Cass Information Systems, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Cass provides payment and information-processing services to large businesses and banking services through Cass Commercial Bank. Unless noted otherwise, figures are in U.S. dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Fee revenue and other income | $21.46 million | $20.84 million | $41.96 million | $41.67 million |
| Net interest income | $9.51 million | $9.28 million | $18.77 million | $18.24 million |
| Net revenue after loan-loss provision | $30.96 million | $30.12 million | $61.73 million | $59.91 million |
| Net income | $5.87 million | $5.55 million | $11.70 million | $11.09 million |
| Diluted earnings per share | $0.52 | $0.48 | $1.03 | $0.96 |
| Net interest margin, tax-equivalent | 3.40% | 3.52% | 3.39% | 3.41% |
- First-half return on average assets was 1.60%, versus 1.56%; return on average equity was 11.41%, versus 11.29%.
- Operating expenses rose 2.3% to $45.98 million in the first half, primarily reflecting higher salaries and benefits from investment in staff and technology, merit increases, and health costs. The effective tax rate was 25.7%, compared with 25.9%.
- First-half net cash from operations was $17.75 million, versus $17.02 million. Investing activities used $40.30 million, mainly reflecting $39.04 million of net loan growth and an $11.67 million increase in payments in excess of funding. Financing activities provided $43.51 million, including a $73.73 million increase in accounts and drafts payable.
Financial position and material changes
- At June 30, total assets were $1.52 billion, up 4.5% from year-end 2015. Loans were $698.13 million, up $39.08 million; cash and cash equivalents were $274.13 million, up $20.96 million.
- Total deposits were $631.00 million, down 2.4% from year-end. Accounts and drafts payable were $650.99 million, up 12.8%; this balance fluctuates with payment-processing activity and is a significant funding source.
- Shareholders’ equity was $210.26 million, up $2.88 million. The company repurchased 187,123 shares during the first half and paid $4.95 million in dividends. A further 301,156 shares remained available under the buyback authorization at June 30.
- Cash and cash equivalents represented 18.0% of assets; available-for-sale securities totaled $368.04 million, or 24.2% of assets. No amounts were outstanding under the company’s credit lines at June 30; disclosed lines included $78 million of unsecured federal-funds lines and secured facilities.
- The filing reports no conventional borrowings outstanding under those lines. Deposits and accounts and drafts payable are material liabilities; total liabilities were $1.31 billion.
Business trends, outlook, and risks
- First-half payment and processing revenue increased 3.3%. Expense-management transaction volume rose 8.9%, while transportation transaction volume fell 1.2% and transportation dollar volume fell 10.8%. Management attributed transportation weakness mainly to reduced activity among existing customers, particularly oil and gas businesses, and lower fuel prices reducing invoice amounts.
- Management said increased earning-asset volume more than offset modestly lower yields, raising first-half tax-equivalent net interest income 3.0%. Net interest margin declined slightly. The company noted that higher interest rates generally support net interest income, while lower rates can pressure it.
- A $1.0 million first-half credit to provision for loan losses reflected improved portfolio assessment, primarily following payoff of a large nonperforming loan. Nonperforming loans fell to $362,000, or 0.05% of loans, from $3.14 million, or 0.48%, at year-end; the allowance was $10.67 million, or 1.53% of loans.
- First-half securities-sale gains were $387,000, down from $1.64 million a year earlier. Available-for-sale securities had $20.36 million of gross unrealized gains and no gross unrealized losses at June 30; the related accumulated other comprehensive loss improved by $4.93 million from year-end.
- Management anticipated that cash, maturing investments, and operating cash flow would be sufficient for operations and capital expenditures in 2016; estimated capital expenditures were $5 million to $7 million. No earnings or revenue guidance was provided.
- Key exposures include interest-rate changes, economic and invoice-processing activity, energy costs, loan credit quality, and the ability to win new business. Management stated that legal proceedings were not expected to have a material effect and that there were no material changes to previously disclosed risk factors. The company and bank reported capital ratios above regulatory minimums.
- Management reported effective disclosure controls and procedures and no material second-quarter change in internal control over financial reporting. The filing describes pending legal matters but records no estimated loss accrual for off-balance-sheet credit commitments; management considered litigation outcomes not material.
Important facts for investors to verify
- Whether transportation volumes and dollar activity recover, especially among oil and gas customers, and whether expense-management growth continues.
- Whether net interest margin stabilizes and how rate changes affect earnings, given the company’s reliance on payment-related balances and interest income.
- Whether the $1.0 million loan-loss provision credit is sustainable; monitor loan growth, nonperforming loans, and allowance adequacy.
- How much of reported earnings growth reflects operating performance versus the prior-year comparison in securities gains and the 2016 provision release.
- Future capital spending, share repurchases, dividends, and liquidity needs, including movements in accounts and drafts payable and deposits.
- Potential changes from tax examinations and unrecognized tax benefits, pension funding decisions, off-balance-sheet commitments, and adoption of new accounting standards.