# Cass Information Systems Inc: Form 10-Q for the period ended Mar 31, 2023

- Company: [Cass Information Systems Inc](/companies/cass.md) (CIK 708781)
- Form: 10-Q
- Filed: 2023-05-09
- Accepted by EDGAR: May 9, 2023, 15:07 ET
- Period: 2023-03-31
- Accession: 0001628280-23-016684
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/708781/000162828023016684/cass-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/708781/000162828023016684/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $31.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $3.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $1.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $7.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.51 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.52 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 13,863,398 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $9.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $2.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $4.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-03-31 | $2.43bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $2.21bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $217.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,008 characters.

### Overview

Cass Information Systems, Inc. ("Cass" or the "Company") provides payment and information processing services to large manufacturing, distribution and retail enterprises across the United States. The Company’s services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays facility-related invoices, which include electricity and gas as well as waste and telecommunications expenses, and is a provider of telecom expense management solutions. Cass solutions include integrated payments, a B2B payment platform for clients that require an agile fintech partner. Additionally, the Company offers a church management software solution and an on-line platform to provide generosity services for faith-based and non-profit organizations. The Company’s bank subsidiary, Cass Commercial Bank (the “Bank”), supports the Company’s payment operations. The Bank also provides banking services to its target markets, which include privately held businesses in the St. Louis metropolitan area and restaurant franchises and faith-based ministries within the United States.

The specific payment and information processing services provided to each customer are developed individually to meet each customer’s requirements, which can vary greatly. In addition, the degree of automation such as electronic data interchange, imaging, work flow, and web-based solutions varies greatly among customers and industries. These factors combine so that pricing varies greatly among the customer base. In general, however, Cass is compensated for its processing services through service fees, transactional level payment services, and investment of account balances generated during the payment process. The amount, type, and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed. Transactional level payment services and interest income from the balances generated during the payment processing cycle are affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed. Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management. Other factors will also influence revenue and profitability, such as changes in the general level of interest rates, which have a significant effect on net interest income. The funds generated by these processing activities are invested in overnight investments, investment grade securities, advances to payees, and loans generated by the Bank. The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings. The Bank also assesses fees on other services such as cash management services.

Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, energy, telecommunication and environmental payment and audit. The benefits that can be achieved by outsourcing transaction processing, and the management information generated by Cass systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs, and consolidation of telecommunication providers. Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff, and the growth and quality of the loan portfolio. The general level of interest rates also has a significant effect on the revenue of the Company. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s 2022 Annual Report on Form 10-K, a decline in the general level of interest rates can have a negative impact on net interest income and conversely, a rise in the general level of interest rates can have a positive impact on net interest income. The cost of fuel is another factor that has a significant impact on the transportation sector. As the price of fuel goes up or down, the Company’s earnings increase or decrease with the dollar amount of transportation invoices.

Currently, management views Cass’ major opportunity as the continued expansion of its payment and information processing service offerings and customer base. Management intends to accomplish this by maintaining the Company’s leadership position in applied technology, which when combined with the security and processing controls of the Bank, makes Cass unique in the industry.

### Recent Industry Developments

During the first quarter of 2023, the banking industry experienced significant volatility with high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company’s liquidity position and balance sheet remains strong. The Company had cash and cash equivalents of $210.5 million at March 31, 2023. In addition, all of the Company's investment securities are classified as available-for-sale and the Company expects to generate approximately $232.5 million of cash flows through amortization and maturities of investment securities within the next 16 months. The

Company also took a number of preemptive actions, which included proactive outreach to clients and actions to maximize its funding sources in response to these recent developments. The Company remains well-capitalized and has no nonperforming loans.

### Critical Accounting Policies

The Company has prepared the consolidated financial statements in this report in accordance with the Financial Accounting Standards Board Accounting Standards Codification. In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates have been generally accurate in the past, have been consistent and have not required any material changes. There can be no assurances that actual results will not differ from those estimates. The accounting policy that requires significant management estimates and is deemed critical to the Company’s results of operations or financial position has been discussed with the Audit and Risk Committee of the Board of Directors and is described below.

*Allowance for Credit Losses.* The Company performs periodic and systematic detailed reviews of its loan portfolio to determine management’s estimate of the lifetime expected credit losses. Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments” section of this report.

### Results of Operations

The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-month period ended March 31, 2023 (“First Quarter of 2023”) compared to the three-month period ended March 31, 2022 (“First Quarter of 2022”). The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes and with the statistical information and financial data appearing in this report, as well as in the Company’s 2022 Annual Report on Form 10-K. Results of operations for the First Quarter of 2023 are not necessarily indicative of the results to be attained for any other period.

### Summary of Results

The following table summarizes the Company’s operating results:

*(In thousands except per share data)*

| 2023 | First Quarter of 2022 | % Change |  |
| --- | ---: | ---: | ---: |
| Processing fees | $19,513 | $19,036 | 2.5% |
| Financial fees | 11,259 | 10,532 | 6.9% |
| Net interest income | 16,898 | 11,903 | 42.0% |
| (Release of) provision for credit loss | (340) | 230 | (247.8)% |
| Other | 1,335 | 862 | 54.9% |
| Total revenues | 49,345 | 42,103 | 17.2% |
| Operating expense | 40,372 | 31,828 | 26.8% |
| Income before income tax expense | 8,973 | 10,275 | (12.7)% |
| Income tax expense | 1,856 | 2,017 | (8.0)% |
| Net income | $7,117 | $8,258 | (13.8)% |
| Diluted earnings per share | $0.51 | $0.60 | (15.0)% |
| Return on average assets | 1.15% | 1.32% | — |
| Return on average equity | 13.76% | 14.21% | — |

The Company recorded revenue of $49.3 million during the three months ended March 31, 2023, up 17.2% from the three months ended March 31, 2022, primarily driven by rising interest rates which positively impacted net interest income and financial fees. Operating expense increased 26.8% primarily driven by an increase in full-time equivalent employees and other expenses due to strategic investment in technology initiatives. Net income was $7.1 million and diluted EPS was $0.51 per share, decreases of 13.8% and 15.0% from the three months ended March 31, 2022, respectively.

The Company posted a 1.15% return on average assets and 13.76% return on average equity.

### Fee Revenue and Other Income

The Company’s fee revenue is derived mainly from transportation and facility processing and financial fees. As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis, discounts received for services provided to carriers and by the accounts and drafts payable balances generated in the payment process which can be used to generate interest income. Processing volumes, average payments in advance of funding, and fee revenue were as follows:

*(In thousands)*

| 2023 | First Quarter of 2022 | % Change |  |
| --- | ---: | ---: | ---: |
| Transportation invoice volume | 9,098 | 8,958 | 1.6% |
| Transportation invoice dollar volume | $10,268,451 | $10,855,180 | (5.4)% |
| Facility-related transaction volume 1 2 | 3,468 | 3,293 | 5.3% |
| Facility-related dollar volume 2 | $5,313,385 | $4,643,942 | 14.4% |
| Average payments in advance of funding | $240,890 | $279,479 | (13.8)% |
| Processing fees | $19,513 | $19,036 | 2.5% |
| Financial fees | $11,259 | $10,532 | 6.9% |
| Other fees | $1,335 | $862 | 54.9% |

1\. Facility expense transaction volumes have been restated for the prior period to reflect total invoices processed. Previously, billing account numbers were utilized for the telecom division as a proxy for transactions.

2\. Includes energy, telecom and environmental.

#### First Quarter of 2023 compared to First Quarter of 2022:

Financial fee revenue increased $727,000, or 6.9%, primarily attributable to the increase in short-term interest rates and increase in facility-related dollar volume of 14.4%, partially offset by a decline in transportation dollar volumes of 5.4%.

Processing fee revenue increased $477,000, or 2.5%, primarily attributable to the increase in transportation and facility-related transaction volumes of 1.6% and 5.3%, respectively.

### Net Interest Income

Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest expense on deposits and other interest-bearing liabilities. Net interest income is a significant source of the Company’s revenues. The following table summarizes the changes in tax-equivalent net interest income and related factors:

*(In thousands)*

| 2023 | First Quarter of 2022 | % Change |  |
| --- | ---: | ---: | ---: |
| Average earnings assets | $2,162,734 | $2,122,915 | 1.9% |
| Average interest-bearing liabilities | 591,102 | 593,057 | (0.3)% |
| Net interest income\* | 17,219 | 12,349 | 39.4% |
| Net interest margin\* | 3.23% | 2.36% |  |
| Yield on earning assets\* | 3.84% | 2.40% |  |
| Cost of interest-bearing liabilities | 2.20% | 0.15% |  |

\*Presented on a tax-equivalent basis assuming a tax rate of 21% for both 2023 and 2022.

#### First Quarter of 2023 compared to First Quarter of 2022:

The increase in net interest income is primarily due to the Federal Reserve's actions to increase the Federal Funds rate throughout 2022 and into the first quarter of 2023, positively affecting the net interest margin which increased to 3.23% as compared to 2.36% in the prior year. Additionally, average earning assets increased $39.8 million, or 1.9%, and contributed to the increase in net interest income. The yield on interest-earning assets increased 144 basis points from 2.40% to 3.84% while the cost of interest-bearing liabilities increased 205 basis points from 0.15% to 2.20%.

Average loans increased $116.3 million, or 12.1%, to $1.1 billion. This increase was due to loan growth during 2022, specifically in the Company's franchise restaurants, faith-based, and lease financing receivables portfolios. The average yield on loans increased 90 basis points to 4.61% primarily due to the increase in short-term interest rates.

Average investment securities increased $101.0 million, or 14.6%, as cash provided by increases in funding sources was utilized to purchase investment securities. The average yield on taxable investment securities increased 105 basis points to 2.54% as a result of the increase in short and long-term interest rates. The average yield on tax-exempt investment securities declined 10 basis points to 2.82%. These securities are longer term fixed rate and do not reprice as quickly in a rising interest rate environment.

Average short-term investments, consisting of interest-bearing deposits in other financial institutions and federal funds sold, decreased $177.5 million, or 37.6%. The decrease is primarily a result of the increase in the average balances of investment securities and loans. The average yield on short-term investments increased 409 basis points to 4.28% primarily due to the increase in short-term interest rates that began in March 2022. The vast majority of these short-term investments are held at the Federal Reserve Bank.

The average balance of interest-bearing deposits decreased $2.0 million, or 0.3%. The average rate paid on interest-bearing deposits increased 203 basis points to 2.18% due to the increase in short-term interest rates.

Average demand deposits decreased $20.4 million, or 3.6%. The decrease was driven by deposit attrition as larger depository clients moved their funds to higher interest rate alternatives.

Average accounts and drafts payable increased $7.1 million, or 0.7%. The increase in average accounts and drafts payable was primarily driven by the increase in facility expense dollar volumes of 14.4%, partially offset by the decrease in transportation dollar volumes of 5.4%.

### Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential

The following tables show the condensed average balance sheets for each of the periods reported, the tax-equivalent interest income and expense for each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported.

*(In thousands)*

| Average Balance Assets1 Interest-earning assets | First Quarter of 2023 Interest Income/ Expense | Yield/ Rate | Average Balance | First Quarter of 2022 Interest Income/ Expense | Yield/ Rate |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans2: | $1,076,221 | $12,235 | 4.61% | $959,851 | $8,777 | 3.71% |
| Investment securities3: |  |  |  |  |  |  |
| Taxable | 571,673 | 3,586 | 2.54% | 395,233 | 1,456 | 1.49% |
| Tax-exempt4 | 219,690 | 1,529 | 2.82% | 295,152 | 2,123 | 2.92% |
| Short-term investments | 295,150 | 3,113 | 4.28% | 472,679 | 216 | 0.19% |
| Total interest-earning assets | 2,162,734 | 20,463 | 3.84% | 2,122,915 | 12,572 | 2.40% |
| Non-interest-earning assets |  |  |  |  |  |  |
| Cash and due from banks | 22,044 |  |  | 22,781 |  |  |
| Premises and equipment, net | 20,433 |  |  | 18,706 |  |  |
| Bank-owned life insurance | 48,111 |  |  | 43,167 |  |  |
| Goodwill and other intangibles | 21,355 |  |  | 16,772 |  |  |
| Payments in advance of funding | 240,890 |  |  | 279,479 |  |  |
| Unrealized loss on investment securities | (66,525) |  |  | (1,347) |  |  |
| Other assets | 63,834 |  |  | 37,836 |  |  |
| Allowance for credit losses | (13,535) |  |  | (12,046) |  |  |
| Total assets | $2,499,341 |  |  | $2,528,263 |  |  |
| **Liabilities and Shareholders’ Equity1** |  |  |  |  |  |  |
| Interest-bearing liabilities |  |  |  |  |  |  |
| Interest-bearing demand deposits | $523,410 | $2,824 | 2.19% | $530,491 | $136 | 0.10% |
| Savings deposits | 7,102 | 22 | 1.26% | 17,488 | 2 | 0.05% |
| Time deposits \>= $100 | 23,803 | 110 | 1.87% | 17,928 | 41 | 0.93% |
| Other time deposits | 36,787 | 215 | 2.37% | 27,150 | 44 | 0.66% |
| Total interest-bearing deposits | 591,102 | 3,171 | 2.18% | 593,057 | 223 | 0.15% |
| Short-term borrowings | 5,833 | 73 | 5.08% | — | — | —% |
| Total interest-bearing liabilities | 596,935 | 3,244 | 2.20% | 593,057 | 223 | 0.15% |
| Non-interest bearing liabilities |  |  |  |  |  |  |
| Demand deposits | 553,644 |  |  | 574,064 |  |  |
| Accounts and drafts payable | 1,095,182 |  |  | 1,088,105 |  |  |
| Other liabilities | 43,789 |  |  | 37,317 |  |  |
| Total liabilities | 2,289,550 |  |  | 2,292,543 |  |  |
| Shareholders’ equity | 209,791 |  |  | 235,720 |  |  |
| Total liabilities and shareholders’ equity | $2,499,341 |  |  | $2,528,263 |  |  |
| Net interest income |  | $17,219 |  |  | $12,349 |  |
| Net interest margin |  |  | 3.23% |  |  | 2.36% |
| Interest spread |  |  | 1.64% |  |  | 2.25% |

1\. Balances shown are daily averages.

2\. Interest income on loans includes net loan fees of $220,000 and $225,000 for the first quarter of 2023 and 2022, respectively.

3\. For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.

4\. Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for both 2023 and 2022. The tax-equivalent adjustment was approximately $321,000 and $446,000 for the first quarter of 2023 and 2022, respectively.

### Analysis of Net Interest Income Changes

The following tables present the changes in interest income and expense between periods due to changes in volume and interest rates. That portion of the change in interest attributable to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.

*(In thousands)*

| Volume Increase (decrease) in interest income: | First Quarter of 2023 Compared to First Quarter of 2022 Rate | Total |  |
| --- | ---: | ---: | ---: |
| Loans1: | $1,150 | $2,308 | $3,458 |
| Investment securities: |  |  |  |
| Taxable | 827 | 1,303 | 2,130 |
| Tax-exempt2 | (527) | (67) | (594) |
| Short-term investments | (111) | 3,008 | 2,897 |
| Total interest income | 1,339 | 6,552 | 7,891 |
| Interest expense on: |  |  |  |
| Interest-bearing demand deposits | (2) | 2,690 | 2,688 |
| Savings deposits | (2) | 22 | 20 |
| Time deposits \>=$100 | 17 | 52 | 69 |
| Other time deposits | 20 | 151 | 171 |
| Short-term borrowings | 37 | 36 | 73 |
| Total interest expense | 70 | 2,951 | 3,021 |
| Net interest income | $1,269 | $3,601 | $4,870 |

1\. Interest income includes net loan fees.

2\. Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the three months ended March 31, 2023 and 2022.

### Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments

The Company recorded a release of credit losses and off-balance sheet credit exposures of $340,000, and a provision for credit losses of $230,000 in the First Quarter of 2023 and 2022, respectively. The amount of the (release of) provision for credit losses is derived from the Company’s quarterly Current Expected Credit Loss (“CECL”) model. The amount of the (release of) provision for credit losses will fluctuate as determined by these quarterly analyses. The release of credit losses in the First Quarter of 2023 was primarily driven by the decrease in loan balances outstanding from December 31, 2022.

The Company experienced no loan charge-offs in the First Quarter of 2023 and 2022. The ACL was $13.3 million at March 31, 2023 compared to $13.5 million at December 31, 2022. The ACL represented 1.24% of outstanding loans at March 31, 2023 and 1.25% of outstanding loans at December 31, 2022. The allowance for unfunded commitments was $177,000 at March 31, 2023 and $232,000 at December 31, 2022. There were no nonperforming loans outstanding at March 31, 2023. The Company had one loan that was considered an individually evaluated credit at December 31, 2022, with no specific allowance. This loan was paid off in full in January 2023.

The ACL has been established and is maintained to estimate the lifetime expected credit losses in the loan portfolio. An ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense based on changes in the economic forecast, qualitative risk factors, loan volume, and individual loans. For loans that are individually evaluated, the Company uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral value.

The Company also utilizes ratio analyses to evaluate the overall reasonableness of the ACL compared to its peers and required levels of regulatory capital. Federal and state regulatory agencies review the Company’s methodology for maintaining the ACL. These agencies may require the Company to adjust the ACL based on their judgments and interpretations about information available to them at the time of their examinations.

### Summary of Credit Loss Experience

The following table presents information on the Company's (release of) provision for credit losses and analysis of the ACL:

*(In thousands)*

|  | First Quarter of 2023 | 2022 |
| --- | ---: | ---: |
| Allowance for credit losses at beginning of period | $13,539 | $12,041 |
| (Release of) provision for credit losses | (285) | 365 |
| Allowance for credit losses at end of period | $13,254 | $12,406 |
| Allowance for unfunded commitments at beginning of period | $232 | $367 |
| (Release of) provision for credit losses | (55) | (135) |
| Allowance for unfunded commitments at end of period | $177 | $232 |
| Loans outstanding: |  |  |
| Average | $1,076,221 | $959,851 |
| March 31 | 1,070,373 | 977,203 |
| Ratio of allowance for credit losses to loans outstanding at March 31 | 1.24% | 1.27% |

### Operating Expenses

Total operating expenses for the First Quarter of 2023 increased $8.5 million, or 26.8%, compared to the First Quarter of 2022. The following table details the components of operating expenses:

*(In thousands)*

| 2023 | First Quarter of 2022 |  |
| --- | ---: | ---: |
| Salaries and commissions | $22,605 | $19,631 |
| Share-based compensation | 1,950 | 1,340 |
| Net periodic pension cost (benefit) | 135 | (618) |
| Other benefits | 5,336 | 4,365 |
| Personnel | $30,026 | $24,718 |
| Occupancy | 855 | 915 |
| Equipment | 2,082 | 1,711 |
| Amortization of intangible assets | 195 | 135 |
| Other operating | 7,214 | 4,349 |
| Total operating expense | $40,372 | $31,828 |

#### First Quarter of 2023 compared to First Quarter of 2022:

Personnel expenses increased $5.3 million, or 21.5%. Salaries increased $3.0 million, or 15.1%, as a result of merit increases, wage pressures, and an increase in average full-time equivalent employees of 13.2% due to the Touchpoint acquisition and strategic investment in various technology initiatives. Share-based compensation increased $610,000 primarily related to executive succession matters. Pension expense increased $753,000. Despite the Company’s defined benefit pension plan being frozen in the first quarter of 2021 resulting in no service cost in subsequent periods, expense increased as a result of the accounting impact of the decline in plan assets during 2022 and corresponding decline in expected return on plan assets for 2023. Other benefits, such as 401(k) match, health insurance and payroll taxes, increased

$971,000, or 22.2%, primarily due to the 13.2% increase in average full-time equivalent employees as well as a significant increase in employer health insurance costs over prior year levels.

Other operating expenses increased $2.9 million, or 65.9%. Certain expense categories such as outside service fees and data processing fees are elevated as the Company invests in, and transitions to, improved technology. Multiple technology platforms are being maintained prior to switching over to what the Company believes will be more efficient technology platforms for facility and transportation data entry processing by the end of 2023.

### Financial Condition

Total assets at March 31, 2023 were $2.4 billion, a decrease of $145.6 million, or 5.7%, from December 31, 2022.

The Company experienced an increase in cash and cash equivalents of $9.5 million, or 4.7%. The change in cash and cash equivalents reflects the Company’s daily liquidity position and is primarily affected by changes in funding sources, mainly accounts and drafts payable and deposits, cash flows in and out of loans, investments securities and payments in advance of funding.

The investment securities portfolio decreased $51.4 million, or 6.8%, during the first three months of 2023. The decrease is primarily due to the sale of $61.4 million of short-term securities partially offset by purchases of $15.2 million and a decrease in unrealized losses as a result of the decline in market interest rates during the first quarter of 2023.

Loans decreased $12.5 million, or 1.2%. The decrease was primarily due to a decrease in lease financing receivables of $15.7 million.

Payments in advance of funding decreased $34.0 million, or 11.6%. The decrease in the balance is primarily due to a 5.4% decrease in transportation dollar volumes, which led to fewer dollars advanced to freight carriers.

Accounts and drafts receivable from customers decreased $58.5 million, or 61.1%, from December 31, 2022. The decrease is solely due to timing of customer funding.

Total liabilities at March 31, 2023 were $2.2 billion, a decrease of $156.8 million, or 6.6%, from December 31, 2022.

Total deposits at March 31, 2023 were $1.1 billion, a decrease of $141.1 million, or 11.2%, from December 31, 2022. The decrease in deposits was partially due to seasonality with corporate clients making tax and annual bonus payments and fulfilling other operating needs as the Company generally sees a decline in depository balances during the first quarter. In addition, the Company experienced deposit attrition as larger depository clients moved their funds to higher interest rate alternates outside of Cass Commercial Bank.

Accounts and drafts payable at March 31, 2023 were $1.1 billion, a decrease of $16.2 million, or 1.5%, from December 31, 2022. The decrease in these balances, which are non-interest bearing, are primarily reflective of the decrease in transportation dollar volumes of 5.4%, partially offset by the increase in facility expense dollar volumes of 14.4%. Accounts and drafts payable are a stable source of funding generated by payment float from transportation and facility clients. Accounts and drafts payable will fluctuate from period-end to period-end due to the payment processing cycle, which results in lower balances on days when payments clear and higher balances on days when payments are issued. For this reason, average balances are generally a more meaningful measure of accounts and drafts payable.

Total shareholders’ equity at March 31, 2023 was $217.5 million, an $11.2 million, or 5.4%, increase from December 31, 2022. The increase in shareholders’ equity is a result of first quarter 2023 earnings and a decrease in accumulated other comprehensive loss of $7.1 million due to the decline in market interest rates and resulting positive impact on the fair value of available-for-sale investment securities. These increases were partially offset by dividends paid of $4.0 million.

### Liquidity and Capital Resources

The discipline of liquidity management as practiced by the Company seeks to ensure that funds are available to fulfill all payment obligations relating to invoices processed as they become due and meet depositor withdrawal requests and borrower credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of funds. Primary liquidity to meet demand is provided by short-term liquid assets that can be converted to cash, maturing securities and the ability to obtain funds from external sources. The Company's Asset/Liability Committee has direct oversight responsibility for the Company's liquidity position and profile. Management considers both on-balance sheet and off-balance sheet items in its evaluation of liquidity.

The balance of liquid assets consists of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and money market funds. Cash and cash equivalents totaled $210.5 million at March 31, 2023, an increase of $9.5 million, or 4.7%, from December 31, 2022. At March 31, 2023, these assets represented 8.7% of total assets and are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.

Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment securities were $703.0 million at March 31, 2023, a decrease of $51.4 million from December 31, 2022. These assets represented 29.0% of total assets at March 31, 2023. Of the total portfolio, 12.3% mature in one year, 30.9% mature in one to five years, and 56.8% mature in five or more years. The Company expects to generate approximately $232.5 million of cash flows through amortization and maturities of investment securities within the next 16 months.

The Bank has unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $83.0 million in aggregate. As of March 31, 2023, the Bank also has secured lines of credit with the Federal Home Loan Bank of $216.1 million collateralized by mortgage loans. The Company also has secured lines of credit from three banks up to a maximum of $200.0 million in aggregate collateralized by state and political subdivision securities. There were no amounts outstanding under any line of credit as of March 31, 2023 or December 31, 2022.

The deposits of the Company's banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize other commercial products of the Bank, including CassPay and faith-based customers. The accounts and drafts payable generated by the Company has also historically been a stable source of funds. The Company is part of the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) deposit placement programs. Time deposits include $36.9 million of CDARS deposits and interest-bearing demand deposits include $96.0 million of ICS deposits. These programs offer the Bank’s customers the ability to maximize Federal Deposit Insurance Corporation (“FDIC”) insurance coverage. The Company uses these programs to retain or attract deposits from existing customers.

Net cash flows provided by operating activities were $9.3 million for the three months ended March 31, 2023, compared to $14.7 million for the three months ended March 31, 2022, a decrease of $5.4 million. Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and loan portfolios and customer activity influences changes in deposit and accounts and drafts payable balances. Other causes for the changes in these account balances are discussed earlier in this report. Due to the daily fluctuations in these account balances, the analysis of changes in average balances, also discussed earlier in this report, can be more indicative of underlying activity than the period-end balances used in the statements of cash flows. Management anticipates that cash and cash equivalents, maturing investments and cash from operations will continue to be sufficient to fund the Company’s operations and capital expenditures in 2023, which are estimated to range from $8 million to $10 million.

Net income plus amortization of intangible assets, net amortization of premium/discount on investment securities and depreciation of premises and equipment was $8.5 million and $10.1 million for the three-months ended March 31, 2023 and 2022, respectively, a decrease of $1.6 million. The decrease was due to the decrease in net income of $1.1 million and decrease in net amortization of premium/discount on investment securities of $529,000. The net amortization of premium/discount on investment securities is dependent on the type of securities purchased and changes in the prevailing market interest rate environment.

Other factors impacting the $5.4 million decrease in net cash provided by operating activities include:

- A decrease in other operating activities, net of $3.1 million, primarily due to changes in various accounts receivable and payable;
- An increase in accounts receivable of $1.2 million due to the timing of customer payments; and
- A change in the (release of) provision for credit losses of $570,000 primarily due to changes in loans outstanding during the respective periods.

These factors were partially offset by:

- An increase in stock-based compensation expense of $610,000 primarily related to executive succession matters; and
- An increase in the pension liability of $741,000.

The Company faces market risk to the extent that its net interest income and fair market value of equity are affected by changes in market interest rates. For information regarding the market risk of the Company’s financial instruments, see Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

There are several trends and uncertainties that may impact the Company’s ability to generate revenues and income at the levels that it has in the past. In addition, these trends and uncertainties may impact available liquidity. Those that could significantly impact the Company include the general levels of interest rates, business activity, inflation, and energy costs as well as new business opportunities available to the Company.

As a financial institution, a significant source of the Company’s earnings is generated from net interest income. Therefore, the prevailing interest rate environment is important to the Company’s performance. A major portion of the Company’s funding sources are the non interest-bearing accounts and drafts payable generated from its payment and information processing services. Accordingly, higher levels of interest rates will generally allow the Company to earn more net interest income. Conversely, a lower interest rate environment will generally tend to depress net interest income. The Company actively manages its balance sheet in an effort to maximize net interest income as the interest rate environment changes. If the primary source of liquidity is reduced in a low interest rate environment, a greater reliance would be placed on secondary sources of liquidity including borrowing lines, the ability of the Bank to generate deposits, and the investment portfolio to ensure overall liquidity remains at acceptable levels.

The overall level of economic activity can have a significant impact on the Company’s ability to generate revenues and income, as the volume and size of customer invoices processed may increase or decrease. Lower levels of economic activity decrease both fee income (as fewer invoices are processed) and balances of accounts and drafts payable (as fewer invoices are processed) from the Company's transportation customers

The relative level of energy costs can impact the Company’s earnings and available liquidity. Lower levels of energy costs will tend to decrease transportation and energy invoice amounts resulting in a corresponding decrease in accounts and drafts payable. Decreases in accounts and drafts payable generate lower interest income and reduce liquidity.

New business opportunities are an important component of the Company’s strategy to grow earnings and improve performance. Generating new customers allows the Company to leverage existing systems and facilities and grow revenues faster than expenses.

As a bank holding company, the Company and the Bank are subject to capital requirements pursuant to the FRB’s capital guidelines which include (i) risk-based capital guidelines, which are designed to make capital requirements more sensitive to various risk profiles and account for off-balance sheet exposure; (ii) guidelines that consider market risk, which is the risk of loss due to change in value of assets and liabilities due to changes in interest rates; and (iii) guidelines that use a leverage ratio which places a constraint on the maximum degree of risk to which a financial holding company may leverage its equity capital base.

The Basel III Capital Rules require banking organizations, like Cass, to maintain:

- a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (resulting in a minimum common equity Tier 1 capital ratio of 7.0%);
- a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%);
- a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (resulting in a minimum total capital ratio of 10.5%); and
- a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.

Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for non-advanced approaches institutions like Cass that have exercised a one-time opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values.

The calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. For instance, the Basel III Capital Rules and the Capital Simplification Rules provide for a number of deductions from and adjustments to common equity Tier 1 capital. These include, for example, the requirement that certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from Tier 1 capital to the extent that any one such category exceeds 25% of common equity Tier 1 capital.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets, are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans, and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

The Company and the Bank continue to exceed all regulatory capital requirements, as evidenced by the following capital amounts and ratios:

*(In thousands)*

| At March 31, 2023 Total capital (to risk-weighted assets) | Actual Amount | Ratio | Capital Requirements Amount | Ratio | Requirement to be Well-Capitalized Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cass Information Systems, Inc. | $261,432 | 14.49% | $144,307 | 8.00% | $ N/A | N/A % |
| Cass Commercial Bank | 184,901 | 15.98 | 92,549 | 8.00 | 115,686 | 10.00 |
| Common Equity Tier I Capital (to risk-weighted assets) |  |  |  |  |  |  |
| Cass Information Systems, Inc. | 248,178 | 13.76 | 81,172 | 4.50 | N/A | N/A |
| Cass Commercial Bank | 172,384 | 14.90 | 52,059 | 4.50 | 75,196 | 6.50 |
| Tier I capital (to risk-weighted assets) |  |  |  |  |  |  |
| Cass Information Systems, Inc. | 248,178 | 13.76 | 108,230 | 6.00 | N/A | N/A |
| Cass Commercial Bank | 172,384 | 14.90 | 69,412 | 6.00 | 92,549 | 8.00 |
| Tier I capital (to average assets) |  |  |  |  |  |  |
| Cass Information Systems, Inc. | 248,178 | 10.01 | 99,124 | 4.00 | N/A | N/A |
| Cass Commercial Bank | 172,384 | 11.30 | 61,009 | 4.00 | 76,261 | 5.00 |
| **At December 31, 2022** |  |  |  |  |  |  |
| Total capital (to risk-weighted assets) |  |  |  |  |  |  |
| Cass Information Systems, Inc. | $257,313 | 13.52% | $152,306 | 8.00% | $ N/A | N/A % |
| Cass Commercial Bank | 186,075 | 16.00 | 93,044 | 8.00 | 116,305 | 10.00 |
| Common Equity Tier I Capital (to risk-weighted assets) |  |  |  |  |  |  |
| Cass Information Systems, Inc. | 243,774 | 12.80 | 85,672 | 4.50 | N/A | N/A |
| Cass Commercial Bank | 172,848 | 14.86 | 52,337 | 4.50 | 75,598 | 6.50 |
| Tier I capital (to risk-weighted assets) |  |  |  |  |  |  |
| Cass Information Systems, Inc. | 243,774 | 12.80 | 114,229 | 6.00 | N/A | N/A |
| Cass Commercial Bank | 172,848 | 14.86 | 69,783 | 6.00 | 93,044 | 8.00 |
| Tier I capital (to average assets) |  |  |  |  |  |  |
| Cass Information Systems, Inc. | 243,771 | 9.52 | 102,386 | 4.00 | N/A | N/A |
| Cass Commercial Bank | 172,848 | 10.77 | 64,196 | 4.00 | 80,245 | 5.00 |

-31-

### Impact of Inflation

Inflation could have the impact of increasing operating expenses, such as compensation expense. Inflationary pressures may also have an impact on total assets, earnings and capital, which could impact the Company's ability to grow. During 2021 and 2022, supply chain disruption, rising energy prices and inflation, among other factors, had the impact of increasing the average balance of accounts and drafts payable and total assets. An increase in total assets could have the impact of decreasing our regulatory capital ratios if earnings and total regulatory capital do not increase at the same rate.

As a result of rising inflation, the Federal Reserve increased the Federal Funds rate over the course of 2022 and into the first quarter of 2023. The increase in the Federal Funds rate has contributed to the increase in the Company's net interest margin, therefore positively impacting net interest income. There can be no assurance that further increases in the Federal Funds rate will occur, and the Company continues to monitor such impact to its future levels of net interest income.

### Impact of New and Not Yet Adopted Accounting Pronouncements

In March 2022, the FASB issued ASU 2022-02. This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL methodology for estimating allowances for credit losses and enhances the disclosure requirements for loan restructurings made with borrowers experiencing financial difficulty. Instead, entities are required to evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or continuation of an existing loan. In addition, the amendments require a public business entity to disclose current period gross charge-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The implementation of this ASU effective January 1, 2023 did not have a material impact on the consolidated financial statements.

## Market risk

As filed, 1,101 characters.

As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, the Company manages its interest rate risk through measurement techniques that include gap analysis and a simulation model. As part of the risk management process, asset/liability management policies are established and monitored by management.

The following table summarizes simulated changes in net interest income versus unchanged rates over the next 12 months as of March 31, 2023 and December 31, 2022.

|  | % change in projected net interest income March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| +200 basis points | 10.8% | 10.6% |
| +100 basis points | 4.7% | 4.2% |
| Flat rates | —% | —% |
| -100 basis points | (1.1)% | —% |
| -200 basis points | (1.3)% | (1.5)% |

The Company is generally asset sensitive as average interest-earning assets of $2.16 billion for the first quarter of 2023 greatly exceeded average interest-bearing liabilities of $596.9 million. The table above on the projected impact of interest rate shocks results from a static balance sheet at March 31, 2023.

## Controls and procedures

As filed, 923 characters.

The Company’s management, under the supervision and with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report and concluded that, as of such date, these controls and procedures were effective.

There were no changes in the First Quarter of 2023 in the Company's internal control over financial reporting identified by the Company’s principal executive officer and principal financial officer in connection with their evaluation that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended).

## Risk factors

As filed, 5,250 characters.

The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2022, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). Except as set forth below, there are no material changes to the Risk Factors as disclosed in the Company’s 2022 Annual Report on Form 10-K.

**The Company could experience an unexpected inability to obtain needed liquidity which could adversely affect the Company's business, profitability, and viability as a going concern.**

Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities and is essential to a financial institution’s business. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. The bank failures in March 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution's ability to satisfy its obligations to depositors. The Company seeks to ensure funding needs are met by maintaining a level of liquidity through asset and liability management. If the Company becomes unable to obtain funds when needed, it could have a material adverse effect on its business, financial condition, and results of operations.

**Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.**

The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank, and First Republic Bank have generated significant market volatility among publicly traded bank holding companies. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.

**Rising interest rates have decreased the value of the Company’s available-for-sale securities portfolio, and the Company would realize losses if it were required to sell such securities to meet liquidity needs.**

As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the fair value of previously issued government and other fixed income securities has declined significantly, resulting in unrealized losses. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. Treasuries, agency debt, mortgage-backed securities, and other qualifying assets as collateral at par to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.

**Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.**

The Company anticipates increased regulatory scrutiny and new regulations designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. Among other things, there may be an increased focus by regulators on deposit composition and the level of uninsured deposits. As primarily a commercial bank, the Bank has a higher degree of uninsured deposits compared to larger national banks or smaller community banks with a stronger focus on retail deposits. As a result, the Bank could face increased scrutiny or be viewed as higher risk.

Filed May 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-016684. Last ingested by Listed: Oct 24, 2026, 14:56 ET. No prices; not investment advice.