Cass Information Systems, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Cass provides payment and information-processing services and banking services. Comparisons are with Q1 2019 unless otherwise noted. Dollar amounts are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Prior comparable period / year-end |
|---|---|---|
| Fee revenue and other income | $27.10 | $27.01 |
| Total net revenue | $38.14 | $38.37 |
| Net interest income, GAAP | $11.37 | $11.61 |
| Net interest margin, tax-equivalent | 3.21% | 3.42% |
| Provision for loan losses | $0.33 | $0.25 |
| Operating expenses | $28.93 | $28.46 |
| Net income | $7.55 | $8.16 |
| Diluted EPS | $0.52 | $0.55 |
| Return on average assets / equity | 1.70% / 12.50% | 1.96% / 14.67% |
| Total assets | $1,731.98 | $1,764.24 at Dec. 31, 2019 |
| Cash and cash equivalents | $163.19 | $203.95 at Dec. 31, 2019 |
| Loans, net | $843.89 | $762.08 at Dec. 31, 2019 |
| Deposits | $726.61 | $757.14 at Dec. 31, 2019 |
| Short-term borrowings | None outstanding | $18.00 at Dec. 31, 2019, repaid Jan. 2, 2020 |
| Shareholders’ equity | $241.28 | $244.19 at Dec. 31, 2019 |
| Operating cash flow | $18.16 | $16.44 |
| Investing / financing cash flow | $(51.38) / $(7.55) | $(26.61) / $(36.41) |
Q1 loan growth was $82.14 million from year-end. The allowance for loan losses was $10.89 million, or 1.27% of loans, versus $10.56 million, or 1.37%, at year-end; there were no nonperforming loans. Cash declined by $40.76 million during the quarter. Operating cash generation did not cover investing outflows, principally reflecting loan growth.
At March 31, liquid assets were 9.4% of total assets. Cass reported no borrowings on its available credit lines, including $83 million in unsecured correspondent-bank lines and secured facilities. The company and bank exceeded regulatory capital requirements; the company’s total capital ratio was 19.16% and common equity Tier 1 ratio was 18.32%.
Material changes and business trends
- Net income fell 7.6% and diluted EPS fell 5.5%. Total net revenue decreased 0.6%, while operating expenses rose 1.6%.
- Payment and processing revenue declined 3.6%. Transportation invoice count and dollars processed fell 7.5% and 7.4%; facility-expense transaction count and dollar volume fell 6.9% and 4.4%.
- Tax-equivalent net interest income declined 2.4%, and margin narrowed 21 basis points. Lower interest rates reduced asset yields; growth in average earning assets partly offset the impact.
- Q1 included $1.07 million in securities-sale gains, compared with $0.01 million a year earlier. This helped support reported fee revenue and other income.
- Segment tax-equivalent pretax income was $6.21 million for Information Services, $2.70 million for Banking Services, and $0.79 million for Corporate, Eliminations and Other; the corresponding 2019 figures were $7.59 million, $3.26 million, and $(0.40) million.
Outlook, risks, and unusual items
- Management said the COVID-19 pandemic’s full impact was unknown. Business closures, manufacturing contraction, and low oil prices were reducing processing activity; Federal Reserve rate cuts were pressuring interest income. Management warned prolonged disruption could increase credit-loss provisions, impairments, or restructuring costs.
- Cass deferred borrower principal payments, as needed, for up to six months. As of April 30, it had processed 343 PPP loan applications totaling approximately $180 million, primarily for existing customers and 100% guaranteed by the SBA.
- The company elected under the CARES Act to defer CECL adoption until the earlier of Dec. 31, 2020 or termination of the national emergency. It estimated adoption could increase the allowance and unfunded-commitment reserves by up to 25%, with a one-time retained-earnings adjustment.
- Management considered capital sufficient to withstand an extended recession but noted capital ratios and liquidity could be affected by losses, deposit withdrawals, or more expensive funding. Remote work was implemented; Cass reported no material adverse effect on controls or operations as of filing.
- Management expected cash, maturing investments, and operating cash flow to fund 2020 operations and estimated capital expenditures of $4 million to $6 million. No earnings or revenue guidance was provided. A $75 million First Horizon secured credit line became effective April 30, up from $50 million.
- The stock repurchase program was temporarily suspended March 16. Q1 repurchases totaled 128,779 shares for $5.51 million; quarterly dividends were $3.92 million. Management said pending legal matters were not expected to have a material effect.
Important facts for investors to verify
- Subsequent-quarter processing volumes, customer activity, and the duration and financial effects of COVID-19 and lower energy prices.
- Loan performance, payment deferrals, credit grades, and any change in the allowance or PPP-related exposures.
- Net interest margin sensitivity to continued low rates, funding costs, deposit trends, and liquidity use.
- CECL adoption timing and the eventual allowance and reserve impact; the filing’s estimate is “up to 25%,” not a final amount.
- Whether securities-sale gains, share repurchases, and dividends recur or change, and whether capital spending remains within the stated range.