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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

Commission File No. 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

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbols

Name of each exchange on which registered

Common stock, par value $.50

CASS

The Nasdaq Global Select Market

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, smaller reporting company, or an emerging growth company. See the 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 number of shares outstanding of the registrant's only class of common stock as of October 26, 2020: Common stock, par value $.50 per share – 14,422,133 shares outstanding.

-1-


TABLE OF CONTENTS

PART I – Financial Information

Item 1.FINANCIAL STATEMENTS

Consolidated Balance Sheets
September 30, 2020 (unaudited) and December 31, 2019

3

Consolidated Statements of Income
Three and nine months ended September 30, 2020 and 2019 (unaudited)

4

Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2020 and 2019 (unaudited)

5

Consolidated Statements of Cash Flows
Nine months ended September 30, 2020 and 2019 (unaudited)

6

Consolidated Statements of Shareholders’ Equity
Three and nine months ended September 30, 2020 and 2019 (unaudited)

7

Notes to Consolidated Financial Statements (unaudited)

8

Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

20

Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

31

Item 4.CONTROLS AND PROCEDURES

31

PART II – Other Information – Items 1. – 6.

31

SIGNATURES

34

Forward-looking Statements - Factors That May Affect Future Results

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 Part I, Item 1A, “Risk Factors” of the Company’s 2019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), which may be updated from time to time in our future filings with the SEC. 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.

-2-


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands except Share and Per Share Data)

 

 

September 30,

2020

(Unaudited)

 

December 31,

2019

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

15,950

 

$

18,076

Interest-bearing deposits in other financial institutions

 

 

208,783

 

 

172,422

Federal funds sold and other short-term investments

 

 

214,718

 

 

13,456

Cash and cash equivalents

 

 

439,451

 

 

203,954

Securities available-for-sale, at fair value

 

 

365,165

 

 

422,665

 

 

 

 

 

 

 

Loans

 

 

944,557

 

 

772,638

Less: Allowance for loan losses

 

 

11,298

 

 

10,556

Loans, net

 

 

933,259

 

 

762,082

Payments in excess of funding

 

 

161,392

 

 

206,158

Premises and equipment, net

 

 

18,890

 

 

20,527

Investment in bank-owned life insurance

 

 

17,942

 

 

17,599

Goodwill

 

 

14,262

 

 

14,262

Other intangible assets, net

 

 

3,637

 

 

4,281

Other assets

 

 

46,465

 

 

112,715

Total assets

 

$

2,000,463

 

$

1,764,243

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

374,382

 

$

351,091

Interest-bearing

 

 

536,803

 

 

406,045

Total deposits

 

 

911,185

 

 

757,136

Accounts and drafts payable

 

 

771,607

 

 

684,295

Short-term borrowings

 

 

 

 

18,000

Other liabilities

 

 

66,180

 

 

60,622

Total liabilities

 

 

1,748,972

 

 

1,520,053

 

 

 

 

 

 

 

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 and 15,505,772 shares issued at September 30, 2020 and December 31, 2019

 

 

7,753

 

 

7,753

Additional paid-in capital

 

 

205,053

 

 

205,397

Retained earnings

 

 

97,402

 

 

90,341

Common shares in treasury, at cost (1,083,639 shares at September 30, 2020 and 991,406 shares at December 31, 2019)

 

 

(49,410)

 

 

(45,381)

Accumulated other comprehensive loss

 

 

(9,307)

 

 

(13,920)

Total shareholders’ equity

 

 

251,491

 

 

244,190

Total liabilities and shareholders’ equity

 

$

2,000,463

 

$

1,764,243

See accompanying notes to unaudited consolidated financial statements.

-3-


CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in Thousands except Per Share Data)

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

2020

 

2019

 

2020

 

2019

Fee Revenue and Other Income:

 

 

 

 

 

 

 

 

 

 

 

 

Information services payment and processing revenue

 

$

24,376

 

$

27,741

 

$

72,540

 

$

81,050

Bank service fees

 

 

441

 

 

307

 

 

1,249

 

 

984

Gains on sales of securities

 

 

 

 

 

 

1,069

 

 

19

Other

 

 

115

 

 

214

 

 

343

 

 

594

Total fee revenue and other income

 

 

24,932

 

 

28,262

 

 

75,201

 

 

82,647

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

 

9,067

 

 

9,548

 

 

27,366

 

 

27,564

Interest and dividends on securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

373

 

 

612

 

 

1,406

 

 

1,893

Exempt from federal income taxes

 

 

1,753

 

 

1,925

 

 

5,357

 

 

5,956

Interest on federal funds sold and other short-term investments

 

 

86

 

 

1,581

 

 

1,130

 

 

4,477

Total interest income

 

 

11,279

 

 

13,666

 

 

35,259

 

 

39,890

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

465

 

 

1,392

 

 

1,909

 

 

3,987

Interest on short-term borrowings

 

 

 

 

 

 

2

 

 

Total interest expense

 

 

465

 

 

1,392

 

 

1,911

 

 

3,987

Net interest income

 

 

10,814

 

 

12,274

 

 

33,348

 

 

35,903

Provision for loan losses

 

 

 

 

 

 

725

 

 

250

Net interest income after provision for loan losses

 

 

10,814

 

 

12,274

 

 

32,623

 

 

35,653

Total net revenue

 

 

35,746

 

 

40,536

 

 

107,824

 

 

118,300

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Personnel

 

 

22,521

 

 

23,514

 

 

65,839

 

 

68,594

Occupancy

 

 

930

 

 

973

 

 

2,809

 

 

2,930

Equipment

 

 

1,648

 

 

1,554

 

 

4,900

 

 

4,575

Amortization of intangible assets

 

 

215

 

 

150

 

 

644

 

 

359

Other operating expense

 

 

3,366

 

 

4,372

 

 

10,774

 

 

12,538

Total operating expense

 

 

28,680

 

 

30,563

 

 

84,966

 

 

88,996

Income before income tax expense

 

 

7,066

 

 

9,973

 

 

22,858

 

 

29,304

Income tax expense

 

 

1,285

 

 

1,787

 

 

4,093

 

 

5,271

Net income

 

$

5,781

 

$

8,186

 

$

18,765

 

$

24,033

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.40

 

$

.57

 

$

1.31

 

$

1.66

Diluted earnings per share

 

 

.40

 

 

.56

 

 

1.29

 

 

1.64

See accompanying notes to unaudited consolidated financial statements.

-4-


CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in Thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2020

2019

2020

2019

Comprehensive income:

Net income

$

5,781

$

8,186

$

18,765

$

24,033

Other comprehensive income:

 

 

 

Net unrealized gain on securities available-for-sale

 

224

 

1,571

 

7,209

 

13,317

Tax effect

 

(53)

 

(374)

 

(1,716)

 

(3,170)

Reclassification adjustments for gains included in net income

 

 

 

(1,069)

 

(19)

Tax effect

 

 

 

254

 

5

Foreign currency translation adjustments

 

63

 

(78)

 

(65)

 

(74)

Total comprehensive income

$

6,015

$

9,305

$

23,378

$

34,092

See accompanying notes to unaudited consolidated financial statements.

-5-


CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in Thousands)

 

 

Nine Months Ended

September 30,

 

 

2020

 

2019

Cash Flows From Operating Activities:

 

 

 

 

 

 

Net income

 

$

18,765

 

$

24,033

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

8,391

 

 

8,103

Gains on sales of securities

 

 

(1,069)

 

 

(19)

Stock-based compensation expense

 

 

2,277

 

 

2,286

Provision for loan losses

 

 

725

 

 

250

Decrease (increase) in income tax liability

 

 

527

 

 

(1,384)

Increase in pension liability

 

 

3,315

 

 

3,888

Decrease (increase) in accounts receivable

 

 

1,339

 

 

(399)

Other operating activities, net

 

 

5,791

 

 

3,016

Net cash provided by operating activities

 

 

40,061

 

 

39,774

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

Proceeds from sales of securities available-for-sale

 

 

19,629

 

 

4,648

Proceeds from maturities of securities available-for-sale

 

 

43,605

 

 

18,001

Purchase of securities available-for-sale

 

 

(2,931)

 

 

Net increase in loans

 

 

(171,902)

 

 

(45,763)

Decrease (increase) in payments in excess of funding

 

 

44,766

 

 

(47,448)

Purchases of premises and equipment, net

 

 

(1,705)

 

 

(1,877)

Acquisition of Gateway Giving, LLC

 

 

 

 

(3,000)

Net cash used in investing activities

 

 

(68,538)

 

 

(75,439)

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

Net increase (decrease) in noninterest-bearing demand deposits

 

 

23,290

 

 

(2,563)

Net increase (decrease) in interest-bearing demand and savings deposits

 

 

136,639

 

 

(10,485)

Net (decrease) increase in time deposits

 

 

(5,881)

 

 

2,355

Net increase in accounts and drafts payable

 

 

146,280

 

 

57,772

Net decrease in short-term borrowings

 

 

(18,000)

 

 

Cash dividends paid

 

 

(11,704)

 

 

(11,317)

Purchase of common shares for treasury

 

 

(5,508)

 

 

(7,799)

Other financing activities, net

 

 

(1,142)

 

 

(493)

Net cash provided by financing activities

 

 

263,974

 

 

27,470

Net increase (decrease) in cash and cash equivalents

 

 

235,497

 

 

(8,195)

Cash and cash equivalents at beginning of period

 

 

203,954

 

 

230,933

Cash and cash equivalents at end of period

 

$

439,451

 

$

222,738

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

Cash paid for interest

 

$

1,889

 

$

3,831

Cash paid for income taxes

 

 

3,567

 

 

6,648

See accompanying notes to unaudited consolidated financial statements.

-6-


CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

(Dollars in Thousands except Per Share Data)

Common

Stock

Additional

Paid-in

Capital

Retained

Earnings

Treasury

Stock

Accumulated

Other

Comprehensive

(Loss) Income

Total

Balance, June 30, 2019

$

7,753

$

205,463

$

83,470

$

(46,333)

$

(9,932)

$

240,421

 

Net income

 

 

 

8,186

 

 

 

8,186

Cash dividends ($.26 per share)

 

 

 

(3,769)

 

 

 

(3,769)

Issuance of 795 common shares pursuant to stock-based compensation plan, net

 

 

(5)

 

 

48

 

 

43

Exercise of SARs

 

 

(552)

 

 

300

 

 

(252)

Stock-based compensation expense

 

 

869

 

 

 

 

869

Other comprehensive income

 

 

 

 

 

1,119

 

1,119

Balance, September 30, 2019

$

7,753

$

205,775

$

87,887

$

(45,985)

$

(8,813)

$

246,617

 

Balance, June 30, 2020

$

7,753

$

204,258

$

95,514

$

(49,457)

$

(9,541)

$

248,527

 

Net income

 

 

 

5,781

 

 

 

5,781

Cash dividends ($.27 per share)

 

 

 

(3,893)

 

 

 

(3,893)

Issuance of 1,165 common shares pursuant to stock-based compensation plan, net

 

 

(4)

 

 

47

 

 

43

Stock-based compensation expense

 

 

799

 

 

 

 

799

Other comprehensive income

 

 

 

 

 

234

 

234

Balance, September 30, 2020

$

7,753

$

205,053

$

97,402

$

(49,410)

$

(9,307)

$

251,491

Common

Stock

Additional

Paid-in

Capital

Retained

Earnings

Treasury

Stock

Accumulated

Other

Comprehensive

(Loss) Income

Total

Balance, December 31, 2018

$

7,753

$

205,770

$

75,171

$

(39,974)

$

(18,872)

$

229,848

 

Net income

 

 

 

24,033

 

 

24,033

Cash dividends ($.26 per share)

 

 

 

(11,317)

 

 

 

(11,317)

Issuance of 36,062 common shares pursuant to stock-based compensation plan, net

 

 

(1,426)

 

 

1,324

 

 

(102)

Exercise of SARs

 

 

(855)

 

 

464

 

 

(391)

Stock-based compensation expense

 

 

2,286

 

 

 

 

2,286

Purchase of 154,593 common shares

 

 

 

 

(7,799)

 

 

(7,799)

Other comprehensive income

 

 

 

 

 

10,059

 

10,059

Balance, September 30, 2019

$

7,753

$

205,775

$

87,887

$

(45,985)

$

(8,813)

$

246,617

 

Balance, December 31, 2019

$

7,753

$

205,397

$

90,341

$

(45,381)

$

(13,920)

$

244,190

 

Net income

 

 

 

18,765

 

 

18,765

Cash dividends ($.27 per share)

 

 

 

(11,704)

 

 

(11,704)

Issuance of 67,790 common shares pursuant to stock-based compensation plan, net

 

 

(2,378)

 

 

1,338

 

(1,040)

Exercise of SARs

 

 

(243)

 

 

141

 

(102)

Stock-based compensation expense

 

 

2,277

 

 

 

2,277

Purchase of 128,779 common shares

 

 

 

 

(5,508)

 

(5,508)

Other comprehensive income

 

 

 

 

 

4,613

 

4,613

Balance, September 30, 2020

$

7,753

$

205,053

$

97,402

$

(49,410)

$

(9,307)

$

251,491

See accompanying notes to unaudited consolidated financial statements.

-7-


CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Certain amounts in prior-period financial statements have been reclassified to conform to the current period’s presentation. For further information, refer to the audited consolidated financial statements and related footnotes included in Cass Information System, Inc.’s (the “Company” or “Cass”) Annual Report on Form 10-K for the year ended December 31, 2019.

Risks and Uncertainties

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. This response to the COVID-19 pandemic has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment.

The Company has evaluated subsequent events after the consolidated balance sheet date of September 30, 2020 and the breadth of the impact of the global presence of COVID-19 on the Company’s business is currently unknown. Cass is closely monitoring developments related to COVID-19 checking regularly for updated information and recommendations from the World Health Organization and the U.S. Centers for Disease Control and Prevention, from national, state, and local governments, and evaluating courses of action being taken by peers. The duration and severity of the effect of COVID-19 on economic, market and business conditions remain uncertain. At this time, the Company remains subject to heightened business, operational, market, credit and other risks related to the COVID-19 pandemic, including, but not limited to, those discussed below, which may have an adverse effect on business, financial condition and results of operations.

Financial position and results of operations - The global health crisis caused by COVID-19 has and will continue to negatively impact business activity throughout the world. The COVID-19 outbreak and associated counter-acting measures implemented by governments around the world, as well as increased business uncertainty, are having an adverse impact on the Company’s financial results and are discussed in more detail below. Although in various locations certain activity restrictions have been relaxed with some success, many states and localities are experiencing significant increases in the number of COVID-19 cases, prompting a reinstatement of prior activity restrictions in some locations and the need for additional aid and other forms of relief for affected individuals, businesses and other entities. When and if COVID-19 is demonstrably contained, the Company anticipates a rebound in economic activity; however, any such rebound is contingent upon the rate and effectiveness of the containment efforts deployed by federal, state, and local governments. In light of the evolving health, social, economic and business environment, governmental regulations or mandates, and business disruptions that have occurred and could continue to occur, the aggregate impact that COVID-19 could have on the Company’s financial condition and operating results remains highly uncertain.

In response to COVID-19, the Federal Reserve has taken action to lower the Federal Funds rate, which has adversely affected interest income and therefore, the Company’s results of operations and financial condition. The Federal Reserve has continued its commitment to this approach, indicating that the target Federal Funds rate would remain at current levels until the economy is in a more stable employment and price-stability position.

To the extent the business disruption continues for an extended period, additional cost management actions will be considered. Future asset impairment charges, increases in allowance for loan losses, or restructuring charges could be more likely and will be dependent on the severity and duration of this crisis and its effect on the Company’s borrowers.

For payment processing services, business closures, including constrictions in the manufacturing sector, have led to a decrease in the number of transactions and dollars processed due to the decline in customers’ business activity. In addition, the dampened demand for oil and resulting plummet in oil prices has had, and can continue to have, a negative effect on both the number of freight transactions processed and the dollar amount of invoices processed. Other financial impact could occur though such potential impact is unknown at this time.

Capital and liquidity - While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by future financial losses.

-8-


The Company maintains access to multiple sources of liquidity. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Bank’s customers to draw down deposits, the Company might become more reliant on more expensive sources of funding.

Asset valuation - Currently, the Company does not expect COVID-19 to affect its ability to fairly value the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

The economic slowdown as a result of COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, necessitate a goodwill or intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Processes, controls and business continuity - In accord with its federally mandated Pandemic Plan and Business Continuity Plan, Cass has deployed its remote workforce program. Most Cass employees around the globe are now working and conducting business remotely. Employees necessary to oversee certain business coordination activities or to conduct essential physical activities such as mail handling and scanning operations, remain in offices. In addition, employees are now being permitted to return to the offices on a voluntary basis. Employees are required to report any exposure or diagnosis and must adhere to the defined safety protocol to enter the offices.

In the past several years, Cass has invested in sophisticated technology initiatives that enable employees to operate remotely with full system(s) access along with unified and transparent voice and electronic communications capabilities, ensuring seamless service delivery. The Company cannot predict when or how it will fully lift the actions put in place as part of the Business Continuity Plan, including work from home requirements and travel restrictions. Cass does not believe the work from home protocol has materially adversely impacted internal controls, financial reporting systems, or operations.

Note 2 – Intangible Assets

The Company accounts for intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Goodwill and Other Intangible Assets (“FASB ASC 350”), which requires that intangibles with indefinite useful lives be tested annually for impairment, or when management deems there is a triggering event, and those with finite useful lives be amortized over their useful lives.

Details of the Company’s intangible assets are as follows:

September 30, 2020

December 31, 2019

(In thousands)

Gross Carrying

Amount

Accumulated

Amortization

Gross Carrying

Amount

Accumulated

Amortization

Assets eligible for amortization:

 

 

 

 

Customer lists

$

4,778

$

(3,793)

$

4,778

$

(3,463)

Patents

 

72

 

(23)

 

72

 

(20)

Non-compete agreements

 

332

 

(332)

 

332

 

(332)

Software

 

2,844

 

(638)

 

2,844

 

(358)

Trade Name

190

(10)

190

(3)

Other

 

500

 

(283)

 

500

 

(259)

Unamortized intangible assets:

 

 

 

 

 

Goodwill1

 

14,489

 

(227)

 

14,489

 

(227)

Total intangible assets

$

23,205

$

(5,306)

$

23,205

$

(4,662)

1 Amortization through December 31, 2001 prior to adoption of FASB ASC 350.

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 $644,000 and $359,000 for the nine-month periods ended September 30, 2020 and 2019, 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.

-9-


Note 3 – 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. 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.

The calculations of basic and diluted earnings per share are as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

(In thousands except share and per share data)

2020

2019

2020

2019

Basic:

Net income

$

5,781

$

8,186

$

18,765

$

24,033

Weighted-average common shares outstanding

 

14,348,151

 

14,417,725

 

14,373,243

 

14,435,670

Basic earnings per share

$

.40

$

.57

$

1.31

$

1.66

 

Diluted:

 

 

 

Net income

$

5,781

$

8,186

$

18,765

$

24,033

Weighted-average common shares outstanding

 

14,348,151

 

14,417,725

 

14,373,243

 

14,435,670

Effect of dilutive restricted stock and stock appreciation rights

 

198,336

 

262,917

 

200,723

 

258,123

Weighted-average common shares outstanding assuming dilution

 

14,546,487

 

14,680,642

 

14,573,966

 

14,693,793

Diluted earnings per share

$

.40

$

.56

$

1.29

$

1.64

Note 4 – Stock Repurchases

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 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 did not repurchase shares during the three-month periods ended September 30, 2020 and 2019 and repurchased 128,779 and 154,593 during the nine-month periods ended September 30, 2020 and 2019, respectively. As of September 30, 2020, 371,221 shares remained available for repurchase under the program. Repurchases may be made in the open market or through negotiated transactions from time to time depending on market conditions.

As of March 16, 2020, the Company has temporarily suspended the treasury stock buyback program.

On October 20, 2020, the Board of Directors restored the treasury stock buyback program which authorizes the Company to repurchase up to an aggregate of 500,000 shares.

Note 5 – Industry Segment Information

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 the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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:

-10-


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.

Summarized information about the Company’s operations in each industry segment is as follows:

(In thousands)

Information

Services

Banking

Services

Corporate,

Eliminations

and Other

Total

Three Months Ended September 30, 2020

Fee income

$

24,198

$

651

$

83

$

24,932

Interest income*

 

6,306

 

7,212

 

(1,773)

 

11,745

Interest expense

 

 

465

 

 

465

Intersegment income (expense)

 

 

593

 

(593)

 

Tax-equivalized pre-tax income*

 

5,718

 

3,506

 

(1,692)

 

7,532

Goodwill

 

12,433

 

1,829

 

 

14,262

Other intangible assets, net

 

837

 

2,800

 

 

3,637

Total assets

 

905,158

 

1,105,845

 

(10,540)

 

2,000,463

Average funding sources

 

751,010

 

780,217

 

 

1,531,227

Three Months Ended September 30, 2019

 

 

 

 

Fee income

$

28,026

$

257

$

(21)

$

28,262

Interest income*

 

6,760

 

7,930

 

(513)

 

14,177

Interest expense

 

 

1,392

 

 

1,392

Intersegment income (expense)

 

 

533

 

(533)

 

Tax-equivalized pre-tax income*

 

7,619

 

3,399

 

(534)

 

10,484

Goodwill

 

15,758

 

136

 

 

15,894

Other intangible assets, net

 

3,170

 

 

 

3,170

Total assets

 

908,946

 

862,142

 

9,922

 

1,781,010

Average funding sources

 

704,772

 

588,226

 

 

1,292,998

Nine Months Ended September 30, 2020:

 

 

 

 

Fee income

$

72,098

$

1,906

$

1,197

$

75,201

Interest income*

 

18,153

 

21,097

 

(2,567)

 

36,683

Interest expense

 

 

1,911

 

 

1,911

Intersegment income (expense)

 

 

1,674

 

(1,674)

 

Tax-equivalized pre-tax income*

 

16,462

 

9,190

 

(1,370)

 

24,282

Goodwill

 

12,433

 

1,829

 

 

14,262

Other intangible assets, net

 

837

 

2,800

 

 

3,637

Total assets

 

905,158

 

1,105,845

 

(10,540)

 

2,000,463

Average funding sources

 

703,142

 

712,903

 

 

1,416,045

Nine Months Ended September 30, 2019

 

 

 

 

Fee income

$

82,049

$

1,040

$

(442)

$

82,647

Interest income*

 

19,273

 

23,082

 

(883)

 

41,472

Interest expense

 

 

3,987

 

 

3,987

Intersegment income (expense)

 

 

1,587

 

(1,587)

 

Tax-equivalized pre-tax income*

 

21,997

 

10,214

 

(1,324)

 

30,887

Goodwill

 

15,758

 

136

 

 

15,894

Other intangible assets, net

 

3,170

 

 

 

3,170

Total assets

 

908,946

 

862,142

 

9,922

 

1,781,010

Average funding sources

 

667,741

 

583,458

 

 

1,251,199

* Presented on a tax-equivalent basis assuming a tax rate of 21% for both 2020 and 2019. The tax-equivalent adjustment was approximately $466,000 and $511,000 for the Three Months Ended 2020 and 2019, respectively, and $1,424,000 and $1,583,000 for the Nine Months Ended 2020 and 2019, respectively.

Note 6 – Loans by Type

A summary of loan categories is as follows:

(In thousands)

September 30,

2020

December 31,

2019

Commercial and industrial

$

301,886

$

323,857

Paycheck protection program (“PPP”)

172,211

Real estate:

 

 

 

Commercial:

 

 

 

Mortgage

 

94,792

 

101,654

Construction

 

23,795

 

25,299

Faith-based:

 

 

 

Mortgage

331,419

 

305,826

Construction

20,452

 

15,945

Other

 

2

 

57

Total loans

$

944,557

$

772,638

-11-


In support of the Coronavirus, Aid, Relief, and Economic Security Act (the “CARES Act”), the Bank had processed nearly 350 applications for PPP loans of approximately $170,000,000 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 no allowance for loan loss was recorded for these loans.

The following table presents the aging of loans by loan categories at September 30, 2020 and December 31, 2019:

Performing

Nonperforming

(In thousands)

Current

30-59

Days

60-89

Days

90

Days

and

Over

Non-

accrual

Total

Loans

September 30, 2020

Commercial and industrial

$

301,886

$

$

$

$

$

301,886

PPP

172,211

172,211

Real estate:

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

Mortgage

 

94,792

 

 

 

 

 

94,792

Construction

 

23,795

 

 

 

 

 

23,795

Faith-based:

 

 

 

 

 

 

Mortgage

 

331,419

 

 

 

 

 

331,419

Construction

 

20,452

 

 

 

 

 

20,452

Other

 

2

 

 

 

 

 

2

Total

$

944,557

$

$

$

$

$

944,557

December 31, 2019

 

 

 

 

 

 

Commercial and industrial

$

323,857

$

$

$

$

$