UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended | |||||
| OR | |||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| For the transition period from __________ to __________ | |||||
Commission File No. 000-20827
____________________
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
(314 ) 506-5500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbols | Name of each exchange on which registered | ||||||||||||
____________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | o | x | |||||||||||||||
| Non-Accelerated Filer | o | Smaller Reporting Company | Emerging Growth Company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
The number of shares outstanding of the registrant's only class of common stock as of April 22, 2022: Common stock, par value $.50 per share – 13,652,849 shares outstanding.
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TABLE OF CONTENTS
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors beyond our control, which may cause future performance to be materially different from expected performance summarized in the forward-looking statements. These risks, uncertainties and other factors are discussed in Part I, Item 1A, “Risk Factors” of the Company’s 2021 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), which may be updated from time to time in our future filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share and Per Share Data)
March 31, 2022 (Unaudited) | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Cash and cash equivalents | |||||||||||
| Securities available-for-sale, at fair value | |||||||||||
| Loans | |||||||||||
| Less: Allowance for credit losses | |||||||||||
| Loans, net | |||||||||||
| Payments in advance of funding | |||||||||||
| Premises and equipment, net | |||||||||||
| Investment in bank-owned life insurance | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Deposits: | |||||||||||
| Noninterest-bearing | $ | $ | |||||||||
| Interest-bearing | |||||||||||
| Total deposits | |||||||||||
| Accounts and drafts payable | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Shareholders’ Equity: | |||||||||||
Preferred stock, par value $ | |||||||||||
Common stock, par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Common shares in treasury, at cost ( | ( | ( | |||||||||
| Accumulated other comprehensive (loss) income | ( | ||||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes to unaudited consolidated financial statements.
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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Fee Revenue and Other Income: | |||||||||||
| Processing fees | $ | $ | |||||||||
| Financial fees | |||||||||||
| Other | |||||||||||
| Total fee revenue and other income | |||||||||||
| Interest Income: | |||||||||||
| Interest and fees on loans | |||||||||||
| Interest and dividends on securities: | |||||||||||
| Taxable | |||||||||||
| Exempt from federal income taxes | |||||||||||
| Interest on federal funds sold and other short-term investments | |||||||||||
| Total interest income | |||||||||||
| Interest Expense: | |||||||||||
| Interest on deposits | |||||||||||
| Total interest expense | |||||||||||
| Net interest income | |||||||||||
| Provision for (release of) credit losses | ( | ||||||||||
| Net interest income after provision for (release of) credit losses | |||||||||||
| Total net revenue | |||||||||||
| Operating Expense: | |||||||||||
| Personnel | |||||||||||
| Occupancy | |||||||||||
| Equipment | |||||||||||
| Amortization of intangible assets | |||||||||||
| Other operating expense | |||||||||||
| Total operating expense | |||||||||||
| Income before income tax expense | |||||||||||
| Income tax expense | |||||||||||
| Net income | $ | $ | |||||||||
| Basic earnings per share | $ | $ | |||||||||
| Diluted earnings per share | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Comprehensive Income: | |||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive (loss) income: | |||||||||||
| Net unrealized loss on securities available-for-sale | ( | ( | |||||||||
| Tax effect | |||||||||||
| Reclassification adjustments for gains included in net income | ( | ||||||||||
| Tax effect | |||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||
| Total comprehensive (loss) income | $ | ( | $ | ||||||||
See accompanying notes to unaudited consolidated financial statements.
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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash Flows From Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Gains on sales of securities | ( | ||||||||||
| Stock-based compensation expense | |||||||||||
| Provision for (release of) credit losses | ( | ||||||||||
| Increase in current income tax liability | |||||||||||
| (Decrease) increase in pension liability | ( | ||||||||||
| Increase in accounts receivable | ( | ( | |||||||||
| Other operating activities, net | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows From Investing Activities: | |||||||||||
| Proceeds from sales of securities available-for-sale | |||||||||||
| Proceeds from maturities of securities available-for-sale | |||||||||||
| Purchase of securities available-for-sale | ( | ( | |||||||||
| Net (increase) decrease in loans | ( | ||||||||||
| Purchase of bank-owned life insurance | ( | ||||||||||
| Increase in payments in advance of funding | ( | ( | |||||||||
| Purchases of premises and equipment, net | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash Flows From Financing Activities: | |||||||||||
| Net increase (decrease) in noninterest-bearing demand deposits | ( | ||||||||||
| Net (decrease) increase in interest-bearing demand and savings deposits | ( | ||||||||||
| Net decrease in time deposits | ( | ( | |||||||||
| Net (decrease) increase in accounts and drafts payable | ( | ||||||||||
| Cash dividends paid | ( | ( | |||||||||
| Purchase of common shares for treasury | ( | ( | |||||||||
| Other financing activities, net | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(Unaudited)
(Dollars in Thousands except per share data)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
Cash dividends ($ | ( | ( | |||||||||||||||||||||||||||||||||
Issuance of | ( | ( | |||||||||||||||||||||||||||||||||
| Exercise of SARs | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
Purchase of | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive income | ( | ( | |||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
Balance, December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
Cash dividends ($ | ( | ( | |||||||||||||||||||||||||||||||||
Issuance of | ( | ( | |||||||||||||||||||||||||||||||||
| Exercise of SARs | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
Purchase of | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
Balance, March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
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CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Certain amounts in prior-period financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications have no effect on previously reported net income or shareholders’ equity. For further information, refer to the audited consolidated financial statements and related footnotes included in Cass Information System, Inc.’s (the “Company” or “Cass”) Annual Report on Form 10-K for the year ended December 31, 2021.
Risks and Uncertainties
Note 2 – Intangible Assets
The Company accounts for intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Goodwill and Other Intangible Assets, which requires that intangibles with indefinite useful lives be tested annually for impairment, or when management deems there is a triggering event, and those with finite useful lives be amortized over their useful lives.
Details of the Company’s intangible assets are as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In thousands) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||
| Assets eligible for amortization: | |||||||||||||||||||||||
| Customer lists | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Patents | ( | ( | |||||||||||||||||||||
| Software | ( | ( | |||||||||||||||||||||
| Trade Name | ( | ( | |||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||
| Unamortized intangible assets: | |||||||||||||||||||||||
| Goodwill | — | — | |||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Note 3 – Earnings Per Share
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common shares outstanding and the weighted-average number of potential common shares outstanding. Under the treasury stock method, stock appreciation rights (“SARs”) are dilutive when the average market price of the Company’s common stock, combined with the effect of any unamortized compensation expense, exceeds the SAR price during a period.
The calculations of basic and diluted earnings per share are as follows:
| (In thousands except share and per share data) | Three Months Ended March 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Basic | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Weighted-average common shares outstanding | ||||||||||||||
| Basic earnings per share | $ | $ | ||||||||||||
| Diluted | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Weighted-average common shares outstanding | ||||||||||||||
| Effect of dilutive restricted stock and stock appreciation rights | ||||||||||||||
| Weighted-average common shares outstanding assuming dilution | ||||||||||||||
| Diluted earnings per share | $ | $ | ||||||||||||
Note 4 – Stock Repurchases
Note 5 – Industry Segment Information
The services provided by the Company are classified into two reportable segments: Information Services and Banking Services. Each of these segments provides distinct services that are marketed through different channels. They are managed separately due to their unique service and processing requirements.
The Information Services segment provides transportation, energy, telecommunication, and environmental invoice processing and payment services to large corporations. The Banking Services segment provides banking services primarily to privately held businesses and faith-based ministries, including on-line generosity services, as well as supporting the banking needs of the Information Services segment.
The Company’s accounting policies for segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Management evaluates segment performance based on tax-equivalized (as defined in the footnote to the chart on the following table) pre-tax income after allocations for corporate expenses. Transactions between segments are accounted for at what management believes to be fair value.
Substantially all revenue originates from, and all long-lived assets are located within, the United States and no revenue from any customer of any segment exceeds 10% of the Company’s consolidated revenue.
Funding sources represent average balances and deposits generated by Information Services and Banking Services and there is no allocation methodology used. Segment interest income is a function of the relative share of average funding sources generated by each segment multiplied by the following rates:
•Information Services – one or more fixed rates depending upon the specific characteristics of the funding source, and
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•Banking Services – a variable rate that is based upon the overall performance of the Company’s earning assets.
Any difference between total segment interest income and overall total Company interest income is included in Corporate, Eliminations, and Other.
| (In thousands) | Information Services | Banking Services | Corporate, Eliminations and Other | Total | |||||||||||||||||||
Three Months Ended March 31, 2022: | |||||||||||||||||||||||
| Fee income | $ | $ | $ | $ | |||||||||||||||||||
| Interest income* | ( | ||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Intersegment income (expense) | ( | — | |||||||||||||||||||||
| Tax-equivalized pre-tax income* | |||||||||||||||||||||||
| Goodwill | |||||||||||||||||||||||
| Other intangible assets, net | |||||||||||||||||||||||
| Total assets | ( | ||||||||||||||||||||||
| Average funding sources | |||||||||||||||||||||||
Three Months Ended March 31, 2021: | |||||||||||||||||||||||
| Fee income | $ | $ | $ | $ | |||||||||||||||||||
| Interest income* | ( | ||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Intersegment income (expense) | ( | — | |||||||||||||||||||||
| Tax-equivalized pre-tax income* | |||||||||||||||||||||||
| Goodwill | |||||||||||||||||||||||
| Other intangible assets, net | |||||||||||||||||||||||
| Total assets | ( | ||||||||||||||||||||||
| Average funding sources | |||||||||||||||||||||||
Note 6 – Loans by Type
A summary of loans is as follows:
| (In thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Commercial and industrial | $ | $ | |||||||||
| Real estate: | |||||||||||
| Commercial: | |||||||||||
| Mortgage | |||||||||||
| Construction | |||||||||||
| Faith-based: | |||||||||||
| Mortgage | |||||||||||
| Construction | |||||||||||
| Paycheck Protection Program (“PPP”) | |||||||||||
| Other | |||||||||||
| Total loans | $ | $ | |||||||||
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The following table presents the aging of loans past due by category at March 31, 2022 and December 31, 2021:
| Performing | Nonperforming | ||||||||||||||||||||||||||||||||||
| (In thousands) | Current | 30-59 Days | 60-89 Days | 90 Days and Over | Non- accrual | Total Loans | |||||||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||
| Mortgage | |||||||||||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||||||||
| Faith-based: | |||||||||||||||||||||||||||||||||||
| Mortgage | |||||||||||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||||||||
| PPP | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||
| Mortgage | |||||||||||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||||||||
| Faith-based: | |||||||||||||||||||||||||||||||||||
| Mortgage | |||||||||||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||||||||
| PPP | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of March 31, 2022 and December 31, 2021:
| (In thousands) | Loans Subject to Normal Monitoring1 | Performing Loans Subject to Special Monitoring2 | Nonperforming Loans Subject to Special Monitoring2 | Total Loans | |||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | |||||||||||||||||||
| Real estate | |||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Mortgage | |||||||||||||||||||||||
| Construction | |||||||||||||||||||||||
| Faith-based: | |||||||||||||||||||||||
| Mortgage | |||||||||||||||||||||||
| Construction | |||||||||||||||||||||||
| PPP | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | |||||||||||||||||||
| Real estate | |||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Mortgage | |||||||||||||||||||||||
| Construction | |||||||||||||||||||||||
| Faith-based: | |||||||||||||||||||||||
| Mortgage | |||||||||||||||||||||||
| Construction | |||||||||||||||||||||||
| PPP | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The Company had no loans evaluated for expected credit losses on an individual basis as of March 31, 2022 or December 31, 2021. There were no foreclosed loans recorded as other real estate owned (included in other assets) as of March 31, 2022 or December 31, 2021. There were no loans considered troubled debt restructurings as of March 31, 2022 or December 31, 2021.
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A summary of the activity in allowance for credit losses (“ACL”) by category for the periods ended March 31, 2022 and December 31, 2021 is as follows:
| (In thousands) | C&I | CRE | Faith-based CRE | Construction | Total | ||||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision for (release of) credit losses | ( | ( | ( | ||||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision for (release of) credit losses | ( | ( | |||||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||
Balance at March 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Note 7 – Commitments and Contingencies
In the normal course of business, the Company is party to activities that contain credit, market and operational risks that are not reflected in whole or in part in the Company’s consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments and commitments under operating leases. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. The Company’s maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those instruments. A release of credit losses of $135,000 was recorded during the three months ended March 31, 2022 primarily due to a decrease in unfunded commitments. An allowance for unfunded commitments of $232,000 and $367,000 had been recorded at March 31, 2022 and December 31, 2021, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commercial and standby letters of credit are conditional commitments issued by the Company or its subsidiaries to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At March 31, 2022, the balances of unused loan commitments, standby and commercial letters of credit were $200,547,000 , $12,297,000 , and $1,208,000 , respectively. Since some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting standards as those financial instruments included on the consolidated balance sheets. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of the credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally accounts receivable, inventory, residential or income-producing commercial property or equipment. In the event of nonperformance, the Company or its subsidiaries may obtain and liquidate the collateral to recover amounts paid under guarantees on these financial instruments.
Note 8 – Stock-Based Compensation
The Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”) permits the issuance of up to 1,500,000 shares of the Company’s common stock in the form of stock options, SARs, restricted stock, restricted stock units and performance awards. The Company may issue shares out of treasury stock for these awards. During the three months ended March 31, 2022, 40,462 restricted shares, 57,542 performance-based restricted shares, and no SARs were granted under the Omnibus Plan. Stock-based compensation expense for the three months ended March 31, 2022 and 2021 was $1,090,000 and $693,000 , respectively.
Restricted Stock
Restricted shares granted to Company employees are amortized to expense over a three-year cliff vesting period. Restricted shares granted to members of the Board of Directors are amortized to expense over a one-year service period, with the exception of those shares granted in lieu of cash payments for retainer fees which are expensed in the period earned.
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As of March 31, 2022, the total unrecognized compensation expense related to non-vested restricted shares was $2,625,000 , and the related weighted-average period over which it is expected to be recognized is approximately 1.01 years.
Following is a summary of the activity of the Company's restricted stock for the three months ended March 31, 2022, with total shares and weighted average fair value:
| Three Months Ended March 31, 2022 | |||||||||||
| Shares | Fair Value | ||||||||||
Balance at December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
Balance at March 31, 2022 | $ | ||||||||||
Performance-Based Restricted Stock
The Company has granted three-year performance-based restricted stock (“PBRS”) awards which are contingent upon the Company’s achievement of pre-established financial goals over a three-year cliff vest period. The number of shares issued ranges from 0 % to 150 % of the target opportunity based on the actual achievement of financial goals for the three-year performance period.
Following is a summary of the activity of the PBRS for the three months ended March 31, 2022, based on 100% of target value:
| Three Months Ended March 31, 2022 | |||||||||||
| Shares | Fair Value | ||||||||||
Balance at December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
Balance at March 31, 2022 | $ | ||||||||||
The PBRS that vested during the three months ended March 31, 2022 were based on the Company's achievement of 52.9 % of target financial goals, resulting in the issuance of 17,810 shares of common stock. The outstanding PBRS at March 31, 2022 will vest at scheduled vesting dates and the actual number of shares of common stock issued will range from 0 % to 150 % of the target opportunity based on the actual achievement of financial goals for the respective three-year performance period.
SARs
There were no SARs granted and no expense recognized during the three months ended March 31, 2022. Following is a summary of the activity of the Company’s SARs program for the three months ended March 31, 2022:
| Shares | Weighted- Average Exercise Price | Average Remaining Contractual Term Years | Aggregate Intrinsic Value (In thousands) | ||||||||||||||||||||
Balance at December 31, 2021 | $ | $ | |||||||||||||||||||||
| Exercised | ( | — | — | ||||||||||||||||||||
Exercisable at March 31, 2022 | $ | $ | |||||||||||||||||||||
There were no non-vested SARs at March 31, 2022.
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Note 9 – Defined Pension Plans
The Company has a noncontributory defined-benefit pension plan (the “Plan”), which covers eligible employees. Effective December 31, 2016, the Plan was closed to all new participants. Additionally, the Plan’s benefits were frozen for all remaining participants as of February 28, 2021. As such, subsequent to February 28, 2021, there is no service cost associated with the Plan. The Company accrues and makes contributions designed to fund normal service costs on a current basis using the projected unit credit with service proration method to amortize prior service costs arising from improvements in pension benefits and qualifying service prior to the establishment of the plan over a period of approximately 30 years. Disclosure information is based on a measurement date of December 31 of the corresponding year. The following table represents the components of the net periodic pension costs:
| (In thousands) | Estimated 2022 | Actual 2021 | |||||||||
| Service cost – benefits earned during the year | $ | $ | |||||||||
| Interest cost on projected benefit obligations | |||||||||||
| Expected return on plan assets | ( | ( | |||||||||
| Net amortization | |||||||||||
| Net periodic pension benefit | $ | ( | $ | ( | |||||||
The Company recorded a net periodic benefit of $618,000 for the three-month period ended March 31, 2022, and net periodic pension cost of $273,000 for the three-month period ended March 31, 2021. Pension costs decreased during the three-month period ended March 31, 2022 due to the Plan being frozen as of February 28, 2021. The Company made no contributions to the Plan during the three-month period ended March 31, 2022 and is evaluating the amount of contributions, if any, for the remainder of 2022.
In addition to the above funded benefit plan, the Company has an unfunded supplemental executive retirement plan which covers key executives of the Company. This is a noncontributory plan in which the Company and its subsidiaries make accruals designed to fund normal service costs on a current basis using the same method and criteria as its defined benefit plan. The following table represents the components of the net periodic pension costs for 2021 and an estimate for 2022:
| (In thousands) | Estimated 2022 | Actual 2021 | |||||||||
| Service cost – benefits earned during the year | $ | $ | |||||||||
| Interest cost on projected benefit obligation | |||||||||||
| Net amortization | |||||||||||
| Net periodic pension cost | $ | $ | |||||||||
Note 10 – Income Taxes
Note 11 – Investment in Securities
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category. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities are summarized as follows:
| March 31, 2022 | |||||||||||||||||||||||
| (In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| State and political subdivisions | $ | $ | $ | $ | |||||||||||||||||||
| Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| U.S. treasury bonds | |||||||||||||||||||||||
| Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| (In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| State and political subdivisions | $ | $ | $ | $ | |||||||||||||||||||
| Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The fair values of securities with unrealized losses are as follows:
| March 31, 2022 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| (In thousands) | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| State and political subdivisions | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | |||||||||||||||||||||||||||||||||||
| Corporate Bonds | |||||||||||||||||||||||||||||||||||
| Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| (In thousands) | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| State and political subdivisions | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | |||||||||||||||||||||||||||||||||||
| Corporate Bonds | |||||||||||||||||||||||||||||||||||
| Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
There were 180 securities, or 49 % (4 greater than 12 months), in an unrealized loss position as of March 31, 2022. The unrealized losses at March 31, 2022 were primarily attributable to changes in market interest rates after the securities were purchased. There were 101 securities, or 28 % (0 greater than 12 months), in an unrealized loss position as of December 31, 2021. At March 31, 2022 and December 31, 2021, the Company had not recorded an allowance for credit losses on securities.
The amortized cost and fair value of investment securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
| March 31, 2022 | |||||||||||
| (In thousands) | Amortized Cost | Fair Value | |||||||||
Due in 1 year or less | $ | $ | |||||||||
Due after 1 year through 5 years | |||||||||||
Due after 5 years through 10 years | |||||||||||
Due after 10 years | |||||||||||
| Total | $ | $ | |||||||||
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Note 12 – Fair Value of Financial Instruments
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Balance sheet assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Investment securities | |||||||||||||||||||||||
| Loans, net | |||||||||||||||||||||||
| Accrued interest receivable | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Balance sheet liabilities: | |||||||||||||||||||||||
| Deposits | $ | $ | $ | $ | |||||||||||||||||||
| Accounts and drafts payable | |||||||||||||||||||||||
| Accrued interest payable | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents - The carrying amount approximates fair value.
Investment in Securities - The fair value is measured on a recurring basis using Level 2 valuations. Refer to Note 11, “Investment in Securities,” for fair value and unrealized gains and losses by investment type.
Loans - The fair value is estimated using present values of future cash flows discounted at risk-adjusted interest rates for each loan category designated by management and is therefore a Level 3 valuation. Management believes that the risk factor embedded in the interest rates along with the allowance for credit losses result in a fair valuation.
Accrued Interest Receivable - The carrying amount approximates fair value.
Deposits - The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities and therefore, is a Level 2 valuation. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market or the benefit derived from the customer relationship inherent in existing deposits.
Accounts and Drafts Payable - The carrying amount approximates fair value.
Accrued Interest Payable - The carrying amount approximates fair value.
Note 13 – Revenue from Contracts with Customers
Revenue is recognized as the obligation to the customer is satisfied. The following is detail of the Company’s revenue from contracts with clients.
Processing fees – The Company earns fees on a per-item or monthly basis for the invoice processing services rendered on behalf of customers. Per-item fees are recognized at the point in time when the performance obligation is satisfied. Monthly fees are earned over the course of a month, representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.
Financial fees – The Company earns fees on a transaction level basis for invoice payment services when making customer payments. Fees are recognized at the point in time when the payment transactions are made, which is when the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.
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Bank service fees – Revenue from service fees consists of service charges and fees on deposit accounts under depository agreements with customers to provide access to deposited funds. Service charges on deposit accounts are transaction-based fees that are recognized at the point in time when the performance obligation is satisfied. Service charges are recognized on a monthly basis representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.
For the Three Months Ended March 31, | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Fee revenue and other income | ||||||||||||||
| In-scope of FASB ASC 606 | ||||||||||||||
| Processing fees | $ | $ | ||||||||||||
| Financial fees | ||||||||||||||
| Information services payment and processing revenue | ||||||||||||||
| Bank service fees | ||||||||||||||
| Fee revenue (in-scope of FASB ASC 606) | ||||||||||||||
| Other income (out-of-scope of FASB ASC 606) | ||||||||||||||
| Total fee revenue and other income | $ | $ | ||||||||||||
Note 14 – Leases
The Company leases certain premises under operating leases. As of March 31, 2022, the Company had lease liabilities of $4,516,000 and right-of-use assets of $4,080,000 . Lease liabilities and right-of-use assets are reflected in and , respectively. Presented within occupancy expense on the Consolidated Statements of Income for the three months ended March 31, 2022, operating lease cost was $400,000 , short-term lease cost was $51,000 , and there was no variable lease cost. At March 31, 2022, the weighted average remaining lease term for the operating leases was 6.0 years and the weighted average discount rate used in the measurement of operating lease liabilities was 5.35 %. Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. See the Company’s 2021 Annual Report on Form 10-K for information regarding these commitments.
| (In thousands) | March 31, 2022 | ||||
| Lease payments due | |||||
Less than 1 year | $ | ||||
1-2 years | |||||
2-3 years | |||||
3-4 years | |||||
4-5 years | |||||
Over 5 years | |||||
| Total undiscounted cash flows | |||||
| Discount on cash flows | |||||
| Total lease liability | $ | ||||
There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2022. At March 31, 2022, the Company has one lease that has not yet commenced, but is expected to create approximately $6,800,000 of additional lease liabilities and right-of-use assets for the Company. This lease is a 10-year lease and will commence in June 2022.
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Note 15 – Subsequent Events
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Impact of COVID-19 on the Company’s Business
On March 11, 2020, the World Health Organization (“WHO”) declared the outbreak of COVID-19 as a global pandemic. While the impact of COVID-19 is significantly lessened from March 2020, the ongoing impact, including restrictions imposed to combat its spread, could result in additional and prolonged business closures, supply chain disruptions, work restrictions and activity restrictions. The Company continues to closely monitor developments related to COVID-19 and remains subject to heightened business, operational, market, credit and other risks which may have an adverse effect on its financial condition and results of operations.
Overview
Cass provides payment and information processing services to large manufacturing, distribution and retail enterprises from its offices/locations in St. Louis, Missouri, Columbus, Ohio, Greenville, South Carolina, Wellington, Kansas, Jacksonville, Florida, Breda, Netherlands, Basingstoke, United Kingdom, and Singapore. The Company’s services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays energy invoices, which include electricity and gas as well as waste and telecommunications expenses, and is a provider of telecom expense management solutions. Cass solutions include a B2B payment platform for clients that require an agile fintech partner. Additionally, the Company offers an on-line platform to provide generosity services for faith-based and non-profit organizations. The Company’s bank subsidiary, the “Bank,” supports the Company’s payment operations. The Bank also provides banking services to its target markets, which include privately-owned businesses and faith-based ministries in the St. Louis metropolitan area as well as other selected cities in the United States.
The specific payment and information processing services provided to each customer are developed individually to meet each customer’s requirements, which can vary greatly. In addition, the degree of automation such as electronic data interchange, imaging, work flow, and web-based solutions varies greatly among customers and industries. These factors combine so that pricing varies greatly among the customer base. In general, however, Cass is compensated for its processing services through service fees and investment of account balances generated during the payment process. The amount, type, and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed. The Company also earns financial fees on a transaction level basis for invoice payment services when making customer payments. Financial fees include interchange revenue, foreign exchange fees and fees received through early payment of invoices. Fees are recognized at the point in time when the payment transactions are made, which is when the performance obligation is satisfied. Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed. Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management. Other factors will also influence revenue and profitability, such as changes in the general level of interest rates, which have a significant effect on net interest income. The funds generated by these processing activities are invested in overnight investments, investment grade securities, advances to payees, and loans generated by the Bank. The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings. The Bank also assesses fees on other services such as cash management services.
Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, energy, telecommunication and environmental payment and audit. The benefits that can be achieved by outsourcing transaction processing, and the management information generated by Cass’ systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs, and consolidation of telecommunication providers. Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff, and the growth and quality of the loan portfolio. The general level of interest rates also has a significant effect on the revenue of the Company. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2021 Annual Report on Form 10-K, a decline in the general level of interest rates can have a negative impact on net interest income and conversely, a rise in the general level of interest rates can have a positive impact on net interest income. The cost of fuel is another factor that has a significant impact on the transportation sector. As the price of fuel goes up or down, the Company’s earnings increase or decrease with the dollar amount of transportation invoices.
Currently, management views Cass’ major opportunity as the continued expansion of its payment and information processing service offerings and customer base. Management intends to accomplish this by maintaining the Company’s
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leadership position in applied technology, which when combined with the security and processing controls of the Bank, makes Cass unique in the industry.
Critical Accounting Policies
The Company has prepared the consolidated financial statements in this report in accordance with the Financial Accounting Standards Board Accounting Standards Codification. In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates have been generally accurate in the past, have been consistent and have not required any material changes. There can be no assurances that actual results will not differ from those estimates. The accounting policy that requires significant management estimates and is deemed critical to the Company’s results of operations or financial position has been discussed with the Audit Committee of the Board of Directors and is described below.
Allowance for Credit Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to determine management’s estimate of the lifetime expected credit losses. Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments” section of this report.
Results of Operations
The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended March 31, 2022 (“First Quarter of 2022”) compared to the three-month period ended March 31, 2021 (“First Quarter of 2021”). The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes and with the statistical information and financial data appearing in this report, as well as in the Company’s 2021 Annual Report on Form 10-K. Results of operations for the First Quarter of 2022 are not necessarily indicative of the results to be attained for any other period.
Net Income
The following table summarizes the Company’s operating results:
| (In thousands except per share data) | First Quarter of | ||||||||||||||||
| 2022 | 2021 | % Change | |||||||||||||||
| Net income | $ | 8,258 | $ | 7,071 | 16.8 | % | |||||||||||
| Diluted earnings per share | $ | .60 | $ | .49 | 22.4 | % | |||||||||||
| Return on average assets | 1.32 | % | 1.31 | % | — | ||||||||||||
| Return on average equity | 14.21 | % | 11.09 | % | — | ||||||||||||
Fee Revenue and Other Income
The Company’s fee revenue is derived mainly from transportation and facility processing and financial fees. As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis and by the accounts and drafts payable balances generated in the payment process which can be used to
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generate interest income. In addition, the Company's fee revenue consists of financial fees which are generated through the payment process. Processing volumes, average payments in advance of funding, and fee revenue were as follows:
| (In thousands) | First Quarter of | ||||||||||||||||
| 2022 | 2021 | % Change | |||||||||||||||
| Transportation invoice volume | 8,958 | 8,787 | 1.9 | % | |||||||||||||
| Transportation invoice dollar volume | $ | 10,855,180 | $ | 7,904,639 | 37.3 | % | |||||||||||
| Facility-related transaction volume* | 6,640 | 6,996 | (5.1) | % | |||||||||||||
| Facility-related dollar volume* | $ | 4,643,942 | $ | 3,717,428 | 24.9 | % | |||||||||||
| Average payments in advance of funding | $ | 279,479 | $ | 177,295 | 57.6 | % | |||||||||||
| Processing fees | $ | 19,036 | $ | 18,375 | 3.6 | % | |||||||||||
| Financial fees | $ | 10,532 | $ | 6,997 | 50.5 | % | |||||||||||
*Includes energy, telecom and environmental
First Quarter of 2022 compared to First Quarter of 2021:
Processing fee revenue increased 3.6% driven by the 1.9% increase in transportation invoice volume and an increase in fees generated by our parcel payment services, partially offset by the decrease in facility-related transaction volume of 5.1%. Financial fee revenue increased 50.5%, attributable to the 37.3% and 24.9% increases in transportation and facility-related dollar volumes, respectively. The increase in dollar volumes contributed to a 57.6% increase in average payments in advance of funding, which is a significant driver of our financial fee revenue. The dramatic increase in transportation invoice dollar volume was driven by inflationary pressures, supply chain disruptions, fuel surcharges and scarcity in carrier supply, among other factors. Facility-related invoices decreased 5% while dollar volume increased 25%. The increase in facility-related dollar volume is primarily due to fewer pandemic-related restrictions in the restaurant, retail, and hospitality sectors, creating higher utility usage in addition to rising energy prices.
Net Interest Income
Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest expense on deposits and other interest-bearing liabilities. Net interest income is a significant source of the Company’s revenues. The following table summarizes the changes in tax-equivalent net interest income and related factors:
| (In thousands) | First Quarter of | ||||||||||||||||
| 2022 | 2021 | % Change | |||||||||||||||
| Average earnings assets | $ | 2,122,915 | $ | 1,891,395 | 12.2 | % | |||||||||||
| Average interest-bearing liabilities | 593,057 | 552,906 | 7.3 | % | |||||||||||||
| Net interest income* | 12,349 | 10,807 | 14.3 | % | |||||||||||||
| Net interest margin* | 2.36 | % | 2.32 | % | |||||||||||||
| Yield on earning assets* | 2.40 | % | 2.39 | % | |||||||||||||
| Rate on interest-bearing liabilities | .15 | % | .24 | % | |||||||||||||
*Presented on a tax-equivalent basis assuming a tax rate of 21% for both 2022 and 2021.
First Quarter of 2022 compared to First Quarter of 2021:
Average earning assets increased $231,520,000, or 12.2%. The overall increase in average interest-earning asset balances was primarily due to increases in the investment and loan portfolios. Average investment securities increased $319,253,000, or 86.0%, as cash provided by increases in funding sources was utilized to purchase investment securities. Average loans increased $78,629,000 as organic growth in franchise, faith-based and other commercial and industrial loans
-23-
more than offset a $110,400,000 reduction in average PPP loans. The average balance of short-term investments decreased $166,362,000, or 26.0%, as available funds were deployed into investment securities and loans.
Average accounts and drafts payable increased $189,727,000, or 21.1%, for the First Quarter of 2022 and average interest-bearing liabilities increased $40,151,000, or 7.3%, compared to the First Quarter of 2021. The increase in average accounts and drafts payable was primarily driven by inflationary pressures, supply chain disruptions, fuel surcharges, and scarcity in carrier supply, which continues to drive prices higher. The increase in deposits was driven by significant liquidity in the economy resulting in higher deposit balances.
Tax-equivalent net interest income increased $1,542,000, or 14.3%, compared to the same period in the prior year driven by the 12.2% increase in average interest-earning assets and 4 basis point increase in the net interest margin from 2.32% to 2.36%.
For more information on the changes in net interest income, please refer to the tables that follow.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential
The following tables show the condensed average balance sheets for each of the periods reported, the tax-equivalent interest income and expense for each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported.
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| (In thousands) | First Quarter of 2022 | First Quarter of 2021 | |||||||||||||||||||||||||||||||||
| Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | ||||||||||||||||||||||||||||||
Assets1 | |||||||||||||||||||||||||||||||||||
| Interest-earning assets | |||||||||||||||||||||||||||||||||||
Loans2: | |||||||||||||||||||||||||||||||||||
| Taxable | $ | 959,851 | $ | 8,777 | 3.71 | % | $ | 881,222 | $ | 8,587 | 3.95 | % | |||||||||||||||||||||||
Investment securities3: | |||||||||||||||||||||||||||||||||||
| Taxable | 395,233 | 1,456 | 1.49 | 82,746 | 198 | 0.97 | |||||||||||||||||||||||||||||
Tax-exempt4 | 295,152 | 2,123 | 2.92 | 288,386 | 2,201 | 3.10 | |||||||||||||||||||||||||||||
| Short-term investments | 472,679 | 216 | 0.19 | 639,041 | 152 | 0.10 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 2,122,915 | 12,572 | 2.40 | 1,891,395 | 11,138 | 2.39 | |||||||||||||||||||||||||||||
| Non-interest-earning assets | |||||||||||||||||||||||||||||||||||
| Cash and due from banks | 22,781 | 20,344 | |||||||||||||||||||||||||||||||||
| Premises and equipment, net | 18,706 | 18,070 | |||||||||||||||||||||||||||||||||
| Bank-owned life insurance | 43,167 | 17,920 | |||||||||||||||||||||||||||||||||
| Goodwill and other intangibles | 16,772 | 17,598 | |||||||||||||||||||||||||||||||||
| Other assets | 315,968 | 231,196 | |||||||||||||||||||||||||||||||||
| Allowance for credit losses | (12,046) | (11,956) | |||||||||||||||||||||||||||||||||
| Total assets | $ | 2,528,263 | $ | 2,184,567 | |||||||||||||||||||||||||||||||
Liabilities and Shareholders’ Equity1 | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 530,491 | $ | 136 | 0.10 | % | $ | 475,212 | $ | 151 | 0.13 | % | |||||||||||||||||||||||
| Savings deposits | 17,488 | 2 | 0.05 | 21,800 | 3 | 0.06 | |||||||||||||||||||||||||||||
| Time deposits >= $100 | 17,928 | 41 | 0.93 | 24,505 | 83 | 1.37 | |||||||||||||||||||||||||||||
| Other time deposits | 27,150 | 44 | 0.66 | 31,379 | 94 | 1.21 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 593,057 | 223 | 0.15 | 552,896 | 331 | 0.24 | |||||||||||||||||||||||||||||
| Short-term borrowings | — | — | — | 10 | — | — | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 593,057 | 223 | 0.15 | 552,906 | 331 | 0.24 | |||||||||||||||||||||||||||||
| Non-interest bearing liabilities | |||||||||||||||||||||||||||||||||||
| Demand deposits | 574,064 | 417,942 | |||||||||||||||||||||||||||||||||
| Accounts and drafts payable | 1,088,105 | 898,378 | |||||||||||||||||||||||||||||||||
| Other liabilities | 37,317 | 56,646 | |||||||||||||||||||||||||||||||||
| Total liabilities | 2,292,543 | 1,925,872 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 235,720 | 258,695 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 2,528,263 | $ | 2,184,567 | |||||||||||||||||||||||||||||||
| Net interest income | $ | 12,349 | $ | 10,807 | |||||||||||||||||||||||||||||||
| Net interest margin | 2.36 | % | 2.32 | % | |||||||||||||||||||||||||||||||
| Interest spread | 2.25 | 2.15 | |||||||||||||||||||||||||||||||||
1.Balances shown are daily averages.
2.Interest income on loans includes net loan fees of $225,000 and $901,000 for the First Quarter of 2022 and 2021, respectively. The decrease in net loan fees is due to higher PPP fees in 2021.
3.For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.
4.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for both 2022 and 2021. The tax-equivalent adjustment was approximately $446,000 and $462,000 for the First Quarter of 2022 and 2021, respectively.
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Analysis of Net Interest Income Changes
The following tables present the changes in interest income and expense between periods due to changes in volume and interest rates. That portion of the change in interest attributable to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.
| (In thousands) | First Quarter of 2022 Compared to First Quarter of 2021 | ||||||||||||||||
| Volume | Rate | Total | |||||||||||||||
| Increase (decrease) in interest income: | |||||||||||||||||
Loans1: | |||||||||||||||||
| Taxable | $ | 738 | $ | (548) | $ | 190 | |||||||||||
| Investment securities: | |||||||||||||||||
| Taxable | 1,101 | 157 | 1,258 | ||||||||||||||
Tax-exempt2 | 51 | (129) | (78) | ||||||||||||||
| Short-term investments | (48) | 112 | 64 | ||||||||||||||
| Total interest income | 1,842 | (408) | 1,434 | ||||||||||||||
| Interest expense on: | |||||||||||||||||
| Interest-bearing demand deposits | 16 | (31) | (15) | ||||||||||||||
| Savings deposits | (1) | — | (1) | ||||||||||||||
| Time deposits >=$100 | (19) | (23) | (42) | ||||||||||||||
| Other time deposits | (11) | (39) | (50) | ||||||||||||||
| Total interest expense | (15) | (93) | (108) | ||||||||||||||
| Net interest income | $ | 1,857 | $ | (315) | $ | 1,542 | |||||||||||
1.Interest income includes net loan fees.
2.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the First Quarter of 2022 and 2021.
Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments
The Company recorded a provision for credit losses and off-balance sheet credit exposures of $230,000, and release of credit losses of $600,000 in the First Quarter of 2022 and 2021, respectively. The amount of the provision for (release of) credit losses is derived from the Company’s quarterly Current Expected Credit Loss (“CECL”) model. The amount of the provision for (release of) credit losses will fluctuate as determined by these quarterly analyses. The provision for credit losses in the First Quarter of 2022 was primarily due to loan growth and the related impact in the CECL model.
The Company had net loan recoveries of $0 in the First Quarter of 2022 and $17,000 in the First Quarter of 2021.
The ACL was $12,406,000 at March 31, 2022 compared to $12,041,000 at December 31, 2021. The ACL represented 1.27% of outstanding loans at March 31, 2022 and 1.25% of outstanding loans at December 31, 2021. The allowance for unfunded commitments was $232,000 at March 31, 2022 and $367,000 at December 31, 2021. There were no nonperforming loans outstanding at March 31, 2022 or December 31, 2021.
The ACL has been established and is maintained to estimate the lifetime expected credit losses in the loan portfolio. An ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense based on changes in the economic forecast, qualitative risk factors, loan volume, and individual loans. For loans that are individually evaluated, the Company uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral value.
The Company also utilizes ratio analyses to evaluate the overall reasonableness of the ACL compared to its peers and required levels of regulatory capital. Federal and state regulatory agencies review the Company’s methodology for maintaining the ACL. These agencies may require the Company to adjust the ACL based on their judgments and interpretations about information available to them at the time of their examinations.
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Summary of Credit Loss Experience
The following table presents information on the Company's provision for (release of) credit losses and analysis of the ACL:
First Quarter of | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Allowance for credit losses at beginning of period | $ | 12,041 | $ | 11,944 | |||||||
| Provision for (release of) credit losses | 365 | (240) | |||||||||
| Loans charged off | — | — | |||||||||
| Recoveries on loans previously charged off | — | 17 | |||||||||
| Net recoveries | — | 17 | |||||||||
| Allowance for credit losses at end of period | $ | 12,406 | $ | 11,721 | |||||||
| Allowance for unfunded commitments at beginning of Period | $ | 367 | $ | 567 | |||||||
| Release of credit losses | (135) | (360) | |||||||||
| Allowance for unfunded commitments at end of period | $ | 232 | $ | 207 | |||||||
| Loans outstanding: | |||||||||||
| Average | $ | 959,851 | $ | 881,222 | |||||||
March 31 | 977,203 | 888,575 | |||||||||
| Ratio of ACL to loans outstanding: | |||||||||||
| Average | 1.29 | % | 1.33 | % | |||||||
March 31 | 1.27 | % | 1.32 | % | |||||||
Operating Expenses
Total operating expenses for the First Quarter of 2022 were up 11.6%, or $3,303,000, compared to the First Quarter of 2021. The following table details the components of operating expenses:
| (In thousands) | First Quarter of | ||||||||||
| 2022 | 2021 | ||||||||||
| Personnel | $ | 24,718 | $ | 22,526 | |||||||
| Occupancy | 915 | 947 | |||||||||
| Equipment | 1,711 | 1,675 | |||||||||
| Amortization of intangible assets | 135 | 215 | |||||||||
| Other operating | 4,349 | 3,162 | |||||||||
| Total operating expense | $ | 31,828 | $ | 28,525 | |||||||
Personnel costs increased 9.7% due to a general increase in wages, higher incentive compensation due to the Company's financial performance, an increase in the Company's 401(k) match during March 2021 and strategic investment in various technology initiatives. These factors were partially offset by the freezing of the benefits of the pension plan during the First Quarter of 2021, which resulted in a decrease of pension expense of $890,000.
The increase in other operating expenses was primarily due to an increase in business development and other promotional activities in addition to an increase in data processing related expenses.
Financial Condition
Total assets at March 31, 2022 were $2,422,043,000, a decrease of $132,858,000, or 5.2%, from December 31, 2021. The Company experienced a decrease in cash and cash equivalents of $323,479,000, or 62.8%. The change in cash and cash equivalents reflects the Company’s daily liquidity position and is primarily affected by changes in funding sources, mainly accounts and drafts payable and deposits, cash flows in and out of loans, investments securities and payments in advance of
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funding. The investment securities portfolio increased $101,157,000, or 15.0%, during the First Quarter of 2022 due to a purchase of $100,000,000 of U.S. treasury securities. Payments in advance of funding increased $38,195,000, or 13.1%, due to an increase in transportation dollars processed. In addition, the Company increased loans by $16,635,000, or 1.7%, during the First Quarter of 2022.
Total liabilities at March 31, 2022 were $2,204,965,000, a decrease of $104,138,000, or 4.5%, from December 31, 2021. Total deposits at March 31, 2022 were $1,176,935,000, a decrease of $44,568,000, or 3.6%, from December 31, 2021. Accounts and drafts payable at March 31, 2022 were $989,733,000, a decrease of $60,663,000, or 5.8%, from December 31, 2021. Accounts and drafts payable will fluctuate from period-end to period-end due to the payment processing cycle, which results in lower balances on days when payments clear and higher balances on days when payments are issued. For this reason, average balances are a more meaningful measure of accounts and drafts payable (for average balances refer to the tables under the “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rate and Interest Differential” section of this report).
Total shareholders’ equity at March 31, 2022 was $217,078,000, a $28,720,000, or 11.7%, decrease from December 31, 2021. Total shareholders’ equity decreased due to an other comprehensive loss of $28,122,000 as a result of rising interest rates and the result on the fair value of existing investment securities, share repurchases of $5,086,000, and dividends paid of $3,832,000. These decreases were partially offset by net income of $8,258,000.
Liquidity and Capital Resources
The discipline of liquidity management as practiced by the Company seeks to ensure that funds are available to fulfill all payment obligations relating to invoices processed as they become due and meet depositor withdrawal requests and borrower credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of funds. Primary liquidity to meet demand is provided by short-term liquid assets that can be converted to cash, maturing securities and the ability to obtain funds from external sources.
The balance of liquid assets consists of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and money market funds. Cash and cash equivalents totaled $191,449,000 at March 31, 2022, a decrease of $323,479,000, or 62.8%, from December 31, 2021. At March 31, 2022, these assets represented 7.9% of total assets. These funds are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.
Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment in securities was $774,610,000 at March 31, 2022, an increase of $101,157,000 from December 31, 2021. These assets represented 32.0% of total assets at March 31, 2022. Of the total portfolio, 2.7% mature in one year, 30.8% mature in one to five years, and 66.5% mature in five or more years.
The Bank has unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $83,000,000 in aggregate. As of March 31, 2022, the Bank also has secured lines of credit with the Federal Home Loan Bank of $218,049,000 collateralized by commercial mortgage loans. The Company also has secured lines of credit from two banks up to a maximum of $150,000,000 collateralized by state and political subdivision securities. There were no amounts outstanding under any line of credit as of March 31, 2022 or December 31, 2021.
The deposits of the Company's banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize other commercial products of the Bank. The accounts and drafts payable generated by the Company has also historically been a stable source of funds. The Company is part of the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) deposit placement programs. Time deposits include $26,111,000 of CDARS deposits and interest-bearing demand deposits include $123,156,000 of ICS deposits. These programs offer the Bank’s customers the ability to maximize Federal Deposit Insurance Corporation (“FDIC”) insurance coverage. The Company uses these programs to retain or attract deposits from existing customers.
Net cash flows provided by operating activities were $14,723,000 for the First Quarter of 2022, compared to $16,704,000 for the First Quarter of 2021, a decrease of $1,981,000. Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and loan portfolios and customer activity influences changes in deposit and accounts and drafts payable balances. Other causes for the changes in these account balances are discussed earlier in this report. Due to the daily fluctuations in these account balances, the analysis of changes in average balances, also discussed earlier in this report, can be more indicative of underlying activity than the period-end balances used in the statements of cash flows. Management anticipates that cash and cash equivalents, maturing investments and cash from
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operations will continue to be sufficient to fund the Company’s operations and capital expenditures in 2022, which are estimated to range from $4 million to $6 million.
The Company faces market risk to the extent that its net interest income and fair market value of equity are affected by changes in market interest rates. For information regarding the market risk of the Company’s financial instruments, see Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”
There are several trends and uncertainties that may impact the Company’s ability to generate revenues and income at the levels that it has in the past. In addition, these trends and uncertainties may impact available liquidity. Those that could significantly impact the Company include the general levels of interest rates, business activity, and energy costs as well as new business opportunities available to the Company.
As a financial institution, a significant source of the Company’s earnings is generated from net interest income. Therefore, the prevailing interest rate environment is important to the Company’s performance. A major portion of the Company’s funding sources are the non-interest bearing accounts and drafts payable generated from its payment and information processing services. Accordingly, higher levels of interest rates will generally allow the Company to earn more net interest income. Conversely, a lower interest rate environment will generally tend to depress net interest income. The Company actively manages its balance sheet in an effort to maximize net interest income as the interest rate environment changes. This balance sheet management impacts the mix of earning assets maintained by the Company at any point in time. For example, in a low interest rate environment, short-term relatively lower rate liquid investments may be reduced in favor of longer term relatively higher yielding investments and loans. If the primary source of liquidity is reduced in a low interest rate environment, a greater reliance would be placed on secondary sources of liquidity including borrowing lines, the ability of the Bank to generate deposits, and the investment portfolio to ensure overall liquidity remains at acceptable levels.
The overall level of economic activity can have a significant impact on the Company’s ability to generate revenues and income, as the volume and size of customer invoices processed may increase or decrease. Higher levels of economic activity increase both fee income (as more invoices are processed) and balances of accounts and drafts payable. Lower levels of economic activity, such as those previously experienced by the Company as a result of COVID-19 and governmental actions related thereto, decrease both fee income and balances of accounts and drafts payable.
The relative level of energy costs can impact the Company’s earnings and available liquidity. Lower levels of energy costs will tend to decrease transportation and energy invoice amounts resulting in a corresponding decrease in accounts and drafts payable. Decreases in accounts and drafts payable generate lower interest income.
New business opportunities are an important component of the Company’s strategy to grow earnings and improve performance. Generating new customers allows the Company to leverage existing systems and facilities and grow revenues faster than expenses.
As a bank holding company, the Company and the Bank are subject to capital requirements pursuant to the FRB’s capital guidelines which include (i) risk-based capital guidelines, which are designed to make capital requirements more sensitive to various risk profiles and account for off-balance sheet exposure; (ii) guidelines that consider market risk, which is the risk of loss due to change in value of assets and liabilities due to changes in interest rates; and (iii) guidelines that use a leverage ratio which places a constraint on the maximum degree of risk to which a financial holding company may leverage its equity capital base.
The Basel III Capital Rules require banking organizations, like Cass, to maintain:
•a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer;
•a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer;
•a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer; and
•a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.
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Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for non-advanced approaches institutions like Cass that have exercised a one-time opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The calculation of all types of regulatory capital is subject to deductions and adjustments specified in applicable regulations.
The calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. For instance, the Basel III Capital Rules and the Capital Simplification Rules provide for a number of deductions from and adjustments to common equity Tier 1 capital. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from Tier 1 capital to the extent that any one such category exceeds 25% of common equity Tier 1 capital.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets, are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans, and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
The Company and the Bank continue to exceed all regulatory capital requirements, as evidenced by the following capital amounts and ratios:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| Total capital (to risk-weighted assets) | |||||||||||||||||||||||
| Cass Information Systems, Inc. | $ | 240,619 | 13.96 | % | $ | 240,265 | 14.86 | % | |||||||||||||||
| Cass Commercial Bank | 179,410 | 16.97 | % | 174,614 | 17.21 | % | |||||||||||||||||
| Common equity tier I capital (to risk-weighted assets) | |||||||||||||||||||||||
| Cass Information Systems, Inc. | $ | 228,213 | 13.24 | % | $ | 228,224 | 14.11 | % | |||||||||||||||
| Cass Commercial Bank | 167,465 | 15.84 | % | 163,030 | 16.07 | % | |||||||||||||||||
| Tier I capital (to risk-weighted assets) | |||||||||||||||||||||||
| Cass Information Systems, Inc. | $ | 228,213 | 13.24 | % | $ | 228,224 | 14.11 | % | |||||||||||||||
| Cass Commercial Bank | 167,465 | 15.84 | % | 163,030 | 16.07 | % | |||||||||||||||||
| Tier I capital (to leverage assets) | |||||||||||||||||||||||
| Cass Information Systems, Inc. | $ | 228,213 | 9.09 | % | $ | 228,224 | 9.21 | % | |||||||||||||||
| Cass Commercial Bank | 167,465 | 11.12 | % | 163,030 | 11.05 | % | |||||||||||||||||
Inflation
The Company’s assets and liabilities are primarily monetary, consisting of cash, cash equivalents, securities, loans, payables and deposits. Monetary assets and liabilities are those that can be converted into a fixed number of dollars. The Company's consolidated balance sheet reflects a net positive monetary position (monetary assets exceed monetary liabilities). During periods of inflation, the holding of a net positive monetary position will result in an overall decline in the purchasing power of a company. Management believes that replacement costs of equipment, furniture, and leasehold improvements will not materially affect operations. The rate of inflation does affect certain expenses, such as those for employee compensation, which may not be readily recoverable in the price of the Company’s services.
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Impact of New and Not Yet Adopted Accounting Pronouncements
There are no new accounting pronouncements that are applicable to the company and/or do not materially impact the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the Company manages its interest rate risk through measurement techniques that include gap analysis and a simulation model. As part of the risk management process, asset/liability management policies are established and monitored by management.
| % change in projected net interest income | ||||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||||||||
| +200 basis points | 10.6 | % | 20.6 | % | ||||||||||
| +100 basis points | 4.9 | % | 10.2 | % | ||||||||||
| Flat rates | — | % | — | % | ||||||||||
| -100 basis points | (2.1) | % | (2.5) | % | ||||||||||
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, under the supervision and with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report and concluded that, as of such date, these controls and procedures were effective.
There were no changes in the First Quarter of 2022 in the Company's internal control over financial reporting identified by the Company’s principal executive officer and principal financial officer in connection with their evaluation that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended).
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is the subject of various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of business. Management believes the outcome of all such proceedings will not have a material effect on the businesses or financial conditions of the Company or its subsidiaries.
ITEM 1A. RISK FACTORS
The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2021, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). There are no material changes to the Risk Factors as disclosed in the Company’s 2021 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2022, the Company repurchased a total of 124,874 shares of its common stock pursuant to its treasury stock buyback program, as follows:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||||||||
| January 1, 2022–January 31, 2022 | 44,404 | $ | 40.05 | 44,404 | 426,677 | ||||||||||||||||||
| February 1, 2022–February 28, 2022 | 58,097 | 41.75 | 58,097 | 368,580 | |||||||||||||||||||
| March 1, 2022–March 31, 2022 | 22,373 | 39.42 | 22,373 | 346,207 | |||||||||||||||||||
| Total | 124,874 | $ | 40.73 | 124,874 | 346,207 | ||||||||||||||||||
(1)All repurchases made during the quarter ended March 31, 2022 were made pursuant to the treasury stock buyback program, authorized by the Board of Directors on October 19, 2021 and announced by the Company on October 21, 2021. The program provides that the Company may repurchase up to an aggregate of 750,000 shares of common stock and has no expiration date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a)None.
(b)There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented in the First Quarter of 2022.
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ITEM 6. EXHIBITS
| Exhibit 101.INS XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||
| Exhibit 101.SCH Inline XBRL Taxonomy Extension Schema Document. | ||
| Exhibit 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||
| Exhibit 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. | ||
| Exhibit 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||
| Exhibit 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||
| Exhibit 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CASS INFORMATION SYSTEMS, INC. | ||||||||
DATE: May 6, 2022 | By | /s/ Eric H. Brunngraber | ||||||
| Eric H. Brunngraber | ||||||||
| Chairman and Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
DATE: May 6, 2022 | By | /s/ Michael J. Normile | ||||||
| Michael J. Normile | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||
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Exhibit 31.1
CERTIFICATIONS
I, Eric H. Brunngraber, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Cass Information Systems, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 6, 2022 | |||||
| /s/ Eric H. Brunngraber | |||||
| Eric H. Brunngraber | |||||
| Chairman and Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
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Exhibit 31.2
CERTIFICATIONS
I, Michael J. Normile, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Cass Information Systems, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 6, 2022 | |||||
| /s/ Michael J. Normile | |||||
| Michael J. Normile | |||||
| Executive Vice President and Chief | |||||
| Financial Officer | |||||
| (Principal Financial and Accounting Officer) | |||||
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cass Information Systems, Inc. (“the Company”) on Form 10-Q for the period ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric H. Brunngraber, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Eric H. Brunngraber | |||||
| Eric H. Brunngraber | |||||
| Chairman and Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| May 6, 2022 | |||||
A signed original of this written statement required by Section 906 has been provided to Cass Information Systems, Inc. and will be retained by Cass Information Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cass Information Systems, Inc. (“the Company”) on Form 10-Q for the period ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael J. Normile, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Michael J. Normile | |||||
| Michael J. Normile | |||||
| Executive Vice President and Chief Financial Officer | |||||
| (Principal Financial and Accounting Officer) | |||||
| May 6, 2022 | |||||
A signed original of this written statement required by Section 906 has been provided to Cass Information Systems, Inc. and will be retained by Cass Information Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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