Cass Information Systems(CASS) - 2021 Q1 - Quarterly Report

PART I – Financial Information This section presents the unaudited consolidated financial statements and management's discussion and analysis for the reporting period Item 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements for Cass Information Systems, Inc. and its subsidiaries, including balance sheets, statements of income, comprehensive income, cash flows, and shareholders' equity, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial instrument details Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and shareholders' equity at specific dates - Total assets increased by $13.338 million (0.6%) from December 31, 2020, to March 31, 2021[154] - Cash and cash equivalents decreased by $70.869 million, while securities available-for-sale increased by $69.518 million[154] - Total liabilities increased by $15.011 million (0.8%), driven by a $62.122 million (7.4%) increase in accounts and drafts payable, partially offset by a $47.721 million (4.5%) decrease in total deposits[155] Consolidated Balance Sheet Summary (In thousands) | Metric | March 31, 2021 (Unaudited) | December 31, 2020 | | :---------------------------------- | :------------------------- | :---------------- | | Total Assets | $2,216,573 | $2,203,235 | | Cash and cash equivalents | $599,659 | $670,528 | | Securities available-for-sale | $427,244 | $357,726 | | Loans, net | $876,854 | $879,732 | | Total Liabilities | $1,957,086 | $1,942,075 | | Total Deposits | $1,003,135 | $1,050,856 | | Accounts and drafts payable | $897,508 | $835,386 | | Total Shareholders' Equity | $259,487 | $261,160 | Consolidated Statements of Income This section presents the company's revenues, expenses, and net income over a specific period - Net income decreased by 6.3% year-over-year to $7.071 million for the three months ended March 31, 2021[132] - Diluted earnings per share decreased by 5.8% year-over-year to $0.49[132] - Total fee revenue and other income decreased by 3.4% to $26.175 million, and total interest income decreased by 13.5% to $10.676 million[17][19] Consolidated Statements of Income Summary (In thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :------------------- | | Net Income | $7,071 | $7,545 | -$474 (-6.3%) | | Diluted Earnings Per Share | $0.49 | $0.52 | -$0.03 (-5.8%) | | Total Fee Revenue and Other Income | $26,175 | $27,095 | -$920 (-3.4%) | | Total Interest Income | $10,676 | $12,338 | -$1,662 (-13.5%) | | Net Interest Income | $10,345 | $11,373 | -$1,028 (-9.0%) | | Total Operating Expense | $28,525 | $28,929 | -$404 (-1.4%) | Consolidated Statements of Comprehensive Income This section reports net income and other comprehensive income, reflecting changes in equity from non-owner sources - Total comprehensive income decreased significantly by 47.4% year-over-year to $3.694 million for the three months ended March 31, 2021[22] - The company recorded a net unrealized loss on securities available-for-sale of $4.214 million in Q1 2021, a notable shift from a gain of $578,000 in Q1 2020[22] Consolidated Statements of Comprehensive Income Summary (In thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :-------------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------- | | Net Income | $7,071 | $7,545 | -$474 (-6.3%) | | Net Unrealized (Loss) Gain on Securities Available-for-Sale | ($4,214) | $578 | -$4,792 | | Total Comprehensive Income | $3,694 | $7,026 | -$3,332 (-47.4%) | Consolidated Statements of Cash Flows This section details cash inflows and outflows from operating, investing, and financing activities - Net cash provided by operating activities decreased by 8.0% year-over-year to $16.704 million for the three months ended March 31, 2021[164] - Net cash used in investing activities increased significantly to $94.697 million in Q1 2021, primarily due to increased purchases of securities available-for-sale[25] - Net cash provided by financing activities was $7.124 million in Q1 2021, a reversal from net cash used of $7.545 million in Q1 2020, driven by an increase in accounts and drafts payable[25] Consolidated Statements of Cash Flows Summary (In thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------- | | Net Cash Provided by Operating Activities | $16,704 | $18,160 | -$1,456 (-8.0%) | | Net Cash Used in Investing Activities | ($94,697) | ($51,375) | -$43,322 (+84.3%) | | Net Cash Provided by (Used in) Financing Activities | $7,124 | ($7,545) | +$14,669 | | Net Decrease in Cash and Cash Equivalents | ($70,869) | ($40,760) | -$30,109 (+73.9%) | | Cash and Cash Equivalents at End of Period | $599,659 | $163,194 | +$436,465 (+267.4%) | Consolidated Statements of Shareholders' Equity This section outlines changes in shareholders' equity, including net income, dividends, and share repurchases - Total shareholders' equity decreased by $1.673 million (0.6%) from December 31, 2020, to March 31, 2021[156] - Key factors contributing to the decrease include cash dividends paid ($3.886 million), purchase of common shares for treasury ($1.228 million), and an increase in accumulated other comprehensive loss ($3.377 million), partially offset by net income ($7.071 million)[30][156] Consolidated Statements of Shareholders' Equity Summary (In thousands) | Metric | March 31, 2021 | December 31, 2020 | Change | | :---------------------------------- | :------------- | :---------------- | :------- | | Total Shareholders' Equity | $259,487 | $261,160 | -$1,673 | | Net Income | $7,071 | N/A | N/A | | Cash Dividends Paid | ($3,886) | N/A | N/A | | Purchase of Common Shares for Treasury | ($1,228) | N/A | N/A | | Accumulated Other Comprehensive Loss | ($3,392) | ($15) | -$3,377 | Notes to Consolidated Financial Statements (unaudited) This section provides detailed disclosures on the company's accounting policies, financial instruments, and other relevant financial information, including the impact of COVID-19, intangible assets, earnings per share, stock repurchases, segment information, loan portfolio details, commitments, stock-based compensation, pension plans, income taxes, investment securities, fair value measurements, revenue recognition, and leases Note 1 – Basis of Presentation This note describes the accounting principles and significant events impacting the financial statement preparation - The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and Form 10-Q instructions[33] - The Company is closely monitoring COVID-19 developments, which have led to an unprecedented economic slowdown and increased unemployment, negatively impacting business activity and financial results[34][36][37] - The Federal Reserve's actions to lower the Federal Funds rate in response to COVID-19 have adversely affected the Company's interest income[38] - The aggregate impact of COVID-19 on the Company's financial condition and operating results remains highly uncertain[37] Note 2 – Intangible Assets This note details the company's intangible assets, including amortization schedules and carrying amounts - Intangible assets include customer lists, patents, non-compete agreements, software, trade name, and goodwill[50] - Amortization of intangible assets was $215,000 for both the three-month periods ended March 31, 2021 and 2020[50] - Estimated future amortization of intangibles is $859,000 in 2021, $540,000 in both 2022 and 2023, $498,000 in 2024, and $490,000 in 2025[50] Intangible Assets Summary (In thousands) | Intangible Asset | March 31, 2021 Gross Carrying Amount | March 31, 2021 Accumulated Amortization | December 31, 2020 Gross Carrying Amount | December 31, 2020 Accumulated Amortization | | :------------------------------ | :----------------------------------- | :-------------------------------------- | :-------------------------------------- | :----------------------------------------- | | Customer lists | $4,778 | ($4,012) | $4,778 | ($3,902) | | Patents | $72 | ($25) | $72 | ($24) | | Software | $2,844 | ($824) | $2,844 | ($731) | | Goodwill | $14,489 | ($227) | $14,489 | ($227) | | Total Intangible Assets | $23,205 | ($5,735) | $23,205 | ($5,520) | Note 3 – Earnings Per Share This note provides basic and diluted earnings per share calculations and related share counts - Basic earnings per share was $0.49 for the three months ended March 31, 2021, down from $0.52 in the prior year period[51] - Diluted earnings per share was $0.49 for the three months ended March 31, 2021, also down from $0.52 in the prior year period[51] Earnings Per Share Calculation (In thousands, except per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Net Income | $7,071 | $7,545 | | Weighted-average common shares outstanding | 14,312,260 | 14,422,813 | | Basic Earnings Per Share | $0.49 | $0.52 | | Diluted Earnings Per Share | $0.49 | $0.52 | Note 4 – Stock Repurchases This note outlines the company's stock repurchase activities and remaining authorization under the program - The Company repurchased 31,256 shares during the three-month period ended March 31, 2021, compared to 128,779 shares in the prior year period[52] - As of March 31, 2021, 434,622 shares remained available for repurchase under the program, which has no expiration date[52] - The treasury stock buyback program was restored by the Board of Directors in October 2020, authorizing the repurchase of up to an aggregate of 500,000 shares[52] Note 5 – Industry Segment Information This note provides financial data for the company's distinct operating segments: Information Services and Banking Services - The Company operates in two reportable segments: Information Services and Banking Services, each providing distinct services and managed separately[54] - Information Services provides transportation, energy, telecommunication, and environmental invoice processing and payment services[55] - Banking Services provides banking services primarily to privately held businesses and faith-based ministries, and supports the Information Services segment[55] Segment Performance (In thousands) | Segment Performance | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Information Services: | | | | Fee income | $24,977 | $25,440 | | Interest income* | $5,509 | $4,707 | | Tax-equivalized pre-tax income* | $6,013 | $5,123 | | Banking Services: | | | | Fee income | $638 | $615 | | Interest income* | $5,751 | $7,284 | | Tax-equivalized pre-tax income* | $2,762 | $2,703 | | Total Company: | | | | Total Assets | $2,216,573 | $1,731,982 | | Funding Sources | $1,687,029 | $1,288,964 | Note 6 – Loans by Type This note details the composition of the loan portfolio and the allowance for credit losses - Total loans decreased slightly to $888.575 million at March 31, 2021, from $891.676 million at December 31, 2020[62] - Paycheck Protection Program (PPP) loans increased to $113.474 million at March 31, 2021, from $109.704 million at December 31, 2020[62] - The allowance for credit losses (ACL) decreased to $11.721 million at March 31, 2021, from $11.944 million at December 31, 2020, primarily due to an improved forecast of macroeconomic factors[70] Loans by Category (In thousands) | Loan Category | March 31, 2021 | December 31, 2020 | | :--------------------------- | :------------- | :---------------- | | Commercial and industrial | $302,747 | $298,984 | | Commercial Real Estate Mortgage | $96,630 | $100,419 | | Faith-based Real Estate Mortgage | $331,153 | $333,661 | | Paycheck Protection Program ("PPP") | $113,474 | $109,704 | | Total Loans | $888,575 | $891,676 | Allowance for Credit Losses (In thousands) | Allowance for Credit Losses | March 31, 2021 | December 31, 2020 | | :--------------------------------------- | :------------- | :---------------- | | Balance at Period End | $11,721 | $11,944 | | (Release of) Provision for Credit Losses | ($240) | $645 (for year ended Dec 31, 2020) | | Net Recoveries | $17 | $20 (for year ended Dec 31, 2020) | Note 7 – Commitments and Contingencies This note discloses the company's off-balance sheet commitments and potential contingent liabilities - Unused loan commitments totaled $194.737 million, standby letters of credit $11.619 million, and commercial letters of credit $816,000 at March 31, 2021[77] - A release of credit losses of $360,000 was recorded during Q1 2021 due to lower line of credit usage[76] - The allowance for unfunded commitments decreased to $207,000 at March 31, 2021, from $567,000 at December 31, 2020[76] Time Deposits Contractual Cash Obligations (In thousands) | Time Deposits Contractual Cash Obligations | Amount Total | | :---------------------------------------- | :----------- | | Less than 1 Year | $41,390 | | 1-3 Years | $14,098 | | 3-5 Years | $48 | | Over 5 Years | $0 | | Total | $55,536 | Note 8 – Stock-Based Compensation This note details the expense and unrecognized cost related to stock-based compensation plans - Stock-based compensation expense for the three months ended March 31, 2021, was $693,000, a decrease from $722,000 in the prior year period[79] - Total unrecognized compensation expense related to non-vested restricted shares was $2.642 million as of March 31, 2021, with a weighted-average recognition period of approximately 0.98 years[82] - During Q1 2021, 39,686 restricted shares and 52,240 performance-based restricted shares were granted under the Omnibus Plan, with no SARs granted[79][86] Note 9 – Defined Pension Plans This note outlines the status and costs associated with the company's defined-benefit pension plans - The noncontributory defined-benefit pension plan was closed to new participants in December 2016 and its benefits were frozen for all remaining participants as of February 28, 2021[88] - Pension costs recorded to expense decreased significantly to $273,000 for Q1 2021 from $1.029 million for Q1 2020, primarily due to the plan freeze[89] - Supplemental executive retirement plan costs increased to $160,000 for Q1 2021 from $145,000 for Q1 2020[90] Note 10 – Income Taxes This note provides information on the company's effective tax rate and factors influencing it - The effective tax rate was 17.7% for the three-month period ended March 31, 2021, down from 18.1% in the prior year period[91] - The difference from the statutory rate of 21% is primarily due to tax-exempt interest received from municipal bonds[91] Note 11 – Investment in Securities This note details the composition, fair value, and unrealized gains/losses of investment securities - Total investment securities available-for-sale at fair value increased to $427.244 million at March 31, 2021, from $357.726 million at December 31, 2020[93] - At March 31, 2021, gross unrealized gains were $16.301 million and gross unrealized losses were $885,000, with 33 securities (12% of portfolio) in an unrealized loss position, compared to none at December 31, 2020[93] - Proceeds from sales of available-for-sale securities decreased significantly to $2.991 million in Q1 2021 from $19.629 million in Q1 2020, resulting in gross realized gains of $48,000 (vs. $1.069 million in Q1 2020)[95] Investment Securities Fair Value (In thousands) | Investment Securities | March 31, 2021 Fair Value | December 31, 2020 Fair Value | | :--------------------------------- | :------------------------ | :--------------------------- | | State and political subdivisions | $327,983 | $305,974 | | U.S. government agencies | $99,261 | $51,752 | | Total | $427,244 | $357,726 | Note 12 – Fair Value of Financial Instruments This note provides fair value measurements for financial instruments using a three-level hierarchy - The carrying amounts of cash and cash equivalents, investment securities, accrued interest receivable, deposits, accounts and drafts payable, and accrued interest approximate their fair values[97][98][100][101][102][103] - Loans are valued using Level 3 inputs (present value of future cash flows discounted at risk-adjusted interest rates), while fixed-maturity certificates of deposit are valued using Level 2 inputs (current rates for similar maturities)[99][101] Fair Value of Financial Instruments (In thousands) | Financial Instrument | March 31, 2021 Carrying Amount | March 31, 2021 Fair Value | December 31, 2020 Carrying Amount | December 31, 2020 Fair Value | | :-------------------------------- | :----------------------------- | :------------------------ | :-------------------------------- | :--------------------------- | | Cash and cash equivalents | $599,659 | $599,659 | $670,528 | $670,528 | | Investment securities | $427,244 | $427,244 | $357,726 | $357,726 | | Loans, net | $876,854 | $880,231 | $879,732 | $883,461 | | Deposits | $1,003,135 | $1,003,135 | $1,050,856 | $1,050,856 | | Accounts and drafts payable | $897,508 | $897,508 | $835,386 | $835,386 | Note 13 – Revenue from Contracts with Customers This note details the recognition of revenue from customer contracts across different service categories - Revenue is recognized as the obligation to the customer is satisfied, either at a point in time (per-item fees, payment transactions) or over the course of a month (monthly fees, service charges)[106][107][108] - Information services payment and processing revenue decreased by 1.1% to $25.216 million in Q1 2021 compared to Q1 2020[111] - Bank service fees increased to $494,000 in Q1 2021 from $410,000 in Q1 2020[111] Fee Revenue from Contracts with Customers (In thousands) | Fee Revenue | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Invoice processing fees | $19,064 | $19,124 | | Invoice payment fees | $6,152 | $6,379 | | Information services payment and processing revenue | $25,216 | $25,503 | | Bank service fees | $494 | $410 | | Total fee revenue (in-scope of FASB ASC 606) | $25,710 | $25,913 | Note 14 – Leases This note provides information on the company's lease liabilities, right-of-use assets, and lease costs - As of March 31, 2021, the Company had lease liabilities of $5.799 million and right-of-use assets of $5.255 million[112] - Operating lease cost was $420,000 and short-term lease cost was $30,000 for the three months ended March 31, 2021[112] - The weighted average remaining lease term for operating leases was 6.2 years, and the weighted average discount rate was 5.5%[112] Lease Payments Due (In thousands) | Lease Payments Due | March 31, 2021 | | :-------------------------------- | :------------- | | Less than 1 year | $1,711 | | 1-2 years | $1,558 | | 2-3 years | $628 | | 3-4 years | $507 | | 4-5 years | $517 | | Over 5 years | $1,891 | | Total Lease Liability | $5,799 | Note 15 – Subsequent Events This note discloses any significant events occurring after the balance sheet date that require reporting - No events were identified after the consolidated balance sheet date of March 31, 2021, that would require additional disclosures[114] Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses the company's financial performance and condition, highlighting the ongoing impact of COVID-19 on its business segments, critical accounting policies, detailed results of operations including revenue, net interest income, and expenses, as well as liquidity, capital resources, and the adoption of new accounting pronouncements Impact of COVID-19 on the Company's Business This section analyzes the significant and uncertain effects of the COVID-19 pandemic on the company's operations and financial performance - COVID-19 significantly impacted the global economy and adversely affected the Company's operating results in both Information Services and Banking Services segments[116] - Business disruptions, manufacturing constrictions, decreased oil demand, and general economic uncertainty negatively impacted revenue generation in the Information Services segment[117] - The Federal Reserve's actions to lower the Federal Funds rate in connection with COVID-19 relief adversely affected the Company's net interest income and Banking Services operating results[118] - The Bank processed approximately $170 million in PPP loans in 2020 and an additional $37 million in Q1 2021, which are 100% guaranteed by the Small Business Administration[120] - The aggregate impact of COVID-19 on the Company's financial condition and operating results remains unknown due to uncertainties in vaccine administration and containment efforts[122] Overview This section provides a general description of the company's business model, service offerings, and strategic focus - Cass provides payment and information processing services for transportation, energy, telecommunication, and environmental invoices to large corporations, and offers a B2B payment platform[124] - The Company's bank subsidiary supports payment operations and provides banking services to privately-owned businesses and faith-based ministries[124] - Compensation for processing services is derived from service fees (typically per-item) and investment of account balances generated during the payment process, with transaction volume and dollar volume being key metrics[125] - Management's primary opportunity is the continued expansion of service offerings and customer base by leveraging applied technology and the security of its banking controls[127] Critical Accounting Policies This section highlights key accounting policies requiring significant management judgment and estimates, such as the Allowance for Credit Losses - The Allowance for Credit Losses (ACL) is identified as a critical accounting policy, requiring significant management estimates for lifetime expected credit losses[130] - These estimates are based on established methodologies, but actual results can differ significantly from estimated results[130] Results of Operations The company experienced a decrease in net income and diluted EPS in Q1 2021 compared to Q1 2020, primarily due to lower net interest income and fee revenue, despite increased transaction volumes in information services Net Income This section details the company's net income and diluted earnings per share performance for the period - Net income decreased by 6.3% to $7.071 million in Q1 2021 from $7.545 million in Q1 2020[132] - Diluted earnings per share decreased by 5.8% to $0.49 in Q1 2021 from $0.52 in Q1 2020[132] Net Income and EPS Performance (In thousands, except per share data) | Metric | Q1 2021 | Q1 2020 | % Change | | :----------------------- | :------ | :------ | :------- | | Net income | $7,071 | $7,545 | (6.3)% | | Diluted earnings per share | $0.49 | $0.52 | (5.8)% | | Return on average assets | 1.31% | 1.70% | — | | Return on average equity | 11.09% | 12.50% | — | Fee Revenue and Other Income This section analyzes trends in fee revenue, including transaction volumes and their impact on income - Transportation invoice volume and dollar volume improved by 6.1% and 22.2% respectively in Q1 2021, driven by a stronger manufacturing sector and new customer wins[134] - Facility-related invoice and dollar volumes both increased by 7.5% due to new business wins[134] - Payment and processing fee revenue decreased by 1.1% to $25.216 million, attributed to changes in client mix and a decline in certain non-transaction-based revenue sources like late fees[134] Fee Revenue and Transaction Volume (In thousands, except volume) | Metric | Q1 2021 | Q1 2020 | % Change | | :-------------------------------- | :-------- | :-------- | :------- | | Transportation invoice volume | 8,787 | 8,280 | 6.1% | | Transportation invoice dollar volume | $7,904,639 | $6,467,051 | 22.2% | | Facility expense transaction volume* | 6,996 | 6,509 | 7.5% | | Facility expense dollar volume | $3,717,428 | $3,458,646 | 7.5% | | Payment and processing revenue | $25,216 | $25,503 | (1.1)% | Net Interest Income This section examines changes in net interest income, margin, and the impact of interest rate environments - Tax-equivalized net interest income decreased by 8.9% to $10.807 million in Q1 2021 compared to Q1 2020[138] - Net interest margin declined by 89 basis points from 3.21% to 2.32% year-over-year, reflecting the negative impact of the historically low short-term interest rate environment[138] - Average earning assets increased by 27.1% to $1.891 billion, primarily driven by a 345.7% increase in interest-bearing deposits in other financial institutions and a 10.2% increase in average loans (due to PPP loans)[136] Net Interest Income and Margin Analysis (In thousands, except percentages) | Metric | Q1 2021 | Q1 2020 | % Change | | :--------------------------------- | :------------ | :------------ | :------- | | Average earning assets | $1,891,395 | $1,487,873 | 27.12% | | Average interest-bearing liabilities | $552,906 | $409,376 | 35.06% | | Net interest income* | $10,807 | $11,857 | (8.86)% | | Net interest margin* | 2.32% | 3.21% | — | | Yield on earning assets* | 2.39% | 3.47% | — | | Rate on interest-bearing liabilities | 0.24% | 0.95% | — | Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential This section provides a detailed breakdown of average asset and liability balances and their associated interest rates - Average interest-bearing deposits in other financial institutions surged to $582.104 million in Q1 2021 (from $130.611 million in Q1 2020), but with a significantly lower yield of 0.10% (vs. 1.18%)[143] - Average taxable loans increased to $881.222 million (from $799.502 million), but their yield decreased to 3.95% (from 4.53%)[143] - Average interest-bearing demand deposits increased to $475.212 million (from $326.852 million), with a lower average rate of 0.13% (vs. 0.78%)[143] Analysis of Net Interest Income Changes This section quantifies the impact of volume and rate changes on total interest income and expense - Total interest income decreased by $1.684 million year-over-year, primarily due to a negative rate variance of $2.482 million, partially offset by a positive volume variance of $798,000[146] - Total interest expense decreased by $634,000 year-over-year, mainly driven by a negative rate variance of $773,000, despite a positive volume variance of $139,000[146] - The net interest income decrease of $1.050 million was primarily due to a $1.709 million negative impact from rate changes, partially offset by a $659,000 positive impact from volume changes[146] Analysis of Net Interest Income Changes (In thousands) | Change in Interest Income/Expense | Volume Impact | Rate Impact | Total Change | | :----------------------------------------------- | :------------ | :---------- | :----------- | | Total Interest Income | $798 | ($2,482) | ($1,684) | | Total Interest Expense | $139 | ($773) | ($634) | | Net Interest Income | $659 | ($1,709) | ($1,050) | Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments This section discusses the company's credit loss provisions, allowance for credit losses, and unfunded commitments - The Company recorded a release of credit losses and off-balance sheet credit exposures of $600,000 in Q1 2021, compared to a provision for credit losses of $325,000 in Q1 2020[147] - The Allowance for Credit Losses (ACL) was $11.721 million at March 31, 2021 (1.32% of outstanding loans), slightly down from $11.944 million at December 31, 2020 (1.34%)[148] - Excluding PPP loans, the ACL represented 1.51% of total loans at March 31, 2021[148] - The allowance for unfunded commitments was $207,000 at March 31, 2021, down from $567,000 at December 31, 2020[148] - There were no nonperforming loans outstanding at March 31, 2021, or December 31, 2020[148] Summary of Credit Loss Experience This section provides a summary of the company's credit loss experience, including allowances and net recoveries - The Allowance for Credit Losses at the end of Q1 2021 was $11.721 million, reflecting a release of $240,000 during the quarter[152] - Net recoveries on loans were $17,000 in Q1 2021, compared to $8,000 in Q1 2020[152] - The allowance for unfunded commitments at the end of Q1 2021 was $207,000, following a release of $360,000[152] Credit Loss Experience Summary (In thousands) | Metric | Q1 2021 | Q1 2020 | | :------------------------------------------ | :------ | :------ | | Allowance for credit losses at beginning of period | $11,944 | $10,556 | | (Release of) provision for credit losses | ($240) | $325 | | Net recoveries | $17 | $8 | | Allowance for credit losses at end of period | $11,721 | $10,889 | | Allowance for unfunded commitments at beginning of Period | $567 | $0 | | (Release of) provision for credit losses | ($360) | $0 | | Allowance for unfunded commitments at end of period | $207 | $0 | Operating Expenses This section analyzes the trends and drivers of the company's total operating expenses - Total operating expenses decreased by 1.4% ($404,000) in Q1 2021 compared to Q1 2020[153] - This decrease was primarily a result of pandemic-related declines in travel and other business development activities[153] Financial Condition This section reviews the company's overall financial position, including changes in assets, liabilities, and equity - Total assets increased by $13.338 million (0.6%) to $2.216 billion at March 31, 2021, from December 31, 2020[154] - Significant asset changes included increases in securities ($69.518 million) and payments in excess of funding ($21.912 million), partially offset by a decrease in cash and cash equivalents ($70.869 million)[154] - Total liabilities increased by $15.011 million (0.8%) to $1.957 billion, with accounts and drafts payable increasing by $62.122 million (7.4%) and total deposits decreasing by $47.721 million (4.5%)[155] - Total shareholders' equity decreased by $1.673 million (0.6%) due to share repurchases, dividends paid, and an increase in accumulated other comprehensive loss, partially offset by net income[156] Liquidity and Capital Resources This section assesses the company's ability to meet its financial obligations and maintain adequate capital levels - Cash and cash equivalents decreased by 10.6% to $599.659 million at March 31, 2021, representing 27.1% of total assets[159] - Total investment in securities increased by $69.518 million to $427.244 million, representing 19.3% of total assets[160] - The Bank has unsecured lines of credit totaling $83 million and secured lines of credit totaling $272.258 million, with no amounts outstanding as of March 31, 2021[161] - The Company and the Bank continue to exceed all Basel III regulatory capital requirements[175] Capital Ratios (March 31, 2021) | Capital Ratios (March 31, 2021) | Cass Information Systems, Inc. | Cass Commercial Bank | Minimum Requirement (incl. buffer) | | :-------------------------------------- | :----------------------------- | :------------------- | :-------------------------------- | | Total capital (to risk-weighted assets) | 21.13% | 22.48% | 10.5% | | Common equity tier I capital (to risk-weighted assets) | 20.17% | 21.22% | 7.0% | | Tier I capital (to risk-weighted assets) | 20.17% | 21.22% | 8.5% | | Tier I capital (to leverage assets) | 11.31% | 11.81% | 4.0% | Inflation This section discusses the potential impact of inflation on the company's monetary position and operating expenses - The Company's assets and liabilities are primarily monetary, resulting in a net positive monetary position[176] - During periods of inflation, holding a net positive monetary position will result in an overall decline in the purchasing power of the company[176] - Inflation affects certain expenses, such as employee compensation, which may not be readily recoverable in the price of the Company's services[176] Impact of New and Not Yet Adopted Accounting Pronouncements This section outlines the effects of recently adopted and future accounting standards on the company's financial reporting - The Company adopted ASU 2016-13 (CECL) using a modified retrospective approach on January 1, 2020, after deferring implementation due to the CARES Act[177][179] - Upon adoption, the Company recognized increases of $723,000 in the allowance for credit losses and $402,000 in the reserve for unfunded commitments, with a corresponding $856,000 reduction to retained earnings (net of tax)[179] - The ASU requires measurement and recognition of expected credit losses over the life of the portfolio, rather than incurred losses[178] Impact of ASU 2016-13 Adoption (In thousands) | Impact of ASU 2016-13 Adoption | December 31, 2019 | ASU 2016-13 Adoption | Under ASU 2016-13 | | :------------------------------------------ | :---------------- | :------------------- | :---------------- | | Allowance for credit/loan losses on loans | $10,556 | $723 | $11,279 | | Reserve for unfunded commitments | $0 | $402 | $402 | | Retained earnings | $90,341 | ($856) | $89,485 | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company manages interest rate risk through gap analysis and simulation models, aiming to limit changes in annualized net interest income to 15% from a 200 basis point interest rate shift. The COVID-19 pandemic has introduced significant uncertainty and market volatility, potentially deteriorating the Company's risk position - The Company manages its interest rate risk through measurement techniques including gap analysis and a simulation model[183] - The policy objective is to limit the change in annualized net interest income to 15% from an immediate and sustained parallel change in interest rates of 200 basis points[183] - The economic impact of the COVID-19 pandemic has introduced significant uncertainty and market volatility, which may result in the deterioration of the Company's risk position since December 31, 2020[183] Item 4. CONTROLS AND PROCEDURES Management, under the supervision of the principal executive and financial officers, evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2021, and concluded they were effective. No material changes to internal control over financial reporting were identified during Q1 2021 - The Company's management concluded that its disclosure controls and procedures were effective as of March 31, 2021[184] - No changes in the Company's internal control over financial reporting were identified in Q1 2021 that materially affected or are reasonably likely to materially affect these controls[185] PART II – Other Information This section provides additional information on legal proceedings, risk factors, equity sales, and other disclosures Item 1. LEGAL PROCEEDINGS The Company is involved in various pending or threatened legal actions and proceedings in the ordinary course of business, but management believes their ultimate resolution will not materially affect the Company's financial position or results of operations - The Company is the subject of various pending or threatened legal actions and proceedings that arise in the ordinary course of business[186] - Management believes the ultimate resolution of these legal actions and proceedings will not have a material effect upon the Company's consolidated financial position or results of operations[186] Item 1A. RISK FACTORS There are no material changes to the risk factors previously disclosed in the Company's 2020 Annual Report on Form 10-K - There are no material changes to the Risk Factors as disclosed in the Company's 2020 Annual Report on Form 10-K[187] Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During Q1 2021, the Company repurchased 31,256 shares of its common stock at an average price of $39.29 per share under its treasury stock buyback program. As of March 31, 2021, 434,622 shares remained available for repurchase - The Company repurchased 31,256 shares of its common stock during January 2021 at an average price of $39.29 per share[189] - As of March 31, 2021, 434,622 shares remained available for repurchase under the treasury stock buyback program[189] - The program, last modified in October 2020, authorizes the repurchase of up to an aggregate of 500,000 shares of common stock and has no expiration date[189] Common Stock Repurchase Activity (Shares and Dollars) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :--------------------------------- | :----------------------------- | :--------------------------- | :--------------------------------------------------------------------------- | | January 1, 2021 – January 31, 2021 | 31,256 | $39.29 | 434,622 | | February 1, 2021 – February 29, 2021 | — | — | 434,622 | | March 1, 2021 – March 31, 2021 | — | — | 434,622 | | Total | 31,256 | $39.29 | 434,622 | Item 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported[190] Item 4. MINE SAFETY DISCLOSURES This item is not applicable to the Company - This item is not applicable[191] Item 5. OTHER INFORMATION No other material information or changes to procedures for security holders to recommend Board nominees were reported in Q1 2021 - There have been no material changes to the procedures by which security holders may recommend nominees to the Company's Board of Directors implemented in the First Quarter of 2021[192] Item 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including certifications under the Sarbanes-Oxley Act and XBRL-related documents - Includes Certifications Pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002 (Exhibits 31.1, 31.2, 32.1, 32.2)[194][195] - Includes various Inline XBRL Taxonomy Extension documents (Exhibits 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF) and the Cover Page Interactive Data File (Exhibit 104)[197][198][199][200][201][202] SIGNATURES This section includes the required signatures of the company's principal executive and financial officers - The report is signed by Eric H. Brunngraber, Chairman, President, and Chief Executive Officer, and Michael J. Normile, Executive Vice President and Chief Financial Officer[207] - The signing date for the report is May 6, 2021[207]