Cass Information Systems(CASS) - 2022 Q1 - Quarterly Report

FORM 10-Q Filing Information This section provides essential details regarding the company's regulatory filing Registrant Information This chapter provides basic information for CASS INFORMATION SYSTEMS, INC. as the registrant, including its state of incorporation, employer identification number, principal executive offices, telephone number, and common stock listed on the Nasdaq Global Select Market, confirming the company has filed all required reports and is an accelerated filer - Company Name: CASS INFORMATION SYSTEMS, INC.[4] - State of Incorporation: Missouri[4] - Securities Registered: Common Stock, par value $0.50, trading symbol CASS, registered on the Nasdaq Global Select Market[4] - Filer Status: Accelerated Filer[7] Shares Outstanding As of April 22, 2022, the company had 13,652,849 shares of common stock outstanding - As of April 22, 2022, Common Stock Shares Outstanding: 13,652,849 shares[9] Table of Contents This section outlines the structure and content of the report Forward-looking Statements - Factors That May Affect Future Results This section discusses potential future impacts on the company's performance Forward-looking Statements Disclaimer This report contains forward-looking statements subject to risks and uncertainties beyond the company's control, which may cause actual results to differ materially from expectations, and the company undertakes no obligation to update them publicly - Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors beyond the company's control[13] - These risks, uncertainties, and other factors are discussed in the "Risk Factors" section of the company's 2021 Form 10-K annual report[13] - The company undertakes no obligation to publicly update or revise any forward-looking statements[13] PART I. FINANCIAL INFORMATION This part presents the company's financial statements and related disclosures ITEM 1. FINANCIAL STATEMENTS This chapter provides the company's unaudited consolidated financial statements as of March 31, 2022, including the balance sheets, income statements, comprehensive income statements, cash flow statements, and statements of shareholders' equity, along with related notes, detailing the company's financial position and operating results Consolidated Balance Sheets As of March 31, 2022, the company's total assets were $2,422,043 thousand, a decrease from $2,554,901 thousand as of December 31, 2021, primarily due to a significant reduction in cash and cash equivalents, partially offset by increases in investment securities and net loans | Indicator | March 31, 2022 (thousand USD) | December 31, 2021 (thousand USD) | Change (thousand USD) | Change (%) | | :----------------------------------- | :--------------------- | :---------------------- | :------------ | :------- | | Assets | | | | | | Cash and Bank Deposits | 22,416 | 12,301 | 10,115 | 82.23% | | Short-term Investments | 169,033 | 502,627 | (333,594) | -66.37% | | Cash and Cash Equivalents | 191,449 | 514,928 | (323,479) | -62.81% | | Available-for-sale Securities, at Fair Value | 774,610 | 673,453 | 101,157 | 15.02% | | Loans, Net | 964,796 | 948,526 | 16,270 | 1.71% | | Prepaid Expenses | 329,622 | 291,427 | 38,195 | 13.11% | | Total Assets | 2,422,043 | 2,554,901 | (132,858) | -5.20% | | Liabilities | | | | | | Total Deposits | 1,176,935 | 1,221,503 | (44,568) | -3.65% | | Accounts Payable and Drafts | 989,733 | 1,050,396 | (60,663) | -5.78% | | Total Liabilities | 2,204,965 | 2,309,103 | (104,138) | -4.51% | | Shareholders' Equity | | | | | | Total Shareholders' Equity | 217,078 | 245,798 | (28,720) | -11.68% | Consolidated Statements of Income For the three months ended March 31, 2022, the company's net income was $8,258 thousand, an increase of 16.8% from $7,071 thousand in the prior-year period, driven by significant growth in fee income and financial service fee income, as well as an increase in net interest income | Indicator | For the three months ended March 31, 2022 (thousand USD) | For the three months ended March 31, 2021 (thousand USD) | Change (thousand USD) | Change (%) | | :----------------------------------- | :----------------------------- | :----------------------------- | :------------ | :------- | | Total Fee and Other Income | 30,430 | 26,175 | 4,255 | 16.26% | | Total Interest Income | 12,126 | 10,676 | 1,450 | 13.58% | | Total Interest Expense | 223 | 331 | (108) | -32.63% | | Net Interest Income | 11,903 | 10,345 | 1,558 | 15.06% | | Provision (Reversal) for Credit Losses | 230 | (600) | 830 | -138.33% | | Net Interest Income after Provision (Reversal) for Credit Losses | 11,673 | 10,945 | 728 | 6.65% | | Total Net Revenue | 42,103 | 37,120 | 4,983 | 13.42% | | Total Operating Expenses | 31,828 | 28,525 | 3,303 | 11.58% | | Income Before Income Taxes | 10,275 | 8,595 | 1,680 | 19.55% | | Income Tax Expense | 2,017 | 1,524 | 493 | 32.35% | | Net Income | 8,258 | 7,071 | 1,187 | 16.79% | | Basic Earnings Per Share | 0.61 | 0.49 | 0.12 | 24.49% | | Diluted Earnings Per Share | 0.60 | 0.49 | 0.11 | 22.45% | Consolidated Statements of Comprehensive Income For the three months ended March 31, 2022, the company reported a comprehensive loss of $20,317 thousand, compared to comprehensive income of $3,694 thousand in the prior-year period, primarily due to a significant increase in unrealized net losses on available-for-sale securities | Indicator | For the three months ended March 31, 2022 (thousand USD) | For the three months ended March 31, 2021 (thousand USD) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net Income | 8,258 | 7,071 | | Other Comprehensive (Loss) Income: | | | | Unrealized Net Loss on Available-for-sale Securities | (37,499) | (4,214) | | Tax Impact | 8,925 | 1,003 | | Foreign Currency Translation Adjustment | (1) | (129) | | Total Comprehensive (Loss) Income | (20,317) | 3,694 | - In Q1 2022, the unrealized net loss on available-for-sale securities was $37,499 thousand, compared to $4,214 thousand in Q1 2021, which was the primary driver of the significant decrease in comprehensive income[26] Consolidated Statements of Cash Flows For the three months ended March 31, 2022, net cash provided by operating activities was $14,723 thousand, while investing activities used $201,087 thousand and financing activities used $137,115 thousand, resulting in a net decrease of $323,479 thousand in cash and cash equivalents | Cash Flow Activities | For the three months ended March 31, 2022 (thousand USD) | For the three months ended March 31, 2021 (thousand USD) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided by Operating Activities | 14,723 | 16,704 | | Net Cash Used in Investing Activities | (201,087) | (94,697) | | Net Cash Used in Financing Activities | (137,115) | 7,124 | | Net Decrease in Cash and Cash Equivalents | (323,479) | (70,869) | | Cash and Cash Equivalents at End of Period | 191,449 | 599,659 | - Cash outflow from investing activities significantly increased, primarily due to purchases of available-for-sale securities ($156,597 thousand) and an increase in prepaid expenses ($38,195 thousand)[31] - Cash outflow from financing activities was mainly influenced by a net increase in non-interest-bearing demand deposits ($39,177 thousand), a net decrease in interest-bearing demand and savings deposits ($80,002 thousand), and a net decrease in accounts payable and drafts ($83,054 thousand)[31] Consolidated Statements of Shareholders' Equity As of March 31, 2022, total shareholders' equity was $217,078 thousand, a 11.68% decrease from $245,798 thousand as of December 31, 2021, primarily due to other comprehensive loss, stock repurchases, and cash dividend payments, partially offset by net income | Shareholders' Equity Item | December 31, 2021 (thousand USD) | March 31, 2022 (thousand USD) | Change (thousand USD) | | :----------------------------------- | :---------------------- | :--------------------- | :------------ | | Common Stock | 7,753 | 7,753 | 0 | | Additional Paid-in Capital | 204,276 | 203,149 | (1,127) | | Retained Earnings | 112,220 | 116,646 | 4,426 | | Treasury Stock, Common | (78,904) | (82,348) | (3,444) | | Accumulated Other Comprehensive (Loss) Income | 453 | (28,122) | (28,575) | | Total Shareholders' Equity | 245,798 | 217,078 | (28,720) | - In Q1 2022, net income was $8,258 thousand, cash dividends paid were $3,832 thousand, stock repurchases were $5,086 thousand, and other comprehensive loss was $28,575 thousand[34] Notes to Consolidated Financial Statements (Unaudited) This section provides detailed notes to the consolidated financial statements, covering key financial information and accounting policies such as basis of presentation, intangible assets, earnings per share, stock repurchases, segment information, loan types, commitments and contingencies, stock-based compensation, pension plans, income taxes, investment securities, fair value of financial instruments, revenue from contracts with customers, and leases Note 1 - Basis of Presentation This note explains that the unaudited consolidated financial statements are prepared in accordance with U.S. GAAP and Form 10-Q instructions, and it addresses the ongoing risks and uncertainties related to the COVID-19 pandemic that may affect the company's financial condition and operating results - Financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and the instructions for Form 10-Q, and do not include all information and notes required for complete financial statements[37] - The company continues to closely monitor the COVID-19 pandemic and faces business, operational, market, credit, and other risks that could adversely affect its financial condition and operating results[38] Note 2 – Intangible Assets This note provides detailed information on the company's intangible assets, including the carrying value and accumulated amortization of customer lists, patents, software, trade names, and other intangibles, with net intangible assets totaling $2,429 thousand and goodwill at $14,262 thousand as of March 31, 2022 | Intangible Asset Category | March 31, 2022 (thousand USD) | December 31, 2021 (thousand USD) | | :----------------------------------- | :--------------------- | :---------------------- | | Customer Lists | 4,778 | 4,778 | | Patents | 72 | 72 | | Software | 2,844 | 2,844 | | Trade Names | 190 | 190 | | Other | 500 | 500 | | Unamortized Intangible Assets: Goodwill | 14,262 | 14,262 | | Total Intangible Assets | 22,646 | 22,646 | | Total Accumulated Amortization | (5,955) | (5,820) | | Net Intangible Assets (excluding Goodwill) | 2,429 | 2,564 | - As of March 31, 2022, and December 31, 2021, goodwill remained $14,262 thousand and was not impaired[41] - For the three months ended March 31, 2022, intangible asset amortization expense was $135 thousand, lower than $215 thousand in the prior-year period[41] Note 3 – Earnings Per Share This note details the calculation of basic and diluted earnings per share, with basic EPS at $0.61 and diluted EPS at $0.60 for the three months ended March 31, 2022, both higher than the prior-year period | Indicator | For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | | :----------------------------------- | :-------------------- | :-------------------- | | Basic | | | | Net Income (thousand USD) | 8,258 | 7,071 | | Weighted Average Common Shares Outstanding | 13,577,991 | 14,312,260 | | Basic Earnings Per Share | $0.61 | $0.49 | | Diluted | | | | Net Income (thousand USD) | 8,258 | 7,071 | | Weighted Average Common Shares Outstanding | 13,577,991 | 14,312,260 | | Effect of Dilutive Restricted Stock and Stock Appreciation Rights | 236,233 | 220,809 | | Assumed Diluted Weighted Average Common Shares Outstanding | 13,814,224 | 14,533,069 | | Diluted Earnings Per Share | $0.60 | $0.49 | Note 4 – Stock Repurchases This note discloses the company's stock repurchase program, indicating that as of March 31, 2022, the company had repurchased 124,874 shares of common stock under a board-authorized plan, with 346,207 shares remaining available for repurchase - The company's Board of Directors authorized the repurchase of up to 750,000 shares of common stock in October 2021, with no expiration date[44] - As of March 31, 2022, 346,207 shares remained available for repurchase under the plan[44] - For the three months ended March 31, 2022, the company repurchased 124,874 shares of common stock, compared to 31,256 shares in the prior-year period[44] Note 5 – Industry Segment Information The company operates in two reportable segments: Information Services, which provides transportation, energy, telecom, and environmental invoice processing and payment services, and Banking Services, which offers banking services to privately held businesses and faith-based organizations, with management assessing segment performance based on tax-equivalent income before taxes - The company has two reportable segments: Information Services and Banking Services[45] - The Information Services segment provides transportation, energy, telecom, and environmental invoice processing and payment services[46] - The Banking Services segment primarily provides banking services to privately held businesses and faith-based organizations and supports the banking needs of the Information Services segment[46] | Indicator (thousand USD) | Information Services (2022) | Banking Services (2022) | Corporate, Eliminations & Other (2022) | Total (2022) | | :----------------------------------- | :---------------- | :---------------- | :------------------------ | :---------- | | Fee Income | 29,234 | 628 | 568 | 30,430 | | Interest Income* | 6,326 | 6,482 | (237) | 12,571 | | Tax-Equivalent Income Before Taxes* | 7,815 | 2,850 | 56 | 10,721 | | Total Assets | 1,090,737 | 1,345,958 | (14,652) | 2,422,043 | | Average Funding Sources | 1,008,928 | 966,820 | — | 1,975,748 | | Indicator (thousand USD) | Information Services (2021) | Banking Services (2021) | Corporate, Eliminations & Other (2021) | Total (2021) | | :----------------------------------- | :---------------- | :---------------- | :------------------------ | :---------- | | Fee Income | 25,298 | 317 | 560 | 26,175 | | Interest Income* | 5,509 | 5,751 | (122) | 11,138 | | Tax-Equivalent Income Before Taxes* | 5,786 | 2,988 | 283 | 9,057 | | Total Assets | 1,023,196 | 1,263,669 | (70,292) | 2,216,573 | | Average Funding Sources | 837,852 | 849,177 | — | 1,687,029 | Note 6 – Loans by Type This note provides a detailed classification of the company's loan portfolio, including commercial and industrial, commercial real estate mortgage and construction, faith-based institution mortgage and construction, and PPP loans, totaling $977,202 thousand as of March 31, 2022, with all loans performing and no past due or nonaccrual loans, and an Allowance for Credit Losses (ACL) of $12,406 thousand, representing 1.27% of total loans | Loan Type (thousand USD) | March 31, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :------------- | | Commercial and Industrial | 469,129 | 450,336 | | Real Estate: Commercial Mortgage | 101,018 | 108,759 | | Real Estate: Commercial Construction | 24,757 | 24,797 | | Real Estate: Faith-Based Mortgage | 367,376 | 355,582 | | Real Estate: Faith-Based Construction | 13,512 | 14,664 | | PPP Loans | 1,373 | 6,299 | | Other | 37 | 130 | | Total Loans | 977,202 | 960,567 | - As of March 31, 2022, and December 31, 2021, the company had no past due or nonaccrual loans[56] | Allowance for Credit Losses (ACL) (thousand USD) | March 31, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :------------- | | Beginning Balance | 12,041 | 11,944 | | Provision (Reversal) for Credit Losses | 365 | 70 | | Ending Balance | 12,406 | 12,041 | | ACL as a Percentage of Total Loans | 1.27% | 1.25% | - The increase in the Allowance for Credit Losses during the period ended March 31, 2022, was primarily due to loan balance growth[61] Note 7 – Commitments and Contingencies This note discloses the company's off-balance sheet credit-related financial instruments and commitments in the normal course of business, including credit commitments, commercial letters of credit, and standby letters of credit, with total unused loan commitments of $200,547 thousand as of March 31, 2022 - The company is exposed to credit, market, and operating risks in the normal course of business, some of which are not reflected in the consolidated financial statements[62] - As of March 31, 2022, unused loan commitments, standby letters of credit, and commercial letters of credit balances were $200,547 thousand, $12,297 thousand, and $1,208 thousand, respectively[63] - For the three months ended March 31, 2022, a reversal of $135 thousand for credit losses was recorded, primarily due to a reduction in unfunded commitments[62] Note 8 – Stock-Based Compensation This note details the company's stock-based compensation plans, including restricted stock, performance-based restricted stock, and stock appreciation rights (SARs), with stock-based compensation expense totaling $1,090 thousand for the three months ended March 31, 2022, an increase from the prior-year period - The company grants stock options, SARs, restricted stock, restricted stock units, and performance awards under its Amended and Restated Omnibus Stock and Performance Compensation Plan[64] - For the three months ended March 31, 2022, stock-based compensation expense was $1,090 thousand, compared to $693 thousand in the prior-year period[64] | Restricted Stock Activity (For the three months ended March 31, 2022) | Shares | Weighted Average Fair Value ($) | | :----------------------------------- | :--- | :------------------- | | Balance at December 31, 2021 | 165,553 | 44.81 | | Granted | 40,462 | 39.45 | | Vested | (21,836) | 49.09 | | Balance at March 31, 2022 | 184,179 | 43.13 | | Performance-Based Restricted Stock Activity (For the three months ended March 31, 2022) | Shares | Weighted Average Fair Value ($) | | :----------------------------------- | :--- | :------------------- | | Balance at December 31, 2021 | 116,543 | 46.79 | | Granted | 57,542 | 39.58 | | Vested | (33,668) | 49.09 | | Balance at March 31, 2022 | 140,417 | 43.20 | - For the three months ended March 31, 2022, no SARs were granted, and no related expense was recognized[70] Note 9 – Defined Pension Plans This note provides details on the company's defined benefit pension plan and supplemental executive retirement plan, with a net periodic pension benefit of $618 thousand in Q1 2022, compared to a net periodic pension cost of $273 thousand in the prior-year period, due to the pension plan freeze on February 28, 2021 - The company's non-contributory defined benefit pension plan was frozen for all participants on February 28, 2021, resulting in no service cost for Q1 2022[72] | Components of Net Periodic Pension Cost (thousand USD) | 2022 Estimate | 2021 Actual | | :----------------------------------- | :--------- | :--------- | | Service Cost | — | 1,002 | | Interest Cost on Projected Benefit Obligation | 3,290 | 3,076 | | Expected Return on Plan Assets | (5,860) | (6,310) | | Net Amortization | — | 393 | | Net Periodic Pension Benefit | (2,570) | (1,839) | - In Q1 2022, the company recorded a net periodic pension benefit of $618 thousand, compared to a net periodic pension cost of $273 thousand in Q1 2021, primarily due to the plan freeze[72] Note 10 – Income Taxes This note discloses the company's effective tax rate of 19.6% for the three months ended March 31, 2022, higher than 17.7% in the prior-year period, with the difference primarily stemming from tax-exempt interest on municipal bonds and bank-owned life insurance, as well as an increase in current taxable income - For the three months ended March 31, 2022, the effective tax rate was 19.6%, compared to 17.7% in the prior-year period[74] - The difference between the effective tax rate and the statutory rate of 21% is primarily due to tax-exempt interest from municipal bonds and bank-owned life insurance[74] - The increase in the 2022 effective tax rate was mainly due to higher current taxable income, which reduced the relative impact of tax-exempt income[74] Note 11 – Investment in Securities This note provides information on the fair value, unrealized gains and losses, and contractual maturities of the company's available-for-sale investment securities, with fair value totaling $774,610 thousand as of March 31, 2022, and a significant increase in unrealized losses primarily due to changes in market interest rates | Security Type (thousand USD) | March 31, 2022 Fair Value | December 31, 2021 Fair Value | | :----------------------------------- | :-------------------- | :--------------------- | | State and Local Government Bonds | 339,324 | 371,128 | | Mortgage-Backed Securities | 191,759 | 168,646 | | Corporate Bonds | 91,195 | 84,338 | | U.S. Treasury Securities | 99,587 | — | | Asset-Backed Securities | 52,745 | 49,341 | | Total | 774,610 | 673,453 | | Unrealized Gains and Losses (thousand USD) | March 31, 2022 Unrealized Gains | March 31, 2022 Unrealized Losses | December 31, 2021 Unrealized Gains | December 31, 2021 Unrealized Losses | | :----------------------------------- | :---------------------- | :---------------------- | :----------------------- | :----------------------- | | State and Local Government Bonds | 2,417 | 10,543 | 12,931 | 990 | | Mortgage-Backed Securities | — | 13,763 | 135 | 2,200 | | Corporate Bonds | — | 5,321 | 72 | 272 | | U.S. Treasury Securities | 132 | — | — | — | | Asset-Backed Securities | — | 1,238 | — | 494 | | Total | 2,549 | 30,865 | 13,138 | 3,956 | - As of March 31, 2022, 180 securities (49%) were in an unrealized loss position, primarily attributable to changes in market interest rates since their purchase[78] Note 12 – Fair Value of Financial Instruments This note outlines the carrying and fair values of the company's financial instruments, describing the methods and assumptions used to estimate these values for items such as cash and cash equivalents, investment securities, loans, accrued interest receivable, deposits, accounts payable and drafts, and accrued interest payable | Financial Instrument (thousand USD) | March 31, 2022 Carrying Value | March 31, 2022 Fair Value | December 31, 2021 Carrying Value | December 31, 2021 Fair Value | | :----------------------------------- | :-------------------- | :-------------------- | :--------------------- | :--------------------- | | Cash and Cash Equivalents | 191,449 | 191,449 | 514,928 | 514,928 | | Investment Securities | 774,610 | 774,610 | 673,453 | 673,453 | | Loans, Net | 964,796 | 961,547 | 948,526 | 948,701 | | Deposits | 1,176,935 | 1,176,935 | 1,221,503 | 1,221,503 | | Accounts Payable and Drafts | 989,733 | 989,733 | 1,050,396 | 1,050,396 | - Investment securities are measured using Level 2 valuations for fair value[84] - The fair value of loans is estimated by discounting future cash flows using risk-adjusted interest rates, categorized as a Level 3 valuation[85] Note 13 – Revenue from Contracts with Customers This note explains the company's policy for recognizing revenue from customer contracts under FASB ASC 606, primarily comprising processing fees, financial service fees, and banking service fees, with total fee and other income reaching $30,430 thousand for the three months ended March 31, 2022, a 16.26% increase from the prior-year period - Revenue is recognized when performance obligations to customers are satisfied[90] - Processing fees are recognized on a per-item or monthly basis, financial service fees are recognized when payment transactions occur, and banking service fees are recognized on a transaction or monthly basis[91][92][94] | Revenue Type (thousand USD) | For the three months ended March 31, 2022 | For the three months ended March 31, 2021 | | :----------------------------------- | :-------------------- | :-------------------- | | Processing Fees | 19,036 | 18,375 | | Financial Service Fees | 10,532 | 6,997 | | Information Services Payment and Processing Revenue | 29,568 | 25,372 | | Banking Service Fees | 429 | 337 | | Fee Income within Scope of FASB ASC 606 | 29,997 | 25,709 | | Other Income (outside scope of FASB ASC 606) | 433 | 466 | | Total Fee and Other Income | 30,430 | 26,175 | Note 14 – Leases This note provides detailed information on the company's operating leases, with lease liabilities of $4,516 thousand and right-of-use assets of $4,080 thousand as of March 31, 2022, a weighted-average remaining lease term of 6.0 years, and a weighted-average discount rate of 5.35% - As of March 31, 2022, the company's lease liabilities were $4,516 thousand, and right-of-use assets were $4,080 thousand[96] - For the three months ended March 31, 2022, operating lease costs were $400 thousand, and short-term lease costs were $51 thousand[96] - The weighted-average remaining lease term was 6.0 years, and the weighted-average discount rate was 5.35%[96] - The company has one uncommenced lease expected to begin in June 2022, which will result in approximately $6,800 thousand of additional lease liabilities and right-of-use assets[97] Note 15 – Subsequent Events This note states that the company has evaluated subsequent events through the date of the consolidated balance sheet as of March 31, 2022, and found no events requiring additional disclosure to prevent the financial statements from being misleading - The company has evaluated subsequent events and found no events requiring additional disclosure[99] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance and position Impact of COVID-19 on the Company's Business Despite significant mitigation of COVID-19's impact, the company continues to closely monitor the pandemic's developments and faces ongoing business, operational, market, credit, and other risks that could adversely affect its financial condition and operating results - The ongoing COVID-19 pandemic may lead to additional business closures, supply chain disruptions, work restrictions, and activity limitations[101] - The company continues to closely monitor COVID-19 related developments and faces heightened business, operational, market, credit, and other risks[101] Overview This section outlines Cass Information Systems, Inc.'s business model, primarily providing payment and information processing services for freight, energy, telecom, and environmental invoices, compensated through service fees and investment of account balances, emphasizing its bank subsidiary's role in supporting payment operations and banking services, with management viewing continued expansion of services and customer base as a key opportunity - Cass provides payment and information processing services, including freight invoice rating, payment processing, auditing, and generation of accounting and transportation information[102] - The company also processes energy, waste, and telecom invoices, and offers telecom expense management solutions and a B2B payment platform[102] - The company is compensated through service fees and investment of account balances generated during the payment process, with service fees typically based on per-transaction volume, and financial service fees including interchange revenue, foreign exchange fees, and fees for early payment of invoices[103] - Management believes the company's primary opportunity lies in continuously expanding its payment and information processing service offerings and customer base by maintaining leadership in applied technology combined with the security and processing controls of a bank[105][108] Critical Accounting Policies This section discusses the critical accounting policies used in preparing the consolidated financial statements, particularly the estimation of the Allowance for Credit Losses, which is crucial to the company's operating results and financial position - The company relies on management's estimates and assumptions in preparing financial statements, which have historically been accurate and consistent[109] - The Allowance for Credit Losses is a critical accounting policy involving estimates of expected credit losses on the loan portfolio, where actual results could differ significantly from estimates[110] Results of Operations This section provides a detailed analysis of the company's operating results for Q1 2022 compared to Q1 2021, covering changes and drivers for key financial metrics such as net income, fee income, net interest income, provision for credit losses, and operating expenses Net Income The company's net income for Q1 2022 was $8,258 thousand, representing a 16.8% increase from Q1 2021, with significant growth in both basic and diluted earnings per share, and improved return on average assets and return on average equity | Indicator | Q1 2022 | Q1 2021 | Change (%) | | :----------------------------------- | :------------- | :------------- | :------- | | Net Income (thousand USD) | 8,258 | 7,071 | 16.8% | | Diluted Earnings Per Share ($) | 0.60 | 0.49 | 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 primarily derives from transportation and facility processing and financial service fees, with fee income growing 3.6% and financial service fee income increasing 50.5% in Q1 2022, mainly driven by a substantial increase in transportation and facility-related dollar transaction volume reflecting inflationary pressures, supply chain disruptions, and fuel surcharges | Indicator (thousand USD) | Q1 2022 | Q1 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 Prepaid Balances | 279,479 | 177,295 | 57.6% | | Processing Fees | 19,036 | 18,375 | 3.6% | | Financial Service Fees | 10,532 | 6,997 | 50.5% | - The significant increase in transportation invoice dollar volume (37.3%) was primarily driven by inflationary pressures, supply chain disruptions, fuel surcharges, and carrier supply scarcity[116] - The increase in facility-related dollar volume (24.9%) was mainly due to reduced pandemic-related restrictions in the restaurant, retail, and hospitality industries, leading to increased utility usage and higher energy prices[116] Net Interest Income In Q1 2022, tax-equivalent net interest income grew 14.3% to $12,349 thousand, primarily due to a 12.2% increase in average interest-earning assets and a 4 basis point rise in net interest margin, with growth in both investment and loan portfolios being the main contributors to the increase in interest-earning assets | Indicator (thousand USD) | Q1 2022 | Q1 2021 | Change (%) | | :----------------------------------- | :------------- | :------------- | :------- | | Average Interest-Earning 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 Interest-Earning Assets* | 2.40% | 2.39% | — | | Rate on Interest-Bearing Liabilities | 0.15% | 0.24% | — | - Average interest-earning assets increased by $231,520 thousand (12.2%), primarily due to a $319,253 thousand (86.0%) increase in the investment portfolio and a $78,629 thousand increase in loans[117][118] - Average accounts payable and drafts increased by $189,727 thousand (21.1%), driven by inflationary pressures, supply chain disruptions, and fuel surcharges[120] Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential This section provides detailed information on the company's average balance sheet, including average balances, interest income/expense, and average yields/rates for various interest-earning assets and interest-bearing liabilities, to analyze the impact of interest rate changes on net interest income | Average Balances (thousand USD) | Q1 2022 | Q1 2021 | | :----------------------------------- | :------------- | :------------- | | Interest-Earning Assets | | | | Loans | 959,851 | 881,222 | | Investment Securities | 690,385 | 371,132 | | Short-term Investments | 472,679 | 639,041 | | Total Interest-Earning Assets | 2,122,915 | 1,891,395 | | Interest-Bearing Liabilities | | | | Interest-Bearing Demand Deposits | 530,491 | 475,212 | | Savings Deposits | 17,488 | 21,800 | | Time Deposits | 45,078 | 55,884 | | Total Interest-Bearing Liabilities | 593,057 | 552,896 | | Net Interest Income | 12,349 | 10,807 | | Net Interest Margin | 2.25% | 2.15% | Analysis of Net Interest Income Changes This section analyzes the specific impacts of volume and rate changes on net interest income, showing that in Q1 2022, net interest income increased by $1,542 thousand, with volume changes contributing $1,857 thousand in growth, while rate changes resulted in a $315 thousand reduction | Net Interest Income Change (thousand USD) | Volume Impact | Rate Impact | Total | | :----------------------------------- | :--------- | :------- | :--- | | Increase (Decrease) in Interest Income | | | | | Loans | 738 | (548) | 190 | | Investment Securities: Taxable | 1,101 | 157 | 1,258 | | Investment Securities: Tax-Exempt | 51 | (129) | (78) | | Short-term Investments | (48) | 112 | 64 | | Total Interest Income | 1,842 | (408) | 1,434 | | Interest Expense | | | | | Interest-Bearing Demand Deposits | 16 | (31) | (15) | | Savings Deposits | (1) | — | (1) | | Time Deposits | (30) | (62) | (92) | | Total Interest Expense | (15) | (93) | (108) | | Net Interest Income | 1,857 | (315) | 1,542 | Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments The company recorded a provision for credit losses of $230 thousand in Q1 2022, compared to a reversal of $600 thousand in Q1 2021, with the increase primarily due to loan growth, and as of March 31, 2022, the Allowance for Credit Losses (ACL) was $12,406 thousand, representing 1.27% of outstanding loans - In Q1 2022, the company recorded a provision for credit losses of $230 thousand, compared to a reversal of $600 thousand in Q1 2021[130] - The increase in the provision for credit losses in Q1 2022 was primarily attributable to loan growth and its impact on the CECL model[130] - As of March 31, 2022, the ACL was $12,406 thousand, representing 1.27% of outstanding loans, and the allowance for unfunded commitments was $232 thousand[131] - As of March 31, 2022, and December 31, 2021, the company had no nonaccrual loans[131] Summary of Credit Loss Experience This section summarizes the changes in the company's Allowance for Credit Losses (ACL) and Allowance for Unfunded Commitments, with ACL balance at $12,406 thousand and Allowance for Unfunded Commitments at $232 thousand as of March 31, 2022 | Indicator (thousand USD) | Q1 2022 | Q1 2021 | | :----------------------------------- | :------------- | :------------- | | Beginning Allowance for Credit Losses | 12,041 | 11,944 | | Provision (Reversal) for Credit Losses | 365 | (240) | | Ending Allowance for Credit Losses | 12,406 | 11,721 | | Beginning Allowance for Unfunded Commitments | 367 | 567 | | Reversal of Credit Losses | (135) | (360) | | Ending Allowance for Unfunded Commitments | 232 | 207 | | Total Loans (Average) | 959,851 | 881,222 | | Total Loans (March 31) | 977,203 | 888,575 | | ACL as a Percentage of Total Loans (March 31) | 1.27% | 1.32% | Operating Expenses In Q1 2022, the company's total operating expenses were $31,828 thousand, an 11.6% increase from Q1 2021, driven by a 9.7% increase in personnel costs due to higher salaries, increased incentive compensation, and strategic investments in technology initiatives, partially offset by reduced pension expense, while other operating expenses rose due to business development and data processing-related costs | Operating Expenses (thousand USD) | Q1 2022 | Q1 2021 | | :----------------------------------- | :------------- | :------------- | | Personnel | 24,718 | 22,526 | | Occupancy | 915 | 947 | | Equipment | 1,711 | 1,675 | | Intangible Asset Amortization | 135 | 215 | | Other Operating Expenses | 4,349 | 3,162 | | Total Operating Expenses | 31,828 | 28,525 | - Personnel costs increased by 9.7%, primarily due to general salary increases, higher incentive compensation, increased 401(k) matching, and strategic investments in various technology initiatives[136] - The pension plan freeze resulted in an $890 thousand reduction in pension expense, partially offsetting the increase in personnel costs[136] - Other operating expenses increased primarily due to higher business development and other promotional activities, as well as increased data processing-related expenses[137] Financial Condition As of March 31, 2022, the company's total assets were $2,422,043 thousand, a 5.2% decrease from December 31, 2021, with a significant reduction in cash and cash equivalents, offset by increases in investment securities and loans, while total liabilities and shareholders' equity also decreased, with the latter primarily impacted by other comprehensive loss and stock repurchases - As of March 31, 2022, total assets were $2,422,043 thousand, a decrease of $132,858 thousand (5.2%) from December 31, 2021[138] - Cash and cash equivalents decreased by $323,479 thousand (62.8%), while the investment securities portfolio increased by $101,157 thousand (15.0%), and loans increased by $16,635 thousand (1.7%)[138][140] - Total liabilities decreased by $104,138 thousand (4.5%), with total deposits decreasing by $44,568 thousand (3.6%) and accounts payable and drafts decreasing by $60,663 thousand (5.8%)[141] - Total shareholders' equity decreased by $28,720 thousand (11.7%), primarily due to an other comprehensive loss of $28,122 thousand, stock repurchases of $5,086 thousand, and dividend payments of $3,832 thousand, partially offset by net income of $8,258 thousand[142] Liquidity and Capital Resources The company manages liquidity through short-term liquid assets, maturing securities, and external funding capabilities, with cash and cash equivalents at $191,449 thousand and investment securities at $774,610 thousand as of March 31, 2022, and both the company and its bank subsidiary consistently meet all regulatory capital requirements, including Basel III capital ratios - The company manages liquidity through short-term liquid assets, maturing securities, and external funding capabilities[143] - As of March 31, 2022, cash and cash equivalents were $191,449 thousand, representing 7.9% of total assets, and investment securities were $774,610 thousand, representing 32.0% of total assets[144][145] - The bank subsidiary has unsecured federal funds purchase credit lines totaling $83,000 thousand and Federal Home Loan Bank collateralized credit lines of $218,049 thousand[146] - The company and the bank consistently exceed all regulatory capital requirements, including Basel III Common Equity Tier 1, Tier 1, and Total Capital ratios, as well as the Leverage Ratio[155][162] | Capital Ratios (thousand USD) | March 31, 2022 Amount | March 31, 2022 Ratio | December 31, 2021 Amount | December 31, 2021 Ratio | | :----------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Cass Information Systems, Inc. Total Capital | 240,619 | 13.96% | 240,265 | 14.86% | | Cass Commercial Bank Total Capital | 179,410 | 16.97% | 174,614 | 17.21% | | Cass Information Systems, Inc. Common Equity Tier 1 Capital | 228,213 | 13.24% | 228,224 | 14.11% | | Cass Commercial Bank Common Equity Tier 1 Capital | 167,465 | 15.84% | 163,030 | 16.07% | | Cass Information Systems, Inc. Tier 1 Capital (Risk-Weighted Assets) | 228,213 | 13.24% | 228,224 | 14.11% | | Cass Commercial Bank Tier 1 Capital (Risk-Weighted Assets) | 167,465 | 15.84% | 163,030 | 16.07% | | Cass Information Systems, Inc. Tier 1 Capital (Leverage Assets) | 228,213 | 9.09% | 228,224 | 9.21% | | Cass Commercial Bank Tier 1 Capital (Leverage Assets) | 167,465 | 11.12% | 163,030 | 11.05% | Inflation The company's assets and liabilities are primarily monetary, and holding a net monetary long position during inflationary periods may lead to a decrease in purchasing power, while inflation also impacts expenses like employee compensation, which may not be fully recovered through service pricing - The company's assets and liabilities are primarily monetary, and holding a net monetary long position (monetary assets exceeding monetary liabilities) during inflationary periods can lead to a decrease in purchasing power[163] - Inflation rates affect expenses such as employee compensation, which may not be fully recovered through the company's service pricing[163] Impact of New and Not Yet Adopted Accounting Pronouncements This section indicates that no new accounting pronouncements are applicable to or have a significant impact on the company - No new accounting pronouncements are applicable to and/or have a significant impact on the company[165] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section provides insights into the company's exposure to market risks and how they are managed Market Risk Management The company manages interest rate risk using measurement techniques such as gap analysis and simulation models, and by establishing and monitoring asset/liability management policies, with a 200 basis point increase in interest rates projected to increase net interest income by 10.6% - The company manages interest rate risk through techniques such as gap analysis and simulation models[166] | Interest Rate Change Scenario | Projected Change in Net Interest Income as of March 31, 2022 (%) | | :----------------------------------- | :---------------------------------- | | +200 basis points | 10.6% | | +100 basis points | 4.9% | | Flat | —% | | -100 basis points | (2.1)% | ITEM 4. CONTROLS AND PROCEDURES This section addresses the effectiveness of the company's internal controls and procedures Effectiveness of Controls and Procedures Company management assessed the effectiveness of disclosure controls and procedures as of the end of the reporting period and concluded they are effective, with no significant changes in internal control during the quarter - The company's disclosure controls and procedures were assessed as effective[167] - No significant changes in the company's internal control occurred during Q1 2022[168] PART II. OTHER INFORMATION This part includes additional information not covered in the financial statements ITEM 1. LEGAL PROCEEDINGS The company is involved in various ongoing or potential legal proceedings, but management believes the outcome of all such proceedings will not have a material adverse effect on the business or financial condition of the company or its subsidiaries - The company is involved in various ongoing or potential legal proceedings[171] - Management believes the outcome of all legal proceedings will not have a material adverse effect on the company's business or financial condition[171] ITEM 1A. RISK FACTORS This section states that there have been no material changes to the risk factors disclosed in the company's 2021 Form 10-K annual report - No material changes to the risk factors disclosed in the company's 2021 Form 10-K annual report have occurred[172] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS In Q1 2022, the company repurchased 124,874 shares of common stock under its treasury stock repurchase program, at an average price of $40.73 per share | Period | Total Number of Shares Purchased | Average Price Paid Per Share ($) | Total Number of Shares Purchased Under Publicly Announced Plans | Maximum Number of Shares That May Yet Be Purchased Under the Plans | | :----------------------------------- | :----------- | :------------------- | :------------------------- | :----------------------- | | 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 | ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section states that the company has not experienced any defaults upon senior securities - No defaults upon senior securities[174] ITEM 4. MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the company - Not applicable[175] ITEM 5. OTHER INFORMATION This section indicates that there were no material changes to the company's board of directors nominee recommendation procedures in Q1 2022 - No material changes to the company's board of directors nominee recommendation procedures occurred in Q1 2022[176] ITEM 6. EXHIBITS This section lists the various exhibits filed with the Form 10-Q report, including certifications required by the Sarbanes-Oxley Act and XBRL data files - Exhibits include certifications required under Sections 302 and 906 of the Sarbanes-Oxley Act[178] - Exhibits also include XBRL Instance Document, Taxonomy Extension Schema Document, Calculation Linkbase Document, Label Linkbase Document, Presentation Linkbase Document, and Definition Linkbase Document[178] SIGNATURES This section contains the official signatures for the report Report Signatures This report was signed by Eric H. Brunngraber, Chairman and Chief Executive Officer, and Michael J. Normile, Executive Vice President and Chief Financial Officer, on May 6, 2022, as required by the Securities Exchange Act of 1934 - The report was signed by Eric H. Brunngraber, Chairman and Chief Executive Officer, and Michael J. Normile, Executive Vice President and Chief Financial Officer[183] - The signing date was May 6, 2022[183]