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Square 1 Financial Reports Fourth Quarter and Full Year 2014 Results

DURHAM, N.C., Jan. 21, 2015 (GLOBE NEWSWIRE) -- Square 1 Financial, Inc. (Nasdaq:SQBK) today announced results for the fourth quarter and year ended December 31, 2014.

Consolidated net income available to common shareholders for the fourth quarter of 2014 was $9.5 million, or $0.32 per diluted share, compared to $8.8 million, or $0.29 per diluted share, for the third quarter of 2014. Consolidated net income available to common shareholders for the year ended December 31, 2014 was $34.1 million, or $1.18 per diluted share, compared to $22.1 million, or $0.93 per diluted share, for the year ended December 31, 2013.

"We are very pleased with 2014 results. Overall loan and deposit growth were strong in the fourth quarter and the full year," said CEO Doug Bowers. "We are pleased with credit quality, and are well positioned to continue our momentum into 2015."

Full Year Highlights

Highlights of the full year 2014 include:

  • Net income available to common shareholders increased 54.2% compared to 2013.
  • Return on average common equity of 12.88% and return on average assets of 1.25%.
  • Tangible book value per common share of $10.47 as of December 31, 2014.
  • Average on-balance sheet deposits grew 30.3% to $2.4 billion.
  • Average client investment funds grew 97.9% to $881.8 million.
  • Average loan balances increased 28.9% to $1.2 billion and period end loans increased 24.4% to $1.3 billion.
  • Net loan charge-offs were $8.1 million, or 0.68%, of average loans for the year ended December 31, 2014, compared to net loan charge-offs of $8.8 million, or 0.95%, of average loans for the year ended December 31, 2013.
  • Net interest margin increased to 4.06% from 3.91%.
  • Core banking noninterest income increased 24.7% to $16.6 million and total noninterest income was flat.

Fourth Quarter Highlights

Highlights of the fourth quarter of 2014 include:

  • Net income available to common shareholders increased 8.9% compared to the third quarter of 2014.
  • Return on average common equity of 12.57% and return on average assets of 1.25%.
  • Average on-balance sheet deposits of $2.7 billion, up 6.6% from the third quarter of 2014.
  • Average client investment funds of $1.2 billion, up 29.7% compared to the third quarter of 2014.
  • Average loans grew 7.7% while period-end loans increased 5.9%, compared to the third quarter of 2014.
  • Net loan charge-offs were $3.9 million, or 1.18%, of average loans (annualized) for the fourth quarter of 2014. Provision for loan losses expense increased $1.5 million compared to the third quarter of 2014.
  • Net interest margin increased to 4.12% from 4.00% for the third quarter of 2014.
  • Core banking noninterest income increased to $4.5 million from $4.3 million in the third quarter of 2014, and total noninterest income increased to $6.2 million from $5.5 million.

See "Non-GAAP Financial Measures" at the end of this release for reconciliations of our non-GAAP measures.

Earnings Summary

The $0.8 million increase in net income available to common shareholders compared to the third quarter of 2014 was due primarily to a $2.8 million increase in net interest income and a $0.6 million increase in noninterest income, partially offset by a $1.5 million increase in the provision for loan losses and a $0.7 million increase in noninterest expense.

The $12.0 million increase in net income available to common shareholders for the year ended December 31, 2014 compared to the year ended December 31, 2013, resulted from a $27.4 million increase in net interest income, partially offset by a $10.6 million increase in noninterest expense and a $5.6 million increase in income tax expense.

Net Interest Income and Margin (Fully Tax Equivalent Basis)

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

Net interest income for the quarter increased $2.9 million compared to the third quarter of 2014, primarily driven by an increase in loan interest income of $2.0 million from higher average balances and a higher yield from loan fees. Net interest income increased 35.9% to $107.9 million for the year ended December 31, 2014 compared to the year ended December 31, 2013, which included a 28.4% increase in interest income on loans and a 51.8% increase in interest income on securities.

For the fourth quarter of 2014, our net interest margin increased to 4.12% from 4.00% for the third quarter of 2014. This increase was largely due to the impact of lower cash balances and an increase in the yield earned on our loan portfolio primarily driven by higher loan prepayment fees, which can vary based on the level of prepayments. Loan fees were $3.3 million in the fourth quarter of 2014 compared to loan fees of $2.4 million in the third quarter of 2014.

For the year ended December 31, 2014, our net interest margin increased to 4.06% compared to 3.91% for the year ended December 31, 2013. This increase was primarily due to lower premium amortization on agency mortgage-backed securities resulting from slower prepayments, continued purchases of higher yielding municipal securities, and lower cost of funds resulting from the trust preferred securities conversion and lower rates paid on deposits.

Provision for Loan Losses

The $1.5 million increase in the provision for loan losses compared to the third quarter of 2014 was primarily due to higher net charge-offs. Net loan charge-offs were $3.9 million, or 1.18%, of average loans (annualized) for the fourth quarter of 2014 compared to net loan charge-offs of $1.2 million, or 0.40%, of average loans (annualized) for the third quarter of 2014.

Noninterest Income

Noninterest income for the fourth quarter of 2014 was $6.2 million, an increase of $0.6 million compared to the third quarter of 2014. Core banking noninterest income represents recurring income from traditional banking services provided to our customers (see "Non-GAAP Financial Measures" section). Core banking noninterest income for the fourth quarter of 2014 was $4.5 million, an increase of $0.2 million, or 3.8%, compared to the third quarter of 2014. The increase in core banking noninterest income was primarily driven by higher foreign exchange fee income, which fluctuates based on our customers' needs for foreign currency-based transactions. The remainder of the increase in noninterest income compared to the third quarter of 2014 was primarily due to a $0.2 million increase in the gain on sale of loans and a $0.2 million decrease in losses on securities driven by third quarter losses from the sale of equity securities obtained through the exercise of warrants.

Noninterest income was $25.2 million for the year ended December 31, 2014, and was flat compared to noninterest income of $25.3 million for the year ended December 31, 2013, as $1.9 million higher foreign exchange fee income and a $1.7 million decrease in investment impairment was offset by a $1.9 million decrease in net gain on securities and a $2.2 million decrease in success fees. Success fees are typically volatile and are contingent upon customer success events, such as an acquisition.

Warrant income was $0.8 million in the fourth quarter of 2014, compared to warrant income of $0.7 million in the third quarter of 2014. Warrant income was $3.7 million for the year ended December 31, 2014, compared to $3.8 million for the year ended December 31, 2013. At December 31, 2014, the valuation of our remaining warrants held was $4.3 million held in 461 companies, which included $0.2 million held in six publicly traded companies.

Noninterest Expense

Noninterest expense for the fourth quarter of 2014 increased $0.7 million, or 4.1%, compared to the third quarter of 2014. The increase primarily resulted from $0.8 million higher personnel expenses. Higher personnel expenses were driven by an increase of 5 full-time equivalent employees from the third quarter of 2014 and higher incentive compensation expense.

Noninterest expense for the year ended December 31, 2014 increased $10.6 million, or 19.01%, compared to the year ended December 31, 2013. This increase was largely due to $7.9 million higher personnel expenses driven by an increase of 28 full-time equivalent employees, $0.8 million increase in the provision for unfunded credit commitments, and $0.2 million from amortization of intangibles obtained as part of our acquisition of Sand Hill Finance LLC in December 2013.

Income Tax Provision

Income tax expense increased $0.4 million, or 10.3%, for the fourth quarter of 2014 as compared to the third quarter of 2014, primarily due to a $1.2 million, or 9.4%, increase in pre-tax income and an income tax true up recorded in the fourth quarter of 2014 related to an increase in our annual effective tax rate to 31.4% from 30.8%.

Income tax expense for the year ended December 31, 2014 increased $5.6 million, or 55.8%, compared to the year ended December 31, 2013, primarily due to a $17.4 million, or 53.7%, increase in pre-tax income. Our effective tax rate increased to 31.4% for the year ended December 31, 2014 from 31.0% for the year ended December 31, 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 an increase in the portion of taxable income.

Loans and Credit Quality

Average loans grew $93.7 million while period-end loans increased $75.0 million compared to the third quarter of 2014. The increase in commercial loans occurred in all our major client industry segments, except technology which decreased $2.9 million when compared to the third quarter of 2014. Period-end loans to venture firms increased $9.8 million, or 6.1%, while total loans to venture-backed companies, including life sciences, technology and asset-based loans were up $56.2 million, or 5.5%, at December 31, 2014 compared to September 30, 2014.

At December 31, 2014, nonperforming loans totaled $17.2 million, or 1.28%, of total loans compared to $11.8 million, or 0.93%, of total loans at September 30, 2014 and $14.5 million, or 1.34%, of total loans at December 31, 2013. The allowance for loan losses to nonperforming loans at December 31, 2014, was 132.87%, compared to 193.38% at September 30, 2014, and 127.05% at December 31, 2013.

Period-end loans to venture firms increased $25.7 million, or 17.9%, while total loans to venture-backed companies, including life sciences, technology and asset-based loans were up $204.6 million, or 23.3%, at December 31, 2014 compared to December 31, 2013. Net loan charge-offs were $8.1 million, or 0.68%, of average loans for the year ended December 31, 2014, compared to $8.8 million, or 0.95%, for the year ended December 31, 2013.

Investments

Average investments grew 11.4% compared to the third quarter of 2014 as a result of strong deposit growth. Our available-for-sale securities portfolio totaled $1.3 billion at December 31, 2014, an increase of $107.6 million, or 9.1%, compared to $1.2 billion at September 30, 2014. Our held to maturity securities portfolio had an amortized cost of $300.4 million at December 31, 2014, an increase of $22.3 million, or 8.0%, compared to $278.1 million at September 30, 2014.

Average investments grew 36.7% for the year ended December 31, 2014, compared to the year ended December 31, 2013. Our available-for-sale securities portfolio increased $370.3 million, or 40.1%, compared to $924.2 million at December 31, 2013. Our held to maturity securities portfolio increased $146.2 million, or 94.8%, compared to $154.3 million at December 31, 2013.

Deposits and Client Investment Funds

Our December 31, 2014 period-end deposits increased $108.1 million, or 4.1%, from September 30, 2014 and increased $669.8 million, or 31.8%, to $2.8 billion from December 31, 2013. These increases were primarily due to growth of our client base and a continued strong funding environment for venture-backed firms. Our period-end noninterest-bearing deposits increased $138.3 million, or 8.1%, while our interest-bearing deposits decreased $30.2 million, or 3.2%, from September 30, 2014. Our period-end noninterest-bearing deposits increased $471.0 million, or 34.1%, and our interest-bearing deposits increased $198.8 million, or 27.4%, from December 31, 2013.

Average on-balance sheet deposits increased $167.9 million compared to the third quarter of 2014. Despite the increase in deposits, the average cost of deposits of 0.02% and 0.02% for the fourth quarter of 2014 and the third quarter of 2014, respectively, yielded interest expense on deposits of $0.2 million and $0.1 million, respectively. Average on-balance sheet deposits increased $566.6 million for the year ended December 31, 2014, compared to the year ended December 31, 2013.

Our period-end client investment funds increased to $1.4 billion at December 31, 2014 from $957.6 million at September 30, 2014, an increase of 50.0%, and from $557.9 million at December 31, 2013, an increase of 157.5%, as our clients took advantage of alternative cash investment vehicles offered by Square 1 Asset Management, our registered investment adviser subsidiary. Average off-balance sheet client investment funds grew $276.9 million compared to the third quarter of 2014. Average off-balance sheet client investment funds grew $436.2 million for the year ended December 31, 2014, compared to the year ended December 31, 2013.

Earnings Conference Call

The Company will host a conference call at 10:30 a.m. EST on Wednesday, January 21, 2015, to discuss the financial results for the quarter ended December 31, 2014. Individuals wishing to participate in the conference call may do so by dialing 877.359.9508 from the United States, or 224.357.2393 from outside the United States, and entering Conference ID 71476265. The call will also be available live via webcast on the Investor Relations page of the Company's website, www.square1financial.com. A replay of the call will be available on the Company's website for 90 days beginning on Wednesday, January 21, 2015.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 not limited to, the following: (i) market and economic conditions (including interest rate environment, levels of public offerings, mergers and acquisitions and venture capital financing activities) and the associated impact on us; (ii) 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; (iii) our overall investment plans, strategies and activities, including our investment of excess cash/liquidity; (iv) operational, liquidity and credit risks associated with our business; (v) deterioration of our asset quality; (vi) our overall management of interest rate risk; (vii) our ability to execute our strategy and to achieve organic loan and deposit growth; (viii) increased competition in the financial services industry, nationally, regionally or locally, which may adversely affect pricing and terms; (ix) the adequacy of reserves (including allowance for loan and lease losses) and the appropriateness of our methodology for calculating such reserves; (x) volatility and direction of market interest rates; (xi) changes in the regulatory or legal environment; and (xii) other factors that are discussed in the section titled "Risk Factors," in our registration statement on Form S-1/A, filed with the Securities and Exchange Commission and effective as of March 26, 2014.

The foregoing factors should not be construed as exhaustive. 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. Any forward-looking statement speaks only as of the date on which it is made, and we do not intend, or undertake any obligation to publicly update these forward-looking statements.

About Square 1 Financial

Square 1 Financial is a financial services company focused primarily on serving entrepreneurs and their investors. Square 1 Financial (Nasdaq:SQBK) is headquartered in Durham, North Carolina with twelve loan production offices located in key innovation hubs across the United States. Through Square 1 Bank, which was formed by experienced venture bankers, commercial bankers and entrepreneurs, we offer a full range of banking and financial products focused on the entrepreneurial community and their venture capital and private equity investors. Since inception, we have operated as a highly-focused venture bank and have provided a broad range of financial services to entrepreneurs, growing entrepreneurial companies and the venture capital and private equity communities. We provide banking services to our clients, including venture, commercial and international banking services, asset-based lending programs, and SBA and USDA commercial and real estate loan programs. We also provide investment advisory and asset management services to our clients through Square 1 Asset Management, a subsidiary of Square 1 Bank. More information can be found at www.square1financial.com.

SQUARE 1 FINANCIAL, INC.
Summary Financial Information
At or For the
Three Months Ended Years Ended
(In thousands, except per share data) December 31,
2014
September 30,
2014
December 31,
2013
December 31,
2014
December 31,
2013
Performance Ratios:
Return on average assets 1.25% 1.22% 1.15% 1.25% 1.06%
Return on average common equity 12.57 12.01 14.95 12.88 12.44
Net interest margin(1) 4.12 4.00 3.96 4.06 3.91
Efficiency ratio(2) 47.14 49.79 49.56 49.61 53.10
Per Share Data:
Net income (loss) per basic common share $ 0.33 $ 0.31 $ 0.29 $ 1.25 $ 0.94
Net income (loss) per diluted common share 0.32 0.29 0.29 1.18 0.93
Book value per common share 10.48 10.25 7.80 10.48 7.80
Tangible book value per common share 10.47 10.23 7.77 10.47 7.77
Capital Ratios (consolidated):
Tier 1 leverage capital(4) 9.71% 10.05% 8.34% 9.71% 8.34%
Tier 1 risk-based capital(4) 13.84 13.69 11.38 13.84 11.38
Total risk-based capital(4) 14.96 14.84 12.46 14.96 12.46
Total shareholders' equity to assets 9.78 9.85 8.13 9.78 8.13
Tangible common equity to tangible assets(3) 9.77 9.83 7.89 9.77 7.89
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans 1.70% 1.79% 1.70% 1.70% 1.70%
Allowance for loan losses as a percent of nonperforming loans 132.87 193.38 127.05 132.87 127.05
Net charge-offs to average outstanding loans (annualized) 1.18 0.40 1.38 0.68 0.95
Nonperforming loans as a percent of total loans 1.28 0.93 1.34 1.28 1.34
Nonperforming assets as a percent of total assets 0.56 0.39 0.63 0.56 0.63
Other Ratios and Statistics:
Average loans, net of unearned income, to average deposits 48.8% 48.3% 48.9% 48.5% 49.1%
Period-end full-time equivalent employees 258 253 230 258 230
Average outstanding shares—basic 28,795 28,681 23,544 27,401 23,508
Average outstanding shares—diluted 30,204 30,080 23,972 29,101 23,859
Period-end outstanding shares—basic 28,883 28,701 23,612 28,883 23,612
Period-end outstanding shares—diluted 30,307 30,129 24,056 30,307 24,056
Financial Condition Data:
Average total assets $ 3,032,595 $ 2,838,269 $ 2,380,750 $ 2,724,506 $ 2,090,842
Average cash and cash equivalents 105,705 157,129 205,462 155,894 148,059
Average investment securities - available-for-sale 1,252,625 1,133,467 928,981 1,102,791 870,105
Average investment securities - held-to-maturity 291,648 252,289 138,641 226,310 102,437
Average loans, net of unearned income 1,317,622 1,223,906 1,052,507 1,183,347 918,149
Average on-balance sheet deposits 2,701,630 2,533,778 2,153,002 2,438,017 1,871,421
Average total client investment funds 1,208,638 931,780 565,106 881,837 445,588
Average total shareholders' equity 300,847 289,021 187,518 266,107 182,882
(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. We believe that the most directly comparable GAAP financial measure is total shareholders' equity to assets. See "Non-GAAP Financial Measures."
(4) Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratio for December 31, 2014 are estimates.

SQUARE 1 FINANCIAL, INC.
Interim Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data) December 31,
2014
September 30,
2014
December 31,
2013
Assets
Cash and due from banks $ 14,629 $ 49,615 $ 28,648
Interest-bearing deposits in other banks 72,292 125,991 76,966
Federal funds sold and securities purchased under resale agreements 10,000 116
Total cash and cash equivalents 86,921 185,606 105,730
Investment in time deposits 1,251 1,250 1,250
Investment securities—available for sale, at fair value 1,294,533 1,186,887 924,229
Investment securities—held to maturity, at amortized cost 300,425 278,121 154,255
Loans, net of unearned income of $7.9 million, $7.3 million and $4.5 million 1,346,449 1,271,457 1,082,536
Less allowance for loan losses (22,906) (22,816) (18,379)
Net loans 1,323,543 1,248,641 1,064,157
Premises and equipment, net 4,026 3,723 3,061
Deferred income tax assets, net 9,672 10,142 15,620
Bank owned life insurance 50,723 50,278 31,706
Intangible assets 1,615 1,770 2,065
Other receivables 3,226 3,619 2,592
Warrant valuation 4,304 4,089 5,105
Prepaid expenses 2,063 1,690 1,309
Accrued interest receivable and other assets 12,564 12,370 15,348
Total assets $ 3,094,866 $ 2,988,186 $ 2,326,427
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest-bearing $ 1,851,004 $ 1,712,674 $ 1,380,024
Demand, interest-bearing 71,598 164,859 103,638
Money market deposit accounts 837,630 774,405 596,247
Time deposits 16,320 16,507 26,818
Total deposits 2,776,552 2,668,445 2,106,727
Borrowings and repurchase agreements 12,737
Junior subordinated debt 6,207
Accrued interest payable and other liabilities 15,610 25,539 11,607
Total liabilities $ 2,792,162 $ 2,693,984 $ 2,137,278
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.01 par value; 10,000,000 shares authorized, 0 shares, 0 shares and 5,000 shares issued and outstanding, respectively
Common stock, $.01 par value; 70,000,000, 70,000,000 and 45,000,000 shares authorized, 28,882,678 shares, 28,700,825 shares and 23,611,746 shares issued and outstanding, respectively 289 287 236
Additional paid in capital 251,597 251,841 183,716
Accumulated other comprehensive income (loss) 7,404 8,193 (4,096)
Retained earnings 43,414 33,881 9,293
Total shareholders' equity 302,704 294,202 189,149
Total liabilities and shareholders' equity $ 3,094,866 $ 2,988,186 $ 2,326,427

SQUARE 1 FINANCIAL, INC.
Interim Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data) Three Months Ended Years Ended
December 31,
2014
September 30,
2014
December 31,
2013
December 31,
2014
December 31,
2013
Interest income:
Loans including fees on loans $ 21,315 $ 19,326 $ 16,655 $ 74,763 $ 58,230
Investment securities:
Taxable 6,184 5,568 4,081 21,696 13,369
Non-taxable 2,172 1,960 1,724 7,740 5,702
Federal funds and other short-term investments 77 104 128 382 361
Total interest income 29,748 26,958 22,588 104,581 77,662
Interest expense:
Deposits 150 150 180 573 656
Borrowings and repurchase agreements 15 12 19 42
Junior subordinated debt 155 215 630
Total interest expense 165 150 347 807 1,328
Net interest income 29,583 26,808 22,241 103,774 76,334
Provision for loan losses 4,000 2,500 3,960 12,614 13,300
Net interest income after provision for loan losses 25,583 24,308 18,281 91,160 63,034
Noninterest income:
Service charges and fees 1,188 1,150 1,050 4,533 4,071
Foreign exchange fees 1,951 1,792 1,229 6,746 4,864
Credit card and merchant income 932 914 678 3,246 2,464
Investment impairment (195) (43) (1,720)
Net (loss) gain on securities (24) (235) (212) 1,696
Letter of credit fees 242 293 463 1,347 1,247
Warrant income 792 721 488 3,729 3,750
Gain on sale of loans 439 248 367 1,189 2,033
Bank owned life insurance 445 330 301 1,382 1,073
Other 209 319 2,588 3,300 5,830
Total noninterest income 6,174 5,532 6,969 25,217 25,308
Noninterest expense:
Personnel 11,543 10,790 9,632 43,691 35,759
Occupancy 863 713 695 3,090 2,779
Data processing 928 1,090 868 3,757 3,097
Furniture and equipment 808 769 686 2,939 2,536
Advertising and promotions 495 223 364 1,335 1,255
Professional fees 993 976 952 3,356 3,232
Telecommunications 308 246 306 1,099 1,172
Travel 287 259 337 1,004 1,099
FDIC assessment 429 393 345 1,573 1,293
Other 878 1,376 930 4,707 3,699
Total noninterest expense 17,532 16,835 15,115 66,551 55,921
Income before income tax expense 14,225 13,005 10,135 49,826 32,421
Income tax expense 4,693 4,253 3,193 15,643 10,038
Net income 9,532 8,752 6,942 34,183 22,383
Dividends on preferred stock 62 63 250
Net income available to common shareholders $ 9,532 $ 8,752 $ 6,880 $ 34,120 $ 22,133
Earnings per share—basic $ 0.33 $ 0.31 $ 0.29 $ 1.25 $ 0.94
Earnings per share—diluted $ 0.32 $ 0.29 $ 0.29 $ 1.18 $ 0.93
SQUARE 1 FINANCIAL, INC.
Interim Net Interest Margin Analysis (Unaudited)
Three Months Ended
December 31, 2014 September 30, 2014 December 31, 2013

Average
Balance
Interest
and
Dividends

Yield/
Cost

Average
Balance
Interest
and
Dividends

Yield/
Cost

Average
Balance
Interest
and
Dividends

Yield/
Cost
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits in other banks $ 90,032 $ 69 0.30% $ 132,817 $ 72 0.21% $ 194,764 $ 127 0.26%
Federal funds sold and other short-term investments 7,011 8 0.48 19,191 32 0.67 1,352 1 0.40
Loans, net of unearned income 1,317,622 21,315 6.42 1,223,906 19,326 6.26 1,052,507 16,655 6.28
Nontaxable securities 271,459 3,342 4.88 248,629 3,020 4.82 224,344 2,651 4.69
Taxable securities 1,272,814 6,184 1.93 1,137,127 5,567 1.94 843,273 4,082 1.92
Total interest-earning assets 2,958,938 30,918 4.15 2,761,670 28,017 4.02 2,316,240 23,516 4.03
Less: Allowance for loan losses (23,966) (22,888) (18,702)
Noninterest-earning assets 97,623 99,487 83,212
Total assets $ 3,032,595 $ 2,838,269 $ 2,380,750
Interest-bearing liabilities:
Demand deposits $ 78,946 20 0.10 $ 87,957 18 0.08 $ 99,853 36 0.14
Money market 764,062 122 0.06 765,338 115 0.06 713,684 128 0.07
Time deposits 16,852 8 0.19 27,997 16 0.22 27,378 16 0.23
Total interest-bearing deposits 859,860 150 0.07 881,292 149 0.07 840,915 180 0.08
FHLB advances 15,163 15 0.39 543 1 0.14 3,101 7 0.88
Repurchase agreements 113 0.32 19,813 5
Junior subordinated debt 6,210 154 9.89
Total interest-bearing liabilities 875,136 165 0.07 881,835 150 0.07 870,039 346 0.16
Noninterest-bearing deposits 1,841,770 1,652,486 1,312,085
Other noninterest-bearing liabilities 14,842 14,927 11,108
Total liabilities 2,731,748 2,549,248 2,193,232
Total shareholders' equity 300,847 289,021 187,518
Total liabilities and shareholders' equity $ 3,032,595 $ 2,838,269 $ 2,380,750
Net interest income $ 30,753 $ 27,867 $ 23,170
Interest rate spread 4.08% 3.95% 3.87%
Net interest margin 4.12% 4.00% 3.96%
Ratio of average interest-earning assets to average interest-bearing liabilities 338.11% 313.17% 266.22%
SQUARE 1 FINANCIAL, INC.
Interim Net Interest Margin Analysis (Unaudited)
Years Ended December 31,
2014 2013

Average
Balance
Interest
and
Dividends

Yield/
Cost

Average
Balance
Interest
and
Dividends

Yield/
Cost
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits in other banks $ 133,328 $ 337 0.25% $ 134,026 $ 356 0.27%
Federal funds sold and other short-term investments 7,367 46 0.62 1,346 5 0.39
Loans, net of unearned income 1,183,347 74,763 6.32 918,149 58,230 6.34
Nontaxable securities 245,458 11,908 4.85 193,363 8,772 4.54
Taxable securities 1,083,643 21,695 2.00 779,179 13,369 1.72
Total interest-earning assets 2,653,143 108,749 4.10 2,026,063 80,732 3.98
Less: Allowance for loan losses (21,618) (17,057)
Noninterest-earning assets 92,981 81,836
Total assets $ 2,724,506 $ 2,090,842
Interest-bearing liabilities:
Demand deposits $ 100,136 83 0.08 $ 67,059 96 0.14
Money market 710,296 436 0.06 624,281 499 0.08
Time deposits 25,258 54 0.21 31,552 61 0.19
Total interest-bearing deposits 835,690 573 0.07 722,892 656 0.09
FHLB advances 4,452 17 0.39 8,015 31 0.39
Repurchase agreements 1,502 1 10,672 11
Junior subordinated debt 2,108 216 10.23 6,206 630 10.15
Total interest-bearing liabilities 843,752 807 0.10 747,785 1,328 0.18
Noninterest-bearing deposits 1,602,327 1,148,529
Other noninterest-bearing liabilities 12,320 11,646
Total liabilities 2,458,399 1,907,960
Total shareholders' equity 266,107 182,882
Total liabilities and shareholders' equity $ 2,724,506 $ 2,090,842
Net interest income $ 107,942 $ 79,404
Interest rate spread 4.00% 3.80%
Net interest margin 4.06% 3.91%
Ratio of average interest-earning assets to average interest-bearing liabilities 314.45% 270.94%
SQUARE 1 FINANCIAL, INC.
Loans and Unfunded Commitments
December 31, 2014 September 30, 2014 December 31, 2013
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Commercial loans:
Technology $ 631,979 47.01% $ 634,908 49.65% $ 543,788 50.02%
Life sciences 274,057 20.39 240,375 18.80 224,069 20.61
Asset-based loans 177,701 13.22 152,282 11.91 111,251 10.24
Venture capital/private equity 169,143 12.58 159,349 12.46 143,468 13.20
SBA and USDA 35,609 2.65 33,245 2.60 23,719 2.18
Other 6,854 0.51 5,468 0.42 1,424 0.13
Total commercial loans 1,295,343 96.36 1,225,627 95.84 1,047,719 96.38
Real estate loans:
SBA and USDA 36,978 2.75 31,532 2.47 27,504 2.53
Total real estate loans 36,978 2.75 31,532 2.47 27,504 2.53
Construction:
SBA and USDA 4,035 0.30 2,290 0.18 287 0.03
Total construction loans 4,035 0.30 2,290 0.18 287 0.03
Credit cards 7,980 0.59 19,345 1.51 11,575 1.06
Total loans 1,344,336 100.00% 1,278,794 100.00% 1,087,085 100.00%
Less unearned income(1) (7,887) (7,337) (4,549)
Total loans, net of unearned income $ 1,336,449 $ 1,271,457 $ 1,082,536
Total unfunded loan commitments $ 1,232,078 $ 1,167,115 $ 977,262
(1) Unearned income consists of unearned loan fees, the discount on SBA loans and the unearned initial warrant value.
Client Investment Funds
We offer our clients alternative cash investment vehicles such as sweep accounts and investment in the Certificates of Deposit Account Registry Service ("CDARS"), the latter of which allows us to place client deposits in one or more insured depository institutions.
December 31, 2014 September 30, 2014 December 31, 2013
Period-end: (Dollars in thousands)
Client investment assets under management $ 976,075 $ 609,284 $ 108,105
Sweep money market funds 404,357 241,274 271,823
CDARS 56,201 107,076 177,955
Total period-end client investment funds $ 1,436,633 $ 957,634 $ 557,883
SQUARE 1 FINANCIAL, INC.
Credit Quality
Three Months Ended Years Ended
December 31,
2014
September 30,
2014
December 31,
2013
December 31,
2014
December 31,
2013
(Dollars in thousands)
Allowance at beginning of period $ 22,816 $ 21,556 $ 18,093 $ 18,379 $ 13,843
Provision for loan losses 4,000 2,500 3,960 12,614 13,300
Charge-offs:
Commercial loans:
Technology 3,408 382 3,411 5,956 9,344
Life sciences 507 1,107 2,023
SBA and USDA 269 518 269
Total commercial loans 3,915 1,489 3,680 8,497 9,613
Total charge offs 3,915 1,489 3,680 8,497 9,613
Recoveries:
Commercial loans:
Technology (1) (13) (6) (170) (699)
Life sciences (4) (5) (9)
SBA and USDA (14) (14) (150)
Total commercial loans (5) (32) (6) (193) (849)
Real estate loans:
SBA and USDA (217) (217)
Total real estate loans (217) (217)
Total recoveries (5) (249) (6) (410) (849)
Net charge offs $ 3,910 $ 1,240 $ 3,674 $ 8,087 $ 8,764
Allowance at end of period $ 22,906 $ 22,816 $ 18,379 $ 22,906 $ 18,379
Total nonaccrual loans $ 17,239 $ 11,798 $ 14,466 $ 17,239 $ 14,466
Credit Quality Ratios:
Allowance for loan losses as a percent of total loans 1.70% 1.79% 1.70% 1.70% 1.70%
Allowance for loan losses as a percent of nonperforming loans 132.87 193.38 127.05 132.87 127.05
Net charge-offs to average outstanding loans (annualized) 1.18 0.40 1.38 0.68 0.95
Nonperforming loans as a percent of total loans 1.28 0.93 1.34 1.28 1.34
Nonperforming assets as a percent of total assets 0.56 0.39 0.63 0.56 0.63
SQUARE 1 FINANCIAL, INC.
Non-GAAP Financial Measures
The information set forth in this release 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.
Efficiency ratio 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. This measure is used by management to evaluate our operational efficiency.
Tangible common equity to tangible assets is a non-GAAP financial measure. This ratio is used by management to evaluate the adequacy of our capital levels. 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.
Our discussions of 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. We believe that the most directly comparable GAAP financial measure is net interest income.
Core banking noninterest income represents recurring income from traditional banking services provided to our customers and excludes line items where results are typically subject to market or other conditions beyond our control. We believe that the most directly comparable GAAP financial measure is noninterest income.
The information provided below reconciles each non-GAAP measure to its most comparable GAAP measure.
(Dollars in thousands) Three Months Ended
December 31,
2014
September 30,
2014
December 31,
2013
Efficiency Ratio
Noninterest expense (GAAP) $ 17,532 $ 16,835 $ 15,115
Net interest taxable equivalent income 30,753 27,867 23,170
Noninterest taxable equivalent income 6,414 5,709 7,131
Less: (loss) gain on sale of securities and impairment (24) (235) (195)
Adjusted operating revenue $ 37,191 $ 33,811 $ 30,496
Efficiency ratio 47.14% 49.79% 49.56%
Tangible Common Equity/Tangible Assets
Total equity $ 302,704 $ 294,202 $ 189,149
Less: preferred stock 4,950
Intangible assets(1) 393 495 800
Tangible common equity $ 302,311 $ 293,707 $ 183,399
Total assets $ 3,094,866 $ 2,988,186 $ 2,326,427
Less: intangible assets(1) 393 495 800
Tangible assets $ 3,094,473 $ 2,987,691 $ 2,325,627
Tangible common equity/tangible assets 9.77% 9.83% 7.89%
(1) Does not include a loan servicing asset of $1.2 million, $1.3 million and $1.3 million at December 31, 2014, September 30, 2014, and December 31, 2013, respectively.
(Dollars in thousands) Three Months Ended
December 31,
2014
September 30,
2014
December 31,
2013
Net Operating Income
GAAP income before taxes $ 14,225 $ 13,005 $ 10,135
Less: (loss) gain on sale of securities and impairment (24) (235) (195)
Add: tax equivalent adjustment 1,409 1,237 1,090
Non-GAAP net operating income before taxes $ 15,658 $ 14,477 $ 11,420
Net Interest Income
GAAP net interest income $ 29,583 $ 26,808 $ 22,241
Add: tax equivalent adjustment 1,170 1,059 929
Non-GAAP net interest income (fully tax equivalent basis) $ 30,753 $ 27,867 $ 23,170
Core Banking Noninterest Income
GAAP noninterest income $ 6,174 $ 5,532 $ 6,969
Less: net (loss) gain on securities (24) (235) (195)
Warrant income 792 721 488
Gain on sale of loans 439 248 367
Bank owned life insurance 445 330 301
Other 27 137 2,445
Non-GAAP core banking noninterest income $ 4,495 $ 4,331 $ 3,563
(Dollars in thousands) Years Ended
December 31,
2014
December 31,
2013
Efficiency Ratio
Noninterest expense (GAAP) $ 66,551 $ 55,921
Net interest taxable equivalent income 107,942 79,404
Noninterest taxable equivalent income 25,963 25,886
Less: (loss) gain on sale of securities and impairment (255) (24)
Adjusted operating revenue $ 134,160 $ 105,314
Efficiency ratio 49.61% 53.10%
Tangible Common Equity/Tangible Assets
Total equity $ 302,704 $ 189,149
Less: preferred stock 4,950
Intangible assets(1) 393 800
Tangible common equity $ 302,311 $ 183,399
Total assets $ 3,094,866 $ 2,326,427
Less: intangible assets(1) 393 800
Tangible assets $ 3,094,473 $ 2,325,627
Tangible common equity/tangible assets 9.77% 7.89%
Net Operating Income
GAAP income before taxes $ 49,826 $ 32,421
Less: (loss) gain on sale of securities and impairment (255) (24)
Add: tax equivalent adjustment 4,912 3,647
Non-GAAP net operating income before taxes $ 54,993 $ 36,092
Net Interest Income
GAAP net interest income $ 103,774 $ 76,334
Add: tax equivalent adjustment 4,168 3,070
Non-GAAP net interest income (fully tax equivalent basis) $ 107,942 $ 79,404
Core Banking Noninterest Income
GAAP noninterest income $ 25,217 $ 25,308
Less: net (loss) gain on securities (255) (24)
Warrant income 3,729 3,750
Gain on sale of loans 1,189 2,033
Bank owned life insurance 1,382 1,073
Other 2,596 5,183
Non-GAAP core banking noninterest income $ 16,576 $ 13,293
(1) Does not include a loan servicing asset of $1.2 million and $1.3 million at December 31, 2014 and December 31, 2013, respectively.

CONTACT: Patrick Oakes Executive Vice President and Chief Financial Officer 919.627.6366 poakes@square1bank.com

Source:Square 1 Financial