To our valued clients,
As you are likely aware, Silicon Valley Bank (SVB) failed last week. This has brought a lot of attention to the stability of the banking industry. We hope this note answers the questions you might have and leaves you feeling good about the strength and stability Cass Commercial Bank (CCB) and its parent company, Cass Information Systems (CIS).
Quoting the Wall Street Journal, “Silicon Valley Bank’s failure boils down to a simple misstep: It grew too fast using borrowed short-term money from depositors who could ask to be repaid at any time and invested it in long-term assets that it was unable, or unwilling, to sell.”
So, what would we be asking if we were you? We have attempted to provide answers to a few of your likely questions:
Q: What caused the problems at Silicon Valley Bank (SVB)?
A: Like most financial institutions, SVB was flooded with liquidity during the pandemic due to government stimulus programs and the 0% interest rate environment. SVB used the excess liquidity from these deposits to invest in securities with a long duration (to achieve a higher yield). As interest rates rose in early 2022, capital raising for technology startups became very challenging, many of whom banked at SVB. Unable to raise capital through fundraising, these SVB customers had to rely on cash reserves to fund operations. To satisfy the depositors demands for cash, SVB began liquidating their securities portfolio, realizing large losses in doing so. As the losses became public, the outflow of cash worsened as many more customers withdrew uninsured funds at an alarming rate. So last Friday, regulators stepped in and assumed control of the bank.
Q: How is Cass different than SVB?
A: We are different in significant ways:
- Cass has a much more diversified asset base than SVB. By the end of 2021, almost 60% of SVB’s assets were in investment securities, most of which had a very long duration. At the end of 2022, Cass’s investment securities represented a modest 29% of total assets.
- Cass’s investments are of a shorter duration than SVB. Of Cass’s $820 million of book value investments at the end of 2022, $84 million were floating rate securities and $159 million were US Treasury bonds which mature in 16 months or less. This is a very different mix than SVB which had a much longer duration (creating larger losses) in their securities portfolio. Cass’s investment choices are considerably more conservative than SVB and Cass has the strength and liquidity to hold the securities to maturity, avoiding any loss.
- SVB has significant exposure to the tech industry, particularly startups. Cass has virtually no exposure to startup technology firms, nor the venture capital firms that fund them. Both of these factors played a significant role in the crisis that unfolded at SVB.
- Cass has no borrowings outstanding. Cass Commercial Bank has access to over $230 million in unused funding from the Federal Home Loan Bank and Cass Information Systems has an additional $200 million in unused lines of credit available from 3 separate financial institutions. We view these as contingent liquidity sources and therefore have no plans to use them. They are insurance to protect us if funding were to decline. It should be emphasized that we do not intend to borrow against these lines, but they are there to ensure a back-up source of liquidity.
- Cass carries significant cash levels given the $100 billion in payment inflows and outflows on an annual basis. Cass averages monthly cash balances of over $300 million to be able to meet the needs of its Transportation and Facility payment customers.
- As a 116-year-old company, Cass has a history of managing through difficult times such as the Great Depression, the “Dot Com” crash in 2000, and the Great Recession of 2007-2011. Cass is managed conservatively to be able to thrive over the long-term.
- Cass’s assets are all of high quality, some of which can be converted to cash very quickly, providing, additional assurance of liquidity.
- Cass’s funding is generated primarily from long-term clients with whom we have built a trusted relationship over many years. CCB has some clients who have been with us over 100 years. CIS has many 40-year + clients which are integral to our operation.
- Finally, our capital ratios are strong with Common Equity Tier I Capital (to risk weighted assets) of 12.80% at CIS and 14.86% as CCB. These ratios well exceed the regulatory requirement for a “Well Capitalized” financial institution. CCB has not sustained a credit loss in 9 years, has no 30-day past due loans and no non-accrual loans. Reserves for loan losses are $13.54 million and represent 1.25% of the $1 billion + loan portfolio. The bank is self-funded with a deposit base of nearly $1.2 billion.
Q: What is Cass doing to protect its customers during this time of uncertainty?
A: We do want you to know that Cass’s executive leadership is having on-going discussions regarding these external events and have already taken steps towards an even more conservative liquidity posture than normal. We are being much more selective regarding assets to place on our balance sheet, both from a quality and pricing perspective. We believe strongly that we have the team in place to thrive in these challenging times.
Q: What can I do to further protect my deposits during this uncertainty?
A: Cass has multiple ways to help insure deposits through its ICS and CDAR programs. Insurance up to $100 million is available on money market accounts and up to $50 million is available on CDs. Contact your Cass representative today to inquire about these fully insured deposit programs.
If you have further questions, please reach out to your Relationship Manager or any of the executive leadership (myself, Martin Resch, Mike Normile, and Eric Brunngraber). We will keep you informed if other disruptions occur during the coming weeks. Thank you for your long support of Cass. It is you, our clients, over our 116-year history, that have made Cass Commercial Bank and Cass Information Systems among the strongest and most stable financial institutions.
Dwight Erdbruegger
President, Cass Commercial Bank