Cass Information Systems, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Cass provides payment and information processing services and banking services. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Payment and processing revenue | $25.221 | $23.282 | $50.048 | $45.571 |
| Total fee revenue and other income | $25.640 | $23.800 | $51.014 | $46.571 |
| Net interest income (GAAP) | $10.719 | $9.862 | $21.328 | $19.381 |
| Total net revenue | $36.359 | $33.662 | $72.342 | $65.952 |
| Operating expenses | $27.463 | $24.901 | $53.645 | $49.219 |
| Net income | $7.509 | $6.513 | $15.601 | $12.820 |
| Diluted EPS | $0.60 | $0.52 | $1.25 | $1.03 |
- Q2 net income increased 15.3%; first-half net income rose 21.7%. Diluted EPS increased 15.4% and 21.4%, respectively.
- Tax-equivalent net interest margin was 3.37% in Q2 versus 3.40% a year earlier, and 3.31% for the first half versus 3.39%. Tax-equivalent net interest income rose 0.3% in Q2 and 1.7% in the first half.
- First-half operating cash flow was $25.096, versus $21.468 a year earlier. Investing activities used $30.367 and financing activities used $96.636; cash and cash equivalents fell $101.907 to $126.203.
Financial position and liquidity
- At June 30, total assets were $1,570.305, down 5.2% from year-end 2017. Loans were $714.861, up from $686.231; securities were $440.863, down from $470.523.
- Deposits were $625.737, down 7.7% from year-end, and accounts and drafts payable were $673.704, down 5.9%. Management attributed deposit outflows primarily to increased competition for deposits.
- Cash and cash equivalents were 8.0% of total assets. Additional liquidity included a $440.863 securities portfolio and credit lines, with no borrowings outstanding under the lines at June 30.
- The filing reports no debt balance; deposits and accounts and drafts payable are the major funding liabilities. Shareholders’ equity was $226.613, up $1.525 from year-end.
- Capital ratios remained well above stated regulatory minimums: Cass total capital ratio was 21.86%, and the Bank’s was 17.80%.
- Credit quality was strong in the reported period: no nonperforming or impaired loans, no past-due loans, and no loan-loss provision. The allowance was $10.215, or 1.43% of loans.
Material changes and unusual items
- Payment and processing revenue increased 8.3% in Q2 and 9.8% in the first half. Q2 transportation invoice dollar volume increased 15.1%, while transportation invoice count rose 4.1%; management cited higher carrier and fuel prices, current-customer volume, and new customer wins.
- Operating expenses increased 10.3% in Q2. Personnel expense rose $2.427 in the quarter; management cited investment in technology and staff, merit increases, and higher retirement costs.
- Net interest income benefited from higher average earning assets and improving rates, but rising deposit costs and the lower tax-equivalent adjustment following the federal tax-rate reduction weighed on comparisons. The Tax Cuts and Jobs Act reduced the federal corporate rate to 21% beginning in 2018.
- Cass recorded securities-sale losses of $0.055 in Q2 and $0.042 in the first half while repositioning the portfolio for changed interest and tax rates. First-half other comprehensive income included a $10.194 after-tax-related unrealized securities loss before tax-effect presentation; accumulated other comprehensive loss increased $7.806 from year-end.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, with no impact on results, the balance sheet, or opening retained earnings.
Outlook, risks, and contingencies
- Management expected cash, maturing investments, and operating cash flows to fund operations and estimated 2018 capital expenditures of $6–$9 million. No earnings or revenue guidance was provided.
- Management identified interest rates, economic and invoice activity, energy costs, and new-business opportunities as factors affecting revenue, earnings, and liquidity. It expects higher rates generally to support net interest income, while lower energy costs can reduce payment-related balances and interest income.
- Interest-rate risk policy limits 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 since year-end.
- Off-balance-sheet commitments included $65.586 of unused loan commitments, $13.088 of standby letters of credit, and $3.836 of commercial letters of credit. The filing states amounts may expire undrawn and no loss accrual was recorded.
- Operating lease commitments totaled $10.420; time deposits with contractual maturities totaled $56.920. Management believed pending legal matters would not materially affect financial position or results. No material changes to the 2017 Form 10-K risk factors were reported.
- The company was evaluating the expected-credit-loss accounting standard, effective for it after December 15, 2019. The lease standard was expected to have no material impact, but adoption effects were still being evaluated.
Important facts for investors to verify
- Whether deposit outflows and lower accounts-and-drafts-payable balances continue, and their effects on funding costs and liquidity.
- Whether fee growth and customer volume can offset expense growth, particularly technology, staffing, and pension costs.
- How rising rates affect both asset yields and deposit pricing, and whether portfolio repositioning or unrealized securities losses persist.
- Whether loan growth changes credit quality, allowance needs, or regulatory capital; reported zero nonperforming loans and no provision are period-specific.
- How the expected-credit-loss and lease accounting standards affect reported balances and results when adopted.