What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2023-02-28 compared with 2022-02-28 · 72 added, 51 removed, 154 unchanged (44% of the section changed)

4 unchanged sentences

Economic and Market Conditions Risk

The COVID-19 pandemic creates significant risks and uncertainties for the Company’s business and results of operations.

In March 2020, the World Health Organization (“WHO”) declared COVID-19 as a global pandemic.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and manufacturing, lowered interest rates, and created significant volatility and disruption in financial markets.

In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in major markets in the Bank is located or does business.

In late fiscal 2020, vaccines for combating COVID-19 were approved by health agencies and have been administered throughout the country.

While vaccination efforts are ongoing and a significant amount of previous business and other restrictions have been lifted, the ongoing impact of COVID-19, including any increases in infection rates, new variants, supply chain disruptions, labor force shortages, and renewed governmental actions and business and activity restrictions to combat its spread, cannot be estimated.

Given these and other uncertainties discussed throughout this report, the Company remains subject to heightened risk, and the aggregate impact that COVID-19 could have on the Company's financial condition and operating results is presently unknown.

As a result, demand for the Company’s products and services has been, and could continue to be, significantly impacted.

Demand for payment and information processing services by manufacturing, distribution, and retail enterprises, and loans and other products and services that the Company and the Bank offer and on which success the Company relies to drive growth, is highly dependent upon the business environment in the primary markets in which the Company operates and in the United States as a whole.

Business closures could cause decreased volumes in the Company’s payment and information processing services due to the decline in customers’ business activity.

Furthermore, the pandemic could influence the recognition of credit losses in the Company’s loan and lease portfolios and increase its allowance for credit losses, as both businesses and consumers are negatively impacted by the economic downturn.

In addition, in an effort to boost consumer spending due to the pandemic, the Federal Reserve has taken action to lower the Federal Funds rate, which has adversely affected, and could continue to adversely affect, interest income and therefore, the Company’s results of operations and financial condition.

Also, pandemic related disruptions in labor markets and global supply chains have led to the emergence of high inflation which, if persistent, could increase expense via increased compensation and other costs.

The Company’s business operations may also be disrupted if significant portions of its workforce are unable to work effectively, because of quarantines, illness, government actions, or other restrictions in connection with the pandemic, travel restrictions, technology limitations and/or disruptions, including remote working measures and their attendant cybersecurity risks.

Furthermore, the business operations of the Company and the Bank may be disrupted due to vendors and third-party service providers being unable to work or provide services effectively, because of quarantines, illness, government actions, or other restrictions in connection with the pandemic.

The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and any future actions taken by governmental authorities and other third parties in response to the pandemic.

Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks described in this Item 1A, “Risk Factors” section, including, but not limited to, risks of credit deterioration, interest rate changes, governmental actions, market volatility, security breaches and technology interruptions.

Vaccine mandates could hinder Cass' ability to attract and retain employees.

Vaccine mandates and other governmental requirements related to the ongoing COVID-19 pandemic could have an adverse impact on the Company's business financial condition and results of operations as they could negatively impact the Company's ability to attract and retain employees, increase expenses, and pose operational issues with respect to testing requirements.

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.

Conditions such as inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values, international conflicts, global pandemics, natural disasters, risks related to climate change, 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.

2 unchanged sentences

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.

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 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.

Due in part to the increase in the Federal Funds rate throughout 2022, the Company's net interest margin increased to 2.74% in 2022 from 2.31% in 2021, therefore increasing net interest income.

As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” a decline in market interest rates would be expected to have a negative impact on the Company’s net interest income.

The value of our goodwill and other intangible assets may decline in the future

As of December 31, 2022, the Company had $21.4 million of goodwill and other intangible assets.

A significant decline in the Company's expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of the Company's common stock may necessitate taking charges in the future related to the impairment of goodwill and other intangible assets which could have a material adverse effect on the Company's business, financial condition and results of operations.

In certain circumstances, Cass remits payment of invoices prior to receiving funds from its customers.

6 unchanged sentences

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.

Fluctuations in interest rates affect Cass’ financial statements, as they do for all 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 replacement of LIBOR as a reference rate.

LIBOR and certain other interest rate benchmarks are the subject of recent national, international and other regulatory guidance and proposals for reform.

These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted.

LIBOR in its current form was anticipated to no longer be available after 2021.

On November 30, 2020 the administrator of LIBOR announced it will consult on its intention to cease publication of the one-week and two-month settings immediately following the LIBOR publication on December 31, 2021, and the remaining U.S.

dollar LIBOR settings immediately following the LIBOR publication on June 30, 2023.

While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of market participants convened by the FRB, the Alternative Reference Rates Committee, has selected the SOFR as its recommended alternative to U.S.

dollar LIBOR.

federal banking agencies issued a statement in November 2020 encouraging banks to transition away from U.S.

dollar LIBOR as soon as practicable and to stop entering into new contracts that use U.S.

dollar LIBOR by December 31, 2021.

SOFR or other alternative reference rates may perform differently than LIBOR in response to changing market conditions.

For example, SOFR could experience greater decreases during times of economic stress, which could require the Company to lend at lower rates at times when the Company's borrowing costs are increasing.

While the Company does not currently originate loans tied to LIBOR, certain of the Company's loans and other financial instruments originated and/or purchased in prior periods include attributes that are either directly or indirectly dependent on LIBOR.

The transition from LIBOR could create additional costs and risk.

The United Kingdom’s Financial Conduct Authority and the administrator of LIBOR have announced that the publication of the most commonly used U.S.

dollar London Interbank Offered Rate (“LIBOR”) settings will cease to be published or cease to be representative after June 30, 2023.

The publication of all other LIBOR settings ceased to be published as of December 31, 2021.

The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace U.S.

dollar LIBOR with a benchmark rate based on the Secured Overnight Financing Rate (“SOFR”) for contracts governed by U.S.

law that have no or ineffective fallbacks, and in December 2022, the Federal Reserve Board adopted related implementing rules.

Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates or the value of LIBOR-based securities will not be adversely affected.

As a result, and despite the enactment of the LIBOR Act, for the most commonly used LIBOR settings, the use or selection of a successor rate could expose the Company to risks associated with disputes and litigation with customers and counterparties and other market participants in connection with implementing LIBOR fallback provisions.

While the Company does not currently originate loans tied to LIBOR, the Company has five loan relationships originated and/or purchased in prior periods that include attributes that are tied to LIBOR.

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 could adversely impact the Company's reputation.

23 unchanged sentences

Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under 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.

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 i) disrupt the proper functioning of Cass’ networks and systems and therefore operations and/or those of certain customers;

ii) 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;

iii) 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;

iv) require significant management attention and resources to remedy the damages that result;

or v) 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.

15 unchanged sentences

The Company maintains an ACL, which is a reserve established through a provision for credit losses charged to expense.

The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on loans.

The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be

collected on loans.

Management uses a systematic, documented approach in determining the appropriate level of ACL, which represents management’s estimate of losses in loans and off-balance sheet exposures as of the balance sheet date.

Management estimated the allowance balance using relevant available information from internal and external factors, relating to past events, current conditions and reasonable and supportable forecasts based on economic sources, such as

Gross Domestic Product (“GDP”).

Historical credit loss experience, of both the Company and similar peer banks, provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for lending management experience, asset quality trends, borrower’s ability to pay, collateral, and other environmental factors.

Adjustments to historical loss information are made for asset quality trends, borrower’s ability to pay, collateral, and other environmental factors.

The ACL is measured on a collective pool basis when similar risk characteristics exist.

The determination of the appropriate level of the allowance for credit 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, including the possibility of a recession, affecting borrowers and securities issuers;

rising interest rates;

new information regarding existing loans, credit commitments and securities holdings;

the lingering effects of the COVID-19 pandemic or other global pandemics;

natural disasters and risks related to climate change;

and identification of additional problem loans, ratings down-grades and other factors, both within and outside of the Company’s control, may require an increase in the allowances for credit losses on loans, securities and off-balance sheet credit exposures.

The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change.

66 unchanged sentences

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.

which it is engaged.

Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions.

16 unchanged sentences

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.

Climate change could have a material negative impact on the Company and its clients

The Company's business, as well as the operations and activities of it clients, could be negatively impacted by climate change.

Climate change presents both immediate and long-term risks to Cass and its clients and these risks are expected to increase over time.

Climate changes presents multi-faceted risks, including (i) operational risk from the physical effects of climate events on facilities and other assets as well as those of clients;

(ii) credit risk from borrowers with significant exposure to climate risk;

and (iii) reputational risk from stakeholder concerns about practices related to climate change, carbon footprint and business relationships with clients who operate in carbon-intensive industries.

The Company's business, reputation and ability to attract and retain employees may also be harmed if the response to climate change is perceived to be ineffective or insufficient.

Climate change exposes Cass to physical risk as its effects may lead to more frequent and more extreme weather events, such as prolonged droughts or flooding, tornados, hurricanes, wildfires and extreme seasonal weather;

and longer-term shifts, such as increasing average temperatures, ozone depletion and rising sea levels.

Such events and long-term shifts may damage, destroy or otherwise impact the value or productivity of the Company's properties and other assets;

reduce the availability of insurance;

and/or disrupt operations and other activities through prolonged outages.

Such events and long-term shifts may also have a significant impact on Cass customers, which could amplify credit risk by diminishing borrowers’ repayment capacity or collateral values, and other businesses and counterparties with whom we transact, which could have a broader impact on the economy, supply chains and distribution networks.

Climate change also exposes Cass to transition risks associated with the transition to a less carbon-dependent economy.

Transition risks may result from changes in policies;

laws and regulations;

technologies;

and/or market preferences to address climate change.

Such changes could materially, negatively impact our business, results of operations, financial condition and/or our reputation, in addition to having a similar impact on our clients.

Cass has clients who operate in carbon-intensive industries that are exposed to climate risks, such as those risks related to the transition to a less carbon-

dependent economy, as well as clients who operate in low-carbon industries that may be subject to risks associated with new technologies.

Federal and state banking regulators and supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their clients, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities.

Given that climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment, the Company faces regulatory risk of increasing focus on the resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios.

Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.

The Company is subject to Environmental, Social and Governance (“ESG”) risks that could adversely affect its reputation and the market price of its securities.

The Company is subject to a variety of risks arising from ESG matters.

ESG matters include climate risk, hiring practices, the diversity of the work force, and racial and social justice issues involving the Company’s personnel, customers and third parties with whom it otherwise does business.

Risks arising from ESG matters may adversely affect, among other things, reputation and the market price of the Company’s securities.

Further, the Company may be exposed to negative publicity based on the identity and activities of those to whom it lends and with which it otherwise does business and the public’s view of the approach and performance of its customers and business partners with respect to ESG matters.

Any such negative publicity could arise from adverse news coverage in traditional media and could also spread through the use of social media platforms.

The Company’s relationships and reputation with its existing and prospective customers and third parties with which it does business could be damaged if it were to become the subject of any such negative publicity.

This, in turn, could have an adverse effect on the Company’s ability to attract and retain customers and employees and could have a negative impact on the market price for securities.

Investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations to address ESG matters when making investment and operational decisions.

Certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to the risks posed by climate change and other ESG matters into their investment theses.

These shifts in investing priorities may result in adverse effects on the market price of the Company’s securities to the extent that investors determine that the Company has not made sufficient progress on ESG matters.

UNRESOLVED STAFF COMMENTS

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors