Cass Information Systems, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are primarily with 2017. The filing also reports fourth-quarter results. Cass provides invoice payment and information-processing services and commercial banking through Cass Commercial Bank. All share and per-share figures reflect the 20% stock dividend paid in December 2018.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Fee revenue and other income | $104.1 million | $95.5 million | +9% |
| Net interest income after provision | $44.2 million | $39.8 million | +11% |
| Total net revenue | $148.3 million | $135.3 million | +10% |
| Operating expenses | $111.9 million | $100.4 million | +11% |
| Net income | $30.3 million | $25.0 million | +21% |
| Diluted earnings per share | $2.03 | $1.68 | +21% |
| Net interest margin, tax-equivalent | 3.32% | 3.34% | Down 2 bps |
| Operating cash flow | $48.3 million | $38.9 million | +$9.4 million |
Processing volume rose 4.8% to 66.3 million transactions and processing dollars increased 12.7% to $42.4 billion. Average earning assets grew 3% to $1.404 billion. The reported effective tax rate was 17%, versus 28% in 2017; excluding the 2017 tax-reform charge, the 2017 rate was 25%.
Fourth-quarter 2018 fee revenue and other income was $26.6 million versus $24.7 million in Q4 2017. Net income was $7.1 million versus $5.3 million, and diluted EPS was $0.47 versus $0.36.
Balance sheet, liquidity and capital
- Year-end assets were $1.695 billion; shareholders’ equity was $229.8 million, or about 13.6% of assets.
- Loans totaled $721.6 million, up 5% year over year. Deposits were $721.9 million. Accounts and drafts payable generated by payment operations were $694.4 million.
- Cash and cash equivalents totaled $230.9 million; available-for-sale securities were $441.5 million. The company reported no amounts outstanding on its disclosed credit lines, which included $83 million of unsecured bank lines, $193.5 million of secured FHLB capacity, and two $50 million corporate lines.
- Operating cash flow was $48.3 million; investing activities used $46.8 million and financing activities provided $1.3 million. The company reported no loan-loss provision in 2018 or 2017, net loan recoveries of $20,000 in 2018, and no nonperforming loans or foreclosed assets at year-end.
- The company and Bank met regulatory capital requirements; the Bank was categorized as well-capitalized. Company common equity Tier 1 capital was 20.49% of risk-weighted assets.
Changes, outlook and notable items
- Management attributed growth to new customer wins, more business from existing customers, new services, higher interest rates, and higher carrier and fuel prices. Processing dollars rose faster than transaction volume, supporting larger investable balances and carrier-service fees.
- Expenses increased as Cass invested in personnel, technology and infrastructure. Personnel expense rose 11%; the company also cited technology-service spending and software depreciation, and hired a CIO and a vice president of security and risk as part of an IT reorganization.
- Net income benefited from the lower federal corporate tax rate and from comparison with the $1.824 million, noncash TCJA charge recorded in 2017. The 2018 finalization of the tax accounting reduced 2018 tax expense by $74,000.
- Management said available cash, maturing investments, operating cash flow and borrowing lines were expected to fund 2019 operations and capital spending. Planned 2019 capital expenditures were $4 million to $6 million. This is not earnings guidance; the filing gives no specific revenue or EPS forecast.
- Interest-rate sensitivity analysis estimated that an immediate, sustained 200-basis-point increase would raise net interest income 11%, while a 200-basis-point decrease would lower it 11%. Management identifies interest rates, business activity, energy costs and new-business opportunities as important performance and liquidity drivers.
- Risks include economic and borrower-credit deterioration, interest-rate and energy-price movements, competition and customer retention, technology execution, cybersecurity and operational disruption, regulation, and the possibility that off-balance-sheet credit commitments are drawn. Loan commitments were $144.0 million; standby and commercial letters of credit were $11.4 million and $3.5 million, respectively. Management reported no material pending legal proceedings.
- Lease accounting adoption was expected to add approximately $9–11 million of assets and liabilities. The company had not determined the impact of the forthcoming expected-credit-loss standard (CECL). Revenue-standard adoption had no material impact. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether fee growth and processing-dollar growth can continue, and how much results depend on interest rates and fuel/carrier prices.
- Whether expense growth and technology investment generate sufficient future revenue and operating leverage.
- Credit quality, concentrations in privately held businesses and faith-based real estate borrowers, and the adequacy of the $10.2 million loan-loss allowance ahead of CECL adoption.
- The sustainability of liquidity and deposit/payment-float balances, and the potential use of credit commitments and borrowing facilities.
- The effect of securities valuation changes, pension funding, tax positions and lease/CECL accounting changes on future earnings, equity and capital.
- Dividend and repurchase levels: cash dividends were $13.2 million and 2018 share repurchases cost $8.8 million; the repurchase program may be changed or discontinued.