Cass Information Systems, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; compared with the corresponding 2020 periods. Unless otherwise noted, financial amounts are in millions of dollars. Cass provides payment and information processing services and banking services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Payment and processing revenue | $26.877 | $24.376 | $78.441 | $72.540 |
| Total fee revenue and other income | $27.577 | $24.932 | $80.739 | $75.201 |
| Net interest income | $11.432 | $10.814 | $32.588 | $33.348 |
| Net interest margin, tax-equivalent | 2.32% | 2.59% | 2.31% | 2.87% |
| Net income | $6.805 | $5.781 | $20.902 | $18.765 |
| Diluted earnings per share | $0.48 | $0.40 | $1.45 | $1.29 |
Q3 net income rose 17.7%; nine-month net income rose 11.4%. Total net revenue, after provision or release for credit losses, was $38.669 million in Q3 and $114.197 million for nine months. Operating expenses increased 7.0% in Q3 and 4.8% for nine months.
Q3 return on average assets was 1.14% and return on average equity was 10.61%; nine-month figures were 1.23% and 10.84%, respectively. The reported nine-month credit-loss release was $0.870 million, compared with a $0.725 million provision in 2020.
Financial position, cash flow and capital
- At September 30, total assets were $2,292.986 million, up 4.1% from year-end 2020. Cash and cash equivalents were $500.309 million; available-for-sale securities were $541.079 million; net loans were $861.373 million.
- Deposits were $1,087.317 million and accounts and drafts payable were $905.479 million. No amounts were outstanding on the disclosed credit lines. The filing does not report conventional long-term borrowings on the balance sheet.
- Shareholders’ equity was $247.643 million, down $13.517 million from December 31, 2020. The decrease primarily reflected $18.975 million of share repurchases, $11.576 million of dividends, and $5.578 million of other comprehensive loss, partly offset by net income.
- Nine-month operating cash flow was $30.680 million, versus $40.061 million in 2020. Investing cash outflow was $276.033 million, including $322.336 million of securities purchases and $24.868 million for bank-owned life insurance. Financing cash inflow was $75.134 million. Cash and cash equivalents decreased by $170.219 million.
- Liquidity included $500.309 million of cash and cash equivalents, equal to 21.8% of assets, and $541.079 million of securities. The Bank disclosed $83 million in unsecured federal-funds lines, a $215.048 million Federal Home Loan Bank line, and two $75 million secured lines; none was drawn at period-end.
- At September 30, consolidated common equity Tier 1 and Tier 1 risk-based capital ratios were each 16.24%, and total risk-based capital was 17.04%. The Bank’s corresponding ratios were 20.20%, 20.20%, and 21.45%. The company and Bank exceeded regulatory minimums.
Changes and management commentary
- Payment and processing revenue grew 10.3% in Q3 and 8.1% for nine months. Management attributed growth mainly to higher transportation volumes and new customers, with higher transportation dollar volume also reflecting increased carrier prices. Facility-related dollar volume rose while transaction volume fell in Q3.
- Average earning assets increased, but the low-rate environment reduced tax-equivalent net interest margin by 27 basis points year over year in Q3 and 56 basis points for nine months. Tax-equivalent net interest income rose 5.5% in Q3 but declined 2.2% for nine months.
- The allowance for credit losses was $11.532 million, or 1.32% of loans, at September 30. There were no past-due or nonperforming loans reported. Management attributed the nine-month allowance release to improved economic conditions and removal of specific allowances; Q3 included a provision primarily related to loan growth.
- COVID-19 effects remained uncertain, including risks from renewed restrictions, variants, supply-chain disruption, and labor shortages. Management cited improving economic conditions but did not provide a specific earnings forecast. It expected cash, maturing investments, and operating cash flows to fund operations and estimated 2021 capital expenditures of $4 million to $6 million.
- Management identified interest rates, economic activity, energy costs, hiring and retention, and new business opportunities as factors that could affect results. A 100-basis-point rate increase was projected to raise net interest income 10.9%; a 100-basis-point decrease was projected to lower it 2.6%.
- Other notable items: the defined-benefit pension plan was frozen for remaining participants effective February 28, 2021; securities-related unrealized losses contributed to nine-month comprehensive income being $15.324 million versus $23.378 million in 2020; and the Board authorized repurchases of up to 750,000 shares on October 19, replacing the prior authorization.
- Management stated that pending legal matters were not expected to have a material effect. No material changes to the risk factors in the 2020 Form 10-K were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether payment-processing growth and transportation invoice volumes persist, and how pricing, customer additions, and processing costs evolve.
- How interest-rate movements affect net interest margin, earnings, and the value of the securities portfolio.
- Whether credit quality and allowance levels remain appropriate as economic conditions change; note the absence of reported nonperforming loans at quarter-end.
- The effect of COVID-19, supply-chain and labor disruptions, and energy costs on customers, volumes, and liquidity.
- Actual capital spending versus the $4 million–$6 million 2021 estimate, and the effect of the expanded share-repurchase authorization on capital and per-share results.
- Potential changes in unrealized securities losses, liquidity needs, and regulatory capital ratios.