We believe that stable, long-term growth and profitability are the result of building
strong customer relationships while maintaining disciplined credit underwriting
standards. We continue to focus on originating high-quality loans and leases and
growing our low-cost deposit base through our relationship-based business lending.
These core strengths enable us to maintain our operational efficiency and increase
profitability, increase our core deposits and grow loans and leases in a sound
manner.
Our loan and lease portfolio consists primarily of real estate mortgage loans,
real estate construction and land loans, and commercial and industrial, or "C&I",
loans and leases. We pursue attractive growth opportunities to expand and enter
new markets aligned with our business model and strategic plans. Additionally,
we focus on cultivating strong relationships with firms within the private equity
and venture capital community nationwide, many of which are also our clients and/or
may invest in our clients.
Our reputation, expertise and relationship-based business banking model enable
us to deepen our relationships with our customers. We leverage our relationships
with existing customers by cross-selling our products and services, including
attracting deposits from and offering cash management solutions to our loan
and lease customers. We price our deposit products with a view to maximizing
our share of each customer's financial services business and prudently managing
our cost of funds.
Focusing on operational efficiency is critical to our profitability and future
growth. We intend to carefully manage our cost structure and continuously refine
and implement internal processes and systems to create further efficiencies
and enhance our earnings. We are also continuing our efforts to shift our deposit
base from certificates of deposit to lower-cost core deposits, a strategic initiative
that was undertaken following the CapitalSource Inc. merger. The acquisition
of Square 1 accelerated this process as nearly all of the $3.8 billion of acquired
deposits were core deposits.
Deposits are our primary source of funds to support our revenue-generating
assets and provide a source of low-cost funds and deposit-related fee income.
We offer traditional deposit products to businesses and other customers with
a variety of rates and terms, including demand, money market, and time deposits.
We also provide international banking services, multi-state deposit services,
asset management services, as well as product offerings through other correspondent
banks. The Bank’s deposits are insured by the Federal Deposit Insurance
Corporation, or "FDIC," up to statutory limits.
Our branch network allows us to gather deposits, expand our brand presence and
service our customers’ banking and cash management needs. In addition,
as the banking industry continues to experience broader customer acceptance
of on-line and mobile banking tools for conducting basic banking functions we
are able to serve our customers through a wide range of non-branch channels,
including on-line and telephone banking platforms, which allows us to attract
new depositors without a commensurate increase in branch traffic.
The composition of our deposit mix changed as a result of the CapitalSource
Inc. merger, which lowered the proportion of core deposits and increased the
proportion of more expensive time deposits. Since the CapitalSource Inc. merger,
we have focused on shifting the mix of our deposits to include a higher proportion
of core deposits. Our dedicated team of professionals has been successful in
growing our low-cost, core deposit base by attracting deposits from our business
customers and offering alternative cash management solutions intended to help
retain business customers. The Square 1 acquisition completed in October 2015
accelerated this shift in deposit mix.
We face strong competition in gathering deposits. Our most direct competition
for deposits comes from nationwide, regional, and community banks, savings banks
and associations, credit unions, insurance companies, money market funds, brokerage
firms and other non-bank financial services companies that target the same customers
we do. We compete actively for deposits and emphasize solicitation of noninterest-bearing
deposits. We seek to provide a higher level of personal service than our larger
competitors, many of whom have more assets, capital and resources than we do
and may be able to conduct more intensive and broader based promotional efforts
to reach both commercial and retail customers. We also compete based on interest
rates. Our cost of funds fluctuates with market interest rates and may be affected
by higher rates being offered by other financial institutions. In certain interest
rate environments, additional significant competition for deposits may be expected
to arise from corporate and government debt securities and money market mutual
funds. Competition for deposits is also affected by the ease with which customers
can transfer deposits from one institution to another.
In addition to deposit products, we also offer select clients non-depository
cash investment options through Square 1 Asset Management, Inc. ("S1AM"),
our registered investment adviser subsidiary, and third-party money market sweep
products. S1AM provides customized investment advisory and asset management
solutions.
We conduct a range of commercial lending activities that includes real estate
mortgage, real estate construction and land loans and C&I loans and leases.
Our commercial real estate loans are secured by a range of property types. Our
C&I loan offerings are diverse and generally include various asset-secured
loans, equipment-secured loans and leases, cash flow loans (leveraged loans)
to finance business acquisitions and recapitalizations, and venture loans to
support the operations of entrepreneurial companies during the various phases
of their start-up operations. We price loans to preserve our interest spread
and maintain our net interest margin. Loan interest rates may be floating throughout
the loan term or fixed. The rates on hybrid loans typically are fixed for a
set period and then become floating later in the loan term. While we do not
actively solicit consumer loans, we hold consumer loans, which are primarily
purchased participation interests in student loans originated and serviced by
a third-party lender.