Cass Information Systems, Inc. — Q2 2019 Form 10-Q
Business context and period. Cass provides invoice processing and payment services to large businesses and banking services through Cass Commercial Bank. This unaudited report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless otherwise noted. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Fee revenue and other income | $27.4m | $25.6m | $54.4m | $51.0m |
| Net interest income | $12.0m | $10.7m | $23.6m | $21.3m |
| Total net revenue | $39.4m | $36.4m | $77.8m | $72.3m |
| Operating expense | $30.0m | $27.5m | $58.4m | $53.6m |
| Net income | $7.7m | $7.5m | $15.8m | $15.6m |
| Diluted EPS | $0.52 | $0.50 | $1.08 | $1.05 |
- Q2 net income rose 2.3% and diluted EPS rose 4.0%; first-half net income rose 1.6% and diluted EPS rose 2.9%. Total net revenue increased 8.3% in Q2 and 7.5% in the first half, while operating expenses increased 9.1% and 8.9%, respectively.
- Payment and processing revenue increased 6.5% in both periods. Q2 transportation invoice count fell 4.2% and dollar volume fell 0.7%; facility-expense dollar volume rose 15.4%, while transaction count fell 3.9%. First-half transportation invoice count declined 3.4%, while dollar volume increased 1.0%.
- Tax-equivalent net interest income was $12.6m in Q2, up 10.7%, and $24.7m in the first half, up 9.1%. Net interest margin improved to 3.52% from 3.37% in Q2 and to 3.47% from 3.31% in the first half. Higher earning-asset balances and yields contributed, while the rate paid on interest-bearing liabilities also rose.
- Return on average assets was 1.81% in Q2 and 1.89% for the first half, versus 1.90% and 1.96%. Return on average equity was 13.21% and 13.92%, versus 13.66% and 14.29%, respectively.
Financial position, cash flow and capital
- At June 30, total assets were $1.729bn, up 2.0% from year-end 2018. Loans were $790.6m, up $69.0m; the loan allowance was $10.5m, or 1.33% of loans. The filing reported no nonperforming, impaired, delinquent 90-days-or-more, or troubled-restructured loans.
- Cash and cash equivalents were $183.5m, down $47.4m from December 31, and represented 10.6% of assets. Available-for-sale securities totaled $435.4m. Deposits declined $85.3m, or 11.8%, to $636.6m; accounts and drafts payable increased $100.5m, or 14.5%, to $794.9m.
- First-half operating cash flow was $26.4m, compared with $25.1m in 2018. Investing activities used $68.9m, including $68.9m of net loan growth and increased payments in excess of funding; financing activities used $4.9m. Cash declined by $47.4m over the period.
- No amounts were outstanding on the disclosed credit lines at June 30. The company and bank exceeded regulatory capital requirements; the bank’s common equity Tier 1 ratio was 17.37% and total capital ratio was 18.38%.
- Shareholders’ equity was $240.4m. The company paid $7.5m in dividends during the first half, at $0.26 per share each quarter, and repurchased $7.8m of stock. The board-authorized repurchase program had 450,222 shares remaining at June 30.
Changes, outlook and risks
- Management attributed processing-revenue growth to an expanding customer base and new services. Q2 transportation volumes faced a difficult comparison with a strong 2018 quarter; facility-expense dollar growth reflected higher client spend and new customers.
- Operating costs increased with investment in technology and staff to win and support business, salary increases, higher retirement costs, and IT restructuring. Pension expense also rose, primarily due to a lower discount rate.
- Management said cash, maturing investments and operating cash flow are expected to fund operations and capital expenditures in 2019; estimated capital expenditures are $4m–$6m. No earnings or revenue guidance was provided. Management identified interest rates, economic activity, energy costs and new-business opportunities as factors that could affect results and liquidity.
- Deposit outflows were attributed to competitive interest rates and fluctuations in B2B payment-platform accounts. Management said the company’s interest-rate risk position had not materially changed from year-end; its policy limits the change in annualized net interest income to 15% under an immediate, sustained 200-basis-point rate move.
- The company disclosed $145.9m of unused loan commitments, $9.9m of standby letters of credit and $2.9m of commercial letters of credit; no estimated losses had been accrued. Management did not expect pending legal proceedings to materially affect financial position or results. Unrecognized tax benefits were approximately $1.5m.
- The company adopted lease accounting in 2019, recognizing $7.3m of lease liabilities at June 30. It expects to adopt the expected-credit-loss standard in 2020; the amount of the opening allowance adjustment and overall financial-statement impact could not yet be determined. Management reported effective disclosure controls and no material changes to the risk factors disclosed in its 2018 Form 10-K.
Important facts for investors to verify
- Whether processing growth and facility-expense dollar volumes persist, given lower transportation and transaction counts.
- Whether expense growth moderates as technology and staffing investments support new business, and how this affects earnings conversion.
- Whether deposit outflows continue and how deposit pricing, payment-platform balances and interest-rate changes affect net interest income and liquidity.
- How loan growth, portfolio mix and the upcoming expected-credit-loss standard affect credit reserves and capital.
- Whether the $4m–$6m capital expenditure estimate, dividend and repurchase activity remain consistent with liquidity and capital needs.