Cass Information Systems, Inc. — Q2 2017 Form 10-Q
Business and period: Cass provides payment and information-processing services to large businesses and banking services through Cass Commercial Bank, serving primarily privately held businesses and churches. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Dollars below are in millions except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Payment and processing revenue | $23.282 | $20.880 | $45.571 | $40.425 |
| Total net revenue | $33.662 | $30.963 | $65.952 | $61.732 |
| Net interest income, GAAP | $9.862 | $9.506 | $19.381 | $18.770 |
| Operating expenses | $24.901 | $23.059 | $49.219 | $45.975 |
| Net income | $6.513 | $5.869 | $12.820 | $11.702 |
| Diluted EPS | $0.58 | $0.52 | $1.13 | $1.03 |
Margins and returns: Tax-equivalent net interest margin was 3.40% in Q2 and 3.39% for the first half, unchanged from the respective 2016 periods. First-half return on average assets was 1.70% (1.60% in 2016); return on average equity was 12.24% (11.41%).
Cash flow: First-half operating cash flow was $21.468 million, versus $17.752 million. Investing activities used $51.404 million, mainly reflecting securities purchases and loan growth; financing activities provided $64.253 million, including an $87.116 million increase in accounts and drafts payable. Cash and cash equivalents rose $34.317 million to $301.060 million.
Financial position and liquidity
- At June 30, 2017, total assets were $1.593 billion, up 5.9% from year-end 2016. Securities were $431.979 million; loans, net of allowance, were $661.487 million.
- Total deposits were $605.039 million, down 2.7% from December 31, 2016. Accounts and drafts payable were $729.403 million, up 13.6%; these balances arise from payment processing and fluctuate with payment timing.
- Shareholders’ equity was $221.358 million, up 6.4% from year-end. The filing reports no outstanding amounts on credit lines. Available facilities included $68 million in unsecured correspondent lines, a $215.010 million secured Federal Home Loan Bank line, and two $50 million secured bank lines.
- Cash and cash equivalents were 18.9% of total assets. Management said cash, maturing investments, and operating cash flows should be sufficient for 2017 operations and estimated capital expenditures of $5–$7 million.
- No conventional debt balance is separately reported in the presented balance sheet; accounts and drafts payable are a substantial operating funding source.
Changes, outlook, and risks
- Q2 net income increased 11.0%; first-half net income rose 9.6%. Payment and processing revenue increased 11.5% in Q2 and 12.7% year to date. Q2 transportation invoice volume grew 5.4% and expense-management transaction volume grew 18.7%, supported by new and existing customers.
- Operating expenses rose 8.0% in Q2. Management cited investment in staff and technology, annual salary increases, higher retirement-plan costs, new strategic partnerships, and acquisition-related professional costs. Personnel expense rose $2.013 million year to date; outside-service expense rose $1.047 million.
- A March 2017 acquisition added $1.406 million of intangible assets, including $0.980 million of goodwill. No acquisition purchase price or detailed contribution to results is specified in the provided filing text.
- There was no loan-loss provision in the first half of 2017, compared with a $1.000 million provision reversal in the first half of 2016. The allowance was $10.196 million, or 1.52% of loans. Nonperforming loans were $0.219 million (0.03% of loans), consisting of one nonaccrual loan; there were no troubled debt restructurings.
- First-half effective tax rate declined to 23.4% from 25.7%, partly due to adoption of share-based-payment accounting guidance and technology investment credits. Adoption reduced income tax expense by $0.278 million for the first half.
- Management identified interest rates, business activity, energy costs, and new-business opportunities as factors affecting revenue, earnings, and liquidity. It said higher rates generally benefit net interest income; its policy limits the change in annualized net interest income to 15% under an immediate, sustained 200-basis-point rate change. Management reported no material change in its interest-rate risk position since year-end.
- The defined-benefit pension plan was closed to new participants effective year-end 2016. First-half pension expense increased; no plan contribution was made during the first half, and the company was evaluating possible contributions for the remainder of 2017.
- Off-balance-sheet commitments at June 30 included $65.583 million of unused loan commitments, $13.977 million of standby letters of credit, and $2.759 million of commercial letters of credit. Management reported no accrual for estimated losses on these items and did not expect pending legal proceedings to have a material effect.
- No formal earnings guidance is provided. The company said the impact of forthcoming revenue-recognition and lease standards was not expected to be material; the impact of the expected-credit-loss standard was still being evaluated. Management reported effective disclosure controls and no material risk-factor changes from its 2016 Form 10-K.
Key facts for investors to verify
- Whether volume and new-customer growth can sustain processing-revenue gains as staffing, technology, partnership, and acquisition costs rise.
- How accounts and drafts payable and deposit balances evolve, given their importance to funding and their sensitivity to payment cycles and customer activity.
- Loan-portfolio quality and allowance adequacy, particularly as the allowance was broadly stable and the first-half provision was zero.
- Interest-rate exposure and the effect of the securities portfolio’s long maturities: 81.8% of securities mature in five or more years, and 96% were state and political subdivision securities.
- Any pension funding needs, acquisition performance, and potential changes in unrecognized tax benefits, which were approximately $1.835 million at June 30, 2017.