Cass Information Systems, Inc. — Q3 2020 Form 10-Q
Period: Three and nine months ended September 30, 2020. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in millions. Cass provides payment and information processing services and banking services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Fee revenue and other income | $24.9 | $28.3 | $75.2 | $82.6 |
| Net interest income | $10.8 | $12.3 | $33.3 | $35.9 |
| Total net revenue | $35.7 | $40.5 | $107.8 | $118.3 |
| Net income | $5.8 | $8.2 | $18.8 | $24.0 |
| Diluted EPS | $0.40 | $0.56 | $1.29 | $1.64 |
- Q3 net income declined 29.4%; nine-month net income declined 21.9%. Return on average assets was 1.14% for Q3 and 1.32% year to date, compared with 1.82% and 1.86% in 2019, respectively.
- Tax-equivalent net interest margin was 2.59% in Q3 and 2.87% for the first nine months, down from 3.38% and 3.44%. Lower market rates reduced asset yields, partly offset by lower deposit costs and higher average earning assets.
- Operating expenses decreased 6.2% in Q3 and 4.5% year to date. Q3 income before tax was $7.1 million; income tax expense was $1.3 million. The nine-month loan-loss provision was $0.7 million, versus $0.3 million a year earlier; none was recorded in Q3.
- Operating cash flow was $40.1 million for the first nine months, compared with $39.8 million in 2019. Investing activities used $68.5 million and financing activities provided $264.0 million; cash and cash equivalents increased $235.5 million to $439.5 million.
Financial position and liquidity
- Total assets were $2.00 billion at September 30, up 13.4% from year-end 2019. Loans were $944.6 million, including $172.2 million of PPP loans; the loan balance rose $171.9 million from year-end.
- Deposits were $911.2 million, up 20.3% from year-end, and accounts and drafts payable were $771.6 million, up 12.8%. These payable balances fluctuate with payment-processing activity.
- Cash and cash equivalents were $439.5 million, or 22.0% of assets. Available-for-sale securities totaled $365.2 million. No borrowings were outstanding at September 30; the company reported substantial unused bank, Federal Home Loan Bank and securities-backed credit lines.
- Shareholders’ equity was $251.5 million, up 3.0% from year-end. The company and bank exceeded regulatory capital requirements; the company’s total capital ratio was 22.09% and common equity Tier 1 ratio was 21.11%.
- The allowance for loan losses was $11.3 million, 1.20% of loans, compared with 1.37% at year-end. No loans were past due 90 days or more or on nonaccrual. However, impaired loans totaled $12.8 million, including two troubled debt restructurings totaling $10.3 million; loans under special monitoring were $18.4 million, versus $4.9 million at year-end.
Changes and management commentary
- Payment and processing revenue declined 12.1% in Q3 and 10.5% year to date. Q3 transportation invoice count and dollar volume fell 6.2% and 4.0%; facility expense dollar volume declined 12.7%. Management said transportation activity was trending toward pre-pandemic levels, while restaurant, retail and hospitality restrictions weighed on facility-related invoice dollars.
- COVID-19-related disruption, business closures, lower oil prices and reduced economic activity adversely affected processing volumes. The Federal Reserve’s rate reductions also pressured interest income and margins. Management said the pandemic’s duration and financial impact remained uncertain.
- The Bank processed nearly 350 PPP applications totaling about $170 million; the loans are SBA-guaranteed and primarily to existing customers. Borrower principal-payment deferrals of up to six months were offered in Q2, and no borrowers remained on deferred terms at Q3-end.
- The company recognized $1.1 million of securities-sale gains in the first nine months of 2020, compared with $0.02 million in 2019. It paid $11.7 million in dividends and repurchased $5.5 million of stock year to date. Repurchases were temporarily suspended in March and restored by the board on October 20, 2020.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management expected cash, maturing investments and operating cash flow to fund operations and capital expenditures, estimated at $4 million to $6 million for 2020.
- The company elected under the CARES Act to defer CECL adoption until the earlier of December 31, 2020 or termination of the national emergency declaration. It estimated adoption could increase the allowance for loan losses and unfunded commitment reserves by approximately 10%, with a one-time cumulative adjustment to retained earnings; the filing says estimates depend on forecasts.
- Key risks include ongoing pandemic effects on payment volumes, borrower credit quality, funding and liquidity, interest rates, energy prices, employee and vendor operations, and cybersecurity. Management noted potential future impairment, loan-loss allowance or restructuring charges if conditions worsen.
- Legal proceedings were described as ordinary-course matters; management did not expect their resolution to materially affect financial position or results. Unused loan commitments were $193.3 million, with standby and commercial letters of credit of $10.3 million and $1.0 million, respectively; no estimated losses were accrued.
- Management reported effective disclosure controls and no material Q3 change in internal control over financial reporting. The filing states no material risk-factor changes other than the added COVID-19 risks.
Most important facts for investors to verify
- Whether transaction volumes and fee revenue recover as pandemic-related restrictions and economic conditions evolve.
- Whether low interest rates continue to compress net interest income and margin despite lower deposit costs.
- Credit quality trends, especially the growth in specially monitored and impaired loans, and the adequacy of the allowance and expected CECL adjustment.
- PPP loan balances, deposit retention and the resulting liquidity and funding profile.
- Whether the restored share-repurchase authorization is used, alongside dividend payments and capital needs.