( SIVB ),Comerica ( CMA ),First Republic Bank ( FRC ),City National ( CYN ) and Bridge Bank, owned byBridge Capital Holdings (BBNK).

There is no precise formula for making loans to VC, private equity and entrepreneurial clients, Bowers says. It takes experience, expertise, instinct and research.

"We look very closely at the investor -- their experience in the space, their knowledge, the amount of capital they have," he said. "The investor is a very key component of how we evaluate whether we want to lend or not."

When lending to a company, Square 1 takes a hard look at property that it holds, its management team's experience and whether it fills an area that had not been filled.

Delving Into The Deal Book

Some funding arrangements that Square 1 has inked in recent months include credit facilities of $3 million to online marketing software provider Accelerize New Media, $4 million to digital publishing technology firm GTxcel, $12.5 million to dietary supplement maker NutraMed and $4.5 million to sitter- and nanny-search service Sittercity.

Square 1 also provided a $7.5 million growth-capital facility to network-reliability tech firm Talari Networks.

There is no shortage of companies in need of funding.

"We believe there is plenty of runway and opportunity out there," Bowers said.

To raise capital for that opportunity, Square 1 took its shares public last month. The company's March 27 IPO priced at 18 -- above its expected range of 15 to 17 -- and raised $104 million by offering 5.8 million shares. The stock closed its first day of trading at 20.60. Shares currently trade near 20.

"The IPO was underwritten by arguably the top two underwriters, in Keefe, Bruyette & Woods and Sandler O'Neill," said Scott Sweet, managing partner at IPO Boutique. "The stock has held up pretty well through this tough sell-off."

Founder Casey's Legacy

Square 1 was founded by Richard Casey, a banking veteran who previously served in a variety of positions at Comerica Bank and its predecessor. A couple of his posts were president of the emerging growth division and managing director of Comerica Ventures. He died in November 2010.

Bowers joined Square 1 three years ago. Previously, he spent years atBank of America (BAC) in a variety of positions.

He also has experience at starting up businesses and working at a private equity firm.

Square 1 has seen a steady rise in its fortunes the past few years. According to a company filing with the Securities and Exchange Commission, Square 1 had net income of $22.4 million in 2013. That was up from $14.4 million in 2012.

The last year that the company reported a net loss was 2010.

Square 1's average deposits grew to $1.87 billion in 2013 from $1.53 billion in 2012.

The company's average loan balance increased to $918 million last year from $751 million a year earlier, while adjusted operating revenue climbed to $105.3 million from $84.2 million.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: SQBK , SIVB , CMA , FRC , CYN

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