Cass Information Systems, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Cass provides payment and information-processing services and banking services through Cass Commercial Bank. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total net revenue | $38.37 | $35.98 | +6.6% |
| Net income | $8.16 | $8.09 | +0.9% |
| Diluted EPS | $0.55 | $0.54 | +1.9% |
| Operating expenses | $28.46 | $26.18 | +8.7% |
| Net interest margin, tax-equivalent | 3.42% | 3.25% | +0.17 percentage points |
| Return on average assets | 1.96% | 2.01% | Down |
| Return on average equity | 14.67% | 14.94% | Down |
- Payment and processing revenue was $26.46 million, up 6.6%. Bank interest income growth and improved yields also supported revenue. The tax-equivalent net interest income rose 7.5% to $12.15 million; yield on earning assets increased to 3.79% from 3.44%, while the rate paid on interest-bearing liabilities rose to 1.34% from 0.72%.
- Operating expenses rose primarily due to higher personnel costs, including strategic technology and staffing investment, merit increases, and increased retirement-plan costs. Income before tax increased 1.1% to $9.91 million.
- Operating cash flow was $16.44 million, versus $18.16 million. Investing activities used $26.61 million, chiefly reflecting $29.71 million of net loan growth. Financing activities used $36.41 million; cash dividends were $3.78 million and treasury-share purchases were $5.70 million. Cash and cash equivalents declined $46.58 million to $184.35 million.
Financial position, liquidity and capital
- Total assets were $1.685 billion at March 31, down 0.6% from year-end 2018. Loans were $751.31 million, up $29.72 million from year-end; the allowance for loan losses was $10.49 million, or 1.40% of loans.
- Deposits declined $66.49 million, or 9.2%, to $655.43 million. Accounts and drafts payable increased $45.00 million, or 6.5%, to $739.36 million; management notes these balances fluctuate with payment-processing timing.
- Liquid assets were $184.35 million, 10.9% of total assets. Securities totaled $441.19 million, 26.2% of assets, and 76% were state and political-subdivision securities. No borrowings were outstanding under the reported credit lines. Available facilities included $83 million of unsecured correspondent lines, a $197.16 million secured Federal Home Loan Bank line, and two $50 million secured bank lines.
- Regulatory capital ratios remained well above stated minimums, including the company’s total capital ratio of 20.58% and the bank’s of 18.38%. Shareholders’ equity was $234.48 million, up 2.0% from year-end; the increase included net income and improved accumulated other comprehensive loss, partly offset by dividends and repurchases.
Material changes and operating trends
- Transportation invoice count declined 2.6%, while dollar volume rose 2.9%, supported in part by higher carrier and fuel prices. Facility-expense dollar volume increased 5.2%, attributed to new customer wins and higher activity from existing accounts; transaction count declined 1.8%.
- Loan growth and a more favorable rate environment contributed to higher net interest income. Deposit interest expense increased to $1.29 million from $0.68 million.
- The company repurchased 107,815 shares in Q1 for $5.70 million; 497,000 shares remained available under the 500,000-share program at March 31.
- Adoption of lease accounting on January 1, 2019 resulted in recognition of operating lease liabilities and right-of-use assets. At March 31, these were $7.59 million and $6.90 million, respectively.
Outlook, risks and contingencies
- Management expects cash, maturing investments, and operating cash flows to be sufficient for operations and capital spending in 2019; estimated capital expenditures are $4 million to $6 million. No earnings or revenue guidance was provided.
- Management identifies interest rates, economic activity, energy costs, customer invoice volumes, and new-business opportunities as factors that may affect revenue, earnings, and liquidity. Lower rates generally pressure net interest income; changes in transportation and energy costs may affect invoice volumes and payment balances.
- The company’s interest-rate policy limits the change in annualized net interest income to 15% under an immediate, sustained parallel 200-basis-point rate change. Management said its risk position had not changed materially from year-end.
- There were no nonperforming loans at March 31. The quarter included a $250,000 loan-loss provision, compared with none in Q1 2018, primarily to support portfolio growth. Management expects to adopt the expected-credit-loss standard in 2020 but could not estimate its impact.
- Unused loan commitments were $145.10 million; standby and commercial letters of credit were $11.03 million and $3.79 million. No losses were accrued for these commitments. Management believes pending legal proceedings will not materially affect financial position or results.
- Management reported effective disclosure controls, no material changes in internal control over financial reporting, and no material changes to the risk factors disclosed in the 2018 Form 10-K.
Investor verification priorities
- Assess whether payment-processing revenue growth and customer wins can persist despite lower transaction counts in transportation and facility services.
- Track whether higher deposit costs offset the improvement in earning-asset yields and net interest margin.
- Review the effect of continued deposit declines, payment-platform balance volatility, and loan growth on liquidity and funding needs.
- Monitor operating-cost growth, especially personnel and technology investment, against revenue growth and profitability.
- Follow credit quality and the future allowance impact from the expected-credit-loss accounting standard; also monitor the $145.10 million of unused loan commitments.