Cass Information Systems, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless stated otherwise. Cass provides invoice processing and payment services to businesses and banking services primarily to privately held businesses and faith-based organizations.
Financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Fee revenue and other income | $30.430 | $26.175; up 16.3% |
| Net interest income (GAAP) | $11.903 | $10.345 |
| Total net revenue | $42.103 | $37.120; up 13.4% |
| Operating expense | $31.828 | $28.525; up 11.6% |
| Net income | $8.258 | $7.071; up 16.8% |
| Diluted EPS | $0.60 | $0.49; up 22.4% |
| Return on average assets / equity | 1.32% / 14.21% | 1.31% / 11.09% |
| Tax-equivalent net interest margin | 2.36% | 2.32% |
Processing fees rose 3.6%; financial fees rose 50.5%. Higher transportation and facility-related invoice dollar volumes and average payments in advance of funding supported financial-fee growth. Tax-equivalent net interest income increased 14.3% to $12.349 million, reflecting higher average earning assets and a four-basis-point margin increase. The effective tax rate was 19.6%, versus 17.7%.
Financial position, cash flow and capital
- Total assets were $2,422.0 million, down 5.2% from year-end. Cash and cash equivalents fell $323.5 million to $191.4 million; available-for-sale securities rose $101.2 million to $774.6 million.
- Loans were $977.2 million, up 1.7% from year-end; the allowance for credit losses was $12.4 million, or 1.27% of loans. The filing reports no past-due, nonaccrual, nonperforming, or troubled-restructured loans at March 31.
- Deposits were $1,176.9 million, down 3.6%, and accounts and drafts payable were $989.7 million, down 5.8%, from year-end. These payable balances fluctuate with payment-processing activity.
- Operating cash flow was $14.7 million, versus $16.7 million a year earlier. Investing cash outflow was $201.1 million, including $156.6 million of securities purchases and a $38.2 million increase in payments in advance of funding. Financing cash outflow was $137.1 million. Cash ended the quarter at $191.4 million.
- No amounts were outstanding on credit lines at quarter-end. Available facilities included $83 million of unsecured federal-funds lines, $218.0 million of secured Federal Home Loan Bank lines, and up to $150 million of secured bank lines.
- Regulatory capital ratios remained above stated minimum requirements: Cass consolidated common equity Tier 1 ratio was 13.24%, and the Bank’s was 15.84%.
Material changes and notable items
- Transportation invoice dollar volume increased 37.3%, which management attributed to inflation, supply-chain disruptions, fuel surcharges, and limited carrier supply. Facility-related dollar volume rose 24.9%, while transaction volume declined 5.1%.
- Personnel expense increased 9.7%, reflecting wage increases, incentive compensation, and technology investment; other operating expense rose with business-development, promotional, and data-processing costs.
- Rising interest rates drove a $37.5 million pretax unrealized loss on available-for-sale securities. After tax, the securities-related loss contributed to a $28.6 million other comprehensive loss and reduced shareholders’ equity by $28.7 million to $217.1 million.
- Cass repurchased 124,874 shares for $5.1 million and paid $3.8 million in dividends. The quarterly dividend was $0.28 per share; 346,207 shares remained authorized for repurchase.
- A 10-year lease expected to commence in June 2022 is expected to add approximately $6.8 million of lease liabilities and right-of-use assets.
Outlook, risks and contingencies
Management gave no earnings or revenue guidance. It expects cash, maturing investments, and operating cash flow to fund 2022 operations and capital expenditures, estimated at $4 million to $6 million. Management identifies interest rates, economic activity, energy costs, invoice volumes, staffing costs, and new-business opportunities as factors affecting results and liquidity. Its rate model estimated projected net interest income changes of +10.6% for a 200-basis-point increase, +4.9% for a 100-basis-point increase, and -2.1% for a 100-basis-point decrease.
Risks include market-rate movements and resulting securities-value changes, credit losses, fluctuations in customer payment float and deposits, inflation and wage pressures, and ongoing COVID-19-related business or operational disruptions. Unused loan commitments were $200.5 million; standby and commercial letters of credit were $12.3 million and $1.2 million, respectively. Management said pending or threatened legal matters are not expected to have a material effect. The filing reports no material changes to previously disclosed risk factors and no subsequent events requiring disclosure.
Important facts for investors to verify
- Whether elevated invoice dollar volumes and financial-fee growth persist, particularly as inflation, fuel costs, and supply-chain conditions change.
- How interest-rate movements affect net interest income and the fair value of the securities portfolio, including the effect of unrealized losses on equity and liquidity.
- Whether deposit and payment-processing balances remain stable, given their importance to funding and period-to-period cash movements.
- How loan growth, credit conditions, and CECL assumptions affect future provisions and the allowance for credit losses.
- Whether higher personnel and technology-related costs, planned capital spending, share repurchases, and the upcoming lease remain consistent with management’s liquidity expectations.