CASS INFORMATION SYSTEMS INC (CASS) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Executive Overview
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
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combine so that pricing varies greatly among the customer base. In general, however, Cass is compensated for its processing services through service fees, transactional level payment services, 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. Transactional level payment services and interest income from the balances generated during the payment processing cycle are 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.
The Company continues to operate profitably, posting a 0.82% return on average assets and 8.37% return on average equity. The Company’s common equity Tier 1 capital ratio was 13.84% at December 31, 2024, significantly exceeding regulatory requirements. In addition, the Company has maintained exceptional credit quality with no non-performing loans at December 31, 2024, and no loan charge-offs during the year ended December 31, 2024.
The Company’s solid capital and liquidity positions, combined with ongoing earnings, are expected to continue to allow for investment in strategic opportunities when they become available, in addition to return of capital to shareholders. The Company delivered $16.5 million in dividend payments and $7.2 million in share repurchases during 2024. The Company continues to invest in the technology, processes, and people required to support its multi-national customer base.
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.
Recent Industry Developments
The transportation industry continues to experience a decline in overall freight rates caused by an ongoing freight recession. The freight recession adversely affects the number of freight transactions and dollar amount of invoices processed. Partially as a result, the Company's transportation invoice and dollar volumes declined 0.6% and 5.7%, respectively during the year ended December 31, 2024 as compared to the same period in 2023. Transportation dollar volumes are key to the Company’s revenue as higher volumes generally lead to an increase in payment float, which generates interest income, as well as an increase in payments in advance of funding, which generates financial fees.
Recent Items of Note
Average interest-earning assets for December 31, 2024 declined $65.4 million, or 3.1%, as compared to 2023. The Company had fewer funds to invest due to the loss of approximately $100.0 million of balances in February 2024 as a result of a cyber attack experienced by a CassPay client. CassPay offers solutions such as integrated payments, a B2B payment platform for clients. The loss of CassPay balances was partially offset by an increase in facility dollar volumes of 8.1%, leading to higher average accounts and drafts payable.
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Despite the decline in average interest-earning assets during the year, the Company’s liquidity position and balance sheet remains strong. The Company maintained average short-term investments of $326.2 million during 2024. In addition, all of the Company's investment securities are classified as available-for-sale and there were no outstanding borrowings at December 31, 2024.
The Company recorded bad debt expense of $7.8 million for the year ended December 31, 2024 on a funding receivable related to a facility client. See Note 15, "Commitments and Contingencies" for further information.
During July 2024, the Company approved an Amendment providing for the termination of its noncontributory defined-benefit pension plan. The Company recorded a one-time termination expense of approximately $3.5 million through operating expense related to the plan termination during the fourth quarter of 2024 as the plan liabilities were settled. The successful termination of the plan is expected to reduce run rate operating expense by approximately $1.0 million on an annual basis.
In December 2024, the Company acquired AcuAudit, a freight audit platform for ocean and international air freight, from Acuitive Solutions LLC. The Asset Purchase Agreement reflects a base purchase price of $3.0 million and an earnout based on annualized recurring revenue at the end of 24 months. Current annualized recurring revenue is approximately $2.5 million. The Company expects the impact of the acquisition to be EBITDA neutral in 2025 and a minimal negative impact to diluted earnings per share driven by intangible amortization.
Summary of Results
Various indicators are used by management in evaluating the Company's financial condition and operating performance. Among these indicators are net income and earnings per share, total revenue, operating expense, asset quality indicators such as nonperforming assets to assets and net charge-offs to average loans, and return on average assets and equity.
| (In thousands except per share data) | For the Years Ended December 31, | % Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 v. 2023 | 2023 v. 2022 | |||||||||||||
| Processing fees | $ | 82,671 | $ | 79,566 | $ | 76,470 | 3.9 | % | 4.0 | % | |||||||
| Financial fees | 43,297 | 45,985 | 43,757 | (5.8) | % | 5.1 | % | ||||||||||
| Net interest income | 67,787 | 66,494 | 58,844 | 1.9 | % | 13.0 | % | ||||||||||
| Provision for (release of) credit losses | 447 | (550) | 1,350 | (181.3) | % | (140.7) | % | ||||||||||
| Other | 5,881 | 4,916 | 4,755 | 19.6 | % | 3.4 | % | ||||||||||
| Total revenues | 199,189 | 197,511 | 182,476 | 0.8 | % | 8.2 | % | ||||||||||
| Operating expense | 174,970 | 160,155 | 139,576 | 9.3 | % | 14.7 | % | ||||||||||
| Income before income tax expense | 24,219 | 37,356 | 42,900 | (35.2) | % | (12.9) | % | ||||||||||
| Income tax expense | 5,051 | 7,297 | 7,996 | (30.8) | % | (8.7) | % | ||||||||||
| Net income | $ | 19,168 | $ | 30,059 | $ | 34,904 | (36.2) | % | (13.9) | % | |||||||
| Diluted earnings per share | $ | 1.39 | $ | 2.18 | $ | 2.53 | (36.2) | % | (13.8) | % | |||||||
| Return on average assets | 0.82 | % | 1.24 | % | 1.35 | % | — | — | |||||||||
| Return on average equity | 8.37 | % | 14.24 | % | 16.53 | % | — | — |
The Company recorded revenue of $199.2 million in December 31, 2024, up 0.8% from the prior year, due to increases in processing fees and net interest income, partially offset by a decrease in financial fees and the negative variance in the provision for (release of) credit losses. Operating expenses increased 9.3% largely driven by $7.8 million of bad debt expense experienced on a funding receivable related to a facility client as well as a one-time non-cash expense of $3.5 million in the fourth quarter of 2024 related to the termination of its noncontributory defined-benefit pension plan. Net income was $19.2 million and diluted EPS was $1.39 per share, decreases of 36.2% for both from the prior year.
The Company posted a 0.82% return on average assets and 8.37% return on average equity. The Company did not have any nonperforming assets at December 31, 2024 and did not have any loan charge-offs during 2024.
Further detail about the components of revenue and expenses are explained in the sections following.
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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, average payments in advance of funding, fee revenue and other income were as follows:
| (In thousands) | December 31, | % Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 v. 2023 | 2023 v. 2022 | ||||||||||||||
| Transportation invoice transaction volume | 35,729 | 35,949 | 36,807 | (0.6) | % | (2.3) | % | |||||||||||
| Transportation invoice dollar volume | $ | 36,113,169 | $ | 38,288,478 | $ | 44,749,359 | (5.7) | % | (14.4) | % | ||||||||
| Facility transaction volume(1) | 17,135 | 13,857 | 12,990 | 23.7 | % | 6.7 | % | |||||||||||
| Facility dollar volume(1) | $ | 21,438,282 | $ | 19,836,821 | $ | 19,514,049 | 8.1 | % | 1.7 | % | ||||||||
| Average payments in advance of funding | $ | 202,860 | $ | 234,865 | $ | 278,185 | (13.6) | % | (15.6) | % | ||||||||
| Processing fees | $ | 82,671 | $ | 79,566 | $ | 76,470 | 3.9 | % | 4.0 | % | ||||||||
| Financial fees | $ | 43,297 | $ | 45,985 | $ | 43,757 | (5.8) | % | 5.1 | % | ||||||||
| Other income | $ | 5,881 | $ | 4,916 | $ | 4,755 | 19.6 | % | 3.4 | % |
(1)Includes utility, telecom and waste
Processing fees increased $3.1 million, or 3.9%, during 2024 largely driven by a 23.7% increase in facility transaction volumes. Transportation invoice volumes decreased 0.6% over the same period. The decline in transportation volumes is primarily due to the on-going freight recession.
Financial fees decreased $2.7 million, or 5.8%, in 2024 primarily attributable to the decline in transportation invoice dollar volumes of 5.7%. The decline in transportation invoice dollar volumes had a direct effect on the 13.6% decrease in average payments in advance of funding, which is the primary generator of financial fees.
Other income increased $965,000, or 19.6%, in 2024 largely due to higher bank-owned life insurance revenue and TouchPoint fees.
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) | December 31, | % Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 v. 2023 | 2023 v. 2022 | |||||||||||||
| Average earning assets | $ | 2,011,554 | $ | 2,076,951 | $ | 2,205,792 | (3.1) | % | (5.8) | % | |||||||
| Average interest-bearing liabilities | $ | 634,592 | $ | 573,308 | $ | 603,262 | 10.7 | % | (5.0) | % | |||||||
| Net interest income (1) | $ | 68,798 | $ | 67,583 | $ | 60,533 | 1.8 | % | 11.6 | % | |||||||
| Net interest margin (1) | 3.42 | % | 3.25 | % | 2.74 | % | — | — | |||||||||
| Yield on earning assets (1) | 4.43 | % | 4.04 | % | 2.90 | % | — | — | |||||||||
| Rate on interest bearing liabilities | 3.19 | % | 2.84 | % | 0.58 | % | — | — |
(1)Presented on a tax-equivalent basis using a tax rate of 21%.
The increase in net interest income in 2024 as compared to 2023 is primarily due to an increase in the net interest margin to 3.42% as compared to 3.25% in the prior year. The increase in the net interest margin was partially offset by a decrease in average earning assets of $65.4 million, or 3.1%. The yield on interest-earning assets increased 39 basis points from 4.04%
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in 2023 to 4.43% in 2024 while the cost of interest-bearing liabilities increased 35 basis points from 2.84% in 2023 to 3.19% in 2024.
Average loans decreased $6.9 million, or 0.7%, to $1.05 billion. This decrease was due to the Company opting to be more selective in booking new loans as a result of a decline in average deposits. The average yield on loans increased 47 basis points to 5.28% in 2024.
Average investment securities decreased $97.5 million, or 13.3%, due to the sale and maturity of investment securities throughout 2024. The investment portfolio will expand and contract over time as the Company manages its liquidity and interest rate position. The average tax-equivalent yield on investment securities increased 19 basis points to 2.82% in 2024 as a result of purchases of new investment securities at current market interest rates, which are higher than the average interest rate in the current investment portfolio.
Average short-term investments, consisting of interest-bearing deposits in other financial institutions and federal funds sold, increased $39.0 million, or 13.6%. The increase is primarily a result of the decline in average investment securities and loans, partially offset by a decrease in average funding sources. The average yield on short-term investments increased 5 basis points to 4.83% in 2024 primarily due to the higher short-term market interest rates when comparing the periods. The majority of these short-term investments are held at the Federal Reserve Bank.
The average balance of interest-bearing deposits increased $63.5 million, or 11.1%. Average non-interest-bearing demand deposits decreased $97.9 million, or 19.1%. The Company has experienced a migration of client funds from non-interest bearing to interest-bearing driven by the higher interest rate environment prior to the recent 100 basis point decline in the Federal Funds rate. The average rate paid on interest-bearing deposits increased 36 basis points to 3.19% in 2024 due to higher average short-term interest rates.
Average accounts and drafts payable decreased $50.7 million, or 4.7%. The decrease in these balances, which are non-interest bearing, are primarily reflective of a cyber event at a CassPay client during the first quarter of 2024, which decreased average balances by approximately $100.0 million, and a decrease in transportation dollar volumes of 0.6%, partially offset by an increase in facility dollar volumes of 8.1%. Accounts and drafts payable are a significant source of funding generated by payment float from transportation and facility clients.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential
The following table contains condensed average balance sheets for each of the periods reported, the tax-equivalent interest income and expense on each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported:
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| (In thousands) | 2024 | 2023 | 2022 | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | ||||||||||||||||||||||||||
| Assets (1) | ||||||||||||||||||||||||||||||||||
| Interest-earning assets | ||||||||||||||||||||||||||||||||||
| Loans (2): | $ | 1,048,732 | $ | 55,362 | 5.28 | % | $ | 1,055,668 | $ | 50,825 | 4.81 | % | $ | 992,004 | $ | 39,460 | 3.98 | % | ||||||||||||||||
| Securities (4): | ||||||||||||||||||||||||||||||||||
| Taxable | 474,753 | 13,423 | 2.83 | 541,159 | 14,118 | 2.61 | 509,537 | 10,083 | 1.98 | |||||||||||||||||||||||||
| Tax-exempt (3) | 161,836 | 4,519 | 2.79 | 192,881 | 5,186 | 2.69 | 279,247 | 8,043 | 2.88 | |||||||||||||||||||||||||
| Short-term investments | 326,233 | 15,752 | 4.83 | 287,243 | 13,720 | 4.78 | 425,004 | 6,429 | 1.51 | |||||||||||||||||||||||||
| Total interest-earning assets | 2,011,554 | 89,056 | 4.43 | % | 2,076,951 | 83,849 | 4.04 | % | 2,205,792 | 64,015 | 2.90 | % | ||||||||||||||||||||||
| Non-interest-earning assets | ||||||||||||||||||||||||||||||||||
| Cash and due from banks | 23,695 | 24,914 | 20,772 | |||||||||||||||||||||||||||||||
| Premises and equipment, net | 33,309 | 24,445 | 19,291 | |||||||||||||||||||||||||||||||
| Payments in advance of funding | 202,860 | 234,865 | 278,185 | |||||||||||||||||||||||||||||||
| Bank-owned life insurance | 49,715 | 48,540 | 46,468 | |||||||||||||||||||||||||||||||
| Goodwill and other intangibles | 20,314 | 21,060 | 19,558 | |||||||||||||||||||||||||||||||
| Unrealized (loss) gain on investment securities | (57,772) | (68,893) | (43,147) | |||||||||||||||||||||||||||||||
| Other assets | 79,091 | 71,050 | 51,686 | |||||||||||||||||||||||||||||||
| Allowance for credit losses | (13,369) | (13,324) | (12,527) | |||||||||||||||||||||||||||||||
| Total assets | $ | 2,349,397 | $ | 2,419,608 | $ | 2,586,078 | ||||||||||||||||||||||||||||
| Liabilities and Shareholders’ Equity (1) | ||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 549,164 | $ | 17,028 | 3.10 | % | $ | 496,154 | $ | 14,056 | 2.83 | % | $ | 549,054 | $ | 3,118 | 0.57 | % | ||||||||||||||||
| Savings deposits | 7,148 | 116 | 1.62 | 7,162 | 113 | 1.58 | 13,288 | 38 | 0.29 | |||||||||||||||||||||||||
| Time deposits =$250 | 27,211 | 597 | 2.19 | 23,912 | 417 | 1.74 | 18,272 | 102 | 0.56 | |||||||||||||||||||||||||
| Other time deposits | 51,058 | 2,516 | 4.93 | 43,839 | 1,564 | 3.57 | 22,637 | 224 | 0.99 | |||||||||||||||||||||||||
| Total interest-bearing deposits | 634,581 | 20,257 | 3.19 | 571,067 | 16,150 | 2.83 | 603,251 | 3,482 | 0.58 | |||||||||||||||||||||||||
| Short-term borrowings | 11 | 1 | 9.09 | 2,241 | 116 | 5.18 | 11 | — | — | |||||||||||||||||||||||||
| Total interest-bearing liabilities | 634,592 | 20,258 | 3.19 | % | 573,308 | 16,266 | 2.84 | % | 603,262 | 3,482 | 0.58 | % | ||||||||||||||||||||||
| Noninterest-bearing liabilities | ||||||||||||||||||||||||||||||||||
| Demand deposits | 414,711 | 512,608 | 588,121 | |||||||||||||||||||||||||||||||
| Accounts and drafts payable | 1,030,520 | 1,081,245 | 1,141,329 | |||||||||||||||||||||||||||||||
| Other liabilities | 40,630 | 41,378 | 42,224 | |||||||||||||||||||||||||||||||
| Total liabilities | 2,120,453 | 2,208,539 | 2,374,936 | |||||||||||||||||||||||||||||||
| Shareholders’ equity | 228,944 | 211,069 | 211,142 | |||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 2,349,397 | $ | 2,419,608 | $ | 2,586,078 | ||||||||||||||||||||||||||||
| Net interest income (3) | $ | 68,798 | $ | 67,583 | $ | 60,533 | ||||||||||||||||||||||||||||
| Net interest margin (3) | 3.42 | % | 3.25 | % | 2.74 | % | ||||||||||||||||||||||||||||
| Interest spread | 1.23 | % | 1.20 | % | 2.32 | % |
(1)Balances shown are daily averages.
(2)Interest income on loans includes net loan fees of $477,000, $686,000, and $684,000 for 2024, 2023 and 2022, respectively. Loan fees include $0, $0, and $167,000 of Paycheck Protection Program ("PPP") loan fees for 2024, 2023 and 2022, respectively.
(3)Interest income is presented on a tax-equivalent basis assuming a tax rate of 21%. The tax-equivalent adjustment was approximately $1.0 million, $1.1 million, and $1.7 million for 2024, 2023, and 2022, respectively.
(4)For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.
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Analysis of Net Interest Income Changes
The following table presents the changes in interest income and expense between years due to changes in volume and interest rates.
| (In thousands) | 2024 Over 2023 | 2023 Over 2022 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Volume (1) | Rate (1) | Total | Volume(1) | Rate (1) | Total | |||||||||||||||||
| Increase (decrease) in interest income: | ||||||||||||||||||||||
| Loans (2): | $ | (338) | $ | 4,875 | $ | 4,537 | $ | 2,657 | $ | 8,708 | $ | 11,365 | ||||||||||
| Securities: | ||||||||||||||||||||||
| Taxable | (1,823) | 1,128 | (695) | 658 | 3,377 | 4,035 | ||||||||||||||||
| Tax-exempt (3) | (862) | 195 | (667) | (2,351) | (506) | (2,857) | ||||||||||||||||
| Short-term investments | 1,881 | 151 | 2,032 | (2,671) | 9,962 | 7,291 | ||||||||||||||||
| Total interest income | $ | (1,142) | $ | 6,349 | $ | 5,207 | $ | (1,707) | $ | 21,541 | $ | 19,834 | ||||||||||
| Interest expense on: | ||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 1,577 | $ | 1,395 | $ | 2,972 | $ | (329) | $ | 11,267 | $ | 10,938 | ||||||||||
| Savings deposits | — | 3 | 3 | (25) | 100 | 75 | ||||||||||||||||
| Time deposits =$250 | 63 | 117 | 180 | 40 | 275 | 315 | ||||||||||||||||
| Other time deposits | 287 | 665 | 952 | 354 | 986 | 1,340 | ||||||||||||||||
| Short-term borrowings | (165) | 50 | (115) | — | 116 | 116 | ||||||||||||||||
| Total interest expense | 1,762 | 2,230 | 3,992 | 40 | 12,744 | 12,784 | ||||||||||||||||
| Net interest income | $ | (2,904) | $ | 4,119 | $ | 1,215 | $ | (1,747) | $ | 8,797 | $ | 7,050 |
(1)The change in interest due to the combined rate/volume variance has been allocated in proportion to the absolute dollar amounts of the change in each.
(2)Interest income includes net loan fees.
(3)Interest income is presented on a tax-equivalent basis assuming a tax rate of 21%.
Loan Portfolio
Interest earned on the loan portfolio is a primary source of income for the Company. The loan portfolio was $1.08 billion, representing 45.2% of the Company's total assets as of December 31, 2024 and generated $55.4 million in interest income during the year ended December 31, 2024. 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, 2024.
| Loans by Type | December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2024 | 2023 | 2022 | |||||||
| Commercial and industrial | $ | 559,262 | $ | 498,502 | $ | 561,616 | ||||
| Real estate (commercial and faith-based): | ||||||||||
| Mortgage | 488,075 | 499,739 | 495,280 | |||||||
| Construction | 34,652 | 16,023 | 25,968 | |||||||
| Other | — | 54 | 42 | |||||||
| Total loans | $ | 1,081,989 | $ | 1,014,318 | $ | 1,082,906 |
The Company does not have any foreign loans. The Company's loan portfolio includes $110,000 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.
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Loans by Maturity as of December 31, 2024
| (In thousands) | One Year Or Less | Over 1 Year Through 5 Years | Over 5 Years Through 15 Years (1) | Total | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed Rate | Floating Rate | Fixed Rate | Floating Rate | Fixed Rate | Floating Rate | |||||||||||||||||||||
| Commercial and industrial | $ | 41,723 | $ | 58,439 | $ | 204,118 | $ | 26,622 | $ | 211,391 | $ | 16,969 | $ | 559,262 | ||||||||||||
| Real Estate: | ||||||||||||||||||||||||||
| Mortgage | 78,873 | 25,777 | 304,990 | 12,115 | 66,320 | — | 488,075 | |||||||||||||||||||
| Construction | 12,638 | 27 | 13,654 | 8,333 | — | — | 34,652 | |||||||||||||||||||
| Total loans | $ | 133,234 | $ | 84,243 | $ | 522,762 | $ | 47,070 | $ | 277,711 | $ | 16,969 | $ | 1,081,989 |
(1)The Company did not have any loans with maturities greater than 15 years.
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. The Company's primary market niche for banking services is privately held businesses, franchise restaurants, 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 $67.7 million, or 6.7%, to $1.08 billion at December 31, 2024. Franchise restaurant loans, which are included in commercial and industrial loans, increased $43.1 million during 2024. Faith-based loans increased $5.2 million, during 2024. 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.
Performing loans subject to special monitoring increased from $5.5 million at December 31, 2023 to $51.2 million at December 31, 2024. These loans possess some credit deficiency or potential weakness which requires a higher level of management attention. The increase during 2024 is primarily due to a large franchise restaurant relationship that has experienced some level of financial weakness. However, the Company does not believe there is any concern of credit loss at December 31, 2024.
Provision and Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments
The Company recorded a provision for credit losses and off-balance sheet credit exposures of $447,000 in 2024 and a release of credit losses of $550,000 in 2023. The amount of the provision for (release of) credit losses was derived from the Company’s CECL model. The amount of the provision will fluctuate as determined by these analyses. The Company had no loan charge-offs or recoveries in 2024 and 2023. The ACL was $13.4 million at December 31, 2024 compared to $13.1 million at December 31, 2023. The ACL represented 1.24% and 1.29% of outstanding loans at December 31, 2024 and December 31, 2023, respectively. The allowance for unfunded commitments was $273,000 at December 31, 2024 and $132,000 at December 31, 2023. There were no nonperforming loans outstanding at December 31, 2024 or December 31, 2023.
The ACL has been established and is maintained to estimate the lifetime credit losses expected 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
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evaluated, the Company uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral values.
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) | December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2021 | 2020 | ||||||||||||||
| Allowance at beginning of year | $ | 13,089 | $ | 13,539 | $ | 12,041 | $ | 11,944 | $ | 11,279 | ||||||||
| Loans charged-off: | ||||||||||||||||||
| Commercial and industrial | — | — | — | — | — | |||||||||||||
| Real estate (commercial and faith-based): | ||||||||||||||||||
| Mortgage | — | — | — | — | — | |||||||||||||
| Construction | — | — | — | — | — | |||||||||||||
| Other | — | — | — | — | — | |||||||||||||
| Total loans charged-off | — | — | — | — | — | |||||||||||||
| Recoveries of loans previously charged-off: | ||||||||||||||||||
| Commercial and industrial | — | — | 13 | 12 | 19 | |||||||||||||
| Real estate (commercial and faith-based): | ||||||||||||||||||
| Mortgage | — | — | — | 15 | 1 | |||||||||||||
| Construction | — | — | — | — | — | |||||||||||||
| Other | — | — | — | — | — | |||||||||||||
| Total recoveries of loans previously charged-off | — | — | 13 | 27 | 20 | |||||||||||||
| Net loans recovered | — | — | (13) | (27) | (20) | |||||||||||||
| Provision for (release of) credit losses | 306 | (450) | 1,485 | 70 | 645 | |||||||||||||
| Allowance at end of year | $ | 13,395 | $ | 13,089 | $ | 13,539 | $ | 12,041 | $ | 11,944 | ||||||||
| Allowance for unfunded commitments at beginning of year | $ | 132 | $ | 232 | $ | 367 | $ | 567 | $ | 402 | ||||||||
| Provision for (release of) credit losses | 141 | (100) | (135) | (200) | 165 | |||||||||||||
| Allowance for unfunded commitments at end of year | 273 | 132 | 232 | 367 | 567 | |||||||||||||
| Loans outstanding: | ||||||||||||||||||
| Average | $ | 1,048,732 | $ | 1,055,668 | $ | 992,004 | $ | 887,662 | $ | 906,631 | ||||||||
| December 31 | 1,081,989 | 1,014,318 | 1,082,906 | 960,567 | 891,676 | |||||||||||||
| Ratio of allowance for credit losses to loans outstanding at December 31 | 1.24 | % | 1.29 | % | 1.25 | % | 1.25 | % | 1.34 | % | ||||||||
| Ratio of net recoveries to average loans outstanding | — | % | — | % | — | % | — | % | — | % | ||||||||
| Allocation of allowance for credit losses (1): | ||||||||||||||||||
| Commercial and industrial | $ | 5,897 | $ | 5,412 | $ | 5,977 | $ | 5,035 | $ | 4,635 | ||||||||
| Real estate (commercial and faith-based): | ||||||||||||||||||
| Mortgage | 7,281 | 7,569 | 7,378 | 6,714 | 6,892 | |||||||||||||
| Construction | 217 | 108 | 184 | 292 | 417 | |||||||||||||
| Total | $ | 13,395 | $ | 13,089 | $ | 13,539 | $ | 12,041 | $ | 11,944 | ||||||||
| Percentage of categories to total loans: | ||||||||||||||||||
| Commercial and industrial | 51.7 | % | 49.1 | % | 51.9 | % | 46.9 | % | 33.5 | % | ||||||||
| Real estate (commercial and faith-based): | ||||||||||||||||||
| Mortgage | 45.1 | 49.3 | 45.7 | 48.3 | 48.7 | |||||||||||||
| Construction | 3.2 | 1.6 | 2.4 | 4.1 | 5.5 | |||||||||||||
| PPP | — | — | — | 0.7 | 12.3 | |||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
(1)Although specific allocations exist, the entire allowance is available to absorb losses in any particular loan category.
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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. Loans with modifications to borrowers experiencing financial difficulty 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 income recognized on nonaccrual loans for the years ended 2024 and 2023.
There were no nonaccrual loans at December 31, 2024 and December 31, 2023. There were no foreclosed assets at December 31, 2024 or December 31, 2023.
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) | December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2021 | 2020 | ||||||||||||||
| Commercial and industrial: | ||||||||||||||||||
| Nonaccrual | $ | — | $ | — | $ | 1,150 | $ | — | $ | — | ||||||||
| Total nonperforming loans | $ | — | $ | — | $ | 1,150 | $ | — | $ | — | ||||||||
| Total foreclosed assets | — | — | — | — | — | |||||||||||||
| Total nonperforming assets | $ | — | $ | — | $ | 1,150 | $ | — | $ | — |
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Operating Expenses
Operating expenses in 2024 compared to 2023 and 2022 include the following significant pre-tax components:
| (In thousands) | December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| Salaries and commissions | $ | 96,356 | $ | 93,474 | $ | 85,489 | ||||||
| Share-based compensation | 3,167 | 4,139 | 6,732 | |||||||||
| Net periodic pension cost (benefit) | 4,172 | 878 | (2,453) | |||||||||
| Other benefits | 19,696 | 20,203 | 16,706 | |||||||||
| Total personnel expense | $ | 123,391 | $ | 118,694 | $ | 106,474 | ||||||
| Occupancy | 3,446 | 3,560 | 3,676 | |||||||||
| Equipment | 8,305 | 7,138 | 6,668 | |||||||||
| Bad debt expense | 7,847 | — | — | |||||||||
| Amortization of intangible assets | 739 | 780 | 680 | |||||||||
| Other operating | 31,242 | 29,983 | 22,078 | |||||||||
| Total operating expense | $ | 174,970 | $ | 160,155 | $ | 139,576 |
Total operating expenses increased 9.3% in 2024 compared to 2023.
Salaries and commissions increased $2.9 million, or 3.1%, as a result of merit increases and an increase in average full-time equivalent employees ("FTEs") of 1.6%.
Share-based compensation decreased $1.0 million, reflecting the Company's financial performance and the impact on performance-based restricted stock between the periods.
Net periodic pension cost increased $3.3 million. The Company recorded a one-time non-cash expense of $3.5 million in the fourth quarter of 2024 related to the termination of its noncontributory defined-benefit pension plan. The termination of the plan is expected to reduce run rate operating expense by approximately $1.0 million on an annual basis.
Other benefits, such as 401(k) match, health insurance and payroll taxes decreased $507,000, or 2.5%.
Equipment expense increased $1.2 million, or 16.3%, primarily due to an increase in depreciation expense on software related to recently completed technology initiatives.
The Company recorded bad debt expense during 2024 of $7.8 million on a funding receivable related to a facility client. While the Company is in the process of litigation to collect the receivable, a full write-off to bad debt expense was recorded as a result of a credit analysis.
Other operating expense increased $1.3 million, or 4.2%, to $31.2 million. The Company incurred $1.3 million of late fees on facility transactions during 2024 driven by a check processing delay with a third-party vendor, the same CassPay client which incurred the cyber attack.
Income Tax Expense
Income tax expense in 2024 totaled $5.1 million, compared to $7.3 million in 2023. When measured as a percent of pre-tax income, the Company’s effective tax rate was 20.9% and 19.5% in 2024 and 2023, respectively. The increase in the effective tax rate in 2024 compared to 2023 was primarily due to a lower level of tax-free interest income on municipal securities in the current year, in addition to $304,000 of tax penalties incurred in 2024 on the surrender and redeployment of bank-owned life insurance policies to increase future noninterest income.
Investment Portfolio
Investment securities decreased $99.1 million, or 15.8%, during 2024 to $528.0 million at December 31, 2024. U.S. Treasury securities decreased $108.7 million to $0 at December 31, 2024 compared to $108.7 million at December 31,
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2023. State and political securities decreased $47.1 million, or 21.5%, to $172.0 million at December 31, 2024. Mortgage-backed securities increased $75.5 million, or 47.8%, to $233.3 million at December 31, 2024. 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 2024, the Company purchased investment securities totaling $119.7 million and sold investment securities totaling $60.1 million. The Company generally utilized funds from maturities and sales of U.S. Treasury securities and state and political securities to increase short-term investments and fund purchases of mortgage-backed securities.
There was no single issuer of securities in the investment portfolio at December 31, 2024 for which the aggregate amortized cost exceeded 10% of total shareholders' equity.
| Investments by Type | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | December 31, | |||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| State and political subdivisions | $ | 171,964 | $ | 219,035 | $ | 295,126 | ||||||
| Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | 233,275 | 157,799 | 173,939 | |||||||||
| Corporate bonds | 87,786 | 102,340 | 85,097 | |||||||||
| Asset-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | 34,996 | 39,222 | 45,023 | |||||||||
| Treasury securities | — | 108,721 | 155,283 | |||||||||
| Total investments | $ | 528,021 | $ | 627,117 | $ | 754,468 |
| Investment Securities by Maturity | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (At December 31, 2024) | ||||||||||||||||||
| (In thousands) | Within 1 Year | Over 1 to 5 Years | Over 5 to 10 Years | Over 10 Years | Yield (1) | |||||||||||||
| State and political subdivisions | $ | 8,820 | $ | 57,494 | $ | 92,565 | $ | 13,085 | 2.34 | % | ||||||||
| Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | — | 466 | 45,641 | 187,169 | 2.62 | % | ||||||||||||
| Corporate bonds | — | 44,267 | 43,519 | — | 3.12 | % | ||||||||||||
| Asset-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | — | — | 1,727 | 33,268 | 5.58 | % | ||||||||||||
| Total investments | $ | 8,820 | $ | 102,227 | $ | 183,452 | $ | 233,522 | 2.78 | % | ||||||||
| Weighted average yield (1) | 3.38 | % | 3.60 | % | 2.13 | % | 3.01 | % | 2.78 | % |
(1)Yields are presented on a tax-equivalent basis assuming a tax rate of 21%.
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Deposits and Accounts and Drafts Payable
| (In thousands) | December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||||
| Noninterest-bearing demand deposits | $ | 251,230 | $ | 524,359 | $ | 642,757 | ||||||||
| Interest-bearing deposits | 716,686 | 616,455 | 614,460 | |||||||||||
| Total deposits | $ | 967,916 | $ | 1,140,814 | $ | 1,257,217 | ||||||||
| Accounts and drafts payable | $ | 1,149,276 | $ | 1,071,369 | $ | 1,067,600 |
Total deposits decreased $172.9 million, or 15.2% during 2024. Noninterest-bearing demand deposits decreased $273.1 million, or 52.1%, to $251.2 million at December 31, 2024 and interest-bearing deposits increased $100.2 million, or 16.3%, to $716.7 million at December 31, 2024. The Company has experienced a migration of client funds from non-interest bearing to interest-bearing driven by the higher interest rate environment prior to the recent 100 basis point cumulative decline in the Federal Funds rate in the fourth quarter of 2024. The decrease in total deposits between the periods was also driven by timing of customer funds. The average balance of deposits is more indicative of trends period to period.
Accounts and drafts payable generated by the Company in its payment processing operations increased $77.9 million, or 7.3%, to $1.15 billion, at December 31, 2024. 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. Average accounts and drafts payable decreased $50.7 million, or 4.7%, to $1.03 billion during 2024. The decrease in these balances, which are non-interest bearing, are primarily reflective of a cyber event at a CassPay client during the first quarter of 2024, which decreased average balances by approximately $100.0 million, and a decrease in transportation dollar volumes of 0.6%, partially offset by an increase in facility dollar volumes of 8.1%.
The composition of average deposits and the average rates paid on those deposits is represented in the table entitled “Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential” which is included earlier in this discussion. The Company does not have any significant deposits from foreign depositors.
Maturities of Certificates of Deposit as of December 31, 2024
| (In thousands) | $100 or Less | $100 to Less Than $250 | $250 or More | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three months or less | $ | 3,384 | $ | 38,468 | $ | 8,047 | $ | 49,899 | ||||||
| Three to six months | 731 | 8,062 | 4,526 | 13,319 | ||||||||||
| Six to twelve months | 871 | 6,806 | 4,733 | 12,410 | ||||||||||
| Over twelve months | 390 | 1,075 | 4,371 | 5,836 | ||||||||||
| Total | $ | 5,376 | $ | 54,411 | $ | 21,677 | $ | 81,464 |
Liquidity
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 balance of liquid assets consists of cash and cash equivalents, which includes cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold, and money market funds. These balances totaled $349.7 million at December 31, 2024, a decrease of $22.7 million, or 6.1%, from December 31, 2023. The decrease during
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2024 is primarily attributed to a decrease in deposits and an increase in loans, partially offset by decreases in securities available-for-sale and accounts and drafts receivable from customers and an increase in accounts and drafts payable. At December 31, 2024, cash and cash equivalents represented 14.6% of total assets and 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 securities available-for-sale at fair value were $528.0 million at December 31, 2024, a decrease of $99.1 million, or 15.8%, from December 31, 2023. Investment securities represented 22.0% of total assets at December 31, 2024. Of the total portfolio, 1.7% mature in one year or less, 19.4% mature after one year through five years and 78.9% mature after five years.
As of December 31, 2024, the Bank had unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $83.0 million in aggregate. As of December 31, 2024, the Bank had secured lines of credit with the Federal Home Loan Bank of $183.6 million collateralized by commercial mortgage loans. At December 31, 2024, the Company had lines of credit from three banks up to a maximum of $250.0 million in aggregate collateralized by state and political subdivision securities. There were no amounts outstanding at December 31, 2024 and 2023 under any of the lines 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 2024, 2023 and 2022 were $38.9 million, $36.9 million, and $51.6 million, 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 2025. The Company estimates that capital expenditures for 2025 should range from $6 million to $8 million. Capital expenditures in 2025 are expected to primarily consist of purchases of equipment and software related to the payment and information processing services business.
Net income plus amortization of intangible assets, net amortization of premium/discount on investment securities and depreciation of premises and equipment was $28.7 million and $39.5 million for the years ended December 31, 2024 and December 31, 2023, respectively, a decrease of $10.8 million year over year. The decrease was due to the decrease in net income of $10.9 million and lower net amortization of premium/discount on investment securities of $882,000, partially offset by an increase in depreciation of $1.1 million. The net amortization of premium/discount on investment securities is dependent on the type of securities purchased and changes in the prevailing market interest rate environment.
Other factors impacting the $2.0 million increase in net cash provided by operating activities include:
•A decrease in share-based compensation expense of $1.0 million;
•An increase in other operating activities, net of $8.2 million, primarily due to changes in various accounts receivable and payable;
•An increase in current income tax liability of $2.3 million;
•A change in the FASB ASC 715 pension adjustment of $2.6 million; and
•A change in the provision for (release of) credit losses of $1.0 million primarily due to changes in loans outstanding during the respective periods.
On an overall basis, the Company's $2.0 million increase in net cash provided by operating activities was primarily due to changes in cash flows from fluctuations in tax and other accounts offset by the decline in net income.
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
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significantly impact the Company include the general levels of interest rates, business activity, inflation, 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 or lower average dollar 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 2024, new business was added in both the transportation and facility expense management operations, driven by both successful marketing efforts and the solid market leadership position held by Cass.
Capital Resources
One of management’s primary objectives is to maintain a strong capital base to warrant the confidence of customers, shareholders, and bank regulatory agencies. A strong capital base is needed to take advantage of profitable growth opportunities that arise and to provide assurance to depositors and creditors. The Company and its banking subsidiary continue to exceed all regulatory capital requirements, as evidenced by the capital ratios at December 31, 2024 as shown in Item 8, Note 2 of this report.
Cash dividends paid were $16.5 million and $16.0 million in 2024 and 2023, respectively.
Shareholders’ equity was $229.0 million, or 9.6% of total assets, at December 31, 2024, a decrease of $779,000 as compared to December 31, 2023. The decrease was primarily a result of the payment of cash dividends of $16.5 million, and the repurchase of treasury shares of $7.2 million, partially offset by net income of $19.2 million and the decrease in accumulated other comprehensive loss of $2.3 million.
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. During 2024, the Bank paid dividends of $20.0 million to the Company. As of December 31, 2024, unappropriated retained earnings of $31.4 million 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 approved by the Board of Directors in October 2023 pursuant to which the Board of Directors has authorized the repurchase of up to 500,000 shares of the Company’s common stock and has no expiration date. A total of 318,581 shares remain under the buyback program at December 31, 2024.
The Company repurchased a total of 167,455 shares at an aggregate cost of $7.2 million during the year ended December 31, 2024 and 150,541 shares at an aggregate cost of $5.8 million during the year ended December 31, 2023. A portion of the repurchased shares may be used for the Company’s employee benefit plans and the balance will be available
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for other general corporate purposes. The pace of future repurchase activity will depend on factors such as levels of regulatory capital, 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.
Impact of Inflation
Inflation could have the impact of increasing our operating expenses, such as compensation expense. Inflationary pressures may also have an impact on total assets, earnings and capital, which could impact the Company's ability to grow. An increase in total assets could have the impact of decreasing regulatory capital ratios if earnings and total regulatory capital do not increase at the same rate.
As a result of rising inflation, the Federal Reserve increased the Federal Funds rate throughout 2022 and 2023. The increase in the Federal Funds rate has contributed to the increase in the Company's net interest margin to 3.42% in 2024 from 3.25% in 2023 and 2.74% in 2022, therefore positively impacting net interest income. The Federal Reserve began to decrease the Federal Funds rate during the last four months of 2024 by a cumulative 100 basis points. Further decreases in the Federal Funds rate resulting from softening inflation or other reasons could negatively impact the Company's net interest margin and income in 2025.
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. A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to the Company's Consolidated Financial Statements are included in Item 8, "Financial Statements and Supplementary Data—Note 1.”
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 and Risk 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. The process combines many factors: economic factors, historical credit loss experience, of both the Company and similar peer banks, loan portfolio growth and concentrations, asset quality, and other qualitative and quantitative factors which could affect future credit loss. Given the Company's recent historical loss experience, the impact of the qualitative risk factors related to the collective ACL is a substantial percentage of the overall ACL. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses, and therefore the appropriateness of the ACL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the ACL and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all loan types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Various regulatory agencies, as an integral part of the examination process, periodically review the ACL. Such agencies may require the Company to recognize additions to the ACL or reserve increases to adversely graded classified loans based on information available to them at the time of their examinations. The Company believes the level of ACL is appropriate. 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 Note 1 "Summary of Significant Accounting Policies" and Note 4 "Loans," as well as the “Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments” section of this report.
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-
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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, 2024, an allowance for unfunded commitments of $273,000 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 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, 2024, the balance of loan commitments, standby and commercial letters of credit were $247.4 million, $12.0 million and $400,000, 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.