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Item 3. Legal Proceedings

2022-02-28 compared with 2021-02-26 · 0 added, 598 removed, 5 unchanged (99% of the section changed)

4 unchanged sentences

Not applicable.

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 17, 2021, there were approximately 3,716 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 2020, 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 162,901 shares at an aggregate cost of $6,825,000 during the year ended December 31, 2020 and 154,593 shares at an aggregate cost of $7,779,000 during the year ended December 31, 2019.

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, business and market conditions, 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, 2020, the Company repurchased a total of 34,122 shares of its common stock pursuant to its treasury stock buyback program, as follows:

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 1

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

October 1, 2020 –

October 31, 2020

November 1, 2020 –

November 30, 2020

December 1, 2020 –

December 31, 2020

All repurchases made during the quarter ended December 31, 2020 were made pursuant to the treasury stock buyback program, which was authorized by the Board of Directors on October 17, 2011 and announced by the Company on October 20, 2011.

The program, as modified by the Board of Directors on October 20, 2014, provides that the Company may repurchase up to an aggregate of 500,000 shares of common stock and has no expiration date.

The program is periodically modified by the Board of Directors and was most recently modified on October 20, 2020 to restore the aggregate number of shares available for repurchase to 500,000.

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”), the index of Nasdaq computer and data processing stocks, and the index of Nasdaq bank stocks.

The graph assumes $100 was invested on December 31, 2015, with dividends reinvested.

Returns are based on period end prices.

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 credit/loan losses

Net interest income after provision

Operating expense

Income before income tax expense

Income tax expense

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’

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 credit/loan losses to loans at year-end

Nonperforming assets to loans and foreclosed assets

Net loan (recoveries) charge-offs to average loans outstanding

Includes one-time, non-cash Tax Cuts and Jobs Act (“TCJA”) charge of $1,824,000.

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, 2020, 2019 and 2018.

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/A filed with the SEC on March 6, 2020 and incorporated herein by reference for a discussion and analysis of the more significant factors that affected periods prior to 2019.

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 solutions include a B2B payment platform for clients that require an agile

fintech partner.

Additionally, the Company offers an on-line platform to provide generosity services for faith-based and non-profit organizations.

The Company’s bank subsidiary, the “Bank,”

supports the Company’s payment operations.

The Bank also provides banking services to its target markets, which include privately-owned businesses and faith-based ministries in the St.

Louis metropolitan area as well as other selected cities in the United States.

The specific payment and information processing services provided to each customer are developed individually to meet each customer’s requirements, which can vary greatly.

In addition, the degree of automation such as electronic data interchange, imaging, work flow, and web-based solutions varies greatly among customers and industries.

These factors combine so that pricing varies greatly among the customer base.

In general, however, Cass is compensated for its processing services through service fees 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, advances to payees, and loans generated by the Bank.

The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings.

The Bank also assesses fees on other services such as cash management services.

Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions such as freight, energy, telecommunication and environmental payment and audit.

The benefits that can be achieved by outsourcing transaction processing, and the management information generated by Cass’

systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs, and consolidation of telecommunication providers.

Economic factors that impact the Company include the general level of economic activity that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff, and the growth and quality of the loan portfolio.

The general level of interest rates also has a significant effect on the revenue of the Company.

As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,”

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 2020, total fee revenue and other income decreased $9,628,000, or 9%, net interest income after provision for credit losses decreased $2,651,000, or 6%, total operating expenses decreased $5,154,000, or 4%, and net income decreased $5,228,000, or 17%.

This performance in 2020 was negatively impacted by the COVID-19 global pandemic.

For payment processing services, business closures have led to a decrease in the number of transactions and dollars processed due to the decline in customers’

business activity, which resulted in a negative effect on total fee revenue and other income.

Additionally, the Federal Reserve’s actions to lower the Federal Funds rate adversely impacted net interest income.

Total operating expenses decreased as the lower number of transactions processed had a corresponding reduction in personnel expense and COVID-19 limited employee travel-related expenses.

The asset quality of the Company’s loans and investments as of December 31, 2020 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 Pronouncements

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

The standard is effective for fiscal periods beginning after December 15, 2019.

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020 and included provisions that temporarily delayed the required implementation date of ASU 2016-13 to the earlier of the end of the national pandemic or December 31, 2020.

The Consolidated Appropriations Act (“CAA”) was signed into law on December 27, 2020 and extended the deferral of required implementation of ASU 2016-13 to the earlier of the first day of a company’s fiscal year that begins after the date the COVID-19 national emergency comes to an end or January 1, 2022.

The Company elected to defer the adoption of ASU 2016-13 until December 31, 2020 with an effective date of January 1, 2020.

The ASU required measurement and recognition of expected credit losses for financial instruments held, as applicable, which include allowances for credit losses expected over the life of the portfolio, rather than incurred losses, which include allowances for current probable and estimable losses within the portfolio.

Under this standard, the Company is required to hold an allowance equal to the expected life-of-loan losses on the loan portfolio.

It also applies to off-balance sheet credit exposures

such as loan commitments, standby letters of credit and other similar instruments.

In addition, ASU 2016-13 made changes to the accounting for available-for-sale debt securities.

The Company adopted ASU 2016-13 using a modified retrospective approach.

Results for annual reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Results for quarterly reporting periods beginning after December 31, 2020 in the Company’s Form 10-Q will be presented under ASU 2016-13 while prior quarterly period amounts continue to be reported in accordance with previously applicable GAAP.

The Company recognized increases of $723,000 in the allowance for credit losses and $402,000 in the reserve for unfunded commitments, with a corresponding reduction to retained earnings, net of tax, of $856,000.

No credit loss allowance was required upon adoption for the investment securities portfolio.

The following table illustrates the impact of the adoption of ASU 2016-13:

(In thousands)

December 31, 2019

Impact of ASU 2016-13 Adoption

As Reported Under ASU 2016-13

Allowance for credit/loan losses on loans

Deferred tax asset

Reserve for unfunded commitments

Shareholders’

Retained earnings

Critical Accounting Policies

The Company has prepared the consolidated financial statements in this report in accordance with the FASB Accounting Standards Codification (“ASC”).

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 Credit Losses.

The Company performs periodic and systematic detailed reviews of its loan portfolio to determine management’s estimate of the lifetime expected credit losses.

Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results.

These policies affect both segments of the Company.

The impact and associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments”

section of this report.

See Item 8, “Financial Statements and Supplementary Data—Note 1”

for additional information on the adoption of ASU 2016-13.

Impact of COVID-19 on the Company’s Business

During the year ended December 31, 2020, the effects of COVID-19 and related actions to attempt to control its spread significantly impacted the global economy and adversely affected the Company’s operating results in both the Information Services and Banking Services segments.

With the spread of COVID-19 to the U.S.

in the first quarter of 2020, many state and local governments recommended or mandated limitations on crowd size, closures of businesses and shelter-in-place orders in order to slow the transmission.

The extent and nature of government actions varied during fiscal year 2020 and in early fiscal year 2021 based upon the then-current extent and severity of the COVID-19 pandemic within the respective localities.

Severe business disruptions, resulting constrictions in the manufacturing sector for most of the year, decreased oil demand and prices and general economic uncertainty, significantly and adversely impacted the Company’s customers’

business operations and had a corresponding negative affect on the Company’s revenue generation in each sector of the Company’s Information Services segment.

The Federal Reserve also took action to lower the Federal Funds rate in connection with COVID-19 relief, adversely affecting the Company’s net interest income and operating results for fiscal 2020 tied to Banking Services.

The Federal Reserve has indicated that it will retain the current low level interest rates until the economy has stabilized.

Bank regulatory agencies and various governmental authorities are urging financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19.

Accordingly, and in coordination with its primary regulators, the Company deferred borrower principal payments on loans during the second quarter of 2020, on an as needed basis, for periods of up to six months.

There were no borrowers remaining on deferred terms at the end of the third quarter of 2020.

In response to COVID-19, the CARES Act was adopted on March 27, 2020.

The CARES Act provides for an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief.

Among other things, the CARES Act established the Paycheck Protection Program (“PPP”), which allows entities to apply for low-interest private loans to fund payroll and other costs which, subject to certain conditions and qualifications, are partially or fully forgivable.

In support of the CARES Act, the Bank had processed nearly 350 applications for PPP loans of approximately $170,000,000 during the year ended December 31, 2020 to provide much-needed cash to small business and self-employed taxpayers during the COVID-19 crisis.

The loans were primarily made to existing bank customers and are 100% guaranteed by the Small Business Administration and helped offset the near-zero interest rate environment.

Cass remains committed to creating a safe and healthy environment for employees while offering assurance that it remains a financially strong service provider possessing the resources necessary to weather this pandemic in support of its valued customers.

In late fiscal 2020, vaccines effective in combatting COVID-19 were approved by health agencies and began to be administered.

However, initial quantities of vaccines are limited and full administration of the COVID-19 vaccines is unlikely to occur in most jurisdictions until mid- to late-2021.

The timeline and outlook of economic recovery from COVID-19 is unknown at this time, and prolonged, extensive business interruptions would continue to adversely affect the Company’s operations and financial results.

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.

For further discussion on COVID-19 and its impact on the Company, refer to Item 8, “Financial Statements and Supplementary Data—Note 1.

Summary of Results

For the Years Ended December 31,

(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 credit/loan losses

Total net revenue

Average earning assets

Net interest margin (1)

Diluted earnings per share

Return on average assets

Return on average equity

Presented on a tax-equivalent basis.

The results of 2020 compared to 2019 include the following significant items:

Overall, the Company’s revenue and profitability declined, primarily as a result of the COVID-19 global pandemic.

For payment processing services, business closures have led to a decrease in the number of transactions and dollars processed due to the decline in customers’

business activity.

COVID-19, along with a constriction in manufacturing activity for a portion of the year, had a negative effect on payment processing fees, processing volume, and invoice dollars processed and paid which decreased 10%, 5%, and 7%, respectively.

Average earning assets increased 14% and net interest income after provision for credit losses decreased 6% year over year.

The Federal Reserve’s actions to lower the Federal Funds rate adversely impacted net interest income after provision

for credit losses and the net interest rate margin.

The increase in average earning assets, driven by government stimulus programs, partially offset the impact of the near-zero interest rate environment on the Company’s net interest margin.

There was a provision for credit losses recorded of $810,000 in 2020 compared to $250,000 in 2019.

There were gains from the sale of securities of $1,075,000 and $19,000 in 2020 and 2019, respectively.

Operating expenses decreased $5,154,000 or 4%, as the decrease in the number of transactions processed had a corresponding decrease in personnel expense.

In addition, COVID-19 limited employee travel-related expenses.

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

Includes energy, telecom and environmental

Fee revenue and other income in 2020 compared to 2019 include the following significant pre-tax components:

In the transportation sector, invoice transaction and dollar volume decreased 8% and 6%, respectively, as the global pandemic reduced customers’

business activities.

The manufacturing industry, which represents an important component of the transportation customer base, was constricted for a portion of the year before slowly opening back up towards the latter half of 2020.

Expense management transaction volume decreased 1% and dollar volume decreased 10% as governmental restrictions in the restaurant, retail, and hospitality sectors curtailed business hours and consumers continued to be cautious about travel and entertainment, both creating lower utility usage.

There were gains from the sale of securities in 2020 and 2019 of $1,075,000 and $19,000, respectively.

Net Interest Income

Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest expense on deposits and other interest-bearing liabilities.

Net interest income is a significant source of the Company’s revenues.

The following table summarizes the changes in tax-equivalent net interest income and related factors:

(In thousands)

Average earning assets

Net interest income (1)

Net interest margin (1)

Yield on earning assets (1)

Rate on interest bearing liabilities

Presented on a tax-equivalent basis using a tax rate of 21% in 2020, 2019 and 2018.

The decrease in net interest income in 2020 compared to 2019 is primarily due to the Federal Reserve’s actions to lower the Federal Funds rate to near-zero levels, which adversely impacted net interest income and the net interest rate margin.

The yield on interest-earning assets declined 75 basis points from 3.71% in 2019 to 2.96% in 2020 while the cost of interest-bearing liabilities declined 83 basis points from 1.32% in 2019 to 0.49% in 2020.

However, the Company also had average balances of demand deposits and accounts and drafts payable of $356,400,000 and $803,600,000 in 2020, respectively that do not pay any interest.

As such, when interest rates decline, interest income on assets funded by these balances decline but the cost paid on these balances remains at zero.

Total average loans increased $146,208,000, or 19%, to $906,361,000 largely due to the funding of PPP loans in addition to organic loan growth.

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.

Total average investment in securities and certificates of deposit decreased $59,448,000, or 14%.

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 increased $94,532,000, or 82%.

Average federal funds sold and other short-term investments increased $20,606,000, or 12%.

These balances increased considerably in 2020 as governmental stimulus activity boosted deposit balances which contributed to the rise in federal funds sold and other short-term investments.

Total average interest-bearing deposits increased $85,567,000, or 22%, largely due to the impact of government stimulus and resulting cash deposits.

Average non-interest bearing demand deposits increased $80,132,000, or 29%, also largely due to the impact of government stimulus and resulting cash deposits.

Distribution of Assets, Liabilities and Shareholders'

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:

(In thousands)

Average Balance

Interest Income/ Expense

Average Balance

Interest Income/ Expense

Earning assets

Loans (2), (3) :

Tax-exempt (4)

Securities (5) :

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

Allowance for credit/loan losses

Liabilities and Shareholders’

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’

Total liabilities and share-holders’

Net interest income (4)

Net interest margin (4)

Interest spread

Balances shown are daily averages.

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.

Interest income on loans includes net loan fees of $3,608,000, $650,000, and $393,000 for 2020, 2019 and 2018, respectively.

2020 loan fees include $3,057,000 of PPP loan fees.

Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% in 2020, 2019 and 2018.

The tax-equivalent adjustment was approximately $1,889,000, $2,085,000, and $2,422,000 for 2020, 2019, and 2018, respectively.

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

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.

2020 Over 2019

2019 Over 2018

(In thousands)

Increase (decrease) in interest income:

Loans (2), (3) :

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

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.

Average balances include nonaccrual loans.

Interest income includes net loan fees.

Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% in 2020, 2019 and 2018.

Loan Portfolio

Interest earned on the loan portfolio is a primary source of income for the Company.

The loan portfolio was $891,676,000 representing 40% of the Company's total assets as of December 31, 2020 and generated $37,665,000 in revenue during the year then ended.

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, 2020.

Loans by Type

(In thousands)

Commercial and industrial

Real estate (commercial and faith-based):

Industrial Revenue Bond

Loans by Maturity as of December 31, 2020

Through 5 Years

(In thousands)

Commercial and industrial

Loans have been classified as having "floating"

interest rates if the rate specified in the loan varies with the prime commercial rate of interest.

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.

Loans increased $119,038,000, or 15%, to $891,676,000 during the year-ended December 31, 2020 compared to December 31, 2019, largely due to the funding of PPP loans in addition to organic loan growth.

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 Credit Losses on Loans and Allowance for Unfunded Commitments

The Company recorded a provision for credit/loan losses and off-balance sheet credit exposures of $810,000 in 2020 and $250,000 in 2019.

There was no provision for loan losses in 2018.

The amount of the provisions for credit losses was derived from the Company’s quarterly Current Expected Credit Loss (“CECL”) model.

The amount of the provision will fluctuate as determined by these quarterly analyses.

The Company had net loan recoveries of $20,000 and $81,000 in 2020 and 2019, respectively.

The ACL was $11,944,000 at December 31, 2020 compared to an allowance for loan losses (“ALLL”) of $10,556,000 at December 31, 2019.

The ACL represented 1.34% of outstanding loans at year-end 2020 and the ALLL represented 1.37% of outstanding loans at year-end 2019.

Excluding PPP loans, the ACL represented 1.53% of total loans at December 31, 2020.

The allowance for unfunded commitments was $567,000 at December 31, 2020 and there was no allowance for unfunded commitments at December 31, 2019.

There were no nonperforming loans outstanding at December 31, 2020, 2019 or 2018.

The ACL has been established and is maintained to estimate the lifetime credit losses inherent in the loan portfolio.

An ongoing assessment is performed to determine if the balance is adequate.

Charges or credits are made to expense based on changes in the economic forecast, qualitative risk factors, loan volume, and individual loans.

For loans that are individually evaluated, the Company uses two impairment measurement methods:

1) the present value of expected future cash flows and 2) collateral value.

The Company also utilizes ratio analysis to evaluate the overall reasonableness of the ACL compared to its peers and required levels of regulatory capital.

Federal and state regulatory agencies review the Company’s methodology for maintaining the ACL.

These agencies may require the Company to adjust the ACL based on their judgments and interpretations about information available to them at the time of their examinations.

The following schedule summarizes activity in the ACL and the allocation of the allowance to the Company’s loan categories.

Summary of Credit Loss Experience

(In thousands)

Allowance at beginning of year

Loans charged-off:

Commercial and industrial

Real estate (commercial and faith-based):

Total loans charged-off

Recoveries of loans previously charged-off:

Commercial and industrial

Real estate (commercial and faith-based):

Total recoveries of loans previously charged-off

Net loans recovered

Provision charged (credited) to expense

Allowance at end of year

Cumulative effect of accounting change (ASU 2016-13)

Allowance at beginning of next year

Allowance for unfunded commitments at beginning of year

Provision charged to expense

Allowance for unfunded commitments at end of year

Cumulative effect of accounting change (ASU 2016-13)

Allowance for unfunded commitments at beginning of next year

Loans outstanding:

Ratio of allowance for credit/loan losses to loans outstanding:

Ratio of net recoveries to average loans outstanding

Allocation of allowance for credit/loan losses (1) :

Commercial and industrial

Real estate (commercial and faith-based):

Industrial Revenue Bond

Percentage of categories to total loans:

Commercial and industrial

Real estate (commercial and faith-based):

Industrial Revenue Bond

Although specific allocations exist, the entire allowance is available to absorb losses in any particular loan category.

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, 2020 and 2019, respectively.

There were no nonaccrual loans or foreclosed assets at December 31, 2020 or December 31, 2019.

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:

Contractually past due 90 days or more and still accruing

Real estate –

Nonaccrual (1)

Contractually past due 90 days or more and still accruing

Total nonperforming loans

Total foreclosed assets

Total nonperforming assets

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 2020 compared to 2019 include the following significant pre-tax components:

Personnel expense decreased $3,021,000, or 3%, to $88,062,000 as COVID-19 caused a decrease in invoice processing volumes and a corresponding decrease in personnel expense.

Promotional expense decreased $1,654,000, or 43%, as employee travel-related expenses were limited throughout the year.

Income Tax Expense

Income tax expense in 2020 totaled $5,165,000 compared to $7,062,000 in 2019.

When measured as a percent of pre-tax income, the Company’s effective tax rate was 17% in 2020 and 19% in 2019.

The decrease in the effective tax rate in 2020 compared to 2019 was primarily due to tax-exempt income from municipal bonds being a larger percentage of total pretax income, in addition to the eligibility of additional tax credits.

Investment Portfolio

Investment portfolio changes from December 31, 2019 to December 31, 2020:

State and political subdivision securities decreased $18,473,000, or 6%, to $305,974,000.

government agency securities decreased $45,966,000 to $51,752,000.

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 purchased securities totaling $20,043,000.

There was no single issuer of securities in the investment portfolio at December 31, 2020 for which the aggregate amortized cost exceeded 10% of total shareholders'

Investments by Type

(In thousands)

State and political subdivisions

government agencies

Certificates of deposit

Total investments

Investment Securities by Maturity

(At December 31, 2020)

(In thousands)

State and political subdivisions

government agencies

Total investments

Weighted average yield (1)

Yields are presented on a tax-equivalent basis assuming a tax rate of 21% for 2020, 2019 and 2018.

Deposits and Accounts and Drafts Payable

Noninterest-bearing demand deposits increased 41% from December 31, 2019 to $493,504,000 at December 31, 2020.

The average balances of these deposits increased 29% in 2020 to $356,433,000.

The increase in deposits during 2020 is primarily attributed to government related stimulus activity and the resulting increase in cash deposits.

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 increased $151,307,000, or 37%, to $557,352,000 at December 31, 2020.

The average balances of these deposits increased 22% to $480,410,000 in 2020 from $394,843,000 in 2019.

The increase in deposits during 2020 is primarily attributed to government related stimulus activity and the resulting increase in cash deposits.

Accounts and drafts payable generated by the Company in its payment processing operations increased $151,091,000, or 22%, to $835,386,000 at December 31, 2020.

The average balance of these funds increased $18,403,000, or 2%, to $803,605,000 in 2020.

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'

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, 2020

(In thousands)

Three months or less

Three to six months

Six to twelve months

Over twelve months

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 $670,528,000 at December 31, 2020, an increase of $466,574,000, or 229%, from December 31, 2019.

The increase during 2020 is primarily attributed to government related stimulus activity and the resulting increase in cash deposits.

At December 31, 2020, these assets represented 30% of 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 $357,726,000 at December 31, 2020, a decrease of $64,939,000, or 15%, from December 31, 2019.

These assets represented 16% of total assets at December 31, 2020 and were primarily state and political subdivision and treasury securities.

Of the total portfolio, 14% mature in one year or less, 28% mature after one year through five years and 58% mature after five years.

As of December 31, 2020, 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, 2020, the Bank had secured lines of credit with the Federal Home Loan Bank (“FHLB”) of $191,992,000 collateralized by commercial mortgage loans.

At December 31, 2020, the Company had lines of credit from UMB Bank of $75,000,000 and First Tennessee Bank of $75,000,000 collateralized by state and political subdivision securities.

Under the lines of credit discussed above, there were no amounts outstanding at December 31, 2020 and $18,000,000 outstanding at December 31, 2019.

The amount outstanding at the end of the 2019 was borrowed on December 31, 2019 and repaid on January 2, 2020.

In addition to the lines of credit discussed above, as of April 21, 2020 the Bank was approved for the Federal Reserve’s Paycheck Protection Program Lending Facility.

The Bank can receive non-recourse loans with the previously mentioned PPP loans pledged as collateral.

The Bank can borrow an amount up to 100% of the amount of the PPP loans, which was $109,704,000 as of December 31, 2020.

There was no amount outstanding at December 31, 2020 for this line of credit.

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 2020, 2019 and 2018 were $47,781,000, $42,126,000, and $48,335,000, 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 2021.

The Company anticipates the annual capital expenditures for 2021 should range from $5 million to $7 million.

Capital expenditures in 2021 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 expenses.

During 2020, 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.

During fiscal 2020, the actions taken by state and local governments to reduce the spread of the COVID-19 pandemic impacted the Company’s financial condition.

For a discussion of trends and impacts to liquidity relating to COVID-19, refer to Note 1 “Basis of Presentation.”

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, 2020 as shown in Item 8, Note 2 of this report.

In 2020, cash dividends paid were $1.08 per share for a total of $15,599,000, an increase of $365,000, or 2%, compared to $1.05 per share for a total of $15,234,000 in 2019.

The increase is attributable to the per-share amount paid.

Shareholders’

equity was $261,160,000, or 12% of total assets, at December 31, 2020, an increase of $16,970,000 over the balance at December 31, 2019.

This increase resulted primarily from net income of $25,176,000 and a decrease in other comprehensive loss of $13,905,000.

This increase was partially offset by cash dividends of $15,599,000 and the repurchase of treasury shares of $6,825,000.

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, 2020, unappropriated retained earnings of $48,680,000 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 162,901 shares at an aggregate cost of $6,825,000 during the year ended December 31, 2020 and 154,593 shares at an aggregate cost of $7,799,000 during the year ended December 31, 2019.

As of December 31, 2020, 465,878 shares remained available for repurchase under the program.

In October 2020, 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, business and market conditions, 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.

Commitments, 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.

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, 2020, an allowance for unfunded commitments of $567,000 had been recorded.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Provision and Allowance for Credit Losses and Unfunded Commitments”

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, 2020, the balance of loan commitments, standby and commercial letters of credit were $192,916,000, $10,609,000 and $955,000, 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.

See Note 14 –

Disclosures about Fair Value of Financial Instruments for more information.

The following table summarizes contractual cash obligations of the Company related to time deposits at December 31, 2020:

Amount of Commitment Expiration per Period

(In thousands)

Time deposits

During 2020, the Company made no contribution 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 2020, these assumptions were as follows:

Weighted average discount rate

Rate of increase in compensation levels

Expected long-term rate of return on assets

6.00% graded down to 3.25% over the first seven years of service.

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 3. Legal Proceedings