Cass Information Systems, Inc. — 2019 Form 10-K
Business context and reporting period. Cass provides invoice processing, payment, audit and information services to corporate customers in transportation, energy, telecommunications and environmental expense markets. It also operates Cass Commercial Bank, serving businesses and faith-based ministries, and added online generosity services through its September 2019 acquisition of Gateway Giving, LLC (Gyve). This annual report covers the fiscal year ended December 31, 2019; comparisons below are with 2018.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Fee revenue and other income | $110.1 million | $104.1 million | +6% |
| Total net revenue | $157.2 million | $148.3 million | +6% |
| Net interest income after loan-loss provision | $47.2 million | $44.2 million | +7% |
| Operating expense | $119.8 million | $111.9 million | +7% |
| Income before tax | $37.5 million | $36.3 million | +3% |
| Net income | $30.4 million | $30.3 million | +0.4% |
| Diluted earnings per share | $2.07 | $2.03 | +2% |
| Net interest margin, tax-equivalent | 3.36% | 3.32% | +4 basis points |
| Return on average assets / equity | 1.74% / 12.86% | 1.85% / 13.55% | Both lower |
- Payment and processing revenue rose 6% to $108.0 million. Total processing volume fell 4% to 63.6 million transactions, while processing dollars rose 1% to $43.0 billion. Transportation transaction volume declined 4%; expense-management transaction volume declined 4%, but its dollar volume increased 8%.
- Average earning assets increased 5% to $1.47 billion; loans outstanding grew 7% to $772.6 million. Total assets at year-end were $1.76 billion, and shareholders’ equity was $244.2 million.
- Cash provided by operating activities was $42.1 million, down from $48.3 million. Cash and cash equivalents ended the year at $204.0 million, down $27.0 million. Investing activities used $75.8 million, including loan growth and increased payments in excess of funding.
- Year-end deposits were $757.1 million and accounts and drafts payable were $684.3 million. The company reported $18.0 million of short-term borrowings at year-end; this borrowing was drawn on December 31, 2019 and repaid January 2, 2020. The filing does not report long-term debt.
- The loan-loss allowance was $10.6 million, or 1.37% of loans; the company recorded a $250,000 provision and $81,000 of net recoveries. It reported no nonperforming loans or foreclosed assets at year-end.
Material changes, outlook and commentary
- Management attributed revenue growth to new customer wins, more business from existing customers and new services. These gains faced late-year headwinds from a volatile business climate, competition, weaker transportation comparisons and lower interest rates. Loss of a high-transaction facility-expense customer also reduced transaction volume.
- Operating expense increased mainly from investment in technology and staffing, higher outside-service and equipment costs, and Gyve integration. Net income was nearly flat despite revenue growth.
- Gyve’s September acquisition involved $3.0 million cash consideration and a contingent earnout initially valued at $2.0 million, against a contractual potential earnout of up to $4.0 million. Future changes in the earnout’s fair value may affect earnings.
- Management expected cash, maturing investments, operating cash flow and borrowing lines to fund operations and capital needs in 2020. Planned 2020 capital expenditures were $4–$6 million, primarily for equipment and software. No earnings or revenue guidance was provided.
- The company adopted the lease accounting standard in 2019, initially recognizing $7.8 million of lease liabilities and $7.4 million of right-of-use assets. At year-end, lease liabilities were $6.7 million. Adoption of the expected-credit-loss standard on January 1, 2020 was expected to produce a one-time retained-earnings adjustment and increase the loan-loss allowance and unfunded-commitment reserves by up to 25%; the filing does not state the final impact.
- Liquidity included $204.0 million of cash and cash equivalents, $422.7 million of available-for-sale securities, $83.0 million in unsecured correspondent-bank lines, $192.0 million in secured FHLB capacity, and two $50.0 million company lines secured by securities. The company said its funding sources were expected to remain sufficient.
Risks, contingencies and other notable disclosures
- Key exposures include interest-rate changes, economic and industry weakness affecting transaction activity or borrowers, customer and loan concentrations, competition, and possible disruption or cyberattack affecting company, customer, cloud-provider or vendor systems. Management said it had not experienced a significant cybersecurity compromise to date, but warned that its defenses and insurance may not cover every event.
- The company is exposed to the transition away from LIBOR after 2021 through loans and other instruments. It also identified potential effects from lower energy prices on transportation volumes and invoice values.
- Off-balance-sheet commitments included $197.8 million of loan commitments, $13.3 million of standby letters of credit and $2.8 million of commercial letters of credit. No estimated losses were accrued; amounts may not be drawn in full.
- Routine litigation was not expected by management to have a material adverse effect. The company disclosed an ongoing IRS audit for tax year 2017 and state tax examinations for 2015–2018; it believed unrecognized tax benefits could decline by approximately $315,000 over the next 12 months.
- The company and Bank met applicable regulatory capital requirements and the Bank was categorized as well-capitalized. The independent auditor gave unqualified opinions on the financial statements and internal controls; the allowance for loan losses’ qualitative adjustments were identified as a critical audit matter.
Most important facts for investors to verify
- Whether fee growth can continue despite declining transaction counts, customer loss and competitive pressure, and whether technology and Gyve spending produces returns.
- How lower rates, changing funding costs and payment-related balances affect net interest income and liquidity; verify the short-term borrowing was repaid as disclosed.
- The actual 2020 effect of the expected-credit-loss standard on the allowance, reserves and retained earnings, compared with management’s estimate of an increase of up to 25%.
- Loan portfolio performance and the adequacy of the $10.6 million allowance, particularly given commercial and faith-based lending exposure and the judgmental qualitative component.
- Gyve’s realized performance and any subsequent changes to its contingent earnout; also track planned capital spending, pension funding and the company’s dividend and repurchase activity.