Cass Information Systems, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Unless stated otherwise, dollar figures are in millions. Cass provides invoice payment and information-processing services and banking services through Cass Commercial Bank.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Fee revenue and other income | $24.207 | $22.148 | $70.778 | $64.110 |
| Net interest income | $10.094 | $9.480 | $29.475 | $28.250 |
| Total net revenue | $34.301 | $31.628 | $100.253 | $93.360 |
| Operating expense | $25.042 | $23.551 | $74.261 | $69.526 |
| Net income | $6.863 | $6.222 | $19.683 | $17.924 |
| Diluted EPS | $0.61 | $0.55 | $1.74 | $1.58 |
Net income increased 10.3% for the quarter and 9.8% year to date. Q3 return on average assets was 1.70% and return on average equity was 12.34%; nine-month figures were 1.70% and 12.27%, respectively. On a tax-equivalent basis, net interest margin was 3.27% in Q3 versus 3.19%, and 3.35% year to date versus 3.32%. The nine-month effective tax rate was 24.3%, compared with 24.8%; adoption of stock-compensation accounting guidance reduced year-to-date tax expense by $278,000.
Balance sheet, cash flow and capital
- Total assets were $1.557 billion, up 3.4% from December 31, 2016. Cash and cash equivalents were $242.1 million, down $24.6 million; available-for-sale securities were $457.1 million, up $66.5 million.
- Loans were $658.1 million, down $6.8 million from year-end. Deposits declined $12.7 million to $609.2 million. Accounts and drafts payable rose $44.9 million to $687.2 million; these balances arise from payment-processing activity and fluctuate with the processing cycle.
- Nine-month operating cash flow was $27.9 million, versus $25.6 million. Investing activities used $74.0 million, mainly reflecting $97.5 million of securities purchases; financing activities provided $21.5 million. Cash and cash equivalents ended at $242.1 million.
- The filing reports no borrowings outstanding on credit lines. Available facilities include $68.0 million in unsecured federal-funds lines, a $211.5 million secured Federal Home Loan Bank line, and two $50.0 million secured bank lines.
- Company and bank regulatory capital ratios remained well above stated minimums: Company total capital ratio 22.97% and common equity Tier 1 ratio 21.95%; bank ratios were 17.13% and 16.00%, respectively.
Material changes and management commentary
Payment and processing revenue rose 9.3% in Q3 and 11.5% year to date. Management attributed growth to customer gains, increased business from existing customers, and expanded services. Q3 transportation invoice volume increased 0.7% and dollar volume 5.1%; expense-management transaction volume increased 14.9%. Year-to-date increases were 3.1%, 6.8%, and 20.5%, respectively.
Operating expense increased 6.3% in Q3. Personnel expense rose due to staffing and technology investments, merit increases, and higher retirement costs; equipment expense also increased with technology investment. Net interest income benefited from higher short-term investment yields and the Cass prime rate after Federal Reserve actions. Average loans were lower, while average securities and payment-related accounts and drafts payable were higher.
No loan-loss provision was recorded in 2017 year to date, compared with a $1.0 million negative provision (benefit) in 2016. The allowance for loan losses was $10.2 million, or 1.55% of loans. Nonperforming loans were $215,000, or 0.03% of loans; the filing reports one nonaccrual loan, no troubled debt restructurings, and no loans 90 days past due and accruing.
Outlook, risks and other notable items
- Management expected cash, maturing investments, and operating cash flow to be sufficient for operations and estimated 2017 capital expenditures of $5–$7 million. This is management’s expectation, not earnings guidance.
- Management identifies interest rates, economic and invoice-processing activity, energy costs, customer growth, staffing, and credit quality as factors that can affect revenue, earnings, and liquidity. A lower-rate environment may pressure net interest income; the company’s policy is to limit the change in annualized net interest income to 15% for an immediate, sustained 200-basis-point rate change. Management said its September 2017 risk position had not materially changed from year-end.
- The securities portfolio was 91% state and political subdivision securities; 82.5% was scheduled to mature in five or more years. Management considered reported unrealized losses temporary and did not expect to be required to sell affected securities before recovery.
- Off-balance-sheet commitments included $91.1 million of unused loan commitments, $13.8 million of standby letters of credit, and $3.2 million of commercial letters of credit; no estimated losses were accrued. Management said pending legal matters were not expected to have a material effect.
- Unrecognized tax benefits were approximately $1.84 million; about $1.41 million would affect the effective tax rate if recognized. Management anticipated a possible $226,000 reduction over the next 12 months from statutes of limitation lapsing.
- After quarter-end, the board declared a 10% common-stock dividend and a $0.24-per-share cash dividend, both payable December 15, 2017. The board also restored the share-repurchase authorization to 500,000 shares. The company repurchased 38,042 shares during Q3.
- Management said the pending revenue-recognition and lease accounting standards were not expected to have a material impact; the impact of the expected-credit-loss standard was still under evaluation. No material risk-factor changes were reported, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether processing-volume and customer growth continue to support fee revenue as staffing, technology, and pension costs rise.
- How interest-rate changes and the long-dated, municipal-heavy securities portfolio affect net interest income, liquidity, and fair value.
- Loan quality, the adequacy of the allowance, and the effect of adopting expected-credit-loss accounting.
- The stability of payment-related accounts and drafts payable and bank deposits, and the availability of unused credit facilities under stress.
- The final cost and share-count effects of the declared stock and cash dividends, repurchases, and any resolution of uncertain tax positions or legal matters.