Cass Information Systems, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. Cass provides payment and information-processing services and banking services through Cass Commercial Bank. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Fee revenue and other income | $19.7M | $17.3M | $57.7M | $53.4M |
| Net interest income, GAAP | $9.4M | $10.6M | $29.5M | $32.1M |
| Total net revenue | $29.1M | $27.9M | $86.7M | $84.8M |
| Operating expenses | $21.4M | $19.9M | $62.8M | $60.5M |
| Net income | $6.1M | $6.1M | $18.2M | $18.0M |
| Diluted EPS | $0.53 | $0.53 | $1.57 | $1.56 |
For Q3, net income increased 0.8%; for the nine-month period it increased 1.6%. Nine-month total net revenue rose 2.3%. The filing’s tax-equivalent net interest margin was 3.45% for Q3 and 3.72% for nine months, down from 3.86% and 4.02%, respectively. These tax-equivalent figures differ from GAAP net interest income reported above.
Q3 transportation transaction volume grew 14.9% and expense-management transaction volume grew 9.8%. For nine months, the respective increases were 10.2% and 5.3%. Fee revenue from information-services payment and processing grew 10.8% in Q3 and 5.5% year to date.
Financial position, liquidity and credit
- At September 30, 2013, total assets were $1.329B, up 3.3% from year-end 2012. Cash and cash equivalents were $240.3M, or 18.1% of assets; available-for-sale securities were $308.7M.
- Loans were $635.0M, down $52.7M from December 31, 2012. Deposits were $560.8M, down $2.9M; accounts and drafts payable were $564.7M, up $42.0M. Shareholders’ equity was $178.7M.
- No amounts were outstanding on the disclosed borrowing lines. The Bank had $88M in unsecured correspondent-bank lines, $172.4M in secured Federal Home Loan Bank capacity, and Cass had a $50M secured UMB line.
- Nine-month operating cash flow was $21.9M versus $25.0M a year earlier. Cash and cash equivalents increased $99.2M during the period, including cash from investing and financing activities.
- The allowance for loan losses was $11.7M, or 1.84% of loans. Nonperforming loans were $1.9M (0.30% of loans), down from $6.6M (0.96%) at December 31, 2012. Nine-month provision expense was $0.5M; net charge-offs were $1.2M.
- Regulatory capital ratios remained above minimum requirements: Cass total capital ratio 21.89% and Tier 1 leverage ratio 13.18%; Bank ratios were 15.43% and 11.43%, respectively.
Changes, outlook and risks
- Lower market rates, lower average loans and securities, and competitive pressure on lending reduced net interest income. Tax-equivalent net interest income fell 11.8% in Q3 and 8.7% for nine months; the filing attributes the margin pressure chiefly to low rates and repricing or runoff of higher-yielding assets.
- Operating expenses increased 7.3% in Q3. Nine-month salaries and benefits rose $2.0M, and occupancy expense rose $0.5M, reflecting higher processing volumes, new business, facility expansion and new headquarters. Equipment expense also increased, partly due to depreciation on a recently introduced global software platform.
- Reported gains on securities sales were $0.9M in Q3 and $4.0M year to date, versus $0.3M and $2.4M in the comparable periods. The nine-month results also included a lower income-tax expense, which management attributed to reversals of reserves for previously uncertain tax positions. The effective tax rate was 23.7% year to date versus 25.9% in 2012.
- Management said transportation, telecom and environmental volumes grew, while energy-market volumes were flat amid customer-retention effects from industry mergers and acquisitions; new sales remained strong. It identified interest rates, business activity, energy costs and new business opportunities as important factors affecting results.
- Management expected cash, maturing investments and operating cash flow to be sufficient for operations and capital expenditures, estimated at less than $6M for 2013. No earnings or revenue guidance was provided. The company’s interest-rate policy seeks to limit the change in annualized net interest income to 15% for an immediate, sustained 200-basis-point parallel rate change; management reported no material change in risk position from year-end.
- Unfunded credit commitments at September 30 included $3.1M of unused loan commitments, $13.3M of standby letters of credit and $3.4M of commercial letters of credit. Management said pending legal matters were not expected to have a material effect. Unrecognized tax benefits were approximately $1.4M; the company noted tax examinations for federal and state years 2010–2012.
Important facts for investors to verify
- Whether payment-processing volume and fee growth can offset continued net-interest-margin pressure and loan competition.
- How much reported earnings depended on securities-sale gains and tax-reserve reversals, and whether either is repeatable.
- Loan-portfolio trends, including the $13.0M of performing loans under special monitoring, allowance adequacy, and the sustainability of lower nonperforming balances.
- Liquidity and funding trends, particularly changes in payment-related accounts and drafts payable, deposits, and investment-portfolio valuation.
- Potential effects of interest rates, energy-market consolidation, operating-cost growth, tax examinations and off-balance-sheet commitments.