Cass Information Systems, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; financial statements are unaudited. Cass provides invoice payment and information-processing services and commercial banking through Cass Commercial Bank. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where indicated.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Payment and processing revenue | $19.7m | $19.6m | $39.1m | $38.0m |
| Total net revenue | $30.1m | $29.3m | $59.9m | $58.0m |
| Net interest income | $9.3m | $9.3m | $18.2m | $18.5m |
| Operating expenses | $22.6m | $21.3m | $44.9m | $42.3m |
| Net income | $5.5m | $6.0m | $11.1m | $11.8m |
| Diluted EPS | $0.48 | $0.52 | $0.96 | $1.02 |
- Q2 net income fell 8.1% and first-half net income fell 6.4%; diluted EPS declined 7.7% and 5.9%, respectively. Q2 and first-half total net revenue increased 2.8% and 3.3%, while operating expenses rose 6.3% and 6.2%.
- Tax-equivalent net interest margin was 3.52% in Q2 versus 3.50% a year earlier, but 3.41% for the first half versus 3.46%. GAAP net interest income declined modestly in both comparison periods.
- Return on average assets was 1.58% for Q2 and 1.56% for the first half, compared with 1.73% and 1.72%. Return on average equity was 11.27% and 11.29%, compared with 12.22% and 12.24%.
- Segment net income for the first half was $7.4m in Information Services, down from $8.4m, and $3.7m in Banking Services, up from $3.5m.
Balance sheet, cash flow and capital
- At June 30, 2015, total assets were $1,366.9m, down 8.9% from year-end 2014. Cash and cash equivalents were $158.6m, down $135.7m; available-for-sale securities were $347.8m; and net loans were $663.3m.
- Deposits were $555.4m, down 10.2% from year-end, and accounts and drafts payable were $584.5m, down 10.8%. These payables fluctuate with payment-processing timing. Shareholders’ equity was $197.4m versus $200.4m at year-end.
- No amounts were outstanding on the disclosed borrowing lines at June 30. Available facilities included $88.0m in unsecured correspondent-bank lines, $173.8m in secured Federal Home Loan Bank lines, and $100.0m in secured bank lines. The filing does not report other debt outstanding.
- For the first half, operating cash flow was $17.0m versus $18.6m; investing cash flow was a $7.3m outflow versus a $68.0m outflow; and financing cash flow was a $145.4m outflow versus a $5.9m inflow. Financing uses included deposit and payable reductions, $4.8m of dividends, and $6.1m of share repurchases.
- The company and Bank exceeded regulatory capital requirements. At June 30, the consolidated total capital ratio was 22.19% and the Bank’s was 16.33%; consolidated and Bank common equity Tier 1 ratios were 20.94% and 15.07%.
Changes, outlook and risks
- Transportation invoice transaction volume increased 1.0% in Q2 and 2.8% for the first half, but oil and gas customer activity softened. Expense-management transaction volume fell 3.1% in Q2 and 2.1% for the first half; dollar volume fell 9.9% and 9.4%, respectively, with management citing competitor consolidation in energy and client retention effects.
- Reported results included securities-sale gains of $0.7m in Q2 and $1.6m in the first half, versus none in the comparable 2014 periods. Operating costs rose notably in salaries and benefits, reflecting higher health costs, pension expense, merit increases, and investment in staff and technology; occupancy and other operating costs also increased.
- Nonperforming loans rose to $3.2m, or 0.46% of loans, from $0.5m, or 0.07%, at year-end, primarily due to one additional loan. The allowance for loan losses was $11.9m, or 1.76% of loans; provision expense was zero. No loans were 90 days past due and accruing, no troubled debt restructurings were reported, and there were no foreclosed assets.
- Pension costs increased substantially following a lower discount rate and updated mortality tables. The company made no pension-plan contribution in the first half and was evaluating whether to contribute in 2015.
- Management expected cash, maturing investments, and operating cash flow to fund operations and estimated 2015 capital expenditures of $5m–$7m. No earnings or revenue guidance was provided. Management identified interest rates, economic and business activity, energy costs, and new-business opportunities as factors affecting results and liquidity; lower rates generally pressure net interest income.
- Management said its interest-rate risk position had not materially changed from year-end; policy limits the change in annualized net interest income to 15% under an immediate, sustained 200-basis-point parallel rate move. Pending legal matters were not expected to have a material effect. The filing reported no material change in risk factors and no subsequent event requiring disclosure.
- Off-balance-sheet commitments at June 30 included $8.3m of unused loan commitments, $11.7m of standby letters of credit, and $1.5m of commercial letters of credit; no estimated losses were accrued. Unrecognized tax benefits were approximately $1.3m.
Key facts for investors to verify
- Whether the rise in nonperforming loans is temporary or signals broader deterioration, and how the allowance is assessed given zero provision expense.
- Whether expense-management volume and customer retention stabilize, especially in energy, and whether transportation growth offsets weakness in existing customers.
- How pension assumptions, costs, and any 2015 contribution affect future expenses and cash needs.
- Whether securities-sale gains and balance-sheet liquidity movements recur; assess the effects of lower interest rates and the large share of securities maturing after five years.
- Reconcile the reported cash decline with deposit and accounts-payable movements, and monitor the effect of continued repurchases and dividends on capital and liquidity.