Cass Information Systems, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; financial statements are unaudited. Cass provides payment and information processing services and banking services through Cass Commercial Bank. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where shown.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total net revenue | $27.33m | $24.69m | $80.01m | $71.22m |
| Net income | $6.06m | $5.58m | $17.52m | $15.23m |
| Diluted EPS | $0.64 | $0.59 | $1.85 | $1.61 |
| Net interest income, tax-equivalent | $12.77m | $12.41m | $38.82m | $36.10m |
| Net interest margin, tax-equivalent | 4.15% | 4.47% | 4.43% | 4.66% |
- Q3 net income rose 8.6% and diluted EPS 8.5%; nine-month net income rose 15.0% and diluted EPS 14.9%.
- Payment and processing revenue was $15.81m in Q3, up 13.8%, and $45.37m for nine months, up 12.9%. Q3 transportation and utility transaction volumes each increased about 11%; transportation dollar volume rose 20%.
- Operating expenses increased 11% in both comparison periods, driven mainly by salaries and benefits and higher professional, consulting, and outside-service costs. Provision for loan losses declined to $0.55m from $0.95m in Q3 and to $1.85m from $3.00m for nine months.
- Net interest income increased as average earning assets grew, despite lower yields and margins amid declining interest rates. The nine-month tax-equivalent yield on earning assets fell to 4.81% from 5.13%; the rate on interest-bearing liabilities fell to 1.12% from 1.42%.
Financial position, cash flow, and capital
- At September 30, total assets were $1.406bn, up 18% from December 31, 2010; loans were $692.4m, down from $708.6m. Deposits totaled $549.8m, up 6%; accounts and drafts payable were $683.2m, up 32%.
- Cash and cash equivalents were $334.8m, up $195.9m since year-end and 24% of assets. Management attributed significant balance-sheet movements partly to payment-processing activity and daily liquidity management. Accounts and drafts payable can fluctuate with payment-cycle timing.
- Operating cash flow for the first nine months was $23.0m versus $21.7m a year earlier. Cash increased by $195.9m; financing cash flow included a $167.1m increase in accounts and drafts payable and $4.5m of dividends paid.
- No borrowings were outstanding under the reported credit lines at September 30. Available facilities included $88.0m in unsecured correspondent-bank lines, a $126.7m secured Federal Home Loan Bank line, and a $10.0m secured federal funds line. The filing does not report conventional debt outstanding at period-end.
- Regulatory capital ratios exceeded stated minimums: Cass total capital ratio was 17.79% and Tier 1 leverage ratio 11.34%; the Bank’s were 12.14% and 9.52%, respectively.
Outlook, risks, and notable items
- Management said cash, maturing investments, and operating cash flow should be sufficient for operations and capital expenditures in 2011; estimated capital expenditures were below $3m. No earnings or revenue guidance was provided.
- Management identified interest rates, economic and customer activity, energy costs, and new-business opportunities as factors that may affect revenue, earnings, and liquidity. Lower rates generally pressure net interest income. The company’s policy limits the modeled change in annualized net interest income to 15% for an immediate, sustained 200-basis-point rate change; management said its risk position had not materially changed from year-end.
- Credit quality warrants attention: impaired loans rose to $6.41m (0.93% of loans) from $0.57m at year-end, including $4.48m in two troubled debt restructurings and $1.93m in nonaccrual loans. Nine-month net charge-offs were $0.73m versus $0.53m. The allowance was $13.01m, or 1.88% of loans, versus 1.68% at year-end. Two foreclosed properties totaled $1.91m.
- Unused loan commitments were $9.26m; standby and commercial letters of credit were $22.38m and $4.66m. No losses were accrued for these instruments. Management believed pending legal matters would not materially affect financial position or results.
- After quarter-end, the board declared a 10% stock dividend, payable December 15, 2011, and authorized repurchases of up to 300,000 shares. No shares were repurchased in the first nine months of 2011.
Important facts for investors to verify
- Whether the increase in impaired loans and troubled debt restructurings leads to further charge-offs, provisions, or collateral losses.
- Whether processing-volume growth and higher fee revenue can continue to offset expense growth and pressure on interest margins.
- How much of the large cash and payable movements reflects recurring payment-processing activity versus period-end timing.
- Current regulatory capital, credit-line availability, and liquidity trends in subsequent filings.
- The effect and implementation details of the declared stock dividend and newly authorized repurchase program.