Cass Information Systems(CASS) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's analysis of financial condition Item 1. Financial Statements This section presents unaudited consolidated financial statements including balance sheets, income, comprehensive income, cash flows, and equity Consolidated Balance Sheets Total assets slightly decreased to $2.50 billion, driven by reduced loans and securities, offset by increased cash Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 (Unaudited) | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $408,435 | $200,942 | | Securities available-for-sale | $615,855 | $754,468 | | Loans, net | $1,026,300 | $1,069,367 | | Total Assets | $2,504,878 | $2,573,023 | | Liabilities & Equity | | | | Total deposits | $1,177,342 | $1,257,217 | | Accounts and drafts payable | $1,082,224 | $1,067,600 | | Total Liabilities | $2,298,642 | $2,366,698 | | Total Shareholders' Equity | $206,236 | $206,325 | Consolidated Statements of Income Net income declined in Q3 and nine-month periods due to increased operating expenses outpacing revenue growth Income Statement Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total net revenue | $49,223 | $47,205 | $146,775 | $133,530 | | Total operating expense | $40,063 | $36,321 | $119,774 | $101,788 | | Net income | $7,394 | $8,799 | $21,649 | $25,619 | | Diluted earnings per share | $0.54 | $0.64 | $1.56 | $1.86 | Consolidated Statements of Comprehensive Income Total comprehensive income significantly improved for the nine-month period due to smaller unrealized losses on securities Comprehensive Income (Loss) Summary (in thousands) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $7,394 | $8,799 | $21,649 | $25,619 | | Other comprehensive (loss) income | $(10,526) | $(20,114) | $(7,599) | $(66,832) | | Total comprehensive (loss) income | $(3,132) | $(11,315) | $14,050 | $(41,213) | Consolidated Statements of Cash Flows Net cash increased by $207.5 million for the nine months, primarily from investing activities and operations Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $29,366 | $40,799 | | Net cash provided by (used in) investing activities | $194,245 | $(249,861) | | Net cash (used in) provided by financing activities | $(16,118) | $41,128 | | Net increase (decrease) in cash | $207,493 | $(167,934) | Consolidated Statements of Shareholders' Equity Shareholders' equity remained stable, influenced by dividends, repurchases, and comprehensive loss, offset by net income - For the nine months ended September 30, 2023, the company paid cash dividends of $0.87 per share, totaling $11.9 million[35] - The company repurchased 136,577 common shares for $5.2 million during the first nine months of 2023[35] Notes to Consolidated Financial Statements Notes detail accounting policies, segment information, loan portfolio, stock repurchase program, and recent accounting standard adoption - The company operates in two reportable segments: Information Services (invoice processing for transportation, energy, etc.) and Banking Services (commercial banking)[45][76] - Total loans decreased to $1.04 billion at September 30, 2023, from $1.08 billion at December 31, 2022. The portfolio consists primarily of commercial & industrial and real estate loans, with no loans past due as of September 30, 2023[82] - The company repurchased 136,577 shares in the first nine months of 2023. A new repurchase authorization for up to 500,000 shares was approved by the Board on October 17, 2023, replacing the prior program[75] - Effective January 1, 2023, the company adopted ASU 2022-02, which eliminated the accounting guidance for troubled debt restructurings and enhanced disclosure requirements for loan modifications to borrowers experiencing financial difficulty[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth, net income decline due to expenses, freight recession impact, and strong liquidity Results of Operations Net income decreased due to higher operating expenses, despite growth in fee revenue and net interest income Key Performance Metrics | Metric | Q3 2023 vs Q3 2022 | 9M 2023 vs 9M 2022 | | :--- | :--- | :--- | | Net Revenue | +4.3% | +9.9% | | Operating Expense | +10.3% | +17.7% | | Net Income | -16.0% | -15.5% | | Diluted EPS | -15.6% | -16.1% | - Processing fee revenue increased 5.1% in Q3 2023 vs Q3 2022, driven by a 3.1% increase in facility-related invoice volumes and ancillary fees, which offset a 4.9% decline in transportation invoice volumes[235] - Net interest income for the nine months ended Sep 30, 2023, increased 19.1% year-over-year, primarily due to the increase in the Federal Funds rate, which expanded the net interest margin to 3.24% from 2.61%[114][186] - Personnel expenses, the largest component of operating costs, increased 14.6% for the nine-month period due to merit increases, an increase in full-time employees for technology initiatives, and higher benefit costs[225] Financial Condition Total assets decreased, marked by increased cash, decreased investments and loans, and a decline in total deposits - Cash and cash equivalents increased by $207.5 million (103.3%) during the first nine months of 2023[228] - The investment securities portfolio decreased by $138.6 million (18.4%), primarily due to sales and maturities[259] - Loans decreased by $43.3 million (4.0%) as the company became more selective in booking new loans amid declining deposits[248] - Total deposits decreased by $79.9 million (6.4%) from year-end 2022, as commercial clients moved funds to higher-rate alternatives, but balances have shown recent stabilization[249] Liquidity and Capital Resources The company maintains strong liquidity with substantial cash and borrowing capacity, exceeding all regulatory capital requirements - Primary liquidity is strong, with cash and cash equivalents at $408.4 million, representing 16.3% of total assets[263] - The company has substantial secondary liquidity, including unsecured lines of credit up to $83.0 million and secured lines of credit up to $457.8 million, with no amounts outstanding[251] Regulatory Capital Ratios (Consolidated) as of Sep 30, 2023 | Ratio | Actual | Requirement for Well-Capitalized | | :--- | :--- | :--- | | Total capital (to risk-weighted assets) | 15.30% | N/A | | Common Equity Tier I Capital | 14.53% | N/A | | Tier I capital (to risk-weighted assets) | 14.53% | N/A | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk, with simulations indicating asset sensitivity to rate changes Simulated Change in Net Interest Income (Next 12 Months) | Rate Shock | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | +200 basis points | +13.7% | +10.6% | | +100 basis points | +8.2% | +4.2% | | -100 basis points | -3.2% | —% | | -200 basis points | -6.0% | -1.5% | - The company is generally asset sensitive, as average interest-earning assets of $2.06 billion for Q3 2023 significantly exceeded average interest-bearing liabilities of $591.6 million[282] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[283] - No material changes in internal control over financial reporting were identified during the third quarter of 2023[270] PART II. OTHER INFORMATION This section covers legal proceedings, updated risk factors, equity sales, and other miscellaneous information Item 1. Legal Proceedings The company is subject to ordinary course legal actions, not expected to materially affect financial condition - Management does not expect any pending or threatened legal actions to have a material effect on the company's business or financial condition[284] Item 1A. Risk Factors Updated risks include liquidity issues from eroded confidence, potential realized losses on securities, and increased regulatory scrutiny - The company identifies a risk of an unexpected inability to obtain liquidity due to eroded customer confidence in regional banks following recent high-profile bank failures[274][276] - Rising interest rates have created significant unrealized losses in the available-for-sale securities portfolio, which could become realized losses if the company were required to sell them to meet liquidity needs[277][287] - The company anticipates increased regulatory scrutiny and new regulations in response to recent banking industry events, which could increase costs and reduce profitability[88][296] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details on common stock repurchases during Q3 2023 and a new share repurchase authorization are provided Share Repurchases for Q3 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jul 2023 | 1,122 | $38.68 | | Aug 2023 | 60,900 | $38.79 | | Sep 2023 | 11,250 | $38.16 | | Total | 73,272 | $38.69 | - On October 17, 2023, the Board of Directors authorized a new repurchase program for up to 500,000 shares, replacing the previous authorization from October 2021[75][298] Item 3. Defaults Upon Senior Securities This item is not applicable to the company - Not applicable[91] Item 5. Other Information No other significant information reported, specifically no Rule 10b5-1 trading arrangements by officers or directors - During Q3 2023, none of the company's officers or directors adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements[92] Item 6. Exhibits This section lists filed exhibits, including Sarbanes-Oxley certifications and Interactive Data Files (XBRL) - The exhibits filed with this report include CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (Exhibit 101)[93][293] Signatures The report was duly signed by the President and CEO, and Executive Vice President and CFO - The report was duly signed on November 7, 2023, by Martin H. Resch, President and Chief Executive Officer, and Michael J. Normile, Executive Vice President and Chief Financial Officer[96][302]