The Power To
Deliver Solutions
Around the world, leading enterprises
rely on Cass for our vertical expertise,
processing power and global payment
network to execute critical financial
transactions while driving greater
visibility, control and efficiency across
business critical expenses.
2019 Annual Report
and Form 10-K
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Cass Information Systems, Inc. (NASDAQ: CASS)
is a leading provider of integrated information
and payment management solutions. Cass enables
enterprises to achieve visibility, control and efficiency
in their supply chains, communications networks,
facilities and other operations.
Disbursing over $60 billion annually on behalf of clients, and with total
assets of $1.7 billion, Cass is uniquely supported by Cass Commercial
Bank. Founded in 1906 and a wholly owned subsidiary, Cass Bank provides
sophisticated financial exchange services to the parent organization and
its clients. Cass is part of the Russell 2000®.
2019 Year in Review
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
% CHANGE
Total Net Revenue
Net Income
Basic Earnings per Common Share
Diluted Earnings per Common Share
Dividends Paid per Common Share
$157,235,000
$30,404,000
$148,266,000
$30,268,000
$2.11
$2.07
$1.05
$2.06
$2.03
$0.89
Total Number of Transactions Processed
63,567,000
66,255,000
Total Dollar Volume of Invoices Processed and Paid
$42,973,242,000
$42,380,453,000
Return on Average Total Shareholders’ Equity
Return on Average Assets
12.86%
1.74%
13.55%
1.85%
6.05%
0.45%
2.43%
1.97%
17.98%
-4.06%
1.40%
AS OF DECEMBER 31,
Total Assets
Total Shareholders’ Equity
Book Value per Common Share
2019
2018
% CHANGE
$1,764,243,000
$1,695,176,000
$244,190,000
$229,848,000
$16.82
$15.72
4.07%
6.24%
7.00%
TOTAL TRANSACTIONS
in millions
TOTAL INVOICE DOLLARS PAID
in billions of dollars
TOTAL NET REVENUES
in millions of dollars
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2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
DILUTED EARNINGS
PER COMMON SHARE
in dollars
NET INCOME
in millions of dollars
BOOK VALUE PER SHARE
in dollars
2
5
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1
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6
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2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
10-YEAR CLOSING SHARE
STOCK PRICE PERFORMANCE
in dollars, as of 12/31
For a 10-year period starting
in 2009, the Cass Information
Systems, Inc. share price has
nearly tripled in value, displaying
an average annual growth rate
of nearly 11% per year.
20.94
57.74
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Dear Fellow
Shareholders,
A Letter from Cass Chairman, President
and CEO, Eric Brunngraber
I am pleased to report that
Cass delivered another year
of solid financial performance.
As we enter 2020, our 114th year in business, I am pleased
to report that in 2019 Cass Information Systems, Inc.
delivered another year of solid financial performance.
Cass realized record revenue of $157.2 million in 2019, up
6% from 2018 and surpassing the $150 million milestone
for the first time. Payment and processing fees also
increased 6%, or $5.8 million, over the prior year. Driving
the gains were a growing customer base and new fee-
generating services. Net investment income, derived
from returns on funding balances generated by our
payment processing clients and from deposit balances
at Cass Commercial Bank, was up 7% to $47.2 million.
Higher revenues and income helped us moderate
headwinds that developed in the second half of the
year. First, a production pull-back by our customers in
the industrial sector caused transportation volume to
contract. Second, our utility payment group experienced
the loss of a high transaction volume client. Finally,
recent actions by the Federal Reserve to lower interest
rates have had a negative effect on interest income.
Total operating expenses in 2019 were $119.8 million,
7% higher than in 2018. Although some of this amount
is attributable to the growth of our business, most of
it represents our continuing strategic investment in
the people, technology and infrastructure necessary
to scale our information and payment processing
activities. This includes the integration costs related to
the recently acquired Gyve on-line generosity platform.
The Cass Portfolio of Solutions
TR ANSPORTATION
ENERGY
TELECOM
Freight Audit
and Payment
Cass helps companies under-
Utility Bill
Management
Cass processes and pays customers’
Telecom Expense
Management
Cass helps global enterprises gain control
stand, control, and optimize
invoices for electricity, gas and water,
of their fixed and mobile telecom assets,
their transportation costs. Cass
plus more than 50 other facility-
improving how they source, procure,
processes and pays invoices,
related expenses. Cass excels at
manage and pay for communications
delivers actionable business
providing accurate data, lightning
and technology investments, delivering
intelligence, and provides
fast bill turnaround and flexible
cost reductions, operational efficiency
working capital programs
funding and general ledger integrations.
and global transparency. Other offerings
for both clients and carriers.
Customers get unique visibility of
include cloud expense management
their spend with the ExpenseSmart®
and “bring your own device” direct
data warehouse portal.
stipend reimbursement.
Cass realized record revenue
of $157.2 million in 2019,
up 6% from 2018.
For the year, the company earned $2.07 per diluted
share, an increase of 2% over 2018. Net income was
$30.4 million compared to $30.3 million in 2018.
Cass continued to generate strong profit metrics,
posting a 1.7% return on average assets and a
12.9% return on average equity. These returns are
noteworthy given the low interest rate environment
and our strong liquidity and capital positions. Our
year-end Tier 1 capital-to-assets ratio was 13.2%,
a figure that far surpasses that of our peers and
greatly exceeds all regulatory requirements.
A strong financial position, combined with the
considerable cash flow generated by our operations,
enables Cass to invest in strategic opportunities as
they emerge and to reward shareholders. In 2019,
Cass delivered more than $23 million in dividend
payments and share repurchases to shareholders.
Business Group Summaries
Transportation Information Services
Despite economic uncertainty, Cass achieved respectable
bill volumes and paid dollars in 2019 compared to the
record levels of 2018. Volume declines in our base
business due to lower manufacturing output and inter-
national trade tensions were largely offset by new
accounts. We were pleased by the revenue gains achieved
on the investments we have made for working capital
programs for both customers and their carrier partners.
The application of improved Optical Character
Recognition technology to our paper invoice
processing system marked a significant step
forward. Cass also formed a partnership with The
Global Supply Chain Institute at the University of
Tennessee-Knoxville Haslam School of Business
and Stifel Financial Corp. to collaborate on the
publication of our widely referenced transportation
indexes. To sustain leadership in the freight, audit
and payment space, Cass will continue to invest in its
internal technology stack and in advanced levels of
automation within its internal processing systems.
Telecom Expense Management
In 2019, Telecom Expense Management emerged as
a recognized leader in its space, adding more than a
dozen new clients, including several more Fortune 200
logos. Global client acquisition increasingly relies on the
ability to satisfy complex data privacy requirements and
Cass excels with systems and backend processes that
satisfy not only GDPR, but provides the infrastructure
to respond to changing global law. As a result, Cass
set all-time highs for dollars processed and paid, while
managing telecom and mobility spend with more than
1,800 vendors on six continents in 42 currencies.
As the market constantly undergoes vendor consolidation
due to private equity acquisitions, Cass has established
itself with enterprise customers and industry analysts
(including Gartner), as a financially strong and globally
capable partner with a single unified platform. We
anticipate earnings growth as earlier investments in fixed
costs to support global expansion come to maturity,
new customer acquisition rates remain robust and our
industry-leading customer retention rates are maintained.
ENVIRONMENTAL
B2B PAYMENTS
BANKING
Waste Expense
Management
Cass drives durable expense
Integrated
Financial Solutions
Companies rely on Cass as their
Commercial
Banking
Cass Commercial Bank focuses
reduction and improves
behind-the-scenes payment
on four primary target segments:
sustainability practices for
management provider. Cass
St. Louis-area businesses, faith-based
clients by leveraging its waste
is able to move funds securely,
and not-for-profit organizations,
expertise, powerful WasteVision®
consolidate payments and
and restaurant franchise owners.
technology platform and
reduce cost and complexity.
A Federal Reserve member bank,
aggregate buying power.
Cass provides safety, security and
control in moving funds through the
Cass electronic payments network.
Waste Expense Management
2019 proved to be a transformational year for the Waste
institutions in the U.S. in 2019. Average loan balances
grew by 6.9% with average deposit balances up 7.4%.
Expense Management team as it sought to add Fortune
The bank ended the year with zero non-performing loans.
1000 companies to its core clientele in multi-family
residential and healthcare. Central to that effort was the
In the first quarter, Cass Bank strengthened
phased release of WasteVision2, a complete overhaul of
internal business systems and external customer-facing
and rebranded its deposit account offerings by
bundling packages of services to encourage use
portals. WasteVision2 is proving to be a key differentiator
and improve efficiency and security. Overall, fee-
as we market to new targets. Additionally, Cass strength-
based services revenue increased by 4%.
ened its high-level relationships with most major waste
service vendors—a boon for clients going forward.
During the second quarter, Cass launched a new
Utility Expense Management
For the second consecutive year, the Utility Expense
division focused on equipment leasing finance—a
$1 trillion annual U.S. market in which the bank did
not previously participate. The goal is to cultivate
group added a record number of new accounts to
relationships with large public companies to build an
its portfolio—including several major takeaways from
equipment loan portfolio that replaces, at a higher
competitors. Spend under management jumped nearly
yield, booked municipal securities as they mature.
$1 billion as Cass processed an average of 1.2 million
bills per month. To support the payment of 30,000
unique vendors every year, Cass continues to augment
its human data entry processes with increasing use of
robotic processing automation and machine learning.
Finally, the fourth quarter departure of a customer
In the third quarter, Cass acquired the Gyve on-
line generosity platform. The U.S. market for Gyve
is enormous—an estimated 340,000 churches and
1.12 million non-profit organizations with estimated
annual gross revenue potential of $3 billion.
during a major merger posed a temporary setback that
The bank is marketing the service to its existing
is being ameliorated by an active prospect pipeline.
faith-based clients as well as new prospects. In
December, Gyve processed $3.5 million in gifts.
Integrated Financial Solutions
The Integrated Financial Solutions team put together
Also in the third quarter, the bank became a principal
another solid year, adding several significant customers,
boosting headcount in support of customer growth
member of the VISA credit card network, a move
that promises to improve service quality, update
and continuing to efficiently increase dollars disbursed.
client-facing technology and increase revenue.
A major initiative involved augmenting our system to
handle virtual credit card transactions, leveraging the
new status of Cass Commercial Bank as a direct credit
Outlook and Acknowledgment
card issuing institution. We also plan to significantly
We look forward to 2020 with enthusiasm and optimism.
increase our application programming interface (API)
While mindful of current profitability, we will continue to
library. These investments will help lift future fee revenue.
make the expenditures necessary to fund our investments
Information Technology
for the future. We will embrace the challenges posed by
a volatile business climate and declining interest rates
Keenly aware that the rate of innovation and security
and achieve an even stronger competitive position.
demands on technology are greater today than ever
And as we have done for the past 114 years, we will
before, Cass inaugurated Cass TechVision 2020
to meet these challenges head-on by strategically
leveraging its technology investments.
maintain our long-term perspective and relentlessly
focus on our customers and their ever-changing needs.
On behalf of the Board of Directors and our leadership
Over the past 20 months, Cass has successfully
team, thank you for your continuing support and belief
centralized all information technology staff, budget
in the future success of Cass. I remain humbled and
and service management. This centralization has freed
filled with gratitude for the blessings God has bestowed
business groups from the burden of managing technology,
upon us and for His inspiration and guidance.
permitting them to concentrate on achieving profit
goals. Additionally, the delivery of technology services
has improved as measured by speed, cost and security.
Cass Commercial Bank
As widely reported, Cass Commercial Bank retained
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
its standing among the 10 top-performing financial
Cass Information Systems, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendme nt No. 1
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 000-20827
CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Missouri
43-1265338
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
12444 Powerscourt Drive, Suite 550, St. Louis, Missouri 63131
(Address of principal executive offices)
(Zip Code)
(314) 506-5500
(Telephone Number, incl. area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value
$0.50 per share
Trading Symbol
CASS
Name of each exchange on which registered
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act. Large accelerated filer: Accelerated filer: Non-accelerated filer: Smaller reporting company:
Emerging growth company:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately
$702,445,000 based on the closing price of the common stock of $48.48 on June 30, 2019, as reported by The Nasdaq
Global Select Market. As of February 19, 2020, the Registrant had 14,552,402 shares outstanding of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated by reference to the Registrant’s Proxy Statement
for the 2020 Annual Meeting of Shareholders.
EXPLANATORY NOTE
Cass Information Systems, Inc. (the “Company”), filed its Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 (the “Original Filing”) with the United States Securities and Exchange Commission (the “SEC”)
on February 28, 2020. Due to a filing error, certain revisions to the Original Filing were not reflected in the as-filed
version of the Original Filing. The Company is filing this Amendment No. 1 to the Original Filing (“Amendment No.
1”) solely to reflect such revisions, which include, among other corrections, the following: (i) language variations in
the description of certain of the factors that affected the Company’s fiscal 2019 results of operations included in Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (ii) a correction of an
inadvertent error to the amount of unappropriated retained earnings available to the Company’s banking subsidiary for
the declaration of dividends disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and Note 2 to the consolidated financial statements; and (iii) corrections to inadvertent errors in
footing the total net cash provided by operating activities for the year ended December 31, 2019 as reflected in the
Company’s consolidated statements of cash flows.
In addition, the exhibit list included in Item 15 of Part IV has been amended to contain a currently-dated consent of
KPMG LLP and, pursuant to the rules of the SEC, currently-dated certifications from the Company’s Principal
Executive Officer and Principal Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of
2002. Such consent and the certifications of the Company’s Principal Executive Officer and Principal Financial Officer
are attached as exhibits to this Amendment No. 1.
Except as described above, this Amendment No. 1 speaks as of the original filing date of the Original Filing and does
not amend or update any other information contained in the Original Filing to reflect events that may have occurred
subsequent to the original filing date. The Company has included a complete copy of the Original Filing, as amended
per above, in this filing.
CASS INFORMATION SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I.
Item 1.
BUSINESS
Item 1A. RISK FACTORS
Item 1B. UNRESOLVED STAFF COMMENTS
Item 2.
PROPERTIES
Item 3.
LEGAL PROCEEDINGS
Item 4. MINE SAFETY DISCLOSURES
PART II.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 6.
SELECTED FINANCIAL DATA
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A. CONTROLS AND PROCEDURES
Item 9B. OTHER INFORMATION
PART III.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
1
8
13
13
14
14
15
16
16
30
32
63
63
65
66
66
66
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Item 16. FORM 10-K SUMMARY
SIGNATURES
Forward-looking Statements - Factors That May Affect Future Results
67
67
68
69
70
This report may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on
reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks,
uncertainties, and other factors beyond our control, which may cause future performance to be materially different from
expected performance summarized in the forward-looking statements. These risks, uncertainties and other factors are
discussed in the section Part I, Item 1A, “Risk Factors.” We undertake no obligation to publicly update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or
changes to future results over time.
ITEM 1. BUSINESS
Description of Business
PART I.
Cass Information Systems, Inc. (“Cass” or the “Company”) is a leading provider of payment and information processing
services to large manufacturing, distribution and retail enterprises across the United States. The Company provides
transportation invoice rating, payment processing, auditing, accounting and transportation information to many of the nation’s
largest companies. It is also a processor and payer of energy invoices, including electricity, gas, waste, and other facility related
expenses. Further, Cass competes in the telecommunications expense management market which includes bill processing,
audit and payment services for telephone, data line, wireless and communication equipment expense. Cass also provides both
a B2B payment platform for clients that require an agile fintech partner and on-line generosity platform. The Company, through
its wholly owned bank subsidiary, Cass Commercial Bank (the “Bank”), also provides commercial banking services. The
Bank’s primary focus is to support the Company’s payment operations and provide banking services to its target markets,
which include privately-owned businesses and faith-based ministries. Services include commercial and commercial real estate
loans, checking, savings and time deposit accounts, and other cash management services.
Company Strategy and Core Competencies
Cass is an information services company with a primary focus on processing payables and payables-related transactions for
large corporations located in the United States. Cass possesses four core competencies that encompass most of its processing
services.
Data acquisition – This refers to the gathering of data elements from diverse, heterogeneous sources and the building of
complete databases for our customers. Data is the raw material of the information economy. Cass gathers vital data from
complex and diverse input documents, electronic media, proprietary databases and data feeds, including data acquired from
vendor invoices as well as customer procurement and sales systems. Through its numerous methods of obtaining streams and
pieces of raw data, Cass is able to assemble vital data into centralized data management systems and warehouses, thus producing
an engine to create the power of information for managing critical corporate functions and processing systems.
Data management – Once data is assembled, Cass is able to utilize the power from derived information to produce significant
savings and benefits for its clients. This information is integrated into customers’ unique financial and accounting systems,
eliminating the need for internal accounting processing and providing internal and external support for these critical systems.
Information is also used to produce management and exception reporting for operational control, feedback, planning assistance
and performance measurement.
Business Intelligence – Receiving information in the right place at the right time and in the required format is paramount for
business survival. Cass’ information delivery solutions provide reports, digital images, data files and retrieval capabilities
through the internet or directly into customer internal systems. Cass’ proprietary internet management delivery system is the
foundation for driving these critical functions. Transaction, operational, control, status and processing exception information
are all delivered through this system creating an efficient, accessible and highly reliable asset for Cass customers.
Financial exchange – Since Cass is unique among its competition in that it owns a commercial bank, it is also able to manage
the movement of funds from its customers to their suppliers. This is a distinguishing factor, which clearly requires the
processing capability, operating systems and financial integrity of a banking organization. Cass provides immediate, accurate,
controlled and protected funds management and transfer system capabilities for all of its customers. Old and costly check
processing and delivery mechanisms are replaced with more efficient electronic cash management and funds transfer systems.
Cass’ core competencies allow it to perform the highest volumes of transaction processing in an integrated, efficient and
systematic approach. Not only is Cass able to process the transaction, it is also able to collect the data defining the transaction
and effect the financial payment governing its terms.
These core competencies, enhanced through shared business processes, drive Cass’ strategic business units. Building upon
these foundations, Cass continues to explore new business opportunities that leverage these competencies and processes.
Marketing, Customers and Competition
The Company, through its Transportation Information Services business unit, is one of the largest firms in the transportation
bill processing and payment industry in the United States based on the total dollars of transportation bills paid and items
processed. Competition consists of a few primary competitors and numerous small transportation bill audit firms located
throughout the United States. While offering transportation payment services, few of these audit firms compete on a national
basis. These competitors compete mainly on price, functionality and service levels. The Company, through its Expense
Management business unit, also competes with other companies located throughout the United States that pay energy and waste
1
bills and provide management reporting. Available data indicates that the Company is one of the largest providers of energy
information processing and payment services. Cass is unique among these competitors in that it is not exclusively affiliated
with any one energy service provider (“ESP”). Various ESPs market the Company’s services, adding value with their unique
auditing, consulting and technological capabilities. Many of Cass’ services are customized for the ESPs, providing a full-
featured solution without any development costs to the ESP. The Company, through its Telecom Information Services business
unit, is a leader in the growing telecom expense management market and competes with other companies located throughout
the United States in this market. The Company, through its Waste Expense Management business competes against small
expense management companies along with large national account programs of major haulers. The Company, with its recently
completed acquisition of Gateway Giving, LLC, formed a new division known as Gyve Generosity Services (“Gyve”). Gyve
uses an on-line platform to provide generosity services for faith-based and non-profit organizations, which is a complementary
service offering to the Bank’s faith-based customers. Also, the Company through its Integrated Payments business competes
with providers of corporate payment solutions.
The Bank is organized as a Missouri trust company with banking powers and was founded in 1906. The Company was
originally classified as a bank holding corporation due to its ownership of a federally-insured commercial bank and was
originally organized in 1982 as Cass Commercial Corporation under the laws of Missouri. Approval by the Board of Governors
of the Federal Reserve System was received in February 1983. The Company changed its name to Cass Information Systems,
Inc. in January 2001. In December 2011, the Federal Reserve Bank (“FRB”) of St. Louis approved the election of Cass
Information Systems, Inc. to become a financial holding company. As a financial holding company, Cass may engage in
activities that are financial in nature or incidental to a financial activity. The Bank encounters competition from numerous
banks and financial institutions located throughout the St. Louis, Missouri metropolitan area and other areas in which the Bank
competes. The Bank’s principal competitors, however, are large bank holding companies that are able to offer a wide range of
banking and related services through extensive branch networks. The Bank targets its services to privately held businesses
located in the St. Louis, Missouri area and faith-based ministries located in St. Louis, Missouri, Orange County, California,
Colorado Springs, Colorado, and other selected cities located throughout the United States.
The Company holds several trademarks for the payment and rating services it provides. These include: FreightPay,
Transdata, Ratemaker, Best Rate, Rate Exchange, CassPort, Cass Freight Index, Cass Truckload Linehaul Index,
Cass Intermodal Price Index Expense$mart, ExpenseSmart, WasteVision™ and Direct2Carrier Payments™. The
Company holds patents for methods and systems for managing employee-liable expenses and methods and systems for
communicating expense management information. The Company and its subsidiaries are not dependent on any one customer
for a significant portion of their businesses. The Company and its subsidiaries have a varied client base with no individual
client exceeding 10% of total revenue.
Employees
The Company and its subsidiaries had 875 full-time and 247 part-time employees as of February 19, 2020. Of these employees,
the Bank had 54 full-time and one part-time employees.
Supervision and Regulation
The Company and its bank subsidiary are extensively regulated under federal and state law. These laws and regulations are
intended to primarily protect depositors, not shareholders. The Bank is subject to regulation and supervision by the Missouri
Division of Finance, the FRB and the Federal Deposit Insurance Corporation (the “FDIC”). The Company is a financial holding
company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and as such, it is
subject to regulation, supervision and examination by the FRB. Significant elements of the laws and regulations applicable to
the Company and the Bank are described below. The description is qualified in its entirety by reference to the full text of the
statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review
by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory
policies applicable to the Company and its subsidiaries could have a material effect on the business, financial condition and
results of operations of the Company.
Bank Holding Company Activities – In general, the BHC Act limits the business of bank holding companies to banking,
managing or controlling banks and other related activities. In addition, bank holding companies that qualify and elect to be
financial holding companies, such as the Company, may engage in any activity, or acquire and retain the shares of a company
engaged in any activity, that is either (i) financial in nature or incidental to such financial activity or (ii) complementary to a
financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial
system generally. Such permitted activities include securities underwriting and dealing, insurance underwriting and making
merchant banking investments.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries
must be “well capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it
satisfies the requirements for this status discussed in the section “Prompt Corrective Action” below. A depository institution
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subsidiary is considered “well managed” if it received a composite rating and management rating of at least “satisfactory” in
its most recent examination. A financial holding company’s status will also depend upon it maintaining its status as “well
capitalized” and “well managed’ under applicable FRB regulations. If a financial holding company ceases to meet these capital
and management requirements, the FRB may impose limitations or conditions on the conduct of its activities during the non-
compliance period, and the company may not commence any of the broader financial activities permissible for financial holding
companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does
not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions.
In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company
engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding
company must have received a rating of at least “satisfactory” in its most recent examination under the Community
Reinvestment Act. See “Community Reinvestment Act” below.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or
such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the
bank holding company.
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of banks and banking companies.
The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition by the Company of more than 5% of
the voting shares or substantially all of the assets of a bank or bank holding company. Under the Bank Merger Act, the prior
approval of the FRB or other appropriate bank regulatory authority is required for the Bank to merge with another bank or
purchase the assets or assume the deposits of another bank. In reviewing acquisition applications, the bank regulatory
authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position
of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance
record under the Community Reinvestment Act and its compliance with fair housing laws.
The Dodd-Frank Act – The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in
July 2010, significantly restructured the financial regulatory environment in the United States, affecting all bank holding
companies and banks, including the Company and the Bank, some of which are described in more detail below. The impact of
the Dodd-Frank Act on the Company and the Bank has been substantial.
Dividends and Stock Repurchases – Both the Company and the Bank are subject to various regulations that restrict their ability
to pay dividends and the amount of dividends that they may pay. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (“FDICIA”), a depository institution, such as the Bank, may not pay dividends if payment would
cause it to become undercapitalized or if it is already undercapitalized. The payment of dividends by the Company and the
Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital and, under certain
circumstances, the ability of federal regulators to prohibit dividend payments as an unsound or unsafe practice.
In July 2019, the federal bank regulators adopted final rules (the “Capital Simplifications Rules”) applicable to banks, like
Cass, that are not subject to the advanced approaches capital framework that applies to large, internationally active banking
organizations with at least $250 billion in total consolidated assets or at least $10 billion in total on-balance sheet foreign
exposure. Among other things, the Capital Simplifications Rules eliminated the standalone Federal Reserve prior approval
requirement in the Basel III Capital Rules for any repurchase of common stock. In certain circumstances, the Company’s
repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations, policies or
supervisory expectations of the Federal Reserve Board.
Capital Requirements – 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.
Effective July 2, 2013, the FRB approved final rules known as the “Basel III Capital Rules” that substantially revised the risk-
based capital and leverage capital requirements applicable to bank holding companies and depository institutions, including
the Company and the Bank. The Basel III Capital Rules implement aspects of the Basel III capital framework agreed upon by
the Basel Committee and incorporate changes required by the Dodd-Frank Act.
The Basel III Capital Rules implemented common equity Tier 1 capital as a new capital measure, which 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
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(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 loan 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 (“AOCI”), 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. Prior to the adoption of the Capital Simplification Rules, amounts were
deducted from common equity Tier 1 capital to the extent that any one such category exceeded 10% of common equity Tier 1
capital or all such items, in the aggregate, exceeded 15% of common equity Tier 1 capital. The Capital Simplification Rules
took effect for the Company and the Bank as of January 1, 2020.
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.
Fully phased-in as of January 1, 2019, the Basel III Capital Rules require banking organizations, like Cass, to maintain:
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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;
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer;
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; 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.
The FRB has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an
institution’s capital level is or may become inadequate in light of the particular risks or circumstances. As of December 31,
2019, the Company and the Bank met all capital adequacy requirements under the Basel III Capital Rules.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis
regulatory reforms (commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee's
standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for
certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized
approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1,
2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk
capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company or the Bank.
The impact of Basel IV on the Company will depend on the manner in which it is implemented by the federal bank regulators.
Source of Strength Doctrine – FRB and other regulations require bank holding companies to act as a source of financial and
managerial strength to their subsidiary banks. Under this requirement, the Company is expected to commit resources to support
the Bank. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to
depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank
will be assumed by the bankruptcy trustee and entitled to priority of payment.
Deposit Insurance – Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance
Fund (“DIF”) of the FDIC, and the Bank is subject to deposit insurance assessments to maintain the DIF. Deposit insurance
assessments are based on average consolidated total assets minus average tangible equity. Under the FDIC’s risk-based
assessment system, insured institutions with less than $10 billion in assets, such as the Bank, are assigned to one of four risk
categories based on supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions
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paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned and certain other
factors.
In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September
30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income projections for
the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.
FDIC insurance expense totaled approximately $108,700, $222,200 and $220,100 for the years ended December 31, 2019,
2018 and 2017, respectively.
The FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC.
Prompt Corrective Action – The Basel III Capital Rules incorporate new requirements into the prompt correction action
framework, described above. The Federal Deposit Insurance Act (“FDIA”) requires that federal banking agencies take “prompt
corrective action” against depository institutions that do not meet minimum capital requirements and includes the following
five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various
relevant capital measures and certain other factors, as established by regulation.
A depository institution is deemed to be (i) “well-capitalized” if the institution has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 8% or greater, a leverage ratio of 5% or greater, a common equity Tier 1 ratio of
6.5% or greater and is not subject to any regulatory order agreement or written directive to meet and maintain a specific capital
level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8% or greater,
a Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio of 4% or greater, a common equity Tier 1 ratio of 4.5% or
greater and does not meet the definition of “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio of less than 6%, a leverage ratio of less than 4% or a common
equity Tier 1 ratio of less than 4.5%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of
less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a leverage ratio of less than 3% or a common equity Tier 1 ratio
of less than 3%; and (v) “critically undercapitalized” if the institution has a ratio of tangible equity (as defined in the regulations)
to total assets that is equal to or less than 2%. An institution may be deemed to be in a capital category that is lower than
indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory
examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying
prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall
financial condition or prospects for other purposes.
Subject to a narrow exception, a receiver or conservator is required to be appointed for an institution that is “critically
undercapitalized” within specified time frames. The regulations also provide that a capital restoration plan must be filed with
the FRB within 45 days of the date an institution is deemed to have received notice that it is “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding
company up to the lesser of 5% of the institution’s total assets when it was deemed to be undercapitalized or the amount
necessary to achieve compliance with applicable capital requirements. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution including, but not limited to, increased monitoring by
regulators and restrictions on growth, capital distributions and expansion. The FRB could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers
and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary
measures.
As of December 31, 2019, the most recent notification from the regulatory agencies categorized the Company and the Bank as
well-capitalized. For further information regarding the capital ratios and leverage ratio of the Company and the Bank, see Item
8, Note 2 of this report.
Safety and Soundness Regulations – In accordance with the FDIA, the federal banking agencies adopted guidelines establishing
general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the
guidelines require that institutions maintain appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal shareholder. In addition, regulations adopted by the federal banking agencies
authorize the agencies to require that an institution that has been given notice that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If the institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the agency must issue an order directing corrective actions and
may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt
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corrective action” provisions of FDIA. If the institution fails to comply with such an order, the agency may seek to enforce
such order in judicial proceedings and to impose civil money penalties.
Loans-to-One-Borrower – The Bank generally may not make loans or extend credit to a single or related group of borrowers
in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and
surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December
31, 2019, the Bank was in compliance with the loans-to-one-borrower limitations.
Depositor Preference – The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository
institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and
certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims
against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will
have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only
outside of the United States and the parent bank holding company, with respect to any extensions of credit they have made to
such insured depository institution.
Community Reinvestment Act – The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist
in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each
depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to
low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance
with the CRA and are assigned ratings that must be publicly disclosed. In order for a financial holding company to commence
any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC
Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least
“satisfactory” in its most recent examination under the CRA. The Bank received a rating of “satisfactory” in its most recent
CRA exam.
In December 2019, the FDIC and the Office of the Comptroller of the Currency jointly proposed rules that would significantly
change existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-income
communities where there is significant need for credit, more responsible lending, greater access to banking services, and
improvements to critical infrastructure. The proposals focus on four improvement areas: (i) clarifying what activities qualify
for CRA credit; (ii) updating assessment areas where activities count for CRA credit; (iii) providing a more objective method
for measuring CRA performance; and (iv) improving the timeliness and transparency of record keeping and reporting. The
Federal Reserve Board has not joined the proposed rulemaking. The Company will continue to evaluate the impact of any CRA
regulatory changes on the Company’s financial condition and results of operations.
Financial Privacy – Banks and other financial institutions are subject to regulations that limit their ability to disclose non-
public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to
consumers and affect how consumer information is transmitted through diversified financial companies and conveyed to
outside vendors.
The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information and maintaining
information security programs. The standards set forth in the guidelines are intended to ensure the security and confidentiality
of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such
records and protect against unauthorized access to or use of such records or information that could result in substantial harm
or inconvenience to any customer.
Transactions with Affiliates – Transactions between the Bank and its affiliates are subject to regulations that limit the types and
amounts of covered transactions engaged in by the Bank and generally require those transactions to be on an arm’s-length
basis. The term “affiliate” is defined to mean any company that controls or is under common control with the Bank and includes
the Company and its non-bank subsidiaries. “Covered transactions” include a loan or extension of credit, as well as a purchase
of securities issued by an affiliate, certain purchases of assets from the affiliate, certain derivative transactions that create a
credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate. In general, these regulations require that any such transaction
by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be
limited to certain thresholds on an individual and aggregate basis.
Federal law also limits the Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well
as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms
that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing
for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than
the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s
capital.
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Federal Reserve System – FRB regulations require depository institutions to maintain cash reserves against their transaction
accounts (primarily negotiable order of withdrawal and demand deposit accounts). A reserve of 3% is to be maintained against
aggregate transaction accounts between $15.2 million and $110.2 million (subject to adjustment by the FRB) plus a reserve of
10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of
$110.2 million. The first $15.2 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the
reserve requirements. The Bank is in compliance with the foregoing requirements.
Cybersecurity – In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement
indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure
that their risk management processes address the risk posed by compromised customer credentials, including security measures
to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates
that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure
the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive
malware. A financial institution is expected to develop appropriate processes to enable recovery of data and business operations
and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this
type of cyber-attack. If the Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions,
including financial penalties.
In the ordinary course of business, the Company relies on electronic communications and information systems to conduct
operations and store sensitive data. The Company employs an in-depth, layered, defensive approach that leverages people,
processes and technology to manage and maintain cybersecurity controls. The Company also employs a variety of preventative
and detective tools to identify, protect, detect, respond, and recover against suspicious activity, as well as to report on any
suspected advanced persistent threats. Notwithstanding the strength of the Company’s defensive measures, the threat from
cyber attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive
measures. While the Company has not experienced a significant compromise to date, significant data loss or any material
financial losses related to cybersecurity attacks, the Company’s systems and those of its customers and third-party service
providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks
and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving
nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking and other
technology-based products and services by the Company and its customers. See Item 1A, “Risk Factors” for a further discussion
of risks related to cybersecurity.
Other Regulations – The operations of the Company and the Bank are also subject to:
• Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
• Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and
the use of consumer information;
• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection
agencies;
• Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and
customers’ rights and liabilities arising from the use of automated teller machines and other electronic
banking services.
• Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family
residential real estate receive various disclosures, including good faith estimates of settlement costs, lender
servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement
services;
• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit;
• Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such
as digital check images and copies made from that image, the same legal standing as the original paper check;
• The USA PATRIOT Act, which requires banks and savings institutions to establish broadened anti-money
laundering compliance programs and due diligence policies and controls to ensure the detection and reporting
of money laundering; and
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• The Bank Secrecy Act, which requires U.S. financial institutions to collaborate with the U.S. government in
cases of suspected money laundering and fraud.
Certain of these laws are consumer protection laws that extensively govern the Company’s relationship with its customers.
Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by
customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state
and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other
remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each
jurisdiction in which the Company operates and civil money penalties. Failure to comply with consumer protection
requirements may also result in the Company’s inability to pursue merger or acquisition transactions.
Website Availability of SEC Reports
Cass files annual, quarterly and current reports with the Securities and Exchange Commission (the “SEC”). Cass will, as soon
as reasonably practicable after they are electronically filed with or furnished to the SEC, make available free of charge on its
website each of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all
amendments to those reports, and its definitive proxy statements. The address of Cass’ website is: www.cassinfo.com.
The reference to the Company’s website address does not constitute incorporation by reference of the information contained
on the website and should not be considered part of this report.
Statistical Disclosure by Bank Holding Companies
For the statistical disclosure by bank holding companies, refer to Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
ITEM 1A. RISK FACTORS
This section highlights specific risks that could affect the Company’s business. Although this section attempts to highlight key
factors, please be aware that other risks may prove to be important in the future. New risks may emerge at any time, and Cass
cannot predict such risks or estimate the extent to which they may affect the Company’s financial performance. In addition to
the factors discussed elsewhere or incorporated by reference in this report, the identified risks that could cause actual results to
differ materially include the following:
General political, economic or industry conditions may be less favorable than expected.
Local, domestic, and international economic, political and industry-specific conditions and governmental monetary and fiscal
policies affect the industries in which the Company competes, directly and indirectly. Conditions such as inflation, recession,
unemployment, volatile interest rates, tight money supply, real estate values, international conflicts and other factors outside
of Cass’ control may adversely affect the Company. Economic downturns could result in the delinquency of outstanding loans,
which could have a material adverse impact on Cass’ earnings.
Unfavorable developments concerning customer credit quality could affect Cass’ financial results.
Although the Company regularly reviews credit exposure related to its customers and various industry sectors in which it has
business relationships, default risk may arise from events or circumstances that are difficult to detect or foresee. Under such
circumstances, the Company could experience an increase in the level of provision for credit losses, delinquencies,
nonperforming assets, net charge-offs and allowance for credit losses.
The Company has lending concentrations, including, but not limited to, faith-based ministries located in selected cities and
privately-held businesses located in or near St. Louis, Missouri, that could suffer a significant decline which could adversely
affect the Company.
Cass’ customer base consists, in part, of lending concentrations in several segments and geographical areas. If any of these
segments or areas is significantly affected by weak economic conditions, the Company could experience increased credit losses,
and its business could be adversely affected.
Fluctuations in interest rates could affect Cass’ net interest income and balance sheet.
The operations of financial institutions such as the Company are dependent to a large degree on net interest income, which is
the difference between interest income from loans and investments and interest expense on deposits and borrowings. Prevailing
economic conditions, the fiscal and monetary policies of the federal government and the policies of various regulatory agencies
all affect market rates of interest, which in turn significantly affect financial institutions’ net interest income. Fluctuations in
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interest rates affect Cass’ financial statements, as they do for all financial institutions. Volatility in interest rates can also result
in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as federal
government and corporate securities and other investment vehicles, which, because of the absence of federal insurance
premiums and reserve requirements, generally pay higher rates of return than financial institutions. As discussed in greater
detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” a low level of interest rates would have a
negative impact on the Company’s net interest income.
The Company may be adversely impacted by the uncertainty regarding LIBOR as a reference rate.
The United Kingdom’s Financial Conduct Authority announced in 2017 that after 2021 it would no longer persuade or require
banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement indicates
that the continuation of LIBOR on the current basis cannot be guaranteed after 2021 and has resulted in uncertainty about the
future of LIBOR and what may become accepted alternatives to LIBOR. At this time, the Company is not able to predict the
effect of this uncertainty on the markets for LIBOR-indexed financial instruments.
Regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other
things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended
alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar
LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not
possible to predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue
to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments.
Certain of Cass’ loans and other financial instruments include attributes that are either directly or indirectly dependent on
LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are
calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition
will change Cass’ market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and
hedging strategies. Failure to adequately manage this transition process with our customers could adversely impact the
Company’s reputation. Although Cass is currently unable to assess what the ultimate impact of the transition from LIBOR will
be, failure to adequately manage the transition could have a material adverse effect on the Company’s business, financial
condition and results of operations.
Operational difficulties or cyber-security problems could damage Cass’ reputation and business.
In the ordinary course of business, the Company depends on the reliable operation of its computer operations and network
connections from its clients to its systems. Any failure, interruption, or breach in security of these systems would cause Cass
to be unable to process transactions for its clients, resulting in decreased revenues. The Company also relies on electronic
communications and information systems to store sensitive customer data. Any failure, interruption, breach in security or loss
of data, whatever the cause, could reduce client satisfaction with the Company’s products and services and harm Cass’ financial
results. These types of threats may derive from human error, fraud or malice on the part of external or internal parties, or may
result from accidental technological failure. Further, to access the Company’s products and services, Cass’ customers may use
computers and mobile devices that are beyond the Company’s security control systems. The Company’s technologies, systems,
networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of
cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted
measures directed at Cass. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, has
increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
A material security problem affecting Cass could damage its reputation, deter prospects from purchasing its products and
services, deter customers from using its products and services or result in liability to Cass.
Cloud technologies are also critical to the operation of our systems, and our reliance on cloud technologies is growing. Service
disruptions in cloud technologies may lead to delays in accessing, or the loss of, data that is important to our businesses and
may hinder our customers’ access to our products and services.
Although the Company makes significant efforts to maintain the security and integrity of Cass’ information systems and have
implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that Cass’
security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or
damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because
attempted security breaches, particularly cyber-attacks and intrusions, or disruptions will occur in the future, and because the
techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and
in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, the Company may be unable to
anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually
impossible to entirely mitigate this risk. While specific “cyber” insurance coverage is maintained, which would apply in the
event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because
cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under
9
Cass’ cyber insurance coverage. A security breach or other significant disruption of Cass’ information systems or those related
to customers, merchants and third party vendors, including as a result of cyber-attacks, could 1) disrupt the proper functioning
of Cass’ networks and systems and therefore operations and/or those of certain customers; 2) result in the unauthorized access
to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of the
Company or its customers; 3) result in a violation of applicable privacy, data breach and other laws, subjecting the Company
to additional regulatory scrutiny and expose Cass to civil litigation, governmental fines and possible financial liability; 4)
require significant management attention and resources to remedy the damages that result; or 5) harm Cass’ reputation or cause
a decrease in the number of customers that choose to do business with the Company. The occurrence of any of the foregoing
could have a material adverse effect on Cass’ business, financial condition and results of operations.
Cass must respond to rapid technological changes and these changes may be more difficult or expensive than anticipated.
If competitors introduce new products and services embodying new technologies, or if new industry standards and practices
emerge, the Company’s existing product and service offerings, technology and systems may become obsolete. Further, if Cass
fails to adopt or develop new technologies or to adapt its products and services to emerging industry standards, Cass may lose
current and future customers. Finally, Cass’ ability to adopt these technologies can also be inhibited by intellectual property
rights of third parties. Any of these could have a material adverse effect on its business, financial condition and results of
operations. The payment processing and financial services industries are changing rapidly and in order to remain competitive,
Cass must continue to enhance and improve the functionality and features of its products, services and technologies. These
changes may be more difficult or expensive than the Company anticipates.
Operations of the Company’s customer base are impacted by macro-economic factors such as a strong dollar and/or
volatility in commodity prices. A reduction in its customers’ operations could have a material adverse effect on Cass’ results
of operations.
A decline in the cost of oil worldwide can have a negative effect on both the number of freight transactions processed and the
dollar amount of invoices processed. For example, lower oil prices can cause a significant drop in drilling supplies being
transported to fracking operations by domestic railroads and trucks. Lower oil prices can also result in lower gas and fuel prices,
negatively affecting the dollar amounts of the invoices that Cass processes for its freight and shipping customers. A decline in
oil prices could have an adverse effect on the Company’s revenues and could significantly impact its results of operations.
Methods of reducing risk exposures might not be effective.
Instruments, systems and strategies used to hedge or otherwise manage exposure to various types of credit, interest rate, market
and liquidity, operational, regulatory/compliance, business risks and enterprise-wide risks could be less effective than
anticipated. As a result, the Company may not be able to effectively mitigate its risk exposures in particular market
environments or against particular types of risk.
Customer borrowing, repayment, investment, deposit, and payable processing practices may be different than anticipated.
The Company uses a variety of financial tools, models and other methods to anticipate customer behavior as part of its strategic
and financial planning and to meet certain regulatory requirements. Individual, economic, political and industry-specific
conditions and other factors outside of Cass’ control could alter predicted customer borrowing, repayment, investment, deposit,
and payable processing practices. Such a change in these practices could adversely affect Cass’ ability to anticipate business
needs, including cash flow and its impact on liquidity, and to meet regulatory requirements.
Cass’ stock price can become volatile and fluctuate widely in response to a variety of factors.
The Company’s stock price can fluctuate based on factors that can include actual or anticipated variations in Cass’ quarterly
results; new technology or services by competitors; unanticipated losses or gains due to unexpected events, including losses or
gains on securities held for investment purposes; significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving the Company or its competitors; changes in accounting policies or practices;
failure to integrate acquisitions or realize anticipated benefits from acquisitions; or changes in government regulations.
General market fluctuations, industry factors and general economic and political conditions, such as economic slowdowns or
recessions, governmental intervention, interest rate changes, credit loss trends, low trading volume or currency fluctuations
also could cause Cass’ stock price to decrease regardless of the Company’s operating results.
The Company’s allowance for loan losses is subject to continuing evaluation and may be insufficient.
The Company maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged
to expense. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent
in the loan portfolio. Management uses a systematic, documented approach in determining the appropriate level of the
10
allowance for loan losses reserve, which represents management’s best estimate of inherent losses that have been incurred
within the existing portfolio of loans. These estimates are based upon a number of factors, such as review of industry
concentrations; specific credit risks and financial conditions of specific borrowers; loan loss experience; current loan portfolio
quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The
determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and
requires management to make estimates based on risks and trends that are subject to material change. Continuing deterioration
in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem
loans and other factors, some of which are outside of the Company’s control, may require an increase in the allowance for loan
losses. In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an
increase in the provision for loan losses or the recognition of further loan charge-offs based on judgments different than those
of management. If charge-offs in future periods exceed the allowance for loan losses, the Company will need additional
provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in
net income and, possibly, capital, and may have a material adverse effect on the Company’s business, financial condition and
results of operations.
In addition, the adoption of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, as amended, on January 1, 2020 will impact the Company’s
methodology for estimating the allowance for loan losses.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Provision and
Allowance for Loan Losses” and Item 8, “Financial Statements and Supplementary Data—Note 1” for additional information.
Competitive product and pricing pressure within Cass’ markets may change.
The Company operates in a very competitive environment, which is characterized by competition from a number of other
vendors and financial institutions in each market in which it operates. The Company competes with large payment processors
and national and regional financial institutions and also smaller auditing companies and banks in terms of products and pricing.
If the Company is unable to compete effectively in products and pricing in its markets, business could decline.
Management’s ability to maintain and expand customer relationships may differ from expectations.
The industries in which the Company operates are very competitive. The Company not only competes for business
opportunities with new customers, but also competes to maintain and expand the relationships it has with its existing customers.
The Company continues to experience pressures to maintain these relationships as its competitors attempt to capture its
customers.
The introduction, withdrawal, success and timing of business initiatives and strategies, including, but not limited to, the
expansion of payment and processing activities to new markets, the expansion of products and services to existing markets
and opening of new bank branches, may be less successful or may be different than anticipated. Such a result could
adversely affect Cass’ business.
The Company makes certain projections as a basis for developing plans and strategies for its payment processing and banking
products. If the Company does not accurately determine demand for its products and services, it could result in the Company
incurring significant expenses without the anticipated increases in revenue, which could result in an adverse effect on its
earnings.
In addition, there are risks and uncertainties associated with the introduction of new products and services, including substantial
investments of time and resources. The introduction and development of new products and services may not be achieved along
expected timelines, or at all, and may not be successful as a result of factors beyond the Company’s control, including
regulatory, competition and external market factors. Failure to successfully manage these risks in the development and
implementation of new products or services, and failure to integrate such new products and services into our existing system
of internal controls, could have a material adverse effect on our business, financial condition and results of operations.
Management’s ability to retain key officers and employees may change.
Cass’ future operating results depend substantially upon the continued service of Cass’ executive officers and key personnel.
Cass’ future operating results also depend in significant part upon Cass’ ability to attract and retain qualified management,
financial, technical, marketing, sales, and support personnel. Competition for qualified personnel is intense, and the Company
cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the
requisite skills to serve in these positions, and it may be increasingly difficult for the Company to hire personnel over time.
Cass’ business, financial condition and results of operations could be materially adversely affected by the loss of any of its key
employees, by the failure of any key employee to perform in his or her current position, or by Cass’ inability to attract and
retain skilled employees.
11
The Company and the Bank are subject to extensive government regulation and supervision and possible enforcement or
other legal actions that could detrimentally affect Cass’ business.
The Company and the Bank are subject to extensive federal and state regulation and supervision, the primary focus of which
is to protect customers, depositors, the deposit insurance fund and the safety and soundness of the banking system as a whole,
and not shareholders. In addition, since the global financial crisis, financial institutions generally have been subject to increased
scrutiny from regulatory authorities, with an increased focus on risk management and consumer compliance. This regulatory
structure and heightened focus gives the regulatory authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect to capital levels, the timing and amount of
dividend payments, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
Failure to comply with applicable laws, regulations, policies or guidance could result in enforcement and other legal actions
by federal and state authorities, including criminal and civil penalties, the loss of FDIC insurance, revocation of a banking
charter, and other regulatory sanctions, as well as reputational damage, any of which could have a material adverse effect on
the Company’s business, financial condition and results of operations.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The
substance and impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although
any change could impact the regulatory structure under which the Company or its competitors operate and may significantly
increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require
modifications to the Company’s business strategy, and/or limit its ability to pursue business opportunities in an efficient
manner. A change in statutes, regulations or regulatory policies applicable to the Company or any of its subsidiaries could
have a material, adverse effect on the Company’s business, financial condition and results of operations.
See Item 1, “Business—Supervision and Regulation,” and Item 8, Note 2 to the consolidated financial statements included
elsewhere in this report for additional information.
The Company may need to raise additional capital or sell assets if it fails to meet regulatory capital requirements or meet
commitments and liquidity needs. Such capital may not be available on favorable terms, or at all.
Fully phased in, the Basel III Capital rules implemented stricter capital requirements and leverage limits and methods for
calculating risk-weighted assets, meaning the Company is required to hold more capital against such assets. Complying with
these more stringent capital requirements could result in management modifying its business strategy and could limit the
Company’s ability to make distributions, including paying dividends, or buying back shares.
The Company may also need to raise additional capital in the future to provide it with sufficient capital resources and liquidity
to meet commitments and business needs. The ability to raise additional capital, if needed, will depend on, among other things,
conditions in the capital markets at that time and the Company’s financial condition, as well as the need for other financial
institutions to raise capital at the same time. Economic conditions and the loss of confidence in financial institutions may
increase the cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings,
repurchase agreements and borrowings from the discount window of the Federal Reserve.
An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on the
Company’s business, financial condition and results of operations.
Legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly
involving the Company and its subsidiaries, could adversely affect Cass or the financial services industry in general.
The Company is subject to various legal and regulatory proceedings. It is inherently difficult to assess the outcome of these
matters, and there can be no assurance that the Company will prevail in any proceeding or litigation. Any such matter could
result in substantial cost and diversion of Cass’ efforts, which by itself could have a material adverse effect on Cass’ financial
condition and operating results. Further, adverse determinations in such matters could result in actions by Cass’ regulators that
could materially adversely affect Cass’ business, financial condition or results of operations. Please refer to Item 3, “Legal
Proceedings.”
The Company’s accounting policies and methods are the basis of how Cass reports its financial condition and results of
operations, and they require management to make estimates about matters that are inherently uncertain. In addition,
changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting
Standards Board, or other authoritative bodies, could materially impact Cass’ financial statements.
The Company’s accounting policies and methods are fundamental to how Cass records and reports its financial condition and
results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and
methods in order to ensure that they comply with generally accepted accounting principles and reflect management’s judgment
12
as to the most appropriate manner in which to record and report Cass’ financial condition and results of operations. In some
cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might
be reasonable under the circumstances yet might result in the Company reporting materially different amounts than would have
been reported under a different alternative.
Cass has identified one accounting policy as being “critical” to the presentation of its financial condition and results of
operations because they require management to make particularly subjective and/or complex judgments about matters that are
inherently uncertain and because of the likelihood that materially different amounts would be reported under different
conditions or using different assumptions. More information on Cass’ critical accounting policies is contained in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
From time to time, the regulatory agencies, the Financial Accounting Standards Board (“FASB”), and other authoritative bodies
change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements.
These changes can be hard to predict and can materially impact how management records and reports the Company’s financial
condition and results of operations.
The Company and the Bank are subject to liquidity risk.
The Company requires liquidity to meet deposit and accounts and drafts payable obligations as they come due. Access to
funding sources in amounts adequate to finance the Company’s commitments and business activities or on terms that are
acceptable or favorable to the Company could be impaired by risks and uncertainties that are beyond the Company’s control,
including those described in this Item 1A, “Risk Factors” section.
The Company’s access to deposits and accounts and drafts payable for liquidity purposes may also be adversely affected by
the needs of the Company’s depositors and customers. A failure to maintain adequate liquidity could have a material adverse
effect on the Company’s business, financial condition and results of operations.
Cass is subject to examinations and challenges by tax authorities, which, if not resolved in the Company’s favor, could
adversely affect the Company’s financial condition and results of operations.
In the normal course of business, Cass and its affiliates are routinely subject to examinations and challenges from federal and
state tax authorities regarding the amount of taxes due in connection with investments it has made and the businesses in which
it is engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions
taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts,
payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by
tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income
among tax jurisdictions. If any such challenges are made and are not resolved in the Company’s favor, they could have an
adverse effect on Cass’ financial condition and results of operations.
Certain events beyond the Company’s control, such as severe weather, natural disasters, terrorist activities or other
hostilities, may adversely affect the general economy, financial and capital markets, specific industries, and the Company.
Severe weather, natural disasters, acts of terrorism or other hostilities, and other adverse external events beyond the Company’s
control, could have a significant impact on the Company’s ability to conduct business. Such events could disrupt Cass’
operations or those of its customers, affect the stability of the Bank’s deposit base, impair the ability of borrowers to repay
outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue
and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material
adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial
condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In September 2012, the Company entered into a 10-year lease for office space in St. Louis County, Missouri, to house the
headquarters of the Company and the Bank. The Company’s headquarters occupy 13,991 square feet in an office center at
12444 Powerscourt Drive along with 3,563 square feet in the same center at 12412 Powerscourt Drive. The Bank’s headquarters
occupy 10,564 square feet in the same center at 12412 Powerscourt Drive.
The Company owns approximately 61,500 square feet of office space at 13001 Hollenberg Drive in Bridgeton, Missouri where
the Company’s transportation processing activities are performed.
13
The Company owns a production facility of approximately 45,500 square feet located at 2675 Corporate Exchange Drive,
Columbus, Ohio. Additional facilities are located in Greenville, South Carolina, Wellington, Kansas, Jacksonville, Florida and
Columbus, Ohio. The Company has offices in Breda, Netherlands, Basingstoke, United Kingdom, and Singapore to service
its multinational customers.
In addition, the Bank owns a banking facility near downtown St. Louis, Missouri, has an operating branch in the Bridgeton,
Missouri location, and has additional leased facilities in Fenton, Missouri and Colorado Springs, Colorado.
Management believes that these facilities are suitable and adequate for the Company’s operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any pending proceedings other than ordinary routine litigation incidental
to their businesses. Management believes none of these proceedings, if determined adversely, would have a material effect on
the business or financial conditions of the Company or its subsidiaries.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
14
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is quoted on The Nasdaq Global Select Market under the symbol “CASS.” As of February
19, 2020, there were approximately 4,053 holders of record of the Company’s common stock.
The Company has continuously paid regularly scheduled cash dividends since 1934 and expects to continue to pay quarterly
cash dividends in the future. However, future dividend payments will depend on the Company’s earnings, capital requirements,
financial condition, applicable banking regulatory requirements and other factors considered relevant by the Company’s Board
of Directors.
The Company maintains a treasury stock buyback program pursuant to which the Board of Directors has authorized the
repurchase of up to 500,000 shares of the Company’s common stock. As restored by the Board of Directors in October 2019,
the program provides that the Company may repurchase up to an aggregate of 500,000 shares of common stock and has no
expiration date. The Company repurchased a total of 154,593 shares at an aggregate cost of $7,779,000 during the year ended
December 31, 2019 and 169,143 shares at an aggregate cost of $8,838,000 during the year ended December 31, 2018. A portion
of the repurchased shares may be used for the Company’s employee benefit plans, and the balance will be available for other
general corporate purposes. The pace of repurchase activity will depend on factors such as levels of cash generation from
operations, cash requirements for investments, repayment of debt, current stock price, and other factors. The Company may
repurchase shares from time to time on the open market or in private transactions, including structured transactions. The stock
repurchase program may be modified or discontinued at any time.
During the three months ended December 31, 2019, the Company did not repurchase any shares of its common stock pursuant
to its treasury stock buyback program.
Performance Quoted on The Nasdaq Stock Market for the Last Five Fiscal Years
The following graph compares the cumulative total returns over the last five fiscal years of a hypothetical investment of $100
in shares of common stock of the Company with a hypothetical investment of $100 in The Nasdaq Stock Market (“Nasdaq”)
and in the index of Nasdaq computer and data processing stocks. The graph assumes $100 was invested on December 31,
2014, with dividends reinvested. Returns are based on period end prices.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2019
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2014
2015
2016
2017
2018
2019
Cass Information Systems Inc
NASDAQ Computer and Data Processing Index
NASDAQ Stock Market (US Companies)
15
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial information for each of the five years ended December 31. The selected
financial data should be read in conjunction with the Company’s consolidated financial statements and accompanying notes
included in Item 8 of this report.
(Dollars in thousands except per share data)
Fee revenue and other income
Interest and fees on loans
Interest income on debt and equity securities
Other interest income
Total interest income
Interest expense on deposits
Interest on short-term borrowings
Provision for loan losses
Net interest income after provision
Operating expense
Income before income tax expense
Income tax expense
Net income
Diluted earnings per share
Dividends per share
Dividend payout ratio
Average total assets
Average net loans
Average investment securities
Average total deposits
Average total shareholders’ equity
Return on average total assets
Return on average equity
Average equity to assets ratio
Equity to assets ratio at year-end
Tangible common equity to tangible assets
Tangible common equity to risk-weighted
assets
Net interest margin
Allowance for loan losses to loans at year-end
Nonperforming assets to loans and foreclosed
assets
Net loan (recoveries) charge-offs to average
loans outstanding
2019
2018
$ 110,069 $ 104,076 $
36,461
10,336
5,812
52,609
5,191
2
250
47,166
119,769
37,466
7,062
30,404 $
2.07 $
1.05
50.11 %
32,477
11,167
4,282
47,926
3,736
—
—
44,190
111,919
36,347
6,079
30,268 $
2.03 $
.89
43.53 %
$
$
2017
95,512 $
28,641
10,993
2,343
41,977
2,187
—
—
39,790
100,403
34,899
9,885 (1)
25,014 $
1.68 $
.72
42.68 %
2016
86,136 $
29,063
9,801
1,066
39,930
2,029
—
(1,500)
39,401
93,473
32,064
7,716
24,348 $
1.63 $
.68
40.98 %
2015
83,368
28,669
9,498
543
38,710
2,111
—
(850)
37,449
89,783
31,034
7,978
23,056
1.52
.65
42.06 %
$ 1,749,574 $ 1,637,876 $ 1,568,112 $ 1,504,474 $ 1,439,511
659,109
653,459
749,710
330,095
426,657
423,384
579,752
602,490
671,144
197,853
216,548
236,467
700,631
448,890
624,877
223,372
667,158
352,129
614,975
207,060
1.74 %
12.86
13.52
13.84
12.93
1.85 %
13.55
13.64
13.56
12.83
1.60 %
11.55
13.81
14.04
13.25
17.78
3.36
1.37
—
(.01)
18.85
3.32
1.42
—
—
20.23
3.34
1.49
—
—
1.62 %
11.76
13.76
13.82
13.04
20.13
3.32
1.53
1.60 %
11.65
13.74
14.25
13.42
21.19
3.38
1.77
.04
.48 (2)
(.01)
(.09)
(1) Includes one-time, non-cash Tax Cuts and Jobs Act (“TCJA”) charge of $1,824,000.
(2) In February 2016, one nonaccrual loan with a balance of $2,727,000 was paid in full. The percentage, as adjusted, would have been .06%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information about the more significant factors that impacted the financial
condition and results of operations of the Company for the years ended December 31, 2019, 2018 and 2017. This discussion
and analysis should be read in conjunction with the Company’s consolidated financial statements and accompanying notes and
other selected financial data presented elsewhere in this report. Refer to Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC
on March 1, 2019 and incorporated herein by reference for a discussion and analysis of the more significant factors that affected
periods prior to 2018.
Executive Overview
Cass provides payment and information processing services to large manufacturing, distribution and retail enterprises from its
offices/locations in St. Louis, Missouri, Columbus, Ohio, Greenville, South Carolina, Wellington, Kansas, Jacksonville,
Florida, Breda, Netherlands, Basingstoke, United Kingdom, and Singapore. The Company’s services include freight invoice
rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and
pays energy invoices, which include electricity and gas as well as waste and telecommunications expenses, and is a provider
of telecom expense management solutions. Cass provides a B2B payment platform for clients that require an agile fintech
16
partner. Additionally, the Company uses an on-line platform to provide generosity services for faith-based and non-profit
organizations, which is a complementary service offering to the Bank’s faith-based customers. The Company also, through
Cass Commercial Bank, its St. Louis, Missouri-based bank subsidiary, provides banking services in the St. Louis metropolitan
area, Orange County, California, Colorado Springs, Colorado, and other selected cities in the United States. In addition to
supporting the Company’s payment operations, the Bank provides banking services to its target markets, which include
privately-owned businesses and faith-based ministries.
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 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. Interest income from
the balances generated during the payment processing cycle is 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, 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,” 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.
In 2019, total fee revenue and other income increased $5,993,000, or 6%, net interest income after provision for loan losses
increased $2,976,000, or 7%, total operating expenses increased $7,850,000, or 7%, and net income increased $136,000. This
performance in 2019 was driven by new customer wins, increased business from existing customers, and the development and
deployment of new revenue generating services, which overcame headwinds during the later part of the year caused by a
slowdown in industrial economic activity, loss of a high transaction volume account, and lower interest rates. The increase in
total operating expense was due mainly to the Company continuing to invest in technology and staff required to win new
business and support service growth with existing clients, as well as integration costs related to the Gyve on-line generosity
platform that was acquired in September 2019. The asset quality of the Company’s loans and investments as of December 31,
2019 remained strong.
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.
Impact of New and Not Yet Adopted Accounting Pronounce ments
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC Topic 842). The ASU improves financial reporting about
leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and
manufacturing equipment. Consistent with current generally accepted accounting principles (“GAAP”), the recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be
recognized on the balance sheet—the new ASU requires both types of leases to be recognized on the balance sheet. The ASU
also requires disclosures to help investors and other financial statement users better understand the amount, timing, and
uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing
additional information about the amounts recorded in the financial statements. The Company elected to apply ASU 2016-02
as of the beginning of the period of adoption (January 1, 2019) and has not restated comparative periods. The Company has
elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess
17
(i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases
and (iii) initial direct costs for any existing leases. Adoption of the ASU on January 1, 2019 resulted in the recognition of lease
liabilities totaling $7,808,000 and the right-of-use assets totaling $7,383,000. The initial balance sheet gross up upon adoption
was related to operating leases of certain real estate properties. See Note 18 – Leases for additional disclosures related to leases.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The ASU requires measurement and recognition of expected credit losses for financial assets
held, which include allowances for losses expected to be incurred over the life of the portfolio, rather than incurred losses,
which include allowances for current known and inherent losses within the portfolio. Under this standard, the Company will
be required to hold an allowance equal to the expected life-of-loan losses on the loan portfolio. The standard is effective for
fiscal periods beginning after December 15, 2019 and was adopted on January 1, 2020.
The Company formed a cross-functional working group under the direction of the Chief Financial Officer comprised of
individuals from various functional areas including credit, risk management, finance, and accounting that addressed the
adoption and implementation of the ASU. The Company currently expects the adoption of ASU 2016-13 will result in a one-
time cumulative effect adjustment to retained earnings and an increase of up to 25% of the allowance for loan losses and the
reserves for unfunded commitments. The expected increase is a result of changing from an incurred loss model, which
encompasses allowances for current known and inherent losses within the portfolio, to an expected loss model, which
encompasses allowances for losses expected to be incurred over the life of the portfolio. The ASU also requires an allowance
to be established for expected credit losses for certain debt securities and other financial assets, however the Company does
not expect these allowances to be significant.
Critical Accounting Policies
The Company has prepared the consolidated financial statements in this report in accordance with the FASB 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 Committee of
the Board of Directors and is described below.
Allowance for Loan Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to assess
overall collectability. The level of the allowance for loan losses reflects management’s estimate of the collectability of the loan
portfolio. 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 Loan Losses” section of this report. The Company’s estimates have been materially accurate in the past, and accordingly,
the Company has continued to utilize the present processes through 2019, after which current expected credit losses
methodology will be adopted in 2020.
Summary of Results
% Change
2019 v. 2018 2018 v. 2017
4.8%
For the Years Ended December 31,
2018
63,567
2017
2019
$107,953
63,207
$37,597,035
$93,322
66,255
$42,973,242 $42,380,453
$102,181
(In thousands except per share data)
Total processing volume
Total invoice dollars processed and paid
Payment and processing fees
Net interest income after provision for
11.1
loan losses
9.6
Total net revenue
3.0
Average earning assets
—
Net interest margin(1)
21.0
Net income
20.8
Diluted earnings per share
—
Return on average assets
—
Return on average equity
(1) Presented on a tax-equivalent basis. The TCJA reduced the net interest margin by approximately 15 basis points in 2019 and 20
basis points in 2018.
$44,190
$148,266
$1,472,399 $1,403,748
3.32%
$30,268
$2.03
1.85%
13.55%
$39,790
$135,302
$1,362,660
3.34%
$25,014
$1.68
1.60%
11.55%
3.36%
$30,404
$2.07
1.74%
12.86%
6.7
6.0
4.9
—
0.4
2.0
—
—
(4.1)%
1.4
5.6
$47,166
$157,235
12.7
9.5
18
The results of 2019 compared to 2018 include the following significant items:
Overall, the Company’s performance increased slightly as a result of new customer wins, increased business from existing
customers, and the development and deployment of new revenue generating services overcame the effects of a slowdown
in industrial economic activity, loss of a high transaction volume account, and the impact of a lower interest rate
environment. Payment and processing fees increased 6% and total processing volume decreased 4%, respectively. The
development and deployment of new revenue generating services were more than able to offset the decrease in processing
volume as a historically robust 2018 created a difficult comparison for transportation and the loss of a high transaction
volume facility expense customer at the beginning of the fourth quarter of 2019. Total processing dollars increased 1% as
high spend customer acquisitions were able to overcome the transaction shortfall.
Average earning assets increased 5% and net interest income after provision for loan losses increased 7% year over year.
The increase in net interest income after provision for loan losses was due to higher average earning assets and a slightly
higher net interest margin. There was a loan loss provision recorded of $250,000 in 2019 while no provision was recorded
in 2018.
There were gains from the sale of securities in 2019 of $19,000 and $42,000 of losses on sales of securities in 2018.
Operating expenses increased $7,850,000 or 7%, as the Company continued to invest in technology and staff required to
win new business and support service growth with existing clients, as well as integration costs related to the Gyve on-line
generosity platform that was acquired in September 2019.
Fee Revenue and Other Income
The Company’s fee revenue is derived mainly from transportation and facility payment and processing 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, fee revenue and other income were as
follows:
(In thousands)
Transportation invoice transaction volume
Transportation invoice dollar volume
Expense management transaction volume(1)
Expense management dollar volume(1)
Payment and processing revenue
Bank service fees
Gains (losses) on sales of investment
securities
Other
(1)Includes energy, telecom and environmental
2019
December 31,
2018
27,525
36,042
37,542
$28,090,514 $28,549,225
28,713
$14,882,728 $13,831,228
$102,181
$1,335
$107,953
$1,386
2017
35,546
$24,801,733
27,661
$12,795,302
$93,322
$1,349
% Change
2019 v. 2018 2018 v. 2017
5.6%
(4.0)%
(1.6)
(4.1)
7.6
5.6
3.8
15.1
3.8
8.1
9.5
(1.0)
—
(28.4)
$19
$711
$(42)
$602
—
$841
(145.2)
18.1
Fee revenue and other income in 2019 compared to 2018 include the following significant pre-tax components:
In the transportation sector, invoice transaction and dollar volume decreased 4% and 2%, respectively, as a historically
robust 2018 created a difficult comparison for 2019. With manufacturing companies representing an important component
of the transportation customer base, the widely reported 2019 contraction in this sector created year-over-year trials for
the division. Expense management transaction volume decreased 4%, mainly due to the loss of a high transaction volume
customer, while dollar volume increased 8% as new, high spend customer acquisitions overcame the transaction shortfall.
There were gains from the sale of securities in 2019 of $19,000 and losses on sales of securities in 2018 of $42,000.
19
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:
December 31,
(In thousands)
Average earning assets
Net interest income (1)
Net interest margin (1)
Yield on earning assets (1)
Rate on interest bearing liabilities
2019
$1,472,399
$49,501
3.36%
3.71%
1.32%
2017
2018
$1,403,748 $1,362,660
$45,480
3.34%
3.50%
.56%
$46,612
3.32%
3.59%
1.00%
% Change
2019 v. 2018
4.9%
6.2%
2018 v. 2017
3.0%
2.5%
(1) Presented on a tax-equivalent basis using a tax rate of 21% in both 2019 and 2018 and 35% in 2017. The net interest margin
and yield on earning assets are lower by approximately 15 basis points in 2019 and 20 basis points in 2018 and net interest
income was lower by approximately $2,300,000 in 2019 and $2,700,000 in 2018 as a result of a lower tax-equivalent adjustment
due to TCJA.
Net interest income in 2019 compared to 2018:
The increase in net interest income was primarily due to an increase in average earning assets and a slight increase in
the net interest margin. More information is contained in the tables below and in Item 7A of this report.
Total average investment in securities and certificates of deposit decreased $30,169,000, or 7%. The investment
portfolio will expand and contract over time as the Company manages its liquidity and interest rate position. Average
interest bearing deposits in other financial institutions decreased $8,192,000, or 7%. Average federal funds sold and
other short-term investments increased $57,705,000, or 51%.
Total average loans increased $49,307,000, or 7%, to $760,153,000. Loans have a positive effect on interest income
and the net interest margin due to the fact that loans are one of the Company’s highest yielding earning assets for any
given maturity.
The Bank’s total average interest-bearing deposits increased $22,892,000, or 6%, compared to the prior year. Average
rates paid on interest-bearing liabilities increased from 1.00% to 1.32% as a result of overall market rate increases for
deposits.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential
The following table contains condensed average balance sheets for each of the periods reported, the tax-equivalent interest
income and expense on 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:
20
(In thousands)
Assets (1)
Earning assets
Loans (2), (3):
Taxable
Tax-exempt (4)
Securities (5):
Taxable
Tax-exempt (4)
Certificates of deposit
Interest-bearing deposits in other
financial institutions
Federal funds sold and other
short-term investments
Total earning assets
Non-earning assets
Cash and due from banks
Premises and equipment, net
Bank owned life insurance
Goodwill and other
intangibles
Other assets
Allowance for loan losses
Total assets
Liabilities and Shareholders’
Equity (1)
Interest-bearing liabilities
Interest-bearing demand
deposits
Savings deposits
Time deposits >=$250
Other time deposits
Total interest-bearing deposits
Short-term borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities
Demand deposits
Accounts and drafts payable
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and share-
holders’ equity
Net interest income (4)
Net interest margin (4)
Interest spread
Average
Balance
2019
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2018
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2017
Interest
Income/
Expense
Yield/
Rate
$760,153 $36,461
—
—
4.80 % $709,280 $32,429
60
1,566
—
4.57 % $658,791 $28,511 4.33 %
3.83
4,862
4.09
199
103,473
319,911
1,573
2,465
9,924
32
2.38
3.10
2.03
86,164
2,007
362,726 11,473
97
6,236
2.33
3.16
1.56
23,172
403,485
6,970
472
16,060
82
2.04
3.98
1.18
115,909
2,286
1.97
124,101
2,338
1.88
100,401
1,036
1.03
171,380
3,526
1,472,399 54,694
2.06
3.71
113,675
1,944
1,403,748 50,348
1.71
3.59
164,979
1,362,660
1,307
47,667
.79
3.50
15,455
21,319
17,489
15,433
217,922
(10,443)
$1,749,574
13,336
22,355
17,142
14,354
177,156
(10,215)
$1,637,876
12,904
21,299
16,676
14,464
150,303
(10,194)
$1,568,112
$311,434 $3,686
103
281
1,121
5,191
2
5,193
10,285
17,634
55,490
394,843
61
394,904
1.18 % $302,816 $2,832
109
1.00
210
1.59
585
2.02
3,736
1.31
—
3.28
3,736
1.32
11,451
16,639
41,045
371,951
10
371,961
.94 % $323,635
15,540
.95
16,022
1.26
38,279
1.43
393,476
1.00
13
—
393,489
1.00
276,301
785,202
56,700
1,513,107
236,467
252,926
745,713
43,904
1,414,504
223,372
209,014
713,052
36,009
1,351,564
216,548
$1,610
79
150
348
2,187
.50 %
.51
.94
.91
.56
— —
.56
2,187
$1,749,574
$49,501
3.36%
2.39%
$1,637,876
$46,612
3.32%
2.59%
$1,568,112
$45,480
3.34%
2.94%
(1) Balances shown are daily averages.
(2) For purposes of these computations, nonaccrual loans are included in the average loan amounts outstanding. Interest on nonaccrual loans
is recorded when received as discussed further in Item 8, Note 1 of this report.
(3) Interest income on loans includes net loan fees of $650,000, $393,000, and $415,000 for 2019, 2018 and 2017, respectively.
(4) Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% in both 2019 and 2018 and 35% in 2017. The tax-
equivalent adjustment was approximately $2,085,000, $2,422,000, and $5,691,000 for 2019, 2018, and 2017, respectively. The TCJA
reduced the yield/rate on tax-exempt securities by approximately 70 basis points and the yield on earning assets and net interest margin
by approximately 15 basis points in 2019 and 20 basis points in 2018. Net interest income also decreased by approximately
$2,300,000 in 2019 and $2,700,000 in 2018 as a result of TCJA.
(5) For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized
cost of the investments.
21
Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between years due to changes in volume and interest
rates.
(In thousands)
Increase (decrease) in interest income:
Loans (2), (3):
Taxable
Tax-exempt (4)
Securities:
Taxable
Tax-exempt (4)
Certificates of deposit
Interest-bearing deposits in other
financial institutions
Federal funds sold and other short-term
investments
Total interest income
Interest expense on:
Interest-bearing demand deposits
Savings deposits
Time deposits >=$250
Other time deposits
Short-term borrowings
Total interest expense
Net interest income
2019 Over 2018
2018 Over 2017
Volume (1) Rate (1)
Total
Volume(1) Rate (1)
Total
$2,394
(60)
$1,638
—
$4,032
(60)
$2,256
(127)
$1,662
(12)
$3,918
(139)
411
(1,332)
(88)
47
(217)
23
458
(1,549)
(65)
1,458
(1,512)
(9)
77
(3,075)
24
1,535
(4,587)
15
(159)
107
(52)
289
1,013
1,302
1,130
$2,296
452
$2,050
1,582
$4,346
(506)
$1,849
1,143
$832
637
$2,681
$83
(11)
13
245
—
330
$1,966
$771
5
58
291
2
1,127
$923
$854
(6)
71
536
2
1,457
$2,889
$(110)
(25)
6
27
—
(102)
$1,951
$1,332
55
54
210
—
1,651
$(819)
$1,222
30
60
237
—
1,549
$1,132
(1) The change in interest due to the combined rate/volume variance has been allocated in proportion to the absolute dollar amounts of the
change in each.
(2) Average balances include nonaccrual loans.
(3) Interest income includes net loan fees.
(4) Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% in both 2019 and 2018 and 35% in 2017. The TCJA
reduced interest income on tax-exempt securities by approximately $2,300,000 in 2019 and $2,700,000 in 2018.
Loan Portfolio
Interest earned on the loan portfolio is a primary source of income for the Company. The loan portfolio was
$772,638,000 and represented 44% of the Company's total assets as of December 31, 2019 and generated $36,461,000 in
revenue during the year then ended. The Company had no sub-prime mortgage loans or residential development loans in its
portfolio for any of the years presented. The following tables show the composition of the loan portfolio at the end of the
periods indicated and remaining maturities for loans as of December 31, 2019.
Loans by Type
(In thousands)
Commercial and industrial
Real estate (commercial and faith-based):
Mortgage
Construction
Industrial Revenue Bond
Other
Total loans
2019
$323,857
407,480
41,244
—
57
$772,638
2018
$277,091
411,752
32,434
—
310
$721,587
December 31,
2017
$236,394
410,748
35,307
3,374
408
$686,231
2016
$214,767
425,947
17,477
6,639
36
$664,866
2015
$193,430
415,564
30,139
19,831
91
$659,055
22
Loans by Maturity
(At December 31, 2019)
One Year
Or Less
Fixed
Rate
Floating
Rate (1)
Over 1 Year
Through 5 Years
Fixed
Rate
Floating
Rate (1)
Over
5 Years
Fixed
Rate
Floating
Rate (1)
$
11,774 $ 83,966 $ 132,551 $
(In thousands)
Commercial and industrial
Real Estate:
Mortgage
Construction
Other
Total loans
(1) Loans have been classified as having "floating" interest rates if the rate specified in the loan varies with the prime commercial rate of
interest.
407,480
41,244
57
49,322 $ 109,395 $ 35,096 $ 772,638
11,304
805
57
73,371 $ 96,132 $ 409,322 $
273,893
2,878
—
55,340 $ 20,572 $ 323,857
54,055
—
—
12,891
1,633
—
7,113
22,555
—
48,224
13,373
—
19,654 $
Total
$
The Company has no concentrations of loans exceeding 10% of total loans, which are not otherwise disclosed in the loan
portfolio composition table and as are discussed in Item 8, Note 4, of this report. As can be seen in the loan composition table
above and as discussed in Item 8, Note 4, the Company's primary market niche for banking services is privately held businesses,
franchises, and faith-based ministries.
Loans to commercial entities are generally secured by the business assets of the borrower, including accounts receivable,
inventory, machinery and equipment, and the real estate from which the borrower operates. Operating lines of credit to these
companies generally are secured by accounts receivable and inventory, with specific percentages of each determined on a
customer-by-customer basis based on various factors including the type of business. Intermediate term credit for machinery
and equipment is generally provided at some percentage of the value of the equipment purchased, depending on the type of
machinery or equipment purchased by the entity. Loans secured exclusively by real estate to businesses and faith-based
ministries are generally made with a maximum 80% loan to value ratio, depending upon the Company's estimate of the resale
value and ability of the property to generate cash. The Company's loan policy requires an independent appraisal for all loans
over $500,000 secured by real estate. Company management monitors the local economy in an attempt to determine whether
it has had a significant deteriorating effect on such real estate loans. When problems are identified, appraised values are updated
on a continual basis, either internally or through an updated external appraisal.
Loan portfolio changes from December 31, 2018 to December 31, 2019:
Total loans increased $51,051,000, or 7%, to $772,638,000. Additional details regarding the types and maturities of
loans in the loan portfolio are contained in the tables above and in Item 8, Note 4.
Provision and Allowance for Loan Losses (ALLL)
The Company recorded a provision of $250,000 in 2019 and no provision for loan losses in 2018 or 2017. The amount of the
provisions for loan losses was derived from the Company’s quarterly analysis of the ALLL. The amount of the provision will
fluctuate as determined by these quarterly analyses. The Company had net loan recoveries of $81,000 and $20,000 in 2019
and 2018, respectively. The ALLL was $10,556,000 at December 31, 2019 compared to $10,225,000 at December 31, 2018.
The allowance represented 1.4% of outstanding loans at year-end 2019 and 2018. From December 31, 2017 to December 31,
2019, there were no nonperforming loans. Nonperforming loans are more fully explained in the section entitled
“Nonperforming Assets.”
The ALLL has been established and is maintained to absorb reasonably estimated and probable losses in the loan portfolio. An
ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense to cover any
deficiency or reduce any excess, as required. The current methodology consists of two components: 1) estimated credit losses
on individually evaluated loans that are determined to be impaired in accordance with FASB ASC 310, Allowance for Credit
Losses and 2) estimated credit losses inherent in the remainder of the loan portfolio in accordance with FASB ASC 450,
Contingencies. Estimated credit losses is an estimate of the current amount of loans that is probable the Company will be
unable to collect according to the original terms.
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. For the remainder of the portfolio, the Company groups loans with similar
risk characteristics into eight segments and applies historical loss rates to each segment based on a five fiscal-year look-back
period. In addition, qualitative factors including credit concentration risk, national and local economic conditions, nature and
volume of loan portfolio, legal and regulatory factors, downturns in specific industries including losses in collateral values,
trends in credit quality at the Company and in the banking industry and trends in risk-rating agencies are also considered.
The Company also utilizes ratio analysis to evaluate the overall reasonableness of the ALLL compared to its peers and required
levels of regulatory capital. Federal and state agencies review the Company’s methodology for maintaining the ALLL. These
23
agencies may require the Company to adjust the ALLL based on their judgments and interpretations about information available
to them at the time of their examinations.
The following schedule summarizes activity in the ALLL and the allocation of the allowance to the Company’s loan categories.
Summary of Loan Loss Experience
(In thousands)
Allowance at beginning of year
Loans charged-off:
Commercial and industrial
Real estate (commercial and faith-based):
Mortgage
Construction
Other
Total loans charged-off
Recoveries of loans previously charged-off:
Commercial and industrial
Real estate (commercial and faith-based):
Mortgage
Construction
Other
Total recoveries of loans previously charged-off
Net loans recovered
Provision charged (credited) to expense
Allowance at end of year
Loans outstanding:
Average
December 31
Ratio of allowance for loan losses to loans
outstanding:
Average
December 31
Ratio of net recoveries to average loans
outstanding
Allocation of allowance for loan losses (1):
Commercial and industrial
Real estate (commercial and faith-based):
Mortgage
Construction
Industrial Revenue Bond
Other (2)
Total
Percentage of categories to total loans:
Commercial and industrial
Real estate (commercial and faith-based):
Mortgage
Construction
Industrial Revenue Bond
Other
Total
2019
$10,225
2018
$10,205
December 31,
2017
$10,175
2016
$11,635
2015
$11,894
—
—
—
—
—
81
—
—
—
—
—
20
—
—
—
—
—
30
—
—
—
—
—
39
—
—
—
81
(81)
250
$10,556
—
—
—
20
(20)
—
$10,225
—
—
—
30
(30)
—
$10,205
1
—
—
40
(40)
(1,500)
$10,175
30
—
—
—
30
610
10
—
1
621
(591)
(850)
$11,635
$760,153
772,638
$710,846
721,587
$663,653
686,231
$678,061
664,866
$671,019
659,055
1.39%
1.37%
(.01)%
1.44%
1.42%
—
1.54%
1.49%
1.50%
1.53%
1.76%
1.77%
—
(.01)%
(.09)%
$4,853
$4,179
$3,652
$3,261
$3,083
5,348
310
—
45
$10,556
5,378
244
—
424
$10,225
5,356
266
52
879
$10,205
5,689
132
101
992
$10,175
6,885
226
320
1,121
$11,635
41.9%
38.4%
34.4%
32.3%
29.3%
52.8%
5.3%
—%
—%
100.0%
57.1%
4.5%
—%
—%
100.0%
59.9%
5.1%
.59%
.01%
100.0%
64.1%
2.6%
1.0%
%
100.0%
63.1%
4.6%
3.0%
%
100.0%
(1) Although specific allocations exist, the entire allowance is available to absorb losses in any particular loan category.
(2) Includes unallocated allowance of $45,000 and $423,000 at December 31, 2019 and 2018, respectively.
Nonperforming Assets
Nonperforming loans are defined as loans on non-accrual status and loans 90 days or more past due but still accruing.
Nonperforming assets include nonperforming loans plus foreclosed real estate. Troubled debt restructurings are not included
in nonperforming loans unless they are on non-accrual status or past due 90 days or more.
It is the policy of the Company to continually monitor its loan portfolio and to discontinue the accrual of interest on any loan
for which collection is not probable. Subsequent payments received on such loans are applied to principal if collection of
principal is not probable; otherwise, these receipts are recorded as interest income. There was no interest on nonaccrual loans
for the years ended December 31, 2019 and 2018, respectively.
24
There were no nonaccrual loans or foreclosed assets at December 31, 2019 or December 31, 2018.
The Company does not have any foreign loans. The Company's loan portfolio does not include a significant amount of single
family real estate mortgages, as the Company does not market its services to retail customers. Also, the Company had no sub-
prime mortgage loans or residential development loans in its portfolio in any of the years presented.
The Company does not have any other interest-earning assets which would have been included in nonaccrual, past due or
restructured loans if such assets were loans.
Summary of Nonperforming Assets
(In thousands)
Commercial and industrial:
2019
2018
2017
2016
2015
December 31,
Nonaccrual
Contractually past due 90 days or more and still
$—
$—
$—
accruing
Real estate – mortgage:
Nonaccrual(1)
Contractually past due 90 days or more and still
accruing
Total nonperforming loans
Total foreclosed assets
Total nonperforming assets
—
—
—
$—
—
$—
—
—
—
$—
—
$—
—
—
—
$—
—
$—
$—
—
$—
—
245
3,135
—
$245
—
$245
—
$3,135
—
$3,135
(1) In October 2017, one nonaccrual loan with a balance of $215,000 was paid in full. In February 2016, one nonaccrual loan with a
balance of $2,727,000 was paid in full.
Operating Expenses
Operating expenses in 2019 compared to 2018 include the following significant pre-tax components:
Salaries and employee benefits expense increased $5,202,000, or 6%, to $91,083,000 as the Company invested in staff and
technology development to win new business and support service growth with existing clients. Outside service expense
increased $1,202,000, or 15%, for new services and continual technology advancements to support customers. Equipment
expense increased $530,000, or 9%, to $6,140,000 primarily due to depreciation of internally developed software.
Income Tax Expense
Income tax expense in 2019 totaled $7,062,000 compared to $6,079,000 in 2018. When measured as a percent of pre-tax
income, the Company’s effective tax rate was 19% in 2019 and 17% in 2018. The increase in 2019 compared to 2018 tax
expense was primarily the result of three items:
•
•
•
a decrease in tax-exempt interest from municipal bonds,
an increase in state tax expense and
a prior year reduction of tax expense recorded from the final analysis and measurement of the TCJA.
Investment Portfolio
Investment portfolio changes from December 31, 2018 to December 31, 2019:
State and political subdivision securities decreased $10,270,000, or 3%, to $324,447,000. U.S. government agency
securities decreased $7,104,000 to $97,718,000. The investment portfolio provides the Company with a significant source
of earnings, secondary source of liquidity, and mechanisms to manage the effects of changes in loan demand and interest
rates. Therefore, the size, asset allocation and maturity distribution of the investment portfolio will vary over time
depending on management’s assessment of current and future interest rates, changes in loan demand, changes in the
Company’s sources of funds and the economic outlook. During this period, the Company didn’t purchase any additional
securities as the 2017 passage of the TCJA has made tax-exempt interest less attractive.
There was no single issuer of securities in the investment portfolio at December 31, 2019 for which the aggregate amortized
cost exceeded 10% of total shareholders' equity.
25
Investments by Type
(In thousands)
State and political subdivisions
U.S. government agencies
Certificates of deposit
Total investments
Investment Securities by Maturity
(At December 31, 2019)
$
$
December 31,
2018
2019
324,447 $
97,718
500
422,665 $
2017
334,717 $ 417,032
45,500
104,822
7,991
1,995
441,534 $ 470,523
Within 1
Year
Over 1 to 5
Years
Over 5 to
10 Years
Over
10 Years
(In thousands)
State and political subdivisions
U.S. government agencies
Certificates of deposit
Total investments
Weighted average yield (1)
5,966 $
45,019
500
51,485 $
2.50%
(1) Yields are presented on a tax-equivalent basis assuming a tax rate of 21% in both 2019 and 2018 and 35% in 2017. The TCJA
reduced the yield by approximately 70 basis points.
219,112 $
14,177
233,289 $
3.01%
83,930 $
16,249
100,179 $
2.81%
15,439
22,273
37,712
2.30%
Yield
2.98%(1)
2.37%
2.40%
2.83%
2.83%
$
$
Deposits and Accounts and Drafts Payable
Noninterest-bearing demand deposits increased 12% from December 31, 2018 to $351,091,000 at December 31, 2019. The
average balances of these deposits increased 9% in 2019 to $276,301,000. These balances are primarily maintained by
commercial customers, faith-based ministries, and new payment and information processing relationships and can fluctuate on
a daily basis.
Interest-bearing deposits decreased $2,623,000, or 1%, to $406,045,000 at December 31, 2019. The average balances of these
deposits increased 6% to $394,843,000 in 2019 from $371,951,000 in 2018.
Accounts and drafts payable generated by the Company in its payment processing operations decreased $10,065,000, or 1%,
to $684,295,000 at December 31, 2019. The average balance of these funds increased $39,489,000, or 5%, to $785,202,000 in
2019. This increase was the result of continued growth in the customer base. Due to the Company’s payment processing cycle,
average balances are much more indicative of the underlying activity than period-end balances since point-in-time comparisons
can be misleading if the comparison dates fall on different days of the week.
The composition of average deposits and the average rates paid on those deposits is represented in the table entitled
“Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential” which is included earlier
in this discussion. The Company does not have any significant deposits from foreign depositors.
Maturities of Certificates of Deposit as of December 31, 2019
(In thousands)
Three months or less
Three to six months
Six to twelve months
Over twelve months
Total
Liquidity
$100 or Less
$100 to Less
Than $250
$250 or
More
$
$
3,805 $
290
490
342
4,927 $
17,314
15,799
1,372
13,868
48,353
$
$
1,533 $
2,516
4,762
8,876
17,687 $
Total
22,652
18,605
6,624
23,086
70,967
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 (“ALCO”) 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 balances of liquid assets consist 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, totaled $203,954,000 at December 31,
2019, a decrease of $26,979,000, or 12%, from December 31, 2018. At December 31, 2019, these assets represented 12% of
26
total assets. Cash and cash equivalents 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 in debt securities
available-for-sale at fair value was $422,665,000 at December 31, 2019, a decrease of $18,869,000, or 4%, from December 31,
2018. These assets represented 24% of total assets at December 31, 2019 and were primarily state and political subdivision
and treasury securities. Of the total portfolio, 12% mature in one year or less, 24% mature after one year through five years
and 64% mature after five years.
As of December 31, 2019, the Bank had unsecured lines of credit at correspondent banks to purchase federal funds up to a
maximum of $83,000,000 at the following banks: US Bank, $20,000,000; UMB Bank $20,000,000; Wells Fargo Bank,
$15,000,000; PNC Bank, $12,000,000; Frost National Bank, $10,000,000; and JPM Chase Bank, $6,000,000. As of December
31, 2019, the Bank had secured lines of credit with the Federal Home Loan Bank (“FHLB”) of $192,045,000 collateralized by
commercial mortgage loans. At December 31, 2019, the Company had lines of credit from UMB Bank of $50,000,000 and
First Tennessee Bank of $50,000,000 collateralized by state and political subdivision securities. There was $18,000,000
outstanding under the lines of credit discussed above at December 31, 2019 and no amounts outstanding for 2018. The amount
outstanding at the end of the 2019 was borrowed on December 31, 2019 and repaid on January 2, 2020.
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 many other commercial products of the Bank. The accounts and drafts payable generated by
the Company have also historically been a stable source of funds.
Net cash flows provided by operating activities for the years 2019, 2018 and 2017 were $42,126,000, $48,335,000, and
$38,890,000, respectively. Net income plus depreciation and amortization accounts for most of the operating cash provided.
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. Further analysis
of the changes in these account balances is discussed earlier in this report. Due to the daily fluctuations in these account
balances, management believes that 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, cash from operations, and borrowing lines will continue to
be sufficient to fund the Company’s operations and capital expenditures in 2020. The Company anticipates the annual capital
expenditures for 2020 should range from $4 million to $6 million. Capital expenditures in 2020 are expected to consist of
equipment and software related to the payment and information processing services business.
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, 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 noninterest-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. This balance
sheet management impacts the mix of earning assets maintained by the Company at any point in time. For example, in a low
interest rate environment, short-term relatively lower rate liquid investments may be reduced in favor of longer term relatively
higher yielding investments and loans. 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 generated (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
27
expenses. During 2019, new business was added in both the transportation and facility expense management operations, driven
by both successful marketing efforts and the solid market leadership position held by Cass.
Capital Resources
One of management’s primary objectives is to maintain a strong capital base to warrant the confidence of customers,
shareholders, and bank regulatory agencies. A strong capital base is needed to take advantage of profitable growth opportunities
that arise and to provide assurance to depositors and creditors. The Company and its banking subsidiary continue to exceed all
regulatory capital requirements, as evidenced by the capital ratios at December 31, 2019 as shown in Item 8, Note 2 of this
report.
In 2019, cash dividends paid were $1.05 per share for a total of $15,234,000, an increase of $2,057,000, or 16%, compared to
$.89 per share for a total of $13,177,000 in 2018. The increase is attributable to the per-share amount paid and the increase in
outstanding shares as a result of the stock dividend that occurred in December 2018.
Shareholders’ equity was $244,190,000, or 14% of total assets, at December 31, 2019, an increase of $14,342,000 over the
balance at December 31, 2018. This increase resulted primarily from net income of $30,404,000 and a decrease in other
comprehensive loss of $4,952,000. This increase was partially offset by cash dividends of $15,234,000 and the repurchase of
treasury shares of $7,799,000.
Dividends from the Bank are a source of funds for payment of dividends by the Company to its shareholders. The only
restrictions on dividends are those dictated by regulatory capital requirements, state corporate laws and prudent and sound
banking principles. As of December 31, 2019, unappropriated retained earnings of $42,487,000 were available at the Bank for
the declaration of dividends to the Company without prior approval from regulatory authorities.
The Company maintains a treasury stock buyback program pursuant to which the Board of Directors has authorized the
repurchase of up to 500,000 shares of the Company’s common stock. The Company repurchased 154,593 shares at an aggregate
cost of $7,799,000 during the year ended December 31, 2019 and 169,143 shares at an aggregate cost of $8,838,000 during the
year ended December 31, 2018. As of December 31, 2019, 500,000 shares remained available for repurchase under the
program. In October 2019, the Board restored the capacity of the buyback program to 500,000 shares. A portion of the
repurchased shares may be used for the Company's employee benefit plans, and the balance will be available for other general
corporate purposes. The stock repurchase authorization does not have an expiration date and the pace of repurchase activity
will depend on factors such as levels of cash generation from operations, cash requirements for investments, repayment of debt,
current stock price, and other factors. The Company may repurchase shares from time to time on the open market or in private
transactions, including structured transactions. The stock repurchase program may be modified or discontinued at any time.
Commitme nts, Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, the Company is party to activities that involve credit, market and operational risk that are not
reflected in whole or in part in the Company’s consolidated financial statements. Such activities include traditional off-balance
sheet credit-related financial instruments and commitments under operating and capital leases. These financial instruments
include commitments to extend credit, commercial letters of credit and standby letters of credit. The Company’s maximum
potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments
to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those
instruments. At December 31, 2019, no amounts have been accrued for any estimated losses for these instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commercial and standby letters of credit are conditional commitments issued by the Company or its subsidiaries
to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. At December 31, 2019, the balance of loan
commitments, standby and commercial letters of credit were $197,799,000, $13,288,000 and $2,755,000, respectively. Since
some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future
cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting standards as those
financial instruments included on the consolidated balance sheets. The Company evaluates each customer’s credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of the credit, is based on
management’s credit evaluation of the borrower. Collateral held varies, but is generally accounts receivable, inventory,
residential or income-producing commercial property or equipment. In the event of nonperformance, the Company or its
subsidiaries may obtain and liquidate the collateral to recover amounts paid under its guarantees on these financial instruments.
28
The following table summarizes contractual cash obligations of the Company related to operating lease commitments and time
deposits at December 31, 2019:
(In thousands)
Time deposits
Operating lease commitments
Total
Amount of Commitment Expiration per Period
1-3
Years
Less than 1
Year
3-5
Years
Over
5 Years
Total
$
$
70,967 $
8,121
79,088 $
47,881 $
1,864
49,745 $
21,397 $
3,277
24,674 $
1,689 $
1,009
2,698 $
1,971
1,971
During 2019, the Company made a contribution of $6,900,000 to its noncontributory defined benefit pension plan. In
determining pension expense, the Company makes several assumptions, including the discount rate and long-term rate of return
on assets. These assumptions are determined at the beginning of the plan year based on interest rate levels and financial market
performance.
For 2019, these assumptions were as follows:
Assumption
Weighted average discount rate
Rate of increase in compensation levels
Expected long-term rate of return on assets
Rate
4.30%
(a)
6.50%
(a) 6.00% graded down to 3.25% over the first seven years of service.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company faces market risk to the extent that its net interest income and its fair market value of equity are affected by
changes in market interest rates. The asset/liability management discipline as applied by the Company seeks to limit the
volatility, to the extent possible, of both net interest income and the fair market value of equity that can result from changes in
market interest rates. This is accomplished by limiting the maturities of fixed rate investments, loans, and deposits; matching
fixed rate assets and liabilities to the extent possible; and optimizing the mix of fees and net interest income. However, as
discussed below, the Company's asset/liability position often differs significantly from most other financial holding companies
with significant positive cumulative "gaps" shown for each time horizon presented. This asset sensitive position is caused
primarily by the operations of the Company, which generate large balances of accounts and drafts payable. These balances,
which are noninterest bearing, contribute to the Company’s historical high net interest margin but cause the Company to
become susceptible to changes in interest rates, with a decreasing net interest margin and fair market value of equity in periods
of declining interest rates and an increasing net interest margin and fair market value of equity in periods of rising interest rates.
The Company’s ALCO measures the Company's interest rate risk sensitivity on a quarterly basis to monitor and manage the
variability of earnings and fair market value of equity in various interest rate environments. The ALCO evaluates the Company's
risk position to determine whether the level of exposure is significant enough to hedge a potential decline in earnings and value
or whether the Company can safely increase risk to enhance returns. The ALCO uses gap reports, 12-month net interest income
simulations, and fair market value of equity analyses as its main analytical tools to provide management with insight into the
Company's exposure to changing interest rates.
Management uses a gap report to review any significant mismatch between the re-pricing points of the Company’s rate sensitive
assets and liabilities in certain time horizons. A negative gap indicates that more liabilities re-price in that particular time frame
and, if rates rise, these liabilities will re-price faster than the assets. A positive gap would indicate the opposite. Gap reports
can be misleading in that they capture only the re-pricing timing within the balance sheet, and fail to capture other significant
risks such as basis risk and embedded options risk. Basis risk involves the potential for the spread relationship between rates
to change under different rate environments and embedded options risk relates to the potential for the alteration of the level
and/or timing of cash flows given changes in rates.
Another measurement tool used by management is net interest income simulation, which forecasts net interest income during
the coming 12 months under different interest rate scenarios in order to quantify potential changes in short-term accounting
income. Management has set policy limits specifying acceptable levels of interest rate risk given multiple simulated rate
movements. These simulations are more informative than gap reports because they are able to capture more of the dynamics
within the balance sheet, such as basis risk and embedded options risk. A table containing simulation results as of December
31, 2019, from an immediate and sustained parallel change in interest rates is shown below.
While net interest income simulations do an adequate job of capturing interest rate risk to short term earnings, they do not
capture risk within the current balance sheet beyond 12 months. The Company uses fair market value of equity analyses to help
identify longer-term risk that may reside on the current balance sheet. The fair market value of equity is represented by the
present value of all future income streams generated by the current balance sheet. The Company measures the fair market value
of equity as the net present value of all asset and liability cash flows discounted at forward rates suggested by the current U.S.
Treasury curve plus appropriate credit spreads. This representation of the change in the fair market value of equity under
different rate scenarios gives insight into the magnitude of risk to future earnings due to rate changes. Management has set
policy limits relating to declines in the market value of equity. The table below contains the analysis, which illustrates the
effects of an immediate and sustained parallel change in interest rates as of December 31, 2019:
Change in Interest Rates
+200 basis points
+100 basis points
Stable rates
-100 basis points
-200 basis points
% Change in Net Interest Income % Change in Fair Market Value of Equity
13%
7%
(7%)
(13%)
11%
6%
(3%)
(8%)
30
Interest Rate Sensitivity Position
The following table presents the Company’s interest rate risk position at December 31, 2019 for the various time periods indicated:
(In thousands)
Earning assets:
Loans:
Taxable
Tax-exempt
Securities (1):
Tax-exempt
U.S. government agencies
Treasuries
Certificates of deposit
Investments in the FHLB
and FRB
Federal funds sold and other
short-term investments
$
$
Total earning assets
Interest-sensitive liabilities:
Money market accounts
Now accounts
Savings deposits
Time deposits:
$250K and more
Less than $250K
Federal funds purchased and
other short-term borrowing
$
Total interest-bearing liabilities
Interest sensitivity gap:
Variable
Rate
0-90
Days
91-180
Days
181-364
Days
1-5
Years
Over
5 Years
Total
$
180,864 $ 23,465 $
1,006
10,005
1,346
12,943 $
9,995
250
36,649 $ 409,322 $ 109,395 $
4,960
25,019
250
83,930
1,266
14,983
234,551
36,450
772,638
324,447
37,716
60,002
500
1,346
185,878
368,088 $ 34,476 $
23,188 $
185,878
66,878 $ 509,501 $ 380,396 $ 1,382,527
244,874 $
77,153
13,051
$
$
$
$
$
244,874
77,153
13,051
1,533
2,516
4,762
8,876
21,119
16,089
1,862
14,210
17,687
53,280
18,000
353,078 $ 22,652 $
18,605 $
6,624 $ 23,086 $
$
18,000
424,045
Periodic
Cumulative
$
15,010 $ 11,824 $
15,010
26,834
4,583 $
31,417
60,254 $ 486,415 $ 380,396 $
91,671
578,086
958,482
958,482
958,482
Ratio of interest-bearing assets
to interest-bearing liabilities:
Periodic
Cumulative
1.04
1.04
1.52
1.07
1.25
1.08
10.10
1.23
22.07
2.36
3.26
3.26
3.26
(1) Balances shown reflect earliest re-pricing date.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2019
2018
18,076
172,422
13,456
203,954
422,665
772,638
10,556
762,082
206,158
20,527
17,599
14,262
4,281
112,715
1,764,243
351,091
406,045
757,136
684,295
18,000
60,622
1,520,053
$
$
$
15,042
179,281
36,610
230,933
441,534
721,587
10,225
711,362
160,777
22,031
17,384
12,569
1,554
97,032
1,695,176
313,258
408,668
721,926
694,360
─
49,042
1,465,328
─
─
7,753
205,397
90,341
(45,381)
(13,920)
244,190
1,764,243
7,753
205,770
75,171
(39,974)
(18,872)
229,848
1,695,176
$
$
$
$
$
(In thousands except share and per share data)
Assets
Cash and due from banks
Interest-bearing deposits in other financial institutions
Federal funds sold and other short-term investments
Cash and cash equivalents
Securities available-for-sale, at fair value
Loans
Less allowance for loan losses
Loans, net
Payments in excess of funding
Premises and equipment, net
Investments in bank-owned life insurance
Goodwill
Other intangible assets, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities:
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
Accounts and drafts payable
Short-term borrowings
Other liabilities
Total liabilities
Shareholders’ Equity:
Preferred stock, par value $.50 per share; 2,000,000
shares authorized and no shares issued
Common stock, par value $.50 per share; 40,000,000
shares authorized, 15,505,772 shares issued at
December 31, 2019 and 2018.
Additional paid-in capital
Retained earnings
Common shares in treasury, at cost (991,406 and 894,486
shares at December 31, 2019 and 2018, respectively)
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
32
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
2018
2019
2017
$
$
107,953
1,386
19
711
110,069
$
102,181
1,335
(42)
602
104,076
36,461
32,477
2,497
7,839
5,812
52,609
5,191
2
5,193
47,416
250
47,166
157,235
91,083
3,918
6,140
563
18,065
119,769
37,466
7,062
30,404
2.11
2.07
$
$
2,104
9,063
4,282
47,926
3,736
─
3,736
44,190
─
44,190
148,266
85,881
3,723
5,610
442
16,263
111,919
36,347
6,079
30,268
2.06
2.03
$
$
$
$
93,322
1,349
─
841
95,512
28,641
554
10,439
2,343
41,977
2,187
─
2,187
39,790
─
39,790
135,302
77,339
3,480
5,071
427
14,086
100,403
34,899
9,885
25,014
1.70
1.68
(In thousands except per share data)
Fee Revenue and Other Income:
Information services payment and processing revenue
Bank service fees
Gains (losses) on sales of securities
Other
Total fee revenue and other income
Interest Income:
Interest and fees on loans
Interest and dividends on securities:
Taxable
Exempt from federal income taxes
Interest on federal funds sold and
other short-term investments
Total interest income
Interest Expense:
Interest on deposits
Interest on short-term borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total net revenue
Operating Expense:
Personnel
Occupancy
Equipment
Amortization of intangible assets
Other operating
Total operating expense
Income before income tax expense
Income tax expense
Net income
Basic Earnings Per Share
Diluted Earnings Per Share
See accompanying notes to consolidated financial statements.
33
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31,
2019
2018
2017
$
30,404
$
30,268 $
25,014
13,429
(3,196)
(19)
5
(6,903)
1,643
(7)
4,952
35,356
$
(7,534)
1,793
42
(10)
341
(81)
(103)
(5,552)
24,716 $
6,637
(2,465)
─
─
(1,311)
487
161
3,509
28,523
$
(In thousands)
Comprehensive Income:
Net income
Other comprehensive income (loss):
Net unrealized gain (loss) on securities available-for-sale
Tax effect
Reclassification adjustments for (gains) losses included in
net income
Tax effect
FASB ASC 715 pension adjustment
Tax effect
Foreign currency translation adjustments
Other comprehensive income (loss)
Total comprehensive income
See accompanying notes to consolidated financial statements.
34
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Net (gains) losses on sales of securities
Stock-based compensation expense
Provision for loan losses
Deferred income tax expense (benefit)
(Decrease) increase in current income tax liability
(Decrease) increase in pension liability
Decrease (increase) in accounts receivable
Other operating activities, net
Net cash provided by operating activities
Cash Flows From Investing Activities:
Proceeds from sales of securities available-for-sale
Proceeds from maturities of securities available-for-sale
Purchase of securities available-for-sale
Net increase in loans
Increase in payments in excess of funding
Purchases of premises and equipment, net
Asset acquisition of Gateway Giving, LLC
Net cash used in investing activities
Cash Flows From Financing Activities:
Net increase in noninterest-bearing demand deposits
Net decrease in interest-bearing demand and savings deposits
Net (decrease) increase in time deposits
Net (decrease) increase in accounts and drafts payable
Net increase in short-term borrowings
Cash dividends paid
Purchase of common shares for treasury
Other financing activities, net
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental information:
Cash paid for interest
Cash paid for income taxes
See accompanying notes to consolidated financial statements.
For the Years Ended December 31,
2019
2018
2017
$
30,404 $
30,268 $
25,014
10,939
(19)
3,144
250
1,247
(1,838)
(1,916)
988
(1,073)
42,126
4,648
21,502
─
(50,970)
(45,381)
(2,723)
(2,833)
(75,757)
11,238
42
3,006
─
(3,521)
3,746
4,641
4,709
(5,794)
48,335
58,520
38,116
(82,022)
(35,336)
(21,674)
(4,399)
─
(46,795)
11,341
─
2,339
─
3,997
(3,026)
8,008
(4,656)
(4,127)
38,890
─
44,156
(124,777)
(21,335)
(33,756)
(4,127)
─
(139,839)
37,833
(1,133)
(1,490)
(22,400)
18,000
(15,234)
(7,799)
(1,125)
6,652
(26,979)
230,933
203,954 $
31,717
(7,838)
19,959
(19,595)
─
(13,177)
(8,838)
(945)
1,283
2,823
228,110
230,933 $
66,885
(7,472)
(3,286)
19,601
─
(10,675)
(2,270)
(467)
62,316
(38,633)
266,743
228,110
5,181 $
7,604
3,701 $
6,723
2,178
7,677
$
$
35
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands except per share data)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, December 31, 2016
$ 5,966
$ 128,455
$ 118,363
$ (30,206)
$ (14,543)
$ 208,035
Net income
Cash dividends ($.72 per share)
Stock dividend
Issuance of 29,378 common shares pursuant
to stock-based compensation plan, net
Exercise of SARs
Stock-based compensation expense
Purchase of 50,215 common shares
Other comprehensive income
Other comprehensive income
reclassification for ASU 2018-02
Balance, December 31, 2017
Net income
Cash dividends ($.89 per share)
Stock dividend
Issuance of 33,039 common shares pursuant
to stock-based compensation plan, net
Exercise of SARs
Stock-based compensation expense
Purchase of 169,143 common shares
Other comprehensive loss
Balance, December 31, 2018
Net income
Cash dividends ($1.05 per share)
Issuance of 34,810 common shares pursuant
to stock-based compensation plan, net
Exercise of SARs
Stock-based compensation expense
Purchase of 154,593 common shares
Other comprehensive income
Balance, December 31, 2019
273
142
(2,270)
3,509
25,014
(10,675)
(8)
(548)
(309)
2,340
(2,270)
3,509
$ (32,061)
(2,286)
$ (13,320)
─
$ 225,088
25,014
(10,675)
(75,674)
2,286
$ 59,314
30,268
(13,177)
(1,234)
558
75,108
(821)
(451)
2,340
$ 6,524
$ 204,631
1,229
(991)
(876)
3,006
624
301
(8,838)
$ 7,753
$ 205,770
$ 75,171
$ (39,974)
(5,552)
$ (18,872)
30,404
(15,234)
(1,417)
(2,100)
3,144
1,358
1,034
(7,799)
$ 7,753
$ 205,397
$ 90,341
$ (45,381)
4,952
$ (13,920)
30,268
(13,177)
(5)
(367)
(575)
3,006
(8,838)
(5,552)
$ 229,848
30,404
(15,234)
(59)
(1,066)
3,144
(7,799)
4,952
$ 244,190
See accompanying notes to consolidated financial statements.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting Policies
Summary of Operations Cass Information Systems, Inc. (the “Company”) provides payment and information services, which
include processing and payment of transportation, energy, telecommunications and environmental invoices. These services
include the acquisition and management of data, information delivery and financial exchange. The consolidated balance sheet
captions, “Accounts and drafts payable” and “Payments in excess of funding,” represent the Company’s resulting financial
position related to the payment services that are performed for customers. The Company also provides a full range of banking
services to individual, corporate and institutional customers through Cass Commercial Bank (the “Bank”), its wholly owned
bank subsidiary.
Basis of Presentation The accounting and reporting policies of the Company and its subsidiaries conform to U.S. generally
accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries after elimination of intercompany transactions. Certain amounts in the 2018 and 2017 consolidated
financial statements have been reclassified to conform to the 2019 presentation. Such reclassifications have no effect on
previously reported net income or shareholders’ equity.
Use of Estimates In preparing the consolidated financial statements, Company management is required to make estimates and
assumptions which significantly affect the reported amounts in the consolidated financial statements.
Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers cash and due
from banks, interest-bearing deposits in other financial institutions, federal funds sold and other short-term investments as
segregated in the accompanying consolidated balance sheets to be cash equivalents.
Investment in Debt Securities The Company classifies its debt marketable securities as available-for-sale. Securities classified
as available-for-sale are carried at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from
earnings and reported in accumulated other comprehensive income, a component of shareholders’ equity. A decline in the fair
value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and the
establishment of a new cost basis for the security. To determine whether impairment is other than temporary, the Company
considers guidance provided in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 320, Investments – Debt and Equity Securities. When determining whether a debt security is other-than-
temporarily impaired, the Company assesses whether it has the intent to sell the security and whether it is more likely than not
that the Company will be required to sell prior to recovery of the amortized cost basis. Evidence considered in this assessment
includes the reasons for impairment, the severity and duration of the impairment, changes in value subsequent to year-end and
forecasted performance of the investee. Premiums and discounts are amortized or accreted to interest income over the estimated
lives of the securities using the level-yield method. Interest income is recognized when earned. Gains and losses are calculated
using the specific identification method.
Allowance for Loan Losses (“ALLL”) The ALLL is increased by provisions charged to expense and is available to absorb
charge-offs, net of recoveries. Management utilizes a systematic, documented approach in determining the appropriate level
of the ALLL. Management’s approach provides for estimated credit losses on individually evaluated loans in accordance with
FASB ASC 310, Allowance for Credit Losses (“ASC 310”). These estimates are based upon a number of factors, such as
payment history, financial condition of the borrower, expected future cash flows and discounted collateral exposure.
Estimated credit losses inherent in the remainder of the portfolio are estimated in accordance with FASB ASC 450,
Contingencies. These loans are segmented into groups based on similar risk characteristics. Historical loss rates for each risk
group, which are updated quarterly, are generally quantified using all recorded loan charge-offs and recoveries over a prescribed
look-back period. These historical loss rates for each risk group are used as the starting point to determine the level of the
allowance. The Company’s methodology incorporates an estimated loss emergence period for each risk group. The loss
emergence period is the period of time from when a borrower experiences a loss event and when the actual loss is recognized
in the financial statements, generally at the time of initial charge-off of the loan balance. The Company’s methodology also
includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information
available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors
are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic
conditions and developments, the volume and severity of delinquent and internally classified loans, loan concentrations,
assessment of trends in collateral values, assessment of changes in borrowers’ financial stability, and changes in lending
policies and procedures, including underwriting standards and collections, charge-off and recovery practices.
Management believes the ALLL is adequate to absorb probable losses in the loan portfolio. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require
37
the Company to increase the ALLL based on their judgments and interpretations about information available to them at the
time of their examinations.
Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is computed over the estimated useful lives of the assets, or the respective lease terms for leasehold improvements,
using straight-line and accelerated methods. Estimated useful lives do not exceed 40 years for buildings, the lesser of 10 years
or the life of the lease for leasehold improvements and range from 3 to 7 years for software, equipment, furniture and fixtures.
Maintenance and repairs are charged to expense as incurred.
Intangible Assets Cost in excess of fair value of net assets acquired has resulted from business acquisitions. Goodwill and
intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible
assets with definite useful lives are amortized on a straight-line basis over their respective estimated useful lives.
Periodically, the Company reviews intangible assets for events or changes in circumstances that may indicate that the carrying
amount of the assets may not be recoverable. Based on those reviews, adjustments of recorded amounts have not been required.
Non-marketable Equity Investments The Company accounts for non-marketable equity investments, in which it holds less
than a 20% ownership, under the cost method. Under the cost method of accounting, investments are carried at cost and are
adjusted only for other than temporary declines in fair value, distributions of earnings and additional investments. The
Company periodically evaluates whether any declines in fair value of its investments are other than temporary. In performing
this evaluation, the Company considers various factors including any decline in market price, where available, the investee's
financial condition, results of operations, operating trends and other financial ratios. Non-marketable equity investments are
included in other assets on the consolidated balance sheets.
Foreclosed Assets Real estate acquired as a result of foreclosure is initially recorded at fair value less estimated selling costs.
Fair value is generally determined through the receipt of appraisals. Any write down to fair value at the time the property is
acquired is recorded as a charge-off to the allowance for loan losses. Any decline in the fair value of the property subsequent
to acquisition is recorded as a charge to non-interest expense.
Treasury Stock Purchases of the Company’s common stock are recorded at cost. Upon reissuance, treasury stock is reduced
based upon the average cost basis of shares held.
Comprehensive Income Comprehensive income consists of net income, changes in net unrealized gains (losses) on available-
for-sale securities and pension liability adjustments and is presented in the accompanying consolidated statements of
shareholders' equity and consolidated statements of comprehensive income.
Loans Interest on loans is recognized based upon the principal amounts outstanding. It is the Company’s policy to discontinue
the accrual of interest when there is reasonable doubt as to the collectability of principal or interest. Subsequent payments
received on such loans are applied to principal if there is any doubt as to the collectability of such principal; otherwise, these
receipts are recorded as interest income. The accrual of interest on a loan is resumed when the loan is current as to payment of
both principal and interest and/or the borrower demonstrates the ability to pay and remain current. Loan origination and
commitment fees on originated loans, net of certain direct loan origination costs, are deferred and amortized to interest income
using the level-yield method over the estimated lives of the related loans.
Impairment of Loans A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts
due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the
expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment
could be measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-
dependent loan. Regardless of the historical measurement method used, the Company measures impairment based on the fair
value of the collateral when the Company determines foreclosure is probable. Additionally, impairment of a restructured loan
is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original
loan agreement. The Company uses its nonaccrual methods as discussed above for recognizing interest on impaired loans.
Information Services Revenue A majority of the Company’s revenues are attributable to fees for providing services. These
services include transportation invoice rating, payment processing, auditing, and the generation of accounting and
transportation information. The Company also processes, pays and generates management information from electric, gas,
telecommunications, environmental, and other invoices. The specific payment and information processing services provided
to each customer are developed individually to meet each customer’s specific requirements. The Company enters into service
agreements with customers typically for fixed fees per transaction that are invoiced monthly. Revenues are recognized in the
period services are rendered and earned under the service agreements, as long as collection is reasonably assured.
Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary
tax assets are reduced if necessary, by a
differences are expected
to be recovered or settled.
Deferred
38
deferred tax asset valuation allowance. In the event that management determines it is more likely than not that it will not be
able to realize all or part of net deferred tax assets in the future, the Company adjusts the recorded value of deferred tax assets,
which would result in a direct charge to income tax expense in the period that such determination is made. Likewise, the
Company will reverse the valuation allowance when realization of the deferred tax asset is expected. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The
Company and its subsidiaries file U.S. federal and certain state income tax returns on a consolidated basis. In addition, certain
state jurisdictions are filed on a separate company basis by the Company or its subsidiaries.
The Company recognizes and measures income tax benefits using a two-step model: 1) a tax position must be more likely than
not to be sustained based solely on its technical merits in order to be recognized; and 2) the benefit must be measured as the
largest dollar amount of that position that is more likely than not to be sustained upon settlement. The difference between the
benefit recognized for a tax position in this model and the tax benefit claimed on a tax return is treated as an unrecognized tax
benefit. The Company recognizes income tax related interest and penalties in income tax expense.
Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number
of common shares outstanding and the weighted average number of potential common shares outstanding.
Stock-Based Compensation The Company follows FASB ASC 718, Accounting for Stock Options and Other Stock-based
Compensation (“ASC 718”), which requires that all stock-based compensation be recognized as an expense in the financial
statements and that such cost be measured at the fair value of the award. FASB ASC 718 also requires that excess tax benefits
related to stock option exercises and restricted stock awards be reflected as financing cash inflows instead of operating cash
inflows.
Pension Plans The amounts recognized in the consolidated financial statements related to pension are determined from
actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at
which the liabilities could be settled at December 31, 2019, rate of increase in future compensation levels and mortality rates.
These assumptions are updated annually and are disclosed in Note 10. The Company follows FASB ASC 715 - Compensation
– Retirement Benefits (“ASC 715”), which requires companies to recognize the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability in its consolidated balance sheet and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income. The funded status is measured as the difference
between the fair value of the plan assets and the projected benefit obligation as of the date of its fiscal year-end.
Fair Value Measurements The Company follows the provisions of FASB ASC 820 - Fair Value Measurements and
Disclosures, which defines fair value, establishes a framework for measuring fair value in GAAP, and outlines disclosures
about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. A three-level hierarchy for valuation techniques is used to measure
financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or
unobservable. Financial instrument valuations are considered Level 1 when they are based on quoted prices in active markets
for identical assets or liabilities. Level 2 financial instrument valuations use quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Financial instrument valuations are considered Level 3 when they are determined using pricing models, discounted cash flow
methodologies or similar techniques and at least one significant model assumption or input is unobservable, and when
determination of the fair value requires significant management judgment or estimation. The Company records securities
available for sale at their fair values on a recurring basis using Level 2 valuations. Additionally, the Company records impaired
loans and other real estate owned at their fair value on a nonrecurring basis. The nonrecurring fair value adjustments typically
involve application of lower-of-cost-or-market accounting or impairment write-downs of individual assets.
Impact of New and Not Yet Adopted Accounting Pronounce ments
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC Topic 842). The ASU improves financial reporting about
leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and
manufacturing equipment. Consistent with current generally accepted accounting principles (“GAAP”), the recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be
recognized on the balance sheet—the new ASU requires both types of leases to be recognized on the balance sheet. The ASU
also requires disclosures to help investors and other financial statement users better understand the amount, timing, and
uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing
additional information about the amounts recorded in the financial statements. The Company elected to apply ASU 2016-02
as of the beginning of the period of adoption (January 1, 2019) and has not restated comparative periods. The Company has
elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess
(i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases
39
and (iii) initial direct costs for any existing leases. Adoption of the ASU on January 1, 2019 resulted in the recognition of lease
liabilities totaling $7,808,000 and the right-of-use assets totaling $7,383,000. The initial balance sheet gross up upon adoption
was related to operating leases of certain real estate properties. See Note 18 – Leases for additional disclosures related to leases.
Note 2
Capital Require ments and Regulatory Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The
Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulators to ensure capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios of total and Tier I capital and common equity Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes that as of December 31, 2019 and 2018, the Company and the Bank met all
capital adequacy requirements to which they are subject.
Effective July 2, 2013, the Federal Reserve Board approved final rules known as the “Basel III Capital Rules” that substantially
revised the risk-based capital and leverage capital requirements applicable to bank holding companies and depository
institutions, including the Company and the Bank. The Basel III Capital Rules implement aspects of the Basel III capital
framework agreed upon by the Basel Committee and incorporate changes required by the Dodd-Frank Wall Street Reform and
Consumer Protection Act. Among other things, the Basel III Capital Rules establish stricter capital requirements and calculation
standards, as well as more restrictive risk weightings for certain loans and facilities. The Basel III Capital Rules were effective
for the Company and the Bank on January 1, 2015, subject to a phase-in period that ended on December 31, 2019.
The Bank is also subject to the regulatory framework for prompt corrective action. As of December 31, 2019, the most recent
notification from the regulatory agencies categorized the Bank as well-capitalized. To be categorized as well-capitalized, the
Bank must maintain minimum total risk-based, common equity Tier I risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table below. There are no conditions or events since that notification that management believes have changed
the Bank’s category.
The Company has traditionally paid a quarterly cash dividend to its shareholders. Subsidiary dividends can be a significant
source of funds for payment of dividends by the Company to its shareholders. Banking regulations may limit the amount of
dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the
regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed
the net profits for that year combined with the retained net profits for the preceding two years. Under the foregoing dividend
restrictions and while maintaining its “well capitalized” status, at December 31, 2019, unappropriated retained earnings of
$42,487,000 were available at the Bank for the declaration of dividends to the Company without prior approval from regulatory
authorities. In addition to regulatory requirements and considerations, any payment of dividends in the future will depend on
the Company’s earnings, financial condition and other factors considered relevant by the Company’s Board of Directors.
There were no restricted funds on deposit used to meet regulatory reserve requirements at December 31, 2019 and 2018.
The Company’s and the Bank’s actual and required capital amounts and ratios are as follows:
(In thousands)
At December 31, 2019
Total capital (to risk-weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Common Equity Tier I Capital (to risk-
weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Tier I capital (to average assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Actual
Amount
Ratio
Capital
Requirements
Amount Ratio
Requirement to be
Well-Capitalized
Amount Ratio
$ 249,954
154,011
19.70 %
19.32
$ 101,530
63,778
8.00 %
8.00
$ N/A N/A %
79,722 10.00
239,398
145,673
239,398
145,673
239,398
145,673
18.86
18.27
18.86
18.27
13.24
16.64
40
57,110
35,875
4.50
4.50
76,147
47,833
6.00
6.00
72,329
35,012
4.00
4.00
N/A N/A
6.50
51,819
N/A N/A
8.00
63,778
N/A N/A
5.00
43,765
At December 31, 2018
Total capital (to risk-weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Common Equity Tier I Capital (to risk-
weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Tier I capital (to risk-weighted assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Tier I capital (to average assets)
Cass Information Systems, Inc.
Cass Commercial Bank
Note 3
Investment in Securities
$ 244,660
137,894
21.38 %
18.31
$ 91,550
60,257
8.00 %
8.00
$ N/A
N/A %
75,321 10.00
234,435
130,037
234,435
130,037
234,435
130,037
20.49
17.26
20.49
17.26
13.89
15.35
51,497
33,895
4.50
4.50
68,662
45,193
6.00
6.00
67,500
33,884
4.00
4.00
N/A N/A
6.50
48,959
N/A N/A
8.00
60,257
N/A N/A
5.00
42,354
Investment securities available-for-sale are recorded at fair value on a recurring basis. The Company’s investment securities
available-for-sale at December 31, 2019 and 2018 are measured at fair value using Level 2 valuations. The market evaluation
utilizes several sources which include “observable inputs” rather than “significant unobservable inputs” and therefore falls into
the Level 2 category. The table below presents the balances of securities available-for-sale measured at fair value on a recurring
basis. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of debt and equity securities are
summarized as follows:
(In thousands)
State and political subdivisions
U.S. government agencies
Certificates of deposit
Total
(In thousands)
State and political subdivisions
U.S. government agencies
Certificates of deposit
Total
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
13,727
507
─
14,234
$
$
─
169
─
169
December 31, 2018
Gross
Unrealized
Losses
Gross
Unrealized
Gains
$
$
3,791
86
─
3,877
$
$
1,806
1,417
─
3,223
Amortized
Cost
$ 310,720
97,380
500
$ 408,600
Amortized
Cost
$ 332,732
106,153
1,995
$ 440,880
Fair Value
324,447
97,718
500
422,665
Fair Value
334,717
104,822
1,995
441,534
$
$
$
$
The fair values of securities with unrealized losses are as follows:
Less than 12 months
December 31, 2019
12 months or more
(In thousands)
State and political subdivisions $
U.S. government agencies
Certificates of deposit
Total
$
(In thousands)
State and political subdivisions $
U.S. government agencies
Certificates of deposit
Total
$
Estimated Unrealized Estimated Unrealized
Fair Value
Fair Value
Losses
Losses
Total
Estimated Unrealized
Fair value
Losses
─ $
3,801
─
3,801 $
─ $
12
─
12 $
─ $
17,593
─
17,593 $
─ $
157
─
157 $
─ $
21,394
─
21,394 $
─
169
─
169
Less than 12 months
December 31, 2018
12 months or more
Total
Estimated Unrealized Estimated Unrealized Estimated
Fair value
Fair Value
Fair Value
Losses
Losses
Unrealized
Losses
91,248 $
30,409
─
121,657 $
556 $
130
─
686 $
41
60,546 $
38,005
─
98,551 $
1,250 $ 151,794 $
1,287
─
68,414
─
2,537 $ 220,208 $
1,806
1,417
─
3,223
There were 9 securities, or 3% of the total (7 greater than 12 months), in an unrealized loss position as of December 31, 2019
compared to 136 securities, or 43% (61 greater than 12 months), in an unrealized loss position as of December 31, 2018. All
unrealized losses are reviewed to determine whether the losses are other than temporary. Management believes that all
unrealized losses are temporary since they are market driven, the Company does not have the intent to sell the security, and it
is more likely than not that the Company will not be required to sell prior to recovery of the amortized basis.
The amortized cost and fair value of debt and equity securities by contractual maturity are shown in the following table.
Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or
without prepayment penalties.
December 31, 2019
(In thousands)
Due in 1 year or less
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years
No stated maturity
Total
Amortized Cost
$
51,219
97,799
222,143
37,439
─
$ 408,600
Fair Value
$
51,485
100,179
233,289
37,712
─
422,665
$
The premium related to the purchase of state and political subdivisions was $6,408,000 and $6,857,000 in 2019 and 2018,
respectively.
There were no securities pledged to secure public deposits and for other purposes at December 31, 2019.
Proceeds from sales of debt securities classified as available-for-sale were $4,648,000 in 2019, $58,520,000 in 2018, and $0 in
2017. Gross realized gains on the sales in 2019, 2018, and 2017 were $19,000, $180,000, and $0, respectively. Gross realized
losses on sales in 2019, 2018, and 2017 were $0, $222,000, and $0, respectively.
Loans
Note 4
The Company originates commercial, industrial and real estate loans to businesses and faith-based ministries throughout the
metropolitan St. Louis, Missouri area, Orange County, California, Colorado Springs, Colorado and other selected cities in the
United States. The Company does not have any particular concentration of credit in any one economic sector; however, a
substantial portion of the commercial and industrial loans is extended to privately-held commercial companies and franchises
in these market areas and are generally secured by the assets of the business. The Company also has a substantial portion of
real estate loans secured by mortgages that are extended to faith-based ministries in its market area and selected cities in the
United States.
A summary of loan categories is as follows:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Other
Total loans
December 31,
2019
323,857
$
$
2018
277,091
101,654
25,299
305,826
15,945
57
772,638
$
$
95,605
11,858
316,147
20,576
310
721,587
42
The following table presents the aging of loans by loan categories at December 31, 2019:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Other
Total
Performing
Nonperforming
30-59
Days
60-89
Days
90 Days
and
Over
Non-
accrual
$
$
$
$
$
Current
323,857
$
101,654
25,299
305,826
15,945
57
772,638
$
$
$
$
$
$
The following table presents the aging of loans by loan categories at December 31, 2018:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Other
Total
Performing
Nonperforming
30-59
Days
60-89
Days
90 Days
and
Over
Non-
accrual
$
$
$
$
$
Current
277,091
$
95,605
11,858
316,147
20,576
310
721,587
$
$
$
$
$
$
Total
Loans
323,857
101,654
25,299
305,826
15,945
57
772,638
Total
Loans
277,091
95,605
11,858
316,147
20,576
310
721,587
The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31,
2019:
Loans
Subject to
Normal
Monitoring(1)
$
321,554 $
Performing
Loans Subject to
Special
Monitoring(2)
2,303
$
100,346
25,299
1,308
Nonperforming
Loans Subject
to Special
Monitoring(2)
Total Loans
323,857
$
101,654
25,299
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
304,513
15,945
57
767,714 $
1,313
4,924
305,826
15,945
57
772,638
Other
Total
(1) Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to
satisfy their loan obligation.
(2) Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management
attention.
$
$
$
43
The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of December 31,
2018:
Loans
Subject to
Normal
Monitoring(1)
$
275,308 $
Performing
Loans Subject to
Special
Monitoring (2)
1,783
$
95,447
11,858
158
Nonperforming
Loans Subject to
Special
Monitoring (2)
Total Loans
277,091
$
95,605
11,858
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
314,940
20,576
310
718,439 $
1,207
3,148
316,147
20,576
310
721,587
Other
Total
(1) Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to
satisfy their loan obligation.
(2) Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management
attention.
$
$
$
Impaired loans consist primarily of nonaccrual loans, loans greater than 90 days past due and still accruing interest and troubled
debt restructurings, both performing and non-performing. Troubled debt restructuring involves the granting of a concession to
a borrower experiencing financial difficulty resulting in the modification of terms of the loan, such as changes in payment
schedule or interest rate. There was no ALLL related to impaired loans at both December 31, 2019 and 2018. There were no
non-accrual loans at December 31, 2019 and 2018. There were no loans delinquent 90 days or more and still accruing interest
at both December 31, 2019 and 2018. At December 31, 2019 and 2018, there were no loans classified as troubled debt
restructuring. The average balances of impaired loans during 2019, 2018 and 2017 were $0, $0, and $166,000, respectively.
Income that would have been recognized on non-accrual loans under the original terms of the contract was $0, $0, and $24,000
for 2019, 2018, and 2017, respectively. Income that was recognized on nonaccrual loans was $0, $0, and $17,000, for 2019,
2018, and 2017 respectively. There were no foreclosed assets as of December 31, 2019 or 2018.
The Company does not record loans at fair value on a recurring basis. Once a loan is identified as impaired, management
measures impairment in accordance with FASB ASC 310. At December 31, 2019 and 2018, there were no impaired loans.
The fair value of the collateral is based upon an observable market price or current appraised value and therefore, the Company
classifies these assets as nonrecurring Level 3.
A summary of the activity in the allowance for loan losses for the period ended December 31, 2019 is as follows:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Other
Total
December 31,
2018
Charge-
Offs
Recoveries
$
4,179 $
$
81
$
Provision
593
December 31,
2019
$
4,853
1,417
89
3,961
155
424
10,225 $
$
$
81
$
105
101
(135)
(35)
(379)
250
$
1,522
190
3,826
120
45
10,556
44
A summary of the activity in the allowance for loan losses for the period ended December 31, 2018 is as follows:
(In thousands)
Commercial and industrial
Real estate
Commercial:
Mortgage
Construction
Faith-based:
Mortgage
Construction
Industrial Revenue Bond
Other
Total
December 31,
2017
Charge-
Offs
Recoveries
$
3,652 $
$
20
$
Provision
507
December 31,
2018
$
4,179
1,394
70
3,962
196
52
879
10,205 $
$
$
20
$
23
19
(1)
(41)
(52)
(455)
$
1,417
89
3,961
155
424
10,225
As of December 31, 2019 and 2018, there were loans totaling $167,429 and $278,153, respectively, to affiliates of executive
officers or directors.
Note 5
Pre mises and Equipme nt
A summary of premises and equipment is as follows:
(In thousands)
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Purchased software
Internally developed software
Less accumulated depreciation
Total
December 31,
2019
$
873
14,763
1,843
12,104
3,973
18,780
52,336
31,809
$ 20,527
2018
873
14,684
2,537
16,332
5,043
17,428
56,897
34,866
22,031
$
$
Total depreciation charged to expense in 2019, 2018 and 2017 amounted to $4,227,000, $3,954,000, and $3,624,000,
respectively.
Note 6
Acquired Intangible Assets
The Company accounts for intangible assets in accordance with FASB ASC 350, Goodwill and Other Intangible Assets (“ASC
350”), which requires that intangibles with indefinite useful lives be tested annually for impairment and those with finite useful
lives be amortized over their useful lives.
In September 2019, the Company acquired the assets of Gateway Giving, LLC and recorded intangible assets of $4,983,000.
Those intangible assets were valued at $2,610,000 for software, $1,693,000 for goodwill, $490,000 for the customer list, and
$190,000 for the trade name. The amounts for these intangible assets were originally recorded on a provisional basis and have
been adjusted upon the completion of a valuation. The goodwill is deductible for tax purposes over 15 years, starting in 2019.
The intangible assets and results of Gyve are included in the Banking Services operating segment.
The purchase price of the acquisition consisted of a cash payment of $3,000,000 and a potential earnout of $4,000,000. The
Company recorded the earnout component to be $1,983,000. The fair value of the contingent consideration was estimated on
the acquisition date as the present value of the expected future contingent payments which were determined using a scenario-
based model. Any changes in the estimated fair value of the contingent earn-out consideration, up to the contracted amount,
will be reflected in the results of operations in future periods as they are identified.
45
Details of the Company’s intangible assets are as follows:
(In thousands)
Assets eligible for amortization:
Customer lists
Patent
Non-compete agreements
Software
Trade Name
Other
Unamortized intangible assets:
December 31, 2019
December 31, 2018
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
$
4,778
72
332
2,844
190
500
$
(3,463)
(20)
(332)
(358)
(3)
(259)
$
4,288
72
332
234
500
(3,071)
(16)
(326)
(234)
(225)
(227)
(4,099)
Goodwill (1)
(227)
Total intangible assets
(4,662)
(1)Amortization through December 31, 2001 prior to adoption of FASB ASC 350.
14,489
23,205
$
$
12,796
18,222
$
$
The customer lists are amortized over 7 and 10 years; the patents over 18 years, the non-compete agreements over 2 and 5
years, software over 3 years and 7 years, the trade name over 20 years and other intangible assets over 15 years. Amortization
of intangible assets amounted to $563,000, $442,000, and $427,000 for the years ended December 31, 2019, 2018 and 2017,
respectively. Estimated future amortization of intangibles is $859,000 in both 2020 and 2021, $540,000 in both 2022 and 2023,
and $498,000 in 2024.
Note 7
Interest-Bearing Deposits
Interest-bearing deposits consist of the following:
(In thousands)
Interest-bearing demand deposits
Savings deposits
Time deposits:
Less than $100
$100 to less than $250
$250 or more
Total
Weighted average interest rate
Interest on deposits consists of the following:
(In thousands)
Interest-bearing demand deposits
Savings deposits
Time deposits:
Less than $100
$100 to less than $250
$250 or more
Total
December 31,
2019
322,027 $
13,051
2018
322,709
13,502
4,927
4,862
48,353
51,658
17,687
406,045 $
1.32%
15,937
408,668
1.00%
$
$
December 31,
2018
2,832 $
109
$
433
152
210
3,736 $
$
2019
3,686
103
905
216
281
5,191
$
$
2017
1,611
79
234
114
149
2,187
The scheduled maturities of time deposits are summarized as follows:
(In thousands)
Due within:
One year
Two years
Three years
Four years
Five years
Total
December 31,
2019
2018
Percent
of Total
67.5%
22.3
7.8
2.4
100.0%
Amount
$
$
51,154
18,262
140
983
1,918
72,457
Percent
of Total
70.6%
25.2
0.2
1.4
2.6
100.0%
Amount
$
$
47,881
15,813
5,584
1,689
70,967
46
Note 8
Unused Available Lines of Credit
As of December 31, 2019, the Bank had unsecured lines of credit at correspondent banks to purchase federal funds up to a
maximum of $83,000,000 at the following banks: US Bank, $20,000,000; UMB Bank $20,000,000; Wells Fargo Bank,
$15,000,000; PNC Bank, $12,000,000; Frost National Bank, $10,000,000; and JPM Chase Bank, $6,000,000. As of December
31, 2019, the Bank had secured lines of credit with the Federal Home Loan Bank of $192,045,000 collateralized by commercial
mortgage loans. At December 31, 2019, the Company had lines of credit from UMB Bank of $50,000,000 and First Tennessee
Bank of $50,000,000 collateralized by state and political subdivision securities. There was $18,000,000 outstanding under the
lines of credit discussed above at December 31, 2019 and no amounts outstanding at December 31, 2018. The amount
outstanding at the end of the 2019 was borrowed on December 31, 2019 and repaid on January 2, 2020.
Note 9
Common Stock and Earnings per Share
The table below shows activity in the outstanding shares of the Company’s common stock during 2019.
Shares outstanding at January 1
Issuance of common stock:
Employee restricted stock grants
Employee SARs exercised
Directors’ compensation
Shares repurchased
Shares outstanding at December 31
2019
14,611,286
18,121
27,274
12,278
(154,593)
14,514,366
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of common shares
outstanding and the weighted average number of potential common shares outstanding. Under the treasury stock method, stock
appreciation rights (“SARs”) are dilutive when the average market price of the Company’s common stock, combined with the
effect of any unamortized compensation expense, exceeds the SAR price during a period. Anti-dilutive shares are those SARs
with prices in excess of the current market value.
The calculations of basic and diluted earnings per share are as follows:
(In thousands except share and per share data)
Basic:
Net income
Weighted average common shares outstanding
Basic earnings per share
Diluted:
Net income
$
$
$
Weighted average common shares outstanding
Effect of dilutive restricted stock, performance
based restricted stock (“PBRS”), and SARs
Weighted average common shares outstanding
assuming dilution
Diluted earnings per share
$
Note 10
Employee Benefit Plans
2019
30,404
14,434,445
2.11
30,404
14,434,445
December 31,
2018
2017
$
$
$
30,268
14,675,136
2.06
30,268
14,675,136
$
$
$
25,014
14,700,558
1.70
25,014
14,700,558
257,480
239,066
215,332
14,691,925
2.07
14,914,202
2.03
14,915,890
1.68
$
$
Defined Benefit Plan
The Company has a noncontributory defined-benefit pension plan (the “Plan”), which covers eligible employees. Effective
December 31, 2016, the Plan was closed to all new participants. The Company accrues and makes contributions designed to
fund normal service costs on a current basis using the projected unit credit with service proration method to amortize prior
service costs arising from improvements in pension benefits and qualifying service prior to the establishment of the Plan over
a period of approximately 30 years.
A summary of the activity in the Plan’s projected benefit obligation, assets, funded status and amounts recognized in the
Company’s consolidated balance sheets is as follows:
47
(In thousands)
Projected benefit obligation:
Balance, January 1
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Balance, December 31
Plan assets:
Fair value, January 1
Actual return
Employer contribution
Benefits paid
Fair value, December 31
Funded status:
Accrued pension liability
2019
2018
$
$
$
$
$
96,401 $
3,554
4,103
18,334
(2,565)
119,827 $
74,580 $
15,719
6,900
(2,565)
94,634 $
98,790
4,017
3,703
(7,768)
(2,341)
96,401
81,427
(4,506)
―
(2,341)
74,580
(25,192) $
(21,821)
The following represent the major assumptions used to determine the projected benefit obligation of the Plan. For 2019 and
2018, the Plan’s expected benefit cash flows were discounted using the FTSE Above Median Double-A Curve while in 2017,
the Plan’s expected benefit cash flows were discounted using the Citibank Above Median Curve. For 2019, the Pri-2012
Mortality Table and MP-2019 Mortality Improvement Scale were used. For 2018, the RP-2014 Mortality Table and the MP-
2018 Mortality Improvement Scale were used. For 2017, the RP-2014 Mortality Table and MP-2017 Mortality Improvement
Scale were used.
Weighted average discount rate
Rate of increase in compensation levels
2019
3.30%
(a)
2018
4.30%
(a)
2017
3.75%
(a)
(a) 6.0% graded down to 3.25% over the first seven years of service.
The accumulated benefit obligation was $103,736,000 and $83,724,000 as of December 31, 2019 and 2018, respectively.
During 2019, the Company made a contribution of $6,900,000 to the Plan. The Company has not determined if it will make a
contribution to the Plan in 2020. The following pension benefit payments, which reflect expected future service, as appropriate,
are expected to be paid by the Plan:
2020
2021
2022
2023
2024
2025-2029
Amount
$3,098,000
3,367,000
3,766,000
4,196,000
4,488,000
27,343,000
The Plan’s pension cost included the following components:
(In thousands)
Service cost – benefits earned during the year
Interest cost on projected benefit obligations
Expected return on plan assets
Net amortization and deferral
Net periodic pension cost
For the Year Ende d
December 31,
2018
4,017 $
3,703
(5,202)
1,522
4,040 $
2019
3,555 $
4,103
(4,753)
1,559
4,464 $
$
$
The following represent the major assumptions used to determine the net pension cost of the Plan:
Weighted average discount rate
Rate of increase in compensation levels
Expected long-term rate of return on assets
2019
4.30%
(a)
6.50%
2018
3.75%
(a)
6.50%
(a)
6.0% graded down to 3.25% over the first seven years of service
48
2017
3,733
3,621
(4,681)
1,382
4,055
2017
4.25%
(a)
6.50%
For 2019, the RP-2014 Mortality Table and the MP-2018 Mortality Improvement Table were used. For 2018, the RP-2014
Mortality Table and the MP-2017 Mortality Improvement Table were used. For 2017, the RP-2014 Mortality Table and the MP-
2016 Mortality Improvement Table were used.
The investment objective for the Plan is to maximize total return with a tolerance for average risk. Asset allocation is a balance
between fixed income and equity investments, with a target allocation of approximately 51% fixed income, 19% U.S. equity
and 30% non-U.S. equity. Due to volatility in the market, this target allocation is not always desirable and asset allocations can
fluctuate between acceptable ranges. The fixed income component is invested in pooled investment grade securities. The equity
components are invested in pooled large cap, small/mid cap and non-U.S. stocks. The expected one-year nominal returns and
annual standard deviations are shown by asset class below:
Asset Class
% of Total Portfolio
One-Year Nominal
Return
Annual Standard
Deviation
Core Fixed Income
Large Cap U.S. Equities
Small Cap U.S. Equities
International (Developed)
International (Emerging)
51%
14%
5%
25%
5%
3.78%
6.55%
7.58%
7.86%
10.24%
3.90%
15.30%
19.00%
17.22%
25.05%
Applying appropriate correlation factors between each of the asset classes the long-term rate of return on assets is estimated
to be 6.50%.
A summary of the fair value measurements by type of asset is as follows:
Fair Value Measure ments as of December 31,
2018
2019
(In thousands)
Cash
Equity securities
U.S. Small/Mid Cap Growth
Non-U. S. Core
U.S. Large Cap Passive
Emerging Markets
Fixed Income
U.S. Core
U.S. Passive
Opportunistic
Total
Total
$462
4,491
23,975
13,523
4,559
27,046
15,255
5,323
$94,634
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
$462
$ ―
Total
$423
3,405
18,398
10,471
3,217
4,491
23,975
13,523
4,559
27,046
15,255
5,323
$94,172
10,609
23,827
4,230
$74,580
―
―
―
―
―
―
―
$462
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
$423
$ ―
―
―
―
―
―
―
―
$423
3,405
18,398
10,471
3,217
10,609
23,827
4,230
$74,157
Supplemental Executive Retirement Plan
The Company also has an unfunded supplemental executive retirement plan (“SERP”) which covers key executives of the
Company whose benefits are limited by the Internal Revenue Service under the Company’s qualified retirement plan. The
SERP is a noncontributory plan in which the Company’s subsidiaries make accruals designed to fund normal service costs on
a current basis using the same method and criteria as the Plan.
A summary of the activity in the SERP’s projected benefit obligation and amounts recognized in the Company’s consolidated
balance sheets is as follows:
(In thousands)
Benefit obligation:
Balance, January 1
Service cost
Interest cost
Benefits paid
Actuarial loss (gain)
Balance, December 31
December 31,
2019
2018
$
$
10,097 $
97
408
(262)
1,372
11,712 $
10,094
92
348
(260)
(177)
10,097
49
The following represent the major assumptions used to determine the projected benefit obligation of the SERP. For 2019 and
2018, the SERP’s expected benefit cash flows were discounted using the FTSE Above Median Double-A Curve. For 2017, the
Citigroup Above Median Curve was used.
Weighted average discount rate
Rate of increase in compensation levels
2019
3.00%
(a)
(a) 6.00% graded down to 3.25% over the first seven years of service.
2018
4.10%
(a)
2017
3.50%
(a)
The accumulated benefit obligation was $10,485,000 and $8,830,000 as of December 31, 2019 and 2018, respectively. Since
this is an unfunded plan, there are no plan assets. Benefits paid were $262,000 in 2019, $260,000 in 2018, and $247,000 in
2017. Expected future benefits payable by the Company over the next ten years are as follows:
2020
2021
2022
2023
2024
2025-2029
Amount
$291,000
344,000
752,000
829,000
826,000
4,055,000
The SERP’s pension cost included the following components:
(In thousands)
Service cost – benefits earned during the year
Interest cost on projected benefit obligations
Net amortization and deferral
Net periodic pension cost
For the Year Ende d December 31,
2019
97 $
408
276
781 $
2018
92 $
348
581
1,021 $
2017
143
360
324
827
$
$
The pretax amounts in accumulated other comprehensive loss as of December 31 were as follows:
(In thousands)
Prior service cost
Net actuarial loss
Total
The Plan
SERP
2019
$
29,387
$ 29,387
2018
$
23,580
$ 23,580
2019
$
2,724
$ 2,724
2018
$
1,629
$ 1,629
The estimated pretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 2019
expected to be recognized as components of net periodic benefit cost in 2020 for the Plan are $0 and $1,890,000, respectively.
The estimated pretax prior service cost and net actuarial loss in accumulated other comprehensive loss at December 31, 2019
expected to be recognized as components of net periodic benefit cost in 2020 for the SERP are $0 and $112,000, respectively.
The Company also maintains a noncontributory profit sharing program, which covers most of its employees. Employer
contributions are calculated based upon formulas which relate to current operating results and other factors. Profit sharing
expense recognized in personnel expense in the consolidated statements of income in 2019, 2018, and 2017 was $ 6,841,000,
$6,810,000, and $5,799,000, respectively.
The Company also sponsors a defined contribution 401(k) plan to provide additional retirement benefits to substantially all
employees. Contributions under the 401(k) plan for 2019, 2018 and 2017 were $1,378,000, $1,109,000, and $925,000,
respectively.
Note 11
Stock-based Compe nsation
The Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”) provides incentive
opportunities for key employees and non-employee directors and to align the personal financial interests of such individuals
with those of the Company’s shareholders. The Omnibus Plan permits the issuance of up to 1,500,000 shares of the Company’s
common stock in the form of stock options, SARs, restricted stock, restricted stock units and performance awards.
50
Restricted Stock
Restricted shares granted prior to April 16, 2013 are amortized to expense over the three-year vesting period. Beginning on
April 16, 2013, restricted shares granted to Company employees are amortized to expense over the three-year annual vesting
period whereas restricted shares granted to members of the Board of Directors are amortized to expense over a one-year service
period, with the exception of those shares granted in lieu of cash payment for retainer fees which are expensed in the period
earned. Beginning on February 2, 2017, restricted shares granted to Company employees are amortized to expense over the
three-year cliff vesting period.
Changes in restricted shares outstanding for the year ended December 31, 2019 were as follows:
Balance at December 31, 2018
Granted
Vested
Balance at December 31, 2019
Weighted Average
Grant Date
Fair Value
$45.48
49.30
39.76
$47.24
Shares
99,724
36,812
(13,264)
123,272
During 2018 and 2017, 35,000 and 31,277 shares, respectively, were granted with weighted average per share market values
at date of grant of $49.79 in 2018 and $49.55 in 2017. The fair value of such shares are based on the market price on the date
of grant. Amortization of the restricted stock bonus awards totaled $1,551,000 for 2019, $1,571,000 for 2018 and $1,743,000
for 2017. As of December 31, 2019, the total unrecognized compensation expense related to non-vested restricted stock awards
was $1,438,000 and the related weighted average period over which it is expected to be recognized is approximately 1.07 years.
The total fair value of shares vested during the years ended December 2019, 2018, and 2017 was $527,000, $1,112,000, and
$1,389,000, respectively.
Performance-Based Restricted Stock
In February 2017, the Company granted three-year PBRS awards which are contingent upon the Company’s achievement of
pre-established financial goals over the period from January 1, 2017 through December 31, 2019. The PBRS awards cliff vest
on the three year anniversary of their grant date at levels ranging from 0% to 150% of the target opportunity based on the actual
achievement of financial goals for the three-year performance period. The aggregate target number of PBRS shares granted
was 30,388 with an average grant date fair value of $49.33 per share. The 2019 expense related to these grants totaled $583,000
and is based on the grant date fair value of the awards and the Company’s achievement of 118% of the target financial goals.
The estimated expense for 2019 and each future period through the vesting date is subject to prospective adjustment based
upon changes in the expected achievement of the financial goals.
In each of February and July 2018, the Company granted three-year PBRS awards which are contingent upon the Company’s
achievement of pre-established financial goals over the period from January 1, 2018 through December 31, 2020. The PBRS
awards cliff vest on the three-year anniversary of their grant date at levels ranging from 0% to 150% of the target opportunity
based on the actual achievement of financial goals for the three-year performance period. The aggregate target number of PBRS
shares granted was 35,602 with an average grant date fair value of $49.04 per share. The 2019 expense related to these grants
totaled $674,000 and is based on the grant date fair value of the awards and the Company’s achievement of 117% of the target
financial goals. The estimated expense for 2019 and each future period through the vesting date is subject to prospective
adjustment based upon changes in the expected achievement of the financial goals.
In each of February and June 2019, the Company granted three-year PBRS awards which are contingent upon the Company’s
achievement of pre-established financial goals over the period from January 1, 2019 through December 31, 2021. The PBRS
awards cliff vest on the three-year anniversary of their grant date at levels ranging from 0% to 150% of the target opportunity
based on the actual achievement of financial goals for the three-year performance period. The aggregate target number of PBRS
shares granted was 36,801 with an average grant date fair value of $49.06 per share. The 2019 expense related to these grants
totaled $593,000 and is based on the grant date fair value of the awards and the Company’s achievement of 108% of the target
financial goals. The estimated expense for 2019 and each future period through the vesting date is subject to prospective
adjustment based upon changes in the expected achievement of the financial goals.
SARs
During 2019, there were no SARs granted and no expense recognized. As of December 31, 2019, there was no unrecognized
compensation expense related to SARs.
51
Changes in SARs outstanding for the year ended December 31, 2019 were as follows:
Balance at December 31, 2018
Exercised
Forfeited
Balance at December 31, 2019
Exercisable at December 31, 2019
SARs
237,121
(81,829)
155,292
155,292
Weighted Average Exercise Price
$29.86
24.71
32.58
$32.58
The total intrinsic value of SARs exercised during 2019 and 2018 was $2,022,000 and $1,110,000, respectively. The average
remaining contractual term for SARs outstanding as of December 31, 2019 was 2.92 years, and the aggregate intrinsic value
was $3,908,000. The average remaining contractual term for SARs exercisable as of December 31, 2018 was 3.50 years, and
the aggregate intrinsic value was $5,468,000.
The total compensation cost for share-based payment arrangements was $3,144,000, $3,006,000, and $2,340,000, in 2019,
2018, and 2017, respectively.
Note 12
Other Operating Expense
Details of other operating expense are as follows:
(In thousands)
Postage and supplies
Promotional expense
Professional fees
Outside service fees
Data processing services
Telecommunications
Other
Total other operating expense
Note 13
Income Taxes
The components of income tax expense (benefit) are as follows:
(In thousands)
Current:
Federal
State
Deferred:
Federal
State
Total income tax expense
For the Years Ended December 31,
2019
1,875 $
3,838
2,388
5,529
1,283
748
2,404
18,065 $
2018
2,180 $
3,344
2,170
4,909
919
778
1,963
16,263 $
2017
2,087
2,557
1,650
4,424
897
749
1,722
14,086
For the Years Ended December 31,
2019
2018
2017
4,423 $
1,392
8,557 $
1,043
1,097
150
7,062
(3,404)
(117)
6,079
$
$
4,250
1,638
4,256
(259)
9,885
$
$
$
$
A reconciliation of expected income tax expense (benefit), computed by applying the effective federal statutory rate of 21%
for each of 2019 and 2018 and 35% for 2017 to income before income tax expense is as follows:
(In thousands)
Expected income tax expense
(Reductions) increases resulting from:
Tax-exempt income
State taxes, net of federal benefit
Share-based compensation adjustment
Adjustment of deferred tax asset or liability for TCJA
Other, net
Total income tax expense
For the Years Ended December 31,
2019
7,868 $
2018
7,633 $
2017
12,214
(1,755)
1,218
(281)
12
7,062 $
(2,009)
732
(286)
(74)
83
6,079 $
(3,868)
896
(376)
1,824
(805)
9,885
$
$
Income tax expense in 2019 totaled $7,062,000 compared to $6,079,000 and $9,885,000 in 2018 and 2017, respectively. When
measured as a percent of pre-tax income, the Company’s effective tax rate was 19% in 2019, 17% in 2018, and 28% in 2017.
The increase in 2019 tax expense was primarily the result of the decrease in the amount of tax-exempt income from municipal
52
bonds, an increase in state tax expense, and a prior year reduction of tax expense recorded from the final analysis and
measurement of the TCJA.
The tax effects of temporary differences which give rise to significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
(In thousands)
Deferred tax assets:
Allowance for loan losses
ASC 715 pension funding liability
Net operating loss carryforward (1)
Supplemental executive retirement plan accrual
Stock compensation
Total deferred tax assets
Deferred tax liabilities:
Premises and equipment
Pension
Intangible assets
Unrealized gain on investment in securities available-for-sale
Other
Total deferred tax liabilities
December 31,
2019
$
$
2,452
7,642
27
2,087
1,987
14,195
$
$
2018
2,376
6,000
50
1,968
1,673
12,067
(1,937)
(409)
(1,212)
(2,821)
(974)
(1,379)
(3,348)
(196)
(8,718)
5,477
$
$
(156)
(80)
(3,794)
8,273
$
$
Net deferred tax assets
(1) As of December 31, 2019, the Company had approximately $128,000 of net operating loss carry forwards as a result of the
acquisition of Franklin Bancorp. The utilization of the net operating loss carry forward is subject to Section 382 of the Internal
Revenue Code and limits the Company’s use to approximately $122,000 per year during the carry forward period, which expires
in 2024.
A valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets
will not be realized. The Company has not established a valuation allowance at December 31, 2019 or 2018, due to
management’s belief that all criteria for recognition have been met, including the expectation of projected future taxable income
sufficient to support the realization of deferred tax assets.
The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is presented in the following
table:
(In thousands)
Balance at January 1
Changes in unrecognized tax benefits as a result of tax
positions taken during a prior year
Changes in unrecognized tax benefits as a result of tax
position taken during the current year
Reductions to unrecognized tax benefits as a result of a
lapse of the applicable statute of limitations
Balance at December 31
2019
$1,403
56
171
2018
$1,632
2017
$1,623
(135)
192
(15)
263
(331)
$1,299
(286)
$1,403
(239)
$1,632
At December 31, 2019, 2018 and 2017, the balances of the Company’s unrecognized tax benefits which would, if recognized,
affect the Company’s effective tax rate were $1,184,000, $1,272,000 and $1,464,000, respectively. These amounts are net of
the offsetting benefits from other taxing jurisdictions.
As of December 31, 2019, 2018 and 2017, the Company had $151,000, $136,000 and $139,000, respectively, in accrued interest
related to unrecognized tax benefits.
The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease by
approximately $315,000 over the next 12 months. The reduction primarily relates to the anticipated lapse in the statute of
limitations. The unrecognized tax benefits relate primarily to apportionment of taxable income among various state tax
jurisdictions.
The Company is subject to income tax in the U.S. federal jurisdiction, numerous state jurisdictions, and a foreign jurisdiction.
The Company’s federal income tax returns for tax years 2016 through 2018 remain subject to examination by the Internal
Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2015 through 2018. The
Company is currently under audit from the Internal Revenue Service for the 2017 tax year.
53
Note 14
Disclosures about Fair Value of Financial Instrume nts
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit, commercial letters of credit and
standby letters of credit. The Company’s maximum potential exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit, commercial letters of credit and standby letters of
credit is represented by the contractual amounts of those instruments. At December 31, 2019 and 2018, no amounts have been
accrued for any estimated losses for these instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance
of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The approximate remaining terms of commercial and standby letters of credit range from
less than one to five years. Since these financial instruments may expire without being drawn upon, the total amounts do not
necessarily represent future cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting
standards as those financial instruments included on the consolidated balance sheets. The Company evaluates each customer’s credit-
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of the credit, is based on
management’s credit evaluation of the borrower. Collateral held varies, but is generally accounts receivable, inventory, residential or
income-producing commercial property or equipment. In the event of nonperformance, the Company may obtain and liquidate
the collateral to recover amounts paid under its guarantees on these financial instruments.
The following table shows conditional commitments to extend credit, standby letters of credit and commercial letters:
(In thousands)
Conditional commitments to extend credit
Standby letters of credit
Commercial letters of credit
December 31,
$
2019
197,799 $
13,288
2,755
2018
144,010
11,368
3,486
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties
drawing on such financial instruments and the present credit worthiness of such counterparties. The Company believes such
commitments have been made at terms which are competitive in the markets in which it operates; however, no premium or
discount is offered thereon.
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments:
(In thousands)
Balance sheet assets:
Cash and cash equivalents
Investment in securities
Loans, net
Accrued interest receivable
Total
Balance sheet liabilities:
Deposits
Accounts and drafts payable
Accrued interest payable
Total
December 31,
2019
2018
Carrying
Amount
203,954
422,665
762,082
6,706
1,395,407
757,136
684,295
103
1,441,534
$
$
$
$
Fair Value
$
$
$
$
203,954
422,665
776,653
6,706
1,409,978
757,790
684,295
103
1,442,188
Carrying
Amount
230,933
441,534
711,362
7,069
1,390,898
721,926
694,360
91
1,416,377
$
$
$
$
Fair Value
230,933
441,534
711,090
7,069
1,390,626
722,018
694,360
91
1,416,469
$
$
$
$
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it
is practicable to estimate that value:
Cash and Cash Equivalents The carrying amount approximates fair value.
Investment in Securities The fair value is measured on a recurring basis using Level 2 valuations. Refer to Note 3, “Investment
in Securities,” for fair value and unrealized gains and losses by investment type.
54
Loans The fair value is estimated using present values of future cash flows discounted at risk-adjusted interest rates for each
loan category designated by management and is therefore a Level 3 valuation. Management believes that the risk factor
embedded in the interest rates along with the allowance for loan losses results in a fair valuation.
Impaired loans are valued using the fair value of the collateral which is based upon an observable market price or current
appraised value and therefore, the fair value is a nonrecurring Level 3 valuation.
Accrued Interest Receivable The carrying amount approximates fair value.
Deposits The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities and therefore, is a Level 2 valuation. The fair value estimates above do not
include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market or the benefit derived from the customer relationship inherent in existing deposits.
Accounts and Drafts Payable The carrying amount approximates fair value.
Accrued Interest The carrying amount approximates fair value.
Limitations Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial
instruments. Other significant assets or liabilities that are not considered financial assets or liabilities include premises and
equipment and the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market (core deposit intangible). In addition, tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
Note 15
Contingencies
The Company and its subsidiaries are not involved in any pending proceedings other than ordinary routine litigation incidental
to their businesses. Management believes none of these proceedings, if determined adversely, would have a material effect on
the business or financial condition of the Company or its subsidiaries.
Note 16
Revenue from Contracts with Customers
On January 1, 2018, the Company adopted FASB ASC 606 and selected the modified retrospective transition method. The
adoption of this new standard did not impact the Company’s results of operations or balance sheet and there was no cumulative
effect of initially applying this new revenue standard to the opening balance of retained earnings. Since interest income on
loans and securities are both excluded from this topic, a significant portion of the Company’s revenues are not subject to the
new guidance. The services that fall within the scope of FASB ASC 606 are presented within fee revenue and other income in
the consolidated statements of income and are recognized as revenue as the performance obligation to the customer is satisfied.
Services within the scope of FASB ASC 606 include invoice processing and payment fees, bank service fees, and OREO.
Invoice processing fees – The Company earns fees on a per-item or monthly basis for the invoice processing services rendered
on behalf of customers. Per-item fees are recognized at the point in time when the performance obligation is satisfied. Monthly
fees are earned over the course of a month, representing the period over which the performance obligation is satisfied. The
Company also earns interest income from the balances generated during the payment cycle for the invoices processed, which
is an integral component of the Company’s compensation for invoice processing services but is out-of-scope of FASB ASC
606. The contracts have no significant impact related to variable consideration and no significant financing components.
Invoice payment fees – The Company earns fees on a transaction level basis for invoice payment services when making
customer payments. Fees are recognized at the point in time when the payment transactions are made, which is when the
performance obligation is satisfied. The contracts have no significant impact related to variable consideration and no significant
financing components.
Bank service fees – Revenue from service fees consists of service charges and fees on deposit accounts under depository
agreements with customers to provide access to deposited funds. Service charges on deposit accounts are transaction based
fees that are recognized at the point in time when the performance obligation is satisfied. Service charges are recognized on a
monthly basis representing the period over which the performance obligation is satisfied. The contracts have no significant
impact related to variable consideration and no significant financing components.
OREO – The Company currently does not have any OREO and has not in recent years. Net gains or losses would be recorded
when other real estate is sold to a third party and substantially all of the consideration for the transfer of property is received.
55
(In thousands)
Fee revenue and other income
In-scope of FASB ASC 606
Invoice processing fees
Invoice payment fees
Information services payment and processing revenue
Bank service fees
Fee revenue (in-scope of FASB ASC 606)
Other income (out-of-scope of FASB
ASC 606)
Total fee revenue and other income
Net interest income after provision for loan losses
(out-of-scope of FASB ASC 606)
Total net revenue
Note 17
Industry Segment Information
For the Years Ended December 31,
2017
2018
2019
$
$
81,329
26,624
107,953
1,386
109,339
730
110,069
$
78,461
23,720
102,181
1,335
103,516
560
104,076
72,961
20,361
93,322
1,349
94,671
841
95,512
47,166
157,235
$
44,190
148,266
39,790
135,302
$
$
The services provided by the Company are classified into two reportable segments: Information Services and Banking Services.
Each of these segments provides distinct services that are marketed through different channels. They are managed separately
due to their unique service and processing requirements.
The Information Services segment provides transportation, energy, telecommunication, and environmental invoice processing
and payment services to large corporations. The Banking Services segment provides banking services primarily to privately
held businesses and faith-based ministries, including on-line generosity services, as well as supporting the banking needs of
the Information Services segment.
The Company’s accounting policies for segments are the same as those described in Note 1 of this report. Management
evaluates segment performance based on tax-equivalized (as defined in the footnote to the chart on the following table) pre-tax
income after allocations for corporate expenses. Transactions between segments are accounted for at what management
believes to be fair value.
Substantially all revenue originates from, and all long-lived assets are located within the United States, and no revenue from
any customer of any segment exceeds 10% of the Company’s consolidated revenue.
Funding sources represent average balances and deposits generated by Information Services and Banking Services and there is
no allocation methodology used. Segment interest income is a function of the relative share of average funding sources
generated by each segment multiplied by the following rates:
Information Services – one or more fixed rates depending upon the specific characteristics of the funding source, and
•
• Banking Services – a variable rate that is based upon the overall performance of the Company’s earning assets.
Any difference between total segment interest income and overall total Company interest income is included in Corporate,
Eliminations, and Other. Certain amounts in the table below for 2018 and 2017 have been reclassified to conform to the 2019
presentation.
56
Summarized information about the Company’s operations in each industry segment for the years ended December 31, 2019,
2018 and 2017, is as follows:
(In thousands)
2019
Fee income from customers
Interest income*
Interest expense
Intersegment income (expense)
Depreciation and amortization
Tax-equivalized pre-tax income*
Goodwill
Other intangible assets, net
Total Assets
Funding Sources
2018
Fee income from customers
Interest income*
Interest expense
Intersegment income (expense)
Depreciation and amortization
Tax-equivalized pre-tax income*
Goodwill
Other intangible assets, net
Total Assets
Funding Sources
2017
Fee income from customers
Interest income*
Interest expense
Intersegment income (expense)
Depreciation and amortization
Tax-equivalized pre-tax income*
Goodwill
Other intangible assets, net
Total Assets
Funding Sources
Information
Services
Banking
Services
Corporate,
Eliminations
and Other
Total
$
108,882 $
1,660 $
(473) $
110,069
25,616
─
─
4,659
28,542
12,433
1,142
844,483
676,068
30,646
5,193
2,107
131
13,048
1,829
3,139
915,341
592,905
(1,568)
─
(2,107)
─
(2,040)
─
─
4,419
─
54,694
5,193
─
4,790
39,550
14,262
4,281
1,764,243
1,268,973
$
102,839 $
1,307 $
(70) $
104,076
25,074
─
─
4,254
27,763
12,433
1,554
826,201
642,733
27,770
3,736
1,880
142
13,571
136
─
886,291
572,653
(2,496)
─
(1,880)
─
(2,566)
─
─
50,348
3,736
─
4,396
38,768
12,569
1,554
(17,316)
─
1,695,176
1,215,386
$
93,484 $
1,547 $
481 $
23,813
─
─
3,902
28,168
12,433
1,996
854,214
604,493
27,376
2,187
1,362
149
15,460
136
─
830,672
598,986
(3,522)
─
(1,362)
─
(3,039)
─
─
(27,677)
─
95,512
47,667
2,187
─
4,051
40,589
12,569
1,996
1,603,209
1,203,479
* Presented on a tax-equivalent basis assuming a tax rate of 21% for 2019 and 2018 and 35% for 2017. The tax-equivalent adjustment was approximately
$2,084,000 for 2019, $2,422,000 for 2018, and $5,691,000 for 2017.
Note 18
Leases
On January 1, 2019, the Company adopted ASU 2016-02. The Company leases certain premises under operating leases. As
of December 31, 2019, the Company had lease liabilities of $6,682,000 and right-of-use assets of $5,848,000. Lease liabilities
and right-of-use assets are reflected in other liabilities and other assets, respectively. Included in occupancy expense on the
consolidated statements of income for 2019 was operating lease cost of $1,675,000, short-term lease cost of $145,000, and
there was no variable lease cost. The Company paid cash of $1,531,000 for operating lease amounts included in the
measurement of lease liabilities for the year ended December 31, 2019. No right-of-use assets were obtained in exchange for
lease liabilities during the year ended December 31, 2019.
For the year ended December 31, 2019, the weighted average remaining lease term for the operating leases was 6.4 years and
the weighted average discount rate used in the measurement of operating lease liabilities was 5.5%. Certain of the Company’s
57
leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease
liabilities as they are not reasonably certain to be exercised. There has been no significant change in the Company’s expected
future minimum lease payments since December 31, 2018.
A maturity analysis of operating lease liabilities and undiscounted cash flows as of December 31, 2019 was as follows:
(In thousands)
Lease payments due
Less than 1 year
1-2 years
2-3 years
3-4 years
4-5 years
Over 5 years
Total undiscounted cash flows
Discount on cash flows
Total lease liability
December 31,
2019
$
$
1,748
1,613
1,538
614
392
1,972
7,877
1,195
6,682
There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the year ended
December 31, 2019. At December 31, 2019, the Company had one lease that had not yet commenced, but is expected to create
approximately $800,000 of additional lease liabilities and right-of-use assets for the Company. This lease is anticipated to
commence in 2020.
Note 19
Subsequent Events
In accordance with FASB ASC 855 - Subsequent Events, the Company has evaluated subsequent events after the consolidated
balance sheet date of December 31, 2019, and there were no events identified that would require additional disclosures to prevent
the Company’s consolidated financial statements from being misleading.
Note 20
Condensed Financial Information of Parent Company
Following are the condensed balance sheets of the Company (parent company only) and the related condensed statements of
income and cash flows.
(In thousands)
Assets
Cash and due from banks
Short-term investments
Securities available-for-sale, at fair value
Loans, net
Payments in excess of funding
Investments in subsidiaries
Premises and equipment, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities:
Accounts and drafts payable
Short-term borrowings
Other liabilities
Total liabilities
Total shareholders’ equity
$
$
$
Total liabilities and shareholders’ equity
$
58
Condensed Balance Sheets
December 31,
2019
2018
17,032
3,223
422,665
45,187
206,158
145,400
19,940
137,226
996,831
683,485
18,000
50,987
752,472
244,359
996,831
$
$
$
$
35,735
35,201
441,534
20,188
160,777
130,231
21,358
117,374
962,398
693,026
—
39,362
732,388
230,010
962,398
$
Condensed Statements of Income
For the Years Ended December 31,
2019
2,599
106,198
15,713
19
518
125,047
2018
2,668
100,628
14,159
(42)
456
117,869
2017
2,172
93,133
13,217
—
483
109,005
$
81,432
26,136
107,568
17,479
2,860
14,619
15,785
30,404
$
77,946
23,442
101,388
16,481
1,788
14,693
15,575
30,268
$
70,409
20,333
90,742
18,263
4,394
13,869
11,145
25,014
Condensed Statements of Cash Flows
For the Years Ended December 31,
2019
2018
2017
$
30,404
$
30,268
$
25,014
(15,785)
(6,289)
9,474
3,144
6,104
27,052
26,150
(24,999)
(45,381)
(2,637)
(2,833)
(49,700)
(21,875)
18,000
(15,234)
(7,799)
(1,125)
(28,033)
(50,681)
70,936
20,255
$
(15,575)
(1,012)
3,829
2,583
10,242
30,335
14,615
(7,949)
(21,674)
(4,211)
—
(19,219)
(22,316)
—
(13,177)
(8,838)
(635)
(44,966)
(33,850)
104,786
70,936
$
(11,145)
(7,257)
10,118
1,743
9,219
27,692
(80,621)
34,944
(33,756)
(4,020)
—
(83,453)
20,397
—
(10,675)
(2,270)
(267)
7,185
(48,576)
153,362
104,786
(In thousands)
Income from subsidiaries – management fees
Information services revenue
Net interest income after provision
Gain (loss) on sales of investment securities
Other income
Total income
Expenses:
Salaries and employee benefits
Other expenses
Total expenses
Income before income tax and equity in undistributed
income of subsidiaries
Income tax expense
Income before undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income
$
$
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in undistributed income of subsidiaries
Net change in other assets
Net change in other liabilities
Stock-based compensation expense
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Net decrease (increase) in securities
Net (increase) decrease in loans
Net increase in payments in excess of funding
Purchases of premises and equipment, net
Asset acquisition of Gateway Giving, LLC
Net cash used in investing activities
Cash flows from financing activities:
Net (decrease) increase in accounts and drafts payable
Short-term borrowings
Cash dividends paid
Purchase of common shares for treasury
Other financing activities, net
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
59
Note 21
SUPPLEMENTARY FINANCIAL INFORMATION
(Unaudited)
(In thousands except per share data)
2019
Fee revenue and other income
Interest income
Interest expense
Net interest income
Provision for loan losses
Operating expense
Income tax expense
Net income
Net income per share:
Basic earnings per share
Diluted earnings per share
2018
Fee revenue and other income
Interest income
Interest expense
Net interest income
Provision for loan losses
Operating expense
Income tax expense
Net income
Net income per share:
Basic earnings per share
Diluted earnings per share
$
$
$
$
$
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
27,013 $
12,897
1,290
11,607
250
28,462
1,745
8,163 $
27,372 $
13,327
1,305
12,022
—
29,971
1,739
7,684 $
28,262 $
13,666
1,392
12,274
—
30,563
1,787
8,186 $
27,422 $
12,719
1,206
11,513
—
30,773
1,791
6,371 $
YTD
110,069
52,609
5,193
47,416
250
119,769
7,062
30,404
.56 $
.55
.53 $
.52
.57 $
.56
.44 $
.43
2.11
2.07
25,374 $
11,288
679
10,609
—
26,182
1,709
8,092 $
25,640 $
11,513
794
10,719
—
27,463
1,387
7,509 $
26,435 $
12,215
1,029
11,186
—
28,530
1,481
7,610 $
26,627 $
12,910
1,234
11,676
—
29,744
1,502
7,057 $
104,076
47,926
3,736
44,190
—
111,919
6,079
30,268
.55 $
.54
.51 $
.50
.52 $
.51
.48 $
.47
2.06
2.03
60
Report of Inde pendent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cass Information Systems, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cass Information Systems, Inc. and subsidiaries (the
Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, cash
flows, and shareholders’ equity for each of the years in the three year period ended December 31, 2019, and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations
and its cash flows for each of the years in the three year period ended December 31, 2019, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 28, 2020 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of qualitative factor adjustments to the allowance for loan losses
As discussed in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for loan losses related to
loans collectively evaluated for impairment (ALLL) represented the total allowance for loan losses of $10.6 million as of
December 31, 2019, or 1.37% of total loans. The Company estimates the ALLL using a methodology that first uses a
quantitative component, which groups loans with similar risk characteristics and develops historical loss rates using
recorded charge-offs and recoveries over a historical period. The Company’s methodology also includes qualitative risk
factors that allow management to adjust its estimates of losses based on the most recent information available and to
address other limitations in the quantitative component of the ALLL model.
We identified the assessment of qualitative risk factors as a critical audit matter. The qualitative component represented a
significant percentage of the overall ALLL. This is due to the fact that given the current credit environment and the low
level of actual losses incurred in recent years, the quantitative component is not capturing all the risk of loss in the portfolio.
As a result, the assessment of the qualitative risk factors required complex and subjective auditor judgment, including
knowledge and experience in the industry, in order to evaluate the qualitative framework and related risk factors.
Specifically, the qualitative risk factors included concentrations of credit risk, economic conditions, underlying collateral
values within the Company’s portfolio, and the effect of other legal and regulatory factors. In addition, auditor judgment
was required to evaluate the sufficiency of audit evidence obtained.
61
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal
controls over the (1) development and approval of the overall ALLL methodology, (2) development of the qualitative
framework and evaluation of the related risk factors, (3) determination of the qualitative risk factor adjustments, and (4)
analysis of the ALLL results, trends, and ratios. We tested the Company’s process to assess the qualitative factors and
related adjustments used to develop the ALLL estimate by:
‒
‒
‒
‒
assessing the maximum qualitative factor adjustment,
evaluating the metrics, including the relevance of sources of data and assumptions, used to allocate the qualitative
factor adjustments,
analyzing the determination of each qualitative factor adjustment, and
evaluating trends in the total ALLL, including the qualitative factor adjustments, for consistency with trends in loan
portfolio growth (attrition) and credit performance.
In addition, we involved credit risk professionals with industry knowledge and experience who assisted in evaluating:
‒
the Company’s overall ALLL methodology, which included the qualitative framework and related risk factors, for
compliance with U.S. generally accepted accounting principles, and
the resulting qualitative risk factors and their relationship to the quantitative model and how they address recent
information available not captured in that quantitative model.
‒
We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained
related to the Company’s ALLL.
/s/ KPMG LLP
We have served as the Company’s auditor since 1983.
St. Louis, Missouri
February 28, 2020
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2019.
Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of December 31, 2019.
Manage ment’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentations.
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control
over financial reporting was effective as of December 31, 2019.
There have not been changes in our internal control over financial reporting that occurred during our fourth fiscal quarter that
have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP,
our independent registered public accounting firm. KPMG LLP’s report, which expresses an unqualified opinion on the
effectiveness of our internal control over financial reporting as of December 31, 2019, is included below.
63
Report of Inde pendent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cass Information Systems, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Cass Information Systems, Inc. and subsidiaries’ (the Company) internal control over financial reporting as
of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated
statements of income, comprehensive income, cash flows, and shareholders’ equity for each of the years in the three-year period
ended December 31, 2019 and the related notes (collectively, the consolidated financial statements), and our report dated
February 28, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
St. Louis, Missouri
February 28, 2020
64
ITEM 9B. OTHER INFORMATION
None.
65
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information required by this Item 10 is incorporated herein by reference to the following sections of the Company’s
definitive Proxy Statement for its 2020 Annual Meeting of Shareholders (“2020 Proxy Statement”), a copy of which will be
filed with the SEC no later than 120 days after the close of the fiscal year: “Election of Directors – Proposal 1,” “Executive
Compensation and Related Information,” and “Beneficial Ownership of Securities.”
The Company has adopted a Code of Conduct and Business Ethics policy, applicable to all Company directors, executive
officers and employees. The policy is publicly available and can be viewed on the Company’s website at www.cassinfo.com.
The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding the amendment to, or a
waiver of, a provision of this policy that applies to the Company’s principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar functions, and that relates to any element of the code
of ethics definition enumerated in Item 406(b) of Regulation S-K by posting such information on its website.
There were no material changes to the procedures by which shareholders may recommend nominees to the Board during the
fourth quarter of fiscal 2019.
ITEM 11. EXECUTIVE COMPENSATION
Certain information required pursuant to this Item 11 is incorporated herein by reference to the sections entitled “Election of
Directors – Proposal 1” and “Executive Compensation and Related Information” of the Company’s 2020 Proxy Statement, a
copy of which will be filed with the SEC no later than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information required pursuant to this Item 12 is incorporated herein by reference to the section entitled “Beneficial Ownership
of Securities” of the Company’s 2020 Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after
the close of the fiscal year.
Securities Authorized for Issuance under Equity Compensation Plans
The following information is as of December 31, 2019:
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
377,946
$42.37
441,366
_
_
_
377,946
$42.37
441,366
Plan Category
Equity compensation plans
approved by security
holders (1)(2)
Equity compensation plans
not approved by security
holders
Total
(1) Amount disclosed relates to the Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”).
(2) Includes restricted stock units, restricted stock, SARs, and performance-based stock. Performance-based stock is included assuming
100% attainment of the targets. The actual number of shares of performance-based stock to be awarded at the end of applicable
performance periods ranges from 0% to 150% of the target amount awarded depending on the Company’s achievement of pre-
established financial goals.
Refer to Note 11 to the consolidated financial statements for information concerning the Omnibus Plan.
66
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by this Item 13 is incorporated herein by reference to the section entitled “Election of Directors – Proposal
1” of the Company’s 2020 Proxy Statement, a copy of which will be filed with the SEC no later than 120 days after the close
of the fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning our principal accountant’s fees and services is incorporated herein by reference to the section entitled
“Ratification of Appointment of Independent Registered Public Accounting Firm – Proposal 3” of the Company’s 2020 Proxy
Statement, a copy of which will be filed with the SEC no later than 120 days after the close of the fiscal year.
67
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are incorporated by reference in or filed as an exhibit to this report:
(1) and (2)
Financial Statements and Financial Statement Schedules
Included in Item 8 of this report.
(3)
Exhibits listed under (b) of this Item 15.
(b)
Exhibits
3.1
Restated Articles of Incorporation of Registrant, incorporated by reference
to Exhibit 4.1 to Form S-8 Registration Statement No. 333-44499, filed
with the SEC on January 20, 1998.
3.2 Amendment to Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1
to the current report on Form 8-K, filed with the SEC on April 19, 2013.
3.3 Articles of Merger of Cass Commercial Corporation, incorporated by reference to
Exhibit 3.1 to the quarterly report on Form 10-Q for the quarter ended
September 30, 2006.
3.4 Second Amended and Restated Bylaws of Registrant, incorporated by reference to Exhibit
3.1 to the current report on Form 8-K, filed with the SEC on July 21, 2016.
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Description of the Registrant’s securities, incorporated by reference to Exhibit 4.1 to the
annual report on Form 10-K for the year ended December 31, 2019.
Form of Directors’ Indemnification Agreement, incorporated by reference to Exhibit 10.1
to the quarterly report on Form 10-Q for the quarter ended March 31, 2003.*
Amended and Restated Omnibus Stock and Performance Compensation Plan, incorporated
by reference to Exhibit 10.1 to the current report on Form 8-K, filed with the SEC on April
19, 2013.*
Amendment and Restatement of the Supplemental Executive Retirement Plan, incorporated
by reference to Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter ended
September 30, 2007.*
Form of Stock Appreciation Rights Award Agreement, incorporated by reference to Exhibit
10.4 to the quarterly report on Form 10-Q for the quarter ended September 30, 2007.*
Form of Restricted Stock Award Agreement, incorporated by reference to Exhibit 10.8 to
the annual report on Form 10-K for the year ended December 31, 2016.*
Form of Restricted Stock Unit Agreement, incorporated by reference to Exhibit 10.9 to the
annual report on Form 10-K for the year ended December 31, 2016.*
Description of Cass Information Systems, Inc. Profit Sharing Program, incorporated by
reference to Exhibit 10.7 to the annual report on For 10-K for the year ended December 31,
2018.*
21
Subsidiaries of registrant, incorporated by reference to Exhibit 21 to the annual report on
Form 10-K for the year ended December 31, 2019.
23
Consent of Independent Registered Public Accounting Firm.
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
68
32 .1
32 .2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
104
Cover Page Interactive Data File
*Management contract or compensatory plan arrangement
(c) None.
ITEM 16. FORM 10-K SUMMARY
None.
69
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES
Date: March 6, 2020
Date: March 6, 2020
CASS INFORMATION SYSTEMS, INC.
By
/s/ Eric H. Brunngraber
Eric H. Brunngraber
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By
/s/ P. Stephen Appelbaum
P. Stephen Appelbaum
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
70
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Shareholder Information
CORPORATE HEADQUARTERS
Cass Information Systems, Inc.
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
cass@cassinfo.com
www.cassinfo.com
COMMON STOCK
The company’s common stock trades
on the NASDAQ stock market under
the symbol CASS.
ANNUAL MEETING
The annual meeting of shareholders
will be held April 21, 2020 at 8:30 a.m.
at the Cass office at 13001 Hollenberg
Drive, Bridgeton, Missouri 63044.
No presentations are planned.
Board of Directors
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
Ralph W. Clermont
Retired Managing Partner,
KPMG LLP, Saint Louis,
Missouri
INVESTOR RELATIONS
Security analysts, investment man-
TRANSFER AGENT
Shareholder correspondence should
agers and others seeking financial
be mailed to:
information about the Company
should contact:
Investor Relations Department
Cass Information Systems, Inc.
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
INDEPENDENT AUDITORS
KPMG LLP
10 South Broadway, Suite 900
Saint Louis, Missouri 63102
Computershare
P.O. Box 505000
Louisville, KY 40233
Overnight correspondence should
be mailed to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
SHAREHOLDER WEBSITE:
www.computershare.com/investor
SHAREHOLDER ONLINE INQUIRIES:
https://www-us.computershare.com
/investor/Contact
TOLL-FREE PHONE:
866-323-8170
Benjamin F. (Tad) Edwards, IV
Chairman, Chief Executive
Joseph D. Rupp
Lead Director and Retired Chairman,
Officer and President,
President and Chief Executive Officer,
Benjamin F. Edwards & Company
Olin Corporation
James J. Lindemann
Retired Executive Vice President,
Emerson
Randall L. Schilling
Chief Executive Officer,
OPO Startups, LLC
Robert A. Ebel
Retired Chief Executive Officer,
Sally H. Roth
Retired Area President — Upper
Universal Printing Company
Midwest, Regions Bank
Franklin D. Wicks, Jr., Ph.D.
Retired Executive Vice President
and President, Applied Markets,
Sigma-Aldrich
Executive Officers
Eric H. Brunngraber
Chairman, President and
Chief Executive Officer
Mark A. Campbell
President, Transportation
Information Services
Dwight D. Erdbruegger
President, Cass Commercial
Bank
P. Stephen Appelbaum
Executive Vice President
James M. Cavellier
Executive Vice President and
Gary B. Langfitt
President, Expense
and Chief Financial Officer
Chief Information Officer
Management Services
Cass Information Systems 10-K
12444 Powerscourt Drive, Suite 550
Saint Louis, Missouri 63131
314-506-5500
www.cassinfo.com