Cass Information Systems, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Cass provides payment and information processing services and banking services. Figures are in U.S. dollars; financial statement amounts are in thousands except per-share data.
Financial results and position
- Revenue: Total net revenue was $35.983 million, up 11.4%. Payment and processing revenue rose 11.4% to $24.827 million. Transportation invoice dollar volume increased 15.6%; facility expense dollar volume increased 8.3%.
- Profit: Net income was $8.092 million, up 28.3%; diluted EPS was $0.65 versus $0.51. Return on average assets was 2.01% versus 1.70%, and return on average equity was 14.94% versus 12.36%.
- Interest income and margins: GAAP net interest income increased to $10.609 million from $9.519 million. Tax-equivalent net interest income was $11.296 million, up 3.3%; tax-equivalent net interest margin declined to 3.25% from 3.37%. Management attributed the margin and earning-asset yield comparison partly to the lower federal tax rate under the Tax Cuts and Jobs Act and noted an improving rate environment.
- Expenses and credit: Operating expenses increased 7.7% to $26.182 million, including an 8.4% increase in salaries and benefits. No loan-loss provision was recorded. The allowance was $10.210 million, or 1.45% of loans; there were no nonperforming loans at quarter-end.
- Cash flow: Operating cash flow was $18.159 million, versus $5.621 million. Investing activities used $31.784 million and financing activities used $14.903 million; cash and cash equivalents decreased $28.528 million to $199.582 million.
- Balance sheet and liquidity: Assets totaled $1.651 billion. Loans, net, were $691.790 million and available-for-sale securities were $454.981 million. Deposits declined 5.7% from year-end to $639.243 million, while accounts and drafts payable rose 4.4% to $747.455 million. Cash and cash equivalents represented 12.1% of assets. No amounts were drawn on credit lines; the filing reports $68 million of unsecured correspondent-bank lines and additional secured lines.
- Debt and capital: The filing reports no outstanding amounts under its credit lines at March 31, 2018; it does not identify a separate borrowing balance in the presented balance sheet. Cass and its bank exceeded regulatory capital requirements; the company’s total risk-based capital ratio was 21.37% and the bank’s was 17.70%.
- Other comprehensive income: Comprehensive income was $0.673 million, down from $7.895 million, primarily reflecting an after-tax unrealized loss on available-for-sale securities. Accumulated other comprehensive loss increased to $20.738 million from $13.320 million at year-end.
Material changes and management commentary
- Information Services growth reflected higher transportation volume and prices, including carrier and fuel costs, as well as new customers and increased activity from existing customers. Transportation invoice volume rose 9.7%; facility expense transaction volume rose 4.5%.
- Average earning assets increased 7.2%, while average interest-bearing liabilities decreased 2.7%. Management said customers shifted deposits to higher-yielding accounts at competitors; the average rate on interest-bearing liabilities increased to 0.72% from 0.50%.
- Management cited investment in technology and infrastructure, merit increases, and higher retirement costs as factors in expense growth. It identified expansion of payment and information processing offerings and the customer base as a key opportunity.
- Management expects cash, maturing investments, and operating cash flow to fund operations and estimated 2018 capital expenditures of $6 million to $9 million. This is not earnings guidance; the filing provides no specific full-year revenue or EPS forecast.
- Key sensitivities include interest rates, economic and invoice activity, energy and fuel costs, customer outsourcing decisions, deposit behavior, loan quality, and the ability to win new business. The company’s policy seeks to limit the change in annualized net interest income to 15% under an immediate, sustained 200-basis-point rate change; management said its risk position had not materially changed from year-end.
Risks, contingencies, and unusual items
- Unrealized losses on available-for-sale securities totaled $5.224 million at March 31, 2018, compared with $1.383 million at year-end. Management considered these losses temporary and stated it was more likely than not the company would not need to sell the securities before recovery.
- Unused loan commitments were $63.069 million; standby and commercial letters of credit were $12.507 million and $3.510 million, respectively. No estimated losses were accrued for these commitments.
- Management said pending legal matters were not expected to have a material effect. The filing reports no material changes to the risk factors in the 2017 Form 10-K.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method; adoption had no impact on results, the balance sheet, or opening retained earnings. The effect of the future expected-credit-loss standard was still under evaluation.
- Unrecognized tax benefits were approximately $1.697 million; about $299,000 may be reduced over the next 12 months through statute expirations. Federal tax years 2014–2016 and state tax years 2013–2016 remained subject to examination.
Important facts for investors to verify
- Whether processing revenue growth and higher transaction volumes persist, and how much is attributable to price, fuel and carrier costs, or underlying volume.
- Whether net interest margin stabilizes as rates and deposit competition change, including the effects of tax-equivalent adjustments and the 2017 tax-law change.
- Trends in deposits, accounts and drafts payable, and liquidity needs; payable balances can fluctuate with payment-processing timing.
- Portfolio credit quality and allowance adequacy as loans grow; reported nonperforming loans were zero at quarter-end.
- Changes in securities fair values and unrealized losses, and any effects on equity or liquidity.
- Actual 2018 capital spending versus the estimated $6 million–$9 million range, and any update to the company’s outlook or material risks in subsequent filings.