Cass Information Systems(CASS) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the quarterly period ended June 30, 2023, revealing a decrease in net income primarily due to higher operating expenses despite increased net interest income Consolidated Balance Sheets As of June 30, 2023, total assets decreased to $2.47 billion from $2.57 billion, primarily due to reduced securities and loans, while total liabilities also fell to $2.26 billion from $2.37 billion, and shareholders' equity increased to $215.1 million from $206.3 million | Account | June 30, 2023 ($ in thousands) | Dec 31, 2022 ($ in thousands) | | :--- | :--- | :--- | | Total Assets | 2,470,796 | 2,573,023 | | Cash and cash equivalents | 270,473 | 200,942 | | Loans, net | 1,042,654 | 1,069,367 | | Securities available-for-sale | 637,513 | 754,468 | | Total Liabilities | 2,255,650 | 2,366,698 | | Total deposits | 1,191,434 | 1,257,217 | | Accounts and drafts payable | 1,021,524 | 1,067,600 | | Total Shareholders' Equity | 215,146 | 206,325 | Consolidated Statements of Income Net income for Q2 2023 decreased to $7.1 million from $8.6 million, and for the first half of 2023, it fell to $14.3 million from $16.8 million, primarily due to a significant increase in operating expenses outpacing revenue growth | Metric | Q2 2023 ($ in thousands) | Q2 2022 ($ in thousands) | H1 2023 ($ in thousands) | H1 2022 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total net revenue | 48,207 | 44,222 | 97,552 | 86,325 | | Total operating expense | 39,339 | 33,639 | 79,711 | 65,467 | | Net income | 7,138 | 8,562 | 14,255 | 16,820 | | Diluted earnings per share | $0.52 | $0.62 | $1.03 | $1.22 | Consolidated Statements of Comprehensive Income Total comprehensive income for Q2 2023 significantly improved to $3.0 million from a $9.6 million loss in Q2 2022, driven by a smaller net unrealized loss on available-for-sale securities | Metric | Q2 2023 ($ in thousands) | Q2 2022 ($ in thousands) | H1 2023 ($ in thousands) | H1 2022 ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net income | 7,138 | 8,562 | 14,255 | 16,820 | | Other comprehensive income (loss) | (4,124) | (18,147) | 2,927 | (46,722) | | Total comprehensive income (loss) | 3,014 | (9,585) | 17,182 | (29,902) | Consolidated Statements of Cash Flows For the first half of 2023, net cash from operations decreased to $17.0 million, while investing activities provided $163.5 million, and financing activities used $110.9 million, resulting in a $69.5 million increase in cash and cash equivalents | Cash Flow Activity (Six Months Ended June 30) | 2023 ($ in thousands) | 2022 ($ in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | 16,973 | 31,062 | | Net cash provided by (used in) investing activities | 163,485 | (163,705) | | Net cash used in financing activities | (110,927) | (121,051) | | Net increase (decrease) in cash and cash equivalents | 69,531 | (253,694) | Consolidated Statements of Shareholders' Equity Shareholders' equity increased from $206.3 million at year-end 2022 to $215.1 million by June 30, 2023, driven by net income and positive other comprehensive income, partially offset by dividends and share repurchases - Balance at Dec 31, 2022: $206,325 thousand[91] - Key changes in H1 2023 include: Net income of $14,255 thousand, cash dividends of ($7,941) thousand, share repurchases of ($2,377) thousand, and other comprehensive gain of $2,927 thousand[26][91] - Balance at June 30, 2023: $215,146 thousand[26] Notes to Consolidated Financial Statements The notes provide detailed information supporting the financial statements, covering operating segments, loan portfolio quality, stock-based compensation, investment securities fair value, and revenue recognition policies - The Company operates in two reportable segments: Information Services (invoice processing and payment) and Banking Services (commercial banking)[30][57] - Total loans stood at $1.06 billion as of June 30, 2023, with the vast majority classified as 'Normal' credit grade and no loans past due[35][36] - The company adopted ASU 2022-02, which eliminated the accounting for troubled debt restructurings and enhanced disclosures for loan modifications for borrowers in financial difficulty[37] - Stock-based compensation expense was $2.9 million for the first six months of 2023, down from $3.2 million in the same period of 2022[70] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q2 2023 performance, noting revenue growth driven by net interest income, but a 16.6% net income decline due to a 16.9% increase in operating expenses from technology investments and personnel costs, alongside impacts of banking industry volatility on deposits and the company's strong liquidity and capital position Results of Operations In Q2 2023, net interest income grew 17.4% to $16.0 million and financial fees increased 9.8% to $11.7 million, but a 16.9% rise in operating expenses to $39.3 million, driven by personnel and technology costs, led to a 16.6% decrease in net income to $7.1 million | Metric (Q2 2023 vs Q2 2022) | 2023 ($ in thousands) | 2022 ($ in thousands) | % Change | | :--- | :--- | :--- | :--- | | Net interest income | 16,014 | 13,641 | 17.4% | | Total revenues | 48,207 | 44,222 | 9.0% | | Operating expense | 39,339 | 33,639 | 16.9% | | Net income | 7,138 | 8,562 | (16.6)% | | Diluted EPS | $0.52 | $0.62 | (16.1)% | - The increase in net interest income was primarily due to the rise in the Federal Funds rate, which expanded the net interest margin to 3.25% from 2.54% in the prior year[169] - Operating expenses increased due to merit increases, wage pressures, a 10.9% increase in average full-time employees for technology initiatives, and higher costs for outside services during a technology platform transition[172][196] Financial Condition Total assets decreased by $102.2 million (4.0%) to $2.5 billion from year-end 2022, primarily due to reduced investment securities and loans, while total liabilities fell by $111.0 million (4.7%) due to lower deposits, and shareholders' equity grew by $8.8 million (4.3%) to $215.1 million - Total assets decreased by 4.0% to $2.5 billion at June 30, 2023[174] - The investment securities portfolio decreased by $117.0 million (15.5%) due to sales and maturities[175] - Total deposits decreased by $65.8 million (5.2%) as larger clients moved funds to higher-interest alternatives[177] - Shareholders' equity increased by 4.3% to $215.1 million, driven by earnings and a decrease in accumulated other comprehensive loss[203] Liquidity and Capital Resources The company maintains a strong liquidity position with cash and cash equivalents increasing to $270.5 million and access to substantial undrawn credit lines, while both the holding company and Cass Commercial Bank exceed all regulatory capital requirements, demonstrating robust capital ratios - Cash and cash equivalents totaled $270.5 million at June 30, 2023, representing 10.9% of total assets[180] - The company has access to $83.0 million in unsecured federal funds lines and $464.3 million in secured lines of credit, with no outstanding balances as of June 30, 2023[181] | Capital Ratios (Cass Commercial Bank) | June 30, 2023 | Well-Capitalized Requirement | | :--- | :--- | :--- | | Total capital (to risk-weighted assets) | 17.06% | 10.00% | | Tier I capital (to risk-weighted assets) | 15.94% | 8.00% | | Common Equity Tier I Capital | 15.94% | 6.50% | | Tier I capital (to average assets) | 12.37% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk The company is asset-sensitive, with simulations indicating that a 100 basis point increase in interest rates would boost projected net interest income by 7.4% over 12 months, and a 200 basis point increase by 12.7% - The company is asset sensitive, as average interest-earning assets of $2.0 billion greatly exceeded average interest-bearing liabilities of $512.5 million in Q2 2023[189] | Interest Rate Shock | % Change in Projected Net Interest Income (June 30, 2023) | | :--- | :--- | | +200 basis points | 12.7% | | +100 basis points | 7.4% | | -100 basis points | (3.3)% | | -200 basis points | (5.7)% | Controls and Procedures The company's principal executive and financial officers concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting identified during Q2 2023 - Management concluded that disclosure controls and procedures were effective as of June 30, 2023[213] - No changes in internal control over financial reporting were identified in Q2 2023 that materially affected, or are reasonably likely to materially affect, the company's internal controls[190] PART II. OTHER INFORMATION Legal Proceedings The company is subject to various ordinary course legal actions, which management believes will not materially affect its business or financial condition - Management does not expect pending legal actions to have a material effect on the company's businesses or financial conditions[214] Risk Factors This section outlines material risks, including liquidity concerns from potential deposit outflows due to eroded customer confidence, the negative impact of rising interest rates on the securities portfolio, and increased regulatory scrutiny and costs - A key risk is the potential inability to obtain needed liquidity to satisfy deposit withdrawal requests, which could be accelerated if uninsured depositors lose confidence[216][233] - Recent bank failures have eroded customer confidence, potentially causing customers to move deposits to larger institutions or higher-yielding investments, which could adversely impact liquidity and results[217][234] - Rising interest rates have caused significant unrealized losses in the available-for-sale securities portfolio. A forced sale to meet liquidity needs could result in realized losses, impairing capital[218][235] [Unregistered Sales of Equity Securities and Use of Proceeds](index=40&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECU RITIES%20AND%20USE%20OF%20PROCEEDS) During Q2 2023, the company repurchased 63,305 shares of common stock at an average price of $37.55 per share under its treasury stock buyback program, with 277,402 shares remaining for repurchase | Period (2023) | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April | 13,678 | $37.10 | | May | 45,921 | $37.56 | | June | 3,706 | $39.13 | | Total Q2 | 63,305 | $37.55 | - As of June 30, 2023, a maximum of 277,402 shares may yet be purchased under the authorized plan[220][239] Exhibits This section lists the exhibits filed with the Form 10-Q, including the 2023 Omnibus Stock and Performance Compensation Plan, related award agreements, and CEO and CFO certifications - Filed exhibits include the 2023 Omnibus Stock and Performance Compensation Plan and various award agreements[222] - Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[222]