Below is transcript of the Square 1 Financial Inc (NASDAQ:SQBK)’s Fourth Quarter 2014 Earnings Call, held on January 21, 2015, at 10:30 a.m.EST.
Square 1 Financial Inc (NASDAQ:SQBK) is a financial services company. The Company is a bank holding company for Square 1 Bank. Through Square 1 Bank, the Company focuses its banking activities almost on venture capital firms and private equity firms and the portfolio companies funded by such firms.
Company Executives:
Leah Webb, General Counsel
Dough Bowers, President & CEO
Pat Oaks, Chief Financials Officer
Analysts:
Jennifer Demba, Suntrust
Aaron Deer, Sandler O’Neil
Julianna Balick, KBW.
Operator
Good morning, my name is Saeid and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Square 1 Financial Fourth Quarter 2014 Earnings Call. All lines have been placed on mute to prevent any background noise, after the speakers [inaudible] there will be a question and answer session. At this time I would like to hand the conference over to Miss Leah Webb, General Counsel. Ma’am you may begin your conference.
Leah Webb – General Counsel
Thank you, Saeid. And thank you everyone for joining us for our fourth quarter 2014 earnings call. Doug Bowers, President and CEO and Pat Oakes, CFO are here to discuss results. As a reminder, the Square 1 Financial current earnings release is available on the Investor Relations section of square1financial.com.
I wish to caution you that we will be making forward-looking statements during this call and that actual results may differ materially. We encourage you to review the disclaimer in the earnings release dealing with forward-looking information. This disclaimer applies equally to statements made in this call. In addition, some discussions may include references to non-GAAP financial measures, information about those measures including reconciliation to GAAP measures may be found in our SEC filings and in our earnings release. And with that I will turn the call over to the President and CEO of Square 1 Financial, Doug Bowers.
Dough Bowers – President & CEO
Thank you, Leah, and thanks everyone for joining us today for our fourth quarter and full year 2014 earnings call. I’m with our Chief Financial Officer, Pat Oakes, and our Chief Credit Officer, Diane Earle. Pat and I will have some brief some comments and then we will open it up for questions.
To begin with, we are very pleased with our results for the fourth quarter and indeed for all of 2014. We’re especially satisfied with the solid growth in loans, deposits and favorable credit cost. In the fourth quarter we generated net income of $9.5 million, our best quarter to date and we generated full year net income of $34.1 million. We finished the year at 68 basis points for net charge offs, all together these results add up to a strong financial performance for the quarter and a very good full year 2014 for Square 1.
Average loan balances increased nearly 29% compared to full year 2013, this loan growth is a result of deeper coverage in key markets, more loans to later stage clients and the growing momentum of our overall brand awareness. Deposits increased for the year with average on balance sheet deposits up 30%, we have also seen tremendous growth in average client investment funds, $558 million at year-end 2013 versus $1.4 billion at the year-end of 2014 or 158% year-over-year.
In our business the ability to move deposits off balance sheet is key to keeping our capital ratios in our target range. Growth in client investment funds shows our ability to manage deposits off balance sheet in a way that works well for our clients and for the bank. Once again it is worth mentioning that our registered investment advisor, Square 1 Asset Management had zero investments as late as summer 2013 and we ended 2014 with $976 million in client investment funds under management.
We often talk about the volatility that exists in certain elements of our business. This quarter we saw a degree of higher charge offs at a 118 basis points for the quarter but the total for 2014 resulting charge offs was 68 basis points. This certainly exceeds our historical charge off average of just slightly less than 1%.
We keep a close watch on our sector and all the key metrics point to good health, strong VC investment and fund raising and healthy exist across the Board in 2014. We remain committed to our growth strategy. We will continue to hire throughout 2014 while looking to be as effective in everything we do. On the hiring front 28 people joined us in 2014. We’re seeing the positive results of shifting our mix of loan business to include more later-stage companies. We believe this loan mix tilt will help us continue to lower credit costs. All in all the Square 1 brand is accelerating as evidenced by the growth in new clients, loan balances and deposits. Those were the Square 1 headlines for 2014, we’re very pleased with our results and we certainly expect to build on that success in 2015. I will turn the call now over to Pat Oakes who will talk more about our results. Pat?
Pat Oaks – Chief Financials Officer
Thanks, Dough and good morning everyone. Let me highlight a few items before turning the call back over to Doug. Our net interest margin for the quarter was 4.12%, an increase of 12 basis points over the prior quarter. The margin was helped by a decrease in our cash balances along with 921,000 in higher loan fees. Overall loan fees increased from $2.4 million to $3.4 million. The loan yield excluding fees decreased nine basis points to 5.41% for the quarter. Our provision expense for the quarter was $4 million, an increase of 1.5 million from our previous quarter mainly due to the higher net charge-off Doug discussed earlier.
As a percentage of loans the allowance for loan loss decreased to 1.7% compared to 1.79% from the previous quarter and is equal to reserve at December 31. 2013. Core banking non-interest income which represents income from traditional banking services provided to our customers was up 25% for the year compared to 2013. As we continue to focus on enhancing our product offerings and adding new customers. The core banking non-interest income for the fourth quarter was $4.5 million, an increase of $200,000 or 4% from the previous quarter driven mainly by higher foreign exchange income. As I mentioned last quarter, foreign exchange income can fluctuate based on our customers’ needs and we benefited again this quarter from a larger number of transactions which may not be repeatable in the future.
Warrant income for the fourth quarter was 792,000 up slightly from the third quarter. The quarter includes a higher number of merger transactions for our customers. Non-interest expense increased by 697,000 for the quarter to 17.5 million as personnel expense increased by 753,000 from higher salaries and incentive compensation expense.
Expenses were up a total of 19% for the year compared to 2013. We anticipate expenses to increase in the mid-teens in 2015 as we continue to recruit bankers and invest in our franchise. The effective tax rate for the fourth quarter was higher as we saw an increase in the portion of income that was taxable resulting in true-up in the quarter to raise our annual effective tax rate to 31.4%. Now I will turn the call back over to Doug.
Dough Bowers – President & CEO
All right, well thank you, Pat. Operator if we could open it up for questions, please.
Operator
Thank you, sir. Ladies and gentlemen on the phone line if you’d like to ask a question please press * then 1 on your telephone. If your questions have been answer and you wish to remove yourself from the queue please press the pound key. Once again, if you have a question please press * then 1. Our first question comes from Jennifer Demba from Suntrust, your line is open please go ahead.
Q: Good morning. Couple of questions, first of all on your loan growth, just wondering if you could break that down geographically for us, if you can. Just let us kind of give us an idea where you’re seeing relatively more momentum?
Dough Bowers – President & CEO
Well, from a geographic perspective, I’m not sure it would be very helpful and in fact it is very broad-based but we saw good activity on the VCS side, the Venture Capital Services, the Capital call lines. So, good increases there, good increases in the later-stage business as we mentioned, our SBA portfolio continues to grow and more in the expansion stage we’re in. So, we do think of it in geography terms, we also think much more in terms of how we’re doing across the stages.
Q: Ok. I know your net charge offs picked up a little bit this quarter. Was there any lumpiness in there or was it just a bunch of smaller losses?
Dough Bowers – President & CEO
For the most part smaller loans, in keeping with the average loan balance, you’re using the word, this lumpiness, this degree of volatility that happens with these kinds of loans that showed through in the first quarter and we obviously had a very good year by comparison.
Q: Can I ask one more follow-up? You said you hired 28 people last year; do you have a sort of goal in mind for hires this year?
Dough Bowers – President & CEO
Well, we do. The numbers are going to move around but it will be approximately that same number of hires for 2015.
Operator
Thank you and our next question comes from Aaron Deer from Sandler O’Neil. The line is open please go ahead.
Q: Maybe just a follow-up on Jennifer’s question with respect to the higher end, amongst that number of folks that you’re looking to hire this year, how would you characterize the split between people that are going to be frontline bankers versus folks that are more back office to kind of support the infrastructure.
Dough Bowers – President & CEO
Closer to 50/50 in terms of the balance. And when we say that, of course, the [inaudible] include the greater risk area which obviously is important for our business.
Q: Sure. And then with the loan growth in the quarter, seems like you had strong growth in life sciences side and the ABL well the technology book looked flat, can you talk about what kind of demand and production decisions were behind those dynamics?
Dough Bowers – President & CEO
There’s a couple of things. One, we had a strategy that we continued to execute on around this degree of tilt to later-stage. So, with the capital raise, with the increase in house limits and with the opportunities we are seeing in the marketplace and most importantly with what we believed to be an approved in credit quality that comes from that later-stage in more improved credit, if you will. We are going to have a degree of tilt, you saw it in ’14 and you’ll continue to see that. [inaudible] was a little bit of a catch-up in terms of activity in the fourth quarter vis-à-vis prior quarter. Some of that certainly having to do with the amount of life science activity that was more equity oriented either private or public in the first half of the year versus debt oriented.
And I would just note in the technology section, you’ve got to be careful of [inaudible] right? Our overall commitments were up, the actual [inaudible] was down a little bit.
Q: With respect to the strategy to move more toward later stage, can you talk about the pricing differential on early stage credits versus later stage?
Dough Bowers – President & CEO
Yeah, it comes in two forms, there is less warrant opportunity traditionally in that arena and you do have a typically a little less in margin. Some of what you make up for all of that is a higher degree if traditional banking activity, being foreign exchange, credit card, and you also have a bigger depositary base opportunity just given the size of the company.
But you know, I should say, Aaron. I want to be sure here that our brand is and will remain near the early-stage business. So, the greater world of early-stage tech and life sciences remains a big part of our focus but we do believe and we now do have the capacity to be more available, more capable in the later-stage world. I should also say that companies are holding on longer rounds are bigger and so all of that is causing a degree of increased opportunity generally speaking, there’s simply more later-stage opportunity out there.
Q: You should be able to thank businesses further through their life cycle as well.
Operator
Our next question comes from Julianna Balick from KBW. Your line is open, please go ahead.
Q: Good morning. I wanted to follow-up on some of the topics of that have already been raised in Q&A and in your remarks. In terms of the strong loan growth that we saw this quarter, which was most excellent, could you comment as to whether that is just coming. How much of that is market share gains from your competitors and if so which competitors you’re taking market share from? Or how much of that is simply that the market is getting bigger with the rate of new company formation and VC investment so that you know there is more to go around for everyone.
Dough Bowers – President & CEO
Well, a little bit of both, I think would be the best answer. There is a degrees of take-away that goes on with our competition, us from them and them from us. But broadly speaking this has a lot to do with the degree of expanded opportunity and right alongside of that the degree of our expanded reach, brand, feed on the street, all of that is causing that opportunity.
Q: That makes sense. And who are your biggest competitors and especially now as your brand gets bigger and your reach expands, you know, who are you coming up against the most often for loans?
Dough Bowers – President & CEO
Yeah, I mean Julianna you know all these players, there’s nothing really that has changed, Silicon Valley Bank remains, a very very important competitor in this space, NN we certainly deal with, Comerica in a meaningful way, some of the [inaudible] that funds, will compete in this space and then, after that, it’s pretty modest.
Q: Got it. And then jumping real quick to loan yields, your underlying loan yields you remarked decrease nine basis points, how much of that is coming in from competitive pressure on the loan yields in the marketplace versus how much of that is coming from your mix shift as you kind of get into later stage lending.
Pat Oaks – Chief Financials Officer
The later-stage lending is probably not as big an impact as in the fourth quarter a little bit increase in VCS, but we’re seeing overall pressure from whether is early-stage or later-stage throughout the Board of keeping that loan yield up. So, there is some pressure just in general in our business.
Q: Okay, and in terms of thinking about next year, you had said that you’re looking for expense increase in the mid-teens. What is the underlying growth expectation for loans and/or deposits or both that you’ve under that and to what degree, at what level of growth will push your incentive comp up so that we see expense growth higher than mid-teens?
Dough Bowers – President & CEO
I think you have to start with what the industry did in 2014 so you all would know the statistics but you had investment levels go from nearly $30 billion to $48.5 billion, so significant amounts of investment but probably more importantly is you had 254 funds raised in 2014 for a total of nearly $30 billion and that’s the highest level we’ve had since 06. So, it’s just great to see that the number of funds that have raised as well as these dollars amounts. So you certainly have a refueled venture community out there and so that gives us a fair degree of optimism alongside our brand, our hiring and the things that we’ve been doing. There’s a lot of momentum, Julianna as we go into 2015. So when we stare at deposit opportunity, a great deal more of relativity, but when we look at the amount of activity that is going on out there we’re very upbeat, same is true with loans.
Q: And then real quick on credit, in terms of the charge off that you had this quarter, could you break them out between early stage, middle stage, late stage to give us a little bit more in granularity there.
Pat Oaks – Chief Financials Officer
I don’t have that information in front of me.
Q: And then final question, I will step back down, in the implications for your reserves and the provision cost for next year or next quarter if you had the increased charge off levels this quarter does that mean we should be looking for higher provision next quarter from the historical loan loss, historically look back in reserves or has that already flown through?
Pat Oaks – Chief Financials Officer
There could potentially be some impact there, you’re right when you capitalize the [inaudible] reserves but I would say the biggest fluctuation for us in the reserve is as much on the specific reserve around our non-performers.
Dough Bowers – President & CEO
Maybe another way to go at that Julianna is non-performers did take up in the last quarter but compared fourth quarter, year-end 13 to year-end 14 it’s approximately flat. Overall reserves 170 going into this year, roughly [inaudible] with where we were last year and as we look at our specific reserves we feel like we’re in a very good place.
Q: And do you have more color on the NPA tick up?
Dough Bowers – President & CEO
The majority of it is I would say is a function of the kind of volatility you experience in this world. So, 6 credits, $10 million, gives you an idea of the amount of granularity that takes place in this kind of business.
Q: One more question. Does Square 1 have any lending exposure to any companies that maybe have disproportionate exposure to the energy industry and the recent oil price decline, have you guys scrubbed your portfolio for any potential exposure there?
Operator
Our next question comes from Jennifer Demba from Suntrust, your line is open please go ahead.
Q: One more question. Does Square 1 have any lending exposure to any companies that maybe have disproportionate exposure to the energy industry and the recent oil price decline, have you guys scrubbed your portfolio for any potential exposure there?
Dough Bowers – President & CEO
As you might suspect we certainly have, so less than 1% of our loan portfolio directly related we’ve been very modest, very very modest participant in anything in the [inaudible] green energy space. So we feel very very good, as good as one can feel as you go through these shocks. But for us, when you think about greater life sciences, greater technology and greater VCA’s which makes up 90 plus percent of our loan portfolio and then the amount that really ever engages in the world of outright oil and gas. It’s modest period and it’s particularly modest for us.
Operator
Thank you, at this time I would like to hand the conference back over to Mr. Bowers for closing remarks.
Dough Bowers – President & CEO
Thank you operator. We’re obviously very pleased with the results for 14 and importantly we’re on to 15 in a very big way with a very bright outlook. So, thank you very much for your time and your interest.
Operator
Ladies and gentlemen thank you for participating in today’s conference this concludes the program. You may now disconnect and have a wonderful day.
