Cass Information Systems, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the supplied text does not provide a separate fourth-quarter income statement. Cass provides payment and information processing services and banking services through Cass Commercial Bank.
Financial performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $182.5 million | $154.1 million | +18.4% |
| Net income | $34.9 million | $28.6 million | +22.0% |
| Diluted EPS | $2.53 | $2.00 | +26.5% |
| Net interest margin, tax-equivalent | 2.74% | 2.31% | +43 basis points |
| Return on average assets | 1.35% | 1.23% | Increased |
| Return on average equity | 16.53% | 11.29% | Increased |
| Operating cash flow | $51.6 million | $34.5 million | Increased |
- Financial fees rose 33.7% to $43.8 million, reflecting greater invoice dollars processed and higher interest rates. Transportation and facility invoice dollar volumes grew 21.5% and 23.0%, respectively; the filing cites inflation and higher energy prices among the drivers.
- Processing fees increased 2.5% to $76.5 million. Operating expenses rose 16.0% to $139.6 million, led by personnel costs and other operating expenses, including technology investment, wage pressures, and the TouchPoint acquisition.
- Loans increased 12.7% to $1.08 billion. The allowance for credit losses was $13.5 million, or 1.25% of loans. One $1.2 million nonperforming loan was reported at year-end and was paid in full in January 2023; Cass reported no loan charge-offs in 2022.
Financial position, liquidity and capital
- Year-end assets were $2.57 billion, compared with $2.55 billion in 2021. Deposits totaled $1.26 billion and accounts and drafts payable were $1.07 billion.
- Cash and cash equivalents fell to $200.9 million from $514.9 million, primarily as cash funded securities purchases and loan growth. Available-for-sale securities totaled $754.5 million, up 12.0% year over year.
- Operating cash flow was $51.6 million; investing activities used $306.4 million and financing activities used $59.2 million. These flows reflect active portfolio management and changes in customer balances.
- The Company reported no outstanding amounts under its credit lines at year-end. Available facilities included $83.0 million of unsecured federal funds lines, $237.8 million of secured Federal Home Loan Bank lines, and $200.0 million of lines collateralized by securities.
- Common equity Tier 1 capital was 12.80% at year-end, versus 14.11% in 2021; the Company and Bank met applicable capital requirements and the Bank was categorized as well-capitalized.
- Shareholders’ equity declined to $206.3 million from $245.8 million. The main factor was a $59.8 million other comprehensive loss, largely associated with falling market values of securities as interest rates rose. The securities portfolio had $70.6 million of gross unrealized losses; management said it did not intend, and was not likely required, to sell those securities before anticipated recovery.
Material changes, outlook and risks
- Drivers and outlook: Higher interest rates and larger payment volumes lifted financial fees and net interest income. Management said cash, maturing investments, operating cash flow and borrowing lines were expected to support 2023 operations and capital expenditures. Planned 2023 capital expenditures were estimated at $8 million to $10 million, mainly for equipment and software. This is not formal earnings guidance.
- Interest-rate exposure: Cass described itself as generally asset-sensitive. Its year-end static-balance-sheet simulation estimated net interest income would rise 10.6% under an immediate, sustained 200-basis-point increase and fall 1.5% under a 200-basis-point decrease. Actual results may differ as balances and rates change.
- Technology and acquisition: Cass acquired TouchPoint in June 2022 for $4.9 million cash, with potential earn-out consideration valued at $389,000 and settled at that amount during the fourth quarter. Management expected new facility and freight data-entry technology platforms to improve efficiency, with migration planned by the end of 2023.
- Principal risks: Economic weakness, inflation, energy and transportation trends, rate changes, credit quality, liquidity, competition, employee retention, cybersecurity and technology disruption, and extensive banking regulation could affect results. Cass also identified climate and ESG-related risks. Five legacy loan relationships had attributes tied to LIBOR, although the Company said it did not currently originate LIBOR-based loans.
- Credit estimates: The allowance for credit losses depends on forecasts and qualitative judgments. KPMG identified assessment of these qualitative factors as a critical audit matter, while issuing an unqualified opinion on the financial statements and internal control over financial reporting.
- Other: The filing reported no material pending legal proceedings and no subsequent events requiring additional disclosure. Cash dividends were $15.4 million in 2022; share repurchases were $5.3 million. Future dividends and repurchases remain subject to earnings, capital, liquidity, regulatory and other considerations.
Important facts for investors to verify
- Whether stronger fee volumes and elevated interest rates persist, and how deposit costs respond to further rate changes or rate declines.
- Whether the $70.6 million of gross unrealized securities losses recover as expected, and the potential effects of securities sales or further rate movements on equity and liquidity.
- Credit quality and concentration trends in commercial and industrial, franchise restaurant, and faith-based lending, including the performance of loan growth and the allowance for credit losses.
- Progress, costs and realized benefits from TouchPoint and the planned technology platform transition.
- 2023 capital expenditures, liquidity needs, capital ratios, and the effect of dividends and any resumed share repurchases.