Cass Information Systems, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Cass provides invoice processing and payment services, with a banking subsidiary serving businesses and faith-based organizations. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total net revenue | $47.2 | $38.7 | $133.5 | $114.2 |
| Net income | $8.8 | $6.8 | $25.6 | $20.9 |
| Diluted EPS | $0.64 | $0.48 | $1.86 | $1.45 |
| Operating expenses | $36.3 | $30.7 | $101.8 | $89.0 |
- Total net revenue increased 22.1% in Q3 and 16.9% for the first nine months; net income rose 29.3% and 22.6%, respectively. Management attributed stronger profitability primarily to financial-fee growth and higher net interest income.
- Q3 processing fees increased 2.7%, while financial fees increased 30.5%; nine-month increases were 2.3% and 40.2%. Higher invoice dollar volumes and average payments in advance of funding supported financial fees. Transportation dollar volume benefited from inflation, supply disruptions and fuel surcharges; facility dollar volume reflected higher energy prices.
- GAAP net interest income was $16.0 million in Q3, up from $11.4 million, and $41.5 million for nine months, up from $32.6 million. Tax-equivalent net interest margin rose to 2.90% from 2.32% in Q3 and to 2.61% from 2.31% for nine months, as higher rates increased asset yields.
- Operating expenses increased 18.3% in Q3 and 14.3% for nine months. Personnel costs rose with wage pressure, higher staffing, stock compensation and profit sharing; other operating costs increased partly from technology investment and maintaining multiple platforms ahead of planned system transitions.
- Q3 provision for credit losses was $0.55 million versus $0.34 million; the nine-month provision was $0.85 million versus a $0.87 million release in 2021. Management cited loan growth and economic factors, including a lower GDP forecast.
- Operating cash flow was $40.8 million for nine months, compared with $30.7 million. Investing activities used $249.9 million, primarily reflecting securities purchases and loan growth; financing activities provided $41.1 million. Cash and cash equivalents declined $167.9 million to $347.0 million.
Financial position, liquidity and capital
- At September 30, 2022, total assets were $2.611 billion, loans net of allowance were $1.024 billion, and available-for-sale securities were $763.8 million. Loans increased 8.0% and securities increased 13.4% from year-end 2021.
- Deposits were $1.230 billion, up 0.7% from year-end; accounts and drafts payable were $1.146 billion, up 9.1%. The filing reports no amounts outstanding on credit lines or short-term borrowings at quarter-end.
- Cash and cash equivalents were 13.3% of assets. Available-for-sale securities were 29.3% of assets; 57.4% of the portfolio matured in five or more years. Available borrowing capacity included $83 million of unsecured correspondent-bank lines, $228.9 million of secured Federal Home Loan Bank lines, and up to $150 million of secured bank lines.
- Shareholders’ equity declined 22.0% to $191.7 million, mainly from $66.8 million of other comprehensive losses as rising rates reduced securities’ fair values, plus dividends and repurchases; net income partly offset the decline. Securities had $78.0 million of gross unrealized losses, which management primarily attributed to interest-rate changes; no securities credit-loss allowance was recorded.
- The allowance for credit losses was $13.0 million, or 1.26% of loans; there were no nonperforming loans at quarter-end. Regulatory capital ratios remained above stated minimum requirements: consolidated total capital ratio 14.07% and common equity Tier 1 ratio 13.33%; the bank’s corresponding ratios were 16.08% and 14.96%.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management expected cash, maturing investments and operating cash flows to be sufficient for operations and capital expenditures, estimated at $4 million to $6 million in 2022.
- Interest-rate exposure is material: the company’s model projected next-12-month net interest income changes of +13.1% for a 200-basis-point increase, +5.5% for a 100-basis-point increase, and -2.5% for a 100-basis-point decrease. The modeled benefit from rising rates had fallen from year-end 2021, primarily due to Treasury purchases.
- Key stated sensitivities include interest rates, economic and invoice activity, energy costs, staffing and the ability to win new business. Higher rates generally benefit net interest income, while weaker activity or lower energy costs may reduce processing volumes, payment balances and related interest income.
- Cass acquired mobile church-management software developer TouchPoint in June 2022. The purchase included $4.9 million cash consideration and contingent earn-out consideration valued at $0.389 million, with a contractual maximum of $2.5 million. Results and acquired intangibles are included in Information Services.
- Credit commitments included $207.9 million to extend credit, $13.5 million of standby letters of credit and $1.6 million of commercial letters of credit; amounts may not be drawn. Management said pending or threatened legal matters were not expected to materially affect the company. No material risk-factor changes or subsequent events requiring disclosure were reported.
Important facts for investors to verify
- Whether elevated financial fees and invoice dollar volumes persist if inflation, fuel surcharges or energy prices moderate.
- How rising rates affect both asset yields and deposit costs, and whether actual net interest income tracks the filing’s sensitivity model.
- The duration and potential recovery of securities’ unrealized losses, and implications for equity and liquidity if securities need to be sold.
- Credit performance as the loan portfolio grows, including exposure to restaurant franchises, commercial borrowers and faith-based lending.
- Whether technology investments and the TouchPoint acquisition generate expected efficiencies and growth while personnel and other operating expenses remain elevated.