Cass Information Systems, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Cass provides payment and invoice-processing services to corporate clients and banking services through Cass Commercial Bank. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Fee revenue and other income | $28.262 | $26.435 | $82.647 | $77.449 |
| Net interest income, GAAP | $12.274 | $11.186 | $35.903 | $32.514 |
| Total net revenue | $40.536 | $37.621 | $118.300 | $109.963 |
| Operating expenses | $30.563 | $28.530 | $88.996 | $82.175 |
| Net income | $8.186 | $7.610 | $24.033 | $23.211 |
| Diluted EPS | $0.56 | $0.51 | $1.64 | $1.55 |
- Q3 net income rose 7.6% and diluted EPS rose 9.8%; nine-month net income rose 3.5% and diluted EPS rose 5.8%.
- Tax-equivalent net interest margin was 3.38% in Q3 versus 3.34%; for nine months it was 3.44% versus 3.32%. Net interest income on the same tax-equivalent basis increased 8.8% in Q3 and 9.0% for the nine-month period.
- Q3 payment and processing revenue grew 6.6%; nine-month growth was 6.5%. Personnel expense increased $1.8 million in Q3 and $4.9 million over nine months, driven by staffing and technology investment, merit increases, and higher retirement-plan costs.
- Cash from operating activities was $39.774 million for the first nine months, compared with $38.796 million. Investing activities used $75.439 million and financing activities provided $27.470 million; cash and cash equivalents ended at $222.738 million, down $8.195 million from year-end 2018.
Financial position, liquidity and capital
- At September 30, total assets were $1.781 billion, loans net of allowance were $756.875 million, securities available-for-sale were $427.591 million, and shareholders’ equity was $246.617 million. Assets increased 5.1% from December 31, 2018.
- Deposits were $711.233 million, while accounts and drafts payable were $762.075 million. The filing reports no amounts outstanding under credit lines; it does not identify conventional funded debt as a material balance-sheet item.
- Cash and cash equivalents represented 12.5% of assets. Available secondary liquidity included unsecured federal-funds lines totaling $83 million, a $191.241 million secured Federal Home Loan Bank line, and secured lines of $50 million each with UMB Bank and First Tennessee Bank. None was drawn at September 30.
- The company and bank exceeded regulatory capital requirements. Cass’s total capital ratio was 19.72% and common equity Tier 1 ratio 18.88%; the bank’s corresponding ratios were 19.08% and 18.06%.
- Allowance for loan losses was $10.509 million, or 1.37% of loans. The filing reported no nonperforming, delinquent 90-days-or-more, or impaired loans. The nine-month provision was $250,000, primarily to support loan growth.
Material changes and notable items
- Growth in net interest income reflected higher average earning assets and yields, including growth in loans and short-term investments. Higher deposit rates also increased interest expense; the rate on interest-bearing liabilities rose to 1.38% in Q3 from 1.13%.
- Transportation invoice volume declined 3.1% in Q3 and 3.3% for nine months; transportation dollar volume declined 2.2% in Q3 and was nearly flat for nine months. Facility-expense dollar volume rose 12.3% in Q3 and 10.9% for nine months, supported by major clients and new customers.
- In September, Cass acquired Gateway Giving, LLC assets for $3.0 million cash plus a potential $4.0 million earnout, estimated at $2.3 million. Provisional acquired intangibles and goodwill totaled $5.3 million and remain subject to valuation.
- Share repurchases totaled $7.799 million for the first nine months. The board restored the authorization for repurchases of up to 500,000 shares on October 22, 2019; 450,222 shares remained available at quarter-end. Dividends paid over nine months were $11.317 million.
- Adoption of the lease accounting standard resulted in recognition of lease liabilities and right-of-use assets. At quarter-end, these were $7.019 million and $6.241 million, respectively; another lease expected to commence in 2020 could add approximately $800,000 of each.
Outlook, risks and contingencies
- Management estimated 2019 capital expenditures of $4 million to $6 million and expected cash, maturing investments, and operating cash flow to fund operations and capital needs. The filing provides no earnings or revenue guidance.
- Management identified interest rates, economic and business activity, energy costs, transaction volumes, and new-business opportunities as factors that could affect revenue, earnings, and liquidity. Lower rates may depress net interest income; lower energy costs may reduce invoice values and related payment balances.
- The company was preparing to adopt the expected-credit-loss standard effective in 2020. It anticipated a one-time cumulative adjustment to the allowance but could not yet estimate its amount or overall impact.
- Unused loan commitments were $171.503 million; standby and commercial letters of credit were $10.180 million and $2.662 million. No estimated losses were accrued. Management believed pending legal matters would not materially affect financial position or results.
- Management considered securities unrealized losses temporary and did not expect forced sales before recovery. The filing states there were no material changes to disclosed risk factors and no material change in interest-rate risk position.
Important facts for investors to verify
- Whether processing-fee growth and new customer contributions can offset declining transportation invoice volumes and rising operating costs.
- How interest-rate changes affect the company’s net interest margin, deposit costs, and investment of payment-processing balances.
- The final Gateway Giving purchase-price allocation and whether the estimated earnout is ultimately payable.
- The adequacy of the loan-loss allowance as the loan portfolio grows, and the eventual impact of the expected-credit-loss standard.
- Capital, liquidity, and funding trends, including payment-processing balances, deposit stability, credit-line availability, and planned capital expenditures.