Cass Information Systems(CASS) - 2021 Q4 - Annual Report

PART I Item 1. Business Cass Information Systems provides payment and information processing services, leveraging its commercial bank subsidiary to serve large enterprises and manage extensive financial regulations - The company's primary services include freight invoice rating, payment processing, auditing, and processing facility-related invoices (electricity, gas, waste, telecom)[11] - Cass's core competencies are data acquisition, data management, business intelligence, and financial exchange, enhanced by its ownership of Cass Commercial Bank[12][16] - As of February 15, 2022, the company employed 884 full-time and 232 part-time employees[24] - The company and its bank subsidiary are extensively regulated by entities including the Missouri Division of Finance, the Federal Reserve Board (FRB), and the Federal Deposit Insurance Corporation (FDIC)[31] - Under the Basel III Capital Rules, the company and the Bank must maintain minimum capital ratios, including a common equity Tier 1 ratio of 7.0% (including the capital conservation buffer)[42] Item 1A. Risk Factors The company faces significant risks from the COVID-19 pandemic, economic factors, cybersecurity threats, credit loss estimation, evolving regulations, and the LIBOR transition - The COVID-19 pandemic poses significant risks, potentially impacting service demand, increasing credit losses, and adversely affecting interest income due to low Federal Funds rates[80][81][84] - Cybersecurity is a major operational risk, as the company depends on reliable computer systems and stores sensitive data, making it a target for cyber-attacks which could damage its reputation and financial results[103][106] - The determination of the Allowance for Credit Losses (ACL) is highly subjective and requires management estimates on risks and trends that are subject to material change, which could impact financial results[110][112] - The company is subject to extensive and evolving government regulation, and failure to comply could result in enforcement actions, penalties, and reputational damage[125][126] - The transition away from LIBOR to alternative reference rates like SOFR could create additional costs, change market risk profiles, and require modifications to pricing models and hedging strategies[96][100] Item 1B. Unresolved Staff Comments The company confirms the absence of any unresolved staff comments from the SEC - There are no unresolved staff comments[144] Item 2. Properties The company's properties include leased headquarters and owned facilities in Missouri and Ohio, with additional locations supporting global operations - The company leases its headquarters in St Louis County, MO[145] - Key owned properties include a 61,500 sq ft office for transportation processing in Bridgeton, MO, and a 45,500 sq ft production facility in Columbus, OH[146][147] Item 3. Legal Proceedings The company is involved in routine litigation not expected to materially impact its financial condition - The company is not involved in any pending legal proceedings other than ordinary routine litigation, which is not expected to have a material impact[150] Item 4. Mine Safety Disclosures This disclosure item is not relevant to the company's operations - Not applicable[152] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "CASS", maintains a long dividend history, and actively repurchased shares in 2021 - The company's common stock is traded on The Nasdaq Global Select Market under the symbol "CASS"[157] - A treasury stock buyback program authorized in October 2021 allows for the repurchase of up to 750,000 shares[159] Share Repurchases in 2021 and 2020 | Year | Shares Repurchased | Aggregate Cost (in thousands) | | :--- | :--- | :--- | | 2021 | 713,857 | $30,997 | | 2020 | 162,901 | $6,825 | Share Repurchases for Q4 2021 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 - Oct 31, 2021 | 28,443 | $42.25 | | Nov 1 - Nov 30, 2021 | 135,022 | $44.81 | | Dec 1 - Dec 31, 2021 | 115,454 | $41.50 | | Total Q4 2021 | 278,919 | $43.10 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, the company saw net income increase by 13.6% to $28.6 million, driven by higher fee revenue and transaction volumes, despite a flat net interest income due to margin compression Financial Summary 2021 vs. 2020 | Metric | 2021 (Amount) | 2020 (Amount) | % Change | | :--- | :--- | :--- | :--- | | Fee revenue and other income | $109.7 million | $100.4 million | 9.2% | | Net interest income after provision | $44.5 million | $44.5 million | (0.1)% | | Net income | $28.6 million | $25.2 million | 13.6% | | Diluted earnings per share | $2.00 | $1.73 | 15.6% | | Total invoice dollars processed | $52.7 billion | $40.0 billion | 31.8% | - The Allowance for Credit Losses (ACL) is identified as a critical accounting policy due to the high degree of subjectivity and management estimates involved in its calculation[172][173] - The significant 32% increase in total invoice dollars processed was driven by supply chain disruptions, fuel surcharges, and carrier scarcity in the freight network, leading to a 10% increase in payment and processing fees[190][192] - Net interest margin declined to 2.31% in 2021 from 2.82% in 2020, primarily due to the Federal Reserve's actions to lower interest rates, which offset the positive impact of a 19% increase in average earning assets[193][203] - Total loans increased by 8% to $960.6 million, driven by a 114% increase in franchise restaurant loans, while PPP loans decreased by $103.4 million due to forgiveness[219] - The company maintained excellent credit quality, with zero nonperforming loans or assets at the end of both 2021 and 2020[220][228] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's asset-sensitive balance sheet makes net interest income susceptible to interest rate changes, with simulations showing a 12% increase for a 100 basis point rate rise - The company has an asset-sensitive balance sheet, primarily due to large noninterest-bearing accounts and drafts payable, making its net interest margin susceptible to changes in market interest rates[271] Projected Impact of Interest Rate Shocks on Net Interest Income (as of Dec 31, 2021) | Change in Interest Rates | % Change in Net Interest Income | | :--- | :--- | | +200 basis points | 24% | | +100 basis points | 12% | | -100 basis points | (3%) | Item 8. Financial Statements and Supplementary Data This section provides the company's audited consolidated financial statements for 2021 and prior years, including balance sheets, income statements, cash flows, and detailed accounting notes Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Assets | $2,554,901 | $2,203,235 | | Loans, net | $948,526 | $879,732 | | Total Deposits | $1,221,503 | $1,050,856 | | Total Liabilities | $2,309,103 | $1,942,075 | | Total Shareholders' Equity | $245,798 | $261,160 | Consolidated Statement of Income Highlights (in thousands) | Account | 2021 (in thousands) | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Total fee revenue and other income | $109,691 | $100,441 | $110,069 | | Net interest income | $44,326 | $45,325 | $47,416 | | Total operating expense | $120,326 | $114,615 | $119,769 | | Net income | $28,604 | $25,176 | $30,404 | - The company adopted the new credit loss accounting standard (ASU 2016-13 / CECL) effective January 1, 2020, resulting in a one-time reduction to retained earnings of $856,000, net of tax[347] - As of December 31, 2021, both the company and Cass Commercial Bank were categorized as "well-capitalized" and met all regulatory capital adequacy requirements[363][364] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants regarding accounting principles, disclosures, or auditing - None reported[498] Item 9A. Controls and Procedures Management and independent auditors concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[499] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[501] - KPMG LLP, the independent auditor, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting[503][505] Item 9B. Other Information The company has no additional information to report for this item - None[512] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[518] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the company's 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[520] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2022 Proxy Statement, detailing outstanding and available securities under equity compensation plans Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Number of securities to be issued upon exercise (a) | Weighted-average exercise price (b) | Number of securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 398,893 | $42.45 | 249,537 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 398,893 | $42.45 | 249,537 | Item 13. Certain Relationships and Related Transactions, and Director Independence Related party transactions and director independence information are incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[526] Item 14. Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the company's 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[527] PART IV Item 15. Exhibits and Financial Statement Schedules This section details all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section contains a list of all documents filed with the Form 10-K, including financial statements and various exhibits[529][530] Item 16. Form 10-K Summary The company has not provided a summary for this specific item - None[539]