Cass Information Systems, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise stated. Cass provides invoice payment and processing services and banking services. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total net revenue | $37.12 | $38.14 | Down 2.7% |
| Net interest income, GAAP | $10.35 | $11.37 | Down 9.0% |
| Fee revenue and other income | $26.18 | $27.10 | Down 3.4% |
| Operating expenses | $28.53 | $28.93 | Down 1.4% |
| Income before tax | $8.60 | $9.21 | Down 6.7% |
| Net income | $7.07 | $7.55 | Down 6.3% |
| Diluted EPS | $0.49 | $0.52 | Down 5.8% |
| Net interest margin, tax-equivalent | 2.32% | 3.21% | Down 89 basis points |
| Return on average assets / equity | 1.31% / 11.09% | 1.70% / 12.50% | Both lower |
| Operating cash flow | $16.70 | $18.16 | Down $1.46 |
Transportation invoice volume rose 6.1% and dollar volume rose 22.2%; facility-expense transaction and dollar volumes each increased 7.5%. Payment and processing revenue nevertheless declined 1.1%, reflecting customer mix and lower late-fee revenue. Management attributed lower expenses partly to pandemic-related reductions in travel and business development.
Financial position, liquidity and capital
- At March 31, total assets were $2.22 billion, up 0.6% from year-end 2020. Cash and cash equivalents were $599.7 million, or 27.1% of assets; available-for-sale securities were $427.2 million.
- Loans were $888.6 million, versus $891.7 million at year-end. The allowance for credit losses was $11.7 million, 1.32% of loans; there were no nonperforming loans and no loan charge-offs in the quarter. The quarter included a $600,000 release of credit losses, including a $360,000 release for unfunded commitments.
- Deposits decreased 4.5% from year-end to $1.00 billion, while accounts and drafts payable increased 7.4% to $897.5 million. Management notes that payable balances vary with payment-cycle timing.
- Investing cash flow was a $94.7 million use, including $125.5 million of securities purchases; financing cash flow provided $7.1 million. The company paid $3.9 million in dividends and repurchased $1.2 million of shares.
- No borrowings were outstanding under credit lines at March 31. Available facilities included $83 million of unsecured correspondent-bank lines, a $197.3 million secured FHLB line, and $150 million of secured lines with two banks. The Bank could also borrow up to approximately $113 million against PPP loans through the Federal Reserve facility.
- The company and Bank exceeded regulatory capital requirements. At March 31, the company’s total risk-based capital ratio was 21.13%, common equity Tier 1 ratio 20.17%, and Tier 1 leverage ratio 11.31%.
Changes, outlook and risks
- Average earning assets increased 27.1%, but lower market rates weighed on income: tax-equivalent asset yield fell to 2.39% from 3.47%. Management linked the margin decline primarily to the historically low-rate environment; average balances held at other financial institutions earned 0.10% versus 1.18% a year earlier.
- Transportation and facility-processing volumes improved year over year, supported by stronger manufacturing activity and customer wins. Management said transportation invoice dollar growth also reflected higher carrier prices. Payment-processing fees were affected by Cass’s decision not to advance payments to customer vendors before receiving customer funds, reducing late fees.
- COVID-19 continues to pose uncertain business, operational, market and credit risks. The filing describes adverse effects on customer activity and interest income, while noting no borrowers remained on payment deferrals at March 31. PPP loans totaled $113.5 million at quarter-end and are SBA-guaranteed.
- The company adopted CECL for the relevant 2021 quarterly reporting and reported a release of credit losses as its macroeconomic forecast improved. Actual future losses remain sensitive to economic conditions and borrower performance.
- The defined-benefit pension plan was frozen for remaining participants effective February 28, 2021. First-quarter pension expense was $273,000, versus $1.03 million in Q1 2020; the company made no plan contribution during the quarter and was evaluating any further 2021 contributions.
- Unrealized losses on available-for-sale securities contributed to other comprehensive loss of $3.38 million and accumulated other comprehensive loss of $3.39 million at quarter-end. The filing reports no securities in an unrealized loss position for 12 months or more.
- Management expects available cash, maturing investments and operating cash flows to fund operations and capital expenditures; estimated 2021 capital expenditures are $4 million to $6 million. No specific earnings or revenue guidance is provided.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. It said pending legal matters are not expected to have a material effect; no material changes to the risk factors in the 2020 Form 10-K were reported.
Important facts for investors to verify
- Whether processing volumes and payable balances remain resilient, and whether volume growth translates into fee revenue.
- How low interest rates, asset yields and balance-sheet mix affect net interest margin and net interest income.
- Credit quality, CECL assumptions and allowance adequacy as pandemic-related conditions evolve, including exposure excluding PPP loans.
- Liquidity and funding trends, particularly changes in deposits and accounts and drafts payable, and any use of contingent borrowing facilities.
- Future changes in securities fair values and accumulated other comprehensive loss, and the impact of the pension freeze and any subsequent plan contributions.