Cass Information Systems, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results are compared with the corresponding 2022 periods. Cass provides invoice processing and payment services and operates Cass Commercial Bank. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Fee revenue and other income | $32.8m | $31.8m | $97.0m | $92.9m |
| Net interest income | $16.5m | $16.0m | $49.5m | $41.5m |
| Total net revenue | $49.2m | $47.2m | $146.8m | $133.5m |
| Operating expenses | $40.1m | $36.3m | $119.8m | $101.8m |
| Net income | $7.4m | $8.8m | $21.6m | $25.6m |
| Diluted EPS | $0.54 | $0.64 | $1.56 | $1.86 |
Q3 net revenue increased 4.3%, but net income fell 16.0%; for the nine-month period, net revenue rose 9.9% while net income declined 15.5%. Tax-equivalent net interest margin was 3.24% in both the quarter and nine-month period, versus 2.90% and 2.61%, respectively, in 2022. Return on average assets/equity was 1.22%/13.80% in Q3 and 1.20%/13.64% year to date.
Balance sheet, liquidity and cash flow
- At September 30, total assets were $2.50bn; cash and cash equivalents, including short-term investments, were $408.4m; available-for-sale securities were $615.9m; and net loans were $1.03bn.
- Deposits were $1.18bn, down 6.4% from year-end 2022. Accounts and drafts payable were $1.08bn. The company reported no outstanding borrowings. Available lines included $83m at correspondent banks, $207.8m secured by mortgage loans at the FHLB, and up to $250m secured by securities.
- For the first nine months, operating cash flow was $29.4m, investing cash flow was $194.2m, and financing cash flow was negative $16.1m. Cash and cash equivalents increased $207.5m to $408.4m. Investing cash flow benefited from securities sales and maturities and a net decrease in loans.
- Shareholders’ equity was $206.2m. Cass and its bank exceeded regulatory capital requirements; the bank’s total capital ratio was 18.14% and its common equity Tier 1 ratio was 16.98%.
Material changes and management commentary
- Higher interest rates lifted interest income and net interest margin, but deposit costs rose sharply: the average cost of interest-bearing liabilities was 3.11% in Q3 versus 0.52% a year earlier. Average noninterest-bearing demand deposits declined 18.1% year over year, and average deposits overall declined 9.5%.
- Transportation invoice dollar volume fell 19.8% in Q3 and 13.5% year to date amid a freight recession. Processing and financial fee revenue nevertheless increased, supported by facility-related activity, ancillary fees and higher short-term rates.
- Operating expenses rose 10.3% in Q3 and 17.7% year to date. Management cited higher staffing and compensation, pension expense, and spending on technology initiatives, including temporary maintenance of multiple platforms ahead of a planned transition by year-end 2023.
- Loans declined 4.0% from year-end, primarily due to lower lease financing receivables; management said it was more selective in new lending amid deposit declines. No loans were past due or on nonaccrual at quarter-end. The allowance for credit losses was $13.3m, or 1.28% of loans.
- Available-for-sale securities had $80.5m of gross unrealized losses at quarter-end, primarily attributed to higher market interest rates. Management said it did not intend, and did not expect, to be required, to sell the securities before recovery or maturity. Accumulated other comprehensive loss was $66.9m.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected cash, maturing investments and operating cash flow to fund operations and capital expenditures, estimated at $8m–$10m for 2023.
- The company highlighted potential deposit outflows and liquidity pressure, including the risk that forced sales of securities with unrealized losses could harm capital and results. It also cited possible increased regulatory scrutiny and costs, interest-rate sensitivity, inflation, economic activity and freight-market conditions.
- Interest-rate simulations indicated projected net interest income changes over the next 12 months of +13.7% for a 200-basis-point increase and -6.0% for a 200-basis-point decrease, versus unchanged rates, using a static balance sheet.
- Two commercial and industrial loans totaling $10.7m were modified through term extensions for borrowers experiencing financial difficulty; they were current at quarter-end. No charge-offs occurred in the first nine months.
- On October 17, 2023, the board authorized a replacement share repurchase program for up to 500,000 shares. Management reported no subsequent event requiring further financial-statement disclosure.
Investor verification priorities
- Track deposit trends, deposit pricing and concentration, and confirm liquidity availability against customer withdrawal and payment needs.
- Assess the securities portfolio’s unrealized losses and the potential capital impact if liquidity needs require sales.
- Monitor whether technology investment, staffing and other expenses moderate, and whether the planned platform transition is completed.
- Follow transportation volumes, payment float and loan portfolio quality, including the performance of modified loans.
- Review future net interest margin and earnings sensitivity as market rates and funding costs change.