Cass Information Systems, Inc. — Q2 2022 Form 10-Q
Business context and period: This unaudited report covers the quarter and six months ended June 30, 2022. Cass provides payment and information processing services and banking services through two reportable segments. Its processing business generates fees and payment-related balances; its bank earns interest income on loans and investments. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Fee revenue and other income | $30.7 | $27.0 | $61.1 | $53.2 |
| Net interest income | $13.6 | $10.8 | $25.5 | $21.2 |
| Net income | $8.6 | $7.0 | $16.8 | $14.1 |
| Diluted EPS | $0.62 | $0.48 | $1.22 | $0.97 |
| Tax-equivalent net interest margin | 2.54% | 2.30% | 2.45% | 2.31% |
| Operating expenses | $33.6 | $29.8 | $65.5 | $58.3 |
Q2 net income rose 21.9% and diluted EPS rose 29.2% year over year; first-half net income rose 19.3%. Q2 total net revenue, after provision for credit losses, was $44.2 million versus $38.4 million. First-half total net revenue was $86.3 million versus $75.5 million. Return on average assets and equity were 1.31% and 16.53% for Q2, compared with 1.24% and 10.83% a year earlier.
Balance sheet, cash flow and liquidity
- At June 30, total assets were $2.444 billion, down 4.3% from year-end 2021. Cash and cash equivalents were $261.2 million, down $253.7 million; available-for-sale securities were $740.1 million, up $66.6 million.
- Loans were $959.5 million, broadly stable from year-end; deposits were $1.190 billion, down 2.6%; accounts and drafts payable were $998.9 million, down 4.9%. Shareholders’ equity was $205.6 million, down 16.3%.
- First-half operating cash flow was $31.1 million, compared with $21.8 million in 2021. Investing activities used $163.7 million and financing activities used $121.1 million. Cash declined $253.7 million during the half.
- No borrowings were outstanding under credit lines at June 30. Available facilities included $83 million of unsecured correspondent-bank lines, $236.1 million of secured Federal Home Loan Bank lines, and up to $150 million of secured bank lines.
- Management expected cash, maturing investments and operating cash flows to fund 2022 operations and capital spending; estimated 2022 capital expenditures were $4 million to $6 million.
Material changes and notable items
- Financial fee revenue increased 41.6% in Q2 and 45.9% in the first half. Management attributed growth primarily to higher transportation and facility-related invoice dollar volumes and higher average payments in advance of funding. Q2 transaction counts declined 1.8% for transportation and 4.0% for facility-related processing, while their dollar volumes rose 27.7% and 24.9%, respectively; inflation, supply-chain disruption, fuel surcharges and energy prices contributed.
- Net interest income benefited from higher average earning assets and rising short-term rates. Taxable investment yields increased, while loan yields were lower year over year, partly reflecting reduced Paycheck Protection Program loan fees.
- Operating expenses increased 12.9% in Q2 and 12.2% in the first half, mainly from personnel costs, including salaries, stock compensation and profit sharing, plus higher data processing, legal, recruiting, business development and travel expenses. The company cited continued technology investment.
- Available-for-sale securities had $53.0 million of gross unrealized losses at June 30, versus $4.0 million at year-end 2021, primarily attributed to rising market interest rates. The resulting decline in accumulated other comprehensive income contributed to the reduction in shareholders’ equity. The filing reported no credit-loss allowance on securities.
- In June, Cass acquired Touchpoint, a mobile church-management software business, for $4.9 million cash plus contingent consideration valued at $0.4 million, with potential earn-out payments up to $2.5 million. Purchase accounting values were provisional.
Credit, outlook and risks
The allowance for credit losses was $12.6 million, or 1.31% of loans, at June 30; there were no nonperforming loans. The first-half provision for credit losses was $0.3 million, compared with a $1.2 million release in the prior-year period. The 2022 provision was attributed primarily to economic factors, including a lower GDP forecast. The allowance for unfunded commitments was $0.1 million.
The filing provides no specific earnings or revenue guidance. Management identifies interest rates, economic and business activity, energy costs, new business opportunities, credit quality, inflation and staffing costs as factors that may affect results and liquidity. Interest-rate sensitivity modeling projected net interest income to increase 11.6% under a 200-basis-point rate increase and decline 5.2% under a 100-basis-point decrease, based on June 30, 2022 assumptions. COVID-19-related operational, market and credit risks remained under monitoring. Management reported no material change in risk factors, no material legal-proceeding impact anticipated, and effective disclosure controls.
Important facts for investors to verify
- Whether growth in financial fees and payment dollar volumes persists if inflation, fuel surcharges or energy prices moderate, especially given lower transaction counts.
- How further interest-rate changes affect net interest income, securities fair values, AOCI and reported equity; review the assumptions behind the sensitivity analysis.
- Whether higher personnel and technology costs can be absorbed while maintaining operating leverage and service growth.
- Touchpoint’s final purchase-price allocation, performance against earn-out targets and contribution to Information Services results.
- Credit trends and the adequacy of loan and unfunded-commitment allowances as economic forecasts evolve.
- Liquidity and funding balances, which fluctuate with payment-processing activity, alongside the maturity profile of the securities portfolio and availability of credit lines.