Cass Information Systems(CASS) - 2021 Q3 - Quarterly Report

FORM 10-Q Filing Information Registrant Information This chapter provides basic registrant information for CASS INFORMATION SYSTEMS, INC., an accelerated filer listed on the Nasdaq Global Select Market, confirming all required reports have been filed - CASS INFORMATION SYSTEMS, INC. is a Missouri-registered company with stock ticker CASS, listed on the Nasdaq Global Select Market[4] - The company is classified as an Accelerated Filer[7] Common Stock Information as of October 22, 2021 | Metric | Data | | :--- | :--- | | Common Stock Par Value | $0.50/share | | Shares of Common Stock Outstanding | 14,010,148 shares | Forward-looking Statements This chapter warns investors that forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and factors beyond the company's control, with no obligation to publicly update or revise them - Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and factors beyond the company's control[13] - The company undertakes no obligation to publicly update or revise any forward-looking statements[13] - These risks, uncertainties, and other factors are discussed in the 'Risk Factors' section of the company's 2020 Form 10-K annual report[13] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This chapter presents the company's consolidated financial statements and related notes for periods ending September 30, 2021, and December 31, 2020 Consolidated Balance Sheets As of September 30, 2021, total assets increased by 4.1% to $2,292,986 thousand, driven by changes in cash, available-for-sale securities, and net loans Consolidated Balance Sheet Key Data (in thousands of dollars) | Metric | September 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and Cash Equivalents | $500,309 | $670,528 | | Available-for-Sale Securities, at Fair Value | $541,079 | $357,726 | | Loans, Net | $861,373 | $879,732 | | Total Assets | $2,292,986 | $2,203,235 | | Liabilities | | | | Total Deposits | $1,087,317 | $1,050,856 | | Accounts Payable and Drafts | $905,479 | $835,386 | | Total Liabilities | $2,045,343 | $1,942,075 | | Shareholders' Equity | | | | Total Shareholders' Equity | $247,643 | $261,160 | | Total Liabilities and Shareholders' Equity | $2,292,986 | $2,203,235 | - Total assets increased by 4.1% from $2,203,235 thousand as of December 31, 2020, to $2,292,986 thousand as of September 30, 2021[16][19] - Cash and cash equivalents decreased by $170,219 thousand, while available-for-sale securities increased by $183,353 thousand[16] Consolidated Statements of Income Net income grew for both the three and nine months ended September 30, 2021, primarily driven by information services payment and processing revenue, despite a slight decline in net interest income for the nine-month period Consolidated Statements of Income Key Data (in thousands of dollars, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Information Services Payment and Processing Revenue | $26,877 | $24,376 | $78,441 | $72,540 | | Bank Service Fees | $533 | $441 | $1,557 | $1,249 | | Total Fee Revenue and Other Income | $27,577 | $24,932 | $80,739 | $75,201 | | Total Interest Income | $11,719 | $11,279 | $33,503 | $35,259 | | Total Interest Expense | $287 | $465 | $915 | $1,911 | | Net Interest Income | $11,432 | $10,814 | $32,588 | $33,348 | | Provision (or Release) for Credit Losses | $340 | $0 | ($870) | $725 | | Net Interest Income (after Provision for Credit Losses) | $11,092 | $10,814 | $33,458 | $32,623 | | Total Net Revenue | $38,669 | $35,746 | $114,197 | $107,824 | | Total Operating Expenses | $30,690 | $28,680 | $89,018 | $84,966 | | Net Income | $6,805 | $5,781 | $20,902 | $18,765 | | Basic Earnings Per Share | $0.48 | $0.40 | $1.47 | $1.31 | | Diluted Earnings Per Share | $0.48 | $0.40 | $1.45 | $1.29 | - Third-quarter net income increased by 17.7% (from $5,781 thousand to $6,805 thousand) year-over-year, and nine-month net income increased by 11.4% (from $18,765 thousand to $20,902 thousand) year-over-year[24] - Nine-month net interest income decreased by 2.2% year-over-year (from $33,348 thousand to $32,588 thousand), primarily due to the low interest rate environment[24] Consolidated Statements of Comprehensive Income Comprehensive income decreased for both the three and nine months ended September 30, 2021, primarily due to changes in net unrealized gains and losses on available-for-sale securities Consolidated Statements of Comprehensive Income Key Data (in thousands of dollars) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $6,805 | $5,781 | $20,902 | $18,765 | | Other Comprehensive Income (Loss): | | | | | | Net Unrealized (Loss) Gain on Available-for-Sale Securities | ($4,438) | $224 | ($7,086) | $7,209 | | Tax Impact | $1,057 | ($53) | $1,687 | ($1,716) | | Foreign Currency Translation Adjustment | ($168) | $63 | ($145) | ($65) | | Total Comprehensive Income | $3,257 | $6,015 | $15,324 | $23,378 | - Third-quarter total comprehensive income decreased by 45.8% year-over-year (from $6,015 thousand to $3,257 thousand), and nine-month total comprehensive income decreased by 34.5% year-over-year (from $23,378 thousand to $15,324 thousand)[27] - Net unrealized gains and losses on available-for-sale securities, which were ($7,086 thousand) for the nine months ended September 30, 2021, compared to $7,209 thousand in the prior year, were the primary driver of the decrease in comprehensive income[27] Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash flow from operating activities decreased, cash outflow from investing activities significantly increased, and net cash flow from financing activities substantially reduced, resulting in a net decrease in cash and cash equivalents Consolidated Statements of Cash Flows Key Data (in thousands of dollars) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net Cash Flow from Operating Activities | $30,680 | $40,061 | | Net Cash Flow from Investing Activities | ($276,033) | ($68,538) | | Net Cash Flow from Financing Activities | $75,134 | $263,974 | | Net (Decrease) Increase in Cash and Cash Equivalents | ($170,219) | $235,497 | | Cash and Cash Equivalents at End of Period | $500,309 | $439,451 | - Net cash flow from operating activities decreased from $40,061 thousand in the prior year to $30,680 thousand for the nine months ended September 30, 2021[34] - Net cash outflow from investing activities significantly increased from $68,538 thousand in the prior year to $276,033 thousand for the nine months ended September 30, 2021, primarily due to purchases of available-for-sale securities and bank-owned life insurance[34] - Net cash flow from financing activities significantly decreased from $263,974 thousand in the prior year to $75,134 thousand for the nine months ended September 30, 2021, mainly due to increased common stock repurchases and cash dividend payments[34] Consolidated Statements of Shareholders' Equity As of September 30, 2021, total shareholders' equity decreased from December 31, 2020, primarily due to stock repurchases, cash dividend payments, and other comprehensive losses, partially offset by net income Consolidated Statements of Shareholders' Equity Key Data (in thousands of dollars) | Metric | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Common Stock | $7,753 | $7,753 | | Additional Paid-in Capital | $204,113 | $204,875 | | Retained Earnings | $108,388 | $99,062 | | Treasury Stock, at Cost | ($67,018) | ($50,515) | | Accumulated Other Comprehensive Loss | ($5,593) | ($15) | | Total Shareholders' Equity | $247,643 | $261,160 | - Total shareholders' equity decreased by $13,517 thousand, or 5.2%, from $261,160 thousand as of December 31, 2020, to $247,643 thousand as of September 30, 2021[39][186] - Key factors contributing to the decrease in shareholders' equity include stock repurchases of $18,975 thousand, cash dividend payments of $11,576 thousand, and other comprehensive losses of $5,578 thousand, partially offset by net income of $20,902 thousand[39][186] Notes to Consolidated Financial Statements This chapter provides detailed notes to the consolidated financial statements, covering accounting basis, COVID-19 impact, intangible assets, earnings per share, stock repurchases, segment information, loan types, commitments, contingencies, equity incentives, pension plans, income taxes, investment securities, fair value of financial instruments, revenue from customer contracts, and leases Note 1 - Basis of Presentation This note explains the basis of financial statement preparation in accordance with GAAP and Form 10-Q requirements, including management's necessary adjustments, and discusses the ongoing impact and risks of the COVID-19 pandemic - Financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and Form 10-Q requirements, including all adjustments deemed necessary by management[42] - The COVID-19 pandemic continues to negatively impact global business activities, potentially leading to business closures, supply chain disruptions, and labor shortages, which could adversely affect the company's financial performance[45][46] - The Federal Reserve's reduction of the federal funds rate in response to COVID-19 may impact the company's net interest income, and the company is considering additional cost control measures while potentially facing asset impairment or increased allowance for credit losses[47][48] Note 2 – Intangible Assets This note provides detailed information on the company's intangible assets, including the carrying value and accumulated amortization for customer lists, patents, software, trademarks, and other intangibles, with goodwill considered to have an indefinite useful life and not amortized Intangible Assets Details (in thousands of dollars) | Intangible Asset Category | Carrying Value as of Sep 30, 2021 | Carrying Value as of Dec 31, 2020 | | :--- | :--- | :--- | | Customer Lists | $4,778 | $4,778 | | Patents | $72 | $72 | | Software | $2,844 | $2,844 | | Trademarks | $190 | $190 | | Other | $500 | $500 | | Goodwill | $14,262 | $14,262 | | Total Intangible Assets | $22,646 | $22,646 | | Accumulated Amortization (Sep 30, 2021) | ($5,605) | | | Accumulated Amortization (Dec 31, 2020) | | ($4,961) | - Goodwill carrying value was $14,262 thousand as of both September 30, 2021, and December 31, 2020, and is not amortized[58] - Intangible asset amortization expense was $644 thousand for the nine months ended September 30, 2021, and September 30, 2020[58] Note 3 – Earnings Per Share This note details the calculation of basic and diluted earnings per share and provides the EPS data for the three and nine months ended September 30, 2021, and 2020 Basic and Diluted Earnings Per Share (in thousands of dollars, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Basic | | | | | | Net Income | $6,805 | $5,781 | $20,902 | $18,765 | | Weighted Average Common Shares Outstanding | 14,040,089 | 14,348,151 | 14,203,369 | 14,373,243 | | Basic Earnings Per Share | $0.48 | $0.40 | $1.47 | $1.31 | | Diluted | | | | | | Net Income | $6,805 | $5,781 | $20,902 | $18,765 | | Effect of Dilutive Restricted Stock and Stock Appreciation Rights | 237,080 | 198,336 | 239,016 | 200,723 | | Diluted Weighted Average Common Shares Outstanding | 14,277,169 | 14,546,487 | 14,442,385 | 14,573,966 | | Diluted Earnings Per Share | $0.48 | $0.40 | $1.45 | $1.29 | - For the three months ended September 30, 2021, basic and diluted earnings per share were both $0.48, up from $0.40 in the prior year period[61] - For the nine months ended September 30, 2021, basic earnings per share were $1.47 and diluted earnings per share were $1.45, both higher than $1.31 and $1.29, respectively, in the prior year period[61] Note 4 – Stock Repurchases This note discloses the company's stock repurchase program, including board-authorized shares and actual repurchases, with an updated authorization in October 2021 - The company maintains a treasury stock repurchase program, with the Board of Directors authorizing the repurchase of up to 500,000 shares of common stock in October 2020, with no expiration date[62] Stock Repurchase Activity (in shares) | Period | Shares Repurchased | | :--- | :--- | | Three Months Ended Sep 30, 2021 | 314,672 | | Three Months Ended Sep 30, 2020 | 0 | | Nine Months Ended Sep 30, 2021 | 434,938 | | Nine Months Ended Sep 30, 2020 | 128,779 | - On October 19, 2021, the Board of Directors authorized the repurchase of up to 750,000 shares of common stock, replacing the previous authorization, with 750,000 shares remaining available for future repurchase[63] Note 5 – Industry Segment Information The company operates in two reportable segments, Information Services and Banking Services, each offering distinct services and marketing channels, with this note providing a summary of their financial performance including fee revenue, interest income, and tax-equivalent income before taxes - The company has two reportable segments: Information Services and Banking Services, which are managed independently due to their unique services and processing requirements[64] - The Information Services segment provides transportation, energy, telecommunications, and environmental invoice processing and payment services, while the Banking Services segment primarily offers banking services to privately held businesses and faith-based organizations, also supporting the banking needs of the Information Services segment[65] Segment Performance Summary (in thousands of dollars) | Metric | Information Services (Three Months Ended Sep 30, 2021) | Banking Services (Three Months Ended Sep 30, 2021) | Information Services (Three Months Ended Sep 30, 2020) | Banking Services (Three Months Ended Sep 30, 2020) | | :--- | :--- | :--- | :--- | :--- | | Fee Revenue | $26,642 | $596 | $24,198 | $651 | | Interest Income* | $6,361 | $6,187 | $5,112 | $7,212 | | Tax-Equivalent Income Before Taxes* | $6,753 | $1,886 | $4,522 | $3,506 | | Metric | Information Services (Nine Months Ended Sep 30, 2021) | Banking Services (Nine Months Ended Sep 30, 2021) | Information Services (Nine Months Ended Sep 30, 2020) | Banking Services (Nine Months Ended Sep 30, 2020) | | :--- | :--- | :--- | :--- | :--- | | Fee Revenue | $77,717 | $1,846 | $72,098 | $1,906 | | Interest Income* | $17,754 | $18,501 | $14,774 | $21,097 | | Tax-Equivalent Income Before Taxes* | $19,170 | $8,080 | $13,082 | $9,190 | Note 6 – Loans by Type This note provides a detailed classification of the company's loan portfolio, including commercial and industrial, real estate (commercial and faith-based), and Paycheck Protection Program (PPP) loans, along with disclosures on loan delinquencies, credit grade distribution, and changes in the allowance for credit losses Loan Category Summary (in thousands of dollars) | Loan Category | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commercial and Industrial | $356,532 | $298,984 | | Commercial Real Estate Mortgage | $103,596 | $100,419 | | Commercial Real Estate Construction | $24,705 | $25,090 | | Faith-Based Real Estate Mortgage | $358,493 | $333,661 | | Faith-Based Real Estate Construction | $13,272 | $23,818 | | Paycheck Protection Program (PPP) | $16,307 | $109,704 | | Total Loans | $872,905 | $891,676 | - As of September 30, 2021, PPP loan balances significantly decreased to $16,307 thousand from $109,704 thousand as of December 31, 2020, reflecting substantial SBA forgiveness of PPP loans[74] Allowance for Credit Losses Changes (in thousands of dollars) | Metric | Balance as of Dec 31, 2020 | Balance as of Sep 30, 2021 | | :--- | :--- | :--- | | Total Allowance for Credit Losses | $11,944 | $11,532 | | Provision (Release) for Credit Losses | ($440) | | | Loan Recoveries | $28 | | | As of September 30, 2021, the allowance for credit losses as a percentage of outstanding loans was 1.32%, compared to 1.34% as of December 31, 2020 | | | Note 7 – Commitments and Contingencies This note discloses the company's credit, market, and operational risks in the normal course of business, including unused loan commitments, standby, and commercial letters of credit, and the release of allowance for credit losses due to improved economic conditions and reduced credit line utilization - As of September 30, 2021, unused loan commitments, standby letters of credit, and commercial letters of credit balances were $194,327 thousand, $12,061 thousand, and $235 thousand, respectively[91] - As of September 30, 2021, the company released $430 thousand from its allowance for credit losses due to improved economic conditions and reduced utilization of credit lines[90] Contractual Cash Obligations for Time Deposits (in thousands of dollars) | Term | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Time Deposits | $50,699 | $34,719 | $15,917 | $63 | $0 | Note 8 – Stock-Based Compensation This note details the company's stock-based compensation plans, including the grant, vesting, and expense recognition for restricted stock, performance-based restricted stock (PBRS), and stock appreciation rights (SARs) Stock-Based Compensation Expense (in thousands of dollars) | Period | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Stock-Based Compensation Expense | $1,066 | $799 | $2,585 | $2,277 | - As of September 30, 2021, total unrecognized compensation cost related to unvested restricted stock was $2,060 thousand, expected to be recognized over approximately 0.70 years[95] - For the nine months ended September 30, 2021, 52,356 shares of restricted stock and 31,150 shares of performance-based restricted stock were granted[93][98] Note 9 – Defined Pension Plans This note provides details on the company's defined benefit pension plan and unfunded executive supplemental retirement plan, including components of net periodic pension cost and reasons for the decrease in pension costs in 2021 - The company's non-contributory defined benefit pension plan was frozen for all participants on February 28, 2021, leading to a decrease in pension costs in 2021[100][101] Net Periodic Pension (Benefit) Cost (in thousands of dollars) | Metric | 2021 Estimate | 2020 Actual | | :--- | :--- | :--- | | Service Cost | $963 | $4,329 | | Interest Cost | $3,069 | $3,908 | | Expected Return on Plan Assets | ($6,299) | ($6,049) | | Net Amortization | $360 | $1,946 | | Net Periodic Pension (Benefit) Cost | ($1,907) | $4,134 | - For the nine months ended September 30, 2021, the company recorded a net periodic benefit of $1,096 thousand, compared to a net periodic pension cost of $3,159 thousand in the prior year period[101] Note 10 – Income Taxes This note discloses the company's effective tax rates and explains the variance from the statutory rate of 21% primarily due to tax-exempt interest from municipal bonds Effective Tax Rates | Period | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Effective Tax Rate | 14.7% | 18.2% | 17.0% | 17.9% | - The effective tax rate for all periods differs from the statutory rate of 21%, primarily due to tax-exempt interest generated from municipal bonds[103] Note 11 – Investment in Securities This note provides detailed information on the company's available-for-sale investment securities, including their amortized cost, unrealized gains/losses, and fair value, categorized by security type and contractual maturity Investment Securities Details (in thousands of dollars) | Security Type | Amortized Cost as of Sep 30, 2021 | Fair Value as of Sep 30, 2021 | Amortized Cost as of Dec 31, 2020 | Fair Value as of Dec 31, 2020 | | :--- | :--- | :--- | :--- | :--- | | State and Political Subdivisions | $345,165 | $358,224 | $287,059 | $305,974 | | U.S. Government Agencies | $112,850 | $112,099 | $50,988 | $51,752 | | Corporate Bonds | $70,516 | $70,756 | | | | Total | $528,531 | $541,079 | $338,047 | $357,726 | - As of September 30, 2021, the company had 66 securities in an unrealized loss position, representing 20% of the total, primarily attributable to changes in market interest rates since the securities were purchased[106] Investment Securities Contractual Maturity (in thousands of dollars) | Maturity Date | Amortized Cost | Fair Value | | :--- | :--- | :--- | | 1 Year or Less | $25,511 | $25,760 | | 1 to 5 Years | $104,620 | $109,737 | | 5 to 10 Years | $210,353 | $219,204 | | More than 10 Years | $188,047 | $186,378 | | Total | $528,531 | $541,079 | Note 12 – Fair Value of Financial Instruments This note summarizes the carrying and fair values of the company's financial instruments and explains the methods and assumptions used for their estimation, including cash and cash equivalents, investment securities, loans, accrued interest, and deposits Carrying Value and Fair Value of Financial Instruments (in thousands of dollars) | Financial Instrument | Carrying Value as of Sep 30, 2021 | Fair Value as of Sep 30, 2021 | Carrying Value as of Dec 31, 2020 | Fair Value as of Dec 31, 2020 | | :--- | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | $500,309 | $500,309 | $670,528 | $670,528 | | Investment Securities | $541,079 | $541,079 | $357,726 | $357,726 | | Loans, Net | $861,373 | $861,828 | $879,732 | $883,461 | | Deposits | $1,087,317 | $1,087,317 | $1,050,856 | $1,050,856 | | Accounts Payable and Drafts | $905,479 | $905,479 | $835,386 | $835,386 | - The fair value of investment securities is measured using Level 2 valuation methods, while the fair value of loans is estimated using discounted present value of future cash flows, categorized as Level 3 valuation[112][113] Note 13 – Revenue from Contracts with Customers This note details the company's revenue recognition policies from customer contracts, primarily comprising invoice processing fees, invoice payment fees, and bank service fees, and provides specific amounts for these revenue categories - Company revenue primarily derives from invoice processing fees (recognized per item or monthly), invoice payment fees (recognized when payment transactions occur), and bank service fees (recognized per transaction or monthly)[119][121][122] Fee Revenue and Other Income Details (in thousands of dollars) | Revenue Category | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Invoice Processing Fees | $19,230 | $18,650 | $58,047 | $55,697 | | Invoice Payment Fees | $7,647 | $5,726 | $20,394 | $16,843 | | Information Services Payment and Processing Revenue | $26,877 | $24,376 | $78,441 | $72,540 | | Bank Service Fees | $533 | $441 | $1,557 | $1,249 | | Total Fee Revenue and Other Income | $27,577 | $24,932 | $80,739 | $75,201 | Note 14 – Leases This note discloses detailed information on the company's operating leases, including lease liabilities, right-of-use assets, operating lease costs, and a maturity analysis of lease liabilities - As of September 30, 2021, the company's lease liabilities were $5,246 thousand, and right-of-use assets were $4,754 thousand[124] Operating Lease Liability Maturity Analysis (in thousands of dollars) | Term | September 30, 2021 | | :--- | :--- | | Less than 1 Year | $1,726 | | 1-2 Years | $1,102 | | 2-3 Years | $563 | | 3-4 Years | $553 | | 4-5 Years | $552 | | More than 5 Years | $1,629 | | Total Undiscounted Cash Flows | $6,125 | | Discounting of Cash Flows | $879 | | Total Lease Liabilities | $5,246 | - As of September 30, 2021, the weighted-average remaining lease term for operating leases was 6.0 years, with a weighted-average discount rate of 5.35%[124] Note 15 – Subsequent Events This note states that the company has evaluated subsequent events after the consolidated balance sheet date of September 30, 2021, and found no events requiring additional disclosure to prevent the financial statements from being misleading - The company has evaluated subsequent events after September 30, 2021, and found no events requiring additional disclosure[128] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This chapter provides management's detailed discussion and analysis of the company's financial condition and operating results, covering the impact of COVID-19, business overview, key accounting policies, operating performance, financial condition, liquidity, capital resources, inflation, and new accounting pronouncements Impact of COVID-19 on the Company's Business The COVID-19 pandemic and its control measures significantly impacted the company's operating results in 2020 and the first nine months of 2021, with ongoing uncertainty posing risks despite improving economic conditions - The COVID-19 pandemic and its control measures significantly impacted the operating results of the company's Information Services and Banking Services segments in 2020 and the first nine months of 2021[130] - The Federal Reserve's reduction of the federal funds rate in response to COVID-19 adversely affected the company's net interest income and banking services operating results[132] - The company actively participated in the Paycheck Protection Program (PPP), processing approximately $210 million in PPP loan applications in 2020 and the first nine months of 2021[134] Overview The company primarily provides payment and information processing services, supported by its bank subsidiary, with revenue derived from service fees and investment income on account balances, influenced by transaction volumes, interest rates, and fuel costs - The company provides transportation, energy, telecommunications, and environmental invoice processing and payment services to large manufacturing, distribution, and retail enterprises[138] - The company is compensated through service fees and investment income generated from account balances during the payment process, with revenue and profitability influenced by transaction volumes, interest rate levels, and fuel costs[139][140] - 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[141] Critical Accounting Policies This chapter discusses the company's critical accounting policies requiring significant estimates and assumptions in preparing consolidated financial statements, particularly the determination of the allowance for credit losses - The allowance for credit losses is a critical accounting policy involving estimates of expected credit losses on the loan portfolio, where actual results may differ significantly from estimates[144] - These policies impact both the company's Information Services and Banking Services segments, with related risks discussed in the "Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments" section[144] Results of Operations This chapter analyzes the company's operating results for the third quarter and first nine months of 2021 compared to the same periods in 2020, including changes in net income, fee revenue, net interest income, allowance for credit losses, and operating expenses Net Income The company achieved growth in net income and diluted earnings per share for both the third quarter and first nine months of 2021, though return on average assets and return on average equity experienced some fluctuations Net Income and Earnings Per Share (in thousands of dollars, except per share data) | Metric | Q3 2021 | Q3 2020 | Change % | Nine Months 2021 | Nine Months 2020 | Change % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Income | $6,805 | $5,781 | 17.7% | $20,902 | $18,765 | 11.4% | | Diluted Earnings Per Share | $0.48 | $0.40 | 20.0% | $1.45 | $1.29 | 12.4% | | Return on Average Assets | 1.14% | 1.14% | — | 1.23% | 1.32% | — | | Return on Average Equity | 10.61% | 9.25% | — | 10.84% | 10.25% | — | - Third-quarter 2021 net income increased by 17.7% year-over-year, with diluted earnings per share growing by 20.0%[146] - Nine-month 2021 net income increased by 11.4% year-over-year, with diluted earnings per share growing by 12.4%[146] Fee Revenue and Other Income The company's fee revenue primarily stems from transportation and facilities payment and processing services, with both third-quarter and nine-month payment and processing fee revenue increasing in 2021, driven by strong manufacturing performance, new customer growth, and rising transportation and energy prices Fee Revenue and Other Income Key Data (in thousands of dollars) | Metric | Q3 2021 | Q3 2020 | Change % | Nine Months 2021 | Nine Months 2020 | Change % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Transportation Invoice Volume | 9,333 | 8,660 | 7.8% | 27,581 | 24,234 | 13.8% | | Transportation Invoice Dollar Volume | $9,540,408 | $6,822,565 | 39.8% | $26,385,936 | $18,987,243 | 39.0% | | Facilities-Related Transaction Volume | 6,675 | 7,117 | (6.2)% | 20,498 | 20,330 | 0.8% | | Facilities-Related Dollar Volume | $4,215,044 | $3,595,586 | 17.2% | $11,590,437 | $10,118,270 | 14.5% | | Payment and Processing Revenue | $26,877 | $24,376 | 10.3% | $78,441 | $72,540 | 8.1% | - Third-quarter 2021 payment and processing fee revenue increased by 10%, driven by strong manufacturing performance, new customer growth, and rising transportation prices[148] - Nine-month 2021 payment and processing revenue increased by 8%, primarily due to growth in transportation invoice volume and dollar volume[153] Net Interest Income Net interest income is a significant revenue source, showing growth in the third quarter of 2021 but a decline for the first nine months, mainly due to a narrowing net interest margin in a low short-term interest rate environment Net Interest Income and Related Factors (in thousands of dollars) | Metric | Q3 2021 | Q3 2020 | Change % | Nine Months 2021 | Nine Months 2020 | Change % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Average Earning Assets | $2,036,296 | $1,734,680 | 17.4% | $1,965,976 | $1,616,090 | 21.7% | | Average Interest-Bearing Liabilities | $600,263 | $507,172 | 18.4% | $583,478 | $465,128 | 25.4% | | Net Interest Income* | $11,900 | $11,280 | 5.5% | $34,005 | $34,772 | (2.2)% | | Net Interest Margin* | 2.32% | 2.59% | | 2.31% | 2.87% | | | Yield on Earning Assets* | 2.37% | 2.69% | | 2.37% | 3.03% | | | Rate on Interest-Bearing Liabilities | 0.19% | 0.36% | | 0.21% | 0.55% | | - Third-quarter 2021 tax-equivalent net interest income increased by 5.5% year-over-year, but the net interest margin decreased from 2.59% to 2.32%, reflecting the negative impact of historically low short-term interest rates[158] - Nine-month 2021 tax-equivalent net interest income decreased by 2.2% year-over-year, with the net interest margin declining from 2.87% to 2.31%, primarily due to the low short-term interest rate environment[163] Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential This chapter provides detailed information on the company's average balance sheet, along with tax-equivalent interest income and expense, average yields, and average rates for various earning assets and interest-bearing liabilities Average Balance Sheet and Interest Differential (in thousands of dollars) | Metric | Q3 2021 Average Balance | Q3 2021 Yield/Rate | Q3 2020 Average Balance | Q3 2020 Yield/Rate | | :--- | :--- | :--- | :--- | :--- | | Loans (Taxable) | $873,070 | 4.08% | $949,836 | 3.80% | | Investment Securities (Taxable) | $209,662 | 1.38% | $69,158 | 2.14% | | Investment Securities (Tax-Exempt) | $308,071 | 2.87% | $284,826 | 3.10% | | Interest-Bearing Demand Deposits | $531,541 | 0.11% | $425,192 | 0.21% | | Net Interest Income | $11,900 | | $11,280 | | | Net Interest Margin | | 2.32% | | 2.59% | | Metric | Nine Months 2021 Average Balance | Nine Months 2021 Yield/Rate | Nine Months 2020 Average Balance | Nine Months 2020 Yield/Rate | | :--- | :--- | :--- | :--- | :--- | | Loans (Taxable) | $885,274 | 3.97% | $904,632 | 4.04% | | Investment Securities (Taxable) | $149,953 | 1.24% | $82,271 | 2.27% | | Investment Securities (Tax-Exempt) | $304,348 | 2.96% | $289,964 | 3.12% | | Interest-Bearing Demand Deposits | $510,886 | 0.11% | $382,424 | 0.37% | | Net Interest Income | $34,005 | | $34,772 | | | Net Interest Margin | | 2.31% | | 2.87% | - In the third quarter of 2021, average earning assets increased by 17.4%, primarily driven by significant increases in deposits and accounts payable[155] - For the nine months ended September 30, 2021, average earning assets increased by 21.7%, and average interest-bearing liabilities increased by 25.4%[159][160] Analysis of Net Interest Income Changes This chapter analyzes the specific impacts of volume and rate changes on the company's net interest income across different periods Analysis of Net Interest Income Changes (in thousands of dollars) | Source of Change | Q3 2021 (Volume) | Q3 2021 (Rate) | Q3 2021 (Total) | | :--- | :--- | :--- | :--- | | Increase (Decrease) in Interest Income: | | | | | Loans (Taxable) | ($751) | $671 | ($80) | | Investment Securities (Taxable) | $530 | ($171) | $359 | | Investment Securities (Tax-Exempt) | $178 | ($169) | $9 | | Total Interest Income | $35 | $407 | $442 | | Interest Expense: | | | | | Interest-Bearing Demand Deposits | $48 | ($130) | ($82) | | Total Interest Expense | ($2) | ($176) | ($178) | | Net Interest Income | $37 | $583 | $620 | | Source of Change | Nine Months 2021 (Volume) | Nine Months 2021 (Rate) | Nine Months 2021 (Total) | | :--- | :--- | :--- | :--- | | Increase (Decrease) in Interest Income: | | | | | Loans (Taxable) | ($593) | ($503) | ($1,096) | | Investment Securities (Taxable) | $812 | ($825) | ($13) | | Investment Securities (Tax-Exempt) | $325 | ($358) | ($33) | | Total Interest Income | $811 | ($2,574) | ($1,763) | | Interest Expense: | | | | | Interest-Bearing Demand Deposits | $275 | ($906) | ($631) | | Total Interest Expense | $105 | ($1,101) | ($996) | | Net Interest Income | $706 | ($1,473) | ($767) | - In the third quarter of 2021, the increase in net interest income was primarily driven by a $583 thousand contribution from rate changes, with volume changes contributing $37 thousand[173] - For the nine months ended September 30, 2021, the decrease in net interest income was mainly due to a ($1,473 thousand) reduction from rate changes, partially offset by a $706 thousand contribution from volume changes[175] Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments This chapter discusses changes in the company's allowance for credit losses and unfunded commitments, including provisions or releases for the third quarter and first nine months of 2021, and their relationship to the loan portfolio and economic conditions - In the third quarter of 2021, the company recorded a $340 thousand provision for credit losses, primarily due to loan growth[176] - For the nine months ended September 30, 2021, the company released $870 thousand from its allowance for credit losses, mainly due to improved economic conditions and the release of specific allowances for problem loans[176] Allowance for Credit Losses and Unfunded Commitments Analysis (in thousands of dollars) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Beginning Allowance for Credit/Loan Losses | $11,171 | $11,292 | $11,944 | $10,556 | | Provision (Release) for Credit/Loan Losses | $350 | $0 | ($440) | $725 | | Ending Allowance for Credit/Loan Losses | $11,532 | $11,298 | $11,532 | $11,298 | | Ending Allowance for Unfunded Commitments | $137 | $0 | $137 | $0 | | Allowance for Credit Losses as % of Outstanding Loans (End of Period) | 1.32% | 1.20% | 1.32% | 1.20% | Operating Expenses The company's operating expenses increased in both the third quarter and first nine months of 2021, primarily due to higher personnel and external service costs driven by increased payment processing volumes - Third-quarter 2021 total operating expenses increased by 7.0% ($2,010 thousand) year-over-year, primarily due to higher personnel and external service costs from increased payment processing volumes[183] - Nine-month 2021 total operating expenses increased by 4.8% ($4,052 thousand) year-over-year, also due to increased payment processing volumes[183] Financial Condition As of September 30, 2021, total assets and total liabilities increased, while total shareholders' equity decreased, with asset growth driven by investment securities and excess payments, and liability growth by deposits and accounts payable - As of September 30, 2021, total assets were $2,292,986 thousand, an increase of $89,751 thousand (4.1%) from December 31, 2020[184] - Asset growth was primarily driven by a $183,353 thousand (51.3%) increase in the investment securities portfolio and a $71,816 thousand (36.9%) increase in excess payments, partially offset by a $170,219 thousand decrease in cash and cash equivalents[184] - As of September 30, 2021, total liabilities were $2,045,343 thousand, an increase of $103,268 thousand (5.3%) from December 31, 2020, primarily driven by a $36,461 thousand increase in deposits and a $70,093 thousand increase in accounts payable[185] - As of September 30, 2021, total shareholders' equity was $247,643 thousand, a decrease of $13,517 thousand (5.2%) from December 31, 2020, primarily due to stock repurchases, cash dividend payments, and other comprehensive losses[186] Liquidity and Capital Resources This chapter discusses the company's liquidity sources and capital adequacy, highlighting ample liquid assets and various secondary liquidity sources, while consistently meeting all regulatory capital requirements - As of September 30, 2021, liquid assets (cash and cash equivalents) were $500,309 thousand, representing 21.8% of total assets, serving as the company's primary source of liquidity[189] - Secondary liquidity sources include the investment portfolio ($541,079 thousand) and the bank's unsecured and secured lines of credit (totaling $373,048 thousand)[190][191] - The company and the bank consistently exceed all regulatory capital requirements, including Common Equity Tier 1, Tier 1, and Total Capital to risk-weighted assets ratios, as well as the Tier 1 Capital to leverage assets ratio[205] Regulatory Capital Ratios (in thousands of dollars) | Metric | Amount as of Sep 30, 2021 | Ratio as of Sep 30, 2021 | Amount as of Dec 31, 2020 | Ratio as of Dec 31, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Capital (to Risk-Weighted Assets) | | | | | | Cass Information Systems, Inc. | $247,480 | 17.04% | $255,332 | 21.41% | | Cass Commercial Bank | $184,869 | 21.45% | $171,298 | 21.46% | | Common Equity Tier 1 Capital (to Risk-Weighted Assets) | | | | | | Cass Information Systems, Inc. | $235,949 | 16.24% | $243,388 | 20.41% | | Cass Commercial Bank | $174,093 | 20.20% | $161,300 | 20.21% | | Tier 1 Capital (to Risk-Weighted Assets) | | | | | | Cass Information Systems, Inc. | $235,949 | 16.24% | $243,388 | 20.41% | | Cass Commercial Bank | $174,093 | 20.20% | $161,300 | 20.21% | | Tier 1 Capital (to Leverage Assets) | | | | | | Cass Information Systems, Inc. | $235,949 | 10.01% | $243,388 | 11.52% | | Cass Commercial Bank | $174,093 | 12.32% | $161,300 | 14.48% | Inflation This chapter discusses the potential impact of inflation on the company's financial condition and operating results, noting that holding a net monetary asset position during inflationary periods may lead to a decrease in purchasing power - The company's assets and liabilities are primarily monetary, and holding a net monetary asset position during inflationary periods may lead to a decrease in purchasing power[206] - Inflation rates affect certain expenses, such as employee compensation, which may not be fully offset by adjustments in the company's service prices[206] Impact of New and Not Yet Adopted Accounting Pronouncements This chapter discusses the adoption of ASU 2016-13 (Financial Instruments – Credit Losses) and its impact on the company's financial statements, including increases in the allowance for credit losses and unfunded commitments - The company has adopted ASU 2016-13, which requires measuring and recognizing expected credit losses for financial instruments rather than incurred losses[208] - The company adopted ASU 2016-13 on January 1, 2020, resulting in an increase of $723 thousand in the allowance for credit losses, $402 thousand in the allowance for unfunded commitments, and a corresponding $856 thousand (net of tax) reduction in retained earnings[211][212] Impact of Adopting ASU 2016-13 (in thousands of dollars) | Metric | December 31, 2019 | Impact of ASU 2016-13 Adoption | Reported under ASU 2016-13 | | :--- | :--- | :--- | :--- | | Allowance for Loan/Credit Losses | $10,556 | $723 | $11,279 | | Deferred Tax Assets | $2,298 | $269 | $2,567 | | Allowance for Unfunded Commitments | $0 | $402 | $402 | | Retained Earnings | $90,341 | ($856) | $89,485 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This chapter discloses quantitative and qualitative information about the company's market risk, particularly interest rate risk, which is managed through gap analysis and simulation models, and assesses the potential impact of interest rate changes on net interest income - The company manages interest rate risk through gap analysis and simulation models, with asset/liability management policies established and monitored by management[213] - The economic impact of the COVID-19 pandemic has introduced significant uncertainty and market volatility, potentially exacerbating the company's risk profile[213] Impact of Interest Rate Changes on Estimated Net Interest Income | Interest Rate Change | Estimated Net Interest Income Change % as of Sep 30, 2021 | Estimated Net Interest Income Change % as of Dec 31, 2020 | | :--- | :--- | :--- | | +200 basis points | 21.7% | 33.0% | | +100 basis points | 10.9% | 16.3% | | Flat | —% | —% | | -100 basis points | (2.6)% | (2.5)% | ITEM 4. CONTROLS AND PROCEDURES This chapter confirms that the company's management has evaluated the effectiveness of disclosure controls and procedures, concluding they are effective as of the end of the reporting period, with no significant changes to internal controls during the period - The company's management has evaluated the effectiveness of disclosure controls and procedures and concluded they are effective as of the end of the reporting period[215] - There were no significant changes in the company's internal controls during the third quarter of 2021 that materially affected internal control over financial reporting[216] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This chapter states that the company is involved in various ongoing or potential legal actions and proceedings, but management believes their ultimate resolution will not materially affect the business or financial condition of the company or its subsidiaries - The company is involved in various ongoing or potential legal actions and proceedings arising in the normal course of business[218] - Management believes the ultimate resolution of these legal proceedings will not materially affect the business or financial condition of the company or its subsidiaries[218] ITEM 1A. RISK FACTORS This chapter notes that the company disclosed risk factors in its 2020 Form 10-K annual report that could affect its business, future performance, or financial condition, and these factors have not materially changed since that report - The company disclosed risk factors in its 2020 Form 10-K annual report that could affect its business, future performance, or financial condition[219] - There have been no material changes to the risk factors since the 2020 Form 10-K annual report disclosure[219] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This chapter discloses the company's common stock repurchases during the third quarter of 2021 under its treasury stock repurchase program, including the number of shares repurchased, average price, and remaining shares available for repurchase - In the third quarter of 2021, the company repurchased 314,672 shares of common stock under its treasury stock repurchase program[220] Q3 2021 Stock Repurchase Details | Period | Total Number of Shares Purchased | Average Price Paid/Share | Total Number of Shares Purchased Under Publicly Announced Plans | Maximum Number of Shares That May Yet Be Purchased Under the Plans | | :--- | :--- | :--- | :--- | :--- | | July 1 – July 31, 2021 | 42,938 | $41.10 | 42,938 | 302,674 | | August 1 – August 31, 2021 | 170,700 | $43.85 | 170,700 | 131,974 | | September 1 – September 30, 2021 | 101,034 | $44.21 | 101,034 | 30,940 | | Total | 314,672 | $43.59 | 314,672 | 30,940 | - On October 19, 2021, the Board of Directors authorized the repurchase of up to 750,000 shares of common stock, replacing the previous authorization[220] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This chapter states that the company has not experienced any defaults upon senior securities - The company has not experienced any defaults upon senior securities[221] ITEM 4. MINE SAFETY DISCLOSURES This chapter states that mine safety disclosures are not applicable to the company's business - Mine safety disclosures are not applicable to the company[222] ITEM 5. OTHER INFORMATION This chapter states that no other material information requires disclosure, and there were no significant changes in the procedures for security holders to recommend director nominees during the third quarter of 2021 - There were no significant changes in the procedures by which security holders may recommend nominees to the Board of Directors during the third quarter of 2021[223] ITEM 6. EXHIBITS This chapter lists the exhibits filed with the 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[225] - Exhibits also include XBRL Instance Document, Taxonomy Extension Schema Document, Calculation Linkbase Document, Label Linkbase Document, Presentation Linkbase Document, and Definition Linkbase Document[225] SIGNATURES Signatures This chapter contains the report's signatures by authorized representatives of the company, as required by the Securities Exchange Act of 1934 - The report was signed on November 5, 2021, by Eric H. Brunngraber, Chairman, President, and Chief Executive Officer, and Michael J. Normile, Executive Vice President and Chief Financial Officer[230]