Cass Information Systems(CASS) - 2022 Q3 - Quarterly Report

FORM 10-Q General Information This section provides administrative details of the Form 10-Q filing for Cass Information Systems, Inc., for the quarter ended September 30, 2022 Filing Details This section details the Form 10-Q filing for Cass Information Systems, Inc., including the period, filer status, and common shares outstanding - The registrant is CASS INFORMATION SYSTEMS, INC., incorporated in Missouri, with Commission File No. 000-20827[4] - The report covers the quarterly period ended September 30, 2022[4] - The registrant is an Accelerated Filer and not a shell company[7][9] Common Stock Outstanding | As of Date | Shares Outstanding | | :--------------- | :----------------- | | October 22, 2022 | 13,661,353 | Forward-looking Statements This section outlines the nature of forward-looking statements, emphasizing they are not guarantees and involve risks discussed in the 2021 Form 10-K - Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors beyond the Company's control[13] - These risks are discussed in Part I, Item 1A, 'Risk Factors' of the Company's 2021 Annual Report on Form 10-K[13] - The Company undertakes no obligation to publicly update or revise any forward-looking statements[13] PART I. FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's discussion and analysis of the Company's financial condition ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheets This section presents the unaudited consolidated balance sheets, highlighting total assets, liabilities, and shareholders' equity Consolidated Balance Sheet Highlights (Dollars in Thousands) | Metric | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :------------------------- | :----------------------- | :----------- | | Total Assets | $2,610,815 | $2,554,901 | | Total Liabilities | $2,419,080 | $2,309,103 | | Total Shareholders' Equity | $191,735 | $245,798 | - Total assets increased by $55.9 million (2.2%) from December 31, 2021, to September 30, 2022, primarily driven by increases in loans and investment securities[18][162][164][165] - Total shareholders' equity decreased by $54.1 million (22.0%) due to unrealized losses on investment securities, share repurchases, and dividends paid, partially offset by net income and stock-based compensation[18][170] Consolidated Statements of Income This section presents the unaudited consolidated statements of income, detailing revenue, expenses, net income, and diluted earnings per share Consolidated Statements of Income Highlights (Dollars in Thousands, except Per Share Data) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total fee revenue and other income | $31,784 | $27,577 | $92,865 | $80,739 | | Total interest income | $16,753 | $11,719 | $42,859 | $33,503 | | Total interest expense | $782 | $287 | $1,344 | $915 | | Net interest income | $15,971 | $11,432 | $41,515 | $32,588 | | Total net revenue | $47,205 | $38,669 | $133,530 | $114,197 | | Total operating expense | $36,321 | $30,690 | $101,788 | $89,018 | | Net income | $8,799 | $6,805 | $25,619 | $20,902 | | Diluted earnings per share | $0.64 | $0.48 | $1.86 | $1.45 | - Net income increased by 29.3% for the three months ended September 30, 2022, and by 22.6% for the nine months ended September 30, 2022, compared to the prior year periods[21][113] - Diluted EPS increased by 33.3% for the three months and 28.3% for the nine months ended September 30, 2022, driven by significant revenue growth in financial fees and net interest income[21][113] Consolidated Statements of Comprehensive Income This section presents the unaudited consolidated statements of comprehensive income, focusing on net income and other comprehensive income components Consolidated Statements of Comprehensive Income Highlights (Dollars in Thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $8,799 | $6,805 | $25,619 | $20,902 | | Net unrealized loss on securities available-for-sale | $(26,127) | $(4,438) | $(87,159) | $(7,086) | | Foreign currency translation adjustments | $(195) | $(168) | $(405) | $(145) | | Total comprehensive (loss) income | $(11,315) | $3,257 | $(41,213) | $15,324 | - Total comprehensive income shifted from a gain in 2021 to a significant loss in 2022, primarily due to a substantial increase in net unrealized losses on available-for-sale securities[24] - Net unrealized loss on securities available-for-sale increased significantly to $(87,159) thousand for the nine months ended September 30, 2022, compared to $(7,086) thousand in the prior year, reflecting rising interest rates[24][170] Consolidated Statements of Cash Flows This section presents the unaudited consolidated statements of cash flows, detailing cash from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Dollars in Thousands) | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $40,799 | $30,680 | | Net cash used in investing activities | $(249,861) | $(276,033) | | Net cash provided by financing activities | $41,128 | $75,134 | | Net decrease in cash and cash equivalents | $(167,934) | $(170,219) | | Cash and cash equivalents at end of period | $346,994 | $500,309 | - Net cash provided by operating activities increased by $10.1 million for the nine months ended September 30, 2022, compared to the prior year[29][177] - The decrease in cash and cash equivalents was primarily due to growth in loans and investment securities, which utilized cash to fund such growth[29][163] Consolidated Statements of Shareholders' Equity This section presents the unaudited consolidated statements of shareholders' equity, detailing changes from net income, dividends, and other comprehensive loss Shareholders' Equity Changes (Nine Months Ended September 30, 2022, Dollars in Thousands) | Item | Amount | | :------------------------------------ | :--------- | | Balance, December 31, 2021 | $245,798 | | Net income | $25,619 | | Cash dividends ($.84 per share) | $(11,478) | | Stock-based compensation expense | $4,479 | | Purchase of common shares for treasury | $(5,299) | | Other comprehensive loss | $(66,832) | | Balance, September 30, 2022 | $191,735 | - Total shareholders' equity decreased by $54.1 million (22.0%) from December 31, 2021, to September 30, 2022[36][170] - The decrease was primarily driven by a $66.8 million accumulated other comprehensive loss due to rising interest rates impacting the fair value of investment securities[36][170] Notes to Consolidated Financial Statements This section provides detailed notes explaining the basis of presentation, significant accounting policies, and specific financial instrument details Note 1 - Basis of Presentation These unaudited financial statements adhere to U.S. GAAP for interim reporting, with management confirming all necessary adjustments for fair presentation - Financial statements are prepared in accordance with U.S. GAAP for interim financial information and Form 10-Q/Rule 10-01 of Regulation S-X[39] - Prior-period financial statements were reclassified to conform to current presentation, with no effect on previously reported net income or shareholders' equity[39] Note 2 – Intangible Assets This note details the Company's intangible assets, including the June 2022 Touchpoint acquisition, which added $5.3 million in goodwill, customer lists, and software - In June 2022, the Company acquired Touchpoint assets for $4.9 million cash plus potential contingent consideration up to $2.5 million, adding $5.289 million in intangible assets[41][42] Intangible Assets (In thousands) | Asset Type | Sep 30, 2022 Gross Carrying Amount | Dec 31, 2021 Gross Carrying Amount | | :--------------- | :--------------------------------- | :--------------------------------- | | Customer lists | $6,470 | $4,778 | | Software | $3,212 | $2,844 | | Trade name | $373 | $190 | | Goodwill | $17,309 | $14,262 | | Total | $27,936 | $22,646 | - Estimated annual amortization of intangibles is projected to be $680,000 in 2022, $780,000 in 2023, $738,000 in 2024, $730,000 in 2025, and $582,000 in 2026[46] Note 3 – Earnings Per Share This note details the calculation of basic and diluted earnings per share, showing increases for the three and nine months ended September 30, 2022 Earnings Per Share (EPS) (Per Share Data) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic EPS | $0.65 | $0.48 | $1.89 | $1.47 | | Diluted EPS | $0.64 | $0.48 | $1.86 | $1.45 | - Diluted EPS increased by 33.3% (from $0.48 to $0.64) for the three months and 28.3% (from $1.45 to $1.86) for the nine months ended September 30, 2022[48][113] Note 4 – Stock Repurchases This note details the Company's treasury stock buyback program, authorized for 750,000 shares, with 340,707 shares remaining available as of September 30, 2022 - Board of Directors authorized repurchase of up to 750,000 shares in October 2021[48] - As of September 30, 2022, 340,707 shares remained available for repurchase[48] Stock Repurchases | Period | Shares Repurchased | | :------------------------------------ | :----------------- | | Three months ended Sep 30, 2022 | 0 | | Three months ended Sep 30, 2021 | 314,672 | | Nine months ended Sep 30, 2022 | 130,374 | | Nine months ended Sep 30, 2021 | 434,938 | Note 5 – Industry Segment Information The Company operates in two segments: Information Services (invoice processing, church management) and Banking Services (banking for businesses and ministries) - The Company has two reportable segments: Information Services and Banking Services, managed separately due to distinct service and processing requirements[49] - Information Services provides transportation, energy, telecom, and environmental invoice processing, plus church management services[50] - Banking Services provides banking services primarily to privately held businesses, restaurant franchises, and faith-based ministries, and supports the Information Services segment[50] Segment Performance (Tax-equivalized pre-tax income, In thousands) | Segment | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Information Services | $5,605 | $6,509 | $20,259 | $18,477 | | Banking Services | $4,126 | $2,130 | $10,418 | $8,773 | | Corporate, Eliminations and Other | $1,565 | $(193) | $2,359 | $(654) | | Total | $11,296 | $8,446 | $33,036 | $26,596 | Note 6 – Loans by Type This note summarizes the Company's loan portfolio, which increased to $1.037 billion, with commercial and industrial loans showing significant growth Loans by Type (In thousands) | Loan Type | Sep 30, 2022 | Dec 31, 2021 | | :------------------------ | :----------- | :----------- | | Commercial and industrial | $539,272 | $450,336 | | Real estate: Commercial | $124,372 | $133,556 | | Real estate: Faith-based | $373,437 | $370,246 | | PPP | $0 | $6,299 | | Total loans | $1,037,101 | $960,567 | - Total loans increased by $76.5 million (8.0%) from December 31, 2021, to September 30, 2022, with significant growth in commercial and industrial loans[59][165] - The Allowance for Credit Losses (ACL) increased to $13.049 million at September 30, 2022, from $12.041 million at December 31, 2021, primarily due to loan growth and external economic factors[64][151][152] - No nonperforming loans were outstanding at September 30, 2022, or December 31, 2021[152] Note 7 – Commitments and Contingencies This note details off-balance sheet credit instruments and commitments, with an allowance for unfunded commitments recorded at $222,000 as of September 30, 2022 - Off-balance sheet activities include commitments to extend credit, commercial letters of credit, and standby letters of credit[65][66] Unfunded Commitments and Letters of Credit (In thousands) | Instrument Type | Sep 30, 2022 | | :------------------------------ | :----------- | | Unfunded commitments | $207,883 | | Standby letters of credit | $13,450 | | Commercial letters of credit | $1,633 | | Allowance for unfunded commitments | $222 | Note 8 – Stock-Based Compensation This note details the Omnibus Plan for stock awards, with stock-based compensation expense increasing due to grants of restricted and performance-based shares - The Omnibus Plan permits issuance of up to 1,500,000 shares for various stock-based awards[67] Stock-Based Compensation Expense (In thousands) | Period | Amount | | :------------------------------------ | :----------- | | Three months ended Sep 30, 2022 | $1,307 | | Three months ended Sep 30, 2021 | $1,066 | | Nine months ended Sep 30, 2022 | $4,479 | | Nine months ended Sep 30, 2021 | $2,585 | - During the nine months ended September 30, 2022, 62,375 restricted shares and 57,542 performance-based restricted shares were granted[67] - As of September 30, 2022, total unrecognized compensation expense for non-vested restricted shares was $2.239 million, expected to be recognized over approximately 0.74 years[70] Note 9 – Defined Pension Plans This note details the Company's noncontributory defined-benefit pension plan, frozen in February 2021, and an unfunded supplemental executive retirement plan - The defined-benefit pension plan was closed to new participants in 2016 and benefits were frozen as of February 28, 2021[75] Net Periodic Pension Benefit (In thousands) | Period | Amount | | :------------------------------------ | :----------- | | Three months ended Sep 30, 2022 | $616 | | Nine months ended Sep 30, 2022 | $1,847 | | Three months ended Sep 30, 2021 | $678 | | Nine months ended Sep 30, 2021 | $1,096 | - The net periodic pension benefit increased during the nine-month period ended September 30, 2022, primarily due to the Plan being frozen[75] Note 10 – Income Taxes This note details the effective tax rates for the three and nine months ended September 30, 2022, which increased due to higher taxable income Effective Tax Rates | Period | Effective Tax Rate | | :------------------------------------ | :----------------- | | Three months ended Sep 30, 2022 | 19.2% | | Nine months ended Sep 30, 2022 | 19.3% | | Three months ended Sep 30, 2021 | 14.7% | | Nine months ended Sep 30, 2021 | 17.0% | - The effective tax rate differs from the statutory rate of 21% primarily due to tax-exempt interest from municipal bonds and bank-owned life insurance[77] - The increase in the effective tax rate for the nine-month period ended September 30, 2022, is primarily a result of higher taxable income[77] Note 11 – Investment in Securities This note details the Company's investment securities, with a fair value of $763.8 million and significant unrealized losses due to rising interest rates Investment Securities Available-for-Sale (In thousands) | Security Type | Sep 30, 2022 Fair Value | Dec 31, 2021 Fair Value | | :-------------------------------------------------------------------------- | :---------------------- | :---------------------- | | State and political subdivisions | $298,446 | $371,128 | | Mortgage-backed securities issued or guaranteed by U.S. government agencies | $178,133 | $168,646 | | Corporate bonds | $83,791 | $84,338 | | U.S. treasury bonds | $155,119 | $0 | | Asset backed securities issued or guaranteed by U.S. government agencies | $48,300 | $49,341 | | Total | $763,789 | $673,453 | - Total investment securities increased by $90.3 million (13.4%) during the first nine months of 2022[79][164] - As of September 30, 2022, there were $78.0 million in gross unrealized losses, primarily due to changes in market interest rates, affecting 326 securities (93% of the portfolio)[79][81] - The Company purchased $155.1 million in U.S. treasury bonds with maturities between one and two years during the first nine months of 2022[164] Note 12 – Fair Value of Financial Instruments This note summarizes the carrying amounts and fair values of financial instruments, with most approximating fair value or measured using Level 2 valuations Fair Value of Financial Instruments (In thousands) | Instrument Type | Sep 30, 2022 Carrying Amount | Sep 30, 2022 Fair Value | Dec 31, 2021 Carrying Amount | Dec 31, 2021 Fair Value | | :------------------------ | :--------------------------- | :---------------------- | :--------------------------- | :---------------------- | | Cash and cash equivalents | $346,994 | $346,994 | $514,928 | $514,928 | | Investment securities | $763,789 | $763,789 | $673,453 | $673,453 | | Loans, net | $1,024,052 | $972,338 | $948,526 | $948,701 | | Deposits | $1,229,721 | $1,229,721 | $1,221,503 | $1,221,503 | | Accounts and drafts payable | $1,146,334 | $1,146,334 | $1,050,396 | $1,050,396 | - Fair value of investment securities is measured using Level 2 valuations[86] - Fair value of loans is estimated using Level 3 valuations, based on present values of future cash flows discounted at risk-adjusted interest rates[87] Note 13 – Revenue from Contracts with Customers This note details revenue recognition from processing, financial, and bank service fees, all recognized when performance obligations are satisfied - Revenue is recognized as the obligation to the customer is satisfied[92] - Processing fees are recognized at the point in time or over the course of a month[93] - Financial fees are recognized at the point in time when payment transactions are made[94] Fee Revenue and Other Income (In thousands) | Revenue Type | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Processing fees | $18,964 | $18,461 | $57,184 | $55,882 | | Financial fees | $11,252 | $8,624 | $32,406 | $23,122 | | Information services payment and processing revenue | $30,216 | $27,085 | $89,590 | $79,004 | | Bank service fees | $289 | $323 | $1,142 | $991 | | Total fee revenue and other income | $31,784 | $27,577 | $92,865 | $80,739 | Note 14 – Leases This note details the Company's operating leases, with liabilities of $9.759 million and right-of-use assets of $9.435 million as of September 30, 2022 Lease Liabilities and Right-of-Use Assets (In thousands) | Metric | Sep 30, 2022 | | :--------------------- | :----------- | | Lease liabilities | $9,759 | | Right-of-use assets | $9,435 | - The weighted-average remaining lease term for operating leases is 8.4 years, with a weighted-average discount rate of 3.59%[98] Operating Lease Costs (In thousands) | Period | Operating Lease Cost | Short-Term Lease Cost | | :------------------------------------ | :------------------- | :-------------------- | | Three months ended Sep 30, 2022 | $386 | $51 | | Nine months ended Sep 30, 2022 | $1,184 | $156 | Note 15 – Subsequent Events No subsequent events requiring additional disclosures were identified after September 30, 2022, to prevent misleading financial statements - No subsequent events requiring additional disclosures were identified after September 30, 2022[101] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the Company's financial performance, condition, key drivers, and critical accounting policies, highlighting revenue and expense trends Overview Cass Information Systems provides payment and information processing services, generating revenue from service fees and interest income - Cass provides payment and information processing services for freight, energy, telecom, and environmental invoices, and offers church management and online generosity services[103] - Compensation is primarily through service fees (per-item or monthly) and interest income from account balances generated during the payment process[104] - Key metrics followed by management include the number of transactions processed and the dollar volume processed, as well as the general level of interest rates[104] - Management's major opportunity is the continued expansion of payment and information processing service offerings and customer base, leveraging applied technology and banking controls[106] Critical Accounting Policies The Company's critical accounting policies involve significant management estimates, particularly for the Allowance for Credit Losses (ACL) - The Allowance for Credit Losses (ACL) is a critical accounting policy requiring significant management estimates[110] - Estimates for ACL are based on established methodologies for determining allowance requirements, but actual results can differ significantly[110] - These policies affect both the Information Services and Banking Services segments[110] Results of Operations This section details the Company's operating results, highlighting growth in net income, fee revenue, and net interest income, alongside rising expenses Net Income Net income and diluted EPS significantly increased for the three and nine months ended September 30, 2022, driven by strong revenue growth Key Profitability Metrics | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | % Change | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | % Change | | :--------------------------- | :-------------------------- | :-------------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Net income (in thousands) | $8,799 | $6,805 | 29.3% | $25,619 | $20,902 | 22.6% | | Diluted earnings per share | $0.64 | $0.48 | 33.3% | $1.86 | $1.45 | 28.3% | | Return on average assets | 1.33% | 1.14% | - | 1.32% | 1.23% | - | | Return on average equity | 16.84% | 10.61% | - | 15.80% | 10.84% | - | - Profitability metrics were up, driven by significant revenue growth in financial fees and net interest income, partially offset by increased operating expenses[113] Fee Revenue and Other Income Fee revenue, especially financial fees, increased significantly due to higher transaction volumes and dollar volumes influenced by inflation and energy costs Fee Revenue and Volume Metrics (In thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | % Change | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Transportation invoice volume | 9,385 | 9,333 | 0.6% | 27,633 | 27,581 | 0.2% | | Transportation invoice dollar volume | $11,549,980 | $9,540,408 | 21.1% | $33,818,573 | $26,385,936 | 28.2% | | Facility-related transaction volume | 3,315 | 3,104 | 6.8% | 9,794 | 9,351 | 4.7% | | Facility-related dollar volume | $5,485,783 | $4,215,044 | 30.1% | $14,699,903 | $11,590,437 | 26.8% | | Average payments in advance of funding | $277,683 | $213,922 | 29.8% | $283,431 | $196,492 | 44.2% | | Processing fees | $18,964 | $18,461 | 2.7% | $57,184 | $55,882 | 2.3% | | Financial fees | $11,252 | $8,624 | 30.5% | $32,406 | $23,122 | 40.2% | - Financial fee revenue increased by 30.5% for the three months and 40.2% for the nine months ended September 30, 2022, driven by increases in transportation and facility-related dollar volumes[117][119] - Increased dollar volumes contributed to a 29.8% (three months) and 44.2% (nine months) increase in average payments in advance of funding, a key driver of financial fee revenue[117][119] Net Interest Income Net interest income increased substantially due to higher average interest-earning assets and an improved net interest margin from rising short-term interest rates Net Interest Income and Related Factors (Tax-equivalent, In thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | % Change | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Average earnings assets | $2,243,219 | $2,036,296 | 10.2% | $2,196,704 | $1,965,976 | 11.7% | | Average interest-bearing liabilities | $597,469 | $600,263 | (0.5)% | $598,812 | $583,478 | 2.6% | | Net interest income* | $16,383 | $11,900 | 37.7% | $42,809 | $34,005 | 25.9% | | Net interest margin* | 2.90% | 2.32% | - | 2.61% | 2.31% | - | | Yield on earning assets* | 3.04% | 2.37% | - | 2.69% | 2.37% | - | | Rate on interest-bearing liabilities | 0.52% | 0.19% | - | 0.30% | 0.21% | - | - Tax-equivalent net interest income increased by 37.7% for the three months and 25.9% for the nine months ended September 30, 2022, driven by increased average interest-earning assets and a higher net interest margin[130][138] - The net interest margin increased due to rising short-term interest rates, which positively impact the Company given its larger interest-earning assets compared to interest-bearing liabilities[130][138] - Average investment securities increased by 59.9% (three months) and 70.0% (nine months), while average loans increased by 12.7% (three months) and 9.9% (nine months)[125][126][133][134] Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments The Company recorded a provision for credit losses of $550,000 for Q3 2022, driven by loan growth and economic factors, increasing ACL to $13.049 million Provision for Credit Losses (In thousands) | Period | Provision for Credit Losses | | :------------------------------------ | :-------------------------- | | Three months ended Sep 30, 2022 | $550 | | Three months ended Sep 30, 2021 | $340 | | Nine months ended Sep 30, 2022 | $850 | | Nine months ended Sep 30, 2021 | $(870) (release) | - The provision for credit losses in 2022 was driven by loan growth and external economic factors, including a reduction in the forecast of Gross Domestic Product[151] Allowance for Credit Losses (ACL) (In thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------ | :----------- | :----------- | | ACL at end of period | $13,049 | $12,041 | | ACL as % of outstanding loans | 1.26% | 1.25% | | Allowance for unfunded commitments | $222 | $367 | - No nonperforming loans were outstanding at September 30, 2022, or December 31, 2021[152] Operating Expenses Total operating expenses increased due to higher personnel costs from merit increases, wage pressures, increased FTEs, and strategic technology investments Operating Expenses (In thousands) | Expense Category | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Personnel | $26,999 | $23,283 | $77,750 | $68,689 | | Other operating expense | $6,524 | $4,539 | $15,748 | $11,798 | | Total operating expense | $36,321 | $30,690 | $101,788 | $89,018 | - Personnel costs increased by 16.0% (three months) and 13.2% (nine months) due to merit increases, wage pressures, increased FTEs (7.5% for three months, 3.8% for nine months), and strategic technology investments[158][160] - Other operating expenses increased by 43.7% (three months) and 33.5% (nine months) due to higher travel, employee procurement, data processing, and professional fees, including investments in technology platforms[159][161] Financial Condition Total assets increased to $2.611 billion, liabilities rose to $2.419 billion, and shareholders' equity decreased to $191.7 million due to unrealized losses - Total assets increased by $55.9 million (2.2%) to $2.611 billion at September 30, 2022, from December 31, 2021[162] - Cash and cash equivalents decreased by $167.9 million (32.6%), primarily due to funding growth in loans and investment securities[163] - The investment securities portfolio increased by $90.3 million (13.4%), including $155.1 million in U.S. treasury bonds[164] - Loans increased by $76.5 million (8.0%), driven by growth in commercial and industrial loans[165] - Total liabilities increased by $109.9 million (4.8%) to $2.419 billion, with accounts and drafts payable increasing by $95.9 million (9.1%)[168][169] - Total shareholders' equity decreased by $54.1 million (22.0%), mainly due to a $66.8 million accumulated other comprehensive loss from unrealized losses on investment securities[170] Liquidity and Capital Resources The Company manages liquidity through liquid assets and borrowing lines, exceeding regulatory capital requirements despite decreasing capital ratios - Primary liquidity is provided by short-term liquid assets (cash and cash equivalents), maturing securities, and external funding sources[171][172] - Cash and cash equivalents totaled $346.994 million at September 30, 2022, a decrease of 32.6% from December 31, 2021[172] - Secondary liquidity sources include the investment portfolio ($763.789 million at Sep 30, 2022) and borrowing lines (unsecured lines of $83 million, secured lines of $228.858 million with FHLB, and $150 million from two banks)[173][174] - Net cash flows from operating activities increased by $10.1 million to $40.799 million for the nine months ended September 30, 2022[177] - The Company and the Bank continue to exceed all regulatory capital requirements under Basel III Capital Rules[183][191] Regulatory Capital Ratios | Metric | Sep 30, 2022 Ratio | Dec 31, 2021 Ratio | | :------------------------------------ | :----------------- | :----------------- | | Cass Information Systems, Inc. Total Capital | 14.07% | 14.86% | | Cass Commercial Bank Total Capital | 16.08% | 17.21% | | Cass Information Systems, Inc. Common Equity Tier I Capital | 13.33% | 14.11% | | Cass Commercial Bank Common Equity Tier I Capital | 14.96% | 16.07% | | Cass Information Systems, Inc. Tier I Capital (to leverage assets) | 9.08% | 9.21% | | Cass Commercial Bank Tier I Capital (to leverage assets) | 10.44% | 11.05% | Inflation The Company's monetary position is net positive; inflation impacts expenses like compensation and influences fee income and accounts payable - The Company holds a net positive monetary position (monetary assets exceed monetary liabilities)[192] - Inflation affects expenses like employee compensation, which may not be readily recoverable in service prices[193] - Higher levels of interest rates generally allow the Company to earn more net interest income due to its funding structure[179] - Overall economic activity and energy costs significantly impact fee income and accounts and drafts payable balances[180][181] Impact of New and Not Yet Adopted Accounting Pronouncements No new accounting pronouncements are applicable or materially impact the Company's financial statements - No new accounting pronouncements are applicable or materially impact the Company[194] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company manages interest rate risk using gap analysis and a simulation model, showing decreased projected net interest income in rising rate scenarios - The Company manages interest rate risk using gap analysis and a simulation model[195] Simulated Changes in Net Interest Income (Next 12 Months) | Interest Rate Change | Sep 30, 2022 | Dec 31, 2021 | | :------------------- | :----------- | :----------- | | +200 basis points | 13.1% | 20.6% | | +100 basis points | 5.5% | 10.2% | | Flat rates | —% | —% | | -100 basis points | (2.5)% | (2.5)% | | -200 basis points | (11.9)% | N/M | - The decrease in projected net interest income in a rising interest rate environment from 2021 to 2022 is primarily due to the purchase of $155.119 million in U.S. treasury bonds[197] ITEM 4. CONTROLS AND PROCEDURES Management concluded the Company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal control - Disclosure controls and procedures were evaluated and concluded to be effective as of September 30, 2022[198] - No material changes in internal control over financial reporting were identified during the Third Quarter of 2022[199] PART II. OTHER INFORMATION This part covers other information including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits ITEM 1. LEGAL PROCEEDINGS The Company is involved in various legal actions, but management believes their outcome will not materially affect business or financial conditions - The Company is involved in various pending or threatened legal actions and proceedings[202] - Management believes the outcome of these proceedings will not materially affect the Company's businesses or financial conditions[202] ITEM 1A. RISK FACTORS No material changes to the risk factors previously disclosed in the Company's 2021 Annual Report on Form 10-K were identified - No material changes to the Risk Factors as disclosed in the Company's 2021 Annual Report on Form 10-K[203] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS There were no unregistered sales of equity securities or use of proceeds to report for the period - None[204] ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities to report for the period - None[205] ITEM 4. MINE SAFETY DISCLOSURES Mine safety disclosures are not applicable to the Company - Not applicable[206] ITEM 5. OTHER INFORMATION No other material information or changes to procedures for recommending Board of Directors nominees were reported in Q3 2022 - No material changes to procedures for security holders to recommend nominees to the Board of Directors in Q3 2022[207] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including Sarbanes-Oxley Act certifications and XBRL documents - Includes Certifications Pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002[208][209] - Includes various Inline XBRL Taxonomy Extension documents (Schema, Calculation, Label, Presentation, Definition Linkbase Documents) and the Cover Page Interactive Data File[209] SIGNATURES This section confirms the report's due signing on November 7, 2022, by the Chairman/CEO and EVP/CFO Signatures The report was duly signed on November 7, 2022, by the Chairman and CEO, and the Executive Vice President and CFO - The report was signed on November 7, 2022[214] - Signed by Eric H. Brunngraber, Chairman and Chief Executive Officer (Principal Executive Officer)[214] - Signed by Michael J. Normile, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)[214]